Posts Tagged ‘Kingspan’
Having been on holidays in Finland and Estonia for the past week, today’s update represents something of a ‘revision session’ as I look through what has been happening since my last update on the stocks that comprise my investment universe.
(Disclaimer: I am a shareholder in AIB plc) To start off with the banks, according to press reports, AIB is looking to reduce its pension deficit by transferring loan assets into it. This is a common-sense move by the bank, which reported a pension liability of €1.5bn at the end of June, and I wonder if it might provide some food for thought for other businesses that find themselves asset rich but cash poor.
(Disclaimer: I am a shareholder in CRH plc) Ireland’s biggest company, CRH, tempered its full-year guidance when it released interim results a few days ago. Having previously forecast that it anticipated “overall like-for-like sales growth in 2012 and a year of progress for CRH”, it now says: “we expect that EBITDA for the year as a whole will be similar to last year’s level”. Tougher macro conditions are to blame, which are clearly beyond the control of the group, although it is mitigating these pressures through cost take-out measures and a focus on cash generation (cash earnings per share, at 85.8c in H1 2012, was well above the 67.1c achieved in H1 2011). On the M&A front the group stepped up its activity here, agreeing to total consideration of €235m for 17 deals in the first six months of the year up from the €172m spent in the same period last year. Overall, the high implied rating that CRH trades on allied to tough end markets means it is difficult to see the shares push significantly higher from here in the short term. This is compounded by a paucity of obvious near-term catalysts for the stock – its next investor day isn’t until November and its next development update isn’t expected until early 2013. One thing that could change that is a substantial earnings-enhancing deal, but on the M&A front it should be noted that CRH’s style is to go for modest bolt-ons over spectacular large transactions (recent chatter around India notwithstanding).
Elsewhere in the construction space Kingspan released good H1 numbers, which came in ahead of market expectations. Encouragingly, there was a good lift in margins (up 100bps to 7.00%) which underlines the strength of this performance. That Kingspan is outperforming the market shouldn’t be seen as a big surprise, however, given that its insulation base gives it a structural edge over more cyclical building materials companies. The benefits of recent acquisitions, particularly as they are integrated into the business, points to a solid outlook for this firm despite the macro headwinds.
In the energy space Dragon Oil released solid interim results. Management is sticking to its medium-term targets, and given its track record few would argue with them. It was interesting to see Dragon Oil is bidding for licences in Afghanistan – these are located in the more stable northern region of the country.
In other resource sector news, Petroceltic announced a merger with Melrose Resources. I don’t follow either company closely, but on paper this looks like a sensible deal which creates a reasonably sized group focused on the Black Sea, North Africa and the Mediterranean Sea with a blend of production, development and exploration assets – hopefully a case of the whole being more than the sum of the parts.
(Disclaimer: I am a shareholder in PetroNeft plc) Wrapping up on what’s been happening in the energy sector, there was an interesting deal in Siberia which has read-through for PetroNeft. TNK-BP sold $400m worth of assets in the region at an implied price of $2.56 a barrel – this is 3x the implied value of PetroNeft, all of whose assets are located in the region.
(Disclaimer: I am a shareholder in Independent News & Media plc) In the TMT sector INM’s 30% owned associate, Australasian media group APN, released its interim results. While its underlying performance was in-line, it took a huge (A$485m – a 70% write-down) charge against the value of its New Zealand print assets. This distracted from a stable topline (continuing operations’ revenues +1% yoy) while underlying operating costs fell 3.3% yoy to A$357m and finance costs were nearly 10% lower yoy. Net debt has fallen to A$470m from A$637m at the end of 2011, helped by the restructuring of the outdoor business. Ominously for INM, APN cut its interim dividend from A3.5c to A1.5c, so INM’s cashflow won’t be helped by lower dividends coming from the southern hemisphere this year.
In the healthcare segment there was a good bit of news from United Drug in recent days. In its Q3 IMS management revealed that it now expects 8-10% earnings growth in 2012, a big increase from the previous guidance of 4-8%. The company also said that it is considering moving its listing from Dublin to London, which surely increases the pressure on the Irish Stock Exchange to seek a deal with another European exchange before it loses any more top plcs. The group also bolstered its Packaging & Specialty division with the acquisition for $61m of Bilcare’s UK and US clinical supplies unit. This is a sensible deal which further enhances UDG’s presence in that space.
And finally, one thing that might provide a lift to my readers in Clonmel today is that C&C’s Magners appears to be making a big marketing push in Finland – in a few of the bars in Helsinki I visited (where a pint* can set you back nearly a tenner!) I noticed that all the bar staff were wearing Magners branded t-shirts and the bottled stuff was widely available. Cider is wildly popular in Scandinavia (Kopparberg hails from Sweden) – by way of illustration, in terms of draught most of the pubs I was in only had two taps – one for either Koff or Karhu and one for cider. Magners is also stocked by the Finnish alcoholic beverage retail monopoly, the charmingly named Alko. So, while I don’t claim to have conducted exhaustive field research (not least given the prices the pubs charged!) it does highlight that Magners is making progress outside of its traditional markets. In its FY12 results C&C revealed that, outside of Ireland and the UK, worldwide Magners volumes grew 28% over the past financial year, with circa 10% of Magners revenue now coming from outside of the British Isles.
* Actually, being good Europeans the Finns sold 0.5 litre drinks in pint glasses.
Since my last update Insulation giant Kingspan announced two acquisitions, buying ThyssenKrupp’s European insulated panels business for €65m and a Middle East composite panels and roofing business, Rigidal, for $39m. These are sensible deals that strengthen Kingspan’s presence in those markets and the acquisition price paid for both is quite undemanding – the ThyssenKrupp business was acquired (if you strip out the €15m pension contribution) for 0.5x its gross assets, and while it is at present modestly loss-making (operating margins are -1.5%), once it is integrated into Kingspan’s existing European operations the synergies should see this rebound into profit, and with the former ThyssenKrupp business having achieved sales of €315m in the year to the end of March 2012 this deal could prove a very tidy bit of business for Kingspan in time. By this I mean that if , for example, the minus sign before its operating margin is replaced by a plus you’re looking at a 10% pre-tax ROI (ex the pension contribution), and given that Kingspan’s insulated panels business achieved trading margins of 6.7% in 2011 the returns over time will presumably be much higher than the example I provide above. As regards Rigidal, a price of 1x sales is undemanding for something that has, according to Kingspan, “an extensive route to market in the Gulf region”, which is an area that currently contributes a small fraction of Kingspan’s annual revenues.
(Disclaimer: I am a shareholder in PetroNeft plc) This morning saw another operations update from PetroNeft. Interest in every one of these updates centres on (i) production trends; and (ii) financing. There was no update today on (ii), while on (i), the company says production is ‘stable’ at 2,000bopd, and while this is lower than the 2,200bopd reported in June I am less concerned than I otherwise might be given that in the intervening period two wells were converted to water injectors for planned pressure support while other points of note include: drilling of the first of ten new production wells on the Arbuzovskoye oil field has commenced and is expected to come into production in September 2012; while the Arbuzovskoye No. 1 well is producing lower than normal output due to an electrical fault with a pump that is scheduled to be replaced. What this all means is that, at least in theory, PetroNeft shareholders could be looking forward to a short-term recovery in production which will either help with securing longer-term funding or make the stock more attractive to a potential suitor.
Elan Corporation announced plans to split the company into two units. Under the plan the group will split into one unit focused on its existing Tysabri blockbuster drug and mainly late-stage projects, and another more early stage drug delivery business platform whose employees will, I assume, be highly incentivised to deliver on the R&D front in the short term given expected cash spend of $50-60m per annum and start up capital from Elan of $120-130m.
Harvey Nash, a UK staffer I’ve held in the past, issued a solid trading update this morning. Despite the ‘challenging environment’ it expects to report solid revenue (+15%) and profit (+6%) growth in the 6 months to the end of July. It’s a stock I like, offering the right sort of diversity for a staffer – geographic, industry and also a mix of permanent/temporary/outsourcing services for clients. I hope to do some work on this company soon with a view to seeing whether it’s worth buying back at current levels – while I know some of the newsflow out of the sector of late hasn’t been too encouraging, the low multiple HVN trades on mitigates against a lot of the macro risks.
