While PetroNeft was only incorporated as recently as 2003 and made its debut on the Dublin and London stock exchanges in 2006, the origins of this story stretch back as far as the 1950s, when Soviet scientists made the first of a number of discoveries of oil in the West Siberian Oil Basin in the areas that now comprise PetroNeft’s areas of operations, Licence 61 and Licence 67. At the time these finds were deemed too small to exploit by Soviet officials, who preferred to focus on bringing larger fields into operation.

PetroNeft acquired 25 year leases over Licence 61 in 2005, and Licence 67 in late 2009. The terrain where these licence areas are located in is extremely challenging. As PetroNeft itself says, “the region is characterized by waterlogged soils, shallow lakes and extensive swamps. Winters are severe and last seven to nine months of the year with mean temperatures ranging from about −15° C to −30° C. “The climate is strongly continental, characterised by long cold (as low as −50°C) winters and short warm summers. Blizzards and heavy snowfalls persist from October till April. The average soil freezing depth is 1.2m. The maximum frost penetration depth in swamps is 0.5m. The snow cover reaches 1.5m. The heating season lasts from mid-September until May. The Licence area is uninhabited , with access via winter roads of compacted snow, or by helicopter or waterways. A long winter makes for greater progress in the exploration and development of the oil fields. Seismic acquisition activities take place in the winter months. Drilling activities can take place year round provided the rig, supplies and heavy equipment have been moved to site during the winter months“. Not your ideal holiday destination, in other words!

PetroNeft’s priority in its early years was to re-analyse vintage seismic and other data, build a central processing plant and export pipeline, and commence drilling development wells. The company spent close to $100m on capex relating to these efforts in the five years to the end of 2010. There have been a number of positives from this, in particular the significant increase in the independently audited 2P (proven & probable) reserves, from 27.9m barrels in 2005 to 96.9m in 2010. In 2011 the group announced the discovery of new oil fields in both the Licence 61 and Licence 67 areas. It has also completed a 60km pipeline connecting its Lineynoye oil field to Imperial Energy’s facilities at Kiev-Eganskoye, storage facilities and a processing facility that can process a minimum of 7,400bfpd (PTR has stated that capacity at this facility would increase to 14,800 bfpd by the end of last year, but I haven’t seen any confirmation that this increase has come on-line – either way, with current production running below 7.4kbopd it’s not a crucial point at this stage).

As with all young energy companies that are focused on bringing new facilities on-stream, funding is key. Since the start of 2006 PetroNeft has raised $127m in gross proceeds from the issue of shares, while it also has a $75m debt facility from Macquarie. Given the scale of the capex noted above, along with the running costs of the firm, the latter facility has become especially important to the group. At the time of the firm’s H1 2011 results the firm disclosed that it had swung into a net debt ($12.9m) position. I estimate that it exited 2011 with net debt of $31.3m.

Of course, debt and equity are not the only sources of funding. In 2010 the group moved from being an exploration company into being an exploration and production company. At the time of its FY10 results, management hailed output of 3,100 bopd and guided that output would rise to “a range of between 7,000 and 8,000 bopd by the end of Q1 2012″. However, soon after the group ran into production difficulties, turning to a fraccing programme to boost output. H1 2011 output averaged only 2,182 bopd as wells were taken offline to facilitate the fraccing. The share price tumbled on the back of output missing previous guidance. In early December 2011, the company struck a different note, saying that the initial results from its post-fraccing wells were “encouraging”, and that output had picked up to about 2,500 bopd.

Just when things had started to look up for PetroNeft, the company suffered a fresh blow when management revealed last Friday that current production levels had tumbled to 2,300 bopd having touched 3,000 bopd at the end of 2011 as reservoir pressure at a number of the fracced wells had declined. This led to a near-40% one-day decline in the share price, as investors reeled from the impact of another production disappointment (PetroNeft had guided in December that output would hit “4,000 to 5,000 bopd by the end of Q1 2012″).

So, with the shares having been on the receiving end of a severe kicking last week, what should be the response of investors like myself? To begin to answer this question, over the past few days I’ve built a model from scratch for the company and incorporated some pretty conservative assumptions into it. On the output side, I see only 3kbopd on average being produced this year, rising to 5kbopd in 2013 and 6kbopd in 2014. I suspect the risks to my 2013 and 2014 estimates are to the upside, but given the production disappointments to date, I see no harm in being cautious. In terms of the oil price, I assume a long-term price of $85, which I also think is extremely prudent.

The obvious question arising from the above assumptions is – “How on earth is PetroNeft going to fund itself if your estimates are correct?”. In my model I have assumed that it will pursue a ‘shareholder friendly’ strategy, in which the company reins in capex to $25m/year for each of the next 3 years (from what I estimate was $40m in 2011). This sees net debt peak at $125m at end-2014, which is clearly well in excess of the current debt facility, but if PTR is able to continue its record of adding to its reserves (I wouldn’t bet against that given the track record noted above) and/or oil prices outperform my conservative forecasts (very likely) I think it’s realistic to assume the company can secure extra credit facilities using its reserves as collateral (as it has been doing up to now). However, this assumes that management, which has presided over an increase in the number of issued shares from the 207.5m average for 2007 to the present 411.6m, will not raise fresh equity either to keep debt levels down or maintain capex at the 2011 rate. This may well turn out to be a heroic assumption.

Standing back from these assumptions makes it clear that making long-term forecasts for PetroNeft, given the relatively early stage its operations are at, the disappointments to date and the possibility that existing shareholders could be heavily diluted (given where the share price is at), is fraught with risk. My model has spat out a NAV of 60p/share, which is 6x where the shares closed at last night (10.0p). Based on my conservative estimates, the biggest risk is that of a large scale equity fundraising, but with 500% theoretical upside on my numbers I have to ask myself if this risk is priced in?

