Screening For Value: Earnings-based Picks From The Resources Sector

5th Oct '22 by Mark Simpson

7 comments 2278 reads

Over the past few weeks, I have been looking at companies highlighted by my earnings-based stock screen. So far, I've found eight non-resource companies that made it firmly onto my watchlist: James Latham (LON:LTHM) Quarto (LON:QRT) Zytronic (LON:ZYT) MJ GLEESON (LON:GLE) Sanderson Design (LON:SDG) Renold (LON:RNO) Arcontech (LON:ARC) Luceco (LON:LUCE) . This week I continue the search for interesting value investments by looking at the companies from the resource sector. Here are the companies that the screen highlighted:

Value Investing & Risk

The first thing to note when looking at this list of companies is the level of political risk that investors are taking. For example, they include oil producers in Nigeria and Kurdistan and gold miners in South Africa. Many investors may conclude that there is a reason why these companies are cheap. And they would be right. Very few companies find their way onto a deep value screen without some hair on them.

However, before ruling these out entirely, it is worth thinking a bit more about the nature of stock market risk. There are two types of company risks: idiosyncratic and systemic. Idiosyncratic risks are risks that are specific to a particular company. In contrast, systemic risks are those that impact the overall market or sector. So, for example, a coup in the country of operation is an idiosyncratic risk for a company, whereas a market crash or a rise in global interest rates is a systemic risk.

Investors cannot wholly escape risk in their portfolio. Often strategies that purport to do this simply move the risk from a known and estimable quantity to a hidden and unquantifiable one. Just ask investors who had "portfolio insurance" in October 1987 or held AAA-rated subprime CDOs in 2008! However, there is one key element of idiosyncratic risk: it is diversifiable. For example, political instability or a change in mining laws in South Africa is unlikely to be correlated with changes in oil production payments in Kurdistan.

So when faced with a compelling valuation but an uncomfortable level of idiosyncratic risk, the value investor can protect themselves by only putting a small amount of their portfolio in each stock. By holding many such companies, plus more significant positions in safer companies with compelling valuation characteristics, the…

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Indie

5th Oct '22

On the palm oil question (re M P Evans (LON:MPE) - I hold - and Anglo-Eastern Plantations (LON:AEP) ), the World Wildlife Fund take on it is here. Their view is that boycotting palm oil is not the answer as substitutions with other vegetable oils can lead to even further environmental and social harm. Instead, they play "an active role in influencing and shaping the RSPO standard to make sure it puts in place more safeguards for people and the planet". The Greenpeace link says that the strengthening of the standard in 2018 hadn't led to change, but the date at the top is 2019. The WWF has a scorecard from 2021 showing different companies that buy palm oil, and their conclusion was "With companies scoring an average of 13.2 points out of 24 and not one single one achieving full marks, the 2021 scorecard is a reminder of the tremendous progress that has yet to be made. But the commendable performance of some companies is proof that sustainable palm oil is achievable."

The last M P Evans (LON:MPE) interim report says "RSPO certification is awarded to mills rather than estates, and at the end of June 2022, three of the Group’s five operational mills had achieved RSPO certification. Increasing milling capacity, and obtaining this accreditation for all mills remains a key priority for the Group. However, RSPO audits are in a post-pandemic catch-up phase"..."In the meantime, all the Group’s crop, and that of its associated scheme smallholders, is produced in full accordance with RSPO standards."

mortimer

mark thanks for all the exhausive work your doing. i have always given these type of stocks half % if anything happens it does not hurt .all others 1to 5%. because for me divis are everything you average 4-6% every year your halfway there. i have cml steppe and mp evans so a great read.

xerxes

Thanks Mark for this interesting commentary. As others have said resource stocks don't get enough mention on Stockopedia. Although I only hold Central Asia Metals (LON:CAML) from the list, I also hold Anglo Asian Mining (LON:AAZ) which epitomises the patience required for these shares - every time I am feeling optimistic about the outlook there seems to be another armed dispute between Azerbaijan and Arnenia and the share price falls away - but you do get to learn about what's going on in the world!

P.S. I hope to take a small punt on one of the other companies on your list once I have done a bit more research

Muhammad Usman

Comprehensive work as usual Mark, thanks!

May I ask why Atalaya Mining (LON:ATYM) didn’t make the initial list?

Mark Simpson

Hi Muhammad,

It's because I'd already looked at Atalaya Mining (LON:ATYM) in a previous Screening for Value article: https://www.stockopedia.com/co...

HTH,

Mark

BattleOfBrit

6th Oct '22

This was a really useful review at just the right amount of detail. It's nice to see coverage of resource companies, which don't get much coverage on Stockopedia.

aflash

7th Oct '22

This series is very useful.

There is so much to keep referring back to that a new article appears before I have finished with the previous one.

Best to use the most recent rather than Sep 14 when the passage quoted appeared.

One of the problems that stumps me is rapidly checking pension deficits.

Although the little Stocko box of Leverage under Other Ratios gives some help, the picture is never clear.

Some companies, MPAC and COA (Coats) come to mind, have sold off part of their liability but I should like to hear Marc talk about that. Is it 50p in the pound or some sort of re-insurance ?

A shorthand method comparing British Telecom (BT.A) that is known to have problems helps me a bit.

It would be a pity to miss some of these long established companies that can offer an investment opportunity despite their 'defined benefit' millstone.

Pension Deficits

In my previous articles, I mentioned that investors would be wise to adjust their valuations for the presence of any Pension Deficits. After all, most pension deficits require the company to make recovery payments, which are real cash that leaves the business that isn't available for dividends, buybacks or re-investment into future growth. The simplest way is to exclude any companies with significant deficits. However, this may miss companies that are cheap despite this extra consideration.

Another way would be to consider the deficit as debt and add it to the EV. However, there are many valuations investors could choose: the IAS19 accounting deficit, the actuarial deficit or even the net present value of the agreed recovery payments. Making the correct choice here is difficult and then may not be straightforward to calculate. Therefore, when a deficit is likely to remain for some time, the easiest way is to adjust the EBIT, not the EV. Comparing this adjusted Earnings Yield to other companies will give a fairer comparison.

Screening for Value: Earnings-based Picks from the Resources Sector

Value Investing & Risk

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Mark Simpson

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