Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 24/8/11

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In my last blog I wrote about how this was going to be a busy week for corporate newsflow, so it’s no surprise that I focus mainly on this today, however, I also have some interesting (to me anyway!) nuggets on State transport policy, QE3 and gold to share with you.

 

(Disclaimer: I’m a shareholder in Glanbia plc) I was delighted to see Glanbia report “excellent” results earlier today. So was the market, with the shares up over 5% at one stage. The company has raised its full-year guidance to 18-20% growth (constant FX) in adjusted EPS from the previous 11-13%. Regular readers will know that it’s one I have been positive on for a while. The conference call threw up some interesting pieces of information. Six of the top ten sports nutrition supplements listed on the leading US website are made by the group, while  in the premix ingredients space Glanbia is no. 3 globally after DSM and US private company Fortitech. Both of those achievements are a vindication of the strategy the group has embarked upon for some years now to diversify away from its commodity business roots. In terms of M&A activity, Glanbia says that it is looking to buy ingredients companies in Asia and customer facing nutritional companies in the US and Europe. All of which sounds good to me!

 

We also got results from FBD this morning which reveal a solid operating performance and news of a JV with Farmers Business Developments for its hotels and leisure business. This JV is a positive development, which will take investor attention away from the non-operating business and allow it to focus more on its excellent insurance unit.

 

The third Irish company to report today was Tullow Oil. The market reaction was positive, but I do note the downward revisions to production (90 – 94 kbopd to 82 – 84 kbopd). Obviously the main value in Tullow is in its exploration and future production upside, but I would prefer to see production picking up to help with the funding of its ambitious plans to develop its new resources.

 

(Disclaimer: I’m a shareholder in Uniq plc) Greencore announced a 91% take-up by shareholders of its rights issue to fund the takeover of Uniq. This is a positive development for the company, and the high take-up was particularly welcome given the recent market turmoil. The challenge now for Greencore’s management team is to integrate the businesses, take costs out and do all it can to prevent the multiples from squeezing margins lower. All of which is easier said than done! This is a stock I have traded successfully in the past and one that remains on the watchlist. I’ll wait and see how the integration and cost take-out goes over the next while.

 

(Disclaimer: I’m a shareholder in Ryanair plc). Ryanair announced the ending of its flights from Dublin to both Kerry and Cork yesterday, which the Irish Examiner’s Niamh Hennessy has a good overview of here. This prompted a lot of debate on various social media websites, and I offer these perspectives to people wondering about the decision:

 

  1. Ryanair has been redeploying aircraft across its network to more profitable routes for years. While there was talk that Cork-Dublin was a “very profitable” route for the carrier, I don’t buy that given the competitive prices (relative to rail etc.) Ryanair charged. Also, on the cost side, Ireland’s main airports are among the most expensive in Europe in terms of landing charges.
  2. Landing charges, a small population and/or a weak domestic economy mean that most of Ireland’s airports hold little attraction for carriers outside of the two domestic airlines, Aer Lingus and Ryanair (I count Aer Arann within AERL, given the importance to it of its relationship with its bigger peer). You can see what I mean by looking at how few carriers outside of AERL and RYA operate year-round scheduled services at Cork, Kerry, Shannon and Ireland West-Knock, which are the main airports outside of Dublin.
  3. Investment in road and rail infrastructure during the Tiger years meant that the Cork-Dublin route did not save a whole lot of time relative to other modes of transport, which limited pricing power on the route.
  4. Some people felt that Kerry Airport should have been an attractive market for Ryanair. This doesn’t stand up to scrutiny, considering that (i) The airport only attracted 424k passengers in the 14 months to the end of 2010; and (ii) If flights from Kerry to Ireland’s major population centre require a taxpayer funded PSO subsidy, there just isn’t the demand for the route.
  5. If Ireland didn’t have so many airports, economies of scale could allow for reduced landing charges at the ones kept open, which would stimulate more interest from carriers. It makes no sense that 4 of the 6 counties in Munster (population 1.2m) have airports. Similarly, it makes no sense that every single county on the west coast of Ireland (save for Leitrim, which only has a 2.5km long coastline) has an airport. Basic economics suggests that airports in the south and west of Ireland will be consolidating over the medium term.
  6. Before I am accused of being a Jackeen with no understanding of the needs of rural Ireland, I should mention that I’m a Cork-born Munster Rugby fanatic.

 

Moneyweek has a beginners guide to investing in gold, which some of you might find of use. Staying with precious metals, here’s two interesting charts – Dow to silver and Dow to gold ratio charts.

 

Fisher Investments provide some useful insights into QE3 here which it posted ahead of the start of the Fed’s Jackson Hole meeting.

 

Finally, a lesson for Ireland. One of our biggest listed companies, Smurfit Kappa Group, has seen Moody’s upgrade its outlook on its debt to “positive” since my last blog. Progress in terms of addressing its debt position was the main driver behind this improved stance, and there’s a lesson there for Irish policymakers, not least given that the State is rated as “junk”. We could solve a lot our financing woes at a stroke by living within our means, rather than continuing to bequeath an obscene national debt mountain onto future generations.

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Written by Philip O'Sullivan

August 24, 2011 at 11:11 am

6 Responses

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  1. […] there were a couple of “postscripts” to my piece yesterday about why Ryanair ended its Irish domestic routes. The Transport Minister, Dr. Leo Varadkar, announced that he would pay two airlines €7.6m a year […]

  2. […] would go bust if split into separate companies. Regular readers of this blog will know that I see consolidation of Ireland’s airports as inevitable – communities need to start preparing for this to happen […]

  3. […] (Disclaimer: I am a shareholder in Glanbia plc) Turning to corporate newsflow, I was interested to read an interview with Glanbia CEO John Moloney in which he guided that the group could spend up to €200m next year on strengthening its nutritionals division. I think Glanbia has done a super job on this unit, which it has taken from a US focused business at the time of acquisition into an internationally diversified operation – just by way of an anecdote I saw an entire wall of a healthfood store in a shopping mall in Dubai taken up with Glanbia’s Optimum Nutrition product range on my honeymoon earlier this year. On a more quantitative measure, Glanbia’s 2010 annual report reveals that the percentage of group revenues coming from outside of its core markets of Ireland, the US and UK rose from 16% in 2009 to 18.5% in 2010. You can read a little more about Glanbia’s nutritionals business here. […]

  4. […] per share for the full year, on a constant currency basis”, which is at the high end of the previously guided 18-20% range. Within the statement management note weaker dairy prices, a theme I flagged last […]

  5. […] previously written about Ireland’s glut of airports. Hence, I am not surprised to read that Galway Airport may […]

  6. […] bias here!) reputation for parsimony cut administration costs by an admirable 35% in response.  Some months ago I wrote of the need for airports in the south and west of Ireland to consolidate, and even after the government’s decision to cease funding for Galway and Sligo Airports I […]


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