Thursday, 18 April 2013

Compass Group (CPG) ... a free hit?

Sodexo (SW FP, mkt cap €10.4bn) is currently off 7% this morning on the back of softer than expected H1 earnings and expectations (according to Bloomberg) that consensus earnings will be cut by c. 5%. North America seems to be ok, but as was always likely, Europe is soggy. By contrast, Compass Group (CPG LN, mkt cap £14.8bn) is just over 1% lower, at 815p/shr. As a percentage of sales, CPG (c. 44%) is more exposed to North America than SW (c. 39%), but at just c. 5% more the difference is relatively marginal. Both have c. 35% exposure to Europe. One would imagine that a tough European market would also be impacting CPG, and that analysts may sharpen their pencils. A short on CPG looks like a free hit. So I've bopped it at 815p.

In summary:

  • SW disappointing H1, likely c. 5% cuts to earnings.
  • CPG and SW both c. 35% exposed to Europe.
  • CPG trading on 15.8x forward earnings (Bloomberg) close to six-yr high.
  • SW trading on 16.6x forward earnings (Bloomberg).
  • Strong correlation between share price performance of CPG and SW; as one would expect of World No.1 and 2 in outsourced catering.

Sodexo vs. Compass share price
Source: Bloomberg
Compass valuation, forward P/E and EV/EBITDA close to 6-yr highs
Source: Bloomberg


Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Thursday, 11 April 2013

Afferro Mining (AFF) ... IMIC might do it


Afferro’s share price has fallen almost as quickly as it had risen in December last. At 60p/shr, it now trades roughly where it was prior to the bid speculation, which prompted the shares rise to as high as 105p. Capitalised at £63m, its enterprise value equates to c. £8m, which suggests that its 2.5bn tonnes of prospective iron ore (1.2bn tonnes indicated / 1.3bn tonnes inferred) is priced at c. 4.8 US cents per tonne. I am told that the going rate for African iron ore juniors EV/contained Fe is between 20-30 cents per tonne. On this basis, AFF would appear cheap. However, AFF is somewhat stranded in Cameroon, many miles away from a port and with no passing railway line. The cost to remedy its isolation is predicted to begin at $4bn.

Sundance Resources (SDL AU, mkt cap AUD 270m), another iron ore junior, is also in Cameroon and now that Hanlong (in hindsight some ramshackle Chinese outfit) is no longer bidding, would seem to be just as isolated. SDL’s share price has fallen from above 30 AUD cents per share to less than 9 from the evaporation of this bid. It may be worth noting that although SDL may be as stranded as AFF, now capitalised at 270m AUD, its resource is priced at c. 9.5 US cents / tonne. Almost twice as that of AFF’s. But this discrepancy is probably neither here nor there as both prospects are nonviable without infrastructure. 

What I find odd, when considering the collapse in AFF’s share price, is that AFF is still in a bid situation. Although Jindal Steel (JSP IN, mkt cap £3.7bn) was touted as a potential bidder, it was the small AIM listed company, IMIC (IMIC LN, mkt cap £16m) which made a formal approach. IMIC proposed it would be prepared to “make an offer, subject to completion of satisfactory due diligence and certain other conditions, for the entire issued and to be issued share capital of Afferro at between 115 and 140 pence per Afferro share. The consideration is to be satisfied by an undisclosed mix of cash, yet to be raised by IMIC, and new IMIC shares.”  The lower of this range equates to 91% higher than AFF’s current share price.

The decline in AFF’s share price suggests that IMIC’s bid is not credible. However, since making its initial approach in December last, IMIC has increased its stake in AFF to 6.8% of the shares (1.8% through options). Further, according to its recent interims from 28 March 2013, IMIC have “... appointed Bank of America Merrill Lynch in the fourth quarter of 2012 to advise on a possible offer for the entire share capital of Afferro ...” IMIC appears to be continuing with its due diligence and efforts to raise finance.

IMIC may be more credible than its current market cap would suggest. It highlights that it has a strong strategic partnership with the African Iron Ore Group (AIOG). The AIOG comprises China Railway Group (390 HK, mkt cap £6.3bn), China Machinery Engineering (1829 K, mkt cap £2bn), MCC Huaye Resources Development, and China Railway Materials. How strong this strategic partnership is remains uncertain, but it is a formidable roll-call.

In terms of what needs to be raised, if IMIC were to tender full cash at the lower end of its suggested range, 115p/shr, this would equate to £121m. The upper end of 140p/shr would require £147m. However, it is worth recalling that AFF retains c. £55m in cash on its balance sheet, or c. 52p/shr. So the net requirement may be as low as £66m and up to £92m. Further, in October 2012, IMIC secured a US$50m/£32m bond instrument “to unlock the potential of iron ore in West and Central Africa.” In June 2012, IMIC raised £10m in equity at 20p/shr, principally funded by high net worths and support from its strategic partner, the African Iron Ore Group (AIOG). It would appear that IMIC has good connections and is relatively competent at raising finance. Appointing BoA Merrills will also probably help on the latter.

