Wexboy
29 Dec 2016
TGISVP - Mincon Group 2016 – The Great Irish Share Valuation Project (Part IV):Company: Mincon Group (MIO:ID)Last TGISVP Post: HereMarket Cap: EUR 162 MPrice: EUR 0.77Mincon’s IPO in late-2013, in the teeth of a commodity bear market, may not have seemed like the smartest idea at the time…but looking back, it seems like genius. Founder Patrick Purcell & family retained a 57% majority stake, while the IPO proceeds allowed management to adopt a longer-term operating perspective (in an obviously difficult environment), invest in restructuring, new product development & other growth initiatives, and also execute a number of bolt-on acquisitions.[NB: There have been some notable departures (CEO, CFO, Chairman & Senior Independent Director) – some to be expected, like the 2015 departure of the former CEO after 30+ years, others perhaps not. Something to monitor… However, the current CEO Joe Purcell obviously offers continuity, while the recent NED appointment of old hand Hugh McCullough is also reassuring.]These acquisitions, plus some encouraging organic growth, have delivered healthy revenue growth in the last couple of years – the current revenue run-rate (as of end-June) has reached a new €74 million peak. However, operating margins which previously averaged almost 23% (prior to 2015) have taken a big hit since, though now appear stable around 14% – consistent cash flow shortfalls (due to increasing receivables & more decentralised inventory, neither of which appears alarming) would suggest we focus on the last twelve months (LTM) operating free cash flow (Op FCF, i.e. operating cash flow, less capex) margin of 8.7% instead. In terms of valuation, averaging the two extremes seems fair, with the resulting near-16% average margin deserving a somewhat generous 1.67 Price/Sales multiple*. We’ll also incorporate surplus cash of €36 million into our valuation, which is available to fund earnings-enhancing investment, acquisitions, share buybacks/tender offers, etc. (& the recent trading update implies an additional €1.3 million of cash). Finance expense is de minimis, so an incremental €16 million of debt** can be comfortably employed here also (limiting finance expense to 15% of Op FCF) – as usual, I’ll apply a 50% haircut to this debt adjustment to be conservative
EUR 74 M Revenue * 1.67 P/S + 37 M Cash + 16 M Debt Adjustment * 50%) / 211 M Shares = EUR 0.80Mincon is pretty much fairly valued here – if you’re finally ready to take the plunge, it may still offer a compelling lower-risk play on the natural resource sector. The company’s tackled some necessary restructuring, invested in new product development, boasts a strong balance sheet, potentially could double current operating margins, and a weak euro adds a powerful new tail-wind (with Brexit posing zero threat). It’s also encouraging to see significant stake-building from Setanta Asset Management (a rare Irish value shop, at 13.5%) & Norman Rentrop (at 8.4%) – with management now emphasising internal investment over acquisitions (which they prudently perceive as too expensive), I wouldn’t be surprised if these shareholders push for a tender offer in due course, to reduce what may otherwise become a growing cash pile.Price Target: EUR 0.80Upside/(Downside): 4%[Again: *Per my rule of thumb, based on long-term observation of market/M&A multiples, a 10-12.5% operating margin deserves a 1.0 P/S multiple (on average). And higher margins justify expanded multiples, e.g. a 30% margin might deserve a 4.0-4.5 P/S multiple. Also, see my related DCC notes & commentary here. **Here’s the math: (6.4 M Op FCF * 15% – 0.2 M Finance Expense) / 5.0% Financing Rate]For related links/graphs/files, plus other TGISVP analyses/price targets: Google the Wexboy investment blog.
