Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘William Hill

Market Musings 22/4/2012

with 4 comments

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.

Written by Philip O'Sullivan

April 22, 2012 at 10:37 am

Market Musings 19/3/2012

leave a comment »

Now that I’ve returned from my travels, this is the first of what’s likely to be three catch-up blogs. In this one I’m going to review the main developments over the past week across the universe of stocks I follow, in the second one I’ll examine the key ‘Chinese takeaways’ from my trip and in the third I hope to catch up on what my peers in the Blogosophere and the media have been saying recently.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector, Trinity Mirror issued FY2011 results. Going into them I had forecast revenues of £731.0m, EBIT of £99.6m and net debt of £195.8m. In the event, these came in at £746.6m, £92.4m (the main variance here was that exceptional items were c. £5m worse than expected) and £200.7m respectively. One thing that did catch me offside was the pension deficit – this widened to £230m from £161m in FY2010. This is a very material move – the deterioration is the equivalent of 27 pence per share, which compares with Trinity Mirror’s current share price (at the time of writing) of 36.5p. Updating my DCF based valuation model produces an equity value of just 13p per share, which represents 63% downside from current levels. However, this valuation is extremely sensitive to movements in the pension deficit – a 10% move in the pension deficit moves the price target by 9p. I would also note: (i) the strong asset backing (freehold property had a book value of 72p/share in 2010); (ii) the further self-help moves the group could implement on the cost side; and (iii) the reasonably strong cash flows (operating cashflow was £76m last year), which give me confidence that the group can nuke its net debt over the coming 3-4 years. Overall, for me Trinity Mirror is downgraded to a hold.

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, Aryzta posted its H1 results. There wasn’t a whole lot in it for me, with management saying: “our EPS guidance of 338 cent for FY12 and 400+ cent for FY13 remains unchanged”. Elsewhere, Total Produce announced this morning that it is to be included in the ISEQ 20 indices, which may prompt some modest index buying.

 

(Disclaimer: I am a shareholder in Playtech plc) In the technology sector, there were reports that Playtech and William Hill are to open talks on their WHO joint venture shortly. From my perspective, the best option for both parties is for William Hill to buy Playtech out (given the difficult working relationship, William Hill’s online needs, Playtech’s balance sheet being significantly strengthened at a time when it’s looking to do deals etc.), a theme explored by IC here. Playtech also issued FY2011 results, which revealed a strong performance (revenues +46%, gross income +41%), while net cash was a healthy €137.3m. Management also signaled that the group has made a strong start to 2012, and that the company has made progress towards achieving a full listing. Playtech’s share price has surged in the past week, tipping 350p and bringing it closer to my breakeven level (~380p). I remain an ‘unhappy holder’ of Playtech but will be ‘less unhappy’ if I can get out of the position flat or slightly up.

 

In the energy space, Tullow’s FY2011 results contained few surprises, save for a big ramp up in the dividend (from 6p to 12p). That said, the implied yield is only ~1%, so hardly anything to get excited about.

 

In the recruitment sector, CPL Resources acquired a Swedish firm, ERHAB. While no details of the consideration paid were released, I would expect it to have been very modest – high six figure / low seven figure territory – given CPL’s past form and its understanding that when you buy a recruitment firm you buy a business whose assets walk out the door at 5pm every evening. Hence, this is likely to be about buying a small number of individuals and then investing in building a strong team around them to increase ERHAB’s share of the market. It’s a model that has worked well for CPL both at home (CPL is the largest recruitment firm in Ireland, and has successfully evolved from being a niche IT recruitment specialist – e.g. CPL = ‘Computer Placement Limited’ – into a diversified operator) and abroad (CPL generated 33% of its permanent fees outside of Ireland in FY2011).

 

Finally, Siteserv has agreed to be sold to a vehicle owned by businessman Mr. Denis O’Brien. Under the terms of the proposed deal, shareholders will receive approximately 3.92c / share. I find this a little surprising given that the scale of Siteserv’s debts might have been expected to result in no consideration going to equity holders. However, IBRC (the former Anglo Irish Bank) seems happy with this arrangement. Overall, it seems the ISEQ is going to lose yet another company.

