Posts Tagged ‘Kerry’
Since my last update the Eurozone’s pressures have again bubbled to the surface, knocking share valuations and pushing down the value of the euro. However, troubles can often lead to opportunities elsewhere, and some of the shares on my buy list are now offering a lower entry price along with a superior potential kicker to earnings from FX than before.
The euro fell to a 2 year low against the US dollar and an 11 year low against the Yen. The key Irish stocks who benefit from a stronger USD relative to the euro include: CRH (which I’m a shareholder in), Kerry, United Drug, Glanbia and Kingspan. There are no Irish plcs with a material exposure to Japan. Another consequence of this turmoil is that yields on many ‘safe’ Eurozone countries have fallen into negative territory, which I find difficult to reconcile given how many non-financial corporates, whose balance sheets have seldom been stronger, are offering well covered attractive dividend yields. On this note, I was unsurprised to see that dividend payouts by UK plcs hit a record high in Q2 of this year.
(Disclaimer: I am a shareholder in Trinity Mirror plc) There was an interesting post on TMF examining “12 shares the market has thrashed this year“. Of the ‘dirty dozen’ I hold TNI, and I concur with the author’s views on it – it’s capitalised at £70m, generated free cashflow of £55m last year (I forecast that it will generate a similar amount this year, putting it on a free cashflow yield of circa 80%!) and as it continues to pay down debt (net debt has fallen from £300m in FY09 to £200m by end-FY11) I see a significant wealth transfer from debt holders to equity holders. While it does have a pension deficit (£230m at end-FY11) this is substantially covered by freehold property with a book value of £177m. It’s a stock I like – on my model it will be debt free by 2015 and generating (I conservatively assume a continued decline in revenues for the newspaper sector i.e. no recovery in advertising and/or circulation revenues) free cash of £35-40m by then – a 50%-60% free cash flow yield based on where the share price is currently at.
China has been rocked by another wave of problems around domestically produced baby formula. The sector there has struggled following the 2008 scandal, which has (understandably) directed Chinese consumers towards foreign brands. This is positive news for Ireland, whose share of global infant formula production is approaching 20%. The key beneficiaries from a plc perspective here are Kerry Group and Glanbia.
Dragon Oil issued a trading update this morning. Due to sand ingress issues it has trimmed 2012 production growth guidance to 10-15% from the previous 15%, but importantly it has retained its medium term output forecast. The firm is increasing the number of wells it proposes to drill this year to compensate for production delays, which is a positive. While the firm has been expanding into the exploration area, acquiring interests in blocks in Iraq and Tunisia, I can’t help but wonder if Dragon should be using its $1.7bn cash pile to buy up financially constrained smallcaps with proven reserves, many of which are trading on bargain basement prices, rather than engage in more speculative exploration activity.
(Disclaimer: I am a shareholder in Tesco plc) I was pleased to see a marked improvement in signage and merchandising in my local Tesco last weekend – on previous visits to the store I found that there was often no correlation between signs and what was actually on the shelves, so perhaps this is an indication that management is delivering on its promise to improve the customer experience in this part of the world. Obviously I’m basing this hunch on a sample of 1 store in a vast network of outlets, but if you’ve noticed similar or divergent trends please feel free to post them in the comments section.
Finally, I am pleased this morning to read that Ireland is proposing to reduce its number of parliamentarians and axe over a quarter of the smallest local councils. Even after this move, the country will still be over-represented at a national level – 158 TDs (MPs) and 60 Senators is still far too much for a country of our size (the 2 European countries closest to us in population terms, Norway and Croatia, have unicameral parliaments with 169 and 151 MPs respectively). Hopefully the people will vote to axe the Senate in next year’s referendum to remove this anomaly.
The main interest this morning is Bank of Ireland’s IMS (more of which anon), but we’ve also seen some interesting developments in other sectors that merit some attention.
