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 21/5/2012

(Disclaimer: I am a shareholder in Ryanair) From an Irish perspective the main news today has been FY12 results from LCC gorilla Ryanair. In the preview I wrote yesterday I noted that the market (as reflected by consensus of €494m) was expecting net income to come in ahead of company guidance (€480m) and said that updates on possible special dividends and yields would be of particular interest. In the event, Ryanair unveiled 25% higher net income of €503m, announced a €483m special dividend (equivalent to a circa 8.5% yield) and broke the €1bn operating cashflow mark for the first time. Buoyed by the impressive cash generation, the carrier finished the year with net debt of only €110m – or 0.1x EBITDA. Assuming shareholders approve the special dividend announced today, it will mean that Ryanair will have returned €1.5bn to shareholders between buybacks and dividends over the past 5 years – that’s over a quarter of its current market cap.

 

Looking ahead to the current year, Ryanair is guiding 5% passenger growth to just over 79m passengers, but changes in passenger mix (greater exposure to Hungary, Poland, Spain and provincial UK), higher fuel costs and the effects of “recession, austerity [and] currency concerns” have seen it pitch FY13 net income guidance in a range of €400-440m. This forecast pushed the shares lower earlier today but against that I would point to the carrier’s form for low-balling guidance – don’t forget that Ryanair upgraded its earnings projection twice in the past 6 months – along with its 90% hedging of its FY13 fuel needs (which reduces the risks from a volatile expenditure item that accounted for 43% of its operating costs in FY12) as a sign that perhaps this represents the ‘minimum’ out-turn we can expect from Ryanair in FY13. In any event, having provisionally updated my model (I still need to add some extra information from the annual report when it comes out) I’m coming out with a SOTP valuation (15x average earnings for the next 2 years + the current value of its stake in Aer Lingus) of close to €5/share (as before), which offers some pretty chunky upside from the €4.04 the shares closed at this evening. Put another way, if you strip the 34c/share dividend from tonight’s close, Ryanair is trading on an ‘ex div’ price of €3.70, which represents 11x trailing earnings for what is an effectively debt free sector leader that is generating free cash flow of >15% of its market capitalisation. To me that is far too cheap.

 

Elsewhere, in the blogosphere Lewis did a great write-up on Cranswick – I really liked the way he dis-aggregated the extent to which movements in both the top line and costs contributed to the net out-turn over the past few years. Something I should think of more overtly building into my own case studies.

 

Finally, did you know that British American Tobacco rolled about 100 cigarettes for every man, woman and child on earth in 2011?

Market Musings 20/5/2012

After the huge volume of company updates we saw on Friday I’m hoping that this week will be a little quieter on the newsflow front. In this update I’m focusing on what to expect from this week’s main scheduled updates from across the universe of stocks I follow, along with one or two other nuggets of information that I found interesting.

 

(Disclaimer: I am a shareholder in Ryanair plc) Given that I have about 17% of my portfolio invested in Ryanair, tomorrow’s FY12 results from Europe’s biggest low cost carrier will be of particular interest to me. RYA guided in late January that it now expects to deliver net income of €480m, having previously upped its guidance by 10% to €440m back in November. With consensus standing at €494m (in my own model, for what it’s worth, I have €491.9m), it seems that the market expects an earnings beat from Ryanair. Of course, nobody trades the history, so all eyes will be on guidance for how RYA has performed since the start of its FY13 financial year, particularly on the yield side, along with any clues on special dividends (unlike most followers of the company I currently forecast two €500m payouts – in both FY13 and FY14 – but given the €106m it has spent on buying back its own shares recently, I’m starting to wonder if I should revise that to one special dividend and further share buybacks). I wouldn’t expect too much ‘new news’ on the cost side given that RYA has hedged 82% of its fuel needs for FY13 already.

 

(Disclaimer: I am a shareholder in Irish Life & Permanent plc) Another company updating the market this week is Irish Life & Permanent, which holds its AGM on Tuesday. I’m assuming that it will repeat the practice of previous years and release an interim management statement at 7am that morning. Following the announced sale of its insurance unit to the State, and news that the State is positively disposed to its restructuring plans, I assume that interest will be centred on: (i) the provision of more information on how the post-restructuring ptsb banking unit will operate; (ii) arrears and impairment trends in the loanbooks; and (iii) any hint of a possible re-start of the sale process around the UK buy-to-let mortgage book.

 

Food manufacturing group Greencore will release its H1 results on Tuesday. The main attention here will be on the integration of Uniq, current trends in the UK convenience food space and how well its (still relatively small) US business is performing. Trading on a PE of circa 6x and yielding around 6%, Greencore looks cheap but I dislike its chunky net debt.

 

(Disclaimer: I am a shareholder in Marston’s plc). With all the market noise on Friday, I didn’t get a chance to properly review the presentations that accompanied some of the results statements that came out that day until yesterday. One that really stood out for me was pub group Marston’s – happily, for all the right reasons. In the group’s interim results presentation management outlined a number of key positives, including: (i) slide 8 illustrates the positive trends in operating margins, which have risen 90bps in 4 years despite the economic headwinds, which underlines the successful execution of the firm’s growth strategy; (ii) slide 37 shows that the firm is comfortably within all of its debt covenants; (iii) slide 19 illustrates just how well the firm’s investment policy is paying off, with targeted ROI from new-builds of 16.5%; (iv) slide 25 shows how the learning effects from this strategy is paying off, with returns on more recently completed establishments standing at 18.5%; and (v) slide 38 shows that the firm has no significant near-term debt maturities, which gives it welcome breathing space. In all, I found Marston’s presentation to be very comforting and remain a happy holder.

 

The government announced that the keel has been laid for the first of the Irish Naval Service’s two new offshore patrol vessels. At 90m long these will be the largest ever vessels operated by the INS, and they are due to be delivered in 2014 and 2015 to replace two of the three Emer class vessels (commissioned in 1978, 1979 and 1980 respectively). In Department of Defence briefing notes prepared for the Minister after he took up his post early last year these were the only significant planned procurement items alluded to, which reflects the present financial constraints. However, by 2015, after the delivery of the OPVs, of the INS’ eight strong flotilla three will have been in service for over 30 years, so this is an area that will have to be revisited by the Minister before long.

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 22/4/2012

Given events over the past few days it’s no surprise that this blog is once more focused on the TMT sector.

 

(Disclaimer: I am a shareholder in both Trinity Mirror plc and Independent News & Media plc) On Friday Richard Beddard asked me why I didn’t appear to be particularly concerned about Trinity Mirror’s pension deficit. Regular readers of this blog know that pensions are always a concern for me – I always incorporate the pension deficit or surplus into my valuation models, while as a former shareholder in Uniq (now a part of Greencore) I know all too well what can happen if the pension deficit gets too big. In the case of Trinity Mirror, at the time of writing the company has a market cap of £79m, while it exited 2011 with a pension deficit of £230m and net debt of £200m. So net long-term liabilities of more than 5x its current market cap, which is certainly concerning. This concern is somewhat alleviated by its freehold property assets of £177m, while last year it generated after-tax operating cash flow of £75m. With well-documented cost take-out measures underway and the UK advertising market still tough, I think it’s reasonable to assume that as the cost measures flow through and advertising picks up that Trinity Mirror can hold cash generation reasonably steady for the next 2-3 years. With modest capex requirements for the business and no dividend payout, this should see net debt more or less eliminated by end-2015. While it’s tricky (if not impossible) to predict where the pension deficit will be by then, it only has to improve by £53m (for information, it deteriorated by £70m last year, so moves of this magnitude are not unthinkable) before it’s covered by the property interests. Obviously, a marked deterioration in the UK newspaper sector or adverse market moves that significantly impact the pension deficit pose risks to this thesis, but if I’m right, I should see the value of my TNI shareholding rally strongly from current levels. One thing that TNI observers may wonder about the above analysis is why I’ve left out the current discussions between the publisher and the pensions authorities in the UK about temporarily reducing payments into the scheme – all other things being equal, these cashflows will be used to nuke liabilities (i.e. less money going to fix the pension deficit = more money going to fix the net debt), and given that I treat net debt and pension deficits the same in my investment models it has little impact on my sentiment towards the company.

