Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Aryzta

Market Musings 10/9/2012

leave a comment »

This is a bit of a hotchpotch of what has been catching my eye over the past few days.

 

To kick off with construction, Abbey announced the results of the mandatory offer from Gallagher Holdings. The latter has raised its stake in the housebuilder by 10.7ppt to 72.6%. This is not enough to force a compulsory acquisition of the balance of the shares, so the stock will retain its listing. In the run up to the deadline, I had struggled about what decision to take about my own holding in the company. While the bid from Gallagher represented a nice exit price on a stock I purchased for only €4.60 a share, it was pitched at a disappointingly wide discount to NAV. In the end, I elected to take the cash, on the grounds that I didn’t want to stick around in a stock that has now arguably moved from ‘quite illiquid’ to ‘extremely illiquid’ (!), which makes it unappealing to many institutional investors. However, I may well re-enter the sector in the not too distant future given that the long-term drivers of growth are very much intact (a very old housing stock, net inward migration, severe pressure on housing in the South-East of England).

 

In the food sector, Investec argues that Premier Foods faces ‘death or glory’ by 2014. Elsewhere, NCB issued very different (in tone) reports on Aryzta and its majority-owned associate, Origin Enterprises. On Origin, NCB argues that weather and FX should provide a tailwind to earnings, while on Aryzta, NCB makes a persuasive argument that it may not hit its 400 cent earnings target for 2013.

 

(Disclaimer: I am a shareholder in Harvey Nash plc) In the recruitment space, SThree released an interim management statement that revealed slowing growth. On an annual basis its gross profits rose 6% in Q3 2012 (in constant currency terms) of its financial year (i.e. to end-August), down from +15% in Q1 and +9% in Q2. Drilling down into the numbers we see it has experienced weakness in both the UK & Ireland and ICT, with other areas performing more resiliently. The slowdown in the headline growth rate was, unsurprisingly, explained by “the difficult macro economic backdrop”, but SThree’s resilient overall performance highlights once more the importance at this time of choosing recruitment stocks that offer diversification (both by industry segment and geographic), an attractive dividend and a strong balance sheet. This is what attracted me to recently buy into one of its peers, Harvey Nash. I hope to find the time to research all of the stocks in the sector that fit this bill over the next while.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc and RBS plc) There were a few items of note in the financials space. I saw a very bullish MarketWatch piece on Bank of Ireland, which served as a reminder that while a lot of the domestic commentary is ‘doom and gloom’ oriented, many international observers are bulled up on Ireland Inc (Franklin Templeton’s bold Irish sovereign debt move is a good example of this, as is this favourable coverage from CNBC). In other sector news, RBS is planning to shut down its precious metals trading unit, while it has also ceased commodities research. The FT also reported that it is nearing a Libor settlement with US and UK authorities, which would remove another legacy overhang from the group, which remains on my watch list. Finally, I offloaded my second biggest holding, Standard Life, which has had a great run of late and is no longer (in my view) in ‘cheap’ territory.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) I was pleased to see that new Trinity Mirror CEO Simon Fox has been set very demanding bonus targets based on the share price performance of the group. It is good to see a remuneration committee flex its muscles in this regard, especially in a way that ensures investors’ and management’s interests are very highly aligned.

 

In the blogosphere, John Kingham says: “When I look at BT I see a company and an investment that screams mediocrity“.

Written by Philip O'Sullivan

September 10, 2012 at 2:40 pm

Market Musings 5/6/2012

with 3 comments

It’s been a very quiet few days as the Jubilee has seen UK markets shut for the first two days of this week, and with most Irish stocks dual-listed in London Ireland has offered little by way of business news also. However, what little there has been is quite significant. Let’s take a look at what’s been going on.

 