Written by Philip O'Sullivan

March 19, 2012 at 11:48 am

Market Musings 22/1/2012

with 2 comments

Gambling, alcohol, weapons and fossil fuels all feature prominently in this blog, which tells me that ethical investment funds are probably not for me!

 

(Disclaimer: I am a shareholder in PetroNeft plc) In terms of the oil sector, I felt quite ill on Thursday as I watched PetroNeft’s share price implode on significant volumes. The damage was done by one of its larger shareholders, investment fund Bluegold, dumping its shareholding. I don’t believe that this trade is any specific reflection on PetroNeft as Bluegold has also in recent days sold down positions in Petroceltic, Deo Petroleum and Mediterranean Oil & Gas. I also note this Reuters report from late last year. Unfortunately, the problem for small-cap oilies in general is that there is a view doing the rounds that they are unable to tap funding in these challenging times, so there seems to be a paucity of buyers to step into the breach. However, I can’t help but wonder if small-cap E&P names will resemble coiled springs whose share prices are ready to explode higher until either (i) sentiment and/or the funding environment changes or (ii) large-cap oil stocks start bidding for them as a way of bolstering their reserves at relatively inexpensive prices. Time will tell if my hunch is correct.

 

Staying with the broader energy sector, Kentz, which I previously was a shareholder in, released a solid trading update. Management see sales and profits marginally ahead of consensus, while net cash at the end of 2011 was an impressive $223m. One that I still have on my watchlist.

 

(Disclaimer: I am a shareholder in Playtech plc) In the betting space William Hill issued a trading update which contained two things that caught my attention. Firstly, the company said that it is to write down its telephone betting business’ book value (£47m) to zero. Internet displacement strikes again! This leads me on to the second thing that I was interested to learn – in 2011 net revenue in its online unit, which Playtech is a minority shareholder in, grew at over 20% for the second year running. While this was broadly in line with what the brokers I follow were expecting, it is nonetheless reassuring. However, my stance remains that I will look to exit Playtech at a suitable opportunity.

 

Moving from the bookies to the pub, Richard Beddard did up a good post on Greene King. Regular readers will know that I recently bought shares in one of its competitors, Marston’s. I quite like MARS, well, obviously – I wouldn’t have bought shares in it otherwise! – but I note that Richard also did up a relatively cautious piece on it two years ago which serves as a useful Devil’s Advocate view for when I get around to doing a proper write-up on why I pulled the trigger on it. For now, here is a summary on why I bought Marston’s.

 

(Disclaimer: I am a shareholder in Irish Life & Permanent plc) The Troika gave Ireland another pat on the back during the week. This has been extensively covered elsewhere, so I don’t propose to go through it in detail here. What did catch my attention from an equity investor’s perspective was the Department of Finance’s comments about Irish Life & Permanent in its press release following the visit. The government will make a decision on IL&P’s “future direction” by the end of April, which tells me that a relaunch of the previously aborted sale process around Irish Life will likely go ahead in the near future, possibly as early as when contracts are agreed with AIB to finalise Irish Life as the latter’s new insurance jv partner. The recap of Irish Life & Permanent is due to be completed by the end of June, so whether the money comes from private sources (through a sale of Irish Life) or the State will be known by then. We’ll also know for once and for all if PTSB has a future as a standalone entity. I’ve a piece covering all of these issues in more detail here.

 

HMV, which I’ve written extensively about before, announced a debt deal and improved supplier terms. While the announcement was greeted with euphoria, I don’t see it changing my view (terminal) on the outlook for its business model.

 

As noted before, my old friend Wexboy has launched an ambitious, and very worthy, undertaking – The Great Irish Share Valuation Project. While I prefer to plod through the Irish and UK markets (with the occasional overseas name thrown in) on a case study-by-case study basis, I like his use of an excel file to plot his recommendations. Here’s a downloadable summary of my views on the stocks I’ve covered in detail on this blog.

 

There has been a lot of media coverage of the upcoming referendum on independence for Scotland. The debate seems to be heavily based around economic matters, which is no surprise given the large transfers Scotland receives from England. I note a report in last weekend’s Financial Times which said that including its geographical share of oil revenues Scotland would have run a 10.6% fiscal deficit in 2010. It’s worth noting that Greece’s deficit in the same year was -10.5%. For years Alex Salmond said Ireland was a key part of his economic model for an independent Scotland. Looking at Scotland’s fiscal position he may get his wish.

