Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Aer Lingus

Market Musings 6/9/2012

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The most interesting development I’ve noted this week has been the surge in bond issuance by corporates taking advantage of low yields to refinance at cheaper rates and also push out the weighted average maturity of their debt. No less than 3 of the 20 stocks I currently hold have been at this in recent days – Smurfit Kappa Group, France Telecom (which sold 10.5 year bonds yielding just 2.6%!) and RBS. While reducing interest bills and pushing out the maturity date for corporate debt piles are positive moves for plcs (e.g. a tailwind for earnings and lowered perceived risk), I can’t help but wonder if the recent spike in corporate bond sales points to a bubble in that market. Although, with central banks continuing to significantly influence sentiment towards bonds in general this is a bubble that may not pop for some time to come yet.

 

Switching to specific Irish corporate newsflow, full-year results from CPL Resources – the largest recruitment company in the country with a circa 40% market share – were released this morning. These revealed a resilient performance, with operating profits growing 39% to €10m, while earnings per share rose by a third (helped by a lower number of shares in issue following the recent tender offer). In terms of the outlook, while noting that the market remains “challenging”, management is confident of achieving “further profitable growth in the months ahead”. In all, this is a good set of numbers from CPL. My view on CPL Resources is positive, underpinned by a first-rate senior management team, dominant market share in its home market, a very strong balance sheet (net cash of €28.0m) and a diversified business model (both by geography and by sector).

 

(Disclaimer: I am a shareholder in Tesco plc) We saw some more distribution channel innovation at Tesco, with the roll-out of drive-through grocery pickups. It will be interesting to see if moves like this help to arrest the decline in Tesco’s UK market share.

 

In the energy sector, Providence Resources said its 80% owned Barryroe oil field offshore Cork may contain another 1.2bn barrels, bringing the total potential resource to 2.8bn (it should be noted that this is a P10 estimate).

 

(Disclaimer: I am a shareholder in Ryanair plc) In the transport space, easyJet said that it is to roll out allocated seating across its network from November. This is a significant move and it will be interesting to see if Ryanair, which has experimented with this, follows suit. Speaking of Ryanair, it reported its busiest ever month in August, carrying a record 8.9m passengers, up 9% year-on-year. There has been a lot of media attention given over to Ryanair’s falling load factors (-1ppt to 88%), but I am not especially concerned by that given the impact capacity redeployments (mainly from northern to southern Europe) have presumably had on traffic stats, so I prefer to focus on the positive momentum in total passengers carried. Elsewhere, Aer Lingus reported a fall in ‘mainline’ passengers carried for the second successive month, however, good capacity management kept loads in positive territory.

 

In the blogosphere Lewis looked at an interesting UK quoted manufacturing company, Renold.

Written by Philip O'Sullivan

September 6, 2012 at 10:58 am

Market Musings 27/8/2012

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(Disclaimer: I am a shareholder in AIB, Bank of Ireland and PTSB) Since my last update I was pleased to see that deposits at Ireland’s covered banks (AIB, Bank of Ireland, PTSB) were +10% year-on-year in July 2012. This is a helpful vote of confidence in the system, given that it suggests that overseas deposits (given the sclerotic domestic economic situation) are returning to the Irish financials.

 

Speaking of Ireland Inc, there has been an intense focus in recent days around the possible introduction of a property tax. Ronan Lyons, who is the most authoritative voice on the Irish property sector, has written a good piece outlining the different considerations around such a measure. I agree with him in principle that we should have such a tax, particularly given that too much of our tax revenues are dependent on flows instead of stock. I say ‘in principle’ because I have difficulty in seeing how Irish people can shoulder yet another tax at this time – we currently have a situation where more than 1 in 5 mortgages are in trouble, while more than 1 in 7 people in the labour force are out of work. Throw in the effects of rising taxes over the past few budgets and falling incomes and I think we could be facing a scenario of mass evasion / people (in many cases justifiably) pleading inability to pay similar to the household charge debacle from earlier this year. Some have argued that a modified ‘property tax’ taking into account incomes should be introduced, but that would in practice only amount to yet another income tax, which will act as a disincentive to work (given the already elevated marginal tax on incomes in Ireland).

