Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Gold

Twelve for 2012 – Part 1

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In a recent email exchange with some of the leading share bloggers in the UK and Ireland I proposed that we each sit down and draft our thoughts for how the markets will behave in 2012, and what stocks we’d like to own to play some of those themes. Given resource limitations (I don’t know of any blogger who has a team of analysts working for them!), there will, I’m sure, be quite a bit of selection bias in the names we highlight – generally speaking, people invest in what they know! I illustrate that perfectly by choosing 5 Irish listed names in my core picks, although all of them are firms with a distinct international dimension (none of them could be described as plays on the Irish domestic economy). But despite the selection bias I do think that this is a worthwhile exercise, and one that will no doubt contribute to idea generation. As ever, readers are strongly advised to do their own research and consult a professional financial adviser if they want to invest their own money.


2012: The Macro Call


Looking ahead to next year, 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.


This screen leads me to highlight 6 ‘core’ conviction investments as being particularly interesting at this time. I’ve also looked at 6 more speculative plays for people with an appetite for risk. In today’s blog I outline my six conviction picks for 2012. In the next one, I will outline my six speculative plays – PetroNeft, Marston’s, Bank of Ireland, Petroceltic, Ladbrokes and Aer Lingus. Some of my readers suggested a number of other names that didn’t make the cut for a variety of reasons (French Connection, LoQ, Software Radio Technology, Sportingbet, Orosur Mining, Soco International, C&C, St. Ives, De La Rue, M&S, Tullett Prebon, Antofagasta, Morgan Sindall, ICON, CRH, élan, Ocado), which I hope to tackle in other blogs over the coming year.


Six Conviction Picks for 2012


Origin Enterprises (Current Price €3.05, Market Cap €406m)


Origin has successfully repositioned its business model over the past few years, merging its fishmeal and food operations (both of which are now treated as associates) and focusing on its core agri-services business. Its recent trading update revealed a positive start to the FY12 financial year (to end-July). Origin will also benefit from a full-year contribution from the businesses acquired last year (UAP and Rigby Taylor) and the integration benefits they provide. The firm has significant firepower to expand its businesses over the coming year, helped by a strong balance sheet, while it also has the option to raise extra capital through selling off one or more of its JVs. Trading on less than 6.5x forward earnings and with a net debt / EBITDA of less than 1x, this stock is overdue a re-rating.


Balance sheet strength: High, with net debt of less than 1x EBITDA.

Defensive/Cyclical: Defensive.

Non-EZ exposure: Just under 60% of Origin’s FY11 revenue came from the UK. Most of the 17.5% Origin says came from the “rest of the world” (i.e. outside of the UK and Ireland) comes from Norway, Poland and the Ukraine.

Dividend yield and cover: Origin yields 3.6% covered just over 4x.


DCC (Current Price €18.53, Market Cap €1.6bn)


(Disclaimer: I have an indirect shareholding in DCC). “Consistency” is a word that comes to mind whenever I think of DCC. The company has delivered growth in EPS every year since its IPO in 1994. In this financial year (to end-March 2012) that record looks like it will draw to an end, with unusually mild weather putting pressure on earnings in its core energy division (60% of group profits).  The shares have struggled in recent times after management lowered guidance due to this weather effect, but as I’ve previously argued, this looks overdone. Profits in its four other divisions (IT, Food, Healthcare and Environmental) are all rising. The company has a consistent record of generating high ROCE (19.9% in 2010, 18.4% in 2009), helped by a solid track record of making astute investments across its business areas. While this financial year looks like a ‘blip’ due to abnormal weather, the next financial year should see a strong rebound in earnings, assuming a more ‘normal’ winter and the benefits from this year’s acquisitions.


Balance sheet strength: Very high. Net debt / EBITDA for the current year is likely to come in around 0.6x.

Defensive/Cyclical: The vast majority of DCC’s businesses are defensive.

