Tuesday, January 31, 2012

Second-hand games market

Slashdot article "Anger with Game Content Lock Spurs Reaction From Studio Head Curt Shilling":
"Studios and publishers are fighting back hard against the used game market, with the upcoming title Kingdoms of Amular the latest to declare it will use a content lock. In this case, KoA ups the ante by locking out part of the game that's normally available in single-player mode. Gamers exploded, with many angry that game content that had shipped on the physical disc was locked away and missing, as well as being angry at the fact that content was withheld from used game players. One forum thread asking if the studio fought back against allowing EA to lock the content went on for 49 pages before Curt Shilling, the head of 38 Studios, took to the forums himself. His commentary on the situation is blunt and to the point. 'This is not 38 trying to take more of your money, or EA in this case, this is us rewarding people for helping us! If you disagree due to methodology, ok, but that is our intent... companies are still trying to figure out how to receive dollars spent on games they make, when they are bought. Is that wrong? if so please tell me how.'"

IDH take profits

I'm new to the whole world of technical analysis. IDH has filled its gap, so I'd be inclined to take profits (remember, this is a paper portfolio, though). It may have a lot further to run though. I don't know.

Notionally bought at 299.5p on 24-Jan-2012 and sold today for 356p. That's a profit of 18.9%. Too bad I can't manage to do this with any kind of consistency.

CRE- Creston

Let's see if I can replicate my success with IDH (Immunodiagnostic) (up 19% since I highlighted it!), with CRE.L (Creston).

CRE was first highlighted extensively in a post by ExpectingValue (many thanks!) in July 2011:
The group itself is a ~£66m market cap, diversified marketing and communications company ... marketing and general consultancy ... advertising, both digital through mobile, social media and general web platforms, offline, and in-store/promotional activity
Sounds like the kind of people for whom you'd slam the phone down mid-conversation.

CRE trades on a PER of 3.3, PFCF 4.5 based on full results. Clearly, all isn't happy in the world of annoying phone calls and jiggling-baloney spadvertising, or whatever it is they really do. Their IMS on 27-Jan-2012 contains the deadly words:
Despite this revenue growth, Headline PBIT is expected to be slightly below that of the prior year
The interims issued on 30-Nov-2011 showed negative net cash flow. It had net debt of £5.8m at the interim stage, and the latest final results showed a net profit of £2.3m, and net cash flows of £8.0m, so we're not at distressed levels.

Over the last 5 days, the share price has dropped 28% off the black of the recent IMS. It reached a hig of about 122p in 2011, and made it down to 46.5p within the last couple of days. Looking at the charts, it seems that from about June 2011 Mr Market was somewhat prescient about the trouble ahead.

The RSI indicates that the shares are heavily oversold (although with a drop of 28%, it would do!), has been in downtrend since July 2011, trades on a PER of 3.3, and I think we've just witnessed an exhaustion gap. So, if you're brave, and don't mind holding your nose, now might be the time to buy.

I just want to emphasise that I have no position in this company.


Monday, January 30, 2012

SHG - Shanta Gold update

SHG.L (Shanta Gold).

Update on fundraising : SHG raises 25m USD since Dec 2011 without equity dilution on favourable terms. This funding will allow for operation through to production at the NLGM (New Luika gold Mine) in April 2012. The NLGM is on track for cold commissioning in Feb, hot commissioning in Mar, and production in Apr 2012 , with full production rates being achieved by end of 2012Q2.

Bauhinia Creek update: The creek orebody is the first of several satellite gold deposits  to be exploited at the NLGM in the Chunya district of Tanzania. It is anticipated that the new mining plan will show an increase in strike length and a final depth of 200m versus the current 100m, with an increase in both production ounces and grade. The revised plan is expected to be released at end Apr 2012.

IAE - Ithaca Energy looks interesting

Oil producer IAE.L (Ithaca Energy) is doing the rounds lately, garnering a well-received writeup on TMF's Pauly Pilot's Pub, and yesterday on Stockopedia as a share that might go up 20% in a month. OK, so I'm a bit late to the party.

On 23-Jan-2012 it announced that
it has received a confidential, non-binding
proposal to acquire all of the outstanding shares of the Company
IAE is looking overbought at the moment, having jumped from about 140p to 175p over the last week. A theory is that there should still be enough maneuvering room for a premium price even at these levels.

It has a market cap of£451m, and a nice cash position of £108m. It trades on a PER of 12.6. Analysts are forecasting an EPS of 41.65p, which would put it on a forward ratio of 4.2. Not bad, even if the bid doesn't work out.


IDH - Director Purchases

Ah, don't you just love it when a plan comes together?

An RNS today announced that a concert of directors purchased 1.2m shares in IDH.L (Immunodiagnostic Systems Holdings) on 27-Jan-2012. That's about £3.8m worth. Directors holdings before the purchases was about £6.5m, which is a nice healthy amount.

Sunday, January 29, 2012

Halifax T&Cs

In the wake of the collapse of MF Global, where investors lost money due to the fact that their investments were pledged as security, I thought it prudent to start digging through the T&Cs (Terms & Conditions) of my brokerage accounts to see if there are any nasties lurking in there.

Extracts from the Halifax Share Dealing Service Terms and Conditions 1/338070-1 (03/11) (NOTE: if you're using a CFD account, different T&Cs will apply, and may be materially different wrt hypothecation)

From section 7.2:
We will not lend or deposit by way of collateral any investments in your account to a third party without your express permission.

Section 7.7:
We will hold your funds so that we
comply with the FSA Rules. This means
that we will hold your money, along with
money belonging to other customers, in
a pooled client money account with an
approved bank
Section 7.8:
In the event of an approved bank being
declared in default we will make a claim
on your behalf, including, where
applicable, through the Financial Services
Compensation Scheme. Under the
Financial Services Compensation Scheme,
compensation of up to £85,000 of funds
held with the relevant approved bank is
available to eligible claimants. You should
note that the £85,000 limit applies to the
aggregate of all your claims against the
relevant approved bank, including any
claims you may have directly against the
relevant approved bank. As such, you may
lose all or part of your funds.

Section 7.9:
If you ask us to deal in overseas
investments for you, we may hold your
money in a bank account with an approved
bank outside the UK or pass your money
to an intermediate broker or agent,
settlement agent or Over The Counter
(OTC) counterparty outside the UK. In such
circumstances the legal and regulatory
regime applying to the approved bank,
intermediate broker, settlement agent or
OTC counterparty will be different from
that of the UK and, in the event of a failure
of the bank, intermediate broker,
settlement agent or OTC counterparty
your money may be treated in a different
manner from that which would apply if
your money was held by a bank
intermediate broker, settlement agent or
OTC counterparty in the UK. Where we
hold your money in a bank account with an
overseas approved bank, such bank may
be entitled to combine the account with
any other account or to exercise any right
of set-off or counterclaim against money
in that account in respect of any sum owed
on any account of ours.
We will not be liable for the solvency,
acts or omissions of any third party
referred to in this Term.

