Weekly Bulletin #8

Portfolio: DOLE, PANR | Monitoring: ESNT, HBRN | Developing: New Conviction Idea This Week

Disclaimer

Value Situations is NOT investment advice and the author is not an investment advisor.

All content on this website and in the newsletter, and all other communication and correspondence from its author, is for informational and educational purposes only and should not in any circumstances, whether express or implied, be considered to be advice of an investment, legal or any other nature.  Please carry out your own research and due diligence.

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Model Portfolio Updates

There are two updates from last week with respect to Model Portfolio names, with Dole Plc (DOLE) announcing its Q4 and FY21 full year annual results, and Pantheon Resources Plc (PANR) confirming issuance of new shares in settlement of its quarterly convertible debt payment.

DOLE

DOLE published its results last Tuesday - highlights from the results release are as follows:

• PF revenue of $9.3bn +3.5% YoY vs. $9.0bn for FY20

• PF adj. EBITDA of $393.6m +5.9% YoY vs. $371.8m for FY20

• PF adj. EBITDA reflects the add-back of $17.6m in exceptional, once-off costs relating to two salad recalls in Dec-21 and Jan-22 , but does not reflect an estimated $3.3m reduction in EBITDA attributable to temporary lost volumes and fixed cost absorption - adjusting for this, underlying EBITDA for FY21 was $396.9m (+6.7% YoY), towards the upper-end of management’s previous guidance of $390m - $400m which was issued prior to the recall issues.

• Notably, Q4 EBITDA of ~$61m was +5% ahead of Q3, when management reported that inflationary pressures had started to impact margins; at that time the market reacted somewhat negatively to this, with a concern that further margin erosion in Q4 was inevitable. This has proved not to be the case as the Diversified Fresh Produce divisions for EMEA and Americas/ROW combined grew EBITDA by +24% vs. Q3 FY21 and +15% YoY vs. Q4 FY20, thanks to the dynamic pricing in these segments where DOLE is able to pass-through cost increases directly to customers to offset inflation.

• Net leverage at FY21 year-end was 2.87x, below the target level of 3x.

• FY22 guidance (before synergies) is revenue of $9.6bn - $9.9bn (+3.2% - 6.5% YoY) and EBITDA of $370m - $380m which reflects an estimated reduction of $25m relating to temporary lost volumes from the salad recall, fixed cost absorption and delays in initiating price increases. Note these issues are expected to be resolved by Q2 FY22, and adding back this non-recurring $25m to EBITDA implies underlying EBITDA of ~$395m - $405m for FY22 based on management’s guidance.

• Management re-iterated that price increases with customers have been agreed across the business, which will mitigate cost inflation pressures through FY22, indicating that EBITDA of ~$400m is a realistic baseline estimate for the current year after factoring in inflation.

All told, this is an impressive set of results from DOLE given inflationary pressures and the unexpected salad recall issue. Furthermore these results are in line with management’s guidance as laid out pre-IPO and when compared to peer Fresh Del Monte Produce’s (FDP) FY21 results, I believe they demonstrate DOLE’s superior management, supply chain and scale advantage over its peers - recall that FDP’s Q4 FY21 EBITDA declined by 38% YoY vs. a much more muted ~15% YoY decline in Q4 for DOLE, with inflation-offsetting price increases to follow for DOLE in FY22; similarly, FDP’s EBITDA margin for Q4 was ~1.45%, or approx. half DOLE’s Q4 EBITDA margin of 2.7%.

Yet despite DOLE being a demonstrably superior business and better positioned to weather cost inflation, FDP continues to trade at a higher multiple of 9x FY21 EBITDA vs. just 6.4x for DOLE! Even more puzzling is that DOLE’s much smaller (and more challenged) niche US peers Mission Produce (AVO) and Calavo Growers (CVGW) trade at ~15x and ~29x respectively on an LTM basis, and ~12x and 15x respectively on NTM basis.

Taking the average NTM multiple for the FDP/AVO/CVGW compset of 12.7x and applying this to DOLE’s FY22 EBITDA guidance of $400m (adding back the exceptional costs of $25m) implies a share price of ~$40/share for DOLE, or +200% to the current share price, and note that’s still before the estimated $30m - $40m in synergies to be achieved from the Total Produce/Dole Food Company merger as outlined at the time of the IPO last year!

Nothing in the FY21 results or FY22 guidance suggests DOLE is falling short of the business plan outlined at the time of the IPO - in fact I believe the opposite is the case, as management has delivered on everything they possibly can have at this (early) stage despite unforeseen challenges, by (1) outperforming peers, (2) delivering revenue and EBITDA on target, (3) instituting a solid dividend at a ~2.4% yield and (4) reducing net leverage below the target level.