 

In the energy sector, I was unsurprised to see a surge in applications for UK North Sea licences following the British government’s reversal of its previous anti-investment stance, which I had been critical of. I hope to do some work on the firms focused on the UK continental shelf (Xcite Energy in particular seems to have a lot of fans) over the coming weeks.

 

In the pharma space, there was an interesting article in The Irish Independent around the prospects for a sale of Elan Corporation that’s worth checking out.

 

(Disclaimer: I am a shareholder in Ryanair plc) In the airline sector, the Irish government made the astonishing revelation that it has yet to formally discuss a sale of its stake in Aer Lingus to Etihad. Considering that a sale of State assets has been agreed with the Troika as part of Ireland’s “bail-out” and Etihad having recently signaled that it may also bid for part of Ryanair’s stake, I would have imagined that Dublin wouldn’t have been slow out of the blocks to have proper talks with the Middle Eastern carrier. This is especially so given that Etihad can effectively only buy either the government’s stake or most of Ryanair’s holding, because even though as a non-EU carrier it can, in theory, buy up to 49% of Aer Lingus, in practice Irish stock exchange rules which say you have to bid for the whole company if you go above 29.9% rules this out for the time being at least (there are some ways of circumventing this, but they would likely prove cumbersome to execute in the short-term).

 

Finally, I was sorry to read that Calum has closed his blog. There is a dearth of high quality blogs in the UK and Ireland covering the stock market and the demise of yet another one is a great shame.

Written by Philip O'Sullivan

August 27, 2012 at 10:46 am

Market Musings 4/8/2012

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The past week has been quite hectic, with two weddings and the deadline for completing a 200 page report for the company I’m on an internship with as part of my MBA studies to safely negotiate. Hence, blogging has been a necessary casualty of my lack of free time. So, what has been happening since my last update?

 

(Disclaimer: I am a shareholder in Ryanair plc) Ryanair released its Q1 results. These contained few surprises. The company is sticking to its FY net income guidance of a range of €400-440m which is reasonable in light of the early stage of its financial year. However, with the likes of Easyjet and Aer Lingus recently upping their forecasts, allied to Europe’s biggest LCC’s form for low-balling guidance (it upgraded its guidance twice in its last financial year) and healthy passenger numbers, I suspect the risks to Ryanair’s profits lie to the upside.

 

Elsewhere, as noted above Aer Lingus upgraded its FY earnings outlook in its interim results. Having previously said that 2012 profits “should match” the 2011 out-turn, it now says they will “at least match” last year’s performance. One aspect of the Aer Lingus results release that was particularly encouraging was the long haul performance – compared to the same period last year, in H1 2012 Aer Lingus’ long haul passenger numbers, load factors and yields all increased by 11.0%, 5.0% and 9.0% respectively. This is a magnificent performance given the tough economic backdrop and illustrates the success of Aer Lingus’ moves to leverage Dublin and Shannon, the only airports in Europe offering US pre-clearance, to win transatlantic customers whose journeys originated in other parts of Europe. This means that news of United Airlines terminating its Madrid-Dulles JV with Aer Lingus is not particularly concerning given that Aer Lingus clearly has sufficient demand to justify redeploying the Airbus A330 currently on the JV route to its own branded Ireland – North America routes.

 

(Disclaimer: I am a shareholder in BP plc) In the energy space BP released its interim results. Market reaction was extremely downbeat, but I am (perhaps foolishly?) taking a contrarian view to this and assuming that its run of disappointments means that management will either: (i) come up with shareholder-friendly goodies (a large buyback, chunkier dividends, sensible M&A) to revitalise the share price; or (ii) come under irresistible pressure from investors to unlock the value in the firm through a break-up of the company.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the TMT segment Trinity Mirror erupted this week, with its share price gaining circa 40%, helped by strong interim results. Regular readers of this blog will know that I’ve been an uber-bull on this name for a while, based on my view that it offers a compelling mix of: (i) Very strong cashflows; (ii) Substantial tangible asset backing; (iii) Rapid deleveraging facilitating a re-rating for the equity component of the EV; and (iv) An absurdly low (and unwarranted) valuation. I’m pleased to see that my central thesis is playing out, with the first six months of 2012 bringing a £60.5m reduction in its combined net debt and pension deficit, an amount equal to 75% of what TNI’s market cap stood at on Tuesday. The catapulting of its share price since then indicates that the market may be starting to wake up to this reality. I suspect the TNI story has a lot further to run – if you annualise the H1 earnings the stock is trading on a forward PE multiple of only 2.3x!