Section 11.12:
If we appoint a custodian to act as our
nominee in respect of investments that
are subject to the law or market practice
of a jurisdiction outside the UK:
• different settlement, legal and
regulatory requirements may apply
from those in the UK; and
• there may be different practices for
the separate identification of safe
custody investments.
Hmmm, who knows what could be lurking in that statement.

Section 11.13:
We are a participant in the Financial
Services Compensation Scheme (FSCS).
As you have been categorised as a retail
client, you may be able to make a claim
on this Scheme if we default in our
obligations to you. Compensation of up
to 100% of the first £50,000 of assets held
is available to eligible claimants. If you ask,
we will send you a summary of your rights
under the Financial Services
Compensation Scheme. Further
information can also be obtained from
the Financial Services Compensation

Section 11.14:
Your investments will be pooled with
investments held for other clients.
This means that your investments will
not be identified by separate certificates.
Our nominee companies are owned by
us. If our nominee defaults, we accept
full responsibility for it. We will not
disclaim losses arising directly from its
fraud, wilful default or negligence.
We are wholly owned by the Lloyds
Banking Group.
Hmmm, the problem is that in the event of default, we can't be sure that Halifax will be able to make good on this promise.

Section 11.17:
We are not responsible for any loss
incurred as a result of the actions or
omissions of any third party.

Comments? Am I being too paranoid? Not paranoid enough? If you perform an audit of your own brokerage account, then please feel free to link below.

Saturday, January 28, 2012

6-month checkup

Let's see what silliness I was talking about in July 2011 ...

SHG (Shanta Gold) I quite liked at 23p, now 25.51p - handily beating the index. It's only recently that it has been beating the index. I wrote:
"slartybarfast" estimated that at 19p, the market cap of SHG is £50m. So, that puts SHG on a PER of about 1.5.
That would put it on a target price of 127p. Other back-of-the-envelope calculation suggest it could be in the region of 100p. The price of gold has gone up since then, and we should be much nearer to actually pouring some gold. End of 2012 Q1, if everything goes according to plan. Processing had already pushed back plans from end 2011, so any delays could scupper the share price short term. They have backup finances in place. I'm bullish on this stock, and I hope to see plenty of action out of this one. Fingers crossed!

I also liked PIC (Pace), which has declined 21% over 6 months, underperforming the indices significantly. I'm such a glutton for punishment on that dog. The share has been gaining momentum over the last month, and trades on an abysmal PER of 4.8. Non-exec Chariman Allan Leighton has made changes at the top, and looks like things are now heading in the right direction. I'm still expecting to see good things out of this one, despite the rough ride shareholders have faced in 2011.

ACHL (Asian Citrus Holdings) - the AIM company that runs orange plantations (we hope). I was downbeat on the company then. A lot of the profits come from revaluing its biological assets. Fair enough, but in common with a lot of these Chinese type stocks, cash flows are significantly below reported profits. Far too iffy for my liking. There was also some funny business involving related parties. ACHL seem to have parted ways, causing the share price to bounce. It hasn't helped long term, as the share price is down 33% over 6 months.It's on a PER of 6.8 and PBV of 0.6. The number of shares in issue has shot up again. I still wouldn't touch this one with a bargepole. I know I'm going to attract a lot of hate from the ACHL bulls for saying this: but I still think this company is uninvestable junk at any price.

Risk on

We're almost done with the first month of 2012, and some distinct patterns are emerging. The Footsie is up 2.9%. Nearly all of the good stuff is down: Brit Amer Tobacco, Morrisons, Tesco, Unilever and Vodafone. Astrazeneca managed to rise - although it's so lowly rated, one wonders how much lower it could go anyway. Diploma and Domino Printing Sciences, which I consider to be good quality companies, have also done very respectably. Maybe because they're not blue chips they've been less influenced by changes in mass psychology. Domino's egg-printing activities has been attracting some excitement (eggcitement? - d'oh) lately, although it's not exactly new news.

Some of the riskier stuff has been flying, though ... Resources in general have been doing well: BHP Billiton up 16%, and one that I've been touting a lot - Afferro - up a honking 44%. Retailers are doing OK - JD up 15%, for example. Financials have been zooming along: Lloyds up 25%, and my somewhat obscure ICP (Intermediate Capital) is up 23%. ICP recently sold patent management company CPA Global, which will generate total proceeds of £387m for ICP. It will receive total cash of £113m, and result in a £43m capital gain for the company. ICP is on a price to free cashflow of 3.4, their distressed debt idea is still looking good to go, so hopefully investors should do well out of all this.

My worst performing share this year is MRW (Morrisons), down 10%. Tesco taking a dive certainly "helped" on that score. Mid-double digit growth is expected on MRW in 2012. It is on a PER of 11.5 - not quite a decade low for the company, but pretty close. The median PER over the last decade was 15.2. So I'm happy enough about holding on to MRW.

2012 is very much a "work in progress", of course. It seems to be conforming to a general pattern I have observed - or think I have observed - over the last few years. Things go great in the beginning, but hit a snag sometime in Q1. Then it's down we go, with all the risky stuff taking a major tumble. So there's everything still to play for. We're also seeing that it's sectors, not shares, that are dominating investor returns.

I'm about 40% quality/defensives, and 60% 'risky' companies. I don't claim this to be an optimal mix, as it's more historical accident than planned exposure, although maybe it on reflection it looks  quite good from a risk/reward point-of-view.

Wednesday, January 25, 2012

RCG Holdings

Ah, good old RCG Holdings, where the intrigue never dies. There's a nice write-up on TMF which explains much of it:

Over the year they've announced the departure of the CEO then the CFO and more recently the COO. They are changing strategy from selling techie equipment to 'offering solutions, projects and services'. As a result they have written off vast amounts of stock and good will. The new strategy hasn't been that successful due to delays in projects.
 A major shareholder in RCG, Ms. Nina Kung, a very wealthy HK celebrity, died and her boyfriend Fung Shui Master Tony Chan claimed that he inherited her RCG shares. A major court case was initiated. Later in early 2010 Tony Chan was arrested in the wake of a High Court judge's ruling that a will giving him Nina Wang's HK$100 billion estate was a forgery. The judge described Chan as a liar and a scheming sycophant lacking in credibility. Round about the same time the RCG offices were raided by the HK Police but no further action was taken

In the last few days the company, just to remind you, an international provider of biometric and RFID products and solution services with a primary focus in the Asia Pacific markets, acquired a mining and exploration company called SPAG. Just don't ask !!.
 Groovy stuff. I wouldn't touch it with a bargepole, of course.

Tuesday, January 24, 2012

Make your mind up!

Gotta love this ... I'm reading the Herald Scotland at the mo'.

