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"we are making large profits $500m"
New shareholder here - bought on Friday at 18.5p approx. Sorry, but I can't believe that unless Hunt corrects the problems with the EPL tomorrow. At the EBITDA level, sure we must be absolutely coining it in. But after tax, surely we could be making nothing - if I've understood the EPL right (and I haven't read the legislation), past historic losses can't be used up so quickly to reduce the EPL, so if we have any deferred tax assets, they may have to be written off under accounting rules that require prudence, the write-off of anything that can't be used in the foreseeable future, I wonder? Harbour Energy's recent announcement suggests this. I hope JH does something about this tomorrow. The other thing is the falling production profile (because we can't invest using internal funds to stop it) doesn't help either, I wonder?
Thanks JL. It seems to be up even more than I thought. On a merger between REA and MPE, somebody told me, can't remember which thread it was on, maybe it was on the AEP discussion thread, that the foreign controlled oil palm cultivators can't have more than 100,000 hectares. That figures because if there are any profits to be had from economies of scale, the Indonesians want to reserve those profits for themselves, just like they don't allow foreigners to earn risk free profits from rent scraping (the reason our coal equity interest was converted into a loan interest, I wonder, all so that our profit potential would be capped if coal prices rocketed, which they duly did - the profit we should have got has been, in effect, re-directed by regulation to an indigenous company, perhaps?). Still despite that, it is all looking good for a target price of back to £2 except for their change of capital allocation plans - I thought they were going to prioritise net debt reduction, but now it seems maintenance capex and expansion capex are more of a priority: the latter two objectives will maybe deliver slower share price appreciation, I wonder, compared with prioritising net debt reduction - I'll have to ask about this at the next AGM and the reasons for the change of heart. Maybe the priorities change as palm oil prices move all over the place, making one strategy better than another?
Disappointing net debt isn't coming down as fast as they previously expected (no figure provided, so it can't be good?). No. of coal shipments exceeded my expectations. Prospect of sand sales is a nice surprise. There could be a write-back of some of the interest previously written off on the loans to the stone and coal interests, I wonder? Really good news they produced more CPO despite the replanting programme. I won't be surprised if these go up 10p on this. I expect these will be back to £2+ in about 18 months' time, assuming enterprise value remains the same, the rise being due to net debt reduction.
The share price ought to recover simply because of the coal and stone interests becoming strongly cash generative. The palm oil levy seems a tad excessive as after the recent palm oil price falls, not such a big levy should be needed to subsidise biodiesel production, given Brent crude is still high. The high export tax ($288) is presumably to try to bring down domestic cooking oil prices, but palm oil has fallen a lot recently so maybe the three export deductions (export tariff, export tax and export levy) will reduce due to a lower cpo reference price being used to determine which taxation band applies - unfortunately our current ex-mill gate price probably reflects one that is suffering taxation for a reference price set far higher than the actual palm oil price, so we are having a very bad month in terms of the amount of tax being taken, but I would hope the authorities would adjust things to be a lot fairer - in the past they have done this when the levels of taxation have been excessive, but WDIK? In the longer term, the company's financial position has moved from being on a knife-edge to a much better place, and despite things not being so good just this month, the longer term looks quite bright: for example a debt repayment of $70m over the next 20 months could add £57m to the market cap, giving a new share price of about £2.50, I wonder? JMV. AIMO. DYOR. Yes, I do think the share price will recover.
"Nevertheless I'm not being shaken out due to a few months of weak prices and output. A mrkt value of £59m
is hardly representative of Nav and H2 on target for another profitable year."
I agree. They must be getting those coal loans repaid what with coal at $390 and production costs of about $110. The same will be true with regard to the loans to the stone interests - the andesite could sell for $16 a tonne, and I would hope their productions costs are not more than $10 a tonne, and they have an awful lot of it but I suppose that is irrelevant as their profit is capped due to only having a loan interest rather than an equity interest. They could also spend about $6m on another biogas plant to convert their vehicle fleet to run on gas, making savings in diesel costs of about $2m a year. CPO futures are up a bit this morning helping to negate yesterday's horrendous price falls. Panmure Gordon has price target of about £4, but I'll be happy if net debt gets down to $100m and we have a share price of £2.50 by end of next year. The days of "material uncertainty as to going concern" are hopefully long gone. ATB.
Morning JL.
According to MPE there is a new export deduction on top of the two you have listed called "export tariff". According to REA this is only payable if you don't want to comply with the DMO requirements and want to export. What I can't understand is why the introduction of such an additional fee should cause the MPE ex-mill gate price to drop $300+ over the last ten days or so. Yes, I get that CPO prices have dropped a lot, but I can't see that why firms can't still export without paying the export tariff by just applying for the export permit in the normal way, proving they have complied the with the DMO requirements. $688 of deductions to export is horrific. I guess the export tariff ceases in August and that it all means REA will just take a bit longer now to get to net debt of $100m, something I was hoping they would achieve by the end of next year.
It was maybe more interesting for what it didn't say (extension planting progress or lack of, reasons for slow certification of mills, detailed reason for flat production such as evacuation problems during rainy season/flooding/trees taking a rest/yields on older trees falling etc.)
"The Board
uses the AGM to communicate with private
and institutional investors and welcomes their
participation."
That, to me, sounds like they don't want to be cross examined about the buy backs in the past and the awarding of options to the HR director. If I get probate before the AGM, I will vote against all the resolutions. Video conference AGM is totally unacceptable. The deployment of a narrative on these boards that it doesn't matter what price buybacks are done at, in contravention to common sense, to what educated CEOs believe (Marks and Spencer 2006), to what experts believe, and thus shielding our BoD from criticism, only adds to my rage. The grotesque portrayal of the buybacks in the 2019 accounts as merely a distribution (the accounting techniques used) couldn't be further from the truth (the accounting standards are written by complete morons, at least as far as informing shareholders correctly what is going on). Buffet, Terry Smith, Phil Oakley are right: buybacks need to be done at the right price, not at any old price. It doesn't matter what valuation metric one uses: DCFs per share (discount rate needs to change if cash goes out of the company and changes the risk), PE ratio (the shares need to trade on a lower PE if cash goes out of the company and changes the risk, and the de-rating can have a bigger effect downward effect on the share price than the opposing concentration of earnings effect) or price to book (stupid buying one's own shares above a price to book above 1?). JMV.
Putup,
I hope to answer your last post in reply to mine about buybacks over the weekend. Travelling today.
Agree it is palm olein and not palm oil that is banned from export. Today's mega price rise in ringgit on the front end of the palm oil price curve e.g. the June contract up 678 rinngit to 7,465 must have occurred for a good reason, so maybe the Indonesians are going to restrict the export of CPO. John Lewis, the main poster on REA, points out that there is limited storage capacity for CPO, so even if they are going to ban its export, they can't do it for long. Maybe the futures market is anticipating a further rise in the export levy and export tax charges.
"The bankruptcy risk/dilution risk changes when cash leaves the company"
“[The bankruptcy/dilution risk changes when cash leaves the company] if they dividend it out. But not necessarily, in either case, when they're distributing EXCESS capital. GKP has capital sitting in cash way in excess of its needs. That is THE very reason it is paying it out. They have the capacity to do about another $275-300m and then things normalise to paying out what they're actually earning in free cash flow.”
The book “Making the Right Investment Decisions: How to Analyse Companies and Value Shares” by ex Warburg analyst, Michael Cahill, explains what drives shareholder value in Chapter 1, the Valuation Villa, and he cites sophisticated concepts (at least from the point of view of reading company accounts designed to inform debt financiers of a prudent view of company’s financial standing) such as “value added growth” and “growth that doesn’t add shareholder value”.
He cites risk changes as being one of the many ‘returns’ shareholders get. Paying out ‘excess’ cash when you have debt finance increases the financial risk, and this is one of the ‘returns’ discerning, risk-averse shareholders don’t want. The cash return, whether as dividend or rise in the share price from a buyback is no good if the financial risk rise causes the share price to fall by a greater amount than the dividend or the share price rise from the concentration of earnings in a buyback. Financial accounts are at present far too primitive to convey this unless they are interpreted by someone like Cahill, Buffet, Terry Smith, Phil Oakley, etc who understand these concepts.
“A company doesn't trade in its own capital.”
It trades between those shareholders leaving and those remaining. Agreed these ‘trades’ don’t show up as profits or losses in the Income Statement or on the Balance Sheet. The success or otherwise of these ‘trades’ shows up in the share price to those with a sophisticated understanding of what drives shareholder value. Accountants and corporate finance geeks maybe are not sophisticated enough in their understanding of these matters.
“I'm done. You've shown an inordinate capacity not to listen and reflect. I would highly suggest, as I have done already, that you reflect some more. You will likely ignore it. That won't make me wrong. Good luck. Seriously, I wish you well Nobull.”
Yes, I am too. I haven’t changed my view one iota. I need to take a break and read more. I remain deeply suspicious our BoD (and its ghost writers, Celicourt) have the competence to understand buybacks properly. Agree to differ. ATB.
"It's interesting that someone who admits they have little experience in this arena chooses to argue so vigorously with someone who has been paid to advise on such issues for more than the last 35 years."
