Before we get to today’s analysis, here is a brief summary from the other businesses reporting their results:
1). Pipehawk (PIP), this radar equipment-maker reported sales growth of 19% and an improved operating loss.
2). WPP PLC (WPP), reported Q3 sales are up 1.1%, but at constant currency, it is down 0.4%. But their existing businesses have deteriorated with Q3 LFL -2% (net sales LFL: -1.1%), compare that to YTD, revenue LFL is down 0.9% (net sales LFL: -0.7%). Also, net debt grew to £5bn due to acquisitions and share buyback activity.
Amazingly, WPP shares are now down by 30% and now has a market cap. of £13bn.
3). Andalas Energy and Power (ADL.L), an Indonesian energy company that is likely to go bust because it has said they were unsuccessful to secure the necessary to funds to implement the objectives of their projects in a longer-time horizon. Also, losses are over $4m.
Finally, the UK is expected to raise interest rate for the first time in a decade to 0.5%, according to estimated forecast and compiled by Bloomberg.
Now, onto the analysis.
Share Price: £0.08 (down 1.5%); Market Capitalisation: £21m.
After raising £5m before costs from an open offer, Egdon has secured much needed financing, as Cash at bank rose to £6.06 million as at 31 July 2017 (31 July 2016: £2.68 million).
This year numbers are disappointing as: “revenue from oil and gas production during the year was lower at £1.04 million (2016: £1.59 million) on production of 38,346 barrels of oil equivalent (“boe”) (2016: 64,604 boe).”
The lower production number is caused by Ceres maintenance and the delay to the expected start-up of the Wressle oilfield development.
In the past years, Egdon Resources has disappointed shareholders with the lack of progress to increase oil output.
But, will this position change going forward?
First, the HYPE
With most oil and gas companies, they always tell investors about the outlandish resources under the acreage of land they operate in, and Egdon Resources is no different.
First, they managed to increase their acreage position in Northern England by 266% to 205,800 acres’ net (833km² net) through a series of targeted acquisitions, farm-ins and success in the 14th Licensing Round.
Second, Egdon has notified investors that there has been a 180% increase in their mean volume of 50.9 TCF (That is trillion cubic feet of gas) in the Gainsborough Trough, the Widmerpool Basin, the Cleveland Basin and the Humber Basin area. How much of this is net attribute to Egdon Resource, no one knows?
How big is 50.9 TCF of gas worth?
No idea, but looking at their previous estimate, which is 20 TCF, then I can tell you how much it’s approximately worth back in 2005. The post is an old BBC article.
It states an Indian state gas company has discovered 20 trillion cubic feet of gas and experts thinks it’s worth £27bn.
Here is the change in gas prices around the world:
Natural gas prices around the world have initially risen above their 2005’s levels but has now fallen back to these levels at recent times. In the US, their gas price is circa. 30% below 2005’s level.
The questions we should be asking are:
1). How much of this gas reserves belong to Egdon Resources?
2). When will production start?
Outlook for Egdon Resource – Realistic Numbers
The guidance for next year is 100-110 boepd, so expect another £1m in revenue at a minimum. If Egdon is successful with their planning appeals for Wressle it could add 125 boepd to existing production later in the 2017-2018 financial year. That takes the total to 230 boepd, or over £2m in revenue.
There are other prospects are: –
1). Drilling in the Holmwood-1 well in Weald Basin licence PEDL143 they expect to commence operations in H1 2018 once all final approvals are in place.
2). The Portland and Corallian sandstones, where Europa has Estimated Mean Prospective Resources of 5.6 million barrels (“mmbbls”) of oil (net Egdon 1.03 mmbbls).
As the Oil and Gas Authority (“OGA”) has granted Egdon licence extensions for both PEDL253 (Biscathorpe) and PEDL241 (North Kelsey) to 30 June 2018. Then,
3). The Biscathorpe Prospect is estimated by Egdon to hold Mean Prospective Resources of 14 mmbbls of oil (Egdon 7.3 mmbbls).
4). And the North Kelsey Prospect has estimate mean prospective Resources of 6.5 mmbbls of oil (Egdon 5.2 mmbbls) in stacked reservoir targets, and hope to drill the well by mid-2018.
On top of that:
It has Resolution Prospect (337 billion cubic feet (“bcf”) of gas, Egdon 100%) in UK offshore licence P.1929.
Egdon has the potential to bring net attribute of circa. 16m barrels online. The low level of oil production and reserves. This makes their oil assets less economical.
It will definitely need to raise further funds down the line.
That leaves hope on their shale gas projects.
Apart from the current level of production, Egdon Resources is still some years away from bringing the rest of their oil and shale gas portfolio into production. Also, they require a series to fundraising to implement these projects. With low oil price being persistent, there are high-risks for things to go wrong, given that it’s in the UK.
And at £20m, Egdon is fairly valued.
Share price: £7.71 (up 4%); Market Capitalisation: £5.2bn.
Just Eat has reported a better than expected 47% in revenue to £138.6m. Their order numbers rose by 29% to 43.1 million in the Third Quarter. The UK saw an increase of 22% to 26.2m orders and internationally, orders were up 43% to 16.9 million.
The clearance to acquire Hungryhouse was received from the Competition and Markets Authority.
Finally, it raised their previous revenue guidance for 2017 of £500m to £515m to between £515 and £530m.
Since listing in 2014, Just Eat has made some daring business deals and were able to convince investors to put £550m of their cash. That came with the reward of Just Eat share price rising from £2.30 to £7.80.
Is the hard work paying off?
Apart from the rising turnover, there are other data pointing to scale and productivity gains.
For example, Just Eat manages to increase fees per order from the slight increase in average orders.
The economies of scale have been rising as it receives more fees of the total processed orders. It shows a 2% improvement from five years ago, while volume is their main driver of growth.
All this was achieved by a series of acquisitions.
Just Eat Acquisitions
Just Eat took a gamble by making the following acquisitions:
In 2015, Just Eat bought Australia’s Menulog for £445m and this is financed by equity issue. Menulog is the market leader in the Australian and New Zealand online takeaway market, with 5,500 unique restaurants and 1.4m active consumers. Menulog made £13.5m in revenues and £1.2m of underlying earnings in the year to March 31, 2015.
The size of the Australian and New Zealand takeaway delivery market is estimated at £1.6bn.
In 2016, Just Eat acquired two other rivals for at least £266m. They are Hungryhouse and SkipTheDishes.
For Hungryhouse, Just Eat paid £200m, with a further cash consideration of up to £40m, based on performance. The acquisition is funded by cash and debt and expects to generate EBITDA of between £12m and £15m.
For SkipTheDishes, it made initial consideration of £66.1m. According to NPD Group, the Canadian online delivery market is worth £1.5bn.
In their 2016’s annual report, Just Eat has revealed an interesting chart showing the online delivery market of countries they operated in.
In total, the market size is £23bn. The UK is by far their biggest market at £6.1bn.
If Just Eat were to take 10% of £23.1bn it gives them £2.31bn in revenue. Their operating profit of £72m on £375m in sales give them a margin of 20%.
Calculation: So, applying 20% to £2.31bn gives Just Eat £460m in operating profit. And minus the 20% tax, gives profit after tax of £358m or 13 times multiple.
This is a realistic expectation for Just Eat because first, it is the biggest online food operator in Europe and they are experiencing fast sales growth. With economies of scale, Just Eat is seeing higher commission fee per order.
Also, we ignore the growth potential of the online food delivery market, which is included in the calculations, it will enhance the company earnings.
N.B.: Revenue of £2.31bn won’t be reached for another ten years. The purpose was to give an impression of how much sales Just Eat could potentially make.
Given they spend close to £900m in acquisitions, I sense Just Eat will slow down their acquisition activities and focus on consolidating and driving profits growth. That will be good for free cash flow and the potential build-up of cash reserves from cash profit.
Any acquisition they make going forward will be carefully targeted to avoid competition watchdogs.
Things to Potentially move Just Eat share price
To the upside:
Sales growth; – consistent growth rate for future years ahead.
The trend in active users’ growth; – maintaining the pace is important.
Maintaining or increasing commission rate per user; –
Increasing net cash flow from operations.
To the downside:
Sales growth suddenly slowing down to single digits;
The number of active users’ growth slow to a crawl;
Commission per order value starts falling;
Operating profit margin starts declining;
Increasing National wage;
Competitors fighting back;
And the usual things that happen during a recession.
At over £5.2bn, the market has pushed Just Eat to new heights causing PER to rise to 75 times. Brokers have forecast by 2019 will cause PER to fall to 24 times (based on EPS rising to 29 pence).
With the successful implementation of grabbing the necessary market share to make a dent in their individual market, Just Eat will focus on generating profits and sustainable company growth.
The problems with investing in Just Eat is I feel the shares are at least one year ahead of their time which will cause it to trade sideways. But, most importantly at £5.2bn, the potential to increase in market size will be limited.
Here are a couple of things investors need to pay attention to when Just Eat gets larger:
1). With a PER of 75 and growing, it is no longer the size of their profits that matters, but the rate of growth.
For example, if Just Eat made £300m in net profit but the growth rate fell to 5% Just Eat shares will fall.
However, if it grew by 25%, the shares are likely to rise because the rate of profit growth is more important.
2). The decrease in commission fees per order will harm operating margins. A potential 30% drop in fees per order could wipe their profit margin even if they make more sales.
Finally, I like Just Eat business model and the simple concept of delivering food. Done on a big scale, their operations become more efficient.
If you are thinking about buying Just Eat and holding the shares for more than ten years, then it is a worthy investment. Right now, the shares are fairly valued given their high growth potential.
Share price: £0.18 (down 7%); Market Capitalisation: £110m.
I previously covered this article stating my displeasure of them for not generating any earnings or cash earnings. But, you got to admire their ability to raise financing from institutional investors.
The Story of Earthport
Chart one: Earthport – Cash balance and equity raised
Prior to the £25m raised, Earthport manages to successfully raise circa. £80m. Since 1998, the total funds raised (incl. £25m) totals over £100m.
Although it states cash and cash equivalents at £11.9 million, this excludes the £25m, so the real cash balance is circa £36m.
Chart two: Administration costs greater than revenue
On an accumulative basis, Earthport’s admin. Expenses exceed that of turnover by 2.9 to 1, or £200m to £70m (prior to today’s results).
However, my analysis may be misleading as admin costs account for 85% of revenue, but is still sky-high and the main reason why the business continues to lose money.
Talking about losing money.
Chart three: Earthport free cash flow and operating loss
The accumulative operating loss totals £72m + £6.3m (today), whereas FCF totals £67m + £2.5m in cash outflows. So, using some basic comparison, it’s no wonder they needed to raise over £100m to fund this cash burn.
I could go on about receivables writedowns and their derivative instruments, but nothing has fazed the institutional investors’ ability to believe in Earthport.
Maybe the Market is Valuing…
Today, the market has taken a dim view of Earthport by sending their share price down by 7%.
But, the market could be valuing Earthport on a revenue basis.
Chart four: Earthport’s price to revenue
On that basis, Earthport would look cheap.
Factors which will move Earthport’s Share Price
That will be when they do the next fundraising. If placing is close to their current share price, then the shares are nice. But, if placing was undersubscribed and needed a steep discount to entice new investors and existing investors, then the shares will collapse.
It’s like a game of Russian Roulette with Earthport and each placing they manage to survive.
Either way, shareholders are living on the edge.
Earthport has survived longer than any actor who played James Bond. And, despite operating loss amounting to £80m, the company still manages to successfully raise funds without seeing share price going below 1 penny.
I can’t understand why big investors are backing this business. Despite the consistency of their losses!
For those who can understand the bigger picture behind Earthport, please leave a comment below.
Thanks for reading today analysis. I’m a bit late.
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The above analysis is based on my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability. I don’t hold the company’s shares unless stated.