In this article, they say
SHARES in Glasgow-based engineering company Weir Group plunged 3.6% yesterday after an influential analyst downgraded its stance on the company due to low gas prices.
Their next article, OTOH, expects "Bright future forecast for oil and gas firms".

They can't both be right, surely.

IDH - Immunofiagnostic Systems

I continue my foray along the Dark Side, trying to sort out my head from my tails in technical analysis.

Here's an interesting one: IDH. It gapped down 18% yesterday, after releasing its latest IMS. It makes diagnostic test kits. Revenues were up from 35.4m to 39.4, for the year. The gist of the concerns seem to be that everyone is thinking the company has gone ex-growth. They are facing increasing competition in their non-automated tests. Their IDS-iSYS test, which is automated, is holding its own, and the company expects to keep investing in new product development, in which is sees a significant unmet market need.

The shares traded near a high of 1200p in Jul 2011, and have been in downtrend since then. They stand at 292p. RSI is below 30 - suggesting that the shares are oversold. This, combined with the gap-down on high volumet yesterday after a significant downtrend suggests that we have just witnessed an exhaustion gap, and now is a good time to buy.

The company has a market cap of £83m, is on AIM, on a PER of 6, and has net cash of £3.3m. So even if it has gone ex-growth, the low PE gives some protection.

I own no shares in IDH, BTW. I'm just learning technical analysis, and just rambling. So caveat emptor.


Playtech update

PTEC (Playtech) is a weird old company. At a market cap of £904m, it gets very little attention out of ADVFN posters. PER of just under 9, ROE of 20%, net cash £56m. A clutch of reports were issued by the company today:
  • Acqusition of Geneity Ltd
  • Signs German JV with Gauselmann
  • Seals South African JV with Peermont
  • issues KPIs
In the KPIs, total revenues up 89%. Everything is going up ... except the share price, which is down 4.6% on the news above. All very curious.

Just a reminder that I bailed out on PTEC earlier this year due to what I perceived to be the overwhelming smell of haddock.


Monday, January 23, 2012


SHG (Shanta Gold) up 7.3% today. Apparently it was tipped in Daily Mail on Saturday. SHG is attracting attention now. Interactive Investor also produced a video on it on 12-Jan-2012. I have a Google Doc on it, in which I guesstimated a fair value of about 100p. Current price is 25p, so there's plenty of upside left on this badboy.

AFF (Afferro Mining) up 2% today. Its rise continues unabated - hopefully they'll be a pullback soon. At 77.5p, it's now at least made it to its net cash position. Plenty of value still left.

OPTS - nice little update

OPT (Optos) is a medical retinal imaging company. It takes pictures of your eyes, basically. It can be used in medical diagnosis. The company's uinique selling point is that it can image a much wider range of the retina than competitors. There is even talk that it may help in the diagnosis of Alzheimers - although the company does not reference that in its IMS.

OPTS has a market cap of 149, is trading on a PER of 10.8, has net debt of 16m. and interest cover of 10.5. Its ROE is 23%. Revenues had increased from 66m in 2010 to 91m in 2011. Looks like a really nice GARP company. The share price has been very volatile the last year. I own a very small amount of this stock, and I'm beginning to wish I had bought more.

It released a cracker of an IMS today for Q1FY12, against comparatives of Q1FY11. Revenues up 20%, 11% on a like-for-like basis. In terms of devices, 32 rentals have been de-installed, 59 are new, and there are 425 renewals. The company is aiming to transition customers from P200 to Daytona.

Daytona (their latest and greatest product) is on track to launch in 2012Q1, with design optimisation nearing completion, and manufacturing scale-up underway. Clinical studies commencing in 4 centres to support the market launch.

TSCO - Filling the gap

I've gone over to the dark side and started learning about technical analysis, particularly about gaps. Tescos up 0.9% today. It looks like it's filling up the downgap nicely. I can't see this puppy going below 312p, which is the low it reached last week,  especially with Buffett on board. I'm hoping it will make it to 380p, filling up most of that gap. If I'm right, still plenty of money left to be made.

So, how's my gobbledegook, then?

Not sure I'll flip this one, though - it seems like a headache-free investment with a nice divvie - well, OK, headache-free if you didn't buy at 380p+.

Sunday, January 22, 2012

PFD - Premier Food

PFD operate in the food product sector, with over 40 brands. It has 8 “power brands”: Hovis, Ambrosia, Mr. Kipling, Sharwood's, Loyd Grossman, Bisto, Oxo and Batchelors.

As at 22-Jan-2012, it is trading at 7.71p, with a market cap of £185m, on a PER of 3.44. In its sector, the average PE is 12.6, and EV/Sales is 3.1, compared with PFD, which is 0.5. Clearly, something is very wrong with this picture, and there’s no prizes for guessing the cause: it has net debt of £1.1b. Based on FY2010, PFD has P/FCF of 1.5, which looks great. Factoring in the net debt of 1261m, though, its EV/FCF is 11.9 - I would hope for a max of 10. The situation has deteriorated in 2011H2, where it produced negative net cash flow. Operating cash flows were down a lot, and interest payments were down a little - hence the negative net cash flow (before capex, I might emphasise).  

On 19-Jan-2012, Fitch downgraded its debt from BB- to B+. “The downgrade reflects a lowering of Fitch's EBITDA expectations for 2011 and beyond, the ongoing tough UK retail environment which is translating into continued price pressure on food manufacturers, as well as the uncertainties arising from the current debt renegotiation and its terms.” Oh dear.

TMF is running a thread (http://bit.ly/zMhtra) on PFD. It contains a lot more detail than I’m presenting here. Quality stuff.

Some positive news is that the company is selling of some its peripheral brands, the debt convenants have been shifted to March (they would have failed if tested in Dec 2011), they are axing 600 jobs, and they expect cost savings to increase from £20m to £40m. In their interim results published 05-Aug-2011, they reported net debt of 1139m, down from 1261m when they reported on 15-Feb-2011. Their debt seems to have topped out in their 28-Aug-2008 report, which was at 1805m. So debt is going down. The banks also seem to be a little bit flexible when it comes to loan negotiation.

PFD does have some strong brands, so it’s not in a structural decline like HMV. The really worrying thing, though, is that in their last set of interims, operating cashflow was 28m, against interest payments of 46m. The comparables last year were 83m and 50m, respectively. So the big question is: is the reduction in cashflow permanent, or a temporary blip? If it can’t restore its cashflow to cover interest payments, then it will be curtains

This company is a clear case of aggressive expansion using a mountain of debt, with inevitable collapse when the landscape changed. I dare say that the proceeds of disposal will be less than the purchase, due to the distressed nature of the sales. Buy high, sell low. On 08-Dec-2011, f PFD agreed to sell Brookes Avana to 2 Sisters Food for £30m. For y/e/ 31-Dec-2010 Brookes had a turnover of 204m, and a trading loss of 0.1m. That should wipe a little more off the debt, but it doesn’t look like it will improve their operating cashflows that much.