Non-EZ exposure: 72% of DCC’s revenue comes from the UK, of the balance, while most of this is euro DCC has a presence in several non-EZ countries such as Sweden and Denmark, while it also has a small US business.

Dividend yield and cover: The shares currently yield 4.0% and are covered 2.7x.


Total Produce (Current Price €0.38, Market Cap €127m)


(Disclaimer: I am a shareholder in Total Produce plc) It’s hard to imagine a more defensive business than the one that distributes fruit and vegetables. Total Produce moves 250m cartons of the stuff around Europe each year, making it the largest player in the sector. Its strategy is simple – it aims to consolidate a highly fragmented industry (despite being the biggest player, it commands only about a 5% market share) and squeeze out higher margins through achieving synergies in a mature market. Trading on just over 5x next year’s earnings and yielding around 5%, its valuation is an anomaly. I see scope for a considerable step-up in M&A activity over the coming year that could lead to earnings upgrades, while further share buybacks (which would also be EPS enhancing) cannot be ruled out.


Balance sheet strength: I estimate that Total Produce will exit 2011 with net debt of around €70m, or 1.2x EBITDA.

Defensive/Cyclical: Very defensive

Non-EZ exposure: Roughly 50% of its H1 revenue was to the UK and “Scandinavia”, which in TOT’s case is mainly Sweden.

Dividend yield and cover: Currently yielding 5%, the dividend is 4x covered.


Irish Continental Group (Current Price €14.71, Market Cap €366m)


(Disclaimer: I am a shareholder in Irish Continental Group plc) It’s relatively plain sailing for marine transport operator ICG. While market conditions remain tough, competitors are exiting the market, which is helping ICG to gain market share. In the first 9 months of 2011 revenues in the Ferry division were flat, while Container & Terminal revenues were up just under 10%. A higher oil price hasn’t helped the bottom line, but the firm should still do about €50m of EBITDA this year (it did €40m in the first 9 months of 2011). I estimate that it’ll finish the year with net debt of only €5m or so, which highlights its balance sheet strength. At the rate at which it’s throwing off cash, I wouldn’t be surprised to see talk of a special dividend (or a rise in what’s already the 2nd highest yield on the ISEQ at 6.8%) over the next year or two.


Balance sheet strength: ICG is virtually debt free

Defensive/Cyclical: Like Ryanair, I would argue that it’s at the defensive end of what is a cyclical industry.

Non-EZ exposure: 23% of its 2010 revenue came from the UK

Dividend yield and cover: 6.8% yield covered about 1.7x by free cashflow. This cover will rise sharply once volumes pick up.


Ryanair (Current Price €3.75, Market Cap €5.5bn)


(Disclaimer: I am a shareholder in Ryanair) With consumers watching every penny, this is music to the ears of cut price airlines like Ryanair. Last month the carrier raised its full-year earnings guidance by 10% as passenger numbers and yields (helped by a better mix of airports) continue to rise. The big catalyst for 2012 is likely to be  a special dividend worth as much as €500m. That’s equivalent to circa 9% of RYA’s current market cap.


Balance sheet strength: Very strong. Depending on the timing of the special dividend, the company could be in a net cash position as early as the middle of the 2012 calendar year.

Defensive/Cyclical: Probably the most defensive stock in a cyclical industry!

Non-EZ exposure:33% of Ryanair’s FY11 revenues were non-euro (primarily sterling)

Dividend yield and cover: Special dividend equivalent to a 9% yield likely in the next financial year.


Gold (Current Price $1,608/ounce)


With central banks busily debasing currencies across the West, a strategy that will only result in more inflation, that would normally be reason enough to hold gold, given its proven qualities as a hedge against rising prices. In these testing times another reason to hold it is as an ‘insurance’ against the really ugly political and economic risks we face – including the possibility of an all-out collapse of the euro. And if that happens – what would you rather own? Something that has been a store of value for thousands of years, or a new Irish currency? This video provides an excellent overview of the merits of owning gold as part of a diversified investment strategy.


* All share prices and market cap details taken from the Irish Stock Exchange website. Gold price from here.

Written by Philip O'Sullivan

December 23, 2011 at 10:58 am

Market Musings 1/12/11

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How the year has flown. It’s hard to believe that it’s December already. Less hard to believe is that central banks remain willing to do whatever they deem necessary to keep the show on the road. As I have noted before, such actions are bullish for equities and commodities (especially gold), and bearish for cash and bonds. Or, put more succinctly, this headline sums up what I make of it all.


(Disclaimer: I have an indirect shareholding in DCC plc) Yet another sign of the under-siege UK consumer: Topps Tiles lfl sales were -6.9% yoy in the past 7 weeks, versus -3.8% in the year to Oct 1. On a more positive note, UK DIY group Kingfisher released an update earlier this morning, but what really caught my attention was the factsheet that accompanied the results. Have a look at the buoyant sales figures for winter-related products such as insulation, electric fires and rocksalt. If people are engaging in precautionary buying because last winter’s freezing weather has taught them not to take any chances, this has positive implications for DCC, the largest home heating oil and gas distributor in the UK and Ireland.


And here’s yet another sign that the Chinese property market is in big trouble.


My thesis for some time has been that when China rolls over, so does Australia. Bang on cue, Australian housing approvals have fallen by almost 25% in the space of two months.


(Disclaimer: I am a shareholder in Total Produce plc) There have been further developments around South Africa’s Capespan, with the fruit group confirming that its largest investors are in “talks“. Total Produce is Capespan’s second largest shareholder, with a 20% stake in the group. For a primer on this newsflow, check out some excellent work by Wexboy and ValueandOpportunity. All of my previous entries on Total Produce can be found here.


(Disclaimer: I am a shareholder in AIB plc and Bank of Ireland plc) We got a trading update from AIB yesterday, which while somewhat lacking in detail contained a number of positive signs. AIB referred to a stabilising NIM, stabilising deposits and good progress on deleveraging. Which pretty much mirrors what Bank of Ireland said in its recent update. While the Irish banks are by no means out of the woods yet, and nor is the broader financial sector, they are in my view moving into more interesting territory.


Finally, Greencore reports its FY results next Tuesday. NCB’s Darren Greenfield has a good preview of them here.

Written by Philip O'Sullivan

December 1, 2011 at 5:18 pm

Market Musings 24/11/11

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I was thinking that I should have something special for this entry, which is my 100th blog post, but in the event the Eurozone has provided all the fireworks.


If you want proof of how the Eurozone crisis has spread from the periphery to the so-called “safe” core, look at yesterday’s German bund auction, described by Monument’s Ostwald as “a complete and utter disaster. If Germany can’t find buyers for its 10 year issuance, what hope has the rest of the currency union? I don’t know about the rest of you, but I prefer being invested in financially strong blue-chips with strong franchises and also commodities over Euro government debt. Staying with the now-troubled “core”, Fitch warned yesterday that its AAA rating on France could be at risk. Elsewhere in the Eurozone, Greece’s Central Bank warns that the country is on its last chance to stay in the single currency. On the plus side, when the Greeks bring back the drachma at least we can all enjoy cheap holidays over there!


Speaking of commodities – a lot of people have been saying to me that they think gold is in bubble territory. For a contrarian view, this tweet from Goldcore is interesting: “Lack of coverage of gold in [the] media is symptomatic of bull market in its infancy as animal spirits & public participation remain negligible“.


My bearish view on consumer facing stocks in the UK means that high quality companies such as Grafton, Wolseley (which I’ve traded before), SIG and Travis Perkins that would ordinarily be contenders for inclusion in my fund aren’t getting a look-in these days. However, one report I recently came across highlights the long-term structural driver for builders’ merchants, namely, that 55% of UK housing was built before 1970 (see Table 2.4 on page 54). Once I’m satisfied that we’re at the low point in the cycle, I will look to buy some exposure to this sector.