 

Speaking of media, I came across an interesting survey of advertising expenditure in Ireland, which is quite timely in light of recent developments in the media sector here. While digital is growing at a rapid rate, it is worth noting that ‘old media’ still accounts for the lion’s share of advertising expenditure. I accept fully that there are clear structural shifts underway in terms of where ad spend is migrating to and from, but I remain confident of my central thesis for both INM and TNI that even though the overall ‘pie’ is shrinking, they have the ability to counter this to at least some degree through market share gains as weaker competitors exit the market. INM, as it likes to remind people at every opportunity (!) “is the only profitable newspaper and media firm in the country“, and many of its titles, at both a national and local level, compete with financially challenged rivals. For Trinity Mirror, the firm’s 130 regional titles and  5 national papers appear to be well placed in terms of right-sizing the cost base (this list suggests that it has been more proactive to date at weeding out underperforming titles than its peers) while the well-documented challenges faced by rivals such as Johnston Press could see an acceleration in rival titles exiting the market in 2012/13.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Following the recent news that two Norwegian kraftliner mills have gone bust, another of Smurfit’s rivals, French containerboard producer Papeterie du Doubs, has gone into liquidation. All of this is supportive for pricing in an industry long known for its problems with overcapacity.

 

(Disclaimer: I am a shareholder in Playtech plc) In the betting space, William Hill’s IMS revealed a solid overall performance, led by its online division, where net revenues rose 33% (relative to a 12% increase in group net revenue). This has bullish read-through for the minority shareholder in the William Hill Online joint venture, Playtech, and it was no surprise to see PTEC’s shares gain 7% on Friday to close at 370p. This is just 10p below my breakeven level on a stock that has repeatedly disappointed me, and if I can get out of it at 380p or better it will be an escape of Harry Houdini proportions!

 

(Disclaimer: I am a shareholder in Ryanair plc) I was interested to read that Flybe has pulled out of Derry Airport in Northern Ireland. This will likely result in (very) modest gains for Ryanair, whose Derry-Liverpool and Derry-Birmingham routes will presumably pick up some traffic from Flybe’s discontinued Derry-Manchester service.

 

In the construction arena, Irish heating and plumbing supplier Harleston bought Heat Merchants and Tubs & Tiles, which came a little bit out of the blue for me given all the chatter linking Saint-Gobain to these assets. The future of the 11-strong chain of Brooks’ builder provider units remains unclear, so hopefully we’ll get some clarity on that this week.

 

(Disclaimer: I am a shareholder in Tesco plc) In the blogosphere, Valuhunter did up (with a little help!) an absolutely fantastic post on Tesco that’s well worth checking out.

 

Finally, if you ever feel like you’ve made a serious blunder in work, just remember that it could be worse – at least you haven’t accidentally fired every single one of your colleagues.

Market Musings 17/4/2012

Having had a rather productive day in terms of college and making the final edits to my articles for the next issue of B&F I thought I’d “treat myself” to writing a short blog on what has been grabbing my attention in the past 24 hours or so.

 

(Disclaimer: I am a shareholder in Ryanair plc) To start with, I was interested to read in Bloxham’s morning wrap that political wrangling may harm Boeing sales – might this further delay a future Ryanair mega-order of new aircraft and increase the likelihood that Europe’s biggest low-cost carrier will pay a second €500m special dividend in addition to the one widely expected in RYA’s FY13 financial year? My own estimates for Ryanair have the carrier paying €500m out in each of FY13 and FY14, so let’s see how this dispute plays out.

 

(Disclaimer: I am a shareholder in Playtech plc) In the TMT space, UTV Media issued an update in which it revealed a significant contract win for its talkSPORT franchise – under the terms of the deal talkSPORT becomes the Premier League’s global audio partner, meaning that it will broadcast commentary outside of Europe on all 380 Barclays Premier League games in multiple languages. This could well prove to be a very significant win for UTV over time. Elsewhere, Playtech announced that it is to buy even more assets from Teddy Sagi, paying him over  €100m for B2B, B2C and property holdings. Given well-documented concerns about deals of this nature (Sagi is presumably in the Guinness Book of Records for the most related party deals with a single plc in history) it was no surprise to me to see the shares move lower today. I really have only myself to blame though, having previously whined about how the stock has repeatedly left me feeling “legged over” (!) but at the same time holding on to it in the hope that I could sell it higher up. There’s a lesson in that for investors everywhere.

 

In the construction space, it appears that the second largest builders merchant chain in Ireland may be carved up between Saint-Gobain and Grafton. Given that Saint-Gobain is quite a rational competitor for Grafton et al in the UK, I wouldn’t see any negative read-through for Grafton if Saint-Gobain were to materially step up its presence in this market.

 

Greencore bought a convenience food manufacturing business in the US, bolstering its presence in that market. They are paying $36.0m for the business, representing historic EV/Sales, EV/EBITDA and P/B multiples of 0.55x, 6.3x and 1.8x which to me look reasonable enough. Obviously the main focus for Greencore remains its UK operation, but for information on the conference call Greencore said that post the acquisition total USA sales will be pro-forma approximately £160m, which on a back-of-the-envelope calculation represents around 14% of group revenues. Greencore USA’s key clients include Ahold, Delhaize and 7-Eleven – while I don’t want to detract from those impressive customers, I note that these are not (obviously) clients of Greencore in the UK – I wonder if it could better improve its competitive position by emulating fellow Irish food stock Aryzta and ‘following the client’ – Aryzta has become a key supplier to McDonalds across at least two continents, for example. Building a relationship like that would reduce the risk for Greencore of having its margins crushed by its customers, given that it is in their customers’ interest to ensure that their suppliers are in good financial shape.

 

(Disclaimer: I am a shareholder in BP plc) Switching to macro news, regular readers of this blog will know that I’m unmoved by some of the more bullish commentary from certain quarters in this country about the Argentine economy, partly because of my first hand experience of having traveled through the country last year and having spoken to locals about the severe hardship many of them are experiencing, and partly because the Argentine government’s flair for doctoring statistics means that one should take any reports based on government produced data with a pinch of salt. Anyways, the latest development there is that the government has moved to nationalise YPF, a development which presumably serves to inform overseas investors that they would have to be out of their mind to put money into Argentina. Whatever about any short-term gains from YPF, how does driving away FDI help aid Argentina in the longer term? I am a little concerned about BP’s $7bn stake in Pan American Energy, especially given the war of words between Argentina and the UK over the Falkland Islands. Wexboy picks up the baton and beats Argentina’s crazed politicians with it here.

 

Finally, reports that the Irish Central Bank is to buy the half-built shell of what had been intended to be a future headquarters for Anglo Irish Bank are to be welcomed, given that it removes an eyesore on the quays that greets many of the 1.7m ferry passengers that use Dublin Port each year (not to mention those of us who live in that part of town!). Now, if NAMA could have similar results with the rest of its portfolio we’d be having some real progress!

Market Musings 12/4/2012

Both the brokers and the bloggers have provided most of the topics of interest to me in recent days, so let’s focus on them in this update.

 

(Disclaimer: I am a shareholder in Ryanair plc) Davy Stockbrokers downgraded LCC easyJet to ‘neutral’ yesterday on valuation grounds, saying that the stock is high enough. I wonder might this stance prompt some EZJ holders to switch into RYA, given the former’s recent outperformance?

 

Speaking of broker downgrades, NCB cut Kerry Group to ‘accumulate’ on valuation grounds yesterday. You can read their rationale for doing so in detail here - it’s similar to the one that prompted me to recently close out my position in Glanbia (at my €5.30/share valuation and forecasts for FY12 Glanbia would be on 9.3x EV/EBITDA, which to me is far from cheap in absolute terms). Staying with the food sector, Donegal Creameries issued what to me looked like solid enough 2011 numbers this morning. It’s not a stock I follow in detail, but I was interested in management’s comments about the rationalisation of Irish dairy processing capacity, which mirrors my previous scribblings on the issue and has clear implications for Kerry and Glanbia. Another thing that interested me was NCB’s morning note, which said that Donegal’s associate, Monaghan Mushrooms, is the world’s second biggest supplier of mushrooms!

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) I was pleased to see more capacity take-out in the European containerboard space this morning, with news of the imminent closure of two mills by Norway’s Peterson. As any student of economics knows, reducing supply in the industry will prove supportive of pricing in a segment where Smurfit Kappa Group has a circa one-third share of European kraftliner capacity. All other things being equal, a €10/tonne rise in kraftliner prices lifts Smurfit’s profits by circa €15m (which is pretty chunky considering consensus 2012 PBT is just under €290m)

 

(Disclaimer: I am a shareholder in Datalex plc) In the TMT sector, I was interested to read a post-results note by Goodbody analyst Colm Foley on Datalex plc. He’s opted for 2012 EBITDA and net cash of $6.1m and $15.5m respectively, which is comfortably ahead of my estimates of $5.3m and $13.0m. Of course, as a shareholder I’ve no objections if my estimates are proven to be too conservative! His PT is 70c (mine is 62c), which is well ahead the price at time of writing of 54c.

 

(Disclaimer: I am a shareholder in Tesco plc) In the blogosphere, Calum did up a detailed piece on Halfords that’s worth a look. He also noticed the latest quarterly letter from Kennox AM is out, which mentions a similar investment case for Tesco to the one that prompted me to recently put 6% of my portfolio into the stock. Elsewhere, Mark Carter did a cracking post asking: ‘How safe are blue chips?‘ which to me is an indictment both of index tracking funds and a lazy buy-and-hold strategy.

 

Here’s an interesting fact about how technological advancements are boosting efficiency - If a modern-day Macbook Air had the energy efficiency of 1991 computers, its battery charge would last 2.5 seconds.

Market Musings 4/4/2012

It’s been a busy couple of days in college, so I’ve been rather neglecting this blog. Let’s round up on what’s been happening.

 

(Disclaimer: I have an indirect shareholding in DCC plc) DCC demonstrated its commitment to good portfolio management once more through the sale of its enterprise distribution business for €48.1m. While the group has earned well-deserved plaudits over the years for its successful acquisition strategy, it has not been averse to selling assets from time-to-time to maximise returns on capital employed – the sale of its mobility and rehabilitation business for €37m around 18 months ago and the brilliantly timed exiting of its Irish housebuilding jv come immediately to mind in this regard. As an aside, we’ve seen some unusually cold weather in the British Isles in recent days, with snow in parts of Ireland and Scotland. Given that DCC is the leading home heating fuel provider in those areas, I assume the cold snap hasn’t done the business any harm.

 

(Disclaimer: I am a shareholder in Marston’s plc) I’ve been doing some more work on Marston’s, the UK pub group I hold in my portfolio, to help deepen my understanding of the business. I am indebted to one of the posters on ADVFN for making a report known to me, which shows the 50 top selling beers in the UK off trade. Marston’s ‘Hobgoblin’ is the 8th most popular brand in the Ale category, while Marston’s ‘Pedigree’ is #15 in the same category. While most of the top selling beers are owned by significant global concerns, I was interested to see that there are several independents represented in the top 50. I don’t see Marston’s going on the acquisition trail anytime soon, given the state of its balance sheet, but on paper some of those independents offer a similar profile of integrated beer producer and pub operator to that which Marston’s offers.  Who knows what the future could hold?

 

In the energy space, Kentz’s share price got thumped today (it’s down nearly 9% at the time of writing). The reason for this is a placing of stock by directors. Originally the firm guided that 12m shares – 10% or so of the shares in issue, would be sold, but in the event the size of the placing was increased due to strong institutional demand to 15m shares. The vendors have undertaken not to sell any more shares for another 6 months. I wonder if the indigestion from this sizable placing could lead to some near-term price weakness.  In the event that it does, I am very likely to call my broker (!) – as regular readers of this blog are aware, Kentz is a stock I sold out of at 403p/share last year and have regretted doing so ever since, and if the price gets down towards the level I sold it at again it will offer outstanding value given the clear progress made in the past 18 months.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) Merrion Capital issued its Q2 2012 preview earlier this week. It’s main stock picks for this quarter are: Sandisk, Nuance Communications, Pearson, Anglo American, Deere, Alstom, Anadarko, Unilever, Weir and ICG.

