Wexboy
03 May 2016
TGISVP - Origin Enterprises 2016 – The Great Irish Share Valuation Project (Part I):Company: Origin Enterprises (OGN:ID)Last TGISVP Post: HereMarket Cap: EUR 856 MPrice: EUR 6.814Origin 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 6.64So, 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 6.64Upside/(Downside): (3)%For related links/graphs/files, more TGISVP analyses/price targets...plus my subsequent OGN trading update comments: Google the Wexboy investment blog.
mcescher
30 Mar 2016
Valuation and growth of Origin Enterprises Origin Enterprises is looking undervalued on this report [link]