(Disclaimer: I am a shareholder in Independent News & Media plc) Macquarie says Gavin O’Reilly’s departure from INM could be a precursor to a sale of its stake in APN. Such a move would, in my view, make a lot of sense – assuming INM can secure an exit price far in excess of its current market value. Last night INM’s shareholding in APN News & Media was valued at €126m, compared to INM’s market cap of €140m. INM’s recent results statement revealed that “as at 31/12/2011 INM carried its investment in APN on its Balance Sheet at an amount of €255.1m or A$1.68 per APN share held”. I appreciate that this is a very crude analysis, but if you were to split the difference between the market value and book value of the APN (i.e. €190.6m, putting APN on the sort of valuation it traded at last summer – which is not unthinkable given that such a sale would put a big chunk of Australasian media assets potentially in play) and INM received these proceeds (let’s ignore any tax implications for the sake of keeping things simple – in any event, presumably, a disposal would be done in a tax efficient manner), it would have the effect of reducing INM’s end-2011 net debt of €426.8m by 45%. In terms of the cashflow effects, INM’s only cashflow from APN is the dividend it receives from the group (€15.8m in 2011), which would cease in the event of a disposal. So, for arguments sake, based off the 2011 results this would put INM on trailing net debt of €236m and EBITDA of €86m (i.e. the €102.2m reported EBITDA less the APN dividend) – a very manageable net debt/EBITDA ratio of 2.7x, not least given how advertising markets are some way off a recovery in its home market. This is also a far superior situation to the net debt / EBITDA ratio of 4.2x INM reported in 2011 – and I think it’s safe to say that measures to dramatically improve INM’s balance sheet such as the above would see a marked improvement in the group’s share price.
(Disclaimer: I am a shareholder in Bank of Ireland plc) We had an IMS from Bank of Ireland this morning. As regular blog readers are aware, my focus where the Irish financials are concerned is fixed on deposit trends, net interest margins, progress on deleveraging and impairment guidance. Two months ago BKIR’s FY2011 results revealed a bit of a mixed bag (in my view) on this front. Today’s statement revealed: (i) End-Q112 deposits of €70bn are more or less in line with the €71bn at end-2011, while the LDR has improved to 142% from 144% at end-2011; (ii) net interest margins are expected to improve in H212 due to lower ELG participation, repricing of the loan book and reduced deposit pricing; (iii) the group continues to make good progress on deleveraging, and has completed / contracted divestments to date of €9.5bn, 95% of its PCAR target, at an average discount of 7.6% (by end 2011 the figures were €8.6bn sold at an average discount of 7.1%). The updated divestment figure remains within the PCAR base case assumptions. Bank of Ireland says: “redemptions and repayments in our other portfolios remain in line with our expectations”; (iv) On impairments, BKIR says: “we maintain our expectation that impairment charges will reduce from the elevated levels experienced in 2011″. The Bank notes that “domestic economic indicators remain weak, unemployment remains elevated, and residential property prices do not appear, as yet, to have fully stabilised”, while Eurozone concerns have heightened – this is no surprise given what we know from recent economic data releases and so on, and I suspect this has been priced in given recent declines in the BKIR share price from its 2012 peak. Overall, I view Bank of Ireland’s IMS as ‘solid’ – in terms of the factors it has control over it is meeting its goals, and while the macro picture remains challenging, it is well placed to capitalise once that situation improves. I remain a happy holder, and would certainly consider adding to my position over time.
(Disclaimer: I am a shareholder in Marston’s plc) I was pleased to see a solid trading update from UK pub group Greene King, which presumably bodes well for Marston’s. Speaking of pub groups: According to the British Beer and Pub Association, there are 51,158 pubs in the UK. Of the listed pub groups, Enterprise Inns has c. 6,250 pubs (12.2%), Punch 5,000 (9.8%), Marston’s 2,150 (4.2%), Greene King 2,000 (3.9%), Mitchells & Butlers 1,600 (3.1%), Spirit 803 (1.6%), Wetherspoon 800 (1.6%), Fuller’s 360 (0.7%) and Young’s 241 (0.5%). I see the market share of these large players steadily increasing over time as smaller operators exit the market.
Speaking of UK plcs, here’s some cheer for income investors – FTSE dividends jump to a record level.
In the food sector, I was interested to read that Nestlé is paying a hefty 5x revenues for Pfizer’s infant nutrition unit. There is bullish read-through for Ireland’s Glanbia and Kerry from that transaction – Ingredients account for 69% & 77% of Kerry Group’s sales & trading profits respectively, while for Glanbia it’s 49% & 67% of underlying sales & EBIT. Clearly, infant nutrition is only a portion of Kerry & Glanbia’s ingredients operations, but this is still supportive from a valuation angle.
To finish up with some macro news, Eurostat provided us with the 2011 fiscal details on EU member states. Ireland, despite all the talk of austerity, was bottom of the list, running up a frightening deficit of 13.1% of GDP last year. The underlying (ex bank recaps) deficit was 9.4%. Greece was the next worst on 9.1%. So, to emphasise, even after stripping out the cost of bank recaps Ireland had the worst deficit in the EU last year. Yet listening to some politicians and pundits here one would be forgiven for thinking that we’re experiencing severe austerity measures relative to what other EU citizens are putting up with.
