Adam Davidson, CEO of Trident Royalties, discusses offtake milestones and catalysts to boost FY24. Watch the video here.
Interesting if it gets there as thats pretty close to the July Montanara bad news crash price, when I first entered. Have been accumulating some more sub 29p but think if it gets down to the 25p neighbourhood probably worth a bigger allocation. Dont want to get too large since Akatara is still not complete, let alone operating and the regular negative news flow still puts JSE in the "speculative" category until and unless they make good on Akatara and hit the anticipated numbers.
Thanks redlse. That is a very well crafted letter. Question is, of course, whether it gets DEC anywhere with the grandstanders - truth is, sadly, a frequent victim of polemic. Id be curious whether the committee is required to issue a formal conclusion/ statement itself to either keep this s***show going or put it to bed. Anyone familiar with procedure here please chime in.
Yes, that was my reaction too - i.e. why do this? I just ran the maths so for other's benefit, I note the following.
1) The transaction sold of 50 MMcfepd, representing 7.2% of DEC's 806 MMcfepd output at 29/3/23 (latest info available per their last presentation)
2) They state a transaction EV multiple of 5.7x 2024 , though thats not quite right as they used the $200mio transaction proceeds as opposed $207.5 EV, including their own 20% rollover, so correct '24 multiple is 5.9x . A minor point, but should be noted.
3) This compares with their current '24 EV (though using June 23 net debt) multiple of 4.9x, based off the $488mio consensus adjusted EBITDA. As we all know this is a somewhat depressing price, but interestingly, the transaction multiple is equivalent to a profroma share price of £19 o 95p on "old money" per share, which I find an interesting benchmark, given that sort of where I figure fair value to be.
So far so (sort of) good, though I cant say I particularly like the disposal of a core asset. I note that the Appalachian assets, to my mind are higher quality than the central region. Rusty and co made a lot of noise about the central region price uplift (which is true), but were rather quiet on the fact that the central region has twice the depletion rate of the Appalachian and a much higher operating cost, so net net I feel the Appalachian assets are superior, though the devil is in the details and we dont know the exact details of the sold assets.
In short, Im probably just about neutral on the transaction but do not understand why they did it, which does concern me.
Thanks - interesting blog. Also got me thinking and digging into the company more, which elicited the following observations
1. Actual organic growth is extremely low - 3% on 2022 and 4% in 2021. Essentially inflation/ subinflation so "ex growth" in the terminology. Im an ex private equity manager and have done buy and builds, but the p/e multiples for ex growth business sure arent in double digits and ultimately your pro-forma earnings growth and value creation is not based on growth per se but on scale driven margin improvements.
2. They clearly got a bloody nose with the Astragon development costs - as a result, capitalised development costs exploded form 9.3mio in '21 to £26mio in '22. Since they dont expense this immediately this has the potential to badly distort margins, and overstate profits if you overcapitalise/ underamortise. To be fair, their policy is to write off over two years, so it doesnt hang around too long, but what it tells me is Astragon came with a higher ongoing cost base than they had assumed
3. I note that not only the CEO has gone but also the Chairman - that is a very exceptional occurrence and implies there have been serious f'ups. The internal staff abuse culture clearly was an issue that needed addressing but the above issues are just as big (if not bigger for investors) and further indicators that all is not well.
As the blogger commented, that could be more bad news coming out with full year results as the new team clears the decks, which typically includes sandbagging all provisions and coming out with the worst story so they can then start afresh looking good as the new team.
I was about to pull the trigger and had a buy order at 1.80, but have now pulled it pending full year results to understand what is their real operating margin and also see if the new team have a solution for the lack of growth (the biggest issue for me when its still trading on a double digit earnings multiple). Am not surprised Jefferies (who know their tech) issued a hold recommendation recently with a 180 target price.
My 2 cents for what its worth
Ladies and Gents, can we please stay on topic here? There's already enough disruption with that maladjusted cretin Grey George (have filtered him out and would appreciate if others would stop feeding the troll, since lse.co.uk has disappointingly declined to block this basket case) , but US political mud slinging provides nothing useful or informative either. Whilst I dont think any of us are in favour of political grandstanding, the company had a case to answer last year after that Bloomberg article and to their credit, came out with a decent response and actions subsequently. That being said, I do think they have a long way to go, since climate change concerns are not going away, so Rusty and the team have to factor in how they best address this for the benefit of the company as well as an emissions perspective.