Looking at it another way, PetroNeft had independently audited 2P reserves of  96.93m barrels of oil at the end of 2010. Given the modest production levels and encouraging news on discoveries since then, I think it’s safe to say that these reserves have grown since then. But, for argument’s sake, taking the 2010 reserve figures as a baseline, yesterday’s closing market valuation and my forecasts for 2012 this puts the group on a current EV/BOE of $1.28, meaning that the market is applying a valuation of only $1.28 to every barrel of oil PetroNeft has in the ground. So, the stock does look cheap on this measure.

Cheap as it may appear, clearly, there are significant risks to this company, and its track record to date doesn’t inspire a lot of confidence. Perhaps the beaten up valuation reflects all of this. Perhaps not. Until management demonstrates that it has overcome the production problems PetroNeft will, in my view, likely remain well outside of ‘suitable for widows and orphans’ territory. However,  not being a widow or an orphan, I need to make up my own mind about what I should do about this stock. My model tells me that PetroNeft won’t necessarily have to raise additional equity to execute its strategy, and on that basis, the shares look like they’re remarkably good value here. However, even if I’m wrong, and existing shareholders get diluted by, say, 50% (yes, I’m picking that number completely out of thin air), the upside is still a multiple of where the shares are trading at. To this end, and while noting that the risks are substantial, I think I’ll be adding to my existing position. Whether this turns out to be a brave or foolish decision, only time will tell.

(Disclaimer: I am a shareholder in Bank of Ireland plc) This morning Bank of Ireland reported its full-year results. Going into them I identified five key things to watch out for. Here’s how BKIR did on those measures: (i) Pre-provision profits – The Bank reported underlying profits of €411m in 2011, which came in behind the €0.5bn many of the Irish brokers had projected; (ii) Deposit trends – The Bank did well here, reporting customer deposits of €71bn, up from the €65bn reported at end-2010. Within that, retail customer deposits in Ireland increased by 2% while retail deposits in the UK increased by 25%; (iii) Net Interest Margin – this was an area of disappointment, falling 13bps in 2011 from the 1.46% recorded in 2010, while after adjusting for the costs of the ELG scheme it was just 1.01% in 2011 versus 1.24% the previous year. Management say that the “recovery in our net interest margins has become more difficult”; (iv) Progress on deleveraging – There was nothing really new on this, but BKIR has done a great job to date (contrary to what some of the permabears have been spinning). Having offloaded €8.6bn of non-core loans it is 86% of the way to meeting its divestment target to the end of 2013, while the disposals to date have been done at levels within the PCAR’s base case assumptions. These disposals have helped cut the LDR from 175% at end-2010 to 144% at end-2011; and (v) Impairments – the underlying bad debt charge worsened to €1,939m in 2011 versus €1,859m in 2010. While management sees the impairment charge falling over time, this forecast is clearly dependent on the performance of the economy.

In all, the results are a bit of a mixed bag, and to tell the truth, they are a little bit worse than what I had expected. However, with the shares up nearly 8% at the time of writing the market seems to be taking a different view to me! In terms of the valuation, there are a certain number of “known unknowns”  for Bank of Ireland, but with the shares currently trading at a level (15.1c) that is well below the forecasted trough TNAVs that are in the market (approximately 22-23c) the question for me is are the potential negatives priced in? My gut feeling is that they are, and I note an estimate from Goodbody this morning that if you apply the ‘adverse case’ scenario from the PCAR to their forecasts for Bank of Ireland that you get to a trough TNAV of 13.9c. Trading on less than 1.1x that multiple, I think that Bank of Ireland is worth holding on to at least.

Elsewhere, one stock I need to find the time to write about is C&C. The company may be known for its cider brands (of which the two best known ones are Bulmers in Ireland and Magners in the UK), but it also has quite a few non-cider brands in its portfolio, some of which it merely distributes, but it also owns Tennent’s Lager, the top-selling lager brand in Scotland and Northern Ireland. I have noticed Tennent’s encroaching into a number of the pubs near where I live (Dublin city centre) of late, and utilising the most scientific (!) sampling method available to me I, ahem, “asked Twitter” if this was a phenomenon other people are seeing. There was a wide range of views, but the most interesting thing I picked up was that some feel that Tennent’s, which is pitched at a lower price point than the premium brands, is making inroads with Ireland’s ‘squeezed middle‘, along with the likes of Diageo’s Tuborg and Gleeson’s Bavaria. It’ll be worth keeping an eye on C&C’s updates throughout the year to see what, if any, the financial impact of this is. Of course, it should not be ignored that some consumers could be trading down from C&C’s premium cider brands to cheaper alternatives too.

(Disclaimer: I am a shareholder in BP plc) Over the weekend I was pleased to see yet another one of BP’s partners in the Macondo well settle legal claims. As part of the settlement, Moex and BP have agreed to dismiss claims against each other. I have written extensively about how the gradual easing of the potential litigation liability has a materially positive impact on the outlook for BP’s valuation.

In the blogosphere, Macro and Cheese (!) did up an interesting piece on LTRO and the markets. This is a timely piece, given that markets have been pushing higher in the year to date despite underwhelming fundamentals, including the fact that, of the Eurostoxx 600 companies that have reported Q4 numbers, only 51% have met or exceeded forecasts (versus 69% of S&P 500 stocks). Furthermore, Q4 profit margins for S&P 500 companies declined 27 bps, or 52bps if you exclude Apple. What happens after the ECB’s second LTRO at end-February? My instinct is that we could see a pullback in markets, which is why I’ve been taking some profits recently.

