Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 13/9/11

with 9 comments

Since my last update, my attention has mainly been caught by some really excellent original research from some of the other bloggers covering UK and Irish equities, M&A activity and further signs of the ongoing stress around peripheral Europe.


One story I missed over the weekend with all the travelling was this report that Origin Enterprises has been on the receiving end of an approach from a private equity player. The suggested price, £400m, looks implausibly low given that this places the group on a PE ratio of only about 8x. The group, which is rapidly deleveraging, is worth a lot more than that given that it is well placed to benefit from the structural growth opportunity in farming due to its strong positions in the areas of agronomy and farm inputs. It should be noted that Origin is 71% owned by Aryzta.


While I’m dubious about the Origin story, one genuine M&A story is the news that Kerry Group has expanded its ingredients operations in the EMEA region with the purchase of SuCrest. This is the type of tasty bolt-on that Kerry is particularly good at doing, and serves as a useful reminder of its considerable scope to expand through acquisition.


IFG shares crashed 26% to €1.20 today after announcing that takeover talks with Bregal Capital have ended. This puts IFG on an PE ratio of circa 6x, which is simply too low for a company with annuity-style revenues and a very strong balance sheet. Of course, the obvious question is what the catalyst to drive the shares from here is going to be, but for patient, longer-term investors, you are unlikely to go wrong with this stock.


There were more signs of stress in peripheral Europe, which make the political response to date look even more ridiculous. Last night Bloomberg reported that the Greek default risk had soared to 98%, while the Greek 1 year bond yield stood at over 117%. Italy, meanwhile, looks like it is trying to sell off the family silver to China. France’s banks have been battered by concerns over their exposure to Europe’s weaker regions. This chart shows how the market is seemingly adopting a “one size fits all” approach to SocGen and BNP – I recall seeing similar identical trading patterns in the Irish banks once upon a time.


Bizarrely, despite the debt worries, many investors continue to favour government bonds over equities at a time when corporate balance sheets have never been stronger!


(Disclaimer: I am a shareholder in Trinity Mirror plc) The wonderful Expecting Value blog had 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 Trinity Mirror due to its much stronger balance sheet (net debt + pension deficit at the H1 stage for TNI was £336m vs. £430m for JPR), better profitability (consensus EBIT figures for TNI and JPR for the current financial year stand at £97m and £73.8m respectively), and better brands (a mixture of national and regional versus regional).


(Disclaimer: I am a shareholder in Abbey plc) Another great blog is my only domestic peer (that I’m aware of) John McElligott’s “Value Stock Inquisition“. Yesterday he wrote a good piece on the UK listed housebuilders, concluding that while the sector is not yet right to buy into, Abbey looks the most attractive. He’s in good company with this view, see here for my previous musings on the stock.


Last, but certainly not least, UK Value Investor has a good analysis of BHP Billiton today that’s worth a read. I bought it for sub-£10 a share a few years ago and sold out at £17, so while I feel a bit foolish for missing its continued ascent since then, my bearish views on China mean that it’s not one I’m likely to buy into up here. Perhaps if it goes below £10 again it might look interesting to me.


Written by Philip O'Sullivan

September 13, 2011 at 5:47 pm

9 Responses

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  1. Philip – I’ve always been a fan of the IFG business, and been in and out of the stock a few times in the past 10-15 years – however, in the past year and a half I became increasingly puzzled at the apparent undervaluation and at the apparent disconnect between adjusted earnings/operating profit figures and the cashflow statement – after endless fiddling around, I eventually plumped for measuring Operating FCF (Cash from Operations less Net Capex) over the past 4.5 years, as I think this is often the best way to drill down to the true underlying Operating Margin of a business – the stake-building going on in IFG at the time re-inforced my preference for this approach as, in my professional experience, companies contemplating an acquisition invariably focus on historical/projected operating cashflows & capex and pay virtually no attention to earnings/adjusted earnings – looking back, IFG’s average Operating FCF Margin is at a reasonably consistent 13.9%, which I’d normally equate to fair value Price/Sales ratio of about 1.2 – taking IFG’s LTM, Revenues are at GBP 110.3 mio, corresponding to a fair value of about EUR 152.6 mio or EUR 1.21 per share – therefore, until earlier this year, I kept an eye on the stock but always concluded: nice business but no decent upside in the stock… – since then, I’ll admit I was tempted by the potential arbitrage profit (on the indicative EUR 1.80 bid price), but I couldn’t bring myself to pull the trigger based on a potential takeover valuation I couldn’t understand for the life of me (btw, this has saved my bacon once or twice before, so performing a complete fundamental valuation is essential when doing any kind of M&A investing, in my opinion – even when there are tempting rumoured/indicative bids being thrown around!) – now with IFG at EUR 1.20 I guess we’re back to square one/fair value, from my perspective – cheers, Wexboy


    September 13, 2011 at 7:50 pm

    • Hi Wexboy, the first thing I’d like to say is that you and your excellent brand of analysis are very welcome here! I agree that cashflow is infinitely more important than earnings when looking at a company from an M&A perspective. In terms of the valuation, it really depends on the cash returns an acquirer would look for. Digging out an old “Rolling Agenda” from Goodbody from May of this year, I see the broker was estimating free cashflow of €22.3m for this year and the next. IFG was expected to finish 2011 with net debt of €6.6m. A quick and dirty Excel calculation tells me that a 10% required return would get you to a valuation of €1.70 a share, while 14% would get you to €1.20, as you calculate above. Given how stable the business is post the restructuring efforts Mark Bourke et al have implemented in recent years, my instinct is that an acquirer would be very comfortable with low double-digit returns, so I’d be more optimistic on the valuation than what you detail above.

      Philip O'Sullivan

      September 13, 2011 at 8:14 pm

  2. not sure what Goodbody’s definition of FCF, but if it’s the same as my Operating FCF above, I measure IFG’s LTM FCF as EUR 18.0 mio, while if it is FCF (after Interest & Taxes) I see EUR 16.3 mio, so EUR 22.3 mio might be a bit stretched for the calendar year – but even if we average out our fair value estimates, I still feel like I’d want to see say EUR 1.00 on the share price before biting to ensure a decent upside/margin of safety and to prioritize vs. other opportunities…and I missed that damn price on the few days that IFG hit that level in the last couple of years..! – then again, considering the recent performance of other Irish shares and global markets, this correction might last a little longer for IFG and maybe bring us down to that kind of level… –

    but I am a big fan/holder of Total Produce 🙂 – and also FBD, after waiting about 4 damn years to buy it I recently pulled the trigger @ EUR 6.21 –


    September 13, 2011 at 9:01 pm

    • Hi Wexboy. Probably easiest if I lay out exactly what they have in:

      Operating profit (€30.4m) + depreciation (€3.5m) + working capital (-€2.6m) + “Other” of €1.6m = Operating Cashflow of €29.2m.

      Then Operating Cashflow + Net Interest (-€2.5m) + Tax (-€2.3m) + Maintenance Capex (-€2.1m) gets you to your free cashflow of €22.3m.

      Suspect you might be adding all of the development capex (Goodies have €1.4m ‘below the line’ for this) and leaving out the ‘other’ figure (No, I don’t know what this is either) to get to your figure.

      Even allowing for the difference, I would also point out that Goodies’ net cash inflow for the year of €16.6m for 2011 works out at 13.25c/share – they’ve about the same cash flow projection for next year. Something to chew over.

      I share your positive views on Total Produce (which I also am a holder of) and FBD (which is not in the portfolio as I’m already well overweight the insurance sector).

      Do you have a blog as well? Happy to link if so.

      Philip O'Sullivan

      September 13, 2011 at 9:15 pm

  3. lord, i don’t know if i’d ever keep up with a blog…! – though i am tempted to start one, but not sure if it would be for selfish or altruistic reasons…selfish in the sense that i know writing out an investment thesis definitely helps clarify one’s investment objective/valuation/focus – happy to trade some comments on a couple of blogs and advfn for the moment, but might work up to a blog sometime later in the year – hmm, if i can figure out how to even set up a site ;-!


    September 14, 2011 at 12:05 am

    • Good stuff – would be good to have a third Irish shares blogger – at the moment it’s just John McElligott and I – and I’ve never been a fan of duopolies!

      Philip O'Sullivan

      September 14, 2011 at 6:30 am

      • thanks, Philip – i admire your diligence (and breadth of commentary) with this site, i’m not sure i can manage anything like that myself, but your encouragement is v welcome so maybe it is about time to take a hack at a blog! – but…going on hols for over a month next week 🙂 – v long time since we’ve been able to take time like this, so looking forward to it, and probably staying offline as much as possible – so November might be a good target date for me – and my wife can get stuck with the task of figuring out WordPress in the meantime 😉


        September 14, 2011 at 2:30 pm

  4. Cheers for the shout out Philip – I agree with you on the TNI vs. JPR front. I suppose I picked JPR to analyse because I’m invariably drawn to the micro-caps, but the points you make are all spot on. TNI are both more profitable and less indebted, the key features I was looking at.

    I have to say I’m tempted. The P/E figure seems crazy – declining industry it may be, but I think that a long-term decline is far more than priced in at the valuation it’s currently at!


    September 14, 2011 at 1:48 pm

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