|2016 – The Great Irish Share Valuation Project (Part I):
Company: Origin Enterprises (OGN:ID)
Last TGISVP Post: Here
Market Cap: EUR 856 M
Price: EUR 6.814
Origin also recently hit my previous Price Target (of EUR 6.34 per share). Adverse weather & squeezed farm incomes may be an obvious culprit, but management deserves some blame too… Here’s the latest annual FY-2015 report (see p. 29): A 15.0% EPS CAGR is touted by management, stretching back to the original IPO in 2007. Except the company enjoyed massive post-IPO/acquisition-led growth the following year – re-base accordingly to 2008 & the CAGR nearly halves to 8.5% pa. And that includes plenty of other moving parts/JVs/associates, which the company’s been slowly divesting since…2011 offers a pretty clean comparison vs. 2015, with Agri-Services revenue/operating profit growth halved again, notching up an average 4.2% pa rate over the last 4 years! Unfortunately, none of that includes the significant FY-016 earnings reversal management’s now flagged…
The moral of the story: Don’t pitch yourself as a growth stock, unless you’ve got the numbers & strategy to back it up! Growth in the fertiliser game’s all about consolidation, whereas Origin’s been mostly all about divestment – fortunately, with Valeo now sold, only animal feed’s left as a potential non-core asset – with just €80 million spent on acquisitions in the past three & a half years. Time for a step-change… Overall, it’s a pretty stable core business, so management needs to start milking it for cash to return to shareholders (via dividends/buy-backs), or else accelerate growth by ramping up its leverage & acquisition pipeline/spending (more acquisitions, bigger acquisitions, or both…) – at this point, I’d still prefer a bet on the latter.
Post-divestments, Origin’s adjusted operating margin’s a little lower at 5.3%, which now deserves a 0.5 Price/Sales ratio. But we should also reflect a much improved balance sheet (& acquisition capacity) – since the business is seasonal, let’s adjust for average unrestricted cash on hand (in the last year) of €117 million. And with actual interest paid amounting to just 8.3% of operating profit, debt could increase an additional €101 million (again, at a 5% rate) & still leave interest coverage at a manageable 6.7 times (i.e. 15% of operating profit) – as usual, to be prudent, we’ll haircut this debt adjustment by 50%. And in terms of profitability, management’s guidance of 52 cents adjusted diluted EPS will hopefully see earnings re-based for growth, so a prospective 12.0 P/E now seems appropriate:
(EUR 0.52 Pros Adj Dil EPS * 12.0 P/E + (1,434 M Revenue * 0.5 P/S + 117 M Avg Cash + 101 M Debt Adjustment * 50%) / 126 M Shares) / 2 = EUR 6.64
So, Origin’s fairly valued here – plus we no longer face an over-hang, with Aryzta (see above) exiting its majority stake last year. Looking ahead, hopefully we’ve reached an inflection point, with management now fully focused on leveraging the core business. And Origin’s agronomy unit may be an intriguing wild card/kicker, as we see opportunities (& unicorns) blossom elsewhere in agri-tech/big data. Again, this depends on management…they still need to recognise the potential value in granting it more autonomy, rather than treating it as simply a fertiliser sales & marketing unit.
Price Target: EUR 6.64
For related links/graphs/files, more TGISVP analyses/price targets...plus my subsequent OGN trading update comments: Google the Wexboy investment blog.|
|As profits' warnings go,this is pretty dire.Not only do we have a warning,the company can't give (even a rough) estimate.I would not be surprised to see further selling.|
|Wexboy, did you buy?|
|Weak enough first half.|
|Steady as she goes,fairly cautious outlook.|
|Goodbye Valeo,it was nice knowing you,Romania here we come!Market seems none too impressed.|
|Surely the 200million acquisition of balconi by valeo foods would get a mention.|
|I will be interested to see who has joined the shareholder register.|
|EPS ahead by 7.5%,agri-services taking up the slack after the sale of the marine protein JV,looking good.|
|I wonder what the situation with Agroscope is,I presume there must be some disruption?|
|Positive trading statement,trading on 14 times earnings forecast,I'm happy to hold at this level,notwithstanding its weather related (and,in Ukraine,political) risks.|
|Most interesting Wexboy,thank you.|
|Company: Origin Enterprises
Prior Post(s): 2012 & 2013
Price: EUR 7.55
I was only mildly bullish on Origin in 2013, but the shares actually surged over 50% in the past year! While the company continues to make steady progress, it's not immediately obvious intrinsic value's kept pace with the share price. Quite honestly, I consider their associate & JV disposals the most encouraging news in the past year. I've long questioned the logic behind hanging onto these stakes, when a more focused strategy offers better upside. The dam broke, though, when the Saudis showed up & lifted Origin's 24% stake in Continental Farmers Group. This was quickly followed by the sale of the company's stake in the Welcon Invest JV to Austevoll Seafoods (AUSS:NO) in July, for EUR 93 million. Now there are growing whispers of a possible Valeo Foods IPO. [Though I suspect a trade sale could be more attractive, despite investors' new-found IPO enthusiasm]. That would pretty much clear the cupboard & present a great opportunity for a step-change in Origin's corporate strategy:
i) Finish the job: Management appears to have an ambiguous attitude towards the animal feed business, which clearly lacks sufficient scale. Understandable, perhaps it's another low margin/high volume business. On the other hand, I think it's a pretty complementary fit with fertilizers & agronomy. Management needs to cut loose, or go big here sell animal-feed asap, or else map out a consolidation strategy within the sector.
ii) Get the monkey off its back: Aryzta (YZA:ID) still owns 68% of Origin this stake will continue to be an overhang for the stock (not that shareholders seem to care right now!). More importantly, it's a potential conflict of interest case in point, Origin originally stated the Welcon proceeds would be 'used ultimately for investment in our core Agri-Services business.' But a few months later, the company actually executed a 100 M tender offer instead, at EUR 7.50, with most of the cash going straight into the majority shareholder's pocket! Clearly a great deal for Aryzta, but for minority shareholders maybe not so much...they might have preferred to see the money reinvested in their company (or funding an acquisition), rather than being spent on an over-priced tender.
iii) Uncover the jewel in the crown: Agronomy's a high value/high margin knowledge business. With the dramatic improvements in satellite & sensor technology, and in (big) data collection, analysis & prediction, there's obviously broader scope to be a tech business also. Noting the average Western farmer's now close to retirement age, plus the insatiable global demand for food, we're on the cusp of a new wave of farmers & intensive farming techniques. This is a high growth opportunity for any agronomy business, whether it's maximizing yields in (N America), or simply lifting yields (in Russia/Ukraine this acquisition is a small but promising start). Unfortunately, Origin's agronomy division appears to be just another sales channel at the moment. Now, this obviously isn't going to change tomorrow, but breaking it out as a separate segment (internally, and externally) would be a great start when divisional management is (visibly) responsible for & incentivized by their own P&L, good things tend to happen in terms of operating strategy & revenue/profit growth!
iv) Bulk up: Origin's agri-business is a blessing & a curse... It's reassuringly stable, which allows for fairly aggressive leverage. But it's also low margin/high volume it's not clear how much scope's left for consolidation and/or margin expansion in the UK/Ireland. If the company wants to maintain/accelerate its growth rate, now's the time to step up & take a few risks. An aggressive new markets & acquisitions strategy is the answer Origin now has significant debt capacity to fund such a strategy, and if investors keep loving the stock it's a perfect opportunity to raise a hefty chunk of fresh equity. The reputation & calibre of Origin's new CFO (to be announced shortly) is crucial to this new strategy.
Meanwhile, adjusted operating margin's stable around 6.4%, which still deserves a 0.5625 Price/Sales multiple. I'll also make a (positive) debt adjustment here I calculate another 155 M of debt would still limit net interest expense to 15% (or less) of operating profit. As I mentioned, I'm quite comfortable with a higher level of leverage here, so I'll break my usual habit of hair-cutting this debt adjustment by 50%. On the earnings front, we've seen an 11-12% growth rate for a number of years now, but the Welcon disposal knocks this back to low single digits for 2014 (and a Valeo IPO/disposal could hurt also) so I'll scale back a smidge to a 10.5 Price/Earnings multiple. Averaging the two approaches, we get:
(EUR 0.505 EPS * 10.5 P/E + (1,368 M Revenue * 0.5625 P/S + 155 M Debt Adjustment) / 125 M Shares) / 2 = EUR 6.34
Origin's mildly over-valued, but still an interesting/high potential stock. I've come close to buying it on a number of occasions...but it was never quite cheap enough! One to watch though we may possibly see a bit of a bumpy period to come (in terms of results, or investor sentiment, or both), as the company (hopefully) transitions from the old Origin to a new higher growth Origin. Which might offer a better buying opportunity for the enterprising investor...
Price Target: EUR 6.34
|Revenue down 12.5% for first three months,not great.|
|Didn't take them long to start competing with Continental Farmer's Group!|
|Having analysed these results,one word springs to mind....................................................................................................yipeeee!!!!!!!!!|
|Please make that 'almost 100%'! Mama never told me they're be days like this.|
|Disregard the word 'almost' in my last post!|
|Adding in dividends,they're up almost 50% in one year,not bad.|
|Let's hope they spend the 90 odd million wisely.|
|I\'m braced for a subdued trading statement,weather has probably weighed on fertiliser sales and agri-advice.|
|Why has the Origin shareprice not responded to the bid for CFG,they own a chunk of their shares.|
|2013 The Great Irish Share Valuation Project (Part VII)
I take a look at Origin Enterprises, plus a batch of other Irish stocks:
|Origin is covered in today's The Phoenix magazine.
For two profitable, debt free, dividend paying companies trading at less than cash look here ( and win an investment book of your choice ):
|Positive statement,making good progress,25 million euro to be invested over next four years,dividend up 34%,Agrii gaining traction.|