 

In the food sector Greencore issued an upbeat trading statement which revealed healthy underlying volume growth allied to management expressing confidence that it can meet full-year earnings expectations.

 

(Disclaimer: I am a shareholder in AIB plc and RBS plc) Switching to financials, I was surprised to read criticism of AIB’s announcement that it is to close a number of branches as part of its efforts to right-size its cost base. As its recent interim results showed, AIB is currently loss-making before you even take provisions into account – which is a clearly unsustainable position. Moreover, the vast majority of transactions these days are done using ATMs, cards and internet banking. Due to all of this, AIB (and indeed its domestic competitors) simply does not need as many branches as it did before.

 

Elsewhere, RBS issued an in-line set of interim results. While LIBOR, IT problems and a daft total nationalisation suggestion by elements within the British government have dominated headlines around the group, it is continuing to make impressive progress in terms of repairing its balance sheet. Investec’s Ian Gordon makes some good points around the numbers (and indeed the outlook for RBS) here. One aspect of the results that I found concerning was Ulster Bank’s impairments. RBS’ Irish unit saw impairments widen to £323m in Q2 2012 from £269m a year earlier, with mortgages to blame for this worsening trend. This has ominous read-through for the other banks operating in the Irish market.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) In the packaging space Smurfit posted another great set of results, with Q2 EBITDA of €255m coming in right at the top of the range of analyst expectations (€236-255m). Management reaffirmed its full-year EBITDA and net debt targets, but I suspect the risk to both is to the upside given that the two largest European packaging firms, Smurfit and DS Smith, have both recently announced chunky price increases.

 

(Disclaimer: I am a shareholder in Abbey plc) There was more good news for my portfolio from the construction sector, with Abbey’s majority shareholder, Charles Gallagher, making an offer to buy out the minority shareholders in the company. The price being offered isn’t exactly stellar, at 0.86x trailing book value, but it’s one I’m happy to accept given that it represents a 42% return on what I paid for the shares in 2009. If only the rest of my investments worked out so well!

Written by Philip O'Sullivan

August 4, 2012 at 8:21 am

Market Musings 18/7/2012

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One of the most interesting developments since my last update has been the number of European countries with negative bond yields. This has been explained as a flight to safety mixed with a currency play, but to me it represents more of a delusion of safety, given that many large European non-financial corporates, which are sitting on a mountain of cash, can offer investors the same currency exposure, a much higher yield and a stronger balance sheet than many sovereigns. Should there be any shift in sentiment away from ‘defensive’ assets such as European government bonds and towards equities, I think stock markets could push significantly higher from here as investors scramble to escape from what to me (and others) looks like a bubble in the bond market.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc) Following on from recent similar moves by its local peers, AIB announced that deposits gathered in the UK will no longer fall under the Irish government’s guarantee scheme. This is a welcome move for AIB as it will lower costs, but it is a less positive development for Ireland’s fiscal positionthe State raised €547m from ELG fees in the first 6 months of 2012.

 

(Disclaimer: I am a shareholder in Ryanair plc) There were a few developments in recent days around Ryanair’s takeover approach for Aer Lingus. Firstly, Europe’s largest LCC posted its offer document for the Irish flag carrier, which contained few surprises. Then the Irish Transport Minister said the government would review the bid based on four criteria, while this morning Aer Lingus rejected the offer, citing both competition and valuation grounds. With Aer Lingus this morning trading on an 18% discount to Ryanair’s bid price, the market continues to indicate a low probability of success for this approach.

 

(Disclaimer: I am a shareholder in France Telecom plc) There were some extraordinary developments in France yesterday, with the new government indicating that it is looking to block telecoms companies from laying off workers despite sliding revenues (Bouyges Telecom guides -10% this year, SFR expects revenues to weaken further after last year’s 3% decline, France Telecom sees average revenue -10% this year). Blocking companies from being able to right-size costs while allowing them be undercut by new entrants is a recipe for disaster.

 

The protracted takeover battle for Cove Energy appears to have reached the endpoint, with PTT winning out over Royal Dutch Shell.

 

In the blogosphere, Lewis has been furthering his knowledge of the UK motor retail sector, profiling Vertu.