We got the latest Irish Exchequer Returns data, for the first five months of 2012, this evening. While at a headline level the deficit has narrowed to €6.5bn versus €10.2bn in the same period last year, as ever the devil is in the detail. Last year’s deficit was swelled by a promissory note payment of €3.1bn (2012 ytd: nil), while this year’s deficit is flattered by €1bn in Central Bank surplus income (versus zero in the same period last year) and negatively impacted by a €0.4bn ‘loan’ into the insurance compensation fund (again, zero in the same period last year). Adjusting for these three factors means that the underlying deficit for the first five months of 2012 is €7.1bn, which is unchanged from the €7.1bn ‘underlying’ deficit in the first five months of 2011. Drilling down deeper into the data, we see that voted government spending, which is day-to-day spending on schools, hospitals etc. and nothing whatsoever to do with bank recaps or interest payments on the national debt, is actually up 2% yoy, despite widespread talk of ‘austerity’ by many media pundits and politicians. Furthermore, we see that tax revenues have increased by some €1.6bn relative to year earlier levels, but €1.3bn of this has been eaten up by increased interest payments on the national debt. With the Irish government continuing to spend like a drunken sailor, it is inevitable that the cost of servicing the national debt will continue to spiral, so there is an sense of ‘running to stand still’ in these Exchequer Returns. Workers are being forced to shoulder increased tax burdens to part-fund (the balance covered by more debt) out of control government spending. With no political party courageous enough to take action to push through the necessary degree of fiscal consolidation it appears certain that taxes will continue to rise, which has the vicious circle effect of discouraging work and investment, thus leading to more pain down the road.

 

Irish-Swiss baked goods giant Aryzta issued its Q3 interim management statement today. Underlying revenue growth slowed sequentially across all key geographies, with Food Europe -2.6% (vs. -1.8% in Q2), Food North America +6.0% (vs. +8.9% in Q2) and Food Rest of World +11.8% (vs +14.2% in Q2). Interestingly, while Aryzta reaffirmed previous guidance of FY EPS of 338c in the year to end-July, there was no mention of the prospects for FY13 (in the H1 results release the company reaffirmed guidance of EPS of 400+ cents in FY13). On the outlook, management noted weak conditions in Europe, but also flagged the benefits of the ongoing ‘self-help’ measures from the ATI programme. The shares finished down 1.7% in Zurich (where the company has its primary listing) today.

 

Unfortunately, from a weather perspective if nothing else, The Diamond Jubilee of Queen Elizabeth II was a bit of a wash-out, which is bad news for UK listed pub groups, most (if not all) of whom were guiding that it would be one of three bumper events for sales this year (the others being Euro 2012 and the Olympics). I wouldn’t be surprised to see some of the pub groups’ share prices moving lower tomorrow (interestingly, cider maker C&C was -1.2% today in Dublin).

 

Hot on the heels of its recent investment in Aer Lingus, Etihad bought 4% of Virgin Australia.

 

The world’s largest yacht is reportedly under construction at a German shipyard.

Written by Philip O'Sullivan

June 5, 2012 at 7:08 pm

Market Musings 19/3/2012

leave a comment »

Now that I’ve returned from my travels, this is the first of what’s likely to be three catch-up blogs. In this one I’m going to review the main developments over the past week across the universe of stocks I follow, in the second one I’ll examine the key ‘Chinese takeaways’ from my trip and in the third I hope to catch up on what my peers in the Blogosophere and the media have been saying recently.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector, Trinity Mirror issued FY2011 results. Going into them I had forecast revenues of £731.0m, EBIT of £99.6m and net debt of £195.8m. In the event, these came in at £746.6m, £92.4m (the main variance here was that exceptional items were c. £5m worse than expected) and £200.7m respectively. One thing that did catch me offside was the pension deficit – this widened to £230m from £161m in FY2010. This is a very material move – the deterioration is the equivalent of 27 pence per share, which compares with Trinity Mirror’s current share price (at the time of writing) of 36.5p. Updating my DCF based valuation model produces an equity value of just 13p per share, which represents 63% downside from current levels. However, this valuation is extremely sensitive to movements in the pension deficit – a 10% move in the pension deficit moves the price target by 9p. I would also note: (i) the strong asset backing (freehold property had a book value of 72p/share in 2010); (ii) the further self-help moves the group could implement on the cost side; and (iii) the reasonably strong cash flows (operating cashflow was £76m last year), which give me confidence that the group can nuke its net debt over the coming 3-4 years. Overall, for me Trinity Mirror is downgraded to a hold.

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, Aryzta posted its H1 results. There wasn’t a whole lot in it for me, with management saying: “our EPS guidance of 338 cent for FY12 and 400+ cent for FY13 remains unchanged”. Elsewhere, Total Produce announced this morning that it is to be included in the ISEQ 20 indices, which may prompt some modest index buying.

