Film, camera and time for 'share price' action
Shares in film distributor and producer Entertainment One (ETO: 199p) are on the verge of a major share price breakout and one that looks fully warranted. It is also good news if you followed my advice three months ago to buy shares in Marwyn Value Investors (MVI: 155p) ('A highly profitable arbitrage play,' 11 February 2013).
Currently, shareholders in Marwyn Value Investors have interests in five companies: Entertainment One (ETO); healthcare software company Advanced Computer Software (ASW); Breedon Aggregates (BREE), the largest independent aggregates company in the UK; specialist asbestos services company Silverdell (SID) and transport and consumer goods investment company Marwyn Management Partners (MMP). Of these companies, all bar Marwyn Management Partners, which only accounts for 1.7 per cent of the net assets of Marwyn, are Investors Chronicle buy recommendations. Admittedly, shares in Silverdell were suspended this morning pending clarification of the company's financial position. However, the holding accounts for less than 5 per cent of the Marwyn's book value.
By far the largest holding is in film producer Entertainment One, the company behind Peppa Pig. That's because three-quarters of Marwyn's net asset value of 205p a share is accounted for by its stake in Entertainment One. This means that buying shares in Marwyn, which trade on an unwarranted 23 per cent discount to net asset value, is a decent way of gaining exposure to Entertainment One. That's something well worth doing because Entertainment One gained a full listing on the London Stock Exchange on Monday, 1 July, so it will now be eligible for entry into the FTSE indices. And with a market value of £532m, the company is a live candidate for entry into the FTSE 250 at the next quarterly review in early September. So index tracking funds will be forced to buy the shares.
Chart breakout looms
It's worth noting that Entertainment One’s shares are also within touching distance of their record high of 209p. It's blue-sky territory after that. A higher valuation would be fully justified on fundamentals. With the full contribution from the acquisition of Alliance Films to come, broking house Peel Hunt expects revenues to soar to £840m in the current financial year to end March 2014, up from £629m in the year to March 2013. On this basis, pre-tax profits are forecast to increase by more than 40 per cent from £53.8m to £76m in the financial year to March 2014. In turn, this lifts EPS from 15.9p to 20p. May's full-year results gave reason to believe that Entertainment One's management team can hit these estimates. For good measure, the company's board has proposed the introduction of a progressive dividend policy for the end of the current year.
In the circumstances, I continue to rate Marwyn's shares, on a spread of 156p to 159p, a value buy and have lifted my price target from 165p to 185p. I also rate Entertainment One shares a trading buy and have a three-month target price of 240p, equating to a forward PE ratio of 12. This is slightly below the 250p target price of broking house Peel Hunt.
Awaiting news of a farm-out deal
Shares in Global Energy Development (GED: 73p), the Latin America-focused petroleum exploration, development and production company with operations in Colombia, remain close to a major support level. At this depressed valuation the company is being valued at only £27m, or half net asset value of £52.8m.
This is partly due to the fact that the potential farm-out of a material portion of the company's interest in its Bolívar shale oil properties, located within the Middle Magdalena Valley in Colombia, South America, has taken far longer than planned. However, in a trading statement yesterday the company confirmed that it is continuing negotiations with parties. I still believe a deal will happen, and one that will spark an overdue share price rerating and a substantial one at that.
To recap, Global Energy is working together with investment bank Jefferies International to find a farm-out partner and guidance is for an announcement to be made by the end of September. The process of due diligence and hammering out terms can take time and, of course, the timing is subject to third-parties. However, it is realistic to assume that a farm-out will ultimately be achieved given the presence of high-quality operators in the area including oil majors ExxonMobil (NYSE: XOM) and Royal Dutch Shell (LSE: RDSA). Any disposal, or farm-out, will also highlight the chronic undervaluation of Global Energy's shares.
Seriously undervalued
This view is supported by analyst Andrew McGeary of broking house Northland Capital. Commenting on the trading update yesterday, Mr McGeary noted: "The Rio Verde water disposal well and more consistent production (last year Tilodiran-2 experienced 120 days of downtime) should significantly enhance this year's profitability as per our forecasts. The company remains inexpensive on earnings and robust given cash generation. On reserves metrics, the shares are exceptionally cheap and the Magdalena assets remain potentially high impact. We await further news as to the appraisal and farm-out prospects in Bocachico and Bolívar respectively."
