Market Musings 9/12/11
The main event since my last blog has been the European summit. Markets pushed a bit higher today and it was interesting to once more see the banks leading the way. If a proper resolution to the Euromess can be found, I suspect banks will be the area to own and hence I’m thinking about increasing my financials exposure. That said, I am reminded of the words of John McElligott in an interview I conducted with him for Business & Finance, in which he said: “Investing in the banking sector is considerably more speculative, if not outright madness“. As for whether or not the latest summit will solve the bloc’s problems, well, if the proposals are put to the Irish people in a referendum I suspect that you would be more likely to see Elvis Presley riding Shergar than see Ireland vote Yes to any European treaty.
(Disclaimer: I am a shareholder in Abbey plc) Housebuilder Abbey released H1 numbers earlier this week which came in behind market consensus and prompted a round of downward revisions to forecasts across the stockbroking community. Not that this miss particularly concerns me, as the difficult housing market conditions that caused the miss is hardly ‘new news’. In any event, for me, Abbey is a compelling story. Its balance sheet is in fantastic shape, with cash and cash equivalents at the end of November of €74m. That’s equal to €3.37 a share, or 66% of the current share price! The company has no debt and its pension scheme is in surplus (to the tune of €3m). Based on tonight’s closing price of €5.15, the company is trading at a discount of 30% to its NAV (€7.35). Its financial strength gives it considerable flexibility in terms of being able to grow its landbank (which the company has been doing, albeit to a modest extent, in recent times), while the company has also been returning money to shareholders through a share buyback (in the past 13 months it has bought back 11% of its shares) as well as paying dividends (8c a share, making a 1.6% yield). While housing market conditions remain challenging across its areas of operation (Southern England, Leinster, Prague), Abbey’s obvious financial strength means that it has the staying power, and more importantly, the firepower, to capitalise on any recovery.
(Disclaimer: I am a shareholder in Ryanair plc) Aer Lingus released strong passenger statistics for November, which continues the positive narrative from the company that I’ve been tracking in recent times. It also mirrors Ryanair’s better-than-expected passenger stats for the same month, which along with the recent upgrade to earnings guidance from Europe’s largest LCC has helped give the shares a lift in recent times.
Value guru Richard Beddard asked if I was familiar with CPL Resources, Ireland’s leading staffer. It’s a stock I covered in my analyst days, and one I have great admiration for. Just by way of background, the company was founded by CEO Anne Heraty in 1989. Its name comes from Computer Placement Limited, which underlines its technology recruitment origins. It has, however, expanded into multiple other business areas over the years through a series of smart acquisitions. CPL has been very disciplined on the M&A front, preferring to spend six or low seven digit sums of money for businesses, as it understands that when you buy a staffer you’re buying a business whose assets walk out the door at 5pm every evening. So, the M&A strategy has been about buying a good group of people in a particular niche and then investing in growing that team so that if anyone leaves there is ample strength in depth to compensate for their departure.
The group has a dominant position in the recruitment market in Ireland (it’s particularly strong in the multinational space, so while the domestic economy’s troubles have hurt it, CPL has plenty of other domestic revenue streams), and it has a decent overseas business with offices in the UK, the Czech Republic, Slovakia, Poland, Hungary, Bulgaria and Spain. In its 2011 financial year the company generated 33% of its profits outside of Ireland.
CPL’s business is not just about placing candidates. It has also built up a decent operation providing outsourced functions to companies such as payroll, training, and HR services. This provides it with a lot of recurring revenue, while its strength in temporary placements delivers similar results (for staffers, permanent placements generate a once-off fee, while temporary placements generate recurring fees so long as the candidate is in situ).
Given the M&A discipline noted above, its limited capex requirements and its record of consistently generating profits the company has been an impressive cash generator over the years. At the end of FY11 (end-June) the company had €46m in net cash. Management elected to return €20m of this to shareholders through a tender offer at €3 a share.
In terms of the valuation, post the completion of the tender offer CPL has 30,545,159 shares in issue. Based on its closing price this evening of €2.70 this gives it a market cap of €82.5m. Taking net cash as €26m (i.e. the end-FY11 net cash less €20m for the tender offer), this gives an enterprise value of €56.5m. Which is just under 7x its FY11 EBITDA. In its most recent update management said that it expects “further profitable growth in the six months to 31 December 2011“. This is an industry with limited visibility on future earnings, so even if you conservatively assume that the current dislocation means that FY12 profits will be flat, the question you must ask yourself is this: “Does a recruiter with diversified earnings streams (both by industry and geography), a very strong balance sheet, an excellent and experienced management team and a proven track record going back over 20 years merit an EV/EBITDA rating above 7x at this stage of the cycle?” The answer for me is a yes.