 

(Disclaimer: I am a shareholder in Playtech plc) In the technology sector, there were reports that Playtech and William Hill are to open talks on their WHO joint venture shortly. From my perspective, the best option for both parties is for William Hill to buy Playtech out (given the difficult working relationship, William Hill’s online needs, Playtech’s balance sheet being significantly strengthened at a time when it’s looking to do deals etc.), a theme explored by IC here. Playtech also issued FY2011 results, which revealed a strong performance (revenues +46%, gross income +41%), while net cash was a healthy €137.3m. Management also signaled that the group has made a strong start to 2012, and that the company has made progress towards achieving a full listing. Playtech’s share price has surged in the past week, tipping 350p and bringing it closer to my breakeven level (~380p). I remain an ‘unhappy holder’ of Playtech but will be ‘less unhappy’ if I can get out of the position flat or slightly up.

 

In the energy space, Tullow’s FY2011 results contained few surprises, save for a big ramp up in the dividend (from 6p to 12p). That said, the implied yield is only ~1%, so hardly anything to get excited about.

 

In the recruitment sector, CPL Resources acquired a Swedish firm, ERHAB. While no details of the consideration paid were released, I would expect it to have been very modest – high six figure / low seven figure territory – given CPL’s past form and its understanding that when you buy a recruitment firm you buy a business whose assets walk out the door at 5pm every evening. Hence, this is likely to be about buying a small number of individuals and then investing in building a strong team around them to increase ERHAB’s share of the market. It’s a model that has worked well for CPL both at home (CPL is the largest recruitment firm in Ireland, and has successfully evolved from being a niche IT recruitment specialist – e.g. CPL = ‘Computer Placement Limited’ – into a diversified operator) and abroad (CPL generated 33% of its permanent fees outside of Ireland in FY2011).

 

Finally, Siteserv has agreed to be sold to a vehicle owned by businessman Mr. Denis O’Brien. Under the terms of the proposed deal, shareholders will receive approximately 3.92c / share. I find this a little surprising given that the scale of Siteserv’s debts might have been expected to result in no consideration going to equity holders. However, IBRC (the former Anglo Irish Bank) seems happy with this arrangement. Overall, it seems the ISEQ is going to lose yet another company.

Written by Philip O'Sullivan

March 19, 2012 at 11:48 am

Market Musings 4/3/2012

with one comment

Big share deals and Ireland Inc have provided the most interest since my last market update. Let’s see what the lessons from these are.

 

(Disclaimer: I am a shareholder in Ryanair plc) To kick off with the transport sector, Ryanair announced that it bought back 9.5m of its own shares at a cost of €39m. This is particularly interesting in light of comments made on the carrier’s conference call post its Q3 results that it could spend up to €200m on share buybacks. This should help to prop up the share price against the pressure of the recent spike in oil prices. I hope to do a detailed piece on Ryanair over the coming days.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) To switch from the purchase of a big block of shares to a sale of one, private equity houses Cinven and CVC announced that they sold a 9.7% stake in Smurfit Kappa Group for €158m. The two retain an 8.2% position which is subject to a lock-in agreement until the release of SKG’s Q1 results in May – which I can’t help but wonder if this will be seen as a near-term overhang on the stock – time will tell.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) These big share transactions bring to mind a lot of the other stakes in Irish plcs that could change hands this year. The Irish government has signaled a willingness to sell its 25.1% stake in Aer Lingus. One51 has said that it will sell non-core assets, which I assume includes its circa 12% stake in Irish Continental Group. How long will baked goods company Aryzta hold on to its 71.4% shareholding in agri group Origin Enterprises plc for? Given the recent boardroom dispute at UTV Media, what are the intentions of its 18% shareholder and fellow Irish plc TVC Holdings? We could be in for an interesting few months ahead.

 

Switching to Ireland Inc, the IMF struck a relatively positive note about the country’s prospects. However, the fiscal crisis continues to drag on. Exchequer Returns data for the first two months of the year revealed that the year to date deficit stands at €2.07bn versus €1.95bn in the same period in 2011. The tax take increased from €4.9bn to €6.3bn, but voted expenditure (the part of spending that the government has full discretion over) rose by €474m – this is a disappointing performance. Non-voted expenditure ballooned from €580m to €1.6bn, let by a massive increase in interest costs on the national debt (€848m vs only €61m) and a €250m loan to the insurance compensation fund. The interest costs serve as a reminder of the consequence of this government’s (and its predecessor’s) failure to close the fiscal jaws been revenue and spending. It is astonishing, given the unemployment and emigration crises Ireland is facing, that the government spent 10x on national debt interest costs (€848m) in the first 2 months of 2012 than it did on the Department of Jobs, Enterprise & Innovation (€84.5m).