(Disclaimer: I am a shareholder in Ryanair plc) The main Irish corporate news since my last update has been Ryanair’s strong Q3 results. The company raised its full-year net income forecast from €440m to €480m (having already raised it from €400m back in November). However, even this raised guidance looks conservative, given that Ryanair generated €558m in net income in the first 9 months of its financial year. In my last blog I wrote that one of Ryanair’s competitors, Spanair, had gone bust. Another competitor, Hungary’s Malev, looks to be in dire straits. The timing of this couldn’t be better for Ryanair, which is opening 5 new routes from Budapest in April. Easing competitive pressures as rival airlines cut back on capacity and/or exit the market altogether are facilitating Ryanair’s policy of nudging up ticket prices (average fares rose 17% in Q3) – and with circa 75m passengers a year using the carrier, every incremental euro of per passenger revenue has a material impact on the bottom line. Given these factors, I’m happy to run my Ryanair position (which makes up a chunky 17% of my portfolio) for now. To finish up on Ryanair on a humorous note, Mark Carter spotted that Google Finance’s profile of the airline concludes with this rather disturbing line: “Ryanair sells seats on a one-way basis“.
Elsewhere in the airline sector, Aer Lingus responded to press reports about the IASS pension deficit. This has been a big overhang for the company, and while a resolution looks likely to involve AERL parting with some of its large cash pile, in a funny way the market appears to place more of a value on removing the uncertainty than it does on the cash outflow that will likely be involved, given the way AERL’s share price has been motoring ahead of late.
(Disclaimer: I am a shareholder in Irish Life & Permanent plc) Bloomberg picked up on a Sunday Times report that IL&P is to sell its agricultural finance unit to Rabobank. There is quite a bit of uncertainty around the future of IL&P’s banking unit, with some people arguing that ptsb will remain as a ‘third force’ in Irish banking, while others (including myself) don’t see an independent future for it. Seeing the bank exiting yet another area strengthens my conviction that ptsb doesn’t have a standalone future. All will be revealed in April when the government makes clear its intentions for the group.
(Disclaimer: I am a shareholder in Bank of Ireland plc and Allied Irish Banks plc) There was more encouraging news elsewhere in Ireland’s financial sector. Bloomberg had a positive piece about funding prospects for the banks, but I wouldn’t get too carried away by that, given how the recent bond swap involved considerable participation by the domestic players. Elsewhere the Central Bank released data for December which confirmed recent comments from the likes of Bank of Ireland and AIB, namely that deposits appear to have stabilised. Again, I wouldn’t read too much into it, given that it relates to such a short timeframe, but it is nonetheless encouraging. In terms of the commercial property sector, CBRE produced an interesting chart that highlights how Dublin has swung from offering among the lowest yields in Europe to the second highest. Hopefully that might flush out some more investor interest for NAMA’s CRE holdings!
(Disclaimer: I am a shareholder in RBS plc) There was a lot of adverse commentary around executive pay at RBS. Most of this commentary was high on rhetoric and low on facts. Allister Heath, the editor of City A.M. (which is always a useful place to go to for insightful editoricals) wrote a good piece that cuts through the noise and gets to the root of the issue here.
(Disclaimer: I am a shareholder in Glanbia plc) Here’s an interesting statistic – 78% of adolescents in urban India consume at least one dietary supplement. This bodes well for the likes of Ireland’s Kerry Group and Glanbia, which have a presence in this space.
In the blogosphere, Wexboy added part III of The Great Irish Share Valuation Project, while Lewis at Expecting Value did up a detailed piece on Nationwide Accident Repair Services.
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.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.
It’s been an interesting couple of days with the backdrop of continued unrest in Greece ahead of a (yet another) crucial parliamentary vote and the (I assume) imminent announcement of Christine Lagarde as the new head of the IMF, an appointment that, as I’ve said before, is likely to have adverse consequences for Ireland.
There was an interesting article in the Irish Times about the longer-term prospects for the agri sector here. One data point of note was the revelation that one in six infants in the world now feed on infant milk formula produced and processed in Ireland. While a number of foreign owned companies are prominent among the list of producers here, I know that this is an area that Kerry Group has made big strides in, especially in China where locals remain wary of Chinese producers after this scandal. My highlighting of Ireland’s large presence in this space led to a rather heated discussion on Twitter about the rights and wrongs of these products, so in order to avoid my blog becoming a similar battleground, I simply present the facts as reported by the Irish Times here!
(Disclaimer: I am a shareholder in BP plc) Dolmen Stockbrokers released a bullish note on BP yesterday. It believes that recent legal developments around Macondo (e.g. Weatherford) have positive implications for outstanding litigation. I agree with their view, and it is a big factor behind my long position in the stock. As I noted yesterday on Twitter: “BP’s market cap is $131bn. Further settlements should cut into the $20bn set aside for Macondo claims and act as catalyst for the share price“.
Elsewhere on the FTSE, we received further signs of weakness in the UK consumer sector today. Carpetright announced that it has suspended its dividend. Its Chairman and CEO, Lord Harris of Peckham, said: “Looking forward, I see no respite from the challenging environment over the next year“. Chocolate retailer Thorntons also provided a glum strategy update today, announcing that it will close up to half of its stores. I wonder how many Irish companies with an exposure to the UK consumer will provide similar updates in the upcoming results season?
Citigroup today provided investors with its list of preferred UK mid-cap picks, while LCH raised its margin requirement on Irish government bonds for the second time in a matter of weeks. It’s now 80%, from 75% previously.
Turning to the elimination of government waste, I was pleased to see the cabinet agree to proposals to combine the two local authorities in Limerick (whose population is a mere 186,000). This is a good first step, but there is plenty more low-hanging fruit to cut as well. For instance the government should implement the recommendation in the McCarthy Report to abolish all town councils and borough councils as well – I really struggle to see the value of expensive (in aggregate) talking shops where some elected representatives have polled fewer than 3 dozen first preference votes. As an aside, I was amused to see Fianna Fáil Senator Averil Power, with a straight face, warn Irish people about the potential downsides to selling State assets last night, given that her party signed up to privatising same just a few short months ago in the EU/IMF “bailout” agreement. I’m open to correction on this, but I believe that the all of the governments that privatised State assets since Ireland achieved its independence were led by Fianna Fáil!
Blogging has been light the past few days because I’ve had to finish off some articles for Business & Finance magazine. That said, it probably would have been reasonably light anyway because we haven’t had a whole lot new going on in the markets since I last scribbled down my thoughts.
On Ireland Inc, Moody’s followed up last week’s 2 notch downgrade of Ireland by downgrading AIB, Bank of Ireland, EBS & IL&P by 2 notches and ICS by 1 notch. All of Ireland’s banks are now listed as “junk”, and to me this shows just why a longer-term financing facility has to be put in place by the ECB – with that sort of a rating, and the economy not about to “turn the corner” any time soon, you cannot realistically expect them to be able to go out and source funding at affordable rates once the EU-IMF “arrangement” (anyone who calls it a “bail-out” needs their head examined) expires in 2013.
Staying with Ireland, privatisation was always going to be one of the measures used by government to address the country’s battered balance sheet, and the McCarthy report has advocated the disposal of some assets. Taoiseach Enda Kenny has spoken of raising €2bn from asset disposals, which would only cover the deficit for the first two months of this year.
On the deficit, I was interested to hear that the President of Uganda has bought himself a new Gulfstream private jet. And that would be of no interest whatsoever to me, if the geniuses in the previous government here hadn’t given him €33m in direct aid last year.
The UK housing market has been defying gravity for some time, so I wasn’t overly surprised to see that London property asking prices have increase to record levels. It is amazing that this is happening given that (i) rates are going to go up this year; (ii) austerity measures are only going to intensify; and leading on from that (iii) 500,000 public sector workers are scheduled to lose their jobs. So, in my view, this UK housing recovery from the lows seen during the recession is only going to end in tears.
(Disclaimer: I’m a shareholder in Playtech) Those of you who like to gamble will be interested in the FBI and Department of Justice raids on US poker sites last week. Davy’s David Jennings – who along with Gavin Kelleher in Goodbody is one of the two best analysts covering the sector in this part of the world – has a great summary of what the implications of these raids on Europe’s listed players are here.
Staying with the US, S&P downgraded its outlook from stable to negative for the first time ever. This is no surprise, given what I’ve written in the past about the US’ unsustainable deficit. Other sovereign concerns saw gold break $1,500 an ounce for the first time, while Greek 2 year yields hit 20% and Portuguese 2 year yields hit 10%. The only solution to all of this is – as we have here – severe fiscal consolidation, which will put further strain on consumer-orientated stocks. And God help Northern Ireland if the UK expects it to pay its own way – government spending accounts for a whopping 78% of Northern Ireland’s GDP.