As I’ve outlined before DOLE’s market valuation simply makes no sense, particularly now given its proven, robust performance through FY21 and Q4 in particular. I continue to see no material change to my underwrite thesis or valuation.

PANR

Last Tuesday PANR announced the issuance of 3,080,798 new ordinary shares in settlement of the $3.3m quarterly repayment due on its convertible bond.

This is a little below my previous quick estimate of shares to be issued on the repayment, but in any event represents negligible dilution and conserves cash resources to continue to fund the current drilling and testing programme.

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Situations Monitor

There was news-flow relating to two situations I’m following last week, namely Essentra Plc (ESNT) and Hibernia REIT Plc (HBRN):

ESNT

ESNT is a break-up/value unlock situation I highlighted back in December with a key part of the thesis being the proposed divestments of its Packaging and Filters segments to create a pure play industrial components player. Both these segments are under strategic review which is ongoing, and should ESNT dispose of them the remaining Components business should attract a higher market multiple given its more focused management and positive growth prospects.

ESNT reported its full year FY21 results last Friday, and it continues to look like an interesting value situation.

Key takeaways from the release are as follows:

• Revenue increased by +8.4% YoY on a LFL basis

• Adjusted operating profit increased +46.5% YoY

• EBITDA (pre-IFRS 16) increased +19% YoY to ~£118m

• Net leverage (pre-IFRS 16, excluding leases) of 1.5x (1.7x including leases)

• Order book ahead of level at start of FY21

Regarding outlook, ESNT stated that it has made a strong start to FY22, with sales ahead of PY period YTD. In terms of the individual business segments, the core Components segment is expected to grow market share, while Packaging is forecast to return to its historic growth rate after a slowdown due to COVID. The Filters segment is expected to generate strong growth with the ramp up of its China JV and outsourcing contracts.

With respect to the strategic reviews of Packaging and Filters, these are progressing in line with management’s expectations and it will be Q2 FY22 at the earliest before these are concluded.

Following the FY21 results, ESNT currently trades at sub-10x EBITDA vs. an average of ~15x for listed UK and US peers. Updating my previous valuation analysis, assuming ESNT can dispose of the Packaging and Filters segments each at a multiple of 9x LTM EBITDA, this should generate ~£490m in net cash proceeds (after assumed leakage for costs and taxes), and strip out ~£10m in central costs that the remaining business would no longer carry.

This would leave a debt-free, growing Components business that should generate ~£74m in EBITDA by FY24. Assuming a 15x multiple on this core business (in line with industrial peers) and a share buyback programme of ~£200m facilitated by the segment disposal proceeds (which would still leave the business with ~£100m in cash) this implies a target price of ~£5/share or +63% vs. the current share price as at the time of writing. This equates to a return profile of ~27% IRR / 1.6x MOIC over a two year investment term, making ESNT an interesting event-driven situation worth watching.

HBRN

HBRN annnounced last Thursday that it has agreed to sell The Forum office block in Dublin’s International Financial Services Centre (IFSC) district for €30.8m to US office-real estate investor Spear Street Capital.

The Forum is currently vacant and is an older asset, developed in 2003 and the capital value per sq. ft of ~€655 reflects this (newer prime offices in Dublin City Centre trade at well over €1,000 per sq. ft).

HBRN’s rationale for selling the Forum makes good commercial sense - it allows the company offload an older, less future-proof asset and recycle the proceeds into the development of its Harcourt Square and Clanwilliam office campus projects, in line with management’s “strategic priorities of office asset clustering and ESG excellence” - essentially delivering the type of prime, amenity-rich office accommodation that corporate occupiers are seeking in a post-COVID world.

HBRN’s shares rebounded last week to €1.19/share from its recent (and absurd) low of ~€1.06/share, and now trade at a still very cheap 0.68x NAV.

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Developing Situations - New Conviction Idea later this week

Later this week I will publish my next high conviction idea for inclusion in the Value Sits Model Portfolio.

The target equity here is an extremely cheap spin-off situation that I believe offers ~90% upside to the current share price over the next two years.

I intended to publish this idea on Wednesday.

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Any Other Business

For this week’s AOB I thought I’d share a recent and very thought-provoking Twitter Spaces discussion hosted by my friend Twebs (I previously discussed Kenmare Resources with Twebs on his Single Stock Spaces podcast).

Twebs has posted the discussion on his Asymmetry Infantry Substack, and as per his intro the impetus for it was to try to make sense of the commodity and equity markets given recent events in Ukraine.

The discussion is led by @agnostoxxx, who is an extremely smart thinker and investor who outlines his view on the world and markets following the Russian invasion of Ukraine, and there are many other insightful contributions from other speakers as well.

It’s a wide-ranging discussion that I highly recommend listening to.