Market Musings 22/8/2012

Having been on holidays in Finland and Estonia for the past week, today’s update represents something of a ‘revision session’ as I look through what has been happening since my last update on the stocks that comprise my investment universe.

 

(Disclaimer: I am a shareholder in AIB plc) To start off with the banks, according to press reports, AIB is looking to reduce its pension deficit by transferring loan assets into it. This is a common-sense move by the bank, which reported a pension liability of €1.5bn at the end of June, and I wonder if it might provide some food for thought for other businesses that find themselves asset rich but cash poor.

 

(Disclaimer: I am a shareholder in CRH plc) Ireland’s biggest company, CRH, tempered its full-year guidance when it released interim results a few days ago. Having previously forecast that it anticipated “overall like-for-like sales growth in 2012 and a year of progress for CRH”, it now says: “we expect that EBITDA for the year as a whole will be similar to last year’s level”. Tougher macro conditions are to blame, which are clearly beyond the control of the group, although it is mitigating these pressures through cost take-out measures and a focus on cash generation (cash earnings per share, at 85.8c in H1 2012, was well above the 67.1c achieved in H1 2011). On the M&A front the group stepped up its activity here, agreeing to total consideration of €235m for 17 deals in the first six months of the year up from the €172m spent in the same period last year. Overall, the high implied rating that CRH trades on allied to tough end markets means it is difficult to see the shares push significantly higher from here in the short term. This is compounded by a paucity of obvious near-term catalysts for the stock – its next investor day isn’t until November and its next development update isn’t expected until early 2013. One thing that could change that is a substantial earnings-enhancing deal, but on the M&A front it should be noted that CRH’s style is to go for modest bolt-ons over spectacular large transactions (recent chatter around India notwithstanding).

 

Elsewhere in the construction space Kingspan released good H1 numbers, which came in ahead of market expectations. Encouragingly, there was a good lift in margins (up 100bps to 7.00%) which underlines the strength of this performance. That Kingspan is outperforming the market shouldn’t be seen as a big surprise, however, given that its insulation base gives it a structural edge over more cyclical building materials companies. The benefits of recent acquisitions, particularly as they are integrated into the business, points to a solid outlook for this firm despite the macro headwinds.

 

In the energy space Dragon Oil released solid interim results. Management is sticking to its medium-term targets, and given its track record few would argue with them. It was interesting to see Dragon Oil is bidding for licences in Afghanistan – these are located in the more stable northern region of the country.

 

In other resource sector news, Petroceltic announced a merger with Melrose Resources. I don’t follow either company closely, but on paper this looks like a sensible deal which creates a reasonably sized group focused on the Black Sea, North Africa and the Mediterranean Sea with a blend of production, development and exploration assets – hopefully a case of the whole being more than the sum of the parts.

 

(Disclaimer: I am a shareholder in PetroNeft plc) Wrapping up on what’s been happening in the energy sector, there was an interesting deal in Siberia which has read-through for PetroNeft. TNK-BP sold $400m worth of assets in the region at an implied price of $2.56 a barrel – this is 3x the implied value of PetroNeft, all of whose assets are located in the region.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) In the TMT sector INM’s 30% owned associate, Australasian media group APN, released its interim results. While its underlying performance was in-line, it took a huge (A$485m – a 70% write-down) charge against the value of its New Zealand print assets. This distracted from a stable topline (continuing operations’ revenues +1% yoy) while underlying operating costs fell 3.3% yoy to A$357m and finance costs were nearly 10% lower yoy. Net debt has fallen to A$470m from A$637m at the end of 2011, helped by the restructuring of the outdoor business. Ominously for INM, APN cut its interim dividend from A3.5c to A1.5c, so INM’s cashflow won’t be helped by lower dividends coming from the southern hemisphere this year.