Finally, I’m going to be travelling from tomorrow until Tuesday week, so you can expect some ‘radio silence’ from me until then. However, as always the markets will continue to churn out plenty of newsflow. The key things to watch out for over the coming days, at least from an Irish corporate perspective are:
(Disclaimer: I am a shareholder in CRH plc) CRH reports its interim results tomorrow. Many of its peers have updated the market in recent weeks, and the sector commentary has been full of reports of tough conditions in Europe but a better picture in the US. This narrative was pretty much mirrored in its trading update back in May. It will be interesting to see if there has been any changes in the trends noted across its operations, particularly in the US where there has recently been signs that things could be getting a bit softer, while another area of focus will be on the acquisition front – CRH reported H1 ‘acquisition and investment initiatives’ totaling €0.25bn in July, and more recently it has been linked with a potential large deal in India.
Another firm reporting H1 results tomorrow is Dragon Oil. It recently noted some minor production issues, but these should be resolved in the near term with the installation of sand screens. The company also recently upped its 2012 development well target to 16 wells from the previous 13, which gives further confidence that it will meet its medium term production goals. I don’t think there’s any real scope for any surprises tomorrow given how recently it last updated the market and its relatively ‘boring’ (at least where oil companies are concerned!) business model, and with the shares supported by the ongoing $200m buyback and trading at a reasonably big discount to NAV I wouldn’t have any major near-term concerns around the stock.
Next Monday Kingspan will report its interim results. The group issued a very solid trading update in May, despite what it described as a “subdued global construction market environment” and it will be interesting to see if it is noticing any changing trends across its world-wide operations since that update.
The main focus since my last wrap has been the troubling developments in Spain. There is a sense of déjà vu about that for Irish people, especially given the initial hollow denials and now the failure to grasp the nettle about the scale of the problem. It is implausible that Spain, with its circa €1trn GDP, needs ‘only’ €100bn to support its troubled banks, given that Ireland (GDP €161bn) has so far injected over €60bn into its banks (slide 49), not least given that the massive scale of the problems in Spain have been known about for quite some time.
(Disclaimer: I am a shareholder in Independent News & Media plc) The main corporate news in Ireland has been provided by Independent News & Media, whose Chairman and CFO were voted off the board at Friday’s AGM. I can only hope that these changes will prove to be the final events in a battle for control of Ireland’s largest newspaper group that have proven to be a distraction from more pressing issues such as remedying the firm’s excessive debt pile and reshaping its portfolio of assets. On the latter note, it was interesting to read reports that INM’s largest shareholder, Denis O’Brien, favours an exiting of South Africa, where senior ANC politician and wealthy businessman Cyril Ramaphosa is reportedly interested in acquiring the group’s interests in that market. My own preference would be for a sale of INM’s stake in Australasian group APN News & Media, given both that APN is exposed to a far more mature market with limited growth prospects and INM’s minority shareholding means that it has limited control over APN’s cashflows, unlike its wholly-owned subsidiary in South Africa.
(Disclaimer: I am a shareholder in Abbey plc) In recent months I’ve noted positive commentary on the UK housebuilding sector by the listed corporates in that space. Bellway’s interim management statement, released on Friday, continued this trend, with management noting improving reservations, margins and average selling prices. This strengthens my conviction around my holding in Abbey plc, which derives the majority of its profits from South-East England.
Speaking of UK housing, the Department of Energy & Climate Change released some interesting stats about insulation rates. While over the five years to April 2012 some 3m houses had seen cavity wall insulation fitted and 5m had loft insulation fitted, a significant proportion of the UK’s housing stock is still lacking adequate insulation. Some 38% of homes with lofts have no loft insulation, while 40% of houses with cavity walls have no cavity wall insulation. These are addressable markets of 9m and 8m houses respectively, which highlights the structural growth opportunity (in every sense) that’s out there for the likes of Kingspan and SIG.
In the food and beverage sector, this article highlights Diageo’s competitive advantage in the scotch whisky market.
Switching to the banks, Liberum’s Cormac Leech provided some interesting views on the UK financials, which to some extent mirrors my Eurozone-related near-term caution around Bank of Ireland, as expressed in yesterday’s case study. The one thing I would differ from Cormac on is RBS, given that while he is correct to flag its large exposure to Ireland, as I’ve outlined before RBS’ Irish unit (Ulster Bank) has a largely domestically funded balance sheet which mitigates a lot of this risk.
Finally, the Republic of Ireland plays its first game in Euro 2012 against Croatia this evening. This picture of fans at Dublin Airport’s Terminal 2 made me smile.
We’ve seen a deluge of trading updates in the past 24 hours or so. Let’s run through what new insights they’ve provided us with.
In the construction sector, Kingspan released a trading update today. The group has made a solid start to 2012, posting an 8% rise in sales in the first four months of the year, “of which Mainland Europe was up 9%, UK up 2% and North America up 10%”. Despite this impressive performance, I note that management caution that: “in general, the year opened with relatively more optimism regarding potential activity levels in some construction markets. This dissipated somewhat as we progressed through the first quarter with sentiment weaker now than at the beginning of the year”. As I’ve stated before, Kingspan has undoubted ‘structural growth’ qualities that set it apart from most construction related stocks, but I don’t see anything in this statement to warrant Kingspan shares pushing significantly ahead of their 13.0x forward earnings multiple in the short term.
Elsewhere, Grafton issued a trading statement this morning which revealed diverging trends across its operations. Its UK business appears to be gaining market share, but Irish conditions remain very challenging. It was interesting to see, despite many of its competitors having exited the market, that Grafton’s Irish retail (Woodie’s DIY, Atlantic Homecare) and merchanting (Heitons, Chadwicks) sales were -16% and -9% respectively in the first four months of 2012. This bodes ill for the state of the domestic economy.
Glanbia released a trading update yesterday that contained few surprises relative to my expectations. While management is sticking to its full-year guidance, the impact of tough comparatives is shown by a forecast of flat earnings in H1 relative to year-earlier levels. Within the different business areas, nutrition continues to perform strongly, posting a 9% jump in revenue in Q1 2012, but Dairy Ireland’s revenues fell 5% in the same period. Overall, this statement reinforces my view that I was right to ‘step out’ of Glanbia for a while.
In other food sector news, Fyffes upgraded its FY EBITA target to €25-30m from the previous €22-27m. This is a great performance by Fyffes in light of the headwind of high fuel prices in particular.
UTV Media announced that it has inked a new 5 year bank facility today, which to me reflects the very impressive progress the group has made in terms of rebuilding its balance sheet in recent years.
(Disclaimer: I am a shareholder in Trinity Mirror plc) I was delighted by Trinity Mirror’s interim management statement today. While advertising conditions remain under pressure, cash generation remains very strong, as evidenced by the £24m (11%) improvement in its net debt in the year to date. On top of that, the pension deficit has also seen a £54m positive movement since the end of 2011. The combined improvement in Trinity Mirror’s long-term liabilities is equivalent to 100% of its closing market capitalisation from yesterday. This also shows that my narrative around the company appears to be playing out.
(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Speaking of narratives, I was pleased to learn of another containerboard mill closure in Europe, which is supportive for pricing in an industry where Smurfit Kappa is king.
In the retail space, Clinton Cards went into administration yesterday. This is bad news for its employees, and for retail REITs – Clinton’s over 700 stores are to be found in most large shopping centres in the UK and Ireland.
In the blogosphere, Lewis came up with an interesting way of gauging fashion ‘trends’ – might this offer new insights into trading retail stocks?
(Disclaimer: I am a shareholder in Independent News & Media) Since my last update, Denis O’Brien confirmed that he has increased his stake in Independent News & Media to 29.9%, which is the maximum level he can own without being compelled to bid for the balance of the company. The next largest shareholders are Sir Anthony J. O’Reilly on 13.3% and Dermot Desmond on 5.75%, so half of the company’s shares are held by those three individuals. This will presumably see the Irish Stock Exchange reduce its free float determination on INM and hence the company’s weighting, but if O’Brien’s purchases lead to deeper efforts to reform the group and lift profitability that will hardly matter to the rest of INM’s shareholders.
Aer Lingus announced that it is to pay its maiden dividend as a publicly quoted company. The 3c/share dividend works out at a 3.1% yield based on Friday’s closing price, and with management indicating a willingness to pay the same amount out in each of the next 2 years, that means people buying Aer Lingus at these levels get nearly a 10th of their money back in a little over 2 years, while in terms of the prospects for capital appreciation, Aer Lingus exited 2011 with net cash of €317.6m, which compares to a current market cap of €521m. So for only €204m or so you get Aer Lingus’ owned aircraft, Heathrow landing slots, earnings streams etc. Sounds pretty attractive to me.
Speaking of Aer Lingus shares, one outfit that holds some in its funds is Matterley. I’ve met Henry and George before and I’m a fan of their value-oriented approach. I see they’re still long Aer Lingus after correctly identifying the opportunity in it when it was (and this is astonishing when you think about it) trading at a discount to its net cash. Another Irish listed stock they hold is Dragon Oil, which I traded in and out of earlier this year.
In terms of what to expect over the coming days, we’ve a busy week ahead in Ireland in terms of scheduled corporate newsflow. In a nutshell here are what I’m expecting / looking out for:
- (Disclaimer: I am a shareholder in CRH plc) CRH trading update on Tuesday – This should be a bit of a mixed bag. Recent peer updates reveal improving trends in the United States, but patches of weakness in some of the group’s key European markets. Strong cost take-out efforts should see profitability rise compared to year-earlier levels. I will be looking for: (i) indications on how trading is going as we move into H2; and (ii) any sign of a pick-up in M&A activity.
- United Drug results on Wednesday – Health cutbacks should presumably mean the tone of these results is reasonably subdued, but its very strong balance sheet and proven willingness to invest in expanding its international operations means that there’s an outside chance of an M&A announcement to distract from the underlying performance.
- Glanbia trading update on Wednesday – Tough comparatives due to a blow-out 2011 will presumably mean that the headline growth rate will slow somewhat, but the underlying performance of the group should be quite resilient. Recent signs of a weakening in the dairy market won’t help, but the high-margin nutrition space is clearly going from strength to strength, as evidenced by Nestle’s recent $12bn deal for Pfizer’s infant formula business. I took profits in this name earlier in 2012, and would look to buy back in on any weakness.
- Fyffes trading update on Thursday – I’ll be watching this one for news on (i) pricing; (ii) share buybacks (possibly); and (iii) the success the group is having with passing on high fuel costs. There may well be some read-through for Total Produce, which regular readers know is a core holding (in every sense!) in my portfolio.
- Grafton trading update on Thursday – The main interest here will be on trading conditions in the UK and Ireland. The group has been carefully adding to its portfolio of operations through bolt-on deals in its key markets as well as in its nascent Belgian operation, so there may be an update on this also within the statement.
- Kingspan trading update on Thursday – The group smashed expectations in its FY2011 results, so I wouldn’t be surprised to see another good update from the company this week. While its structural growth qualities are not in any doubt due to its leading position in the insulation space, any sign of an improvement in cyclical demand could be a catalyst to push these shares significantly higher.
- (Disclaimer: I am a shareholder in PetroNeft plc) PetroNeft results on Friday – In my view, the main areas of interest in this release will be: (i) production levels, given recent disappointments on this front; and (ii) financing. What management says about these will presumably prompt a violent share price reaction – either to the upside or the downside!
The main Irish business news since my last update has been the release of results from a number of the largest plcs here. Let’s run through what the implications of those are and then look at what else has been happening in the wider market.