It will be interesting to see how this unfolds; from a safe distance, of course.

Saturday, January 21, 2012

Greenblatt - Genius

From page 28:
As much as possible, you don't want to be well paid merely for taking big risks. Anyone can manage that. You want to be well paid because you did your homework. If you are one of the few people to analyze a particular investment opportunity, it follows that you are in the best position to assess the appropriate payoff for the risk taken. Not all obscure or hidden investment opportunities are attractive. The idea is to place your "bets" in situations where the rewards promise to greatly outweigh the risks.

Wednesday, January 18, 2012


Many thanks go to Nate Tobik at Oddball stocks for his post answering my questions about net-nets. Sketch notes below

Prefer cash and receivables to inventory. Avoid high debt. Poor management often want to lever up. Ensure trading is at least cashflow positive, otherwise the asset base can be eroded. If ncav is mostly inventory, look at the operations for potential margin expansion. Exit when the company reaches ncav - they're usually lousy businesses, and aren't worth holding beyond that.

Many thanks, Nate.

Tuesday, January 17, 2012

CRND - Central Rand Gold

I just the quickest of quick looks at CRND Central Rand Gold. Sheesh, I'm gonna get real stung by these resources one day. Anyway, ultra-quick workup ...

I noticed CRND mentioned on TMF under the article "A portfolio of punished penny shares":
I'll tell you of a punished penny share. A Gold Mine that is flooded with water ,a Gold Mine that lost its mining rights. A Gold Mine that has brought pumps to get rid of said water.They will be operational in around 6 months. A Gold Mine that has got its Licence back. A Gold Mine that could produce 7000 ounces a month. Was down to 0.3p now 1.03p . I brought @ 0.78p . The name ? Central Rand ,ticker CRND as always DYOR ( do your own research)

Working on the basis of 7000 oz pm - assuming that's correct - that's 84k oz pa. Gold at 1600 USD / oz means revenues of 134.4m USD pa, which is about 87m GBP. There is 1599.68m shares in issue, so revenue is about 5.4pps. Goldies seem to be trading at 2.2X revenue, suggesting a fair price of  11.88p. Current price: 1.08p.

Although riskier thatn SHG (which in itself is risky enough), it has a lot more upside that SHG (with a FV of about 100p, against SP of 23p). I haven't checked any of the facts in the foregoing statement, or tried to gauge the level of profit from the revenues, so it's a monster DYOR on this one. Still, interesting nonetheless.


SHG - Shanta Gold

I said I'd do a little writeup on Shanta ... and here it is.

Quick run-down on Shanta:
SHG is a gold explorer in Tanzania. Production is expected in 2012.

2011 saw its share price drop by 22%. This was due to a combination of factors:
  • an unexpected share placing at 18p, which drove the share price down
  • general negative sentiment against the resource sector. Large-cap miner BLT (BHP Billiton) dropped 25% for the year, for example.
  • mining at New Luika did not commence in December 2011, as originally planned, due to delays in the construction of the mine’s process plant. Management has pushed pushed back the commissioning to the end of 2012Q1. Shares dropped 6% as a result.

SHG currently has stockpiled gold. The delay in processing it, particularly about the timing and the possibility of further delays, has raised concerns about SHG’s cash position. However, on 21-Dec-2011, SHG announced that it had secured a first bridging loan of 5m USD, with a second one for 15-20m USD in an advanced stage of negotiations.

Short-term backup finance therefore looks in place, despite market fears, and I believe that the completion of the construction of the processing plant will act as a near-term catalyst for the re-rating of the shares. I expect the share price to arise in anticipation of the happy day, although of course there could be further delays that will negatively affect sentiment.

I estimated  a fair value of 100p:
Looking at New Luika, production over first 3 years is estimated at 175-190,000 oz. Call is 60,000 oz pa. Let's say costs are 610 USD/oz, towards the high end, and hopefully absorbing all the other costs. If gold is say 1610 USD/oz, that's a profit of about 1000 USD/oz. Assuming tax at 30%, and a ROX of 1 USD = 0.654 GBP, that works out at a profit of £27.5m (= 60000 * 1000 * 0.7 * 0.654), or close to 10pps. Digital Look show analyst estimates of 12.26pps. So at least I'm in the right ballpark. Based on a PER of 12.26p, that puts Shanta on a PE of less than 3. I can’t imagine that situation lasting much longer.
You can see a more detailed writeup by me as a Google Doc. I also point to a more detailed, and hence more accurate, gauge on expected profits in the doc.



ICP - Intermediate Capital

ICP - it's all going according to my cunning plan. IMS issued today for 3 m/e 20-Dec-2011:
Our mezzanine portfolio continues to perform well. The last quarter of 2011 saw a very low level of activity in the European private equity industry due to the uncertain economic outlook and, above all, to the absence of senior debt financing. We are seeing evidence that European banks are further retrenching from LBO financing. As a result, private equity sponsors are now focussing on the refinancing risk of their portfolio companies and we have seen a material pick up in the pipeline of potential new investments in capital restructurings of solid companies.
No major insight went into my purchase of this share last year - the company had highlighted its opportunities some time ago, and it was cheap. Sometimes it pays just to keep things simple and do the obvious.

Shares up 3.3%, although the market is up 1.2%.

Monday, January 16, 2012

Dropping like flies

The market is certainly been acting goofy the last week ...

TSCO (Tescos) the supermarket chain - market cap £25.4b - down 16% on Thu 12-Jan-2012. It reported UK LFL sales down 1.5%.

ISYS (Invensys) the software company - market cap £1.5b - down 21% on Fri 13-Jan-2012. It warned that profits would be signficiantly lower due to contract delays and engineering problems.

CCL (Carnival) the cruise operator - market cap £4.8b - down 19% on opening trade on Mon 16-Jan-2012. One of its ships, Costa Concordia, grounded. The loss is expected to be $85-$95m. A drop of 19% corresponds to a loss in market value of £96m, which is about $146m.

Interesting times. Who's next, I wonder.

Sunday, January 15, 2012

Tesco in Korea

I saw this video some time ago - but couldn't locate it. In South Korea, Tesco has a "virtual store". They have pictures as advertising boards, which lays out merchandise exactly at would appear in the supermarkets. You then photo the image using your smart phone, scan the "QR code", and the item appears in you virtual cart. You can pay, and have the goods delivered when you get home.

Go figure.

ICP - Intermediate Capital

I'm just taking another look at the situation on ICP.
 Intermediate Capital Group plc is an independent mezzanine provider with investment portfolios in Europe, Asia Pacific and the United States. It structures and provides mezzanine finance, leveraged credit and minority equity.
On a PBV basis, it looks undervalued: it is currently trading on a PBV of 0.7, whereas over the last decade it was 1.8. So, there's considerable upside looking at it from a PBV viewpoint. Looking at a PER basis suggests maybe a more modest rise: currently trading at a PER of 7.7, against its historic norms of 12.7.

The largest director deals over the last year look to amount to about £1m and a bit - the bulk of which was by Attwood at 324p. Current share price is 245p. Attwood owns about £3.2m in shares, and Evain about £1.9m. Not bad.

Their trading statement on 06-Oct-2011 highlighted the following:

the imbalance between supply
and demand for credit which will remain a feature of the European credit markets
for the foreseeable future.  This imbalance is placing considerable stress on
credit markets and therefore presents considerable opportunities for specialist
lenders to generate high returns by acquiring debt at attractive discounts in a
distressed market, providing recovery finance to existing buyouts and offering
reliable financing solutions for new transactions.
 On 30-Nov-2011 it launched a 7% retail bond.

Things are pretty much the same as the last time I looked at them, and things seem to be going according to plan. Looking good.

AFF - Afferro Mining

Not about AFF directly, but something I'll work into my valuations.

Link Bloomberg reported 2 days ago:
Exxaro Resources Ltd. agreed to buy African Iron Ltd. for about A$338 million ($349 million) Exxaro will pay as much as 57 cents a share and 37 cents an option for Perth-based African Iron, they said today in a joint statement.
Having a quick squint at African Iron Ltd's website:

The Mayoko Project is located in the politically stable Republic of Congo and is directly connected to the Atlantic sea port of Pointe Noire by an operational railway.The Mayoko Project has an existing DSO Inferred Mineral Resource of 33Mt at 56% Fe and six targets with an exploration target size totalling 0.9-1.3Bt1 of hematite and magnetite.Recent diamond drilling has confirmed potential extensions to the DSO Resource at Mt Lekoumou and demonstrated enriched banded iron formation ('BIF') over a 7km strike as potential “beneficiable” DSO ('bDSO') to extend DSO mine life and/or increase the production rate.The objective is to commence initial DSO production by mid 2013, ramping up to a steady state 5Mtpa.

Mt Lekoumou has an Inferred Mineral Resource of 33Mt at 56% Fe (with a 50% Fe cut-off) prepared in 2008 based on 36 shallow diamond drill holes completed by ICES-Geomin in 1974-75.
18 diamond drill holes (3,687m) completed between Jan-Aug 2010. This diamond drilling confirmed the 2008 resource and demonstrated resource upside. The drilling also showed weathered enriched hematite and underlying fresh magnetite BIF in lenses 50-200m thick over a strike length of 7km.

Healtcare producers

Background work for discussion of SCHE.


     mkt  per
amei  10 -1.8
cth   49  3.8
mdg    4  6.1
sche   1  0.1
syr  248 15.0
tstl  16 18.0

Saturday, January 14, 2012

SHG - Shanta Gold

Some sketch notes of the Interactive Investor iBall video on Shanta Gold released on Thu 12-Jan-2012.

SHG soon to go into production. 2012Q1 estimated - there were delays due to equipment delivery. SHG's ventual goal is 200k oz pa. Singida is expected to prodcue 45k oz pa when it goes live in 2013. Most eyes are on New Luika, where production is expected Real Soon Now. It already has a stockpile that needs processing. New Luika is expected to produce 190k oz in the first three years. It should pay for itself in the first 12 months, and then bankroll Singida.

Bridging loans are in place, and the company does not expect to have to go to the Market for additional funding.

Posters have speculated that institutional investors therefore have no incentive to sit on the sidelines and hope to pick up stock cheap in a placing. they'll have to invest directly, if they want it.

Brokers have pencilled in 12.26p for both y/e 31-Dec-2012 and y/e 31-Dec-2013. I presume these estimates were done prior to a knowledge of the delays. Still, on a forward PER of 1.9, there's plenty of room for a huge margin of error.

I have a holding in SHG.


Investor fickleness

Not that I've never been a fickle-minded investor myself ... but I thought it'd be interesting to put the latest Tesco saga into some perspective.

Looking over at the Morrisons board, I can't see many negative comments. Here's what someone said on 06-Dec-2011:
I'd agree with that around the heartland of Leeds / Bradford too, stores are notably more busy than usual with queues despite adequate amounts of checkouts being open.
I had to go back to 24-Nov-2011 to see anything especially negative:
I feel he will destroy rather than create shareholder value, in his pursuit of copying the worst bits of Tesco and Sainsbury
 Sainsbury's had no special comments on it either, so I'll skip that.

 Now look at the Tesco's boards. Although there are of course positive comments, there are many negative ones:
they have pushed, shoved and stamped on everyone in the way
 They're bad bast*rds and should all be hanged
 Another example of poor UK corporate and political governance
 has Mr Buffet got it wrong this time
they have been replacing well known brands with their own not much cheaper inferior brands
You get the idea. There are some positive posts, but they are almost all uniformly negative, pointing out it's a defensive company, and so on. There are also references to Anthony Worrall Thompson, but I'll regard those as an irrelevancy.

Rewind to August time, before the recent RNS which caused a massive decline in the stock, and people were talking about:
their real growth focus is overseas, particularly Asia, rather than in the UK.
and Citigroup notes:
A supermarket price war might be just over the horizon ... Tesco is now 30% more expensive than Aldi ... We believe the current situation is unsustainable.
This share is a dog
Well the jury is still out on the macro issue but, more specifically, TSCO is heading lower and the next question is whether it will breach the two year closing low of 360p which it touched a couple of weeks ago. In my view there are management questions, strategic developments and competitive issues which are current factors that are also impacting sentiment here too
 Tesco plc (LON:TSCO) shares are due a rebound
Goldmans and Nomura out this morning reiterating their 'buys' and 500p TP while Citi retaining 'sell' TP 385p
 Actually, the above comments surprised me. I had expected them to be more positive.

It's noteworthy that a clutch of analysts downgraded TSCO when it announced the UK LFL fall, and the share price has plummeted over 15%.

Also noteworthy is the fact that over the last 3 years, TSCO has declined 13%, whilst the Footsie has risen 27%. Patience isn't always rewarded.

What to look for

Link on citywire, which asks what to look for in buying a share. Comment #6 reads:
here are my six trading rules, as u can see only one refers to stock selection.

Rule 1
Fundamentals gets a share into your buy list, they will not get you out of a bad trade. Fundamentals are useful but remember that how a market should react and how it does react are two very, very different things. Don't get married to a fundamental opinion if the price does not confirm it.

Rule 2
If you have to look, it isn’t there.
Forget your college degree and trust your instincts. The best trades jump out of nowhere and create a sense of urgency. Take a deep breath, then act quickly before the opportunity disappears.

Rule 3
Price has memory.
What happened the last time a stock hit a certain level? Chances are it will happen again. Watch trades closely when price returns to a battleground.
The prior action can predict the future.

Rule 4
BIG LOSSES rarely come without warning.
You have no one to blame but yourself. The chart told you to leave, the news told you to leave and your mother told you to leave. Learn to visualize trouble and head for safety with only a few bars of information.

