Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 15/7/11

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It’s been an extremely busy few days, both in terms of the financial markets and also in terms of preparations for my honeymoon – at this stage, however, the jungles of Borneo look safer than most risk assets! So what has been catching my attention?


Goldbugs have been amazed, and rightly so, by this exchange between Congressman Ron Paul, who has spent his career fighting for sound money and economic discipline, and Ben Bernanke, who has not. While the entire video is worth watching (let’s be honest, I think anything involving Dr. Paul is worth watching!), the part starting at 4.25 to the end is truly astonishing.



Fitch downgraded Greece by 3 notches to CCC. Just as we had here earlier this week, there was a chorus of discontent from local politicians, central bankers and the European Commission, but who could blame Fitch for this move? According to its own definition, CCC means:  “currently vulnerable and dependent on favorable economic conditions to meet its commitments“. That said, I don’t think that Fitch’s new rating quite covers the mess Greece is in.


I raised an eyebrow when I spotted the normally very good James Mackintosh express surprise that Ireland’s ISEQ index was in positive territory the day after the sovereign was downgraded to junk status. Firstly, movements in the ISEQ are meaningless, as 30% of its market cap is comprised of only 2 stocks – CRH and Ryanair. Secondly, the majority of the profits generated by companies listed on the ISEQ come from outside of Ireland. Indeed, on my numbers not 1 of the 10 biggest ISEQ names (which at the time of writing are: Tullow, CRH, Kerry, Ryanair, Dragon, Aryzta, Smurfit Kappa, DCC, Paddy Power and Glanbia) have Ireland as their main profit centre!


(Disclaimer: I’m a shareholder in Abbey plc) Staying with Irish plcs, yesterday brought the release of housebuilder Abbey’s results. While there were a number of variances with what the brokers were forecasting on the revenue line and so on, its adjusted EPS of 41.4c was 3% ahead of consensus (Davy 42.0c, Goodbody 38.0c). Abbey’s net cash was €77.4m at end-FY11, or €3.37/share, an impressive out-turn after it spent €21.4m buying land and €8.5m on share buybacks.  So its net cash is 67% of its current market capitalisation, which implies that the market is valuing the rest of the group at €37.5m. Considering that the group is well run, debt free and carrying inventory (plots of land, part/wholly finished houses, materials) with a (audited in April of this year) book value of €83m (and obvious upside potential once the landbank is developed) and fixed assets of €22m, this looks too low even after taking the trade creditors of €30.8m into account. I think Abbey is cheap here.


And in other corporate Ireland news, DCC  moderated its FY earnings guidance (in constant currency terms) from “broadly in line with the prior year” to “broadly in line with to modestly behind the prior year” in an interim management statement issued earlier today. I wouldn’t lose sleep over this downward revision – Q1 (the period covered in the IMS) is a seasonally quiet time of the year (representing 15% of full-year profits) and a particularly cold winter (DCC’s guidance assumes a “normal winter”) would see earnings estimates revised sharply upwards. In any event, DCC is trading on less than 10x earnings, which is an inexpensive rating for a company of its quality, track record, impressive returns and balance sheet strength.


Kerry Group announced this afternoon that it has made an approach to Cargill Group for its flavors business.  Stockbrokers NCB tell me that they estimate that the unit has revenues of “around $200m”, so slapping an EV/Sales multiple of circa 1.5x on that would get you a €200-250m valuation, which is within Kerry’s existing facilities. NCB’s Darren Greenfield tells me that this would only take Kerry’s net debt/EBITDA to “around 2x” so there’s plenty more scope for it to make further acquisitions.


Some positive news for Ireland Inc – four private equity groups are leading the battle for Anglo Irish Bank’s US loanbook. This level of interest bodes well for the sale price.


The troika was in Dublin this week, to tell us that we’re meeting all of the targets set as part of the EU-IMF arrangement (I loathe the term “bailout”). That’s all fine and dandy, however, the markets are clearly saying that Ireland needs to start exceeding them.


Speaking of credibility, the EBA released the latest round of European banks’ stress tests this evening. Supposedly they only have a combined capital shortfall of €2.5bn, which incidentally is less than what Ireland had to put into Irish Nationwide Building Society alone. I have every expectation that this stress test will prove to be every bit as credible as its predecessors, with my suspicions only partially heightened by this excellent analysis by Tracy Alloway in the FT.


Written by Philip O'Sullivan

July 15, 2011 at 6:12 pm

One Response

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  1. […] week I wrote about how the overall ISEQ level is irrelevant. In recent days Greencore has said that it will move its main listing to the FTSE, while DCC is […]

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