Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 15/9/11

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There’s been a bit of a disconnect between the commentariat and the markets in the past 48 hours or so. Reading what many journalists and investors are saying on Twitter and other social media sites about the Eurozone crisis you get the sense that the world is about to end, but, as I’ve said before, Greece’s troubles are hardly “news” and, in any event, given the way markets have behaved in recent months I would argue that this debacle is already (at least largely) priced in. So, I’m not surprised to see a strong performance in share prices on both sides of the Atlantic yesterday, despite the gloomy commentary.

 

So what has been grabbing my attention? We’ve seen great results from CPL Resources, a positive development around Ireland’s debt position, some noise around Ryanair, privatisation murmurs here and a postponed IPO.

 

Turning firstly to CPL Resources, the company issued strong results yesterday, with EPS +57% to 19.2c, while the dividend was hiked by 25% to 5c. The group announced that it was putting some of its cash mountain to work, announcing a €20m share buyback, which is pretty material considering that the market cap before yesterday was a mere €93m. One of the best things about CPL for Irish investors is that, with its market leading position in the recruitment industry and presence across multiple sectors, it has a birds-eye view of labour market trends here. So, I was pleased to see management state that  “there are some positive signs emerging in the markets we serve”. In terms of my view on the stock, I really like the company. Its CEO and FD, Anne Heraty and Josephine Tierney respectively, are among the best executives you’ll find in any Irish plc. On the valuation, stripping out the net cash gives you an enterprise value of only €56m for CPL. This is an absurdly low valuation for a company with a dominant share of the Irish recruitment market, a strong management team and a proven track record. Obviously, labour market conditions are challenging, but don’t forget that a lot of CPL’s business comes from the multinational sector, which is doing rather well – as evidenced by buoyant merchandise trade data and a healthy IT sector.

 

The European Commission has decided to reduce the spread on the EFSF money lent to Ireland to zero. Some people seem to think that this means that the interest rate is now zero, so for their benefit this means that they are not charging Ireland any more than the EFSF has to pay to borrow it in the first place. While this is a positive, the estimated annual savings of up to €600m have to be viewed in the context of a deficit that will approach €20bn this year.

 

(Disclaimer: I am a shareholder in Ryanair plc) There was a bit of noise around Ryanair yesterday. Stockbrokers NCB cut their forecasts for the group on the back of a deteriorating economic outlook, which is completely reasonable, but I wonder if it’s already priced in given how far the shares have fallen in recent months. Elsewhere, Ryanair published an open letter to Aer Lingus’ Chairman setting out three measures that it believes will arrest the erosion of shareholder value that has taken place in recent years. I wonder how many of Aer Lingus’ shareholders believe the carrier should have hit Ryanair’s first takeover bid of €2.80 a share, given that Aer Lingus is currently trading at 66.6c.

 

Speaking of firms that the Irish government is a big shareholder in, I note that the State is hoping to sell a minority stake in electricity utility ESB. I think they’ll find it very difficult to find a buyer for anything less than a controlling stake, given the structural issues in the ESB. Predictably, this announcement led to much ideologically-driven debate yesterday. The problem with such a debate being that facts go out the window. The cost of electricity here is among the highest in the developed world, with a lot of this down to things like the ESB’s extraordinarily high staff costs. This is hardly good for the overall economy, and in particular the least well-off in society (which is something those on the centre-left who are aghast at the thought of selling any part of ESB should reflect upon).

 

Given the latest act in the Greek Tragedy, this article is worth a read: What happens when a nation goes bankrupt?

 

Finally, I note that Facebook has postponed its IPO to late 2012. Does this herald the end of the social media bubble I wrote about recently?

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Written by Philip O'Sullivan

September 15, 2011 at 7:17 am

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