Earlier this week, a niche specialist resources broker, Ocean Equities, published a detailed research note on IMIC. The note outlined IMIC’s plans for AFF; in corollary it also demonstrated AFF’s extreme cheapness relative to peers. While the note was well written it seemed a bit presumptuous to detail a company’s plans for that of another when the former hadn’t even tendered an offer to the latter. A bit like me viewing a house and telling the vendor to their face what my decorative plans were to his/her home before an offer was accepted and solicitors’ details exchanged. I would imagine that IMIC had a strong hand in constructing this note.

At 60p/shr, I reckon AFF presents an attractive speculative buy opportunity. So I have bought.

In summary:
  • AFF remains in a bid situation where a suggested offer has been in the range of 115p to 140p per share.
  • AFF is currently priced at virtually a zero enterprise value.
  • AFF is net cash positive, with $89m at the last count.
  • IMIC may be a more credible suitor than the market believes.
  • IMIC has a good record of raising finance and has developed strategic partnerships with key infrastructure players. 

Afferro Mining share price
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

Northgate (NTG) ... looks vulnerable to an approach

I've bought a few shares in Northgate, the vehicle rental business, at 312p/shr. If I were a private equity house, I would be drooling over NTG.

I reckon NTG presents broadly the same rationale to purchase as did Speedy Hire (SDY), when I got excited about it (Speedily higher) at 30p/shr. 

I like Northgate (NTG, mkt cap £414m) for the following reasons:
  1. Debt is much less of a concern: In 2009 it was burdened with debt. Net debt stood at £936m. Three years on and the net debt position had been brought down by £551m to £385m at year end April 2012. It was lower still at the group's interims in October 2012; having fallen to £343m. I reckon it will continue to decline. Indeed net debt is forecast (Bloomberg) to fall to £306m for FY 2013. During this period EBITDA has declined from £363m in 2009, to £291m in 2012 and is forecast (Bloomberg) to be £250m in FY 2013. Net debt/EBITDA has declined from 2.6x in 2009, to a projected 1.2x for FY 2013. In 2014, net debt/EBITDA is forecast (Bloomberg) to ease further to 1.1x. In short, debt is much less of a concern.

  2. It is cheaper now than it was in 2009: Despite serious macro concerns remaining in Northgate's key markets, the UK (c. 75% EBIT) and Spain (c. 25% EBIT), I posit that the outlook is more encouraging than it was in 2009. However, while NTG's market cap has risen by c. £313m since 2009, it is considerably cheaper than it was in 2009. Since then, it has raised £108m via equity and generated £422m of free cash flow during 2010-12. That would suggest c. £217m of cash has not been reflected in its valuation, which equates to 52% of its current market cap. The difference between its 2009 valuation and now is further reflected by NTG's enterprise value, which has fallen from £1,039m in 2009 to its current £776m (see figure below). A further £65m (16% of mkt cap) of free cash flow is expected for 2013.

  3. Strong NAV support: Northgate has a net asset value of 275p/shr, providing strong support to its current price of 312p/shr.
     
  4. Significant cash generation through the difficult years: Northgate has continued to generate bags of cash during the weak economic backdrop. Free cash flow after net vehicle sales equated to £172m in 2009, £185m in 2010, £99m in 2011 and £138m in 2012; a total £594m over four years. A further £65m is projected (Bloomberg) for 2013. As highlighted above, debt is becoming much less of a concern. It is worth noting that the group's net interest cost equated to 36p/shr in 2012.

  5. Lowly rated relative to peers: Valuation wise, the shares appear lowly rated on 3x EV/EBITDA (Bloomberg). While serving different rental markets, this compares to the equipment renters Speedy Hire (SDY, mkt cap £263m) on 4.5x, Ashtead (AHT, mkt cap £3.2bn) on 7.1x, Lavendon (LVD, mkt cap £294m) on 4.8x, VP (VP/, mkt cap £137m) on 4.5x. I.e. it is probably 40% too cheap against the average of the equipment renters.  
The key risk is obviously cyclical. But you never know. Macro tailwinds may come about at some point.

In summary ...
Similarly to Speedy Hire, I like Northgate a lot. Even if the enterprise valuation doesn't re-rate, shareholders should be rewarded as the current value of the enterprise migrates over from the debt to the equity side as the cash generation reduces the former. £600m of free cash flow over four years is a lot for a business which is capitalised at £414m and has an EV of c. £740m. As highlighted above, net interest equated to 36p/shr in 2012. That's 12% of the current share price alone. The projected £65m of free cash flow in 2013 equates to a further 150p/shr or another 48% of NTG's current share price. As I said at the start ... if I were private equity I would be drooling.

Northgate share price
Source: Bloomberg
Northgate net debt reduction compared to EV and Mkt Cap
Source: Bloomberg

Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog.