Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘BP

Market Musings 9/8/2012

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Blogging has been interrupted this week by coursework and the Olympics, which have seen some amazing performances from Team Ireland. We’ve also seen an amazing performance from Kerry Group, as detailed in this morning’s H1 results.

 

To kick things off, as noted above Kerry released strong interim results this morning. Despite the disruption and costs of its ‘1 Kerry’ business transformation and ‘Kerryconnect’ IT programmes, the group managed to lift trading margins to 8.25% in H12012 versus 8.06% in the same period last year. Ingredients delivered this improvement, with Consumer Foods holding its margin steady despite the consumer headwinds. Kerry now expects earnings to rise 8-12% this year, an improvement from previous guidance of 7-10% growth. Other items of note in the release include an improvement in operating cashflow (€116.7m in H112 versus €104.6m in H111), while the group completed a €20m ingredients acquisition in Malaysia in H1 and since the period end has also agreed to acquire other ingredients businesses in China and Australia, which highlights the growing importance of Asia-Pacific (now 16.5% of total ingredients revenue) to the group. While this is all positive stuff, my main concern around Kerry is its rating – taking the mid-point of its earnings guidance it is trading on circa 17x earnings, which is pretty punchy for a stock carrying €1.3bn in net debt. Kerry is not one for me at that sort of a multiple.

 

In the pharma space Elan Corporation announced a big setback for its Alzheimer’s drug, which will see it take a $117m charge against it. This could have profound consequences for the stock, with some analysts reckoning that Elan could be taken over.

 

(Disclaimer: I am a shareholder in BP plc) The ‘Value Perspective’ team at Schroders posted an interesting piece about BP that shows how a contrarian approach can often reap serious rewards. I have gradually built up my stake in BP over a number of years, and used the Macondo weakness as an opportunity to ‘average down’ on my in costs as part of that. My rationale back then was that the dip in BP’s market cap between its pre-Macondo highs and post-Macondo lows was far in excess than the ‘worst case’ scenarios being sketched about how much the Gulf of Mexico spill would cost the group, coupled with research that showed previous large spills (such as Exxon Valdez) ultimately cost a lot less than what had been feared. Clearly not a ‘risk free’ punt, but it shows that straying from the investor herd can be a very profitable strategy. It’s a similar logic to what led me into Trinity Mirror (see below) at a time when the received wisdom was that ‘all newspapers are doomed’, hence you could pick up its stock for half-nothing.

 

Staying with matters BP-related, DCC made another sensible bolt-on acquisition, acquiring the former’s LPG distribution business in Britain. It perfectly complements DCC’s existing operations in that market, adding 87k tonnes of bulk and cylinder LPG to the existing network of 190k tonnes, giving DCC 25% of the UK LPG distribution market according to analysis by Davy.

 

(Disclaimer: I am a shareholder in CRH plc) CRH confirmed that it is in talks that could lead to it significantly increasing its presence in the Indian cement market. CRH expanding in India makes perfect sense, given that its cement consumption per capita, at 178kg, is the lowest of the BRICS (Brazil: 311kg, Russia: 350kg, China: 1380kg, South Africa: 217kg). I noted some commentary to the effect that CRH has no BRICS experience, but this is absolute nonsense given that the group already has a presence in three of them – China, Russia and India.

 

In the transport sector Aer Lingus released weak traffic stats for July, bringing to an end a run of strong data. It will be interesting to see if this is just a blip or the start of a new trend. Elsewhere African LCC FastJet is making some impressive progress, as this piece shows (I strongly recommend you view the video accompanying it).

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the blogosphere Lewis has turned bullish on Trinity Mirror following last week’s strong interim results. Regular readers of this blog know I’ve been a bull on the stock for months, and it’s nice to see the thesis finally playing out – there’s a lesson there in terms of sticking to your guns in the absence of any ‘new’ information that might challenge a conviction.

 

To finish up, here are two good pieces that grabbed my attention this week – the first challenges the received wisdom about Thatcher’s policies towards Britain’s coal mines, the second explores Ireland’s craft beer revolution.

Written by Philip O'Sullivan

August 9, 2012 at 3:30 pm

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 16/7/2012

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Since my last update there have been quite a few developments around the banking sector. The Irish banks’ reliance on monetary authorities for funding rose marginally in June, but it remains 32% below peak (€187bn in February 2011) levels. Elsewhere, UBS put together an interesting table showing credit and deposit trends across Europe – the deleveraging process for households in Ireland is especially acute relative to other EU member states, while the deposit trends are disappointing, especially given the competitive rates the banks are offering to savers. On that note, with deposit rates looking set to continue to fall as the Irish banks work towards rebuilding their net interest margins, I wonder if this might lead to more deposits moving out of the country over time. Time will tell.

 

(Disclaimer: I am a shareholder in Bank of Ireland, AIB and Permanent TSB) Speaking of Irish banks, I had a look at the liquidity of their shares after noticing a few comments about abnormal price moves. Bank of Ireland has a free float of 85%, compared to the circa 0.2% of AIB and PTSB that is outside of State ownership, so it was no surprise to see that the average daily volume of shares traded in Dublin in Bank of Ireland (33m) is 44 times that of AIB (750k) and 98x PTSB (337k). Considering that, based on where PTSB’s share price closed on Friday (2.5c) the average daily volume traded in that stock is worth less than €10,000 you would want to be careful not to read too much into any daily movements in its share price. The same applies for AIB, where on the same criteria less than €50k worth of stock is traded each day in Dublin.

 

(Disclaimer: I am a shareholder in RBS plc) Elsewhere in the financial space RBS’ planned IPO of Direct Line was the subject of significant media coverage in recent days. Press reports over the weekend suggested that leading private equity firms are circling around RBS’s insurance operation, which generated operating profits of £454m on revenues of £4,072m last year. I think a trade or private equity sale of this business, which is valued at £3-4bn, would be in shareholders’ best interest – particularly given that, with 11 investment banks lined up to advise RBS on an IPO, the fees involved would be substantial if it goes down the listing route.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Switching to media, TCH announced that it is considering restructuring its debt. The group operates national and local newspapers along with several local radio stations and its quoted competitors include Independent News & Media, UTV Media and Johnston Press. Should any restructuring move lead to closures of underperforming assets there will presumably be opportunities for those three, along with TCH’s unquoted peers, to gain market share.

 

(Disclaimer: I am a shareholder in BP plc)  In the energy space, I am concerned by a report that an Argentinian province is threatening to revoke a licence held by BP’s joint venture, Pan American Energy. The asset in question is Argentina’s largest oil field, while the recent nationalisation of Repsol’s business in that country shows that Argentine politicians are not above taking actions that will ultimately prove ruinous to FDI inflows.

 

Investors Chronicle’s John Ficenec wrote a good piece on the recruitment sector. I’ve been tempted by some of the cheap valuations in the sector of late but am torn by the macroeconomic headwinds. Of course, if there’s any hint of these abating the sector should significantly re-rate, but timing that entry point is easier said than done!

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector I note a report saying Total Produce has made a bolt-on acquisition in France. There’s no official word from the company, but assuming the report is accurate I’m guessing the business should add 1% to TOT’s topline with a slightly lower effect (due to: (i) finance costs; (ii) France having a 33.3% corporate tax rate, versus TOT’s current 19.3% effective rate; and (iii) synergy benefits will presumably be lower than they would be in areas where TOT has a more substantial presence) on earnings.

 

Finally, with the US Presidential election only a few months away, I was interested by the results I got on this questionnaire that matches your political views to those of the candidates – supposedly I’m 93% in-tune with Gary Johnson and 88% with Ron Paul! Why don’t you take the questionnaire and see where you stand.

Written by Philip O'Sullivan

July 16, 2012 at 7:50 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 27/6/2012

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The big news from corporate Ireland this morning is C&C’s Q1 interim management statement. In its first projection for the current financial year, the company sees FY operating profits of €112-118m (last year: €111m). Its core cider brands struggled in Q1, due to poor weather and tough comparatives, but other parts of its portfolio are performing strongly. Regular readers of this blog will recall that a few months ago I wrote that Tennent’s lager appeared to be making headway in pubs here, and this morning C&C revealed a near-50% increase in Tennent’s sales in Ireland as the brand is now available in 1,200 pubs (16% of the total). Overall, this is a pretty much as-expected statement from C&C, but at this early stage of the year it’s hard to make a definitive call on the full-year outlook (who knows, we could have an excellent July and August on the weather front!). On a more fundamental view, the group has an extremely strong balance sheet (net cash was €68m at the end of its last financial year) and has been doing a good job of managing its portfolio of brands in challenging consumer conditions of late. It’s a stock I like.