For the current financial year to end-December, Northland expects Global Energy to produce revenues of around $45.8m, up from $44m (£29m) in 2012, but in the absence of the issues which dragged down profits in 2012, full-year pre-tax profits are expected to rise from $2.7m to $6.2m. On this basis, expect underlying EPS of 11.4¢, or 7.5p at current exchange rates. This means the shares are priced on a very modest 10 times earnings estimates and on less than half Northland's risked-reserves-based price target of 186p.
Catalysts for a rerating
True, the shares are well below my original buy advice of 103p ('Insiders major buy signal', 17 Dec 2012), but there are two major catalysts which could drive the price higher in the coming months.
Firstly, Global Energy is due to report financial results in late September. In my view, profits could have easily more than doubled in the first six months of this year. This will undoubtedly be seen as a positive by investors and can only highlight the undervaluation of the shares on an earnings basis as Northland estimates indicate. Secondly, any farm-out deal will highlight the value in the Magdalena assets and the unwarranted discount to book value the shares are trading on.
In the circumstances, I am comfortable reiterating my buy recommendation with Global Energy's shares priced on a spread of 70p to 73p. Moreover, I still believe that a target price of 140p is feasible.
Seeing the light at Bitterfeld
Solar-wafer manufacturer PV Crystalox Solar (PVCS: 11.5p) has just announced that it has accepted an offer from local management of its facility at Bitterfeld, Germany.
The buyout team will take over the plant and the associated obligations, including those relating to grants and subsidies worth €18.4m, in return for a cash payment of €12.3m (£10.5m) from the company. Excluding this cash payment, the gross assets of the plant are €8m, representing the book value of the plant and equipment. Polysilicon production was suspended at Bitterfeld in November 2011, since when the facility has operated in idle mode and has been racking up annual cash losses of around €9m. In my view, a disposal is much preferable to a shutdown as it reduces cash outflows, gives certainty over their timing and can be completed in a much shorter timescale. Also, the cash payment to the management buyout team looks fair in light of the cash losses the facility was racking up.
It's worth noting that, as I predicted, the EU Commission has now enforced provisional anti-dumping duties on solar products imported from China. This is clearly beneficial for PV Crystalox and supports a more favourable market environment within the EU during the second half of the year. The duties will be levied on imports at an average rate of 11.6 per cent until 6 August, but unless the two sides reach an agreement by that date, the EU Commission has stated that the anti-dumping tax rate will rise to 47.6 per cent. In terms of the timeline, the temporary tax regime will remain in force until December, after which the EU Commission needs to decide whether to impose permanent tariffs on photovoltaic products made in China. If negotiations fail to resolve the dispute, the provisional duties will become permanent for five years. Anti-competitive practices by Far Eastern solar wafer manufacturers led to sharp falls in the spot wafer price, which hit PV Crystalox.
Encouragingly, PV Crystalox notes that spot market price declines appear to have halted and that there has been "some modest recovery in prices across the value chain since the beginning of the year".
It was the combination of a potential cash return and management being able to salvage some value from the business that prompted me to advise buying the shares at 12.15p at the start of this year ('Seeing the light', 21 Jan 2013). The business is now being run with the aim of conserving cash in view of the challenging trading environment. This has led to a focus on cost control and inventory management, including trading of excess polysilicon as opportunities arise.
Therefore, it's worth pointing out that PV Crystalox had net cash of €89.4m (£75.6m), or 18.6p a share, at the end of December 2012. After factoring in the aforementioned cash payment of €12.3m, worth 2.5p a share, to the management buyout team at Bitterfeld, and first-half cash losses at Bitterfeld, PV Crystalox's shares are still trading well below net cash on the balance sheet. Moreover, the company will be returning 7.25p a share to shareholders, details of which will be announced shortly. The shares remain a highly speculative buy on a bid-offer spread of 11.5p to 12p.
