Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 16/8/11

with 4 comments

The main developments since my last blog have been vocal political opposition to the euro bonds I expressed doubts about yesterday, further weak economic readings from core Europe and from a corporate perspective, H1 2011 results from Ireland’s largest quoted company, CRH.

 

In Germany, the Deputy floor leader of the CDU said that euro bonds are “not right for now“, while reports have emerged that the CDU’s coalition partners, the more economically liberal-minded Free Democrats have threatened to walk if Germany supports their introduction. I welcome these developments, which hopefully will once more force governments to take tough decisions to get their own fiscal houses in order and reduce the massive debts they are bequeathing to future generations.

 

Staying with Germany, the country revealed weak Q2 GDP data earlier today, with growth of just 0.1% qoq well below consensus of +0.5% qoq.  This follows on from the similarly weak and below-consensus GDP reading from France a couple of days ago. The three things that immediately come to mind are as follows: (i) This further reduces the likelihood of further ECB rate hikes, which is good news for Irish households; (ii) Expect to see GDP downgrades for the Euro-area on the back of this; and (iii) As sell-side analysts often take their lead from economists’ forecasts, expect to see downward revisions to corporate earnings in due course.

 

(Disclaimer: I’m a shareholder in CRH plc) The ISEQ’s largest constituent, CRH, reported H1 results earlier this morning. EBITDA of €574m was slightly behind consensus of c.€580m. On the outlook, CRH says that it is focused on input cost recovery and maintaining “operational and commercial excellence” against a tough macroeconomic background. I was pleased to see a continued step up in year-to-date acquisition and development spend, which rose to €380m, up from the “approximately €0.3 billion” it reported on July 6. At the time of writing the shares are up 2%, which is probably a fair response given that the results contained few surprises. Presumably management will be embarking on a roadshow in both Europe and North America over the coming weeks which will give them an opportunity to sell the story to a few more investors, so it will be interesting to see how the price evolves over the near term.

 

(Disclaimer: I’m a shareholder in Trinity Mirror plc). There was an interesting article on the Proactive Investors website yesterday about Trinity Mirror. In notes issued after its H1 results, JP Morgan valued the company at 85p/share, while Citi reckon it’s worth 35p/share. Obviously, my views are skewed by the fact that I’m a shareholder in the company (!), but I can’t see how Citi can get to that valuation. At 35p a share, using Citi’s own numbers, this puts the group on less than 2x 2012 PE. While I note Citi’s comments about the pension deficit (yes, the reported deficit is £100m, but net of deferred tax this falls to £74m, or circa 29p a share), this works out at about 18 months profits, which is a relatively healthy position compared to many other plcs. Looking at the group’s other liabilities, in terms of Trinity Mirror’s net debt, at the H1 stage this was £262.2m, which is only 2.0x consensus EBITDA for 2011. Market consensus is pointing to net debt falling another £100m or so between now and the end of 2013. So, I wouldn’t use its liabilities as a stick to beat the group with. In any event, on the asset side, Trinity Mirror had freehold property valued at 72p a share as at 3 January 2010 (the latest annual report has yet to be published), which gives me more comfort on the valuation of the group. So, with the group continuing to deleverage and the 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 market) would get you to at least £1 a share, versus the current share price of 43.5p. As ever, be sure to do your own research!

 

Elsewhere, did you know that Argentina fines economists who publish unfavourable inflation estimates? Certain default advocates in Ireland are fond of quoting Argentinian economic data to “vindicate” their stance, so it is probably instructive to bear the question marks about the accuracy of these statistics in mind the next time you read about how “well” our South American friends have done since their default.

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Written by Philip O'Sullivan

August 16, 2011 at 9:45 am

4 Responses

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  1. […] Philip O'Sullivan piqued my interest in the publishing groups with his paragraph on Trinity Mirror. Put like that, it certainly does seem tempting! I've grouped Johnston and Trinity Mirror together as they're ostensibly similar stocks on similar metrics, and for a summary it's probably fair. They're in a dying industry – we all know that much – but is it dying enough to justify a valuation of less than 2 times both forward and historic earnings? Well, several factors cloud the picture. Both groups have some kind of debt or fixed obligations. The problem isn't as big in Trinity Mirror's case, but Johnston Press list ~£780m of liabilities against ~£250m of tangible assets. Debt normally isn't as big a problem in growing businesses – it is, after all, what helps them increase their revenue/profits; which in turn reduces the burden of the debt. In declining industries, though, the opposite happens – and I'm left with a timeline (perhaps 10 years?) with which this debt must be paid off out of reducing revenue streams. I have to forecast £530m (liabilities – tangible assets) of profits before an equity holder can see a penny. […]

  2. […] a great feature on “Cheap stocks in a turbulent market“, that includes Trinity Mirror, which I’m a bullish shareholder of. The excellent John McElligott has a good contrarian piece on the UK banking sector which is well […]

  3. […] a great piece on regional newspaper group Johnston Press yesterday. Regular readers of this blog will know that my current preference in the UK media sector is Trinity Mirror. Comparing the two, I prefer […]

  4. […] over aggressive”. I’m hoping he’s right, but then, regular readers of this blog will be fully aware of my positive bias towards the stock. The last UK stock, albeit one with material Irish operations, I’ll refer to today is […]


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