 

Elsewhere in the food sector, Glanbia confirmed what’s already in the public domain about the potential restructuring of its Dairy Ingredients Ireland operation, namely that it’s plotting to establish a jv with its majority shareholder, the Glanbia Co-op, to manage this business, which is set to experience a dramatic increase in volumes once EU milk quotas are lifted from 2015. This restructuring would be a positive move for all parties concerned, in that it would free up additional capital for the plc to support its push into the high-growth, high-margin ingredients space while giving the JV the freedom to pursue a strategy that could feasibly create a northern hemisphere version of New Zealand powerhouse Fonterra.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) In the media space, we saw a battle for control of Australia’s Fairfax media group, which could have consequences for INM’s Australasian associate APN News & Media. Elsewhere, UTV Media lost out to Global Radio in the bidding war for GMG’s radio portfolio. However, as I said a few days ago, this has given rise to serious competition concerns, which could potentially lead to other acquisition opportunities for UTV Media et al.

 

In the healthcare space, United Drug made a £13m bolt-on acquisition of a UK medical communications company, which will fit perfectly within its Sales, Marketing & Medical division. This transaction is obviously small from a group context, but nonetheless helps to further diversify United Drug’s revenue streams.

 

(Disclaimer: I am a shareholder in BP plc) Oil behemoth BP did some further portfolio management in recent days, offloading assets in Wyoming and the North Sea for a combined $1.3bn. Throw in the $20-30bn it is likely to receive from a successful sale of its economic interest in TNK-BP and the firm will have a significant war chest to make further acquisitions (or fund a chunky special dividend) with.

 

(Disclaimer: I am a shareholder in RBS plc) The worst of the IT problems that have dogged RBS in recent days appear to be behind the group, and attention is now switching to the fallout. Reuters spoke of a £100m+ bill, but this may prove extraordinarily ambitious, with reports of people being kept imprisoned due to bail money not being processed properly and patients’ medical treatment being imperiled coming to light. Doubtless RBS will be writing a lot of cheques to assuage public anger following this foul-up.

 

There was a lot of excitement around Irish house prices since my last blog post, with the release of official data that show Dublin residential property prices have advanced (marginally) on a month-on-month basis for each of the past three months (national prices were +0.2% mom in May, -15.3% yoy). Despite this recent improvement, residential prices in Dublin, which is going to be the part of the country that leads the market, are still -17.5% on an annual basis (and 57% below the peak) so it seems a little premature to bring out the champagne bottles. The ongoing difficulties in the domestic economy are likely to hold back property prices for some time to come yet, while this December’s budget should bring in further tax increases, not least given that the government has repeatedly demonstrated a lack of willingness to right-size public spending, which will further limit peoples’ ability to service mortgages. Add a lack of mortgage credit availability into the mix and I don’t see any obvious catalyst for a sustained improvement in Irish property prices in the near term.

 

In the blogosphere, Lewis wrote about Dart Group, perennial favourite of the value investing blogosphere (albeit not one for me – given that I already have exposure to some of its competitors e.g. Ryanair and Total Produce).

Written by Philip O'Sullivan

June 27, 2012 at 8:10 am

Market Musings 1/6/2012

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This is a bit of a ‘catch-up’ blog as I spent much of the past couple of days building a financial model for AIB to support my analysis on that stock.

 

(Disclaimer: I am a shareholder in BP plc and PetroNeft plc) The energy sector has seen some very interesting developments. Parkmead, a vehicle led by ex Dana Petroleum executives, agreed to buy DEO Petroleum for £12.7m earlier this week, which hopefully signals a resumption of the frenetic M&A activity within the sector that we saw earlier this year. Elsewhere, Dragon Oil entered the Iraqi market. While the award of one exploration licence is hardly a game-changer for the stock, it is encouraging to see it continue to execute on its strategy of geographic diversification. Going the other way is BP, which said this morning that it is to “pursue a potential sale of its interest in TNK-BP“. I am delighted to hear this news given that the venture seemed to be more trouble than it is worth. In other Russian oil sector news, PetroNeft announced that it has agreed a new $15m debt facility, while also saying that its output is “stable” at 2,200bopd (in its last update in early April output was running at 2,300bopd). PetroNeft’s shares moved higher on the back of the update as some investors had feared that a rights issue / placing would accompany any new facility, but of course it should be noted that $15m doesn’t go too far in this industry.

