Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 1/6/11

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A couple of things have caught my eye since my last update.

Reports of a merger between Valeo and Jacob Fruitfield to create a €300m food group are encouraging. A deal would create a firm with strong synergies and good portfolio of brands. From an Irish plc perspective, it also serves as a further vindication of the strategy of Origin Enterprises, which has repositioned its operations significantly since its demerger from IAWS and flotation on the ISEQ in 2007. It has made its Agronomy (soil management & crop production) and Agri-Inputs (fertiliser & animal feed) units its main focus, while it has successfully sought joint venture partners for its Marine Proteins & Oils unit (50-50 partnership with Austevoll which created the biggest business in Europe in this space) and Food businesses (45% stake in Valeo, its partnership vehicle with Bachelors), that have delivered benefits in terms of higher scale and synergies.  These changes, which have occurred in just 4 years, have reaped dividends. A recent note from Goodbody’s Liam Igoe (“Local Agriculture to Global Agronomy”, published on May 27) highlights that the group delivered EPS growth of 16% per annum between FY07 and FY10. Looking ahead to the future, the structural drivers of the agronomy business (as the world’s population grows, agriculture will have to become more efficient) coupled with an excellent management team led by CEO Tom O’Mahony and CFO Brendan Fitzgerald should deliver further strong earnings growth.

We’ve seen a lot of volatile trading in the Irish financials of late, which is no surprise given that they essentially trade as options. Yesterday saw a staggering 319m shares in Bank of Ireland traded, which has to be an all-time record (outside of IPOs/Follow-On Offerings) for shares traded in a single day in any ISEQ stock. I would caution about reading too much into percentage moves in the Irish financials’ share prices, given that AIB, BKIR and IL&P’s share prices are so low that even a 1c move in the price is material in percentage terms. I understand that a significant amount of the interest in them is coming from retail investors, some of whom are even using CFDs again. Given the violent way that the Irish financials are trading, buying something that resembles an option on margin is a very high risk trading strategy.

This morning’s press brought the news that Tilman Asset Management has been sold to Brewin Dolphin for €36m. There were rumours doing the rounds about this for a while, and I suspect that they will not be the only wealth manager sold in Dublin in 2011. Credit is due to Ray Tilson and his colleagues, including Matt Minch, Rob Tilson and Conor Grimley, for building up a great business.

Omid Malekan did a great video a little while ago – Bank Bailouts Explained – which is worth a look. Perhaps a more tech savvy person than I would like to do an Irish version of this?

On a final note, one thing which does concern me is the degree of populism that’s doing the rounds, both in the media and the wider public discourse, about the situation we find ourselves in. Several people, having seen the building recently used as a backdrop to President Obama’s address to the people of Ireland, have called on the government to “seize” Bank of Ireland’s premises on College Green (the former Irish Houses of Parliament). While nobody could deny that it would make a nice public building, I would caution against any drive to expropriate private assets. Ireland has a reputation for being a safe place to do business, and running around seizing assets isn’t going to help sustain that image. Furthermore, Bank of Ireland remains in talks to try to source private capital to meet its recapitalisation targets, and I don’t imagine that discussions with the private sector (who could reduce the bailout bill for the Irish taxpayer) will go far if there’s a perception that the State is looting the bank. It’s a similar story when it comes to taxing income. We’re bombarded with calls for the rich (whatever that means) to pay their “fair share”. Yet did you know that less than 2% of the population pay a third of all income tax in Ireland? Sadly though, I don’t see any short-term end to all this populist rhetoric.

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Written by Philip O'Sullivan

June 1, 2011 at 1:59 pm

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