Rule 5
Support/Resistance is the key to the market
This is one of the only technicals that the professionals keep coming back too. Where are the support and resistance points? To determine their validity, watch the strength of the price at them.
Buy at support. Sell at resistance.
Trend has only two choices upon reaching a barrier: Continue forward or reverse. Get it right and start counting your money

Rule 6
Bulls live above the 200-day moving average, bears live below.
Bulls live above the cloud, bears live below.
Are you flying with the birds or swimming with the fishes? The 200-day moving
average divides the investing world in two. Bulls and greed live above the 200-day, while bears and fear live below. Sellers eat up rallies below this line and buyers come to the rescue above it.

Thursday, January 12, 2012

Every little helps

In 2011, RB (Reckitt Benckiser) was down 7% in a day on news that a director had decided to retire (he was only in his 40's, or was it 50's?). The share price quickly recovered. Today, TSCO (Tecso) was down a honking 16% on news that UK l-f-l sales were down 1.3%. TSCO now trades on a PER of  9.2, lower than at any point during the last decade.

That such big, stable, profitable companies can experience such precipitous market declines is quite amazing. Anyone who loaded up today is going to make a lot of money; I'm pretty sure of it. I reckon it's a trade that, in the course of a week, could earn as much as the rest of the market will in a year (that's not an actual prediction as to how I think the market will perform, mind).  The trick is knowing exactly the right share to go all-in on.

We shall see. 323.45p

Best metric: EBITDA/TEV

Turnkey analyst state:
We compare the investment performance of portfolios sorted on different valuation measures.  EBITDA/TEV has historically been the best performing metric and outperforms many investor favorites such as price-to-earnings, free-cash-flow to total enterprise value, and book-to-market.  We also explore the investment potential of long-term valuation ratios, which replace one-year earnings with an average of long-term earnings. In contrast to prior empirical work, we find that long-term ratios add little investment value over standard one-year valuation metrics.

Wednesday, January 11, 2012

Falling knives

Saw this great quote about catching falling knives:

As with all things the quality of the knife matters.

PTEC: Playtech

Sold my PTEC shares today for about 286p, having realised quite a substantial loss on them. Despite being on a PER of 8, and the prospect of the US opening up, I sold because:
  • dubious corporate governance. The board seem to be the puppets of major shareholder Teddy Sagi. The company has bought businesses off of him.
  • raising capital when the share price is cheap.
  • Slight puzzlement as to why it doesn't want to move out from AIM to the main market
  • On 04-Nov-2011, non-exec director Barry Gibson resigned "to pursue other interests". "I am stepping down from the Board as the increasing demands of my other commitments have meant that I am unable to devote the appropriate time to my duties as a Board member."
  • Concerns over their broker resignation, Deutsche Bank. "There was speculation the split could be linked to a potential transaction that was either opposed by Deutsche or presented the bank with a conflict.". I asked about the possible implications of broker resignations on TMF, and received the rather chilling response: "I have never seen a good outcome when a Broker resigns". I received pretty much the same response in a private email.
Distinct whiff of fish on this one, so I'm out. It also fits a pattern of acquisitions and equity raising that I find suspicious. The share has 19% one-month relative strength, and 13% three-month relative strength, so there's obviously some momentum behind this share. So I certainly wouldn't rule it out going higher.

I used the proceeds to top up on AFF (Afferro Mining) and SHG (Shanta Gold). I'll explain the bull case on SHG in another post.

Tuesday, January 10, 2012

DLAR: De La Rue

Remember I was talking about DLAR? No renewed bid yet. Apparently Oberthur hasn't finished its business sale yet. Yield on DLAR is 4.6%, and analyst estimates on EPS are really robust for 2012 and 2013. I reckon you can hold onto this one even if a bid doesn't emerge due to the dividend underpinning the share price - although presumably the shares will tumble if Oberthur announces that it is no longer interested. Some may recall that my takeover idea for Sportingbet was a big mistake. So much for my special situations ideas. Caveat emptor! I think that a takeover approach is much more likely with Oberthur, though. Oberthur has been shedding assets, and DLAR's share price is still lower than their original bid. Oberthur's disposals only make sense as a prelude to making a compelling bid for DLAR.

I own a teaspoon of DLAR, and it's done better in 2011 than some of the other stuff I've held (Sportingbet for starters). I continue to hold. I'm not itching to get out.

SRT: Software Radio Technology

I have been eagerly awaiting a write-up of SRT for the share competition on TMF. Fortunately, BobHellen has now made his submission. Maybe one day I will be able to write an investment case as good as that - but not today. SRT has garnered a lot of "second choices", and I think he's picked a live one. Just to try to provide a short summary of his excellent post ...

SRT is a profitable company with cash in the bank selling AIS (Automatic Identification System) equipment into the marine market. It has a commanding market share (c.80%) and cutting edge products that have few equals. What it sells is an indispensable tool which has numerous applications and which is set on an upward growth trajectory unaffected by the latest fashion or trend. The market for AIS is still embryonic and sales are lumpy. At 26p the market forecast p/e for y/e March 2013 is 6.5 based on earnings growth of 32% over the current year forecast. Its market is largely driven by regulation and will increasingly become more non-discretionary. The potential size of the eventual market dwarfs anything seen so far and SRT is well placed to take a very large slice of the pie even if so far unidentified competitors do emerge.
 The two big "cons" appear to be lumpiness in sales, and the declining price points of some of their products.
As regards the unpredictability, commenters have noted that "the market hates uncertainty". Of course, what the market hates, it de-rates. I don't own any shares (at least not yet), but I admit that I'm getting the warm tinglies on this one.

Unintended humour

There are comments on the ADVFN AFF board suggesting some odds goings-on with the shares. Yesterday, posters were saying that you can sell the shares, but they were very difficult to buy. Today posters are saying "something's up". Apparently there's nothing on the newswires, and there's speculation that the shares have been tipped somewhere. Others disagree: "Yeah, this aint a tip! You don't get many £100k buys on the back of tips."

This is the humourous part. Someone said "Your typical RHPS of Momentum investor wouldn't really rack up some of huge buy orders that went through earlier." If you're like me, you have no idea what RHPS means. I Googled for it. Apparently, it could stand for Rocky Horror Picture Show. That's pretty funny, right? Investing in shares that you'd associate with the Rocky Horrow Picture Show. Like GMG (Game Group), perhaps. Man o man is that share a mess. Its banking covenants are even under threat. Googling further, I noticed that RHPS could also stand for Red Hot Penny Shares "guide" ... which is more logical. Still. Red Hot Penny Shares. Rocky Horrow Picture Show. 'nuff said.

I also like the phrase that I saw on a blog: "penny dreadfuls".