Some other interesting data points – the FT had an interesting report on UK university endowments, which showed that Cambridge has built up a £4.0bn fund, Oxford a £3.3bn one, while the remaining 163 other UK universities ‘only’ have £2.0bn. I assume, given the propensity for short-termism in Ireland’s public sector and political establishment, that none of our universities have established the type of meaningful reserves that would propel them into the top tier internationally. Yet the talking heads here persist with the myth that Ireland has a ‘world-class’ education system, despite, for example, our failure to produce a single Nobel Prize winner in any scientific field since Ernest Walton in 1951. Or the fact that no Irish university ranks in the top 200 globally, as per the Academic Ranking of World Universities 2011.


And another data point – I also read in the FT that UK households now dump ‘only’ 7.2m tonnes of food waste annually, 13% below 2006/07 levels, as hard-pressed families embrace thrift.


(Disclaimer: I am a shareholder in Playtech plc) Turning to corporate newsflow, Playtech continues to be a source of extreme annoyance for me. Yesterday it announced a £100m placing, plans for more M&A/jv activity and a new dividend policy. Ivor Jones at Numis makes some good comments about it here which sums up my views about all of this. I also note that the CEO of William Hill, one of Playtech’s largest customers (if not the largest) has been blogging about his sense of annoyance towards Playtech’s CEO. My patience with this company is close to exhaustion.


(Disclaimer: I am a shareholder in PetroNeft plc) I was pleased to see Peel Hunt initiate coverage on PetroNeft with a “Buy” recommendation and 54p price target (150% upside to this morning’s price!). However, near term performance from the Siberian oil producer, as I’ve noted before, will hinge on the results from its hydraulic fracturing programme at the Lineynoye oil field.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) I am intrigued by news that Smurfit has invested in a packaging plant in Russia. Details remain sketchy but I assume that this investment – if confirmed – will not materially alter its debt-reduction plans.

Written by Philip O'Sullivan

November 24, 2011 at 10:18 am

Market Musings 14/11/11

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Concerns around the Eurozone show no signs of abating. Writing in last weekend’s FT, Merryn Somerset Webb perfectly captured the options policymakers are considering when she wrote: “Europe will get one of three things: a break-up leading to a systemic banking crisis and a global recession; or a commitment to an impossible level of austerity followed by recession and civil unrest; or a round of ECB-driven money creation and sovereign bond-buying that will make the UK’s extraordinary QE programme look like my children’s pocket money“.


Like Merryn, I suspect that the third option will be the one chosen by Europe’s political leadership. You only have to look at our main trading partners to see what will happen when the Eurozone’s monetary sluice is fully opened – as I note in the current issue of Business & Finance, inflation in both the US and UK stands at a three year high. This inflation tax will disproportionately affect people on lower incomes, and people need to move to protect themselves against it. My advice remains that you should increase your exposure to both gold and equities (at least, the ones with strong balance sheets) and reduce holdings of cash (whose value will be eroded by inflation) and government debt (given the state of public finances across much of the world).


Speaking of public finances, we recently got an overview of the Irish government’s medium-term fiscal strategy. Have a look at Table 3.2 (on page 28) in it – cutbacks in day-to-day spending between now and 2015 are expected to be mostly offset by ever-increasing debt service costs. This is the inevitable consequence of the dithering by the present government – and its predecessor – when it comes to right-sizing public spending.


Silvio Berlusconi stepped down as Italy’s Prime Minister, leaving behind a dismal track record. As this article notes, it’s easier to do business in Albania than in Italy.


I was not surprised to read that 2011 is likely to be the third highest year for S&P buybacks on record. We’ve seen a lot of share buybacks in Ireland too (e.g. Ryanair, Abbey, United Drug, Dragon Oil) this year, which partly reflects companies’ reluctance to invest capital in M&A and development at a time of such economic uncertainty.


(Disclaimer: I am a shareholder in Irish Continental Group plc) Turning to corporate newsflow, today brought trading updates from both Kingspan and ICG. Kingspan reported that it rate of increase in sales is slowing, but falling input cost pressures are giving a boost to margins. I am a long-term admirer of Kingspan for its structural growth qualities and excellent management (CEO Gene Murtagh is one of the most impressive executives I’ve met) but given the weak macro outlook it’s one that will struggle to reach the valuation it deserves in the near term. ICG released a trading update earlier this afternoon which revealed that 9 month EBITDA has declined by €5m yoy (from €45m to €40m) as fuel costs have increased by €8m over the same period. While, as ICG says, “the economic backdrop remains challenging”, I note that its strong balance sheet (net debt was only €13m at the end of Q3 – and the company paid a dividend of €8.2m during that quarter) gives ICG the staying power to consolidate its position while weaker competitors such as DFDS and Fastnet take capacity out of the market.

Market Musings 21/9/11

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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 9/9/11

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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!

Written by Philip O'Sullivan

September 9, 2011 at 1:23 pm

Market Musings 8/9/11

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I was pleased to see a snap-back in equity markets yesterday, with strong performances on both sides of the Atlantic. I haven’t been too surprised by the recent market gyrations – regular readers of this blog know that I’ve been cautioning about extreme volatility in share prices for some time. Hence all of my trades this year have been ‘for cash’, with none on margin.


So what has been grabbing my attention of late? The main items of note are an interesting follow up on Switzerland’s interventions in the FX market, speculation around the Obama jobs announcement, Aer Lingus’ traffic stats and share register, the UK retail sector and assorted macro indicators.


ZeroHedge had an interesting chart following the SNB intervention – “Here is how Switzerland caught up to the rest of the world in devaluing paper currencies against gold“.


President Obama will announce his jobs package later today. Reports suggest that it will cost in the region of $300bn, which works out at over $20,000 for every unemployed American. This is, of course, like many of his administration’s other economic policies, completely unsustainable. I was amused to see a number of Irish commentators praise this sort of Keynesian intervention. Ireland had some similar ‘stimulus programmes’ in the late 1970s that nearly bankrupted the country, so clearly having a poor memory is no obstacle to building a profile in this part of the world.


In terms of what the US should be doing, I can not better the always-excellent Jill Kerby, who writes:


“America’s jobs crisis will solve itself when debts are cleared, budgets balanced & competitiveness restored. A long haul…”


(Disclaimer: I am a shareholder in Ryanair plc) Elsewhere, Aer Lingus reported its latest traffic statistics yesterday. While I am a huge admirer of the carrier’s CEO Christoph Mueller, I was a little disappointed by Aer Lingus’ year-to-date performance. On this measure, passengers carried are down 1.4% relative to year-earlier levels, while load factors have declined by 2.4ppt. This is despite the absence of last year’s volcano-related disruption and a huge increase in traffic at its Aer Lingus Regional partnership, which acts as a feeder into AERL’s other services. Transport Minister Leo Varadkar indicated that the government could sell its stake in the airline yesterday. Here’s the response of its biggest shareholder, Ryanair. Here’s Davy on it.


It appears that rioters are the only ones frequenting Britain’s High Street these daysDixons reported a 10% drop in like-for-like sales in the 12 weeks ending July 23. And for more retail woe – Both Argos and Homebase recorded big drops in like-for-like sales in the 13 weeks ending August 27.


The IMF cut its Irish growth forecasts yesterday due to a deterioration in the economies of our major trading partners. This mirrors something I wrote earlier this week.


Speaking of matters macro related, Greece’s 1-year bond yield hit 97% yesterday.

Written by Philip O'Sullivan

September 8, 2011 at 7:25 am

Market Musings 25/8/11

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There’s been a couple of interesting developments since I wrote my last blog yesterday around the topics of transport, gold, corporate news and the public finances. Let’s go through them in turn.

Firstly, there were a couple of “postscripts” to my piece yesterday about why Ryanair ended its Irish domestic routes. The Transport Minister, Dr. Leo Varadkar, announced that he would pay two airlines €7.6m a year to operate flights between Dublin and Kerry and also Dublin and Donegal. This decision is frankly ridiculous. Ireland has spent billions upgrading its road, rail and public transport systems, and then the government turns around and gives subsidies to airlines to overfly most of it. Not to mention that this absurdity that this is occurring at a time when the State is running enormous deficits – the Exchequer deficit for the first half of 2011 came to circa €2,500 for every man, woman and child in the country. To further highlight how unsustainable these subsidies are, did you know that between 2005 and November 2010, the Irish taxpayer forked out €69 for every single passenger that went through Donegal and Sligo Airports?

Speaking of wasteful public spending, I see that local councillors can now get their further education paid for by the Irish taxpayer. I didn’t know that having a degree was a prerequisite to becoming a good public representative.

There was a steep drop in the gold price yesterday. I had recently noted that the price was “looking frothy“, so this pullback isn’t a huge surprise. Recently I wrote of how I foresaw further “violent” moves in prices, as volatility across all asset classes is at elevated levels. This partly explains yesterday’s fall. This also helps explain it, and there is likely to be more to come. Mind you, the long-term fundamentals for the barbarous relic remain intact, given that, unlike paper currency, central banks can’t print gold.

I’ve made no secret of the fact that I’m bullish on equities. Fidelity’s Sanjeev Shah, who took over Anthony Bolton’s old fund, agrees.

Some interesting pointers from today’s corporate results. Johnston Press said that the rate of decline in Irish print advertising revenue in H1 2011 reduced to 18.2% (from 29.0% in the first half of 2010). With numbers like that, it is inevitable that Ireland will see further newspaper closures over the next 12-18 months. Tomorrow, Ireland’s biggest newspaper publisher, Independent News & Media plc publishes its H1 results, which will give a further indication on advertising trends here. (Disclaimer: I’m a shareholder in Playtech plc). We also got interim results from betting software provider Playtech today. Regular readers will know that this is a stock I’ve a difficult relationship with, and news that the dividend has been deferred upset me further this morning! However, the reason for deferring the dividend is that it “wanted to retain flexibility for significant joint venture opportunities that exist in the near term“. Hopefully this will prove to be a shareholder-friendly opportunity!

I was amused to see that Belgian, French, Italian and Spanish regulators are extending their short-selling ban on financial shares. It has been a tremendous success up to now, hasn’t it? Andrew Baker, CEO of the Alternative Investment Management Association, says: “Short-selling was not the reason bank share prices were under pressure and banning it has not relieved that pressure“. This sounds like something I wrote at the time this ban came in, doesn’t it?

Finally, a perspective on Ireland’s problems. France (population 63m) has just announced an €11bn austerity package. Ireland’s (population 4m)’s Exchequer deficit in H111 was also €11bn. Anyone in Ireland foolish enough to think that we are not in for further massive spending cuts (including to public sector pay and pensions) and tax hikes has their head in the sand.

Market Musings 24/8/11

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In my last blog I wrote about how this was going to be a busy week for corporate newsflow, so it’s no surprise that I focus mainly on this today, however, I also have some interesting (to me anyway!) nuggets on State transport policy, QE3 and gold to share with you.


(Disclaimer: I’m a shareholder in Glanbia plc) I was delighted to see Glanbia report “excellent” results earlier today. So was the market, with the shares up over 5% at one stage. The company has raised its full-year guidance to 18-20% growth (constant FX) in adjusted EPS from the previous 11-13%. Regular readers will know that it’s one I have been positive on for a while. The conference call threw up some interesting pieces of information. Six of the top ten sports nutrition supplements listed on the leading US website are made by the group, while  in the premix ingredients space Glanbia is no. 3 globally after DSM and US private company Fortitech. Both of those achievements are a vindication of the strategy the group has embarked upon for some years now to diversify away from its commodity business roots. In terms of M&A activity, Glanbia says that it is looking to buy ingredients companies in Asia and customer facing nutritional companies in the US and Europe. All of which sounds good to me!


We also got results from FBD this morning which reveal a solid operating performance and news of a JV with Farmers Business Developments for its hotels and leisure business. This JV is a positive development, which will take investor attention away from the non-operating business and allow it to focus more on its excellent insurance unit.


The third Irish company to report today was Tullow Oil. The market reaction was positive, but I do note the downward revisions to production (90 – 94 kbopd to 82 – 84 kbopd). Obviously the main value in Tullow is in its exploration and future production upside, but I would prefer to see production picking up to help with the funding of its ambitious plans to develop its new resources.


(Disclaimer: I’m a shareholder in Uniq plc) Greencore announced a 91% take-up by shareholders of its rights issue to fund the takeover of Uniq. This is a positive development for the company, and the high take-up was particularly welcome given the recent market turmoil. The challenge now for Greencore’s management team is to integrate the businesses, take costs out and do all it can to prevent the multiples from squeezing margins lower. All of which is easier said than done! This is a stock I have traded successfully in the past and one that remains on the watchlist. I’ll wait and see how the integration and cost take-out goes over the next while.


(Disclaimer: I’m a shareholder in Ryanair plc). Ryanair announced the ending of its flights from Dublin to both Kerry and Cork yesterday, which the Irish Examiner’s Niamh Hennessy has a good overview of here. This prompted a lot of debate on various social media websites, and I offer these perspectives to people wondering about the decision:


  1. Ryanair has been redeploying aircraft across its network to more profitable routes for years. While there was talk that Cork-Dublin was a “very profitable” route for the carrier, I don’t buy that given the competitive prices (relative to rail etc.) Ryanair charged. Also, on the cost side, Ireland’s main airports are among the most expensive in Europe in terms of landing charges.
  2. Landing charges, a small population and/or a weak domestic economy mean that most of Ireland’s airports hold little attraction for carriers outside of the two domestic airlines, Aer Lingus and Ryanair (I count Aer Arann within AERL, given the importance to it of its relationship with its bigger peer). You can see what I mean by looking at how few carriers outside of AERL and RYA operate year-round scheduled services at Cork, Kerry, Shannon and Ireland West-Knock, which are the main airports outside of Dublin.
  3. Investment in road and rail infrastructure during the Tiger years meant that the Cork-Dublin route did not save a whole lot of time relative to other modes of transport, which limited pricing power on the route.
  4. Some people felt that Kerry Airport should have been an attractive market for Ryanair. This doesn’t stand up to scrutiny, considering that (i) The airport only attracted 424k passengers in the 14 months to the end of 2010; and (ii) If flights from Kerry to Ireland’s major population centre require a taxpayer funded PSO subsidy, there just isn’t the demand for the route.
  5. If Ireland didn’t have so many airports, economies of scale could allow for reduced landing charges at the ones kept open, which would stimulate more interest from carriers. It makes no sense that 4 of the 6 counties in Munster (population 1.2m) have airports. Similarly, it makes no sense that every single county on the west coast of Ireland (save for Leitrim, which only has a 2.5km long coastline) has an airport. Basic economics suggests that airports in the south and west of Ireland will be consolidating over the medium term.
  6. Before I am accused of being a Jackeen with no understanding of the needs of rural Ireland, I should mention that I’m a Cork-born Munster Rugby fanatic.


Moneyweek has a beginners guide to investing in gold, which some of you might find of use. Staying with precious metals, here’s two interesting charts – Dow to silver and Dow to gold ratio charts.


Fisher Investments provide some useful insights into QE3 here which it posted ahead of the start of the Fed’s Jackson Hole meeting.


Finally, a lesson for Ireland. One of our biggest listed companies, Smurfit Kappa Group, has seen Moody’s upgrade its outlook on its debt to “positive” since my last blog. Progress in terms of addressing its debt position was the main driver behind this improved stance, and there’s a lesson there for Irish policymakers, not least given that the State is rated as “junk”. We could solve a lot our financing woes at a stroke by living within our means, rather than continuing to bequeath an obscene national debt mountain onto future generations.

Written by Philip O'Sullivan

August 24, 2011 at 11:11 am

Market Musings 21/8/11

with 4 comments

Activity on the blog has been quiet this week as I had to finish two articles for the new issue of Business & Finance magazine, in which I look at the outlook for global markets and also talk to two of Ireland’s brokers, NCB and Dolmen, about the options they have for investors looking to diversify out of Ireland and the eurozone. Sadly, this meant that this blog remained quiet while the markets were anything but that!


There was panic on the global equity markets as investors rotated out of shares and into “safe haven” assets such as gold, which continues to shoot higher. At the time of writing it is just under $1,852 an ounce, having surged 14% in the past 30 days (it’s up 47% in the past year). Another “safe haven” that has seen massive inflows is government bonds, and we’ve seen some chunky moves here, with yields on US Treasuries at levels last seen when Eisenhower was in the White House.


While there is no denying that the catalyst for the slide in equity markets – fears of a ‘double-dip’ recession and deleveraging slowing the pace of a future recovery – is real, the market reaction to me looks excessive. Concerns have been heightened by weak GDP readings across many of the world’s leading economies, however, low growth and high debt are hardly new concerns, and I believe that markets have more than moved to compensate for a more adverse scenario playing out. Moreover, given the hysterical tone of much of the financial commentary I’ve recently read, my view is that we are in and around the point of maximum bearishness (recall, however, the old stock market adage that nobody rings a bell at the top and bottom of the market!), and that shares will rebound significantly between now and the end of 2011.


While there’s no denying that the economic outlook is gloomy, things are nowhere near as bad as they were in 2008 (comparisons with 2008 have been repeatedly made this week) and it shouldn’t be forgotten that corporate balance sheets have dramatically improved since the onset of the global financial crisis (one article I read this week said that US and European corporates are sitting on $3trn in cash). Furthermore, with government bond yields at record lows and sovereign balance sheets in rag order, minuscule returns on cash and gold looking frothy (in the short-term, as it has spiked well above trend, however, the long-term fundamentals remain intact), I would submit that bluechips with strong balance sheets and well-covered dividends (dividend yields for many large corporations stand at a multiple of their countries’ bond yields) are looking particularly attractive here to people with money to invest. 


It takes guts to step in when panic like this sets in. Perhaps the market has further to fall. But when sentiment turns, and the huge sums of cash that have been parked at near-zero returns in the money markets in recent weeks rotate back towards riskier assets, the rebound in equity markets (I can’t see the funds rotating into government bonds or precious metals, given where they are trading at) will be an extremely violent one.


Turning away from the overall market and to specific companies, I was amused to see stockbroker Peel Hunt use the recent UK riots as one of the reasons why it recommends Domino’s Pizza UK & Ireland plc to investors as a buy:


“We would also take seriously recent social developments, which even after calm has been restored, may result in a subtle shift between the considerations for going out as opposed to staying at home. This cannot be bad for the delivery business”


I was pleased to see solid interim results from Kerry Group during the week. Growth was led by its world-class Ingredients division. The company  “remains confident of achieving its growth targets for the full year and delivering 8-12% growth in adjusted EPS” as previously guided.


I recently commented about how there has been a spike in share buybacks. On Thursday Ryanair disclosed that it has bought back a further 1% of its shares. I wonder if any other Irish plcs will follow the lead set by it, Abbey and United Drug given the recent market falls.


Finally, looking to the week ahead, the main scheduled Irish corporate news will be the interim results from Kingspan (Monday), Tullow and Glanbia (both Wednesday) and Independent News & Media (Friday). Doubtless they will provide plenty of talking points.


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