 

Finally, in the blogosphere Neonomic did up a good piece on Home Retail Group, which owns Argos and Homebase, that’s worth a read.

Written by Philip O'Sullivan

March 4, 2012 at 10:23 am

Market Musings 12/1/2012

with one comment

The volume of newsflow is still quite light, but at least what little there is, mainly in the form of trading updates, has provided much food for thought.

 

Computer games retailer Game Group issued a very grim update covering the Christmas trading period. Like-for-like sales in its UK and Irish stores were -15.2% in the 8 weeks to January 7th. This was worse than the -10% recorded in the 49 weeks to the same date, so Christmas offered no respite, even in spite of the much milder weather we have seen this winter. Even more ominously, Game said that “the difficult market conditions raise the likelihood that [Game] will not meet its EBITDA covenants (fixed charge coverage and leverage) when they are tested on 27 February 2012″. Given those pressures, and the structural issues around computer game retailing (both the encroachment of multiples like Tesco into the space and internet operators) it’s not a stock for me.

 

(Disclaimer: I am a shareholder in Ryanair plc) Switching to the travel sector, Ryanair announced that it has opened its 50th base – its first in Cyprus. This marks the latest push by the carrier into Southern Europe, and is a further setback for tour operators and charter airlines alike. 

 

In the construction space, Grafton issued a very solid trading update, with buoyant sales in the UK (helped by good weather) in November and December in particular driving a modest upgrade to its 2011 profit guidance. I was pleased to see a modest uptick in sales trends in its Irish business (circa 25% of revenues), but this was presumably also helped by easy comparatives given the snow disruption in the previous year. Its peer SIG also revealed that 2011 was a bit better than it had projected, but it did add that it believes “market volumes will be slightly down overall in 2012″.

 

(Disclaimer: I am a shareholder in Abbey plc) Staying with construction stocks, housebuilder Barratt Developments issued a strong trading update this morning, revealing a 40% increase in operating profits and saying that it has a “strengthened forward order book” going into the second half of its financial year. It noted that while house prices overall were stable, it saw “greater robustness” in the South-East of England, which has positive implications for Irish listed Abbey, which has most of its operating units in that area.

 

In the food sector, Swiss-Irish baked goods group Aryzta raised just over €140m from a placing. This is a shrewd move that strengthens its balance sheet and gives it more flexibility to undertake more deals in the future.

 

(Disclaimer: I am a shareholder in Playtech Ltd) In the blogosphere, Mark Carter writes of his decision to sell his shareholding in Playtech. I’m minded to follow him to the exit, but I’m in no particular rush to do so (there is not a lot on my ‘shopping list’ at the moment). Elsewhere, John McElligott concludes his two part series asking if Eurozone equities offer good value at these levels.

Written by Philip O'Sullivan

January 12, 2012 at 10:48 am

Market Musings 28/11/11

with 4 comments

Blogging has been light as I have a raft of end-of-term MBA assignments and exams falling due. However, newsflow has been anything but light, with continued Euroland turmoil and a slew of corporate announcements grabbing my attention in recent days. Let’s quickly recap on what’s been happening.

 

In terms of the Eurozone, I don’t see any alternative to debt monetisation by the ECB. This will not be a panacea for the bloc’s problems, but it will buy the members of the currency union some time to get their houses in order (whether it’s used or not, of course, is another matter). All of the PIIGS countries have seen regime change in 2011 to no avail. What the market clearly wants is new policies, not new politicians. I am unmoved by calls for delinquent states to be drop-kicked out of the single currency, as the domino-effect we’ve seen playing out over the past while leaves me convinced that the market will take a “Who’s next?” approach if the likes of Greece are ejected. Such a move would, as we have seen in the US during its quantitative easing drives, lead to a rally for stocks and commodities (especially gold), while it would prove bearish for cash (as inflation will rise) and (at a minimum) longer dated government bonds as inflation expectations pick up. If Eurobonds are introduced, this will likely slap down existing short-dated Euroland government bonds as they will be perceived as riskier than short-term issues guaranteed by all of the Eurozone member states. And of course, if existing government bonds sell off, this will damage banks’ balance sheets even more.

 

Something from the archives – Prudent Investor outlines The 4 Kinds of Money.

 

Switching to corporate newsflow, Promethean disclosed that it has exited its position in IFG. It had held circa 4% of IFG’s shares in issue (which made it the sixth-largest shareholder in IFG), and while a sale at the low level IFG trades at surprised some market watchers, it is in keeping with the winding-up programme underway at Promethean.