 

In the healthcare segment there was a good bit of news from United Drug in recent days. In its Q3 IMS management revealed that it now expects 8-10% earnings growth in 2012, a big increase from the previous guidance of 4-8%. The company also said that it is considering moving its listing from Dublin to London, which surely increases the pressure on the Irish Stock Exchange to seek a deal with another European exchange before it loses any more top plcs. The group also bolstered its Packaging & Specialty division with the acquisition for $61m of Bilcare’s UK and US clinical supplies unit. This is a sensible deal which further enhances UDG’s presence in that space.

 

And finally, one thing that might provide a lift to my readers in Clonmel today is that C&C’s Magners appears to be making a big marketing push in Finland – in a few of the bars in Helsinki I visited (where a pint* can set you back nearly a tenner!) I noticed that all the bar staff were wearing Magners branded t-shirts and the bottled stuff was widely available. Cider is wildly popular in Scandinavia (Kopparberg hails from Sweden) – by way of illustration, in terms of draught most of the pubs I was in only had two taps – one for either Koff or Karhu and one for cider. Magners is also stocked by the Finnish alcoholic beverage retail monopoly, the charmingly named Alko. So, while I don’t claim to have conducted exhaustive field research (not least given the prices the pubs charged!) it does highlight that Magners is making progress outside of its traditional markets. In its FY12 results C&C revealed that, outside of Ireland and the UK, worldwide Magners volumes grew 28% over the past financial year, with circa 10% of Magners revenue now coming from outside of the British Isles.

 

* Actually, being good Europeans the Finns sold 0.5 litre drinks in pint glasses.

Market Musings 13/8/2012

Since my last update Insulation giant Kingspan announced two acquisitions, buying ThyssenKrupp’s European insulated panels business for €65m and a Middle East composite panels and roofing business, Rigidal, for $39m. These are sensible deals that strengthen Kingspan’s presence in those markets and the acquisition price paid for both is quite undemanding – the ThyssenKrupp business was acquired (if you strip out the €15m pension contribution) for 0.5x its gross assets, and while it is at present modestly loss-making (operating margins are -1.5%), once it is integrated into Kingspan’s existing European operations the synergies should see this rebound into profit, and with the former ThyssenKrupp business having achieved sales of €315m in the year to the end of March 2012 this deal could prove a very tidy bit of business for Kingspan in time. By this I mean that if , for example, the minus sign before its operating margin is replaced by a plus you’re looking at a 10% pre-tax ROI (ex the pension contribution), and given that Kingspan’s insulated panels business achieved trading margins of 6.7% in 2011 the returns over time will presumably be much higher than the example I provide above. As regards Rigidal, a price of 1x sales is undemanding for something that has, according to Kingspan, “an extensive route to market in the Gulf region”, which is an area that currently contributes a small fraction of Kingspan’s annual revenues.

 

(Disclaimer: I am a shareholder in PetroNeft plc) This morning saw another operations update from PetroNeft. Interest in every one of these updates centres on (i) production trends; and (ii) financing. There was no update today on (ii), while on (i), the company says production is ‘stable’ at 2,000bopd, and while this is lower than the 2,200bopd reported in June I am less concerned than I otherwise might be given that in the intervening period two wells were converted to water injectors for planned pressure support while other points of note include: drilling of the first of ten new production wells on the Arbuzovskoye oil field has commenced and is expected to come into production in September 2012; while the Arbuzovskoye No. 1 well is producing lower than normal output due to an electrical fault with a pump that is scheduled to be replaced. What this all means is that, at least in theory, PetroNeft shareholders could be looking forward to a short-term recovery in production which will either help with securing longer-term funding or make the stock more attractive to a potential suitor.

 

Elan Corporation announced plans to split the company into two units. Under the plan the group will split into one unit focused on its existing Tysabri blockbuster drug and mainly late-stage  projects, and another more early stage drug delivery business platform whose employees will, I assume, be highly incentivised to deliver on the R&D front in the short term given expected cash spend of $50-60m per annum and start up capital from Elan of $120-130m.

 

Harvey Nash, a UK staffer I’ve held in the past, issued a solid trading update this morning. Despite the ‘challenging environment’ it expects to report solid revenue (+15%) and profit (+6%) growth in the 6 months to the end of July. It’s a stock I like, offering the right sort of diversity for a staffer – geographic, industry and also a mix of permanent/temporary/outsourcing services for clients. I hope to do some work on this company soon with a view to seeing whether it’s worth buying back at current levels – while I know some of the newsflow out of the sector of late hasn’t been too encouraging, the low multiple HVN trades on mitigates against a lot of the macro risks.

 

Finally, I’m going to be travelling from tomorrow until Tuesday week, so you can expect some ‘radio silence’ from me until then. However, as always the markets will continue to churn out plenty of newsflow. The key things to watch out for over the coming days, at least from an Irish corporate perspective are:

 

(Disclaimer: I am a shareholder in CRH plc) CRH reports its interim results tomorrow. Many of its peers have updated the market in recent weeks, and the sector commentary has been full of reports of tough conditions in Europe but a better picture in the US. This narrative was pretty much mirrored in its trading update back in May. It will be interesting to see if there has been any changes in the trends noted across its operations, particularly in the US where there has recently been signs that things could be getting a bit softer, while another area of focus will be on the acquisition front – CRH reported H1 ‘acquisition and investment initiatives’ totaling €0.25bn in July, and more recently it has been linked with a potential large deal in India.

 

Another firm reporting H1 results tomorrow is Dragon Oil.  It recently noted some minor production issues, but these should be resolved in the near term with the installation of sand screens. The company also recently upped its 2012 development well target to 16 wells from the previous 13, which gives further confidence that it will meet its medium term production goals. I don’t think there’s any real scope for any surprises tomorrow given how recently it last updated the market and its relatively ‘boring’ (at least where oil companies are concerned!) business model, and with the shares supported by the ongoing $200m buyback and trading at a reasonably big discount to NAV I wouldn’t have any major near-term concerns around the stock.

 

Next Monday Kingspan will report its interim results. The group issued a very solid trading update in May, despite what it described as a “subdued global construction market environment” and it will be interesting to see if it is noticing any changing trends across its world-wide operations since that update.

Market Musings 24/7/2012

Since my last  update the Eurozone’s pressures have again bubbled to the surface, knocking share valuations and pushing down the value of the euro. However, troubles can often lead to opportunities elsewhere, and some of the shares on my buy list are now offering a lower entry price along with a superior potential kicker to earnings from FX than before.

 

The euro fell to a 2 year low against the US dollar and an 11 year low against the Yen. The key Irish stocks who benefit from a stronger USD relative to the euro include: CRH (which I’m a shareholder in), Kerry, United Drug, Glanbia and Kingspan. There are no Irish plcs with a material exposure to Japan. Another consequence of this turmoil is that yields on many ‘safe’ Eurozone countries have fallen into negative territory, which I find difficult to reconcile given how many non-financial corporates, whose balance sheets have seldom been stronger, are offering well covered attractive dividend yields. On this note, I was unsurprised to see that dividend payouts by UK plcs hit a record high in Q2 of this year.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) There was an interesting post on TMF examining “12 shares the market has thrashed this year“. Of the ‘dirty dozen’ I hold TNI, and I concur with the author’s views on it – it’s capitalised at £70m, generated free cashflow of £55m last year (I forecast that it will generate a similar amount this year, putting it on a free cashflow yield of circa 80%!) and as it continues to pay down debt (net debt has fallen from £300m in FY09 to £200m by end-FY11) I see a significant wealth transfer from debt holders to equity holders. While it does have a pension deficit (£230m at end-FY11) this is substantially covered by freehold property with a book value of £177m. It’s a stock I like – on my model it will be debt free by 2015 and generating (I conservatively assume a continued decline in revenues for the newspaper sector i.e. no recovery in advertising and/or circulation revenues) free cash of £35-40m by then – a 50%-60% free cash flow yield based on where the share price is currently at.

