Market Musings 18/5/2012

We’ve had a Tsunami of company updates since my last blog, so here’s a sector-by-sector wrap of what’s been going on.

 

C&C posted profits that were in line with guidance. The full-year dividend was raised by a chunky 24%, taking the payout ratio to 30%. On the conference call that followed the results management guided that it will raise this to 40% over time. C&C’s balance sheet is in great shape, with net cash hitting €68m last year. This gives the group considerable scope to launch share buy-backs, pay a special dividend or buy new brands – or in other words, it has a ‘nice problem’ of having to worry about what to do with its excess cash. C&C is a stock I’ve held in the past, but I’d want to do a bit more work on it before seeing if I’ve any room for it in the portfolio.

 

(Disclaimer: I am a shareholder in Marston’s plc) Elsewhere in the beverage space, Marston’s posted excellent interim results yesterday. Group revenues were +7.6%, underlying PBT +14.7% and the H1 dividend was raised 5%. All divisions (managed houses, tenanted and franchised and brewing) reported a rise in sales and underlying profits. The group is delivering on its ‘F Plan’ (which it defines as food, families, females and forty/fifty somethings) targets, with an 11% rise in meals served. I’m a very happy holder of the stock.

 

In the energy space, Tullow Oil issued a bullish interim management statement, describing its year-to-date performance as “excellent”. Its year-to-date financials are in-line with expectations, but as ever the main excitement around the stock is based around its exploration activity, which has been yielding encouraging results from Kenya in particular of late.

 

Staying with the oil sector, my old pals Kentz posted a solid trading update this morning, saying the full-year performance would be “marginally ahead of expectations“. Its pipeline is in good shape, with the order backlog standing at $2.46bn at the end of April, up from $2.40bn at end-December.

 

(Disclaimer: I am a shareholder in CRH plc) CRH received net proceeds of €564.5m from the sale of its stake in Portuguese cement firm  Secil. As mentioned before, these funds will provide the group with considerably enhanced financial flexibility to expand through M&A over the coming years.

 

In the retail sector, French Connection was the subject of a lot of attention this week. Richard Beddard did an excellent series of posts on it, summarised here, to which I replied: “Leases and the brand (seems very stale to me) are the big worries I have”.  Those worries didn’t quite go far enough, with the firm posting a profit warning yesterday.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) We got a lot of news from the media space. UTV Media said that its year to date trading is in line with its expectations. Within the statement it was encouraging to see its Irish radio revenues move into positive territory. Elsewhere, INM said today that “advertising conditions remain challenging and erratic. Visibility remains short and susceptible to influence by macro-economic factors”. It added that net debt currently stands at circa €420m (end-2011: €426.8m). Not a lot to get enthusiastic about, especially on the net debt front, but of course much of the focus on INM is on recent moves in its share register and the intentions of new CEO Vincent Crowley.

 

In the betting sector, Paddy Power released a very strong trading update, with net revenue growth in the year to date accelerating to 28% from the 17% booked last year. The group is firing on all cylinders and remains the quality play in the betting space.

 

(Disclaimer: I am a shareholder in Total Produce plc) Irish headquartered food group Glanbia sold its Yoplait franchise back to the brand owner for $18m in cash. Its fellow Irish listed food stock Total Produce reaffirmed its full-year earnings target in a brief update issued earlier today.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc and Datalex plc) In the transport space, ICG’s IMS revealed a weaker performance from the freight side, while passengers were marginally higher relative to year-earlier levels. This is the seasonally quiet period of the year so there isn’t a lot of read-through from today’s statement. Elsewhere, travel software firm Datalex issued an update this morning in which it said its performance is in line with its forecasts.

 

In the financial space, IFG posted a solid trading update. Since it agreed to sell its international business the main interest here is its UK and Irish operations. On this front, management says the UK is registering a “robust” performance, while Ireland is “performing well”. The company hints at the possibility of a special dividend post the completion of the sale of the international unit, so I’ll be watching that closely over the coming months.

 

(Disclaimer: I am an indirect shareholder in Facebook). To finish up with a word on the Facebook IPO, an investment fund I advise went long some Facebook in its IPO today at $40.10. This is very much a short-term trade around its IPO, given that Facebook is trading on 26x historic sales and 107x trailing earnings. Put another way, with a valuation of over $100 per Facebook user, I wouldn’t click the “like” button if someone suggested it as a long-term holding.

Market Musings 2/5/2012

Time to take a break from the study and check up on what’s happening in the markets.

 

This evening Ireland’s Department of Finance released the latest set of Exchequer Returns data, covering the first four months of the year. As happened last month, a lot of commentators seem to be getting very excited about the headline improvement in the deficit. For the first 4 months of 2012 the deficit was €7.1bn versus €9.9bn in the same period of last year. So, a €2.8bn improvement. Actually, no it isn’t. Because there are a number of one-off cash items that need to be adjusted for. Three in particular. Last year’s deficit included a €3.1bn promissory note payment which doesn’t feature in this year’s computation. This year’s deficit includes an outlay of €0.4bn representing a loan to the insurance compensation fund, while this year’s tax receipts are flattered by the receipt of €250m in late corporation tax payments from the end of last year which were received in January. So the Jan-April 2012 headline deficit is a net €150m worse than it should be, making for an underlying deficit of €7.0bn, while the Jan-April 2011 underlying deficit was €6.8bn. In other words, the underlying deficit is marginally worse than it was this time last year. Another important point to note is that voted spending, which is the discretionary part of government expenditure was €15.1bn in the first four months of 2012 versus €14.8bn in the same period last year. So, government discretionary spending is on the rise. And to think that some politicians and commentators maintain that we’re living in an era of savage austerity!

 

Retailer French Connection, a favourite among the UK value investor community, put a fifth of its stores up for sale. It’s not one that I particularly like given my bearish tack towards UK retail in general and my concerns about leases. The retailer’s 2012 annual report reveals operating lease payments on property of £28.1m and total property lease commitments of £217.2m, the vast majority (>80%) of which expire in over five years time. These are pretty chunky numbers for a company that made pre-tax profits of £5.0m last year. I appreciate that it has net cash of £34.2m but even this isn’t enough to allay my nervousness.

 

Playtech, which I recently sold out of, released a solid Q1 update this morning. Within it management announced that it is not to pursue the recently announced related party acquisition, opting instead for a licensing deal, while the company is also to pay the chairman £500k to buy out his share options, so that he can be considered independent for the purposes of the UK Corporate Governance Code. Overall, there’s nothing in it that I can see to make me reconsider my recent selling decision.

 

Kerry Group issued a trading statement at 12pm today in which it maintained FY earnings guidance despite challenging conditions in the Irish and UK consumer foods markets. On the conference call that followed the release management hinted that input price pressures should ease as the year progresses, which is a positive, but of course we’ll have to see if this benefit is countered by still fragile economic conditions in many of its key markets.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Australasian media group APN issued a trading update in which the group guided that H1 profit will be marginally behind prior-year levels due to weakness in New Zealand in particular. The group has initiated a strategic review of its assets in that market which could potentially lead to a sale of all of its New Zealand assets. I have previously argued that INM should sell out of APN altogether and if there is buying interest in media assets in that part of the world (as APN acknowledges) I would contend that now would appear to be a good time to try to kick something off.

 

Bloomberg published an interesting comparison on the Irish and Spanish property crashes.