 

(Disclaimer: I am a shareholder in Ryanair plc) Speaking of transport stocks, I was interested to hear Irish Transport Minister Leo Varadkar lend his voice to calls for 25% State-owned Aer Lingus to pay a dividend. This follows similar calls from Aer Lingus’ 29% shareholder Ryanair, so with a majority of the share register leaning that way, might we see an announcement of a pay-out later in 2012?

 

Switching to macro news, we received Q1 Exchequer Returns data from the Irish Department of Finance yesterday evening. While a lot of the media headlines hailed the deficit closing to €4.3bn from €7.1bn in the first 3 months of 2011, as ever, the devil is in the detail. The deficit for Q1 2011 included a €3.06bn promissory note payment, while the deficit for this year includes a €250m loan to the insurance compensation fund. Also, the ELG contributed €283m of revenue to the Exchequer in Q1 of this year (Q12011: nil). So, adjusting for these factors, it looks to me like the troubling underlying fiscal position, despite all the talk of austerity, is little changed.

 

Regular readers of this website will guess correctly that I was unsurprised to see the EU, US and others complain about Argentina’s restrictive trade policies to the WTO.

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 27/03/2012

It’s good to have a wall of positive newsflow to report for a change – let’s see what’s been cheering me up on the markets since my last update.

 

(Disclaimer: I am a shareholder in Ryanair plc) In the transport sector, I was pleased to see a strong trading update from easyJet yesterday. The low cost carrier now sees a H1 loss of “between £110 million and £120 million compared with the previous expectation of a pre-tax loss of £140 million to £160 million”. There are two reasons for this improved guidance. Firstly, management sees yields rising 10%, versus the previous expectation of an “upper single digits” increase. This has been helped by a number of competitors having exited the market, a theme I have highlighted before. The second factor is that ex-fuel costs have risen by less than expected (+1.5% versus guidance of +3%), helped by benign weather and good cost management. In terms of the read-through for Ryanair, this is all very positive. Ryanair is similarly well placed to exploit the demise of a number of competitors (Spain, where Spanair ceased trading recently, is Ryanair’s biggest market, while the carrier brought forward the opening of a new base at Budapest to exploit Malev’s closure, for example). On the cost side, there is every reason to assume that Ryanair has benefited from the same positive weather effects. Following Ryanair’s strong Q3 results in January I noticed that a number of brokers had pitched their FY12 estimates above the carrier’s revised net income guidance of €480m. In my model I’ve pitched for net income of €492m. Easyjet’s update appears to vindicate that stance.

 

This Thursday will see the release of FY 2011 results from IBRC – the former Anglo Irish Bank. I will be attending its results presentation, and will be interested to see if management’s targets for the company have changed since its last update. You can read my views from the H1 2011 results presentation here. If you’ve any questions – within reason (!) – that you’d like me to put to management, please post them in the comments section below.

 

In the oil space, Tullow Oil saw its shares climb 6.6% yesterday following news of a chunky (>20m net pay) oil find in Kenya. After its amazing success in Ghana and Uganda, might lightning strike a third time for this emerging oil giant? Elsewhere in the oil sector, services group Kentz saw its shares rise nearly 7% yesterday on the back of strong results. I was impressed to see Kentz’s backlog increase by 50% in 2011 to US$2,401m, from the US$1,603m seen at the end of 2010. So, like many of its clients, it appears that Kentz has plenty of fuel in the tank.

 

In the agri sector, Continental Farmers Group reported its full-year results. Their broker, Davy, says CFG’s in-line results were “an excellent achievement“, given the slump in potato prices in Ukraine. While I am attracted to CFG due to the long-term fundamentals around farming, I would want to see a sustained improvement in its cash generation before I’d look to invest in the company.