 

China has been rocked by another wave of problems around domestically produced baby formula. The sector there has struggled following the 2008 scandal, which has (understandably) directed Chinese consumers towards foreign brands. This is positive news for Ireland, whose share of global infant formula production is approaching 20%. The key beneficiaries from a plc perspective here are Kerry Group and Glanbia.

 

Dragon Oil issued a trading update this morning. Due to sand ingress issues it has trimmed 2012 production growth guidance to 10-15% from the previous 15%, but importantly it has retained its medium term output forecast. The firm is increasing the number of wells it proposes to drill this year to compensate for production delays, which is a positive. While the firm has been expanding into the exploration area, acquiring interests in blocks in Iraq and Tunisia, I can’t help but wonder if Dragon should be using its $1.7bn cash pile to buy up financially constrained smallcaps with proven reserves, many of which are trading on bargain basement prices, rather than engage in more speculative exploration activity.

 

(Disclaimer: I am a shareholder in Tesco plc) I was pleased to see a marked improvement in signage and merchandising in my local Tesco last weekend – on previous visits to the store I found that there was often no correlation between signs and what was actually on the shelves, so perhaps this is an indication that management is delivering on its promise to improve the customer experience in this part of the world. Obviously I’m basing this hunch on a sample of 1 store in a vast network of outlets, but if you’ve noticed similar or divergent trends please feel free to post them in the comments section.

 

Finally, I am pleased this morning to read that Ireland is proposing to reduce its number of parliamentarians and axe over a quarter of the smallest local councils. Even after this move, the country will still be over-represented at a national level - 158 TDs (MPs) and 60 Senators is still far too much for a country of our size (the 2 European countries closest to us in population terms, Norway and Croatia, have unicameral parliaments with 169 and 151 MPs respectively). Hopefully the people will vote to axe the Senate in next year’s referendum to remove this anomaly.

Market Musings 7/6/2012

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Market Musings 1/6/2012

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.

Market Musings 19/4/2012

What an eventful 48 hours it’s been since my last update!

 

(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) The media sector has produced much excitement, with boardroom ructions and rumours of stakebuilding to the fore. This morning two large prints in INM – one for 10m shares, the other for 3m, were recorded. Combined this is equivalent to 2.4% of the company. RTE hints that the buyer is not connected to the three billionaires (Tony O’Reilly & family, Dermot Desmond and Denis O’Brien) on the INM register, which adds a further touch of intrigue to the stock. This evening it was confirmed that Gavin O’Reilly has stepped down as INM CEO, to be replaced by Vincent Crowley. I welcome Crowley’s appointment – I met him quite a few times when I covered INM as a sell-side analyst some years ago and was very impressed by him. He has a good reputation for tight cost management (earned at a time when the Irish economy was thriving and few executives here were as focused on cost take-out as he was back then) and any strong action by him on this front could see a decent re-rating for the stock, which is capitalised at only €134m. I take encouragement from INM’s statement this evening that Crowley “has the unanimous support of the Board”, which hopefully will put to rest the ugly (and very public) feuding that has made the underlying performance of the group something of a side-show for too long. In an ideal world this change will pave the way for the group to focus 100% on the main task at hand, i.e. maximising cash generation to fix the balance sheet and enhance shareholder value. Elsewhere in the media sector, in the UK DMGT’s trading update revealed weakening trends in the past three months, which doesn’t bode well for the likes of Trinity Mirror and Johnston Press.

 

(Disclaimer: I am a shareholder in Tesco plc) Tesco released its results and a strategy update. The results were in line, and management sees the 2012/13 performance (yes, I know it’s early days) meeting forecasts. On the strategy front, there was nothing new that I saw given the extensive media previews / leaks (delete where applicable) in the run up to the official announcement. Obviously time will tell if the strategic objectives are met, but I’m willing to give Tesco the benefit of the doubt given its proven track record, strong brand (I know some people dispute this, but I doubt they’d slap Tesco as a prefix to all sorts of new ventures if the brand wasn’t that good) and solid market positions in many of its key geographies. Many analysts seem to concur. Valuhunter did up a good piece on Tesco here that’s worth a look.