As was commented elsewhere the Oak guy's comments are pertinent and I also read his earlier article on the ARO, as this is the central plank of a critical report from last year that someone posted here. Whilst Im generally positive on Rusty and the team (and am now painfully long DEC), I have always struggled with their ARO and more specifically their long term assumptions, lack of a related sinking fund and painfully slow capping activities given the 30,000+ currently inactive wells. Whilst I think they have upped their capping and emissions control game with Next Lvl, I think they are going to have a tough time answering the question "how do you plan to fund your well capping program after 2050 when youre going to have no revenues since no-one will be buying gas anymore" Its obviously a matter of opinion as to where the gas demand curve goes in the long term, but even I struggle to see it continuing out to 2090, which is the basis of their ARO modelling and is an area which they will not be able to absolutely refute because it is literally unknowable. As a result, my guess is that they are going to come under pressure to significantly accelerate their capping activities and/or allocate cash to an ARO fund. Thats my 2cents but who knows how this all pans out.
Agreed (as does the market) re the pension good news. Trading outlook still remains soft and they need a Q4 beat or stronger '24 outlook to move the SP up from here. Fundamentally good company with strong market position but facing negative macro
Given some of the comments in the thread about SRC being over focused on growth and destroying shareholder value etc - I decided to dig further into the company to figure out whats happening. Some key observations:
Whilst the company has doubtless significantly upped its scale through acquisitions - with Nordkalk in particular, they have also successfully grown the top line organically as well as defended operating margins in a difficult environment.
Viz: LfL (Like for Like) sales growth was 13% in H1 '23 and 19% in 2022, with forward analyst forecasts indicating a pretty respectable CAGR to 2025 of ~6%.
EBITDA margin has actually grown from 18.1% in 2021 to 18.9% in 2022 and H1 23, despite the inflation s**tshow.
Buying companies for low multiples absolutely does NOT devalue the buying company – as a former private equity manager who has done buy and builds I can assure you that to achieve low acquisition multiples, achieve operational improvements and to achieve a higher exit valuation for the improved and enlarged whole is one of the surest ways to increase value. The company currently trades at 5.5x 2023 EBITDA, which even at the current low values means acquisitions have been accretive at the
Hi Vigneron - would also be very interested to hear from Max if you'd care to share. My email is jmglg@blueyonder.co.uk
Hi guys, am relatively new to JSE, though was tracking it for a while, and decided to pick some up last month when Montara blew up and it looked oversold, though speculative, so a fairly happy camper on that trade right now. That said, am curious where this goes looking forward so have been looking at the company presentation slides from July, and street forecasts and seems to me that consensus forecasts dont even include any Akatara revenues coming onstream, since producing asset volumes for 2024 are shown by the company at around 17,500boepd, which at. say, $75 per bbl would get them to revenues around $480mio in '24, and the street consensus shows $461mio. Am I missing something? Also, does anyone know - or can point me to information talking about the Akatara economics? Gas has very local pricing and Ive no idea what their benchmark will be - or if they have any offtake agreement in place. Can anyone help out on this so I can get a sense of that?
Hi Trek
You're right that deal related cost accruals would have been booked in other liabilities, but from what I see in the commentary the volume of such provisions (~$20mio?) doesnt reach even a fraction of these "other current liabilities" - $463mio at 6/22 falling to $303mio at 6/23, though i could be wrong given the potential hedging contracts they also set up - though I think they would be booked elsewhere.
Hi Trek. Yes, the FCF number is a bit of a curve ball. Looking though the cash flow (I ignore the P+L as its pointless, courtesy of the "market price" vs realised hedged numbers) there was a huge outflow in working capital settlement - primarily due to a $161mio reduction in "other liabilities". Interestingly, it went the other way in H1 '22, so looks like a volatile line item. These are big numbers however with zero commentary on the financial statements on their nature, which is something I would definitely like more visibility on. As a former CA and subsequent PE guy, to my mind a large number classified as "other" is never a good look and will be curious if they comment on it in the results presentation today
Last time they did a placement like this - which was short on explanations as well, the price subsequently tanked big time. Ultimately it worked out as they had a large acquisition to fund, though it was a while before it happened. Given the potential for similar market response, I wont be participating, since my working assumption is the market may likely puke again and I can buy cheaper in the market. I may of course be wrong, but there are too many similarities, so Im somewhat cautious about this.
Anyone got any idea why the price tanked 4% today in a quiet market on the news of the Mauritius/Madagascar sale? Im assuming its a tiny, irrelevant operation as they didnt even disclose terms, so no idea why there was such an adverse reaction, unless theres something else out there Ive missed?