Pulling rank doesn’t make you right.
“The stake bought back - the company is buying its own shares. They are removed from circulation. The value of the company (ceteris paribus) goes down by the value of the cash leaving the company - number of shares bought x price they were bought at.”
No. The bankruptcy risk/dilution risk changes when cash leaves the company, perhaps imperceptibly to you, but not to me.
Risk increasing requires the company valuation to fall, at least in an efficient market. So if a large amount of cash e.g. $100m leaves the company to do a buyback, when the company has $100m of debt, the dilution/bankruptcy risk rises quite a bit, especially with our equity base, and for me that requires a fall in the share price beyond the amount per share that is being distributed; that’s value destructive to my way of thinking. Think of a company overdoing the dividends – after a while it might get de-rated to reflect the risk of having to do a dilutive placing at a share price not of its choosing.
I get that accountants aren’t interested in such things, and this is probably why Terry Smith is calling for the way buybacks are treated in the accounts to be changed, something which is necessary to clamp down on buyback abuses, but to your way of thinking such abuses don’t and can't happen.
“ There is no investment. The company isn't trading against its own shareholders in its shares. The only people investing are those individuals who forego the cash distribution, ie don't sell into the buyback, and as a result increase their ownership in the company at the buyback price.”
When a company does a buyback it is trading between those selling up and those remaining. Those selling up can be paid too much, in which case those remaining are being fleeced by those leaving, the DCF value associated with the shares involved, and whether the shares were purchased above or below the DCF value, determining whether the deal was value-accretive for the remainers. Same problem with transfers from one pension fund to another.
I hope you understand my point of view better.
"Company buys back shares and parts with cash. Company cancels shares bought back. Company has parted with cash for nothing in return. Where's the investment?"
The investment is the DCF value added, as represented by the stake bought back. This DCF value is then distributed among the remaining shareholders when the shares are cancelled. Don't you get it? The distributed DCF value needs to be greater than the price paid otherwise it isn't value-accretive.
"Dividends and buybacks distribute value; they don't create it."
No. If you buy shares below intrinsic value thousands and thousands of times, you will, like Buffet, on average be making excess returns for the risk taken. You seem to be ****ging off DCF valuations because they can be done both by CFA qualified professionals and by nincompoops - the maths isn't difficult, but making reasonable assumptions is. The uncertainty over the quality of an income stream can be handled by using a higher discount rate.
A dividend is just cash, but a buyback is an investment, which like all investments, needs to produce an excess return to be value-accretive. The probability of it being value-accretive is much higher if the buyback is done below intrinsic value (as calculated by professionals, that is professionals with the expertise to make reasonable assumptions).
Dividends and buybacks are not merely distributions: buybacks need to be done below intrinsic value or not at all. Our Chairman needs to be cross-examined in detail about the last buyback, given he called it value-accretive when it plainly wasn't. It is always prudent to have the general authority to do buybacks, but that authority should not be abused.
"something wrong somewhere, I can’t quite put my finger on it ,??? Any suggestions???"
Huge uncertainty here about the earnings stream quality. Are we one of the 20%? You can buy exactly the same FY2022 eps forecast as we have for 4 times the price by buying MP Evans (both companies have the same year end and both companies are producers of a primary commodity priced in US$). The uncertainty is compounded by our Chairman's refusal ever to take a stake in the company himself while claiming the BoD is aligned with us; they are on the upside, and not at all on the downside, except in the cases of PLG, JH, IW and GS.
"There is no perfect model for calculating the actual intrinsic value, so whatever is calculated has to be a opinion. "
TM, hi. Agreed.
"For some reason, probably somewhere between £2 and £4 guv’ is not the answer people want to read :) "
When the range is as wide as that, then the uncertainty is huge, and that should be a good reason NOT to do a buyback as one can't be certain of it being value-accretive. Another reason not to do a buyback might be if the price to book is > 1, for by not doing a buyback, the cash is part of the capital employed earning x%, whereas after the buyback, the cash is deployed having an ROCE of x% divided by the price to book, the price to book, which if over 1, reduces the ROCE, and of course the share price at which you do the buyback affects the price to book ratio, something which Putup is in complete denial about for according to him, buybacks are just distributions and the price doesn't matter.
"How many different professionals, using different methods would a company have to use to get a “reasonable” spread of guesses and would it necessarily lead to a useable value to justify a buyback taking place or not?"