 

This is absolutely brilliant – check out Paddy Power’s comic-book style annual report.

 

For those of you who follow the oil sector, Dragon Oil’s CEO made some interesting comments about its future strategy in this video interview.

 

(Disclaimer: I am a shareholder in Abbey plc) Following on from recent upbeat comments from Telford Homes, Persimmon issued an IMS laden with news of rising orders, margins and cashflow. This all gives me further comfort on my position in Abbey.

 

On the macro front, I was interested to read that authorities zoned enough land for residential to accommodate double the population of Ireland. I’d love to find the genius who thought it would be a good idea to have local councils give an input into this process.

 

Speaking of housing, Chinese house prices fell in 46 of the 70 biggest cities month-on-month in March (in 37 out of the 70 on a year-on-year basis). I have repeatedly identified this area as a serious problem for China, most recently here.

 

And finally, here’s the IMF’s ultimate guide to which countries are the most vulnerable in terms of debt/leverage. No surprise to see Ireland is covered in red ink.

Market Musings 16/4/2012

This blog has sadly become something of a casualty of late as the main body of my exams are now less than three weeks away and I also have two articles for Business & Finance magazine due in the middle of this week!

 

(Disclaimer: I am a shareholder in France Telecom plc) There was quite a bit of news around France Telecom since my last update. First, the operator finalised the terms of its buyout of Egypt’s Mobinil. This was something I already had penciled into my forecasts for the company, so no surprise there. However, what did surprise me was another story I spotted involving France Telecom, which said that the European Commission is investigating whether France’s telecom regulator was too generous in setting the rates it allows new mobile operator Iliad to charge other companies for calls into its network. While we’ll wait and see what comes of that, anything that undermines Iliad’s Ryanair-style entry into the French mobile market would be good news for France Telecom (yes, I am speaking from a  hopelessly conflicted viewpoint!)

 

Seeing as I’ve mentioned Ryanair, I was also interested to read that Qantas has made the world’s first commercial biofuel flight. This is an interesting development which I’ll be keeping tabs on, especially given that the modest ‘carbon footprint’ involved would certainly help offset some of the EU’s carbon taxes if it was to be rolled out in an economical way in this part of the world.

 

In other energy sector related news, Dragon Oil issued an interim management statement this morning, in which it revealed average Q1 production of 70.6kbopd (the 2011 average was 61.5kbopd), and retained its 2012 gross output growth target of 15%. I didn’t see any ‘new news’ within the statement, but with the group having reached its 2012 output growth target of 15% in Q1, I am guessing that the risks on the production front lie to the upside for Dragon Oil.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) In Friday’s Irish Times former INM director Leslie Buckley called for regime change at the publisher (see here and here). Expectations of a showdown at the AGM remain undiminished. But, of course, one would prefer if the dirty linen wasn’t aired in public, regardless of the grievances involved.

 

(Disclaimer: I am a shareholder in Abbey plc and PetroNeft plc) While reading Edinburgh based microcap fund Nettle Capital’s Q1 2012 factsheet I was interested to learn that they hold Irish listed Abbey, CPL Resources and PetroNeft in their European fund. Great minds and all that!

 

Speaking of Abbey, UK housebuilder Telford Homes issued a strong trading update earlier today in which it said profits would beat expectations due to strong demand. Encouragingly, it has acquired sites that add 1,200 properties to the development pipeline over the past year, which is a vote of confidence in the outlook for the industry. Given Telford’s focus on the south-east of England, which is Abbey’s main area of operations, the read-through for Abbey from this is positive.

 

Switching to macro news, the OECD said that Ireland may need a mini-budget to meet its fiscal targets. This comes as no surprise to me, given my bearish view on the state of the public finances. I despair at the lack of a proper national debate about the fiscal crisis – which has left the door wide open for populist politicians and other vested interests to pretend that this mess can be easily solved through levying punitive taxes on some imaginary army of fabulously wealthy individuals.

 

Cormac Lucey, whose views on both politics and economics I rate very highly, makes a powerful case for why Ireland should reject the forthcoming fiscal treaty.

 

On a lighter note, as a current MBA student at Smurfit, I’ve been thrilled to read of the Smurfit rugby team‘s exploits at the MBA Rugby World Cup in North Carolina – having taken a host of scalps along the way (Duke, Columbia, London Business School, Wharton) the icing on the cake came overnight with the Irish team defeating Harvard University to become world champions for a record tenth time. Congratulations in particular to my classmates Justin Thomas, John O’Loughlin, John MacMahon, Donnchadh Casey, Conor Price, David Pierce and Conor Beirne who were all part of the squad.

Market Musings 22/3/2012

We’ve had quite a bit of news in the past few days, mainly from the people who report the news! Let’s catch up on what’s been happening.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) To start with the media sector, we had FY2011 results from Independent News & Media this morning. Going into them I had forecast revenues, EBIT and net debt of €588m, €77.2m and €432.7m respectively. In the event, they came in at €558m, €75.5m and €426.8m, so more or less in-line. Overall, my sense is that I think the group has done as well as could reasonably be expected. As slide 18 of the results presentation reveals, the group has delivered on almost all of its stated objectives, with the only disappointments being related to areas where it cannot exert any direct control. In terms of my investment view, while updating my model this morning I noticed that the value of its stake in Australasian media group APN News & Media has increased sharply in recent weeks. Based on the exchange rate at the time of writing INM’s shareholding in APN is valued at €142m, which compares to INM’s market capitalisation of €132m (bear in mind INM exited 2011 with net debt of €427m and a pension deficit of €147m). Overall, my valuation model, which as before places a EV/Sales multiple of 1.0x on the core operations and values APN at its current market level, now produces a valuation of 33.9c/share, some 18% above my previous valuation (mainly due to APN) and 41% above where the shares were trading at the time of writing. Given the decent operating performance, strong cash flows and potential for the unlocking of shareholder value through further cost cutting / asset disposals, I must admit that I’m tempted to add to my position.

 

In other media sector news, UTV reported 2011 revenues and profits that came in marginally ahead of expectations, coupled with further progress on reducing its debt pile. In a sign of the times, it wrote down the value of its Irish radio assets by £45m (-37.5%). UTV has been a great performer in recent times despite challenging conditions, but I can’t justify including it in my portfolio given that I already have a number of ‘old media’ plays (i.e. Trinity Mirror and Independent News & Media) in it.

 

Speaking of old and new media, here are some stark data points:

 

1. Total US newspaper ad spend in 2000: $49bn. Total US newspaper ad spend in 2011: $21bn (Source: Financial Times).
2. Total UK mobile ad spend in 2008: £25.5m. Total UK mobile ad spend in 2011: £203m.

 

In the energy space, I was pleased to see more large cap interest in small cap stocks, with Total taking a serious look at Wessex. This is a theme I’ve been banging the drum about for some time. In terms of other M&A news in the sector, I was interested to see more acquisition activity in the North Sea. Elsewhere, Credit Suisse initiated on Dragon with a bullish note. As regular readers of this blog know, a fund I’m an investor in recently sold out of Dragon, but for those of you with a longer-term investment horizon I think it’s an excellent stock to look at given its low-risk model and strong balance sheet.

 

Speaking of oil stocks, yesterday’s UK budget gave a number of tax breaks to the sector, which should spur further exploration and development activity. This is bullish for oil services stocks, such as Lamprell, Hunting, John Wood and my old friends Kentz.

 

In the construction sector, structural steel firm (and hence leading indicator for the construction industry) Severfield-Rowen, a stock I’ve traded in the past,  said the UK remains “extremely challenging“. I keep a close eye on that stock as I think it provides some good read-through for a raft of other construction names with significant exposure to the new build space. Its comments don’t exactly inspire confidence!

 

Turning to the retail sector, Game Group’s shares have been suspended, with management saying the equity is likely to be worthless. I mentioned the stock back in January, and I’m pleased to have reached the conclusion I did then! Another good conclusion on it comes from Mark Carter, who hits the nail on the head with: “I always said that a major chain relying on second-hand sales was a stupid idea anyway“.

Market Musings 10/3/2012

Just a quick update from me before I head to the airport on what’s caught my eye in the past 48 hours.

 

Bloomberg ran an interesting piece about the tactics brewing companies are utilising to grow sales in Africa.

 

In the financial space IFG said that it has received a preliminary approach for its International Corporate Trustee Services division, or in other words its businesses outside of the UK and Ireland.

 

In the commodity space, a fund I advise took profits in Dragon Oil yesterday. While I’m positive on the outlook for oil, my gut feeling was that the share price had run ahead of itself. We may well live to regret the timing of the sale, but as the saying goes, nobody ever went broke taking profits. My remaining energy sector plays are BP and PetroNeft.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) There was an intriguing development on ICG’s share register yesterday. 12.3% shareholder One51 transferred its shareholding from one wholly-owned subsidiary to another. As a totally unrelated aside, earlier this week I speculated that One51′s ICG stake could be offloaded this year.

 

Like I said, a quick update! I’ll be back in Ireland on the 18th and look forward to catching up on what’s been going on in the markets then.

Market Musings 1/3/2012

It’s the calm before the storm as the volume of company newsflow has eased a little in recent days, but with a deluge of results due over the next week or two I think I’ll find plenty more to write about over the coming days.

 

(Disclaimer: I have an indirect shareholding in Dragon Oil plc) To start with the energy sector, Dragon Oil ended takeover talks with Bowleven, which rather takes the gloss of my recent narrative of how this will be a year for consolidation in the industry. Still, one swallow does not a summer make!

 

Turning to the food and beverage sector, Valuhunter did up a good piece on Molson Coors, which reminds me that I have to get around to doing up a piece on C&C one of these days. Speaking of alcohol, did you know that for a period Guinness was exported to the UK in custom-built ‘beer tankers’? Elsewhere, Glanbia, a stock I sold going into the results, released strong FY numbers, but cautioned that earnings momentum will slow in 2012 due to tougher conditions. I’ll post up a piece on Glanbia later today. Finally within this sector, Fyffes posted good numbers today, with results towards the upper end of guidance. It sees more progress in 2012 and hints at doing more share buybacks.

 

(Disclaimer: I am a shareholder in Irish Life & Permanent plc) In the financials space, IL&P said that it would record a big rise in impairment provisions when it releases its 2011 results. This cannot come as a surprise to anyone given recent commentary from the likes of RBS and Bank of Ireland.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) While it had been flagged at the time of the recent Q4 results, I was pleased to see Smurfit Kappa Group announce that it has successfully extended its debt maturities. This will help to further lower the risk profile of the stock, as well as increase management’s flexibility. So good news all round.

 

Here’s an interesting statistic – ITV says that, on average, people in the UK spend 4 hours and 2 minutes every day watching television.

 

(Disclaimer: I am a shareholder in Playtech plc) I was pleased to see news that Playtech has entered the Mexican market, partnering up with the country’s largest land based gaming operator. This is a further affirmation of the quality of the group’s product, but judging from the lacklustre share price performance it will need to do more to improve market sentiment towards the stock.

 

Finally, WordPress tells me that February was the ninth consecutive month in which the numbers of visitors to this blog increased. I’d like to thank you all for your support, and as ever please feel free to get in touch with suggestions on things you’d like me to cover on this site.