 

(Disclaimer: I am a shareholder in Datong plc) Yorkshire-based spy gadget maker Datong released solid H1 results. As previously guided, the first half of the year was unusually quiet, but very bullish guidance saw the shares initially gain well over 30%. The firm’s order intake during April and May was £3.1m, versus £1.2m in the same period last year, supporting management’s previous forecast of an unusually strong H2. Datong had net cash of £2.1m at the end of H1, or roughly 55% of its market capitalisation. NAV of £10m works out at 73 pence per share, a huge premium to the 28.5p the shares currently trade at. While management has been doing a good job in recent times, given Datong’s very poor liquidity and limited resources I can’t help but wonder if investors would be best served if the group were to sell itself off to a larger defence business.

 

In the support services space, Harvey Nash, a staffer I’ve held in the past, released a solid Q1 IMS today. Unsurprisingly, given recent positive signals from the US economy, it sees the strongest growth across its operations there, while the UK and continental Europe is slower. HVN remains on my watchlist, but for the time being I’m focusing on trying to realise value across my portfolio and reduce the number of positions I have as opposed to adding more names to it.

 

(Disclaimer: I am a shareholder in Abbey plc) In the construction space, London-focused housebuilder Telford Homes released a strong set of results, with profits coming in ahead of market expectations. The company raised its full-year dividend by 20% in a strong expression of confidence about the outlook, while in terms of its forecasts for this financial year management say they expect to report a “substantial increase in profit before tax”. Overall, the signs from the South-East England property market remain very robust and this has positive implications for Irish listed housebuilder Abbey, which derives the majority of its business from that part of the UK.

 

In the food and beverage sector, I was interested to learn that Ireland’s Glanbia produces 18% of global output of American-type cheese. Elsewhere, pub group Fuller, Smith & Turner’s full-year results revealed nothing new relative to what its peers have been saying of late, namely that the sector is betting on a positive impact on demand arising from the Jubilee, Olympics and Euro 2012.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector, there was a considerable amount of intrigue around Trinity Mirror. The group dispensed with the services of the editors of the Daily Mirror and Sunday Mirror, announcing that they will be merging the titles. Rival publication The Daily Telegraph claims that the departed pair were planning a bid for the group, with the support of an unnamed ‘wealthy figure’. Regardless of whether or not there’s any truth to that story, to me the stock is great value given its strong asset backing (freehold property worth 69p/share, or 2.5x the current share price) and its low rating (1.2x PE, 5.2x EV/EBIT on my estimates for FY12), while on the liability side it has made material progress in cutting net debt in the year-to-date, while the pension deficit is, I believe, very manageable. Hence, I’ve doubled my stake in Trinity Mirror today.

 

Turning to the macro space, this article served as a useful reminder of what often happens when countries impose capital controls.

 

In the blogosphere, Calum did a good write-up on BSkyB, but I would dissent from his conclusion about the valuation, chiefly because I’m disinclined to pay double-digit multiples for stocks when there are so many names trading on low single-digit multiples in this market. Lewis maintained his impressive blogging work-rate with a piece on Tullett Prebon. Like Lewis that isn’t an area I’m particularly familiar with, so despite being optically cheap my instinct is to stay on the sidelines.

Written by Philip O'Sullivan

June 1, 2012 at 10:30 am

Market Musings 9/5/2012

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Since my last update markets have been rocky on the back of election results in France and Greece in particular. Notwithstanding this present volatility, however, I don’t see this as a game-changer, given that Hollande was the front-runner for the French presidency for quite some time before the election, while Greece has for so long been anything but well-behaved that the election of a large number of cranks to its parliament is unlikely to result in any deviation from the Hellenic Republic’s recent record when it comes to compliance with sound economic policies. What the pullback in the market means for me, if anything, is that some of the stocks I was looking to buy are now more attractively priced, but more on this anon.

 

(Disclaimer: I am a shareholder in CRH plc) We got an interim management statement this morning from CRH. I, and indeed all of the brokers whose preview notes I saw ahead of this announcement, had expected the company to guide that H1 EBITDA would increase compared to year-earlier levels on the back of improving trends in North America and the benefits of cost take-out programmes. In the event, the company is guiding “overall EBITDA in the less significant first half of the year to be close to last year’s level”. While the firm is sticking with its “overall like-for-like sales growth in 2012 and a year of progress for CRH” full-year guidance, I think this is a disappointing statement in light of more upbeat releases from peers in recent times. Other points of note within the statement include: (i) Regional performance as expected, with “a firmer tone in construction markets in the United States” and a weaker economic backdrop in Europe; and (ii) Development spend appears somewhat underwhelming – CRH said it spent €230m on 13 acquisitions and investments in the year to date. This compares with the €186m spent in H12011. Given CRH’s strong balance sheet, I would have hoped that the company would have stepped up its development spend more significantly by now. Overall, I see little in this statement to get enthusiastic about.

 

Elsewhere, United Drug issued its H1 numbers this morning. Going into it I had expected the group to have faced headwinds due to the impact of healthcare cutbacks, in the event the group unveiled a robust performance, achieving both topline growth and an impressive (8%) increase in earnings per share. Management is sticking to its full-year guidance of 4-8% growth in EPS, but given the H1 performance I suspect the risks to United Drug’s numbers lie to the upside.

 

Tullow Oil saw its share price close up over 3% yesterday on the back of a chunky oil discovery in Kenya. The company’s strike rate when it comes to finding new resources is to my knowledge unparalleled in the industry, and  is a testament to the outstanding team built around exploration director Angus McCoss.

 

(Disclaimer: I am a shareholder in BP plc) Speaking of oil stocks, I followed through on my recent commitment to add to my sterling denominated assets and I doubled my position in BP at 420p yesterday. While I appreciate that the oil price is under pressure at this time, for me I think there is a hell of a lot of downside risk priced into BP at these levels (just under 6x PE), while the prospective dividend yield of 5.4% is particularly attractive relative to the poor returns presently available from traditional ‘income assets’.

 

One of my Twitter ‘followers’ asked me if I was concerned about the FX risk after I loaded up on BP shares yesterday. I replied that I was bearish on the euro both in the short-term (due to the market’s nervousness around France, Greece and Ireland) and the long-term (due to growing policy incoherence at the EU level as more and more of the architects of the present strategy are being rejected at the ballot box). For this reason I’ve been buying exposure to sterling both through equities and by moving cash from euro into sterling.

 

(Disclaimer: I am a shareholder in RBS plc) Following its recent Q1 results, RBS CEO Stephen Hester gave an interview that contained a few interesting nuggets. I have to say I’m really getting a sense that the bank has turned the corner, as illustrated by some of Hester’s comments in that clip.

 

(Disclaimer: I am a shareholder in France Telecom plc) In the telco space, Mexican billionaire Carlos Slim’s America Movil bid to raise its stake in Holland’s KPN. With Hutchison Whampoa reportedly prowling round Ireland’s eircom, not long after it bought Orange Austria from France Telecom, who also sold Orange Suisse to private equity firm Apax, this pick-up in M&A activity is presumably bullish for sector valuations. France Telecom is trading at a small discount to my valuation on the company, and I am monitoring the share price closely with a view to exiting the position. Hopefully these developments mean that I can escape from it sooner rather than later!

 

In the macro space, the Adam Smith Institute, which is one of my favourite think tanks, happened upon this great chart which illustrates that Ireland is not the only country in Europe where many politicians and media commentators talk of ‘austerity’, while in reality government spending is in fact little changed compared to the past couple of years.

Written by Philip O'Sullivan

May 9, 2012 at 7:36 am

Market Musings 1/5/2012

with one comment

I found a few minutes to sneak in a quick update before the first of my exams so here is what has been grabbing my attention in recent days:

 

Aer Lingus announced that Etihad has purchased a 2.987% stake in the company. The statement from the company says that Etihad will not purchase any more shares in the carrier, pending the outcome of discussions on reciprocal code-share opportunities and “additional commercial and cost opportunities to develop a closer working relationship in areas such as joint procurement”. We’ll watch this space!

 

In other airline sector news, there was a very unusual development as Delta Air Lines bought an oil refinery in an attempt to reduce its costs. It’s a gutsy strategy, given that the skill-set needed to run an airline is presumably rather different to that needed to run an refining business, but I wish them well.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Smith & Williamson’s Mark Pignatelli (who’s long the stock) made a few interesting comments about Independent News & Media. While I’ll refrain from commenting on his bullish remark about INM being “probably the cheapest stock in Europe” , I concur with his observation about INM fixing its balance sheet and the flow through (hopefully) from a recovery in the Irish economy. I recently wrote about the desirability of INM selling its Australasian media interests, while the operating leverage inherent in INM (which hopefully will be amplified with Vincent Crowley, a man known for his cost-cutting instincts, now at the helm) should hopefully mean a significant recovery in earnings once advertising expenditure starts to pick-up.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) Elsewhere in the media space, Press Gazette did up a good piece on the UK local newspaper market. They found that 242 UK local newspapers have closed in the past 7 years, which to put into context compares with the 238 paid titles the largest local newspaper group, Johnston Press, publishes. Trinity Mirror publishes 130.

 

(Disclaimer: I am a shareholder in BP plc) BP released its Q1 results this morning. While the underlying replacement cost profit of $4.8bn lagged the Reuters consensus ($5.1bn), I’m not too concerned about it  – as management state today, BP continues to make good progress towards meeting its strategic objectives, so one quarterly earnings miss doesn’t prompt much nervousness on my part. The company has been on my watchlist for a while and I would view any share price weakness on the back of this as a buying opportunity.

 

Insurer FBD issued a very solid trading statement ahead of its AGM yesterday. While the “very competitive” Irish insurance market continues to soften, in line with domestic economic activity, FBD is more than holding its own, with operating profit in its underwriting operations “ahead of the prior year and marginally ahead of expectation”. I also note positive noises about the firm’s capital base. Management is for the moment (and is right to, given we’re not even half-way through the year) sticking to its full-year operating EPS guidance of 145-155c, but barring any adverse claims events I wouldn’t be surprised to see upgrades as the year progresses due to: (i) the benefits of the cost take-out programmes in recent years; (ii) FBD’s successful internet strategy; (iii) supportive conditions in its core agri customer base; and (iv) the expansion of its broker channel.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc, AIB plc and Irish Life & Permanent plc) Staying with the financial sector, I was pleased to read that deposits at Ireland’s covered banks rose 1% month-on-month in March. Total covered bank deposits are now at their highest level since February 2011. This represents a nice vote of confidence in the sector. In terms of AIB, I see that it is not going to pay a cash dividend on preference shares to the NPRFC, which means that it will instead issue more shares to 99.8% shareholder, the State (i.e. the Irish taxpayers).

 

Hugh Hendry’s latest letter has been posted onto Scribd.

 

From a macro perspective, I was interested, but not terribly surprised, to read that Ireland’s government deficit over the past 2 years equals Slovakia’s entire GDP. Our deficit for 2011 alone was greater than the size of Cyprus’ economy. I find it increasingly difficult to comprehend how anyone could believe Ireland’s fiscal strategy is sustainable.

 

In the blogosphere, Lewis wrote an interesting piece on Cambrian that’s worth checking out, while Richard wrote a blog post on Churchill China that brought back memories from the time I covered Waterford Wedgwood as a sell-side analyst.

Market Musings 17/4/2012

with 3 comments

Having had a rather productive day in terms of college and making the final edits to my articles for the next issue of B&F I thought I’d “treat myself” to writing a short blog on what has been grabbing my attention in the past 24 hours or so.

 

(Disclaimer: I am a shareholder in Ryanair plc) To start with, I was interested to read in Bloxham’s morning wrap that political wrangling may harm Boeing sales – might this further delay a future Ryanair mega-order of new aircraft and increase the likelihood that Europe’s biggest low-cost carrier will pay a second €500m special dividend in addition to the one widely expected in RYA’s FY13 financial year? My own estimates for Ryanair have the carrier paying €500m out in each of FY13 and FY14, so let’s see how this dispute plays out.

 

(Disclaimer: I am a shareholder in Playtech plc) In the TMT space, UTV Media issued an update in which it revealed a significant contract win for its talkSPORT franchise – under the terms of the deal talkSPORT becomes the Premier League’s global audio partner, meaning that it will broadcast commentary outside of Europe on all 380 Barclays Premier League games in multiple languages. This could well prove to be a very significant win for UTV over time. Elsewhere, Playtech announced that it is to buy even more assets from Teddy Sagi, paying him over  €100m for B2B, B2C and property holdings. Given well-documented concerns about deals of this nature (Sagi is presumably in the Guinness Book of Records for the most related party deals with a single plc in history) it was no surprise to me to see the shares move lower today. I really have only myself to blame though, having previously whined about how the stock has repeatedly left me feeling “legged over” (!) but at the same time holding on to it in the hope that I could sell it higher up. There’s a lesson in that for investors everywhere.

 

In the construction space, it appears that the second largest builders merchant chain in Ireland may be carved up between Saint-Gobain and Grafton. Given that Saint-Gobain is quite a rational competitor for Grafton et al in the UK, I wouldn’t see any negative read-through for Grafton if Saint-Gobain were to materially step up its presence in this market.

 

Greencore bought a convenience food manufacturing business in the US, bolstering its presence in that market. They are paying $36.0m for the business, representing historic EV/Sales, EV/EBITDA and P/B multiples of 0.55x, 6.3x and 1.8x which to me look reasonable enough. Obviously the main focus for Greencore remains its UK operation, but for information on the conference call Greencore said that post the acquisition total USA sales will be pro-forma approximately £160m, which on a back-of-the-envelope calculation represents around 14% of group revenues. Greencore USA’s key clients include Ahold, Delhaize and 7-Eleven – while I don’t want to detract from those impressive customers, I note that these are not (obviously) clients of Greencore in the UK – I wonder if it could better improve its competitive position by emulating fellow Irish food stock Aryzta and ‘following the client’ – Aryzta has become a key supplier to McDonalds across at least two continents, for example. Building a relationship like that would reduce the risk for Greencore of having its margins crushed by its customers, given that it is in their customers’ interest to ensure that their suppliers are in good financial shape.

 

(Disclaimer: I am a shareholder in BP plc) Switching to macro news, regular readers of this blog will know that I’m unmoved by some of the more bullish commentary from certain quarters in this country about the Argentine economy, partly because of my first hand experience of having traveled through the country last year and having spoken to locals about the severe hardship many of them are experiencing, and partly because the Argentine government’s flair for doctoring statistics means that one should take any reports based on government produced data with a pinch of salt. Anyways, the latest development there is that the government has moved to nationalise YPF, a development which presumably serves to inform overseas investors that they would have to be out of their mind to put money into Argentina. Whatever about any short-term gains from YPF, how does driving away FDI help aid Argentina in the longer term? I am a little concerned about BP’s $7bn stake in Pan American Energy, especially given the war of words between Argentina and the UK over the Falkland Islands. Wexboy picks up the baton and beats Argentina’s crazed politicians with it here.

 

Finally, reports that the Irish Central Bank is to buy the half-built shell of what had been intended to be a future headquarters for Anglo Irish Bank are to be welcomed, given that it removes an eyesore on the quays that greets many of the 1.7m ferry passengers that use Dublin Port each year (not to mention those of us who live in that part of town!). Now, if NAMA could have similar results with the rest of its portfolio we’d be having some real progress!

Written by Philip O'Sullivan

April 17, 2012 at 6:14 pm

Market Musings 30/3/2012

with one comment

Irish based market watchers have been hit with a Tsunami of news from the financial sector in the past couple of days, and with Irish Life & Permanent due to report its FY 2011 numbers on Monday there’s more to come.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) To take the Irish financials’ newsflow in chronological order, earlier this week we saw the Irish government buy Irish Life from IL&P for €1.3bn, which is the insurer’s NAV. This comes as no surprise given previous guidance that the IL&P recap question would be resolved by the end of April, which is something I’ve written about previously. In terms of IL&P as an investment proposition, well, we’ll have a better handle on things post Monday’s results, but taking the current market cap of €1.6bn and backing out the €1.3bn for the insurance arm this means the market is in theory valuing the banking unit (a loanbook in the UK and Ireland of circa €33.5bn by my estimates) at €0.3bn. This does look punchy to me in light of ptsb’s low NIM (97bps in H1 2011) and the very high impairment charges (€1.4bn in FY2011 alone). I’m inclined to wait until Monday before fully making my mind up, but I know what my gut is telling me!

 

IBRC (the old Anglo Irish Bank and Irish Nationwide Building Society) released FY 2011 results on Thursday morning which I’ve covered here.

 

That same day, smallcap IFG produced a lot of newsflow. Firstly, its FY 2011 results were in-line at the earnings level, while the dividend was hiked 10% and the company cut its net debt by 29%. Within 2 and a quarter hours, however, this news was completely overshadowed by news that it has agreed to sell its International division for a chunky €84m. This represents ~ 9x EBIT and 1.1x book. Based on where the share price closed at last night, IFG has a market cap of €183m and net debt of circa €11m. So an EV of €194m which equates to roughly 0.9x book and 7.2x EV/EBIT for the whole group. Stripping out the international division means there’s probably still some upside from here given that the UK business is a very attractive annuity-style operation with a strong market position in the SIPP space, while if the Irish losses can be eliminated the upside is even greater.