Yesterday brought FY2011 results from Kingspan. At a headline level, these results were pretty good, with EBIT of €91m coming in ahead of guidance of €82-85m. Free cashflow generation was also impressive, rising to €76.9m last year from 2010′s €39.9m due to rising profits and improved working capital management. Net debt finished the year at only €170m, up circa €50m yoy but a very good performance in light of net acquisition spend of €107m over the year and a near trebling in the cash cost of dividends (€17.3m vs. €6.8m). The all-important outlook statement was encouraging, in particular the reference to improving non-residential markets in the US and UK, which are of critical importance to the group. Overall, a combination of an excellent operating performance and a reassuring outlook bodes well for Kingspan.
(Disclaimer: I am a shareholder in CRH plc) Staying within the construction sector, today saw materials behemoth CRH report FY2011 results. Going into these results the market had been anticipating a beat relative to guidance, given positive sector newsflow in recent weeks (helped by easy comps due to benign weather this winter), and CRH did not disappoint, producing EBITDA of €1.66bn relative to guidance of “approximately €1.6bn”. Like Kingspan, CRH’s outlook statement is pretty reassuring, with references to improving trading conditions in the US, while Europe, unsurprisingly, remains uncertain. While news of improving end-markets in the US is welcome, and management expect the group to make progress in 2012, I think the ‘recovery theme’ will be augmented by M&A, given that CRH’s sector-leading balance sheet gives it considerable flexibility to pick up assets at a time when many of its competitors lack the financial firepower to bid against it, thus facilitating deals being done at very attractive multiples.
Switching to the transport sector, Aer Lingus posted solid FY2011 results this morning. Despite extensive commentary within the results release, there was, however, no real update on the IASS pension issue, which in my view has been a big driver (alongside very impressive traffic stats) behind Aer Lingus’ recent strong performance. In terms of the outlook, the group says it expects that it “will remain significantly profitable albeit below 2011 levels”. Management have done an excellent job on capacity and yield management in recent times, but fuel is a big headwind, with the fragile Irish economy making it tricky to push yields higher to compensate for this.
(Disclaimer: I am a shareholder in Bank of Ireland plc) In the financial space, I was interested to read that BKIR’s UK deposits will no longer be covered under the ELG from March 30 onwards. This is quite significant in light of the impact the cost of the ELG (€449m in 2011) has on BKIR’s pre-provision profits (€411m in 2011), although bear in mind that this news only relates to a portion of the group’s deposit base. The sooner BKIR can extricate itself from the ELG, the better, although granted the group’s ability to do so is heavily dependent on macro factors over which it has minimal influence.
(Disclaimer: I am a shareholder in BP plc) In the energy sector, Thailand’s PTT trumped Shell’s bid for Cove Energy. In my last market round-up I mentioned that a lot of Irish investors will clean up from Cove’s takeover. The Irish Times reckons they’ll split £100m between them - an estimate that could prove light if speculation of a counter-bid is proven correct. Meanwhile, here’s a drum that I’ve been banging for a while – Ernst & Young says that “difficult funding dynamics should result in [the energy sector] remaining a hotbed of M&A activity for much of 2012“. And where is this going to be concentrated? The small-cap space, due to the challenging funding environment. In other sector news, the fraccing revolution is transforming the sector internationally, and this is helping to put downward pressure on gas prices at a time when cheaper energy is badly needed. I was pleased to read that Northern Alaska may hold as much as 80 trillion cubic feet of gas – that’s the equivalent of 80 Corrib gas fields. Finally, I was pleased to read further reports that BP is moving to conclude the post-Macondo litigation. The sooner that is resolved, the better.
In the macro arena, The Economist ran a good piece on Argentina’s dodgy “official statistics”. This should be borne in mind the next time you see these data being used by someone to support an argument that Ireland should try to emulate the economic policies of our Latin American friends over the past 20 years or so.
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.
One of the spin-off benefits from the Rugby World Cup is that the early starts for fans in this part of the world means a extra few hours each weekend to get on top of things! So, what has been grabbing my attention since my last update?
