16/04/2008 - 22:00

Directors’ plays worth a look

16/04/2008 - 22:00

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Briefcase continues to survey directors’ recent buying and selling for clues in the search for investment value.

Directors’ plays worth a look

Briefcase continues to survey directors’ recent buying and selling for clues in the search for investment value. However, recent market ructions associated with Opes Prime and Lift Capital make a mockery of any attempt to select value, based on fundamental value analysis.

Among shares outside of the ASX top 100, the stock market has become somewhat of a casino with share prices buffeted around by liquidator selling, which often has no relationship with underlying value.

This is clearly bad news for holders of these stocks, especially if they are then forced to sell as well, but provides once-in-a-lifetime buying opportunities for those who are able to pick up the bargains. In effect, every bear market works like this – with shares passing from weak hands to strong hands – but today’s market has been further distorted by lax lending practices to margin accounts.

Directors of undervalued Californian heavy oil producer Salinas Energy (SAE) have been buying in the market, but have so far made no impression on its price, unlike the managing director of Texon Petroleum, who recently bought shares in the well performing USA Gulf Coast operator at 40 cents and has enjoyed the ride as the stock rose to 70 cents before settling back at 62 cents.

Texon’s cash flow is mounting steadily from recent small gas discoveries, which should at a minimum provide support for its ongoing activities.

Briefcase believes Salinas is establishing a sustaining cash flow and its ongoing exploration has a good chance of adding value, but no-one seems interested in small oil companies today.

Aggressive agriculture start-up PrimeAg (PAG) has also seen solid buying from its directors. Since listing late last year at $2 per share, PrimeAg has bought up a large swag of well located properties in northern NSW and south-eastern Queensland.

The company is focusing on well-watered and often-irrigated land with the capability for both cropping and feedlot operation. The idea is to maintain a flexible view of what crops to grow or animals to fatten while holding a portfolio of properties which will lower the overall agricultural risk associated with weather events, enabling one property to subsidise the other for water rights, and reducing operating costs by pooling skills and capital equipment.

The business model looks sound to Briefcase. Recent good, if not drought-breaking, rains on that part of the east coast has set up a grand backdrop for the coming season. Valuation of PrimeAg is difficult without a track record, especially for those, like Briefcase, who are not completely around operating costs, yields and production mix; but at listing, some analysis suggested earnings of between seven and eight cents per share in the first year.

Briefcase suspects early analysis would have been hugely conservative and notes that PrimeAg has run ahead of expectations with its land acquisition program. The only bad feature of the recent rains as far as the company goes is that the price of additional land will now be rising, with farmers perhaps keen to get in one more season and may not be as willing to sell as when the area was in drought. PrimeAg will be interesting at $1.50 per share.

•••

Despite the very strong gold price, which has been up and over $A1,000 per ounce, few gold exploration and development companies have shown much form. Integra has had great and ongoing success at its Salt Creek project, south east of Kalgoorlie, and it is well funded for growth based on gold resources of more than 1.6 million ounces, while owning a 1.4 million tonne per annum processing plant.

Meanwhile, stocks such as Perseus and Azumah Resources, which have both been going gangbusters on the exploration front with successful expansions of their gold resources, have found it hard to gain traction in the market, which has become very shy of high risk exploration, especially when more equity is required. Still, Azumah has been kicking goals at its properties in north-west Ghana, where new, pleasingly higher grade drill intersections look to be dragging known resources toward its target of 1 million ounces.

It’s a pity some Azumah stock was caught up in the Opes Prime debacle and the stock has been dumped, but in Briefcase’s opinion it represents bargain buying.

•••

Lawyers are lining up for a wonderful 10 years of fee-flow from the recent market turmoil and malfeasance. Litigation funder IMF is rallying the troops to have a go at Allco and Octaviar, previously MFS, while several companies affected by the Opes Prime shemozzle are getting ready to have a go at both ANZ and the OP receiver. This story will play for years. 

Briefcase believes it is tragic to see shareholders in good companies watching the value of their holdings plummet just because some other shareholder has over-geared his or her shareholding or, in the case of Opes Prime, the stock ‘lender’, to use the term very loosely, goes belly up.

There is clearly something wrong with the current system and regulators will need to find a fix to ensure that this does not happen again.

A fix should involve more disclosure on short selling, restrictions on margin lending and the subsequent use of lent stock.

•••

Oil production from Otto Energy’s 18.3 per cent held Galoc oilfield in the Philippines is set to commence this month, thrusting the company and its partner, Nido Petroleum, into the ranks of oil producers. Otto estimates that it will bank about $12 million per month as of July. Cash flow will decrease once capital payback has been achieved, but with an oil price of around $US100/bbl, Briefcase estimates that operating cash flow should still be around $US8 million per month, even after payback on capital.

Otto has an exciting exploration portfolio with interests in the Philippines, Italy’s Po Valley and in Argentina, where permit approval by the government has been tardy.

Briefcase calculates an underlying value of 42 cents per share for Otto Energy, based on its oil and gas reserves and net cash. The company currently trades market capitalisation of just $A10 per barrel of oil, value equivalent, which is about half fair value, suggesting upside to 60 cents per share. Adding risk adjusted exploration value produces a total risk adjusted target value of 81 cents per share for Otto.

 

• Peter Strachan is the author of subscription-based analyst brief StockAnalysis, further information can be found at Stockanalysis.com.au

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