 

And that’s about it in terms of what’s grabbed my attention since my last update! The main scheduled newsflow to watch out for here over the remainder of the week is DCC’s interim management statement on Friday, which I suspect should be pretty good due to the unusually poor weather we’ve been having in this part of the world.

Written by Philip O'Sullivan

July 18, 2012 at 8:48 am

Market Musings 10/7/2012

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The past few days have been pretty quiet on the newsflow front, which has afforded me the opportunity to work on some financial models. I hope to publish a detailed case study on Smurfit Kappa Group later on this week, so those of you who follow the packaging sector might want to keep an eye out for that.

 

(Disclaimer: I am a shareholder in Abbey plc) This morning housebuilder Abbey released its FY12 results. While the tone was relatively subdued (it should be noted management has form for conservatism) the numbers themselves were pretty good. The firm completed 310 sales in the 12 months to the end of April, +2% year-on-year. Average selling prices were +4% across the group, as a 14% decline in Ireland, which now only represents circa 8% of turnover, was easily offset by a 7% increase in the UK, which accounts for circa 85% of revenue. The balance of Abbey’s activities are in the Czech Republic. Despite shelling out over €20m on share buybacks and landbank purchases, the group finished the year with net cash of €70.1m (56% of the current market cap), -€8.8m year-on-year. Overall, there’s nothing really in the statement for me to alter my narrative on the company, which is: Abbey is an exceptionally well run company, that is overwhelmingly exposed to the attractive South-East England market, with a very strong balance sheet, trading at an unwarranted 25% discount to its NAV. It’s cheap. I like it and would consider adding to my holding.

 

Since my last update, Aer Lingus says that it’s considering launching domestic flights in Britain. This serves to remind me of the value of the carrier’s Heathrow slots (it has the third highest number of take-off and landing slots and London’s busiest airport), and also of the opportunity it has to maximise the value of these through careful route management. If it secures the Heathrow-Edinburgh route, this will not be the first time Aer Lingus has operated routes originating and terminating outside of Ireland – it previously had a base at Gatwick Airport, while it currently flies a Washington DC – Madrid route on behalf of United Continental.

 

(Disclaimer: I am a shareholder in Independent News & Media) In the media space, following its recent shuttering of the Offaly Express, Johnston Press closed another Irish local title, Donegal on Sunday. As I’ve noted before, these unfortunate closures will by default result in market share gains for the likes of Independent News & Media, which publishes 13 local titles in Ireland.

 

In the blogosphere, John Kingham wrote a detailed case study on UTV Media, which he successfully traded in and out of. I covered the stock back in my analyst days (I feature in John’s case study!) and am quite impressed by the progress the company has made in terms of repairing its balance sheet. If only certain other Irish media groups were as successful when it comes to strengthening their financial position!

 

Speaking of case studies on highly indebted companies, Lewis took a peek at Premier Foods and rightly (in my view) concluded that the debt structure was unlikely to prove benign to equity investors.

Written by Philip O'Sullivan

July 10, 2012 at 8:20 am

Market Musings 7/7/2012

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(Disclaimer: I am a shareholder in Ryanair plc) Since my last update, two of Aer Lingus’ shareholders came out to say that they will not be supporting Ryanair’s approach for the company. Etihad, which owns just under 3% of the carrier, said “we are not selling“, pledging its support for management, while elsewhere investment fund Matterley, which has a circa €1m stake in Aer Lingus, said Ryanair’s indicated bid level “still undervalues the asset base of the company, before taking account of the valuable slots at Heathrow”, adding “accordingly, the Fund has retained a significant investment”. While these are interesting developments in terms of providing more colour on investors’ intentions, the market is giving us a clear signal on its perception of Ryanair’s chances of success with the shares closing yesterday at €1.07 – some 18% below the price Ryanair says it would be prepared to pay for Aer Lingus.

 

Staying with Irish plcs, investment fund TVC Holdings issued an update at its AGM yesterday. Management note the wide (29%) discount the shares are trading at relative to its NAV, which I feel is unwarranted given its impressive investment record in recent years. Looking ahead, cash-rich TVC says it believes “there are restructuring opportunities in Ireland and the UK where companies with excessive debt need to raise new equity at attractive terms for new investors”. In terms of opportunities within Ireland, I wonder if TVC will look to leverage its experience in the media sector (it is UTV Media’s largest shareholder with an 18% stake) to help out some of the more geared media players here?

