Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 6/9/11

with 3 comments

What an eventful 24 hours. We’ve seen the Swiss roll over, some outstanding research notes, M&A speculation, corporate results and a lionhearted performance by the Irish soccer team!

 

Obviously, the main news today is that the Swiss National Bank has taken aggressive action to pare the franc’s ascent. The Swissie had benefited from huge inflows from risk averse investors looking to park money in one of the world’s few remaining political and economic safe havens, but this was at the expense of making its exports uncompetitive. Hence, today’s statement came as no surprise (the Swiss had been sabre-rattling in recent weeks).

 

There is an important lesson from this for investors here. Irish investors have been buying non-eurozone bonds in Switzerland, Norway, Canada and Australia to diversify their assets and/or (let’s be honest) keep surplus funds out of the banks, but not all of these investors have been doing so without being fully appraised of all of the risks. With my usual flawless sense of market timing (!), I dealt with this theme in an article in the current issue of Business & Finance, which you can read here. Note carefully the advice given about currency risk by NCB’s Aengus Wilson, who is one of the most astute private wealth advisers in Dublin.

 

There have been some excellent research notes doing the rounds over the past day or so. Tullett Prebon published a very damning report on the UK economy – ‘Thinking the unthinkable – might there be no way out for Britain?’ It warns:

 

Britain’s debts are unsupportable without sustained economic growth…the economy, as currently configured, is aligned against growth

 

Another great note is from UBS. In a report titled ‘Euro break-up – The consequences”, they examine the financial costs for countries exiting the union. Their view is:

 

“Our base case with an overwhelming probability is that the Euro moves slowly (and painfully) towards some kind of fiscal integration. The risk case, of break up, is considerably more costly and close to zero probability”

 

UBS also mentions the following:

 

“It is also worth observing that almost no modern fiat currency monetary unions have broken up without some form of authoritarian or military government, or civil war”

 

Nice.

 

So what else has been going on?

 

(Disclaimer: I am a shareholder in Total Produce plc) We had solid results from Total Produce earlier today. Management reiterated FY earnings guidance of 6.5-7.5c per share. The company has made  €14m worth of “bolt-on” acquisitions since the end of H1, and also says that further share buybacks (it bought back 22m shares last November, or about 6.25% of the shares in issue at that time) remain an option. I really like Total Produce. It’s cheap (taking the midpoint of its guidance it’s on less than 5.5x earnings), it has got a strong balance sheet (net debt/EBITDA was 0.8x at end-2010), it has a stable business model (it is the biggest distributor of fruit and vegetables in Europe, with a reach that enables it to supply multiples across different countries), it has a decent dividend yield (circa 4.5%) and it is spitting out cash (free cash flow for the twelve months ended 30 June 2011 amounted to €29.0m – that’s nearly a quarter of the group’s market cap).

 

Remember the short-selling ban on European financials?

 

Reports suggest that CRH may be about to buy a 75% stake in a cement business owned by a Russian oligarch. While we’ll have to wait and see if this comes to anything, it would dovetail with CRH’s growing presence in emerging markets. In addition, it would also help reduce (albeit modestly) its reliance on the fragile Western economies that account for the overwhelming majority of its business. As Goodbody point out, CRH has more than enough firepower for a deal of the scale mentioned in the report.

 

This evening Ireland’s Finance Minister, Michael Noonan, indicated that GDP forecasts will be cut. Some people on social media sites took this as a sign that he’s softening the public up for a stuffing in this year’s budget, but this is a very shallow analysis that takes no account of the clear deterioration in the economic position of most of Ireland’s biggest trading partners in recent months.

 

Finally, on a happier note the Irish football team somehow managed to secure a nil-all draw in Russia despite ferocious pressure from the home team. This leaves us on track for a play-off position for the Euro 2012 championships. Richard Dunne and Shay Given were absolutely magnificent in helping to save the team’s bacon (not for the first time), and I think Richard in particular will be pleased by this tweet from Paul McGrath:

 

“Richard Dunne congratulations The Best performance I have seen from any Irish centre half and that includes myself”

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3 Responses

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  1. […] yesterday due to a deterioration in the economies of our major trading partners. This mirrors something I wrote earlier this […]

  2. […] view that a collapse of the single currency will be avoided. This would cause complete chaos (some have even suggested civil war), and I think policymakers will deploy all necessary means to contain the problem. However, […]

  3. […] at valuestockinquisition did a great Total Produce post recently, as did Philip O’Sullivan with a post on his blog – Philip’s a shareholder like me, and I think John is contemplating buying, so we […]


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