Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 9/7/11

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Despite this supposedly being a “seasonally quiet time of year”, there has been plenty of interesting corporate and macro newsflow since I last shared my thoughts with you on Thursday.


The banking sector in Ireland has caught my attention in recent times. While reading the new edition of Business & Finance magazine (in which I have articles on global markets and what Irish shares are worth buying these days) I was struck by how much advertising there was in it from overseas banks lending into the Irish market. Specifically, HSBC, KBC and Rabobank have all been stepping up their marketing in this country, which hopefully signals a genuine increased willingness to lend here from them. Given that most domestic “financial institutions” now resemble zombies from a Hammer horror film, the market opportunity for the foreign players is obvious. (Disclaimer: I’m a shareholder in Bank of Ireland plc) We also got the details on the Bank of Ireland rights issue, which aims to raise €1.9bn for the group. I was surprised that the rights price is 10c, which is only a 17% discount to Friday’s closing price. It will be interesting to see how many shareholders (by one estimate circa 60% of BKIR’s register is made up of retail investors) follow their money. The NPRF’s decision not to take up its option to buy a 15% stake in BKIR did not come as a surprise to me as it allows BKIR to dangle the “carrot” to investors that if they all take up their rights then the State shareholding will be capped at 29.2%. If none of them take up their rights then the State will be left with 69.7%.


Builders’ merchanting group Grafton issued a trading statement on Friday, which saw the shares get hockeyed, dropping 8.7% on the day. While I like the company and its business model, I think that Friday’s market reaction was warranted – it reported a big contrast between its performance in the UK (lfl sterling sales +4.7% in H1) versus Ireland (H1 sales -6%) – and the outlook for companies facing the UK consumer is deteriorating as we move into H2. And we all know about the outlook for consumer spending in Ireland!


We also got a trading update from CPL, which is Ireland’s biggest recruitment company. It says that profits for its financial year just ended will be “broadly in line with market expectations”, while the outlook statement was particularly encouraging given management’s long track record of caution when it comes to providing forecasts: “We are experiencing some signs of improvement across our various businesses, and our operations overseas are performing well.  We expect a further gradual improvement in market conditions in the coming months”. Good news for Irish job-seekers!


(Disclaimer: I’m a shareholder in Trinity Mirror plc) In my last blog I wrote about the mixed emotions I was feeling over my Trinity Mirror investment. Its share price has soared 18.3% this week on the back of the demise (of sorts – given that The Sun will likely now be printed on Sundays) of The News of the World. While the gains come on the back of low-life behaviour by certain individuals, I see plenty of happier reasons to believe that this stock has significant upside potential. For starters, its share price (50p) is about 30% below the 72p/share value of the group’s freehold property. It is also trading on a forward PE of circa 2x. Sure, the newspaper industry is in long-term structural decline, so a single-digit multiple is warranted, but with a decent enough balance sheet (the mean net debt/EBITDA forecast for the current financial year is only 1.6x) and chunky enough profits (both of which provide Trinity Mirror with staying power while many of its competitors go bust, which helps to at least partly offset the impact of the newspaper advertising market’s long-term structural contraction) coupled with advertising that looks to be near a cyclical low I think  that the group deserves to be trading at a price that is 2-3x higher than where it currently is.


I have previously written a lot about why I am bearish on China. Despite having held this conviction for some months, I am still amazed by some of the things I see about the construction bubble there. The excellent Tim du Toit at Eurosharelab posted some interesting charts from SocGen about the magnitude of infrastructure  spending in China, while this article from the New York Times that Derek Madden kindly brought to my attention featured this eye-popping passage:


“As municipal projects play out across China, spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s gross domestic product. It is a ratio that no other large nation has approached in modern times.

Even Japan, at the peak of its building boom in the 1980s, reached only about 35 percent, and the figure has hovered around 20 percent for decades in the United States”


Written by Philip O'Sullivan

July 9, 2011 at 6:37 pm

2 Responses

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  1. […] pension deficit under control, I think the market should be starting to look at earnings multiples. As I’ve argued before, a mid single digit PE multiple (on what are depressed earnings, given the state of the advertising […]

  2. […] John McElligott has a characteristically excellent analysis of Grafton Group here. I concur with his view that, while it’s an excellent company, it’s too early to buy it. […]

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