Market Musings 3/9/2012

(Disclaimer: I am a shareholder in Abbey plc) While the macro outlook is challenging, it is interesting to see that two UK focused housebuilders have been the subject of takeover approaches from management in recent weeks. An investment vehicle controlled by Abbey’s Executive Chairman now owns nearly 62% of the company’s shares, with its offer remaining open for acceptances until 1pm (Dublin time) on 7 September 2012. Elsewhere, the Chairman of Redrow has also made a preliminary approach to buy out the firm using a consortium comprising his own investment vehicle and two funds. When management teams, who presumably (!) have access to better information than the likes of you and me, are making such moves, this suggests to me that there is decent value still to be had in the sector.

 

Staying with UK stocks, I sold out of Marston’s this morning. My reasons for doing so were twofold. Firstly, the three catalysts that had been identified for the stock (The Queen’s Jubilee, Euro 2012 and The Olympics) are all over and I am guessing that the regular newsflow from the many quoted UK pub groups means that the impact of these have all been priced in. Secondly, the shares have increased by over 25% (in euro terms) since I added it to the portfolio earlier this year. You can read about why I was originally attracted to Marston’s here. In terms of where the proceeds are being recycled into (Harvey Nash plc), I will upload a blog later today outlining my rationale for the inclusion of ‘an old friend’ back in the portfolio.

 

In other food & beverage sector news, tropical produce importer Fyffes today raised its full-year adjusted EBITA guidance to a range of €28-33m versus the previous €25-30m. This improved outlook is based on decent organic growth and FX effects in H1 2012. Extrapolating from the adjusted EBITA of €23.3m Fyffes achieved in the first half of the year and adjusted diluted EPS of 6.48c in the same period, this points to full-year earnings of at least 8.5c, putting the stock on less than 6x earnings, so clearly cheap. Its sister company, Total Produce, which I hold, reports its interim results tomorrow.

 

(Disclaimer: I am a shareholder in Smurfit Kappa plc) There was a bit of news out of Smurfit Kappa Group since my last update. This morning it announced the launch of a senior secured notes offering, which will raise €200m and $250m, maturing in 2018. The proceeds will be used to repay all of the existing 7.75% senior subordinated notes due in 2015. Given the relatively low rates on offer for similar rated debt at this time, this should, I estimate, shave at least €7m from SKG’s annual interest bill, as well as extending the weighted average maturity of its debt, which reduces the perceived riskiness around the group. In all, a win-win move for Smurfit Kappa. Elsewhere, the group is to invest €28m in a new bag-in-box facility in Spain, which  is a further sign of how Smurfit Kappa’s improved financial position is giving it enhanced flexibility on both the M&A and capex fronts.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) It was confirmed that total Irish newspaper advertising declined 10% in the first 6 months of 2012. Annualising it, and putting in a little bit of a kicker for Christmas related spending, means that it’s still a circa €180m market, so not to be sniffed at despite the confident predictions of certain ‘new media’ devotees who assure me that ‘old media’ is completely toast. While I don’t for one moment dispute that old media is in long-term structural decline, my central thesis on the sector remains that it will not disappear for many years to come, with larger newspaper groups (such as INM) being able to mitigate against the effects of a shrinking market by gaining share as weaker competitors exit the industry. Of course, the extent to which equity investors can benefit from this depends on how successfully INM can prevail over its liabilities, and in this regard I was pleased to read reports of a third bidder entering the fray for INM’s South African unit. The more the merrier, clearly, as this should mean a satisfactory sale price for the business.

 

In the blogosphere, I was pleased to see the launch of two new blogs by Paul Curtis and Mark Murnane. I’ll be updating the blogroll later today – if there are any other investment and/or economics sites you think I should be following, please suggest them in the comments section below.

Market Musings 14/5/2012

The past few days have been relatively quiet in terms of newsflow, but as this is due to change starting tomorrow with a significant number of results and trading updates expected before the end of next week from Irish plcs I thought I should do a quick blog on what’s been grabbing my attention of late.

 

(Disclaimer: I am a shareholder in Total Produce plc) To begin with the food sector, The Irish Times carried an interesting report from the Fyffes AGM at which management admitted that  it considers a re-merger with Total Produce “from time to time”, but has no current plans to execute one. A merger would have some positives – economies of scale, more institutional interest in a combined entity with a higher market cap etc. – but for me it would add a chunk of volatility into the Total Produce investment case that I would prefer to do without. I believe that Total Produce should stick to its stated task of consolidating Europe’s fragmented produce sector – leading Irish companies such as DCC and United Drug have demonstrated in their market segments that focused distribution firms can deliver consistently high returns over time. Why risk that narrative by adding a more volatile component?

 

I was pleased to see that the Irish Stock Exchange will next month be joined by a new entrant – Fastnet Oil & Gas is backed by Raglan Capital and some of the directors of Cove Energy, which was recently sold to Shell for £1.2bn. I suspect that this will attract a lot of private investor interest given the way Cove shareholders made out like bandits. I look forward to tracking its progress.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc). Today it was confirmed that AIB is to issue another 3.6bn shares to the Irish State in lieu of a €280m cash dividend on the NPRFC’s preference shares. This means that AIB will have 517bn (yes, billion, with a “b”!) shares in issue following this transaction. Given tonight’s closing price (7c), AIB is presently capitalised at €36bn, roughly twice its peak during the Celtic Tiger, when the bank also had significant operations in both the United States and Poland. This valuation is quite obviously ridiculous, especially when benchmarked against its closest domestic peer Bank of Ireland, capitalised at only €2.7bn. My only remaining shares in AIB are some legacy ‘staff shares’ that are horribly underwater and which I view as having value solely as a tax loss to offset against capital gains elsewhere in the portfolio at some future point.

 

In the construction space Irish builders merchant and timber distributors Brooks has been bought out of insolvency by Welsh timber firm Premier Forest Products. From a plc perspective, given that Brooks will operate from only 6 outlets post the transaction and the fact that the acquirer is a timber specialist, I assume that this is unlikely to form a base for Premier to build a substantial operation that would have a significant competitive impact on either Saint-Gobain or Grafton in this market.

 

Speaking of builders merchant groups, Travis Perkins released an IMS earlier today in which it stated that: “at a group level the outlook for the year remains unchanged and we remain confident of meeting consensus expectations”. In the first four months of the year Travis Perkins achieved like-for-like group in its UK general merchanting operations of +2.6% (specialist merchanting was +1.9%), which compares with the +1.7% achieved in the same period in that market by Grafton.

 

Fidelity investment director and columnist with the Daily Telegraph Tom Stevenson posted a great video on China, which mirrors many of my findings from my recent trip there.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) As ever the blogosphere has thrown up some interesting nuggets. John Kingham asks if Rolls-Royce shares are as attractive as the company, while Lewis did a great write-up on UK housebuilder Barratt Developments. Elsewhere, Paul Scott provided a very comprehensive review of Trinity Mirror’s AGM, which included some encouraging signals on the dividend (if income is your thing), but as ever my own bias towards strong balance sheets means I’d prefer to see it move towards a zero net debt position before reactivating distributions to shareholders. I am very tempted to increase my position in TNI following its recent good news around its net debt and pension deficit.

Market Musings 10/5/2012

We’ve seen a deluge of trading updates in the past 24 hours or so. Let’s run through what new insights they’ve provided us with.

 

In the construction sector, Kingspan released a trading update today. The group has made a solid start to 2012, posting an 8% rise in sales in the first four months of the year, “of which Mainland Europe was up 9%, UK up 2% and North America up 10%”. Despite this impressive performance, I note that management caution that: “in general, the year opened with relatively more optimism regarding potential activity levels in some construction markets. This dissipated somewhat as we progressed through the first quarter with sentiment weaker now than at the beginning of the year”. As I’ve stated before, Kingspan has undoubted ‘structural growth’ qualities that set it apart from most construction related stocks, but I don’t see anything in this statement to warrant Kingspan shares pushing significantly ahead of their 13.0x forward earnings multiple in the short term.

 

Elsewhere, Grafton issued a trading statement this morning which revealed diverging trends across its operations. Its UK business appears to be gaining market share, but Irish conditions remain very challenging. It was interesting to see, despite many of its competitors having exited the market, that Grafton’s Irish retail (Woodie’s DIY, Atlantic Homecare) and merchanting (Heitons, Chadwicks) sales were -16% and -9% respectively in the first four months of 2012. This bodes ill for the state of the domestic economy.

 

Glanbia released a trading update yesterday that contained few surprises relative to my expectations. While management is sticking to its full-year guidance, the impact of tough comparatives is shown by a forecast of flat earnings in H1 relative to year-earlier levels. Within the different business areas, nutrition continues to perform strongly, posting a 9% jump in revenue in Q1 2012, but Dairy Ireland’s revenues fell 5% in the same period. Overall, this statement reinforces my view that I was right to ‘step out’ of Glanbia for a while.

 

In other food sector news, Fyffes upgraded its FY EBITA target to €25-30m from the previous €22-27m. This is a great performance by Fyffes in light of the headwind of high fuel prices in particular.

 

UTV Media announced that it has inked a new 5 year bank facility today, which to me reflects the very impressive progress the group has made in terms of rebuilding its balance sheet in recent years.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) I was delighted by Trinity Mirror’s interim management statement today. While advertising conditions remain under pressure, cash generation remains very strong, as evidenced by the £24m (11%) improvement in its net debt in the year to date. On top of that, the pension deficit has also seen a £54m positive movement since the end of 2011. The combined improvement in Trinity Mirror’s long-term liabilities is equivalent to 100% of its closing market capitalisation from yesterday. This also shows that my narrative around the company appears to be playing out.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Speaking of narratives, I was pleased to learn of another containerboard mill closure in Europe, which is supportive for pricing in an industry where Smurfit Kappa is king.

 

In the retail space, Clinton Cards went into administration yesterday. This is bad news for its employees, and for retail REITs – Clinton’s over 700 stores are to be found in most large shopping centres in the UK and Ireland.

 

In the blogosphere, Lewis came up with an interesting way of gauging fashion ‘trends’ – might this offer new insights into trading retail stocks?

Market Musings 6/5/2012

(Disclaimer: I am a shareholder in Independent News & Media) Since my last update, Denis O’Brien confirmed that he has increased his stake in Independent News & Media to 29.9%, which is the maximum level he can own without being compelled to bid for the balance of the company. The next largest shareholders are Sir Anthony J. O’Reilly on 13.3% and Dermot Desmond on 5.75%, so half of the company’s shares are held by those three individuals. This will presumably see the Irish Stock Exchange reduce its free float determination on INM and hence the company’s weighting, but if O’Brien’s purchases lead to deeper efforts to reform the group and lift profitability that will hardly matter to the rest of INM’s shareholders.

 

Aer Lingus announced that it is to pay its maiden dividend as a publicly quoted company. The 3c/share dividend works out at a 3.1% yield based on Friday’s closing price, and with management indicating a willingness to pay the same amount out in each of the next 2 years, that means people buying Aer Lingus at these levels get nearly a 10th of their money back in a little over 2 years, while in terms of the prospects for capital appreciation, Aer Lingus exited 2011 with net cash of €317.6m, which compares to a current market cap of €521m. So for only €204m or so you get Aer Lingus’ owned aircraft, Heathrow landing slots, earnings streams etc. Sounds pretty attractive to me.

 

Speaking of Aer Lingus shares, one outfit that holds some in its funds is Matterley. I’ve met Henry and George before and I’m a fan of their value-oriented approach. I see they’re still long Aer Lingus after correctly identifying the opportunity in it when it was (and this is astonishing when you think about it) trading at a discount to its net cash. Another Irish listed stock they hold is Dragon Oil, which I traded in and out of earlier this year.

 

In terms of what to expect over the coming days, we’ve a busy week ahead in Ireland in terms of scheduled corporate newsflow. In a nutshell here are what I’m expecting / looking out for:

 

• (Disclaimer: I am a shareholder in CRH plc) CRH trading update on Tuesday – This should be a bit of a mixed bag. Recent peer updates reveal improving trends in the United States, but patches of weakness in some of the group’s key European markets. Strong cost take-out efforts should see profitability rise compared to year-earlier levels. I will be looking for: (i) indications on how trading is going as we move into H2; and (ii) any sign of a pick-up in M&A activity.
• United Drug results on Wednesday – Health cutbacks should presumably mean the tone of these results is reasonably subdued, but its very strong balance sheet and proven willingness to invest in expanding its international operations means that there’s an outside chance of an M&A announcement to distract from the underlying performance.
• Glanbia trading update on Wednesday – Tough comparatives due to a blow-out 2011 will presumably mean that the headline growth rate will slow somewhat, but the underlying performance of the group should be quite resilient. Recent signs of a weakening in the dairy market won’t help, but the high-margin nutrition space is clearly going from strength to strength, as evidenced by Nestle’s recent $12bn deal for Pfizer’s infant formula business. I took profits in this name earlier in 2012, and would look to buy back in on any weakness.
• Fyffes trading update on Thursday – I’ll be watching this one for news on (i) pricing; (ii) share buybacks (possibly); and (iii) the success the group is having with passing on high fuel costs. There may well be some read-through for Total Produce, which regular readers know is a core holding (in every sense!) in my portfolio.
• Grafton trading update on Thursday – The main interest here will be on trading conditions in the UK and Ireland. The group has been carefully adding to its portfolio of operations through bolt-on deals in its key markets as well as in its nascent Belgian operation, so there may be an update on this also within the statement.
• Kingspan trading update on Thursday – The group smashed expectations in its FY2011 results, so I wouldn’t be surprised to see another good update from the company this week. While its structural growth qualities are not in any doubt due to its leading position in the insulation space, any sign of an improvement in cyclical demand could be a catalyst to push these shares significantly higher.
• (Disclaimer: I am a shareholder in PetroNeft plc) PetroNeft results on Friday – In my view, the main areas of interest in this release will be: (i) production levels, given recent disappointments on this front; and (ii) financing. What management says about these will presumably prompt a violent share price reaction – either to the upside or the downside!

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.

Market Musings 18/11/11

Since my last update it’s been all about the Eurozone crisis and a tidal wave of company newsflow. The latter reads a lot better than the former, which continues my narrative about how corporations appear a safer store of value than sovereigns at this time.

 

(Disclaimer: I am a shareholder in Datalex plc). Kicking off with corporate newsflow, Datalex issued a solid (if frustratingly qualitative) trading update yesterday, in which management revealed that it has doubled its customer base in the past 18 months. The company says that it is on track to deliver growth in both EBITDA and cash this year, but it held back from providing anything more specific than that. In all, a positive enough update, but more detail would have been appreciated.

 

Elsewhere, UTV Media’s trading update, also released yesterday, showed that TV and Irish radio weakness is being cancelled out by UK radio strength. I like what UTV has been doing of late, but what turns me off the story is the way the value of its core radio and TV franchises are being eroded away by structural changes in technology and media consumption.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Staying in the media space, Independent News & Media issued a trading statement earlier today in which management downgraded the group’s FY EBIT guidance from a range of €78-83m to €74-78m, but at the same time it said that the net debt reduction goal is “on target”. Given how, as I’ve noted before, the INM investment case hinges on deleveraging, I’m relaxed about the profit warning (in any event, given deteriorating macro indicators is it really a surprise?) so long as they can continue to squeeze enough cash out of the business to continue to meet their debt reduction goals.

 

Turning to insurer FBD, going into today’s trading statement I cautioned that the recent floods could dent the group’s near-term fortunes. In the event, management issued a very strong trading update, upgrading its full-year earnings guidance by 10%, helped by an improving loss ratio. So, a very big slice of humble pie for me where this company is concerned!

 

The other small listed Irish financial company, IFG, issued a solid statement today. While they don’t spell out what their full-year targets are, management say  ”the group is on track for the year as a whole” and “net debt is now negligible”.

 

(Disclaimer: I am a shareholder in Total Produce plc). Fyffes announced yet another share buyback this afternoon. The company now holds 33m shares in Treasury, which equates to over 10% of the shares it has in issue. I note increasing chatter about the possibility of a re-merger of Fyffes with Total Produce, which is something that I would not welcome given the inherent riskiness of the Fyffes model versus the low-risk strategy Total Produce adopts. It seems that half the blogosphere (possibly a slight exaggeration!) is to be found on the Total Produce share register, with the likes of John McElligott, Wexboy, Valueandopportunity and myself all holding it. Perhaps we should set up our own value-oriented investment fund!

 

Switching to macro news, data released by the Irish Banking Federation show new mortgage lending has halved in the year to the end of September. Even more significantly (but hardly surprising) is the revelation that the volume of investor mortgages, which represented c.14% of total Irish mortgages in 2005/2006, is -99% from peak levels.

 

Interestingly, the Brent-WTI crude spread is narrowing. My old friend Wexboy has a good primer on this issue here.

 

The Eurozone crisis is rumbling on, and to me debt monetisation now looks unavoidable. I gave a presentation to the Smurfit MBA Student Investment Fund earlier today which touched on that issue, and I note this evening that Pimco’s Bill Gross has opined:

 

“[The] ECB must write checks; trillion dollar ones. Otherwise financial delevering will accelerate & threaten systemic stability”.

 

Staying with the Eurozone, this is an interesting blog post – Looking at the eurozone through a NIIP prism.

 

And finally, one of my classmates, Stephen Smith, made this excellent short documentary for the 45th anniversary celebrations for the Smurfit MBA.

Market Musings 11/10/11

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Market Musings 2/10/11

It’s been a busy few days, with a lot of college assignments to work on. Thankfully there hasn’t been a lot of newsflow to go through. Most of what I’ve seen has had a distinctly Irish feel to it. Let’s take a look:

 

(Disclaimer: I’m a shareholder in AIB, CRH and Ryanair) In terms of the markets, I was intrigued to read that AIB’s €21bn market cap is more than CRH (€8.3bn), Ryanair (€4.9bn), Kerry (€4.6bn) and Paddy Power (€1.9bn) combined. This anomaly is primarily down to the billions of shares AIB has issued to the State and its very low free-float – every 1c move in AIB’s share price moves the group’s market cap by €5bn. In terms of where Allieds should be trading at, it’s clearly finger in the air stuff. But for reference, its closest peer, Bank of Ireland, trades at a market cap of only €2.3bn, and you can decide for yourselves whether AIB should be trading at such a vast premium to its main rival.

 

Elsewhere on the ISEQ, I was interested to learn that Irish-Swiss baking group Aryzta’s La Brea line is the 9th best selling fresh bread brand in the United States. Aryzta has a lot of “hidden brands” as well. For example, if you buy a cookie in Subway, it’s made by Arytza’s Otis Spunkmeyer unit. If you buy a McDonalds burger in Australia, it’s made by Aryzta’s Fresh Start Bakeries unit. If you go into a Tim Hortons restaurant in Canada and buy a bagel, it’s made at Aryzta’s Maidstone Bakeries unit. If you go into a Starbucks in the United States and buy a sandwich, the bread is made by Aryzta’s Pennant Foods unit. The list goes on!

 

(Disclaimer: I’m a shareholder in Total Produce plc) Staying in the Irish food sector, I note that the listeria outbreak in the US is spreading. First it was affecting melons, now it’s hitting lettuce. This may have an impact (albeit a small one) on Ireland’s Total Produce and Fyffes.

 

Ireland Inc got a very welcome vote of confidence from Google, which announced that it is to invest €75m in a new data centre in Dublin. The city has become a major hub for the internet industry, with the likes of Twitter, LinkedIn and Facebook all having been attracted to the capital. Hopefully the example they set will encourage more Irish entrepreneurs to set up online businesses, to add to previous success stories such as the gifted Collison brothers from Limerick. As an aside, I was amused to read a report that a pub crawl may have contributed to Twitter’s decision to open an office in Dublin!

 

Bloomberg reports that Ireland is looking for payback for “averting Europe’s Lehman”. While I agree with the gist of the story, I did scratch my head at the mention of how much our bond yields have improved by. Make no mistakes about it, the primary reason for this improvement is gargantuan purchases of our debt by the ECB in the secondary market. The Irish economy has been deteriorating in recent months and the public finances are not materially different to the targets set at the start of the year.

 

Speaking of Ireland’s public finances, how about this revealing comment from Socialist Workers Party TD Richard Boyd-Barrett – when queried about his €12k annual expenses claims for travelling the 12 kilometres between his constituency and Dáil Éireann (the Irish parliament), he explained:

 

“I do not use that money; it goes into a campaign fund.”

 

You’d wonder how many Irish taxpayers would be willing, if it were optional, to pay taxes to fund politicians’ “campaigns”.

Market Musings 21/9/11

Since my last update we’ve seen alleged Ponzi schemes, gold bullion vaults that are running out of space, a deterioration in Ireland’s competitive position and quite a bit of Irish corporate newsflow.

 

Given the perilous state of public finances across the Western World, wholesale reform of welfare systems is something that is an inevitability, regardless of the ideological persuasion of governments. This chart by the always brilliant “Tyler Durden” (!) at Zerohedge gives a clue about the inverted welfare pyramid that is forming in developed economies as demographics turn nasty. RTE’s Emma McNamara tweeted the following this morning:

 

Irish Life’s Gerry Hassett: Workers to retirees 6:1 now; will be 2:1 in 20 years. 

 

 

…which goes to show that Ireland is no different. Speaking of Ireland, Ronan Lyons had an interesting piece on welfare spending yesterday. He identifies one way of saving €700m, but as is inferred by the opening paragraphs of his blogpost, Ireland needs an 11 digit fiscal adjustment, not a 9 digit one.