 

(Disclaimer: I am a shareholder in Datalex plc) Speaking of Irish TMT stocks, I know that I’ve been pushing the bull case for Datalex for a while now, but even I was taken aback by a piece in last weekend’s Sunday Times. The newspaper interviewed United Continental CEO Jeff Smisek, and in the interview he had a go at what he termed the ‘oligopoly GDSs’ such as Amadeus, saying they had “underinvested in their product, as oligopolies always do”. He went on to say: “Our technology is more potent than theirs and we can’t wait for them to catch up”. And who helps United with its online shopping and reservations worldwide? Step forward Ireland’s Datalex.

 

(Disclaimer: I am a shareholder in RBS plc) There was a lot of news around RBS in recent days. Despite recent setbacks, the bank reaffirmed its target of exiting the APS programme by the end of this year. In theory this will save RBS £500m annually in APS fees, however, the costs of the capital implications of an APS exit are trickier to quantify.  Elsewhere, Bloomberg ran an interesting piece on RBS’ efforts to shrink its non-core loanbook. This is an often overlooked part of the group’s story – since 2008 RBS’ non-core assets have shrunk by 70%, or £238bn, which is an impressive performance given the difficult backdrop. However, offloading the remaining 30% is likely to prove to be more a challenge in the near term given how much of it is concentrated in markets where this is a relative paucity of buyers such as Ireland (Ulster Bank’s share of RBS’ non-core loanbook was £14.4bn at the end of 2011). Overall, I continue to monitor RBS closely but I see no reason, given the present uncertainty around it, to increase my exposure to it just yet.

 

Ireland’s so-called ‘bad bank’ NAMA said that it no longer expects to make a profit. Given this, shall we say, “tempering of expectations”, can we still be confident of IBRC’s (Anglo Irish Bank & Irish Nationwide) guidance on how much it will ultimately cost the taxpayer?

 

(Disclaimer: I am a shareholder in BP plc) Bloomberg yesterday reported that BP’s Russian partners are only willing to buy half of its stake in the TNK-BP venture. Given how much trouble BP has had as a 50% shareholder in that venture, I cannot see a scenario where BP is happy to reduce its holding to a minority one. With Gulf of Mexico related payments nearing their end, a successful departure from TNK-BP would equip BP with the financial firepower to consider significant acquisitions elsewhere.

 

(Disclaimer: I am a shareholder in Abbey and ICG) In the blogosphere, Richard Beddard covered the current focus on income stocks. Given the present uncertainty in the markets, it is unsurprising to see people touting income over the naked pursuit of capital gains at this time.  What I found particularly interesting in his post was the comment about companies’ reluctance to invest. This is a definite concern of mine at present – we’ve seen many cash-rich Irish plcs, including Abbey and ICG, launch share buybacks in recent times – and while this is a ‘low risk’ way of flattering earnings per share, I wonder would shareholders’ interests be better served in the long-run through the money being used to support the expansion of those businesses. In the case of Abbey, distressed landbanks of housing are hardly difficult to find in this market – and Abbey operates across three countries (here, the UK and the Czech Republic). For ICG, might it consider a move for something like the Isle of Man Steam Packet Company, which was taken over by the banks (for which it is presumably a non-core asset!) last year? Or given how many PE deals took place during the boom years in the port infrastructure space, particularly in the UK, might there be some distressed assets there worth picking up?

 

Staying with the blogosphere, John Kingham wrote a good piece asking: “When is a good time to invest in the stock market?“. His words are worth sharing with any retail investors you know – the tragedy of the market is that often it’s the private investor who is last to buy into the rally and first to sell at the trough.

 

And finally, also in the blogosphere, the excellent Kelpie Capital presents the bear case for UK housing.

Written by Philip O'Sullivan

July 7, 2012 at 9:14 am

Market Musings 5/7/2012

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It’s been a very busy few days on the newsflow front, so once more this blog represents a catch-up on what’s been happening on a sector-by-sector basis.

 

(Disclaimer: I am a shareholder in CRH plc) CRH issued a development update in which it revealed €0.25bn of investment and acquisition initiatives in H1 2012.