 

Recruiter Harvey Nash is a stock I used to hold, before selling it earlier this year on UK macro concerns. It issued a solid update last week in which it revealed that it is still seeing strong growth, adding that it expects the FY out-turn to be in-line with expectations. I like HVN, but given the challenging outlook for the UK it’s not one I’ll be buying again in the near term.

 

Matterley has a great value-oriented investment approach, so those of you who follow that doctrine should download this videoFund Manager Henry Dixon says he is positive on Dragon Oil, Petropavlovsk, Cranswick and RPC.

 

As we head towards the Budget in Ireland the government is drip-feeding out information to soften up citizens for a tough series of measures. I was very disappointed to hear of plans to raise taxes on dividends, which flies in the face of drives to encourage more saving and investment. Irish household balance sheets are in urgent need of repair, as slides 24 and 25  in this excellent presentation by Cormac Lucey show.

 

(Disclaimer: I am a shareholder in AIB, Bank of Ireland and Irish Life & Permanent). Other Irish balance sheets are in need of shrinking, chiefly, the banks. I was disappointed to see the sale of Irish Life halted. This means that the State will have to inject €1.3bn into its parent, Irish Life & Permanent, or around €300 for every citizen of this country. On a happier note I was pleased to see a Core Tier 1 neutral sale of a Project Finance loan portfolio with total drawn and undrawn commitments of c. €0.59bn by Bank of Ireland today, while reports indicate that AIB is looking to offload €1.4bn of property loans.

 

Aryzta issued a solid Q1 trading update earlier this morning. Revenue trends have continued from FY11 and in terms of the outlook management is retaining its FY EPS guidance.

 

(Disclaimer: I am a shareholder in France Telecom plc and Total Produce plc) Finally, in terms of the best entries I’ve seen in the blogosphere of late, John McElligott has an interesting piece asking if European telecoms dividends are sustainable; while Wexboy has conducted even more detailed research on Total Produce.

Market Musings 11/10/11

leave a comment »

It’s been an interesting couple of days since my last blog, with Irish listed stocks in particular giving me a lot to mull over.

 

Yesterday Dragon Oil announced that it has farmed-in to an offshore prospect in Tunisia. This marks the group’s latest attempts to diversify from its current single producing asset (in Turkmenistan) model. A previous overseas foray, into Yemen, has to date proved disappointing. I like Dragon, due to its strong balance sheet (net cash was an incredible $1.5bn at the end of H1 2011), simple business model centred on growing output from the Cheleken field, from which it has been producing for many years and inexpensive valuation (EV/BOE of circa $2.8). Elsewhere within the energy space, Petroceltic had two positive announcements out yesterday – confirming that it has inked a deal on a new facility with Macquarie and also announcing successful results from its fraccing activities in Algeria. The shares marked up sharply on the back of this newsflow.

 

Aryzta peer CSM issued a profit warning, citing difficult economic conditions. Aryzta was one of the weakest performers on the ISEQ yesterday, presumably on the back of this announcement, but it should be noted that the Irish-Swiss concern recently issued a solid enough set of results.

 

Staying within the Irish food space, I note that Fyffes has returned to the markets to buy more of its own shares – in this case acquiring roughly 6% of its outstanding shares on Friday.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc) In terms of what other bloggers are writing about, my old friend John McElligott has written a great blog post on both Bank of Ireland and FBD. I would agree with his views on both. For me BKIR is a complete punt here, while FBD offers remarkably good value at these levels for investors with a longer-term investment horizon.

 

Speaking of share recommendations, I was interested to see that my former employers Goodbody have initiated coverage on Easyjet with an “Add” recommendation. They have pitched their estimates well below consensus (5% below in FY12, 18% below in FY13) on macro concerns, which looks reasonable to me given recent updates from the likes of Flybe (the UK accounts for c. 40% of EZJ’s capacity).

 

A reminder that not all parts of the economy are struggling – Apple announced that pre-orders for its new iPhone 4S topped one million in a single day.

 

Last, but not least, Reuters has produced this very useful computer model which allows people to “stress-test” European banks under a range of different sovereign debt haircut scenarios.

Written by Philip O'Sullivan

October 11, 2011 at 2:17 pm

Follow

Get every new post delivered to your Inbox.

Join 1,459 other followers

%d bloggers like this: