Market Musings 12/2/2012

As the reporting season starts to really get going it’s no surprise that we’ve seen a lot of newsflow right across the market. Let’s run through what’s been happening on a sector-by-sector basis, and what the read-through for companies yet to report their numbers is.

 

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

 

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

 

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

 

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

 

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

Market Musings 2/11/11

Obviously, events since my last update have been dominated by the staggering behaviour of the Greek authorities. Greece’s decision to hold a referendum now ratchets up the risk factor considerably, and it was no surprise to see markets get hosed yesterday. Even more ominously, the decision by the Greek political leadership to sack the heads of all three branches of the armed forces has raised fears in some quarters that Greece may return to its days of military rule before the crisis is out. As a postscript, RBS made a Freudian slip in a morning note issued yesterday, saying that it sees the Greek vote as “a major negative for Greece and the rest of the momentary union”!

 

Elsewhere, UK retail sector weakness is a theme that has been well-covered on this blog. An update from JJB Sports in which it disclosed an 18% decline in H1 like-for-like sales does nothing to lift the gloom. Today Next revealed that while its High Street stores have seen sales go into reverse, internet sales are performing resiliently. To me this again highlights the disruptive impact of the internet and the negative consequences it is having for the High Street, which is something I’ve touched on before.

 

Speaking of gloom, Danske Bank reported that 9 month losses at its Republic of Ireland unit, National Irish Bank, widened to €600m from €468m in the same period last year. This rise highlights how weak the domestic economy remains, despite headline growth rates being flattered by a resilient export performance (which is mostly led by multinationals).

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) Staying with the domestic economy, I was unsurprised to see the  taxpayer subsidised Swansea-Cork ferry service go into examinership. This is an inevitable consequence of government – both national and local – going overboard. The six counties of Munster (population 1.2m) have four airports, and there is a perfectly good road connection between Rosslare on the east coast (from which ICG provides a Rosslare-Pembroke service at no cost to the taxpayer) and Fastnet Line’s catchment area. Is it any wonder that Cork and Shannon airports lose money when the State is happy to subsidise economically unviable competitors? The Exchequer just cannot keep bleeding taxpayers’ money. There just isn’t the need for a Swansea-Cork service on top of what’s already there – if there was, its operator wouldn’t be going into examinership despite having received so much taxpayer support.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group) Turning to Irish corporate news, this day next week sees Q3 results from Smurfit Kappa Group. The broker notes I’ve received today that preview next week’s numbers all point out – rightly, in my view – that the stock is cheap. However, I was struck by the revelation in a note by the always-excellent David O’Brien at Goodbody that the range of estimates in the market for Q3 EBITDA is €238-266m. Given such an unusually wide range I wonder there’s a good chance that more than a few investors will be disappointed, unless, of course, the company produces blow-out numbers. If it doesn’t, this could mean that the most important aspects of the results release, namely (i) progress on debt paydown; and (ii) commentary on the outlook, given the challenging economic backdrop, could be overlooked by some investors, which would be a pity.

 

In the past few minutes Kerry Group has released an interim management statement. Management has reiterated the company’s FY goal of 8-12% growth in earnings per share. I don’t see anything in the IMS to move the price one way or the other. As far as I can see the performance across business units is as expected and there is no new M&A news.

Market Musings 25/9/11

One of the spin-off benefits from the Rugby World Cup is that the early starts for fans in this part of the world means a extra few hours each weekend to get on top of things! So, what has been grabbing my attention since my last update?

 

We saw another “distressed property auction” in Dublin. While I wish the buyers well, my own instinct is that Irish house prices have further to fall. This is a view shared by Danske Bank (which owns National Irish Bank and Northern Bank). While some people have pointed to the high single digit yields properties at these auctions are clearing at as evidence of the “firesale” prices available in the Irish market, I would point out that an analysis that stops and ends at implied rental yields takes no account of the current elevated cost of borrowing. Nor does it take any account of the restricted credit supply in the market. Nor does it take into account the fewer government incentives for buyers relative to previous years. Nor does it take into account the fact that the domestic economy is still contracting. Nor does it mention the fact that taxes are going up this year and next year (at least). Nor does it mention the fact that you can buy equivalent properties in many advanced European economies for a lot less than what the so-called “distressed” properties here went for. Nor does it mention the fact that unemployment and emigration continue to rise. So, caveat emptor.

 

Speaking of buildings in Ireland, the latest government proposals on retrofitting insulation are positive for the likes of Kingspan. While I’m normally aghast at any government “incentives” – you only have to look at the property market to see how this can go horribly wrong – I think an expanded insulation scheme is a big win-win for Ireland at this time. For three key reasons. Firstly, Ireland has an army of unemployed builders to install the stuff. Secondly, as we import the vast majority of our energy, anything that will cut our import bill is a plus. Thirdly, we manufacture a lot of insulation here. You’ll note that these benefits stand in marked contrast to the previous Fianna Fáil administration’s bright idea of giving people grants to buy new cars – none of which are manufactured here.

 

Mike Bergen had some interesting comments about the Chinese housing market:

• A 100 square meter apartment in China currently costs around 17 times average disposable income, according to Deutsche Bank
• HSBC estimates that China’s housing stock is worth ~350% of GDP, in line with Japan’s residential real estate in 1990
• Economist Stephen Green of Standard Chartered suggests that around 50% of China’s GDP is linked to the fate of the property market.

Regular readers of this blog will be aware of my grave concerns about the Chinese property market. Those new to this site should watch this YouTube video – which reveals that China has 64 million empty apartments – to see just how bad the situation is.

The Irish Times’ Ciaran Hancock had a spot-on article about the outlook for Irish broadcasters. The same bleak outlook applies to Ireland’s saturated newspaper market.

We had the latest rumblings regarding Greece overnight. I would share my old friend Makro Trader’s view that a collapse of the single currency will be avoided. This would cause complete chaos (some have even suggested civil war), and I think policymakers will deploy all necessary means to contain the problem. However, it’s hard to see a solution that doesn’t involve more debt being loaded onto the sovereigns (bearish for government bonds), inflationary monetary policies (bullish for gold and bearish for cash) and banks taking big write-downs (bearish for banks). Hence, it’s no surprise that I continue to advocate that investors stay defensively positioned as we move into Q4.

Market Musings 9/9/11

Since my last update, we’ve seen the good (Tullow), the bad (ECB, Euroland, Obama’s jobs proposals) and the ugly (HMV).

 

On Tullow, one of my more thoughtful readers contacted me yesterday to ask about rumours of bid interest from CNOOC (China National Offshore Oil Corporation). This story continually does the rounds, and given both China’s thirst for oil reserves and Tullow’s spectacular oil finds in Ghana and Uganda (in particular) you can see why. However, while a “Chinese takeaway” is a credible endgame for Tullow, the story itself has appeared with so much frequency that one is reminded of the fable of the boy who cried wolf. So, I wouldn’t be punting on Tullow on the basis of the latest manifestation of this rumour. However, why I would consider punting on Tullow is its exploration activity. On this front, we received a reminder of Tullow’s proven skill in finding oil in new markets with news of a 72m net oil pay find in offshore French Guiana today. This is a shedload of oil. Goodbody’s Gerry Hennigan, who is one of the top oil analysts I’ve ever come across, puts today’s discovery into context:

 

“In comparison to [the] previous discovery in Ghana, 72m of net oil pay is considerable, Mahogany-1 and Mahogany-2 encountered 95m and 50m respectively”

 

And if that’s double-Dutch to you, this piece explains why Tullow’s Ghana find was huge.

 

In Euroland, we have seen both Greece being warned about its fiscal delinquency and the latest ECB meeting. On the latter, the euro has come under pressure as the European Central Bank has halted moves to hike rates, and indeed rate cuts in 2012 are increasingly being seen as a given.

 

Here’s Danske Bank on why the UK should be rated A+, not AAA.

 

Turning to the US, markets have given a lukewarm reaction to President Obama’s jobs plan. The best way America can grow employment is by giving companies the confidence to invest the trillions of dollars in cash they have sitting on corporate balance sheets, rather than having the Federal Government continue to spend money that it doesn’t have. The uncertainty caused by the unsustainable fiscal and monetary paths the Obama administration and Chairman Bernanke have respectively embarked upon does little to promote confidence.

 

Do you know who the 10 countries with the biggest gold reserves are?

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) In terms of other corporate newsflow, Goodbody had a bullish note out on Greencore following its Uniq deal yesterday. They rate it as a “buy” with an 80c price target (c.33% upside). The broker is particularly positive on the food producer’s cashflow and 7.8% dividend yield. By my calculations, Greencore and Irish Continental Group (7.0% yield based on yesterday’s close) are the two highest yielding stocks listed on Dublin’s ISEQ Index. Something for income investors to think about.

 

Following yesterday’s grim updates from Dixons and Home Retail Group (which owns Argos and Homebase), the UK High Street Horror Show continued today with yet another set of eye-watering like-for-like sales numbers from HMV. The UK retail sector is not on my list of things I’d like to invest in at the moment!

 

Another one of my thoughtful readers brought this new film to my attention. Looks good!