 

(Disclaimer: I am a shareholder in Datalex plc) We got some more information on Datalex’s partnership with SITA, which was first disclosed in Datalex’s recent results. Given SITA’s large scale relative to the Irish based travel software provider, this could prove to be very significant for Datalex. I’m still quite bullish on Datalex and see more upside for it from here given how scalable its business model is, and on this note partnerships such as the one with SITA should help open doors for it with more travel companies.

 

(Disclaimer: I am a shareholder in Ryanair plc) Speaking of travel companies, we saw traffic stats released this week by both Ryanair and Aer Lingus. For Ryanair, its June passenger stats provide us with the full picture for Q1 of its financial year. Europe’s biggest LCC carried 5.7% more passengers in Q1 relative to year earlier levels. This compares with guidance of 7% growth in H1, and it should be noted that Q2 is the key period for Ryanair during the year. Aer Lingus’ June passenger stats, released this morning, reveal another strong performance, particularly on the long-haul side, where load factors rose 9ppt to 92.4%.

 

Donegal Creameries issued an AGM statement that revealed a “satisfactory” performance, with management sticking to full-year earnings guidance.

 

TMF wrote a piece on “five smallcaps that could double“. Of the five, I hold Datong, and given its most recently reported NAV of 72.7p a share is well above its share price at the time of writing (31.0p) I think its inclusion on the list is more than warranted, provided that it can deliver on its promises of a recovery in revenues and earnings.

 

Switching to macro news, taking advantage of the enthusiasm that followed the recent EU summit (although the finer details still need to be worked out), Ireland’s NTMA is issuing €500m of 3 month treasury bills today. Obviously, the amount is very small relative to Ireland’s funding needs (and existing stock of debt), and the maturity is short term (and falls within the Troika’s programme, which removes a lot of the risk for buyers), so while it is a welcome development it is hardly a game-changer for Ireland.

 

Speaking of welcome developments for Ireland, according to Reuters some currency strategists expect sterling to rise against the euro, which is good news on a number of different levels. It makes Irish exports into the UK (which buys a sixth of our exports) more competitive, while for Irish plcs that generate a significant proportion of their revenues in sterling (e.g. Paddy Power, Kingspan, Kerry and DCC) but who report in euro this provides a tailwind for earnings.

 

But to move from welcome developments to unwelcome ones, Ireland’s H1 2012 Exchequer Returns reveal continued grounds for concern about the government’s fiscal trajectory. While much of the media commentary has focused on where the numbers are at relative to expectations, the reality is that there has been no underlying improvement in Ireland’s fiscal position. If you strip out significant one-off items, such as the promissory note, the cost of acquiring Irish Life and the loan to the insurance compensation fund, the underlying deficit for H1 2012, at €7.7bn, is only 1% below the underlying deficit for H1 2011. Annualising that means that Ireland is running an underlying deficit of over €3,000 a year for every man, woman and child in the State.

 

I recently reviewed how my 2012 investment picks have performed. Many of my friends in the UK and Irish investment blogosphere have followed suit, namely: John Kingham, Mark Carter, Wexboy, Mr. Contrarian and Expecting Value. Of course, none of us can be said to be investing with a 6 month time horizon in mind, but at the same time it is useful to revisit how portfolios have performed with a view to discerning what, if any, takeaways can be taken from that in order to refine the investment strategy going forward.

 

Speaking of the blogosphere, Calum did an excellent write-up of Dairy Crest that’s worth checking out.

 

And finally, here is the trailer for the Bollywood film that was partly filmed in Dublin.

Written by Philip O'Sullivan

July 5, 2012 at 9:35 am

Market Musings 22/6/2012

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Since my last update Aer Lingus has responded to Ryanair’s takeover approach, saying that the indicated bid price from Europe’s largest LCC undervalues the company, while also noting the regulatory hurdles that Ryanair would have to overcome before being able to gain clearance for any tie-up between the two companies. Echoing the ‘undervalued’ line was Irish Transport Minister Leo Varadkar, who has clearly forgotten that several months ago he said he’d be open to offers of at least €1 a share, which is significantly below the €1.30 Ryanair has stated. Businessman Denis O’Brien offered a few thoughts of his own on the proposed deal in an interview with Bloomberg yesterday.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) Following on from the recent secondary placing in ICG, I’ve taken the opportunity to increase my stake in the company. My rationale is that: (i) the exiting of One51 from the share register removes an overhang from the stock; (ii) the recent slide in the oil price – Brent futures yesterday fell below $90 for the first time since December 2010 – is good news for ICG, which doesn’t hedge its fuel requirements; and (iii) at these levels the stock offers a very attractive dividend yield of 6.75%.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM’s Australasian associate, APN, made a AUD$66m online acquisition, which represents attractive multiples of 0.9x EV/Sales and 8x EV/EBITDA, clearly undemanding for digital assets, although it doesn’t appear to have done a lot to lift the share price.

