Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 10/11/11

with 3 comments

Italy may have dominated the front pages since my last update, but we’ve seen quite a good bit of other newsflow as well, particularly on the corporate side.


The latest chapter in the European sovereign debt crisis is being written at this time, with Italian 10 year bond yields having spiked above 7% yesterday. I don’t propose to dwell much on that specific event given the wall of coverage that it has received elsewhere, but given how many questions I’m being asked about the implications of all of this, I thought I should sketch it out. In simple terms, as sovereign bonds come under pressure, this affects European banks’ holdings of government debt. As European banks book losses on their trading positions, this reduces their capital. Which increases the amount of capital that European banks need to raise. But with so much uncertainty out there, private sector involvement in capital raising is likely to be limited. Which means that governments (at least in Europe) have to put in this extra capital. Which puts public finances under more pressure, which puts sovereign bonds under more pressure, which in turn puts banks’ trading books under more pressure… you get the picture. There are signs that the crisis is spreading, with Spanish-German 10 year bond spreads hitting a euro-era record and rumours intensifying around a sovereign downgrade for France.


(Disclaimer: I am a shareholder in Trinity Mirror plc) I was pleased to see a solid trading update from Trinity Mirror this morning. While advertising revenues remain under pressure (hardly surprising given the UK macro picture), circulation revenues are being buoyed by the demise of the News of the World. Net net, management is guiding a “performance marginally ahead of the top end of the current range of market expectations in 2011”.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc and Playtech plc) Rounding up yesterday’s corporate newsflow, Grafton released a trading update in which it revealed a further moderation in sales in the UK and Ireland, which should come as no surprise given the weak consumer backdrop. This was also a theme of an update from one of Grafton’s peers, SIG, which announced that it sees sales in the UK and Ireland declining next year. Another stock that updated the market yesterday was Smurfit Kappa Group. Going into the results I was nervous about the wide EBITDA consensus range, but in the event EBITDA came in at the high end of this, so my concerns were unwarranted. Smurfit Kappa reaffirmed its year-end net debt target of €2.85bn, which is a good result. I like Smurfit a lot due to the potential upside accruing to shareholders from its ongoing deleveraging, but obviously its share price performance in the near-term will be driven more by macro considerations. Playtech released strong Q3 results in which management expressed confidence on the full year outlook.


With so many people concerned about debt at this time, one stock worth bearing in mind is TVC, which yesterday announced that it is sitting on cash and near-cash assets of €73.0m. It also unveiled a c. 3% increase in NAV in H1 to €1.08/share. In terms of the valuation, at the time of writing TVC’s share price is 75c, which is in-line with net cash per share of 72c. So for a premium of 3c a share (equivalent to €3m) you get an investment portfolio comprising listed and unlisted investments (valued at €36m at end-September) at a discount of around 90%.


Written by Philip O'Sullivan

November 10, 2011 at 11:38 am

3 Responses

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  1. Correct me if I’m wrong, but the logic is that this creates a liquidity crunch….a sentiment that I agree with. “As European banks book losses on their trading positions, this reduces their capital. Which increases the amount of capital that European banks need to raise.” However, there is bigger uncertainty looming due to the ‘book losses’ not being recorded, as Basel II considers government debt ‘risk free’ and does not require a mark to market. As a result, the market is taking the write offs from their share price. I could be wrong, though…..


    November 12, 2011 at 2:57 am

    • Hi James, you’re spot on about the liquidity crunch, with the circularity noted in my “sketch” deepening this problem – as an aside, this is an issue that I touch on in something that is due to be published over the coming days.

      As regards banks’ losses on sovereign debt, my understanding is that government debt is marked to market – I note that in yesterday’s IMS from Bank of Ireland the company made specific reference to “the mark-to-market impact of higher yields on Irish Government bonds” (

      Philip O'Sullivan

      November 12, 2011 at 2:29 pm

  2. […] & circulation trends, helped by easier comparatives. This follows on from the recent positive update by Trinity Mirror and suggests that things are looking a little brighter for the sector, but as […]

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