That's enough nonsense for now. Looking at the boards, I see that are some very experienced and knowledgable mining sector investors there. I mean, some of these guys really know what they're doing, making whatever analysis I do pitiful by comparison. My enthusiasm for ENQ (Enquest) is increasing, and I'll try to put together some of my thoughts as to why I think it has good potential. Be warned, though, that I am sure that there are others who could do an infinitely better job at analysing than me. If someone thinks they have a really good valuation case, then let me know.

Monday, January 9, 2012

NFSC 2012: DPH - Dechra Pharma

I put together my investment case for my second TMF share competition entry. My choice was DPH (Dechra Pharma). Links:
 For convenience, I reproduce the text below.



Principally, Dechra Pharmaceuticals develops drugs for animals. It specialises in companion animals (dogs and cats to you and me) and horses. It also makes specialist pet foods, care products, instruments and consumables to the veterinary profession worldwide. It owns laboratories, where they do a variety of activities, like post mortems, and tests (on blood, faeces, etc.) for diseases, hormone levels, and so on.


DPH should be considered a GARP stock. At 513.4p, it has a market cap of about £340m,  trades on a PER of 14, has a gearing of 35%, and ROE of 23%. Over the last decade, it has a median ROE of 30%. Analysts forecast EPS for 2012 at 39.18p, representing an increase of 14.49% over 2011. The forecast for 2013 is 43.50p, an increase of a further 11.03%. The operating margins over the last decade are about 5.4%, which is not as good as a company like AZN (Astrazeneca) which has been about 27.3%, or GSK (Glaxo) at 31.7%. On the other hand, unlike humans,  is not subject to “ObamaCare”, changes in healthcare plans, and suchlike.

The company has a long record of reasonable debt, great historic returns on equity, and is available at a reasonable price in relation to earnings. The investment case is “more of the same” - you are hoping that the company can continue to innovate and grow earnings like it has done in the past. It looks to be on track to continue to do this. Its revenues for y/e 30-Jun-2011 were £389m, up from £369m prior; an increase of 5.5%. Revenues are split evenly between both halves of the year.

In its prelim results for y/e 30-Jun-2011 ( http://bit.ly/y0MJQX  ) , the company reported:
Although footfall through veterinary practices has declined and the general economic climate remains uncertain we are continuing to demonstrate solid growth in markets in which we trade.  Our branded product range, the focus of our key strategic objective, continues to grow strongly. To sustain this growth we have increased investment in product development, extended the geographies in which we operate, acquired complementary businesses and increased the number of people within sales and marketing.  We believe, therefore, that we are well positioned to ensure future solid growth is maintained and Shareholder value enhanced.

In its IMS dated 04-Nov-2011 ( http://bit.ly/wp82W8 ), it states:
The Group has started the financial year in line with management expectations with revenue in the first quarter 7.7% ahead of the same period last year. The Board believes that the Group is well positioned to maintain growth despite the uncertain global economic conditions.

On 29-Nov-2011, it reported FDA approval for manufacturing at Dales Pharmaceuticals ( http://bit.ly/yfNH5B ). The company expects that this will improve medium term margins. FDA approvals for other products are also being looked at.


Warren Buffett posed the question: does the company produce at least one dollar of market value for each dollar it retains in earnings.

Fortunately, it does. Over the last decade, it has earned 144.23p in basic EPS. Dividends have totalled 71.83p over that period. So the retained earnings have been 72.40p (the difference). During a 10-year period, the share price has grown from about 160p to where it is now: around 510p. That’s an increase of 350p - way in excess of the retained earnings.



Total basic earnings for the last decade was 144.23p. For adjusted earnings, it was 184.44p. So adjusted to basic earnings is 1.28. For a company like AZN, it is 1.04 (2100.59/2029.46), and for GSK it is 1.19 (923.19/776). Ideally, the ratio should be about parity. AZN has the best quality of earnings, and DPH has the worst. Investors will have to make up their own mind if this is tolerable.


Total cashflow per share was 191.82p. It is above the adjusted earnings of 184.44p, which is good, but it is only just above.


DPH has a gearing of 35%, and negative net tangible assets. It has a z-score of 3.23, so looks safe. It has net debt of £34m, which looks reasonable against profits for the latest financial year of £14m, which contained write-downs in any event. It has a current ratio of 1.55.


For the decade, the median ROE was 30.4%. For the latest year, it was 23.1%. The company’s z-score has been consistently high, suggesting that its profitability is due to good returns on capital as opposed to being flattered by financial leverage.


Median operating margins for the last decade has been 5.4%. It currently stands at 8.2%. Median net profit margins for the decade have been 3.1%. It currently stands at 3.6%.


Analysts forecast earnings of 39.16p for y/e 30-Jun-2012, representing growth of 14%. For y/e 30-Jun-2013, the earnings are forecast at 43.39p, a further increase of 11%. Seeing double-digit earnings growth on a reasonable PE was an attraction for me.


Directors own 2.16m shares between them. There are 66.46m shares in issue, so management account for 3.2% ownership. Director Simon Evans shares are valued at £4.7m, Ian Page at £3.8m, and Edwin Torr at £2.1m. Three other directors have about £300k worth of shares between them. I am reassured to see the directors substantial stakes in the company.


I have used exponential fit models to determine an average annual growth rate over the last decade. Revenues have grown by 10.8% CAGR, operating profits by 17.8% CAGR, adjusted EPS by 16.0% CAGR, and number of shares in issue (which ideally should be as low as possible, of course) by 4.0% CAGR

Great 10-Year Record = Great Future, Right?

Interesting PDF by Tweedy, Brown Company. They posed the question "How well did companies with great 10-year records as of December 31, 1990 perform in the next 7 years? A study of the predictability of long-term earnings and intrinsic value growth".

Page 2 explains the basic setup: 71 high ROE companies had an average ROE of 28.9% over the decade to 31-Dec-1990. They had an average 18.8% CAGR in EPS.

What they found: Over the next 7 years, 33% of the companies reported lower EPS in 1997 than in 1990. 26% had 7% CAGR in EPS or less. 22% had 8.5%-14.7% CAGR in EPS. Only 19% had a growth rates of at least 15%.

A similar pattern was noted in "intrinsic value", defined as 10X EBIT + net cash. Despite 7 years of cash generation, IV was lower in 1997 than in 1990 for 28% of the companies. Only 15% were able to increase IV at a rate of 15% or more.

Basic conclusion: consistently high past ROEs  does not indicate future ones.

On page 5, they did their own estimates and concluded:
In Schedule IV, the author’s “best guess” estimated growth rate for sales and EBIT over the next seven-year 1990–1997 period can be compared to the actual growth rate in intrinsic value (10x EBIT value) and e.p.s. that occurred over the 1990–1997 period. The author’s best guess about future growth, which was based solely upon examination and extrapolation of historical financial information (and without any qualitative information), was an extremely inaccurate predictor of the actual growth that subsequently occurred over the seven-year 1990–1997 period.
 Page 11:
Aside from increases in EBIT that can be generated by price increases or cost cuts, which are
often one-time turnaround type changes, the engine that drives EBIT growth over the long term is sales growth. And more sales generally require more operating assets such as inventory and
property, plant and equipment.
Companies that grow a lot over a long, long period of time, have to have sufficient opportunities to reinvest earnings at high rates of return in order to generate more sales and earnings. The math is easy. The hard part is unearthing, sifting, weighing and assessing the qualitative information that drives financial numbers. Isn’t it a paradox that most of what is written about investment analysis in textbooks and journals is about quantitative information, and so little is written about digging up and analyzing the qualitative information that ultimately drives the financial numbers?