And what shape should this fiscal consolidation take? It should mainly take the form of spending cuts in my view. Because tax increases – particularly on businesses – would lead to more of this sort of thing. Bear in mind that most of our large indigenous companies – CRH, Ryanair, Kerry, DCC and so on – only generate a small % of their earnings in Ireland. So hands off our 12.5% corporation tax rate! I should add that I’m a shareholder in Ryanair and CRH and clearly have a vested interest, but the point is a valid one nonetheless.
What would a blogpost from me be without more bashing of the BRICs?
(Disclaimer: I’m a shareholder in Chaucer). I was interested today to see that one of the Lloyd’s insurers, Chaucer, has received a takeover bid, which it has accepted. It’s a little less than what I was hoping for – at a total of 56p it’s about 10% below its recent highs, but given the recent catastrophes that have befallen Japan, New Zealand and Australia some valuation attrition was inevitable. Its biggest shareholder has come out against the deal, so this story may have a few other twists to it. But I’m getting close to 8% dividend yield on it (in constant FX terms) so I’m happy to wait and see what happens. If it all collapses I’ll still have a stock paying me a very handsome dividend, and if not and the deal goes through I’ll have some more cash to play the markets with later on in the year. Not the worst dilemma to have!
Since I last offered my thoughts on the markets on Thursday morning we’ve seen some interesting developments, especially where interest rates and commodity prices are concerned.
Thursday brought news that the Old Lady of Threadneedle Street – The Bank of England – was, as expected, keeping rates on hold for now. I wouldn’t be surprised to see a hike at the next meeting, assuming that the Q1 UK GDP reading on April 27 doesn’t throw up any surprises. One central bank that did hike was the ECB, which raised rates (by 0.25%) for the first time since July 2008. The market is bracing itself for further rate increases over the coming months, and we could well see the ECB base rate hit 2.00% by year-end. This is bad news for the 400,000 tracker mortgage holders in Ireland. As I’ve said before, Ireland has had an inappropriate monetary policy on the way up, and now we have an inappropriate policy on the way down too.
The main culprit behind these rate increases is, of course, inflation. We got a few reminders of how frothy commodity prices have gotten this week with silver breaking the $40 level for the first time since 1980, brent crude hitting a 32 month high and gold reaching another record level. Indeed, China reported its first quarterly trade deficit for 7 years this week, as soaring commodity prices have added massively to its import bill. With the Federal Reserve’s QE2 programme scheduled to end in June, it will be interesting to see what the consequences of this will be. Bloomberg economist Michael McDonough wrote an interesting piece showing a strong correlation between commodity prices and Fed Treasury purchases, which is worth a look.
Despite all of the talk of austerity here, I was surprised to see that subsidies for flights between Dublin and Galway will be maintained until the middle of the summer. The PSO has, in my view, had absolutely no justification for the past few years given the major investment by the State in both road and rail infrastructure between the two cities.
Speaking of austerity, some eye-popping numbers – the US incurred a budget deficit of $830bn in the first six months of fiscal year 2011, some $113bn than in the same period in the previous fiscal year. Figures like that really show up the “historic” $38bn US budget deal for what it is – a complete joke which barely makes a dent in the deficit. On that note, Peter Schiff, as always, tells it how it is here. If you are looking for more details on the US budget, read this thought-provoking piece by Peter Tchir.
In terms of sector calls, Davy turned negative on UK housebuilders, which for me wasn’t a huge surprise given the scary updates coming out of firms exposed to the UK consumer in recent times. I was interested to see some predators looking at European debt too – BlueBay is buying Irish government bonds while SVP is attracted by opportunities in distressed debt in Euroland. Fisher Investments, whose insights I’m a big admirer of, released its latest guidance for investors. It says that this year will be one where stock-picking skills are to the fore, a theme I’ve explored in my articles for Business & Finance magazine since the start of the year.
(Disclaimer: I am a shareholder in CRH plc and AIB plc) Turning to Corporate Ireland, the government confirmed that its stake in AIB is to rise to 92.8% – post the completion of this AIB will have 12.25bn shares in issue. Another plc that caught my eye was Fyffes. I was surprised to read that Fyffes (market cap €143m) paid its directors €2.7m last year, while Ireland’s biggest plc, CRH (market cap €12bn) paid its directors €8.0m in the same period.
In terms of the week ahead, I’ll be watching results from Punch and the IMS from Michael Page tomorrow to get more clues on the health of the UK consumer, while on Wednesday 3 Irish plcs – Tullow, Kerry and Fyffes – all go ex-div so watch out for some interesting price action there. All told my mood is bearish, I’m overweight defensives and see no reason to rebalance my portfolio.