Have been looking at RCH as potentially interesting but have a couple of thoughts/ comments to run by you if youve been following them a while, which it looks like you have
(a) Digital growth has stalled - they were claiming in the July trading call its due to to reduction in advertisers not wanting to be seen online near Ukrainian war news, but that isnt really convincing me along a more widespread digital advertising slowdown Im seeing across the industry (classic recession/ impending recession advertising behaviour). Any hearing/ seeing any other colour on this since its hugely important for them to dig their way out of the print decline
(b) you're correct about pension liability reductions across the board with higher fixed income yields and discount rates, but when I looked in detail at RCH's pension asset composition, there is a scary volume of Liability Driven Investments - the notorious derivative instruments which nearly blew up the UK Pension industry in September. Pension funds were exposed to huge losses form this but I dont see any public comment on this from the company - maybe someone on this has seen company commentary on this somewhere - ideally stating that they didnt have an issue with it?
Would be great if someone could comment on these two points if you have any additional intel?
For anyone who's interested or did some similar analysis, have been running through their operating numbers further and have a few comments which may be of interest
(1) Whilst the Express VPN acquisition was a material coup in my view and has taken them to another level, it should be noted that (a) its a lower margin business , resulting in 51.2% Privacy segment margin in H1 22 vs 55.8% (b) has doubled the level of employee share comp as a % of sales to 4.3% in H1 22 (and this IS a cost before anyone starts to pretend otherwise)
(2) They are playing around a bit with their numbers in two regards (a) they are not immediately expensing customer acquisition costs, but deferring them over an "expected life" including estimated renewals. Whilst technically you can argue for this, and they clearly did with the auditors, it is highly aggressive and absolutely not best practice particularly for a heavily B2C business where there are no long term contracts to back this up and things can change. It also overstates their earnings compared with comparable companies using a more conservative approach and may go some way to explain the apparently very low p.e. ratio they trade on (b) whilst they (correctly) make an adjustment to H1 22 segment results to reflect Express VPN pro forma acquisition costs, which highlights the segment revenue reduction I note above, they choose to then ignore this in the rest of the reporting. If one were to include this appropriate adjustment, then adjusted EBITDA margin fell in H1 from 42% to 32% - a quite significant margin compression. Moreover they then actually made a pro forma operating loss in H1 of $3.5mio and net loss after tax of $21mio. Admittedly the huge jump in D+A to $77mio contributes significantly to this, but the hammered EBITDA margin, hefty employee share costs also are a factor and makes me wonder how this is all going to look when they start reporting numbers without the benefit of technically not having to show these customer acquisition costs
In summary, I do think its an interesting company with a good position, but their numbers needed to be taken with a grain of salt and probably deserve discount as a result.
This is just my own analysis (as well as direct experience with Israeli tech companies who do tend to be fast and loose with their approach to reporting) and would be interested if anyone else has looked at this and has any comments.
Hi guys – am looking at Kape shares potentially given their strong market position and apparently low valuation. That said, there are some odd things with their post Express acquisition balance sheet numbers which I cant figure out so wonder if anyone here has gone through the same process.
In short,
(a) intangibles looks insanely inflated given Express VPN was <$1bn but intangibles have exploded by $1.3bn (intangibles tend not to bother me too much provided all other metrics make sense, but they can also hide other shenanigans)
(b) the deferred contract liabilities , which I think represents Express VPN deferred income, increased by $119mio, but (i) are not backed up by equivalent cash upon acquisition, rendering it non-income and (ii) does not appear in the working capital movements in cash flow – which states only a $3mio (!) increase in this balance To a certain extent this is offset by deferred contract costs , whose $33mio change are correctly reflected in the cash. I note the only way the deferred revenue number could stack up and the balance sheet balance , is if they’ve stuck the equivalent amount into intangibles (see point (a).
I note that the argument can be made that deferred revenues can be ignored (as being worthless) to the extent a company continues to genuinely generate similar levels or (preferably) increasing levels of revenue, as long as you’re not having to also cover any costs/ liabilities incurred by such non existent revenues, but this isn’t clear to me and Im pretty uncomfortable at the lack of transparency and consistency on the numbers.
By way of background Im a qualified C.A. (from decades ago) and investment banker then private equity guy, so I do know how to read numbers and interpret them, and these ones don’t seem right (plus the change of CFO doesn’t help). I may be wrong and perhaps there is a good explanation/ analysis somewhere, so could anyone here help me find that if you had the same questions?
Cheers
Quite - Permira is not exactly distressed and its hardly in their interest to push the price down by selling into a crashing market since they will need to mark to market at quarter end i.e I think those guys are likely the last guys to be "dumping", especially given market illiquidity and the size of their holding - plus the actual results and forward looking statements were a long way from catastrophic - Im a little puzzled to see why the market puked so badly, though they are admittedly now trading reasonably closely to peer multiples, so a correction and reality check was overdue I suppose.