AFF - Afferro Mining

I finally completed my AFF NFSC 2012 submission. Wish me luck. Links:
The text of the document appears below.

NFSC 2012: AFF - Afferro Mining

In April 2011, under a plan of arrangement, African Aura Mining split into two equal parts in order to “unlock the latent value” in both parts [3]; one of which is Afferro Mining.

AFF (Afferro Mining) is a TSX-V/AIM listed exploration and development company with iron ore projects in Cameroon and Liberia - both of which are in West Africa, for the geographically challenged people like me. It is ISA-able.

Some basic stats: based on a share price of 52.8p and 104m shares, the company has a market capitalisation of £54.9m. As reported for 30-Sep-2011 [1] , their equity amounted to $60.9m (£39.3m), with net cash $21.9m (£14.1m) [2]. They reported no turnover, and their  “comprehensive” losses for 9 m/e 30-Sep-2011 were $7.2m (£4.6m).

In December 2011, AFF sold its stake in “Putu” for $65m (£41.9m) cash, and a further deferred cash payment of $50m (£32.3m) [4]. The transaction requires shareholder approval and regulatory consents, but I am not anticipating any problems.

All told, the cash underpinning AFF is 77pps [5]. So, in the most simplistic of terms, for 53p, you get 77p in cash (albeit some of it is deferred consideration), and all the resources for free. For sure, AFF will need to plough that cash into developing its resources, so it’s a question of whether it can generate more value from the resources than it can by expending its cash. The company has stated that due to the divestment programme, it has sufficient resources to develop assets beyond 2013 [5]. Shareholders can therefore take comfort from the fact they are unlikely to be diluted in the near term.


DCF VALUATION -- In April 2011, Stockopedia published a report on AFF [6]. They cited Panmure Gordon’s note giving a DCF valuation before risk adjustment of 2047p per share, and a risk-adjusted value of 491p per share. Things have changed since then, but it’s worthwhile noting how things stood at the time, and just how favourable the discrepancy between price and value was.

COMPARATIVE BASIS -- A compelling valuation was provided yesterday by “j1nxed” posting on ADVFN [7]. The valuation method is relative, comparing EV/TFe (Enterprise Value over Total Fe) against a group of peers. Based on his figures, a fair value for AFF would be $4.37 - way above the current price of $0.81. By way of explanation, the beige box above the column is AFFs theoretical share price on the EV/TFe multiple for the comparator company. The black text inside the column is the EV/TFe (100% iron) for the comparator. Huh? Let’s take AFF, based on 103m shares at $0.81 ps with $78m in cash (ignoring the actual minimum Putu deal), Excluding AFF, the average EV/TFe for comparables is $0.579/t. Using that as a basis for AFF and TFe of 644Mt, that implies an EV of $372.876m, add on the net cash of $78m to give a fair market value $450.876m, divide by 103m shares to get a target share price of $4.37 (293p). AFF is currently trading at an EV/TFe of $0.008/t [9]

OUTRIGHT BUYER VALUATION -- As a further gauge on value, I considered the recent sale of Putu for £74.2m (=£41.9m cash + £32.3m deferred). According to AFF, the management target total resource is (greater than) 3.5 Bt. Mano River Holdings (owned by AFF) had a 38.5% stake, putting the value of an iron ore mine at  £55m/Bt (=74.2m / 0.385/3.5). Looking at the summary on ADVFN dated 13-Dec-2011, I notice that AFF has a 100% interest in the Nkout iron ore project, with a target of 4Bt. That implies a valuation for AFF of £220m (= £55m/Bt * 4Bt), or 211pps, which is about 4X its current market capitalisation. I have completely ignored the current cash position and the three prospects it also has in Cameroon (Ngoa, Akon, Ntem). Obviously, this is a very “finger in the air” valuation on my part, assumes “all things being equal”, which they are unlikely to be, and so on. But it does give you the distinct flavour that AFF is undervalued.

Summary of valuations:
* Current share price: 52.3p
* DCF basis: 491p - 2047p
* Comparative basis: 280p
* Outright buyer basis: 210p


da Silva, Luis - CEO and President

Evans, Dave - Independent Director

Granovsky, Boris - Independent Director

Netherway, David - Chairman

Pas, Guy - a non-exec director. At 13-Dec-2011, and RNS notice http://bit.ly/ApwHKT stated that director Guy Pas owned 6.2m shares, amounting to 5.89% of the company, or £3.4m.

Total board and management appears to be around 7.8m shares, which is 7.2% of the company. There are employee options of 7.3m shares, bringing the fully diluted number to 111.2m.


  • Nkout project is well located, with a 30km connection to Sundance’s planned rail line. Finance decision expected May 2012.
  • Cameroon has stable government for over 20 years. Democratically elected government since 2006. USD 16bn foreign direct investment in mineral, oil and agricultural sectors. Sustained UN and US commitment.
  • Nkout first production is as yet unknown.


BIF - Banded Iron Formation resource

DFS - Definitive Feasibility Study

DSO - Direct Shipping Ore

MRE - Mineral Resource Esitmate

PEA - Preliminary Economic Assessment

PFS - Pre-Feasibility Study


[1] Consolidated Interim Financial Statements for the 3 and 9 months ended September 30, 2011. http://bit.ly/xXXx9F (PDF)

[2] Cash and equivalents are the only interest-bearing items.

[3] Completion of arrangement; commencement of trading. 13-Apr-2011 http://bit.ly/xtBGyI

[4] Sale of Putu Iron Ore Project http://bit.ly/xp5R4O

[5] Conference call 12-Dec-2011 http://bit.ly/w8vBWd (PDF)

[6] Afferro - An Iron Investment for 2011 http://bit.ly/ekekdS

[7] j1nxed - 5 Jan'12 - 12:45 - 11488 http://bit.ly/wMRy7t

[8] Putu, Liberia, Overview http://bit.ly/xqqndn

[9] Calculation of EV/TFe for AFF. Assuming a share price of $0.81, 103m shares, the market cap is $83m. Lop off $78m for cash (although the amount expected from the Putu is a lot higher), to give an EV of $5m.

Based on a 100% interest in inferred 2.0Bt at 32.2% iron at Nkout , that implies 644Mt at 100% (=2Bt * 32.2%).

Divide one by the other (5/644), giving $0.00776/t, or, as you round in your graph, $0.008/t.

Created: 19-Jan-2012