I think it would be great if our CFO was forced to disclose his assumptions as to why a buyback was likely to be value-accretive before he does one. This would stop our BoD abusing buybacks to deliver themselves shed loads of free shares if that was the reason they did the last buyback (I don't know that that is the reason as I haven't read the performance criteria that need to be met). I suspect buybacks are only a good thing when a business has a stable business model with stable growth rates and the shares are cheap perhaps because they've been dragged down in a general market flash crash. Yes, I get that buybacks avoid the inefficiency of dividend taxes, but those efficiency gains can maybe be thrown away by buying on a price to book greater than one, I wonder?
"And what is the magical "intrinsic price" of GKP right now?"
No idea. I am not experienced enough at doing DCF calculations to have a good enough feel for them, but I'd probably start with a 14% discount rate and a long term oil price of about $50 a barrel. I'd probably ignore the return of the cost recovery pool (or model that part separately). For future production, I'd probably model 50k bopd for about 10 years. I'd probably ignore the FDP/future capex for expansion. I don't have figures for long term running costs and maintenance capex. And that's about the nearest I've got to even thinking about an intrinsic value per share. The actual calculation is quite simple from a maths point of view; it's the inputs to the calculation that are difficult to get right. I'd need to check any valuation thus produced against other valuation methods to make sure it sounded reasonable. SimplyWallSt has a DCF value £2.98p, but I don't trust it - they use a very low discount rate, and I haven't worked through their method yet.
"But the way that whole buyback was engineered is troublesome to me."
It troubles me too. It troubles Investors Chronicle too, I wonder, for they referred to "corporate governance issues" in one write-up. I don't like the way a lot of people do not understand buybacks (including our Board) and how they think it doesn't matter what share price they do a buyback at. Putup still doesn't get it. Happy Easter Putup; carry on. Even Warren Buffet thinks buybacks need to be done below intrinsic price, but there's no convincing Putup. I am p*ssed off about giving up some of my risk-taking reward to the HR director.
"A better looking set of nos reported by REA"
Yes, JL, but the tax charge is over 60%! Another negative eps figure again. A lot of it is fluffy stuff - intentions to do extension planting, expectation to sell a million tonnes of stone over 2 years, etc. All a bit disappointing. The high CPO prices will drop off next year when Ukraine plants a sunflower crop next April, I wonder? Coal prices can't possibly stay above $300 a tonne for long, surely? We need $24.3m to deal with the pref arrears and pref divs due this year, and that's to just stand still. JMV.
"The excess cash needs to be earning at least the cost of capital to generate value."
Agreed on that and agreed that the present value of a stream of instant access cash account bank interest, discounted by the company’s cost of capital is going to be close to zero, and therefore any buyback, on that basis, even one above intrinsic value, might be value-accretive in that case.
But the cash has an opportunity cost: it can be invested in buying another development project, in expanding or maintaining our production, in paying down our debt as well as of course in buying back our own shares or indeed the shares of another company.
The notional return to our cash is the value of the best opportunity foregone (due to spending it on the buyback). The incremental DCF value added by the buyback needed to at least exceed the lost value from not paying down our debt. A shortage of net cash later (and delays by the KRG paying us), as the pandemic got underway, meant we had to waste money buying an oil put option to limit our bankruptcy risk (with more cash we wouldn’t have needed to bother). No, I don’t expect our Board to predict oil price crashes and future KRG payment defaults, but when deciding whether to do a buyback, you do not use the HSBC US$ instant access cash account interest rate to determine the value of the cash being lost to the company to execute a buyback. A prudent CFO, looking to do the best for all shareholders (as opposed to for individual directors with LTIPs and VCPs with performance criteria that may or may not be helped to be met with the aid of a buyback) sets a higher hurdle rate to make the right decision.
And you think GKP had excess cash at the time of the buyback? You’ve maybe forgotten about the $100m of debt we also had. If they did have excess net cash, the size of the buyback was far too large in relation to the actual amount of net cash, I wonder (regardless of the eventual outcome).
The opportunity cost of cash can be very high, because if you ever run out of it, the price of raising it (perhaps when the oil price is low) can be exorbitantly expensive (ask anyone who was diluted out by the last debt for equity swap here how value destructive that was).
To help me decide whether a buyback was value-accretive, I wonder if using the average return on equity through out the oil price cycle as the interest rate earned by the cash would be the right way to go about it, and then see if the incremental DCF value added by the number of shares I could buy to be cancelled added more value than the DCF value of the cash lost.
Obviously the lower the share price you buy the shares for, the more DCF value is added, so it is utter twaddle to say that the price paid for the shares cancelled doesn’t matter. IT PLAINLY DOES MATTER. I don’t know how to put Terry Smith’s, Warren Buffet’s and Phil Oakley’s views on this into an algebraic equation. I give up trying to convince you.