Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 5/6/11

with 4 comments

A few bits and pieces have caught my eye since my last update, mostly on the corporate side with a sprinkling of macro news thrown in too for good measure.

(Disclaimer: I’m a shareholder in Glanbia plc) Those of you into emerging markets should read this profile of PZ Cussons’ operations in Nigeria. PZ Cussons has a dairy jv with Ireland’s Glanbia in that market, which has a positive long-term outlook given Nigeria’s rapidly growing population and the strong economic growth it has recorded in recent years. While many Irish people associate Glanbia solely with its domestic liquid milk business (which processes a remarkable 1.4bn litres annually), most of them have no idea that the group has manufacturing facilities in seven countries from Canada to China, or that Glanbia’s facilities in the US State of Idaho process 1.9bn litres of milk (i.e. 35% more than its domestic operations!) annually. Of course, the group is no longer all about dairy, having successfully entered the higher margin nutritionals business through its acquisitions of Optimum Nutrition and BSN. To me Glanbia is like a smaller version of Kerry Group, having evolved from a domestically-focused agri-commodity producer into a diversified international player. I like the company’s business model, and management, a lot!

(Disclaimer: I’m a shareholder in Uniq plc) Elsewhere within the Irish food sector, Greencore was named as a first round bidder for Uniq in the press this week. Regular readers of this blog will know that I am a fan of a tie-up between the two groups, given the cost synergies that this will give coupled with the fact that there is limited overlap in terms of the customer base – Uniq is a major supplier to M&S, which is the UK multiple that Greencore has for many years struggled to break into. Unsurprisingly, given Greencore’s balance sheet (at the end of 2010 group net debt was €193.4m, 2.3x EBITDA) many brokers, including Bloxham, have stated that an element of equity financing (i.e. part or full payment in shares) would be needed to get a deal over the line. My gut feel is that the Uniq pension fund, which holds circa 90% of the shares in Uniq, would be attracted by taking shares in a listed plc as part of a deal. We’ll wait and see what happens.

The issues around government finances show no signs of going away. The Irish Department of Finance released the Exchequer Statement, which made for depressing reading. Irish Exchequer voted expenditure was +6% yoy in the first 5 months of 2011, which is indefensible given the state of the public finances. In terms of Irish govt spending, it should be highlighted that the areas that have seen the biggest cutbacks in the ytd are the ones that create jobs like Tourism (-53% yoy), Trade & Innovation (-35%) and Transport (-30%). The ytd deficit is €10.2bn (that’s circa 7% of GDP!), and yet the political leadership of this country continues to insist that Ireland can return to the debt markets by the end of 2012, but who will lend to us given how out-of-control our spending is? Put it this way – would you lend €1,000 to a friend with a track record of spending 1.5x what they earn? The US government’s spending is also unsustainable, but I was perplexed by Moody’s statement that it may downgrade its ratings on the US if there’s no progress on raising the debt ceiling. With the US deficit over the past 12 months running at circa 10% of GDP, the last thing America needs is an increase in its borrowings. Like Ireland, it will have to learn to live within its means. Speaking of the US economy, have a look at this.

Returning to the Irish market, Bank of Ireland provided more details of its capital raising plans. Bondholders are clearly incentivised to take shares over cash, but it’s going to be a while before investors can confidently estimate a value on the equity (as we won’t know for a while how many bondholders will opt for cash versus shares). Not that this has put some people off, with gigantic volumes noted in the stock during last week. I understand that a lot of this demand is CFD led, which means that some investors are essentially buying an “option” on margin!

The Irish plcs have really raised their game when it comes to investor relations in recent years, with many of the leading non-financial corporates holding annual “investor days” at which the buy-side (fund managers) and sell-side (stockbrokers) are given a tour of some operations and then provided with a briefing from management. I was encouraged to hear that both DCC and Paddy Power, two very important members of the ISEQ, had well-received investor days last week.

Finally, did you know that Ryanair is now the 10th largest airline in the world? The carrier transported 75m passengers in the past 12 months.

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Written by Philip O'Sullivan

June 5, 2011 at 10:16 am

4 Responses

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  1. […] See this post on Robert Wiseman by Mark Carter and this post by Philip O’Sullivan which briefly discusses Irish comparable Glanbia […]

  2. […] (Disclaimer: I am a shareholder in Glanbia plc) From an Irish corporate perspective, I see that Merrion Stockbrokers are bullish on Glanbia. You can read my latest views on the company here. […]

  3. […] (Disclaimer: I’m a shareholder in Glanbia plc). Glanbia issued a solid trading update this morning. Management reiterated 2011 full year adjusted EPS guidance of 11-13% growth, on a constant currency basis. I’m a fan of this group, for reasons I’ve gone into before. […]

  4. […] its full-year guidance to 18-20% growth (constant FX) in adjusted EPS from the previous 11-13%. Regular readers will know that it’s one I have been positive on for a while. The conference call threw up some interesting pieces of information. Six of the top ten sports […]


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