 

Late on Thursday brought news of an ‘Irish solution to an Irish problem’ (of sorts), where despite all the hype of recent days, Bank of Ireland, IBRC and the Irish government will conduct a repo agreement to tackle / kick the can down the road on (delete where applicable) the looming promissory note payment. For me, the winner from this will be Bank of Ireland, which assuming Ireland Inc doesn’t blow up over the next 12 months will get its hands on a margin of 135bps over ECB funding for holding a bond for a year. The loser from this is the government, and by extension the Irish people, because, as Constantin Gurdgiev illustrates, this transaction will add to the national debt.

 

This morning AIB issued its FY 2011 results. While all the headlines this morning are focusing on its reported net profit number, as I noted a few days ago I was always going to focus my attention on: (i) deposit trends; (ii) net interest margin progression; (iii) progress on deleveraging; and (iv) impairment guidance. On these, I was pleased to read that “deposits were stable from August onwards” last year, with the deposit base having increased by €1.5bn since the start of 2012. That isn’t a huge surprise given recent Central Bank data and peer commentary, however. In terms of the NIM, this appears to have improved of late. It was 1.03% for the full-year, having been 0.96% at the interim stage (I don’t know to what extent this has been distorted by EBS and Anglo, so not inclined to work out a H2 figure). Due to a combination of deleveraging and deposit transfers, AIB’s LDR has improved from 165% at end-2010 to 136% at end-2011, so well on track to meet the end-2013 target of 122.5%. Finally, credit quality continued to worsen in 2011 (provisions were €7.7bn vs. €7.1bn in 2010) and given the wretched state of the domestic economy I suspect we’re going to see another big number in 2012. Net net though, AIB’s results are probably as well as could be expected – certainly I don’t see any major surprises in there. In terms of the investment view though, I struggle to understand why people interested in trading the Irish financials would pay nearly 2x historic NAV for AIB when Bank of Ireland is trading on around a third of that level – on a forward basis!

 

Elsewhere, switching to the food sector, I note that PZ Cussons issued a profit warning on the back of social unrest in Nigeria. It made no specific mention of its JV in that market with Glanbia, Nutricima, but even if that is being impacted the effect on Glanbia’s profits is likely to be very modest – Glanbia’s JVs and Associates, which mainly comprise Nutricima, the Southwest Cheese jv in the States and the mozarella JV in Europe, in total contributed 14% of group EBIT in FY11, so any hit would likely be less than 1% at the earnings level.

 

(Disclaimer: I am a shareholder in Ryanair plc) I was pleased to see Ryanair buy back 15m shares yesterday for €4.45 apiece, taking recent share buybacks to €105.75m. In late January CEO Michael O’Leary said the carrier could spend up to €200m on buybacks, which should continue to help support the share price against the pressures of high oil prices.

 

(Disclaimer: I am a shareholder in Datalex plc) Speaking of the travel sector, booking engine software provider Datalex issued its FY 2011 results earlier this morning. The company delivered EBITDA (+42%) and net cash (+13%) growth as promised, while management sees further growth in 2012, despite the troubled macroeconomic backdrop. I was pleased to see the volume of new client wins in 2011, with 8 carriers signed up, including heavyweights Delta Airlines, United Airlines and Malaysian Airlines. Presumably the firm enters 2012 with a strong tailwind (!) given the 2011 contract wins will all be contributing a full 12 month’s revenue this year (that is, assuming that they all went live in 2011 – if any of them did not, they’ll still make initial contributions this year).

 

(Disclaimer: I am a shareholder in BP plc) In the energy space, earlier this week I noted reports that BP was teeing up some asset sales in the North Sea. I didn’t have to wait long to see this occur, with $400m of gas assets disposed of on Tuesday.

 

From a macro perspective, the ASDA income tracker in the UK, which I follow religiously, showed that families remain under severe pressure. The average UK household had £144 a week of discretionary income in February 2012, 6.3% below year-earlier levels. Is it any wonder that many UK retailers are under pressure?

Written by Philip O'Sullivan

March 30, 2012 at 7:37 am

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