 

In the blogosphere, the excellent Value and Opportunity blog offered a much needed sense of perspective for these troubled times, while also outlining the bull case for investing in Europe.

Written by Philip O'Sullivan

June 22, 2012 at 8:00 am

Market Musings 20/6/2012

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(Disclaimer: I am a shareholder in Ryanair plc) The main news since my last blog has been Ryanair’s €1.30/share indicative offer for Aer Lingus. The approach, which values AERL at €694m, marks the third time Europe’s biggest LCC has made an approach for the Irish flag carrier. At the time of writing Aer Lingus shares have risen 22% to €1.15, which is 11% below the indicated bid price from Ryanair, which suggests that the market is not convinced that Ryanair has a high chance of succeeding in this move.

 

In terms of possible motives for this development, there are a number which come to mind. These include: (i) A sincere move by Ryanair to secure a dominant presence in the Irish market (as I recently noted, the combined RYA-AERL share at the three main airports – which handle 96% of all air traffic in and out of Ireland – here is well over 70%); (ii) A move to force Etihad, which recently revealed that it has a near-3% stake in Aer Lingus, to counter-bid for the government’s 25% stake in the carrier (as a non-EU airline Etihad cannot own more than 49.9% of Aer Lingus); (iii) A move to scare Etihad out of increasing its stake in AERL, by reminding it that Ryanair’s 29.8% stake in Aer Lingus is enough to block special resolutions at AGMs and EGMs; (iv) Mischief-making by O’Leary, which may sound ridiculous but then again making an approach for a firm with a significant potential pension issue (of sorts) is an unusual move; (v) a possible move to frustrate the Competition Commission investigation into its AERL stake and/or (vi) O’Leary views the acquisition of AERL as a key part of his entry strategy onto the Transatlantic market, which he has long talked about entering.

 

From my perspective as a shareholder in RYA, I would prefer if the carrier doesn’t pursue this course of action. It has considerable scope to grow organically within the European market, where it has only an 11% share, armed with a proven business model in a competitive landscape where several airlines have gone bust in the year to date and many others are constrained by stretched balance sheets, tough economic conditions and still elevated (despite the recent drop) oil prices. I don’t see the strategic rationale of adding a carrier with a fundamentally different business model to Ryanair.

 

(Disclaimer: I am a shareholder in France Telecom plc) I was dismayed to read that France is considering the introduction of a dividend tax, which is likely to hit big payout companies such as France Telecom. I’m philosophically opposed to such measures in general, given that they amount to double taxation, which along with similar measures such as the taxation of interest income they also serve to discourage savings and investments, at a time when ageing populations mean that Western governments should be doing more to encourage people to provide for the future. From a specific FTE perspective, it also reduces further the attraction of holding the stock, and it remains a position that I will look to exit in the short term.

 

(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) Newspaper publisher Johnston Press is to close one of its Irish regional titles, the Offaly Express newspaper. I’ve previously noted that profitable publishers such as INM and TNI are likely to gain market share as more ‘financially challenged’ peers close titles.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc) Bank of Ireland this morning announced, as expected, the appointment of Archie Kane as its new Governor (Chairman). It also announced that heavyweight investors Wilbur Ross and Prem Watsa would be joining the board, which is a welcome move given their considerable experience will no doubt prove a big help for the board.

 

This is a scary (if predictable) chart – ECB lending by country.

 

Meanwhile, the US Navy is spending $42bn on a new class of aircraft carriers.

Written by Philip O'Sullivan

June 20, 2012 at 9:09 am

Market Musings 7/6/2012

with 2 comments

Markets have been extremely volatile in recent days due to a combination of ratings agency downgrades, dodgy economic signs and a view by some investors (this one included) that the worse things get from a macro perspective, the more likely it will be that Central Banks introduce further quantitative easing.