(Disclaimer: I am a shareholder in France Telecom plc) In the telecoms space, I was interested to read that Deutsche Telekom is considering exiting its Everything Everywhere jv with France Telecom in the UK. It will be interesting to see how the latter responds, given that France Telecom has been exiting operations in Europe of late, selling its Austrian and Swiss businesses. Bernstein reckons that it is likely to IPO Everything Everywhere, which would be my preferred choice – France Telecom needs to slash its vast net debt (€30.3bn at the end of H1 2011) and this, along with the proceeds of the recent disposals, could put a chunky dent into it. With the French state, France Telecom’s biggest shareholder, losing its AAA rating from S&P earlier this year and Moody’s threatening to follow suit, I think heavily indebted corporates in that market are going to come under increasing pressure unless they can get their balance sheets in order. Against that I note that FTE is considering spending $2bn to buy out its Egyptian partner in that market, but the costs of that potential deal are significantly outweighed by the disposal proceeds outlined above.

In the construction sector, I was interested to read that the company that bought out Wolseley’s assets in the Irish market has been placed into examinership. While time will tell what the outcome of that process is, any closures would likely benefit Grafton, which has 67 merchanting outlets and 49 DIY retailing outlets in Ireland. Elsewhere in the sector Valuhunter did up a stonking blog on housebuilder Bellway in which he makes a very interesting observation – the UK benefits cap may lead to some internal migration as people move from the more expensive south-east of England to other regions. I am perplexed to read hand-wringing articles on the benefits cap such as this one – surely it is unreasonable to expect taxpayers to pay for people to live in the most expensive areas?

(Disclaimer: I am a shareholder in Total Produce plc) Switching to food companies, I was interested to read Indian media reports (this doesn’t appear to have been picked up by either the Irish media or any of the domestic brokers here yet) that Tata has ‘dissolved’ its joint venture with Total Produce. This is disappointing, as there’s no denying that the jv offered the greatest organic growth potential of all of Total Produce’s units. However, we have to frame that disappointment in the context that it was only a very small part of Total Produce’s business – I estimate only 1 or 2% of turnover.

(Disclaimer: I am a shareholder in PetroNeft and an indirect shareholder in Dragon Oil) In the energy sector, PetroNeft issued a ghastly trading update, in which it said production has slipped to 2.3kbopd versus 3kbopd at end-2011. This is eerily reminiscent of the technical problems that dogged the stock throughout 2011, and hence it was no surprise to see the share price close down nearly 40% yesterday. Sentiment will not be helped by an RNS posted after the market close by JP Morgan, which said that it has followed up its recent share sale by offloading a further 5m shares. JP Morgan has 6.8% of PetroNeft’s shares remaining, and were it to run its stake down to zero that would mean the market will have to digest about 8x the ADV. I can’t see a queue of buyers for that at the moment. Elsewhere, Dragon Oil said that it is considering making a bid for Bowleven. Contrarian Investor UK welcomes the return of M&A within the sector.

In the recruitment space, Harvey Nash issued a strong trading update. It’s one that I sold out of early last year – in hindsight, with very good timing – but I have been keeping an eye on it because I like its conservatism, diversification and excellent management team. While there is no denying that it’s cheap – it trades on a single digit PE and yields around 4.5% – I suspect there will come a better time to buy Harvey Nash later this year – EPS momentum is set to fall off a cliff from the +16% in the 12 months to end-January 2012 to +4% in the current financial year, before accelerating once again to +34% in the 12 months to end-January 2014.

(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) I was interested to read that IBRC, the bad bank formerly known as Anglo Irish Bank, is “anxious” to take on the tracker mortgages that are causing so much hurt for AIB and IL&P. Bank of Ireland reports results on Monday that will hopefully give a lot of clues about the dynamics within the Irish market at this time. The key things to watch out for in BKIR’s results are pre-provision profits (most analysts expect €500m), deposit trends, net interest margins, progress on deleveraging and impairment guidance.

(Disclaimer: I am a shareholder in Independent News & Media) I recently did up a case study on Independent News & Media, in which I mentioned the problem of imploding newspaper circulations. I was interested to read that INM has just de-registered 12 of its regional titles from the industry’s official circulation auditor, ABC. I’m sure that there’s no correlation between the two!

(Disclaimer: I am a shareholder in Datong plc) I was interested to read a piece in Growth Company about a stock I hadn’t come across before – PSG Solutions. PSG is clearly a microcap, with a market cap of only £26m, but I was interested to learn that it has a unit called Audiotel that specialises in technical surveillance countermeasures. I wonder if it would be a good fit with Datong, whose surveillance capabilities are well documented. Partnering the two could give it a nice breadth of offerings to security agencies. If anyone has a view on this, why not post a comment below.

(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) There has been a lot of news around the Irish financials in recent days. To start off with IL&P, I was interested to read that it has suspended the sale of its UK loanbook along with its subprime business. I find this move more than a little strange given the seemingly buoyant demand for BTL loanbooks in the UK (which is the vast majority of IL&P’s presence in that market) and the fact that IL&P hasn’t written any new business in the UK market since early 2008. The government should be accelerating disposals of non-core assets, not suspending them. Elsewhere, I recently wrote about AIB’s unjustified market valuation. The NPRF has now hired Goodbody Stockbrokers to look into it. Further on in this blog piece I’ve noted some of the consequences of the removal of EU milk quotas in 2015. One potential beneficiary of this, as Bloxham notes, is insurer FBD. Bank of Ireland reports its full-year results on February 20th. Davy have a preview of it here. What I’m looking for in the results are updates on deposits (have recent positive trends been sustained?), de-leveraging (has BKIR continued offloading loans at better-than-expected levels?), margins and the level of provisioning (this will be particularly interesting given recent results from the likes of KBC and Danske Bank).

(Disclaimer: I am a shareholder in Marston’s plc and Tesco plc) In the consumer sector, I read an interesting piece on Marston’s strategy in The Daily Express (yes, really!). It’s a strategy that is reaping rewards, given the group’s rising profitability at a time when UK consumer discretionary spending is under pressure. Speaking of the UK consumer, I bought a position in Tesco earlier this week. While time will tell if my purchase was a little premature, I find being able to pay a single-digit PE multiple and a circa 5% dividend yield for a hugely successful global franchise particularly compelling.

(Disclaimer: I am a shareholder in Glanbia plc) In the food sector, I was interested to read that Dairygold Co-op is contemplating a €130m investment in growing its milk processing capacity. This follows reports that Glanbia is looking into making a similar investment to exploit the structural growth opportunity arising from the removal of EU milk quotas in 2015. I attended a briefing by a Bord Bia executive recently who outlined that China will be a major buyer of Ireland’s expanded milk production so I’m not surprised by Dairygold CEO Jim Woulfe’s comments in the piece linked above. Speaking of emerging markets, Danone’s 2011 results revealed strong growth by its infant nutrition business in particular, which is no surprise given last year’s buoyant performance by Ireland’s Glanbia and Kerry Group (both of which have a significant presence in that area).

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) I was pleased to see S&P upgrade its credit rating on Smurfit Kappa Group to BB from BB- along with applying a stable outlook to it. While it’s not a major surprise given the progress the group has made in cutting its debt, I am pleased to see that the recent resumption of dividend payments by the group hasn’t dissuaded S&P from this move.

Finally, in the blogosphere, John McElligott ran a screen over the Japanese market that identified a few interesting names. Calum has been looking to the United States for inspiration, doing up great articles on Dreamworks Animation and Family Dollar Stores. John did a feature on Flybe which is worth checking out – my view on it is that if the investment case he sketches for Flybe is one you can buy into, then you should be looking at Aer Lingus, which ticks much the same boxes save for having an even stronger balance sheet and superior operating trends.

I find myself having to begin this entry with a confession – I absolutely adore Irish Continental Group. It ticks all the boxes for me – very impressive cash generation, a bulletproof balance sheet, aligned manager and shareholder interests and an almost unassailable market position. More on all of these anon. It’s also delivered thumping returns for me since I bought into it at precisely €10/share in April 2009 – a gross dividend yield of 10% per annum since then and share price appreciation of over 50%. So, what better thing to write about on Valentine’s Day than a stock you love?!!

Irish Continental Group has two operating divisions. The larger of the two, contributing circa 60% of revenue and 80% of underlying profits, is its Ferries business. Within this it operates three modern ferries, Ulysses, Isle of Inishmore and Jonathan Swift, on the central corridor of The Irish Sea between Ireland and Wales. A fourth ferry, Oscar Wilde, operates on the mainly seasonal Ireland – France route. ICG’s fifth ferry, the Kaitaki, is sub-chartered to a New Zealand firm and sails between the North and South Islands there. The fleet is quite modern, with all five having entered service between 1987 and 2001. The ferries have a service life of up to 40 years in this part of the world, meaning that ICG has limited capex requirements for many years to come. ICG has, however, made some changes to its fleet in recent years, selling off the Pride of Bilbao ferry (which it had chartered to P&O for many years and which was surplus to ICG’s requirements) in 2010 and disposing of the Normandy (which was replaced by the more modern Oscar Wilde) in 2008.

The core Ferries unit has a very strong market position. In terms of Ro-Ro (roll on-roll off freight i.e. trucks) it has 50% share of the short-sea route between Ireland and Britain (Stena has the other 50%, so a duopoly). On the tourism side, it has 45% of the short-sea market (again, Stena has the balance). ICG has a very strong moat around its business, for two reasons. Firstly, there is a ban on trucks using Dublin city centre between 7am and 7pm, 7 days a week. For companies looking to make supplies to this area, they need a ferry operator that can help them get around it. So ICG’s strategically located port facilities and convenient sailing times serves hauliers very well indeed. In addition, Stena and ICG’s control of critical port slots (much like airport slots) means that they can get better use of their ferry assets through additional daily sailings on the shorter routes than their competitors, who have to sail to further away ports. Stena and ICG’s control of the shorter routes is also a key attraction for hauliers looking to minimise costs.

In terms of the customer base, as Ireland is an island, virtually all of its international trade moves by boat. I’ve already touched on its large Ro-Ro market share. On the passenger side, with Ireland being home to LCC gorilla Ryanair, one might expect that this business has been decimated, but ICG has held its own in recent years, carrying 1% more passengers in 2010 than it did in 2005. Clearly, the 2010 performance was helped by the Icelandic volcano, but there appears to be a robust market for people travelling by car to avoid getting stiffed with excess baggage charges by the airlines and so on.

ICG’s other division is Container & Terminal. This incorporates intermodal freight services Eucon and Feederlink, along with stevedoring facilities at Dublin and Belfast ports. The latter mainly involves Lo-Lo (load-on load-off freight, i.e. cranes and containers) and caters to third-party firms, including DFDS, MSC Line,Hamburg Sud and Hapag Lloyd, in addition to Eucon and Feederlink.  This unit generates decent (low teen %) ROCE, despite the much reduced trade volumes compared to a few years ago.

As a play (to a certain extent) on the Irish economy, it is unsurprising to see ICG’s performance has deteriorated since the start of the recession. At the peak of the Celtic Tiger period (2007) it generated EBITDA of €80.2m on turnover of €355.8m. By 2010 this had fallen to €53.6m and €262.2m respectively. While revenues have been on the increase again, helped by a strong performance by multinationals located in Ireland, profits in 2011 will be adversely affected by rising oil prices. Looking to this year and beyond, the prospects look more encouraging for three critical reasons. Firstly, two of ICG’s competitors exited the market altogether since the start of 2011, namely Fastnet Line and DFDS. Secondly, capacity by remaining operators such as Stena has been reduced, which is positive for freight and passenger rates.  Thirdly, ICG has incredible operating leverage – estimated at 75% – which leaves it well placed to capitalise on a more benign competitive environment.

Despite the challenging economic conditions, ICG is throwing off a lot of cash. I estimate that it will generate free cashflow (operating cashflow less capex) of €41.4m in 2012. That’s a free cash flow yield of 11.0%. Conservatively assuming modest (~3%) annual revenue growth out to 2014 (which gives revenues that year of €297m, some 16.5% below 2007 levels) and similarly muted cost growth over the period produces a 2014 free cash flow yield of just under 14%. So what will happen with this cash?

The group pays a generous dividend of €1/share (a yield of 6.6%), which costs €25m/year or about 60% of the free cash flow the group throws off. Given its strong balance sheet (net debt was only €13m at the end of September, while the pension deficit was only €17.5m at the end of 2010) the group could easily afford to increase the dividend, or perhaps retain an element of flexibility by periodically paying special dividends and/or buying back shares.

In terms of the valuation, I apply a DCF utilising a 10% discount rate and 2.5% terminal growth rate. In my DCF I have also reduced free cash flow by a notional €10m / year to reflect the long-term costs of replacing the fleet (the gross book value of which was €287m at end-2010). After taking into account the net debt and the pension deficit this produces an equity value of €455.0m, or €18.30 a share (21% upside from last night’s close). Using my 2012 forecasts, this valuation implies a forward (i.e. 2012) PE of 15.3x, P/B of 2.6x, EV/EBITDA of 9.5x and 5.5% dividend yield. This may look pricey, but you’re hardly going to pay peanuts for highly cash generative assets operating in a duopoly market with strong barriers to entry.

At the start of this piece I mentioned that management’s interests are aligned with shareholders. That only scratches the surface. ICG was the subject of what ultimately turned out to be a  three-way takeover battle between 2007 and 2009. The three parties were management, Liam Carroll (an Irish property developer) and Moonduster (a consortium comprising One51 and Doyle Shipping). The process ended in stalemate, but since then we have seen the sale of Carroll’s stake while Doyle exited the register last year.  One51 has said that it will be selling ‘non-core’ assets, which I suspect includes its interest in ICG. This leaves us with management, which has a circa 16% stake in ICG. I don’t propose to second-guess their future intentions, but it is interesting to note that during the takeover battle for ICG they were willing to pay up to €24/share for the group, which is well above the valuation I estimated above. Of course, the world has changed since August 2007, but ICG’s balance sheet has too – net debt has been reduced from €84.5m (the equivalent of €3.40/share) at end-2007 to close to zero now.

So, in summary, to me ICG is a compelling story. It offers a chunky and well-covered dividend yield, is inexpensively rated, possesses a strong balance sheet, has a robust business model and strong market positioning and is throwing off cash. My only regret is that I didn’t buy more of it when it was trading at €10/share!

(Disclaimer: I am a shareholder in CRH plc) Kicking off with the construction sector, I was interested to read that some of CRH’s major peers on both sides of the Atlantic have posted consensus-beating results. HeidelbergCement reported Q4 EBITDA of €639m, well ahead of consensus of €580m, while in the US Beacon Roofing reported EPS of 41c versus expectations of 29c. Just by way of a reminder, CRH’s geographic split is 50% North America, 35% Europe and 15% emerging markets. Based on recent sector results I suspect the risks to CRH’s full-year results on February 28 lie to the upside.

In the food and beverage sector, Diageo revealed that Guinness is recording strong growth in emerging markets, with volumes in Africa increasing by 8% while Asia-Pacific volumes rose 13%. Having had a few pints in a bar in Kuching on the island of Borneo last year, I can indeed confirm that Guinness is making headway in emerging markets! Elsewhere, Greencore announced a very impressive underlying sales performance, recording growth on this measure of 11.2% in the 17 weeks to 27 January. International Flavors & Fragrances, a major competitor of Kerry Group’s Ingredients & Flavours division, reported very strong results that bode well for Kerry’s FY results on February 21. Kerry has previously guided 8-12% growth in earnings for 2011, led by a strong performance by Ingredients & Flavours.

(Disclaimer: I am a shareholder in AIB plc, Bank of Ireland plc and Irish Life & Permanent plc) In the financials space, Danske Bank, which owns National Irish Bank, revealed that its Irish impairments and underlying profits both worsened in 2011. In contrast, KBC said that its Irish subsidiary saw impairment charges fall last year. We should get a clearer overview of the domestic situation when Bank of Ireland issues its full-year results on February 20th. Switching to our friends in the UK, there were a number of interesting data points that could suggest upside to the Irish banks’ deleveraging plans. Firstly, Barclays’ UK retail and business impairments fell 35% to £536m in 2011, making for a 44bps charge (2010: 70bps), which could enhance the attraction of any UK loan books in this segment that the Irish banks attempt to offload. Similarly, news that buy-to-let mortgages in the UK are enjoying something of a renaissance is positive news for Irish Life & Permanent in particular, given that IL&P has to sell its £6.4bn UK BTL-heavy loanbook as part of the PLAR requirements. Of course, time will tell how successful the divestments will ultimately be.

(Disclaimer: I am an indirect shareholder in Dragon Oil plc) As I alluded to recently, an investment fund that I am involved in has gone long Dragon Oil. A couple of days ago I came across this nice summary of the attractions of the company. Elsewhere, my Russian comrade on the MBA programme, Denis Shikunov, posted up E&Y’s 2011 Global Oil & Gas Transactions Review. I think we’ll be seeing a lot of M&A in this space during 2012, given the astonishingly cheap valuations to be found in the small-cap segment in particular.

In the blogosphere, Neonomic posted up an interesting analysis of housebuilder Barratt Developments. It’s a stock a lot of value investing bloggers like, but my preferred play in the sector, due to its bulletproof balance sheet and very inexpensive rating is Abbey. Elsewhere, John Kingham identified an interesting sounding net-net called Molins that’s worth taking a look at. Calum looked at Topps Tiles, which he rightly concludes is a leveraged play on an UK economic recovery. Wexboy posted up part IV of The Great Irish Share Valuation Project. Finally Kelpie Capital posted up a very good piece on Tesco, which is a stock I am strongly minded to purchase.

Independent News & Media has leading newspaper and other media interests in Ireland, South Africa and Australasia. Buoyed by the success of the Irish and South African economies in particular, it enjoyed tremendous growth in the years following the millennium, with reported operating profits rising from €224.1m in 2000 to €349.2m in 2007. However, this profit rise did not correspond to a proportionate improvement in the balance sheet, as considerable investments in growing its operations and generous dividend payouts meant that reported net debt was little changed over the same period (from €1,500m in 2000 to €1,316m in 2007).

While the well-documented problems in the Irish economy certainly didn’t help, the group’s large debt pile proved to be especially problematic once the global financial crisis hit. Management responded with a number of decisive moves, including a €200m debt-for-equity swap, a €92m rights issue, the divestment of over €200m worth of assets, including the loss-making UK Independent Newspaper (sold to former KGB agent Alexander Lebedev) and INM’s stake in Indian publisher Jagran Prakashan, and a €30m share placing.  These moves, and the deconsolidation of INM’s minority stake in Australasian publisher APN (which removed just over €500m of non-recourse debt from INM’s reported group debt), reduced INM’s reported net debt to €473.6m by the end of 2010. In the group’s most recent trading update (in mid-November), management said that it had cut net debt by a further €40m since the start of 2011.

Going forward the group has identified six strategic objectives. These are: (i) Maximise the asset base – the group has been closing loss-making titles such as The Sunday Tribune; (ii) Focus on Market Share – which the group is likely to be able to do given that its market leadership positions in most segments mean that it is set to be the ‘last man standing’ as weaker competitors exit a shrinking market; (iii) Operating Cost Reductions – these were -4.4% yoy in H1 2011; (iv) Digital Diversification – while progress has been made here, digital revenues still only account for 4% of group advertising revenue; (v) Free Cashflow Generation – the €40m of debt reduction guided for 2011 equates to about a third of INM’s current market cap; and (vi) Net debt reduction – taking the above guidance INM’s underlying net debt will have fallen by circa 25% between end-2009 and end-2011.

So, with good progress on the six strategic objectives identified above and the debt situation looking like it’s under control, everything’s rosy for Independent News & Media, right? Well, not quite. There remains the not inconsiderable problem of ongoing economic difficulties in its home market, while the elephant in the room is what I see as the terminal outlook for newspapers – a theme I’ve written about elsewhere. Circulations data from the National Newspapers of Ireland show that in the 5 years to H1 2011 Irish daily newspaper circulations dropped 12%, while over the same period Sunday circulations fell 22%. As noted above, INM’s market leading positions will help to ameliorate the effect of this as it will likely be the ‘last man standing’ in key segments. To illustrate this I note that its Irish daily broadsheet, The Irish Independent, has circulations of 134k, which is roughly equivalent to both of its broadsheet competitors – The Irish Times (101k) and The Irish Examiner (43k) – combined. Of the Sunday titles, INM titles commanded a 55% share in the H1 2011 circulations data.

Another dimension around INM is its share register. From 1973 to 2010 its biggest shareholder, and until 2009 its CEO, was Sir Anthony O’Reilly, who holds 13.3% of the shares in the group. One of O’Reilly’s sons, Gavin, is the current group CEO. The largest shareholder in the group today is another leading Irish businessman, Denis O’Brien. He has a 22.0% shareholding. O’Brien has been vocal in calling for change at INM for some time now. More recently another hugely successful Irish businessman, Dermot Desmond, has been adding to his stake in the firm. He now owns 5.75% of the shares.

In terms of the valuation, based on the price it closed at last night (22.5c) INM is capitalised at €124m. Management has guided a €40m yoy reduction in net debt in 2011, which puts that at €433m. The pension deficit at the end of H1 2011 was €127m. So INM has an Enterprise Value of €684m. Stripping out the value (using the current share price and exchange rate) of its 30.4% stake in listed Australasian media group APN (€126.5m) puts an enterprise value of €557m on its Irish and South African operations, which generated sales and EBITDA of €605.3m and €119.3m (after deducting common costs) respectively in 2010. The sales and EBITDA of these units are likely to have declined by mid-to-high single digits in 2011 (I estimate out-turns of €587.9m and €116.6m respectively for 2011).

I have touched on INM’s cash generation, which is likely to be impressive over the coming years given the group’s limited capex requirements and the absence of a dividend. The group cut net debt by €40m last year, and I see it reducing net debt by a further €50m in 2012. These are pretty material moves for a group with a market cap of only €124m, and you could see the equity part (currently less than 20%) of the enterprise value rise significantly as the group deleverages further. INM has no significant debt maturities until 2014.

On my valuation model I apply an EV / 2012 Sales multiple of 1.0x to the core (Ireland and South African) operations, which I think is very reasonable considering that these are market leading assets that are still generating operating margins in the teens despite extremely challenging economic conditions in Ireland. In addition, INM’s large exposure (I estimate that it will account for over 50% of underlying 2011 EBIT) to South Africa, gives me further confidence on that EV/sales multiple. I also value APN at its current market price despite the premium it would likely fetch in a formal sale process. INM has explored the possibility of selling it before. Stripping out my estimated end-2011 net debt (as guided by management) and pension deficit (holding the H1 2011 deficit steady) gives an equity value of €158.6m, or just under 29c a share. This suggests 28% upside from last night’s close. I have made no allowance for the possible intentions of one or more of INM’s largest shareholders – I see no value in me trying to second-guess that. I have also, for reasons of prudence, not factored in the chunky debt paydown I see in 2012 in the above valuation. Were I to use my estimated end-2012 net debt (€383m) this would take the valuation to 38c/share.

In summary, while I dislike the traditional print media space in general, I see value in INM’s portfolio of assets. Its strong cash generation should not be overlooked, and neither should the strong possibility of competitors falling by the wayside, thus allowing the group to pick up extra market share at no extra cost. The firm’s share register could also potentially throw up a few positive surprises in the coming months as well, as could the unlocking of value through the disposal of more assets, such as APN (I was interested to read that INM appointed an “experienced international investment banker” to its board before Christmas). While I believe that, on paper, there is better value elsewhere in the media space (Trinity Mirror in particular stands out in this regard), to me INM is worth a punt here.

(Disclaimer: I am a shareholder in Smurfit Kappa Group) To kick off with the packaging sector, SKG delivered a slew of positive news this morning. In its Q4 results, management revealed that the group generated EBITDA of €245m, which is at the top of the range of estimates heading into the results. The company also announced that it is to reinstate the dividend, while it is also looking to extend its debt maturities. These are all very encouraging steps, and follow on from recent positive newsflow in the sector (both M&A and price increases).

(Disclaimer: I am a shareholder in AIB plc, Bank of Ireland plc, Irish Life & Permanent plc) Irish financial shares have registered very strong performances of late. While it is true that a number of large overseas investors are bulled up on an Irish recovery trade, I cannot see any justification for AIB to be capitalised at circa €50bn – more than double its peak during the Celtic Tiger years. Investors looking to play this ‘recovery trade’ should note that AIB’s locally quoted peers Bank of Ireland (market cap €4.3bn) and IL&P (market cap €2.1bn) are far more modestly valued (at least in relative terms!). Of the three, Bank of Ireland is by far my preferred stock, and for the sake of full disclosure I quintupled my position in it before Christmas at 8c/share. I’m not entirely sure that I’d be chasing it at these levels (14c) now though.

Continuing the recent run of positive newsflow from the Irish flag carrier, Aer Lingus issued strong traffic stats for January. Excluding its Regional operations, it carried 5.8% more passengers last month than it did a year ago.

Cemex indicated that it is willing to increase its possible offer for the minority of Readymix it doesn’t own by 14% to 25c.

Speaking of smallcaps, Bloxham made a few interesting valuation observations on TVCH, which has flashed up (rightly, in my view) on a lot of value investors’ screens. Elsewhere in the TMT sector DMGT issued an IMS that revealed still-challenging advertising conditions in the UK, the effect of which are being mostly offset by cover price increases.

In the healthcare sector United Drug released a positive trading update, in which management said it expected earnings to grow between 4 and 8% this year, which is a very good performance considering the difficult macro conditions and pressures on public budgets.

(Disclaimer: I am a shareholder in BP plc) BP released a good set of Q4 numbers, with profits ($5bn, +14% yoy) beating expectations ($4.88bn). The company hiked the dividend by 14%, which is very welcome. While Macondo is still clouding the outlook for the group somewhat, my gut feeling is that the risks on that front lie to the upside, given how the process has played out to date (relatively benign official reports, many of BP’s partners agreeing to pay some of the damages etc.). As an aside, Steve Baines, who is one of the more astute market watchers on Twitter, noted that the “planned 16% increase in BP capex to $22bn in FY12 shows that the oil service stocks are the place to be”. Which is why I have had Kentz on my watchlist for some time.

In the drink space, MillerCoors acquired the #3 US cider player. This follows C&C’s recent purchase of the #2 US cider player, Hornsby’s. While cider’s share of the US LAD market is tiny (circa 0.5%), in my view C&C’s €20m investment is a very worthwhile punt – a very modest increase in cider’s market share could deliver very impressive returns on investment.

A lot of journalists and politicians these days love to exclaim: Tax the rich! However, in Britain the top 5% of earners already contribute 47% of income tax. The top 1% pay 28%. How much more tax should these people be paying exactly?

The Irish government said that it will be culling the number of town councils here as part of a shake-up of local government. It is simply preposterous that Co. Tipperary has 2 county councils and 7 town councils – an average of 1 council for every 17,500 people!

And finally, in the blogosphere, Lewis posted up the second half of his very detailed analysis of Dairy Crest Group which I’d encourage you to have  a read of.