 

The Open Republic Institute collates Irish data for the Economic Freedom of the World report. It reveals that Ireland has plummeted 14 places in just a year to become only the 25th most free economy. This is a very worrying development, especially given the way FDI migrates to freer countries, and the way Ireland urgently needs more investment to kick-start the economy.

 

(Disclaimer: I’m a shareholder in PetroNeft plc). We got a good bit of newsflow from PetroNeft in the past 48 hours. Firstly, the company reported a mixed set of interim results yesterday, but it has followed this up with the announcement this morning that it has discovered a new oil field. For me, PetroNeft has been a Jekyll and Hyde story this year, with production undershooting but new discoveries seeing upward revisions to reserves. This isn’t as bad as it could be – I much prefer the way things are to, say, if PetroNeft was exceeding production targets but cutting estimates of its reserves! However, if management can iron out the production shortcomings we could see a big upward move in the share price (PetroNeft is ridiculously cheap on an EV/BOE basis). It’s a stock I’d definitely consider buying more of.

 

We saw some more share buyback activity on the ISEQ yesterday, with Fyffes the latest plc to buy its own shares this year. It joins Ryanair, Abbey and United Drug in doing so. The trade-off to more share buybacks by Irish plcs, however, is that it suggests reluctance towards stepping up M&A activity in these uncertain times.

 

The IMF cut its global growth forecasts yesterday, which prompted frenzied commentary on financial sites and much of the media. However, this downgrade should not have come as a surprise to anyone given the blatantly obvious deterioration in the economic situation in most large countries in recent months.

 

(Disclaimer: I am a shareholder in France Telecom plc). I was pleased to see France Telecom engaging in more repositioning of its portfolio, with the planned sale of its Swiss unit and acquisition of a  firm in the (hilariously named) “Democratic Republic” of the Congo. I bought France Telecom years ago for around €17/share and have enjoyed fat dividends (current payout is €1.40/share) since then, so I’m not overly cross with its current share price (it’s just under €12 this morning). While I am pretty certain that the dividend will be cut in the medium term, I note that a dividend of, say, €1/share would mean a yield of 8.3%, which is pretty good by any measure.

 

Here’s Peter Schiff, who I had the pleasure of meeting last year, giving an economics masterclass to Congress last week. Schiff makes a good deal of money from trading gold, so he will no doubt be reading today of how gold bullion vaults are running out of space.

 

Things are getting worse for Full Tilt Poker. A US attorney has alleged that the firm was operating a Ponzi scheme.

Market Musings 6/9/11

European markets were slaughtered today on renewed banking and sovereign concerns. The Euro Stoxx 600 index recorded its biggest two-day decline since March 2009, while only one stock in the FTSE 100 (Randgold) finished the day in positive territory. Unsurprisingly, banks were the weakest performers in the UK and Ireland (Barclays -6.7%, Lloyds -7.5%, AIB -8.7%, Bank of Ireland -11.4%, RBS -12.3%). Bank of Ireland is now 22% below its recent rights issue price. With the US markets shut today for Labor Day, it will be interesting to see if tomorrow is significantly different.

 

In terms of the things that have grabbed my attention since my last blog, woolly accounting techniques, results from Fyffes and some straight taking from BP are the main items.

 

Listed companies are renowned for putting a gloss on their results, by focusing on the more attractive measures of their financial performance when reporting numbers. By way of illustration, stocks listed in New Zealand used 214 different measures of reporting profits in 2010. The key takeaway from this being that investors should drill down into company results to see what precisely makes up the reported “profit” figure. So, caveat emptor.

 

(Disclaimer: I am a shareholder in Total Produce plc) Fyffes reported solid H1 results today, with management reaffirming FY guidance of adjusted EBITA in the €20-24m range. I’m not a particular fan of Fyffes, despite its cheap rating, strong balance sheet and decent dividend yield. This is because you get all of that, but a significantly more stable business model in its spin-off company, Total Produce, which reports H1 numbers tomorrow.

 

(Disclaimer: I am a shareholder in BP plc) I was pleased to see BP CEO Bob Dudley acknowledge that the company’s shareholders are frustrated with the share price performance. That the company has been one of the cheapest oil majors for some time shows that the market is unconvinced by the strategy being pursued by management, so hopefully this will herald some changes. At a minimum I would like to see a resolution to its distracting rows in Russia and a material shake-up of its portfolio of assets, but if management doesn’t get its act together I wonder if investors will move to demand a break-up of the group to unlock BP’s latent value.