 

This brings to mind something that I have been meaning to mention for a while – I often get queries from people about “what my X month price target for XYZ stock is”. The simple truth is that nobody, except perhaps a market maker in the most illiquid of stocks, has a clue about what price a stock will be trading at tomorrow, let alone in a few months. In a world where we cannot rely on meteorologists to call tomorrow’s weather with 100% accuracy, it would be ill-advised to have that degree of confidence in someone who pontificates on the equity markets! For the record, whenever I express a ‘price target’ for a company, this is my estimate of the underlying equity value of the company, as opposed to a target I see it hitting in any specific timeframe. This is especially true in the current environment, where markets oscillate violently between ‘risk-on’ and ‘risk-off’. All I can do is stick to my central thesis for this year, which I wrote back in December, and which I see no reason to change, given how my thesis, shown below, has played out so far:

 

Looking ahead to [2012], I see no grounds to assume that the macro situation will be materially different to that which we saw in 2011. Sclerotic growth across the leading Western economies, limited credit availability, rising unemployment, political uncertainty and austerity are all likely to be key themes over the coming 12 months. Added to the mix is likely to be a pronounced deterioration in the Chinese economy. I am gravely concerned at the rise in economic nationalism and see further policy incoherence at a European level as countries pull in different directions. However, my sense is that the euro will survive, given that its failure would lead to a deep and prolonged depression on a scale not seen for close to a century. That said, its survival will come at the expense of a weaker euro as monetary policy here is loosened to ensure its survival (given the lack of political consensus on how to fix the issue, I don’t see a solution that doesn’t involve some form of quantitative easing).

 

For me there are five key tactics to mitigate against this pressure:

 

  1. Choose firms with strong balance sheets
  2. Choose defensives over cyclicals
  3. Choose firms with significant exposure to markets outside of the Eurozone
  4. Hedge against inflationary pressures / political risk
  5. Choose firms with attractive and well-covered dividends.

 

Moving on to corporate news, Dragon Oil, which I traded in-and-out of earlier this year, announced a $200m share buyback. Opinions vary on this move. Steve Markus, who I have great respect for, and who is a must-follow on Twitter, said he: “would rather have the cash!” I wonder if more shareholder value would have been delivered had Dragon cast an eye at some of the financially constrained smallcaps (particularly some of the ones you can find on AIM) that are trading at bargain basement prices. Another Irish listed oil stock, Tullow Oil, reported a chunky (31m of net pay) oil find offshore Côte d’Ivoire.

 

(Disclaimer: I am a shareholder in Ryanair plc) We had a lot of news from the airline sector. Aer Lingus released its latest traffic statistics this morning. These were unambiguously good numbers, with load factors +2.9ppt and flown passengers +2.4ppt. I was particularly impressed by the 12.7% rise in long-haul (transatlantic) passengers, a factor of the 10.5% increase in RPKs. Another Irish airline reporting a rise in passenger numbers was Ryanair, which revealed a 5% yoy increase to 7.51m in May, bringing Ryanair’s total number of passengers carried over the past 12 months to 76.6m.

 

In other airline sector news, it was reported today that Kerry Airport’s revenues fell 40% last year. Credit is due to local management, who, demonstrating the county’s well-earned (I may be showing my Cork bias here!) reputation for parsimony cut administration costs by an admirable 35% in response.  Some months ago I wrote of the need for airports in the south and west of Ireland to consolidate, and even after the government’s decision to cease funding for Galway and Sligo Airports I wonder if they’ll be the last to see their government support pulled. Indeed, in this regard I was interested to also read today that Spain is to at least partially close 30 of its 47 State run airports.

 

In the construction space, Grafton put Irish DIY chain Atlantic Homecare into examinership. This is a smart move by management as it should allow it to close underperforming stores and save on the rent bill.

 

(Disclaimer: I am a shareholder in France Telecom plc and Independent News & Media plc) In the TMT sector, France Telecom’s unions were unsuccessful in their moves to force a dividend cut. However, I fear that this may prove to be round one in this battle, given the potential for increased political interference in the company, a concern I’ve previously noted.  In other TMT sector news, it was confirmed that Dermot Desmond has increased his stake in Independent News & Media ahead of tomorrow’s AGM. With yet another INM non-exec confirming their resignation, it will be interesting to see what new faces are co-opted to fill the gaps on the board after a wave of recent departures.

Written by Philip O'Sullivan

June 7, 2012 at 7:38 pm

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