We saw another “distressed property auction” in Dublin. While I wish the buyers well, my own instinct is that Irish house prices have further to fall. This is a view shared by Danske Bank (which owns National Irish Bank and Northern Bank). While some people have pointed to the high single digit yields properties at these auctions are clearing at as evidence of the “firesale” prices available in the Irish market, I would point out that an analysis that stops and ends at implied rental yields takes no account of the current elevated cost of borrowing. Nor does it take any account of the restricted credit supply in the market. Nor does it take into account the fewer government incentives for buyers relative to previous years. Nor does it take into account the fact that the domestic economy is still contracting. Nor does it mention the fact that taxes are going up this year and next year (at least). Nor does it mention the fact that you can buy equivalent properties in many advanced European economies for a lot less than what the so-called “distressed” properties here went for. Nor does it mention the fact that unemployment and emigration continue to rise. So, caveat emptor.
Speaking of buildings in Ireland, the latest government proposals on retrofitting insulation are positive for the likes of Kingspan. While I’m normally aghast at any government “incentives” – you only have to look at the property market to see how this can go horribly wrong – I think an expanded insulation scheme is a big win-win for Ireland at this time. For three key reasons. Firstly, Ireland has an army of unemployed builders to install the stuff. Secondly, as we import the vast majority of our energy, anything that will cut our import bill is a plus. Thirdly, we manufacture a lot of insulation here. You’ll note that these benefits stand in marked contrast to the previous Fianna Fáil administration’s bright idea of giving people grants to buy new cars – none of which are manufactured here.
Mike Bergen had some interesting comments about the Chinese housing market:
- A 100 square meter apartment in China currently costs around 17 times average disposable income, according to Deutsche Bank
- HSBC estimates that China’s housing stock is worth ~350% of GDP, in line with Japan’s residential real estate in 1990
- Economist Stephen Green of Standard Chartered suggests that around 50% of China’s GDP is linked to the fate of the property market.
Markets have thankfully been calmer after the chaos we saw last week. We’ve seen some interesting corporate newsflow, remarkable developments in Libya and interesting insights on a number of blogs since I last sat down to comment on the markets.
This is a busy week for company newsflow, with over 70 firms reporting either full-year or half-year results in the UK and Ireland. Yesterday, Kingspan released its H1 2011 numbers, which revealed a very solid performance in the start of the year, but its outlook statement reveals a tougher economic backdrop, with management saying growth eased in Q2 and will continue to moderate over the rest of the year. As stockbrokers Davy rightly note, “the lowering of…estimates at this juncture is a reflection of a more cautious stance for the building materials sector and is certainly not unique to Kingspan“. Cavan-headquartered Kingspan’s clear structural growth credentials, due to its world-leading insulation technology, which is well placed to benefit from the long-term upward trend in energy prices and ever-tightening energy efficiency regulations, means that it is perfectly positioned to outperform the broader construction sector into the future. However, the deteriorating economic situation in most of its key markets means that the short-term outlook is quite challenging. This is a point highlighted by results this morning from structural steel group Severfield-Rowen, which cautions that: “a full UK recovery remains some years distant” (the UK accounted for 43% of Kingspan’s revenues in 2010).
Events in Libya are finally moving towards the endgame. I was less than surprised to see Western oil companies acting with almost indecent haste to secure contracts from the new authorities there. Have a read of both this and this. Before the conflict began, Libyan oil (mainly particularly high quality “light sweet oil”) production accounted for 2% of global output.
I’ve seen a number of excellent blog posts in the past 24 hours which I feel deserve to be highlighted. Expecting Value has a great feature on “Cheap stocks in a turbulent market“, that includes Trinity Mirror, which I’m a bullish shareholder of. The excellent John McElligott has a good contrarian piece on the UK banking sector which is well worth a read (especially given that the argument he makes is all but ignored by most commentators at this time). I do have a number of banking positions, mainly legacy positions/staff shares in AIB, Bank of Ireland and RBS, but I’m reluctant to add to any of them in the near term given the headwinds the sector faces. Finally, my old friend Ian Parsley has an interesting piece on the media sector: “The demise of television as we know it“, which brought to mind some similar points I’ve previously made about the radio sector.
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.