 

This is an interesting statistic – US online advertising spending will surpass print ad spending for the first time in 2012.

 

Did you hear about the $300bn of 1934 US gov bonds that were “found” in a crashed plane in a Philippines jungle?

 

Speaking of finds, did you hear about the cannon with a range of 14.5km that was discovered in Northern Ireland?

Market Musings 24/11/11

with 2 comments

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Written by Philip O'Sullivan

November 24, 2011 at 10:18 am

Market Musings 4/11/11

with 2 comments

It has been an extraordinary 48 hours since my last update. Greece’s government flip-flopped on the referendum issue which has given some relief to markets, at the expense of underlining again just how incompetent the Eurozone’s political leadership is. We’ve seen a huge amount of corporate newsflow and further updates on the Irish government’s fiscal strategy.

 

UK retailers have attracted my attention quite a bit since the start of the year. Regular readers will know how bearish I am on the sector, so while this isn’t an area I’d look to invest in, Lewis at Expecting Value did a good piece on some of the listed REITs that are one way to get exposure to the UK consumer. Elsewhere, Bloomberg published an interesting article about how more companies are hiring lease-breaking specialists, which bodes ill for the UK REIT sector in general.

 

(Disclaimer: I am a shareholder in RBS plc) Speaking of the UK, RBS released results this morning that were behind expectations, but despite this analysts seem to be taking a glass half-full approach to the stock. I’ve a legacy position in RBS that is horribly underwater, and I have to admit that I have been toying with the idea of doubling/trebling/quadrupling (!) up on my holding in an effort to claw back losses. However, my fears about RBS’ potential losses on European sovereign debt have made me hesitant up to now. It might be one to play once the Euro-madness abates. I’ll wait and see.

 

Closer to home, the Irish government published its Exchequer Returns data for the first 10 months of the year. The deficit came in at €22.2bn (roughly 15% of GDP) versus €14.4bn in the same period last year. Total Irish government voted spending was only -0.5% in the first 10 months of 2011 versus the same period in 2010. So much for “austerity”. Even more ominously, Ireland’s Exchequer deficit for the first 10 months of 2011 is equal to 83% of the entire tax take during that period. Leading on from this, the Irish government is raising its fiscal consolidation target to €3.8bn from the previous €3.6bn. This should come as no surprise to my readers, given that I sketched the reasons why this was certain to happen here.

 

The airline sector has thrown up a lot of interesting pointers in the past few days. Aer Lingus says it expects to report full year 2011 operating profit “at the upper end of the range of current market expectations“, which continues the more positive narrative I’ve remarked on before. Elsewhere, IAG (British Airways + Iberia) has announced that it is to buy BMI. This raises an interesting question as IAG currently has 44% of Heathrow slots while BMI has 8.5%. Should competition authorities compel IAG/BMI to shed some of these, I wonder if Aer Lingus would consider putting some of its vast cash pile to work and buy some slot pairs? As things stand Aer Lingus has the 4th highest number of slots (roughly 4%) at Heathrow, behind IAG, BMI and Virgin Atlantic.

 

In the betting space, Boylesports has bought William Hill’s retail estate in Ireland. While this is only a small number of shops, it is likely to be an incremental positive for Paddy Power, as the fewer people there are making odds, the less competition. I’d an interesting discussion about this on Twitter with a number of my “followers”, and it was interesting to have the Boylesports PR person join the debate, which goes to show that they are very clued in to social media, so well done to Nicola McGeady for her attentiveness!

 

The ECB’s 25bps rate cut is a small positive for Ireland. I’ve previously done up some back of the envelope calculations on how positive this is, if any of my readers have better data please send it on.

 

(Disclaimer: I am a shareholder in Datong plc). One of the smallest positions in my investment fund is Leeds based spy gadget maker Datong plc. When I first invested in them I did rather take it for granted that the equipment they produce would be used against ‘Johnny Taleban’ et al. However, I was intrigued to read that London’s Metropolitan Police uses some of its kit to, ahem, “eavesdrop” on people in the UK. Not that this story has done Datong any harm, given that its share price has shot up following this news. No such thing as bad publicity I guess!

Follow

Get every new post delivered to your Inbox.

Join 1,459 other followers

%d bloggers like this: