Market Musings 31/8/2012

(Disclaimer: I am a shareholder in Irish Continental Group plc) The main news since my last update has been around ICG, whose shares have surged on the back of the announcement of a tender offer pitched at €18.50, or circa 15% above where they closed at on Wednesday. This announcement was contained in its interim results release, which revealed a resilient performance despite the macro headwinds. Revenues were flat, while good work on the cost side meant that EBITDA was only down €1.8m year-on-year in spite of a €4.5m increase in fuel costs. The company is also putting its balance sheet to work with its €111.5m tender offer, which I’m guessing should put net debt / EBITDA at circa 2x by the end of next year, so still undemanding. ICG has also announced the disposal of its Feederlink business for up to €29m, which looks like a great deal – 16x PBT. In all, yesterday’s news reaffirms my view on ICG – a very attractive business model (effectively a duopoly with Stena on the Irish Sea) with potent barriers to entry (capital, control of key port slots and other infrastructure), very strong cashflow generation with no major medium term capex requirements, huge operating leverage benefits once an eventual Irish recovery emerges and a fat dividend to boot.

 

Elsewhere, Kentz released good H1 results, with revenue +9%, PBT +36%, net cash +36% (to $241m)  while its backlog, at $2.54bn, is up 6% in the year to date. I’ve bought and sold Kentz before and would definitely consider putting it back into the portfolio at some stage – it’s a very well-managed business that is plugged into an area with buoyant long-term growth prospects where the long-term nature of work projects provides good visibility on revenues.

 

Switching to TMT stocks, betting software group Playtech released its H1 results yesterday morning, which revealed a very strong performance. It’s a stock I used to hold but which I sold on corporate governance grounds, which is a pity as I like the structural growth story around the sector, but not enough to hold a stock that has given me plenty of sleepless nights in the past!

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM released its interim results this morning. These revealed a 26% decline in operating profits to €25.4m on revenues that were 4% lower at €272.2m. Trading conditions are, unsurprisingly, described as ‘difficult’. I was, however, surprised by the sluggish progress on the deleveraging front. Net debt fell by €3.5m, or less than 1%, since the start of the year. Led by the drop in profitability, free cash flow halved to €12.7m (H1 2011: €23.0m), but most of this was eaten up by cash exceptional items. INM’s retirement benefit obligations widened to €187.8m by the end of June, from €147.0m at the end of 2011. A potential sale of its South African business would significantly improve INM’s balance sheet and save millions in annual interest costs, and on that note I was pleased to see the group confirm in the presentation accompanying the results that it has received 2 bids for that unit. In all, there is little to get exited about from this release. INM is under pressure due to the tough macro conditions, while its high leverage ratchets up the risks around the company. That is not to say that catalysts for a re-rating are difficult to identify. These include a sale (on reasonable terms) of the South Africa business, a recovery in its 30% owned associate APN’s share price, a resolution of its pension issues and an improvement in advertising conditions. However, identification and successful execution are, clearly, two different things, so I’m disinclined to increase my stake in INM (currently 120bps of my portfolio) for the time being at least.

 

(Disclaimer: I am a shareholder in France Telecom plc) There was further disappointing news from the French telecom sector, with Bouygues revealing that its profits in that area have sunk due to intense price competition from the new entrant, Iliad (whose results this morning have come in ahead of expectations). France Telecom is also being impacted by this pressure, but the impact is somewhat mitigated by Iliad’s use of FTE’s network. Speaking of FTE’s network, the group’s chairman was quoted by Reuters as saying they are in preliminary discussions with rivals about sharing 3G networks to reduce costs, which would be a welcome move.

 

Finally, smallcap financial IFG released its interim results today. These revealed a deterioration in profits in its continuing businesses, with UK profits falling due to falling SIPP volumes, investment in risk and compliance, and challenging conditions in the IFA space, while losses in Ireland have widened due to difficult economic conditions. The operating performance is, however, overshadowed by news of a £30m share buyback, which adds IFG to a growing list of firms (CPL, Abbey, Ryanair etc.) here that have launched similar measures in recent times. If only our plcs had the confidence to invest in growing their businesses through acquisition / greenfield initiatives that would (if done properly) augment their growth potential instead of engaging in de-equitisation. Oh well!

Market Musings 23/5/2012

It’s been a relatively quiet 48 hours on the newsflow front since my last update, but what little news we’ve seen has been pretty important. Let’s review what’s been happening in the market.

 

(Disclaimer: I am a shareholder in Ryanair plc) Swedish airline Skyways filed for bankruptcy, making it the second Scandinavian airline after Denmark’s Cimber Sterling to halt operations in a month. Skyways had two hubs, at Gothenburg and Stockholm, both of which are cities where Ryanair has a presence in (albeit not in the same airports) and I assume that Europe’s largest LCC will gain at least some benefit from its demise. Should Ryanair replicate its recent trick in Hungary, where it brought forward the opening of a new base at Budapest to exploit the demise of Malev, and step up its assault on the Scandinavian market, the benefit could be quite significant. Time will tell.

 

Greencore released very solid interim results, revealing that revenue from continuing activities increased by 9.3% with the all-important Convenience Foods division registering a 9.7% rise. Ahead of the results I said my main areas of focus were on: (i) the progress it was making with the integration of Uniq; (ii) how its expanded US operation is doing; and (iii) the balance sheet. On these points, Greencore says: “The integration of Uniq is progressing well and delivery is in line with our business case”, with the HQ and divisional cost reduction plans successfully executed, while it is “progressing well with the realisation of procurement benefits from our increased scale and with supply chain efficiencies”. In terms of the US, there was little specific detail provided in the statement, with much of the 14.3% revenue growth achieved in that market down to the On a Roll acquisition in December 2010. Switching to the balance sheet, net debt stood at £262.2m. £12.2m of that is attributable to seasonal working capital movements, leading to an ‘underlying’ net debt of £250m. Consensus net debt / EBITDA for FY12 is circa 2.9x, not too troublesome but at the same time towards the higher end of my own risk tolerance (in these troubled times), so it’s not one for me at the moment.

 

Fiordland raised its stake in IFG plc to just under 24%.

 

NAMA announced plans to invest €2bn in Ireland “to complete construction work in progress and develop greenfield sites”. This news has been enthusiastically welcomed in some quarters, but I’d be a little bit guarded on it. For starters, details remain a little sketchy, while I also wonder about NAMA’s ability to execute on such a significant step-up in this type of activity in the Irish market (last month it said that only €477m of ‘working and development capital’ approved by NAMA had been drawn down to date, with the majority of this being related to overseas projects). Furthermore this €2bn investment is spread between now and 2016, so the benefits of the plan will be spread over a number of years. My instinct, therefore, is to adopt a ‘wait and see’ approach.

 

The Cove Energy takeover battle took another twist, with PTT trumping Royal Dutch Shell’s offer.

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 4/5/2012

Happily most of the newsflow I’ve seen since my last update has involved encouraging Q1 updates, so let’s run through what’s been happening in the markets.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group) I was delighted to see a blow-out set of Q1 numbers from SKG this morning.  EBITDA of €246m was well above analysts’ forecast range of €181-233m. Other points of note include an increase in the cost take-out goal (from €150m to over €200m), while management now expects to match 2011′s EBITDA outcome this year, which is ahead of what most analysts had expected given the poor state of many of its end markets. This is the latest in a series of encouraging announcements from the company, and I’m a very happy investor in the stock. The only potential negative I see at this time is the troublesome rise of economic nationalism in some Latin American markets. That region contributed 23% of SKG’s EBITDA in the first quarter of 2012, and I am somewhat concerned about its assets in Venezuela (where the government stole some of SKG’s property last year) and Argentina, where the president has been actively implementing insane economic policies of late. However, against that I note that most of SKG’s Latin American assets are located in more stable countries such as Mexico, Chile and Colombia.

 

(Disclaimer: I am a shareholder in RBS plc) Another firm to issue a Q1 update today was RBS. I will refrain from passing judgement on the overall group performance, as I’m in the process of building a model on the company as a precursor to a detailed case study, but from an Ireland Inc perspective I was interested to see what it had to say about Ulster Bank in particular. In the event, RBS says Ulster Bank “still faces exceedingly difficult market conditions”, with impairments continuing to rise in the residential mortgage book. The unit’s total impairments in Q1 2012 were £654m, compared to £570m in Q4 2011 (and £1294m in Q1 2011). Ulster Bank’s Q1 pre-impairment profit was -12.5% yoy. Overall, to me this reads like a ghastly performance by RBS’ Irish operation.

 

Staying with Irish financials, I was interested to read that financier Edmund Truell is raising up to £200m this month to put towards “deals in the European financial services or business administration sectors“. Interestingly, Truell is already the biggest shareholder (via the Fiordland investment vehicle) in Irish listed IFG, which is the biggest administrator of bespoke SIPPs in the UK market. His next moves will be interesting to watch.