(Disclaimer: I am a shareholder in Ryanair plc) As had been widely expected, Hungary’s Malev ceased operations early on Friday. Ryanair illustrated perfectly the flexibility in its business model by bringing forward the opening of a new base at Budapest to exploit the new gap in the market. In other news, Ryanair also issued an open letter to Aer Lingus warning that it would resist any attempts by AERL to top up the IASS pension fund over and above previously disclosed levels. In a final piece of Ryanair related newsflow, the airline announced that the number of passengers it carried in January was -6% yoy, which is broadly in line with expectations. The fact that load factors were flat yoy at 71% to me illustrates that good sense underpinning Ryanair’s decision to ground 80 aircraft (nearly 30% of its fleet) over the winter.

In the energy sector, there was good news for Tullow, which finally inked a PSA with the Ugandan government. Dragon Oil was also the subject of scrutiny by some of the Dublin brokers, with Davy raising its NAV estimate by 7% to 678p, while Goodbody recently upped its total risked NAV derived price target on the Turkmenistan based oil producer to £8.15. Its share price closed at £5.16 on Friday, and for the sake of full disclosure it’s a stock that an investment fund I advise is contemplating adding to its portfolio.

(Disclaimer: I am a shareholder in Independent News & Media plc) I was interested to read that Dermot Desmond has increased his stake in INM to 5.75%. I have a small position in INM and wonder if this is shaping up to be a special situation deserving of more in-depth analysis to see if it’s worth buying more shares in the company. Finding the time to do such an analysis is of course easier said than done!

Elsewhere in the TMT space, I was disappointed to read that the amount of VC funding raised by Irish technology companies fell by 11.5% last year.

In the blogosphere, Wexboy did up an interesting piece on Tanzanite miner Richland Resources. Richard Beddard wrote a thought-provoking article on N Brown (regular readers will know that my preference for some time has been to avoid UK consumer facing stocks, with only Marston’s proving to be the exception to the rule for over a year now). John Kingham wrote a detailed piece on Smith & Nephew that served to remind me of how little attention I give to the pharma sector! Contrarian UK made a very welcome return to blogging by doing a detailed write-up on message board favourite Xcite Energy.

Finally, looking ahead, the main scheduled Irish corporate news this week are FY results from Elan & Smurfit Kappa Group (both on Wednesday) along with AGMs for United Drug (Tuesday) and Greencore (Thursday), which will no doubt provide plenty of food for thought.

(Disclaimer: I am a shareholder in Ryanair plc) To kick off, one of the bull points about Ryanair I noted the last time I mentioned the company was easing competitive pressures, due to the demise of Spanair and, as seems likely, the imminent downfall of Malev. Bloxham’s Joe Gill notes that in addition to Spanair three other European airlines have gone bust in the year to date – Cirrus, Air Alps and Czech Connect. The longer oil stays at these levels the less competition Ryanair will have to face over European skies.

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Following the recent DS Smith – SCA deal, there has been more consolidation in the European packaging space. Subject to regulatory approval, Billerud is to pay €130m (7.2x EV/EBITDA) for UPM’s packaging assets. I read a broker note that said taking account of the synergies would put the multiple to 6.0x EV/EBITDA, which is about a 1/3rd premium to the EV/EBITDA multiple that Ireland’s Smurfit Kappa trades on. Leaving aside the valuation (and I think SKG is very cheap), these deals will help to lessen competitive pressure in the industry (and, one assumes, help pricing), so I view this as a win-win for Smurfit.

There was a lot of excitement around the Facebook IPO. Despite being an avid Facebook user, I have serious misgivings about this float. Facebook has 800m active users, so an implied valuation of $90bn values each of these at $112.50. I wouldn’t pay that much for a client base that mainly posts up pictures of crazy nights out and plays Farmville. Forbes has a good piece on the IPO here. And here’s an interesting piece on the merits of Facebook’s advertising service.

Irlandia Investments, the investment vehicle of the Ryan family (of Ryanair fame) appears to be giving Merrion Pharmaceuticals a dig-out.

I’ve previously written about Ireland’s glut of airports. Hence, I am not surprised to read that Galway Airport may cease trading over the coming days. Assuming it does close down, this will have a marginal benefit (the airport only handled 160,000 passengers in 2010) on Ireland West Airport Knock (83km away, according to Google Maps) and Shannon Airport (79km away).

(Disclaimer: I am a shareholder in Irish Continental Group plc) Staying with the transport space, part-taxpayer funded Fastnet Line confirmed that it is to close down. The company, which operated a loss-making ferry service between Cork and Swansea, had transported 153,000 passengers since its launch in 2010, many of whom would presumably have traveled on the private, unsubsidised and profitable Irish Continental Group’s service between Pembroke and Rosslare had Fastnet not been in operation. So, while Fastnet’s demise is obviously a blow to its workers, a lot of this business will undoubtedly transfer to another Irish company at no further cost to the taxpayer.

Speaking of taxpayers, this evening saw the release of the first set of Exchequer Returns for 2012. Some media outlets are shrieking excitedly about the 17% yoy increase in headline revenue, but this is flattered by a number of factors, such as the late payment of €261m of corporation taxes, expected in December, the effect of the USC on income tax receipts and also the relatively easy comparatives for VAT (retail sales were badly affected 12 months ago by adverse weather conditions). On the expenditure side, there are also a number of one-off items such as a €210m loan to the insurance compensation fund. In all, I wouldn’t read too much into what is just one month’s data.

In the blogosphere, John Kingham took quite a detailed look at Psion that’s worth a look (I don’t know enough about the technology to even begin to consider the merits of investing in it!). Elsewhere, Lewis did up a great piece on Dairy Crest that I’d also recommend you have a read of.

Finally, WordPress tells me that my blog (via several social media platforms) now has 1,000 followers. I’d like to thank you all for your ongoing support and, as ever, please feel free to email and tweet me suggestions on investment related subjects you’d like me to cover on this site.