 

Aer Lingus issued a strong Q1 interim management statement. Within it management upgraded full-year guidance from the “Our expectation for 2012 is that the Group will remain significantly profitable albeit below 2011 levels” provided at the time of the full-year results in February to the new guidance of “If current trends continue, Aer Lingus’ operating profit for 2012 should match that achieved in 2011“. Aer Lingus has done an excellent job of managing yields and capacity against the headwinds of a high oil price and very difficult economic conditions in its home market.

 

(Disclaimer: I am a shareholder in Ryanair plc) Elsewhere in the airline sector, one of the key themes I’ve been pushing in recent months has been the demise of and/or capacity reductions by numerous European carriers and the benefits that this translates into for Ireland’s relatively more efficient carriers.  Denmark’s Cimber Sterling, which carried 2m passengers in 2010, went bust this week. It operated out of Copenhagen, Aalborg and  Billund. Ryanair has a presence in Billund. Another carrier that has been slashing capacity is BMI Baby. It is pulling out of Ireland West-Knock, where its passengers will presumably switch to Ryanair and Flybe, and also out of Belfast, where its passengers will presumably switch to Aer Lingus, Easyjet, Thomas Cook and Flybe. Reduced competition is facilitating fare increases for Ryanair and Aer Lingus at this time.

 

(Disclaimer: I am a shareholder in France Telecom plc) Switching to the TMT sector, France Telecom issued its Q1 results. I was pleased to see the group reaffirm guidance of operating cashflows in 2012 of close to €8bn, but was less pleased to see the group pull back from its guidance for 2013-15. The stock trades at a discount to my estimated valuation on the company, but I am loath to raise my exposure to it, due to the deteriorating outlook noted above and the risk of elevated political interference (over and above Sarkozy’s meddling) going forward, assuming that France swings to the left in the second round of the upcoming presidential elections.

 

(Disclaimer: I am a shareholder in Total Produce plc) Total Produce made a small acquisition, buying a 50% stake in Flancare (Clonmel) Distribution Limited. As the target was in liquidation, I assume the consideration is very modest, but nonetheless take heart from the inference in the statement that these are very well-invested assets.

Market Musings 30/3/2012

Irish based market watchers have been hit with a Tsunami of news from the financial sector in the past couple of days, and with Irish Life & Permanent due to report its FY 2011 numbers on Monday there’s more to come.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) To take the Irish financials’ newsflow in chronological order, earlier this week we saw the Irish government buy Irish Life from IL&P for €1.3bn, which is the insurer’s NAV. This comes as no surprise given previous guidance that the IL&P recap question would be resolved by the end of April, which is something I’ve written about previously. In terms of IL&P as an investment proposition, well, we’ll have a better handle on things post Monday’s results, but taking the current market cap of €1.6bn and backing out the €1.3bn for the insurance arm this means the market is in theory valuing the banking unit (a loanbook in the UK and Ireland of circa €33.5bn by my estimates) at €0.3bn. This does look punchy to me in light of ptsb’s low NIM (97bps in H1 2011) and the very high impairment charges (€1.4bn in FY2011 alone). I’m inclined to wait until Monday before fully making my mind up, but I know what my gut is telling me!

 

IBRC (the old Anglo Irish Bank and Irish Nationwide Building Society) released FY 2011 results on Thursday morning which I’ve covered here.

 

That same day, smallcap IFG produced a lot of newsflow. Firstly, its FY 2011 results were in-line at the earnings level, while the dividend was hiked 10% and the company cut its net debt by 29%. Within 2 and a quarter hours, however, this news was completely overshadowed by news that it has agreed to sell its International division for a chunky €84m. This represents ~ 9x EBIT and 1.1x book. Based on where the share price closed at last night, IFG has a market cap of €183m and net debt of circa €11m. So an EV of €194m which equates to roughly 0.9x book and 7.2x EV/EBIT for the whole group. Stripping out the international division means there’s probably still some upside from here given that the UK business is a very attractive annuity-style operation with a strong market position in the SIPP space, while if the Irish losses can be eliminated the upside is even greater.

 

Late on Thursday brought news of an ‘Irish solution to an Irish problem’ (of sorts), where despite all the hype of recent days, Bank of Ireland, IBRC and the Irish government will conduct a repo agreement to tackle / kick the can down the road on (delete where applicable) the looming promissory note payment. For me, the winner from this will be Bank of Ireland, which assuming Ireland Inc doesn’t blow up over the next 12 months will get its hands on a margin of 135bps over ECB funding for holding a bond for a year. The loser from this is the government, and by extension the Irish people, because, as Constantin Gurdgiev illustrates, this transaction will add to the national debt.

 

This morning AIB issued its FY 2011 results. While all the headlines this morning are focusing on its reported net profit number, as I noted a few days ago I was always going to focus my attention on: (i) deposit trends; (ii) net interest margin progression; (iii) progress on deleveraging; and (iv) impairment guidance. On these, I was pleased to read that “deposits were stable from August onwards” last year, with the deposit base having increased by €1.5bn since the start of 2012. That isn’t a huge surprise given recent Central Bank data and peer commentary, however. In terms of the NIM, this appears to have improved of late. It was 1.03% for the full-year, having been 0.96% at the interim stage (I don’t know to what extent this has been distorted by EBS and Anglo, so not inclined to work out a H2 figure). Due to a combination of deleveraging and deposit transfers, AIB’s LDR has improved from 165% at end-2010 to 136% at end-2011, so well on track to meet the end-2013 target of 122.5%. Finally, credit quality continued to worsen in 2011 (provisions were €7.7bn vs. €7.1bn in 2010) and given the wretched state of the domestic economy I suspect we’re going to see another big number in 2012. Net net though, AIB’s results are probably as well as could be expected – certainly I don’t see any major surprises in there. In terms of the investment view though, I struggle to understand why people interested in trading the Irish financials would pay nearly 2x historic NAV for AIB when Bank of Ireland is trading on around a third of that level – on a forward basis!

 

Elsewhere, switching to the food sector, I note that PZ Cussons issued a profit warning on the back of social unrest in Nigeria. It made no specific mention of its JV in that market with Glanbia, Nutricima, but even if that is being impacted the effect on Glanbia’s profits is likely to be very modest – Glanbia’s JVs and Associates, which mainly comprise Nutricima, the Southwest Cheese jv in the States and the mozarella JV in Europe, in total contributed 14% of group EBIT in FY11, so any hit would likely be less than 1% at the earnings level.

 

(Disclaimer: I am a shareholder in Ryanair plc) I was pleased to see Ryanair buy back 15m shares yesterday for €4.45 apiece, taking recent share buybacks to €105.75m. In late January CEO Michael O’Leary said the carrier could spend up to €200m on buybacks, which should continue to help support the share price against the pressures of high oil prices.

 

(Disclaimer: I am a shareholder in Datalex plc) Speaking of the travel sector, booking engine software provider Datalex issued its FY 2011 results earlier this morning. The company delivered EBITDA (+42%) and net cash (+13%) growth as promised, while management sees further growth in 2012, despite the troubled macroeconomic backdrop. I was pleased to see the volume of new client wins in 2011, with 8 carriers signed up, including heavyweights Delta Airlines, United Airlines and Malaysian Airlines. Presumably the firm enters 2012 with a strong tailwind (!) given the 2011 contract wins will all be contributing a full 12 month’s revenue this year (that is, assuming that they all went live in 2011 – if any of them did not, they’ll still make initial contributions this year).

 

(Disclaimer: I am a shareholder in BP plc) In the energy space, earlier this week I noted reports that BP was teeing up some asset sales in the North Sea. I didn’t have to wait long to see this occur, with $400m of gas assets disposed of on Tuesday.

 

From a macro perspective, the ASDA income tracker in the UK, which I follow religiously, showed that families remain under severe pressure. The average UK household had £144 a week of discretionary income in February 2012, 6.3% below year-earlier levels. Is it any wonder that many UK retailers are under pressure?

Market Musings 10/3/2012

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

 

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

 

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

 

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

 

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

 

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

Market Musings 26/1/2012

It’s been a busy 48 hours on the corporate newsflow front since my last update. Let’s wrap up on what’s been going on.

 

(Disclaimer: I am a shareholder in Ryanair plc) To start off, Easyjet issued a strong trading update this morning, revealing a particularly good performance on the revenue side. This tees us up nicely for Ryanair’s results, which are due on Monday – NCB has a good preview of them here. Ryanair has had a decent move of late, rising from €3.42 at the start of November to the current price at the time of writing of €4.13. With continued positive updates from the sector and increasing chatter of one or possibly two €500m special dividends, I wouldn’t bet against this trend continuing.

 

(Disclaimer: I am a shareholder in both Allied Irish Banks plc and Irish Life & Permanent plc) I note press reports that AIB has told Irish Finance Minister Noonan that it has no interest in taking over IL&P’s permanent tsb banking unit. Given that Noonan effectively controls both companies through the State’s 99%+ stake in the two businesses, I’m not sure that the decision is AIB’s to make! As I recently noted, the State is mulling over its options for IL&P, so we should have a better idea of ptsb’s future within a couple of months. My guess is that ptsb is going to end up being subsumed into either AIB or IBRC (the former Anglo Irish Bank).

 

(Disclaimer: I am a shareholder in Datong plc) Regular readers will recall that a few weeks ago I did a detailed case study on Datong plc. Within it I noted that the outcome of a patent infringement case would have a material effect on the stock’s valuation. Happily for shareholders in it like myself the outcome was a positive one. Management is guiding that the total costs of it will come in “substantially” below the £0.3m it had provided for in its accounts. Hopefully the shares will now start climbing towards the most recently reported NAV of 70p at least.

 

There were some interesting movements in IFG’s share register, with Fiordland upping its stake in the company and One51 exiting the register.

 

This stat grabbed my attention – McDonalds served 1.3bn meals in the UK in 2011 – meaning that on average each Briton ate there 21 times last year.

 

(Disclaimer: I am a shareholder in Marston’s plc) In the blogosphere, Wexboy released part 2 of The Great Irish Share Valuation Project. I would broadly agree with his views on the most recent additions to his list, save for C&C, which I believe should be trading on a mid-teen PE in line with its international peers. This is something that I hope to look into in more detail later this year. Lewis at Expecting Value did a great write-up on Marston’s – that piece, and indeed the article on the same company I’ve previously highlighted by Richard Beddard, really underlines the quality of analysis that one encounters across much of the UK and Irish blogosphere. Elsewhere, Valuhunter did a stonking write-up on Marks & Spencer and Debenhams that’s worth checking out.

Market Musings 28/11/11

Blogging has been light as I have a raft of end-of-term MBA assignments and exams falling due. However, newsflow has been anything but light, with continued Euroland turmoil and a slew of corporate announcements grabbing my attention in recent days. Let’s quickly recap on what’s been happening.

 

In terms of the Eurozone, I don’t see any alternative to debt monetisation by the ECB. This will not be a panacea for the bloc’s problems, but it will buy the members of the currency union some time to get their houses in order (whether it’s used or not, of course, is another matter). All of the PIIGS countries have seen regime change in 2011 to no avail. What the market clearly wants is new policies, not new politicians. I am unmoved by calls for delinquent states to be drop-kicked out of the single currency, as the domino-effect we’ve seen playing out over the past while leaves me convinced that the market will take a “Who’s next?” approach if the likes of Greece are ejected. Such a move would, as we have seen in the US during its quantitative easing drives, lead to a rally for stocks and commodities (especially gold), while it would prove bearish for cash (as inflation will rise) and (at a minimum) longer dated government bonds as inflation expectations pick up. If Eurobonds are introduced, this will likely slap down existing short-dated Euroland government bonds as they will be perceived as riskier than short-term issues guaranteed by all of the Eurozone member states. And of course, if existing government bonds sell off, this will damage banks’ balance sheets even more.

 

Something from the archives – Prudent Investor outlines The 4 Kinds of Money.

 

Switching to corporate newsflow, Promethean disclosed that it has exited its position in IFG. It had held circa 4% of IFG’s shares in issue (which made it the sixth-largest shareholder in IFG), and while a sale at the low level IFG trades at surprised some market watchers, it is in keeping with the winding-up programme underway at Promethean.

 

Recruiter Harvey Nash is a stock I used to hold, before selling it earlier this year on UK macro concerns. It issued a solid update last week in which it revealed that it is still seeing strong growth, adding that it expects the FY out-turn to be in-line with expectations. I like HVN, but given the challenging outlook for the UK it’s not one I’ll be buying again in the near term.

 

Matterley has a great value-oriented investment approach, so those of you who follow that doctrine should download this video – Fund Manager Henry Dixon says he is positive on Dragon Oil, Petropavlovsk, Cranswick and RPC.

 

As we head towards the Budget in Ireland the government is drip-feeding out information to soften up citizens for a tough series of measures. I was very disappointed to hear of plans to raise taxes on dividends, which flies in the face of drives to encourage more saving and investment. Irish household balance sheets are in urgent need of repair, as slides 24 and 25  in this excellent presentation by Cormac Lucey show.

 

(Disclaimer: I am a shareholder in AIB, Bank of Ireland and Irish Life & Permanent). Other Irish balance sheets are in need of shrinking, chiefly, the banks. I was disappointed to see the sale of Irish Life halted. This means that the State will have to inject €1.3bn into its parent, Irish Life & Permanent, or around €300 for every citizen of this country. On a happier note I was pleased to see a Core Tier 1 neutral sale of a Project Finance loan portfolio with total drawn and undrawn commitments of c. €0.59bn by Bank of Ireland today, while reports indicate that AIB is looking to offload €1.4bn of property loans.

 

Aryzta issued a solid Q1 trading update earlier this morning. Revenue trends have continued from FY11 and in terms of the outlook management is retaining its FY EPS guidance.

 

(Disclaimer: I am a shareholder in France Telecom plc and Total Produce plc) Finally, in terms of the best entries I’ve seen in the blogosphere of late, John McElligott has an interesting piece asking if European telecoms dividends are sustainable; while Wexboy has conducted even more detailed research on Total Produce.

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 13/9/11

Since my last update, my attention has mainly been caught by some really excellent original research from some of the other bloggers covering UK and Irish equities, M&A activity and further signs of the ongoing stress around peripheral Europe.

 

One story I missed over the weekend with all the travelling was this report that Origin Enterprises has been on the receiving end of an approach from a private equity player. The suggested price, £400m, looks implausibly low given that this places the group on a PE ratio of only about 8x. The group, which is rapidly deleveraging, is worth a lot more than that given that it is well placed to benefit from the structural growth opportunity in farming due to its strong positions in the areas of agronomy and farm inputs. It should be noted that Origin is 71% owned by Aryzta.

 

While I’m dubious about the Origin story, one genuine M&A story is the news that Kerry Group has expanded its ingredients operations in the EMEA region with the purchase of SuCrest. This is the type of tasty bolt-on that Kerry is particularly good at doing, and serves as a useful reminder of its considerable scope to expand through acquisition.

 

IFG shares crashed 26% to €1.20 today after announcing that takeover talks with Bregal Capital have ended. This puts IFG on an PE ratio of circa 6x, which is simply too low for a company with annuity-style revenues and a very strong balance sheet. Of course, the obvious question is what the catalyst to drive the shares from here is going to be, but for patient, longer-term investors, you are unlikely to go wrong with this stock.

 

There were more signs of stress in peripheral Europe, which make the political response to date look even more ridiculous. Last night Bloomberg reported that the Greek default risk had soared to 98%, while the Greek 1 year bond yield stood at over 117%. Italy, meanwhile, looks like it is trying to sell off the family silver to China. France’s banks have been battered by concerns over their exposure to Europe’s weaker regions. This chart shows how the market is seemingly adopting a “one size fits all” approach to SocGen and BNP – I recall seeing similar identical trading patterns in the Irish banks once upon a time.

 

Bizarrely, despite the debt worries, many investors continue to favour government bonds over equities at a time when corporate balance sheets have never been stronger!

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) The wonderful Expecting Value blog had a great piece on regional newspaper group Johnston Press yesterday. Regular readers of this blog will know that my current preference in the UK media sector is Trinity Mirror. Comparing the two, I prefer Trinity Mirror due to its much stronger balance sheet (net debt + pension deficit at the H1 stage for TNI was £336m vs. £430m for JPR), better profitability (consensus EBIT figures for TNI and JPR for the current financial year stand at £97m and £73.8m respectively), and better brands (a mixture of national and regional versus regional).

 

(Disclaimer: I am a shareholder in Abbey plc) Another great blog is my only domestic peer (that I’m aware of) John McElligott’s “Value Stock Inquisition“. Yesterday he wrote a good piece on the UK listed housebuilders, concluding that while the sector is not yet right to buy into, Abbey looks the most attractive. He’s in good company with this view, see here for my previous musings on the stock.

 

Last, but certainly not least, UK Value Investor has a good analysis of BHP Billiton today that’s worth a read. I bought it for sub-£10 a share a few years ago and sold out at £17, so while I feel a bit foolish for missing its continued ascent since then, my bearish views on China mean that it’s not one I’m likely to buy into up here. Perhaps if it goes below £10 again it might look interesting to me.