Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Twelve for 2012 – Part 1

with 15 comments

In a recent email exchange with some of the leading share bloggers in the UK and Ireland I proposed that we each sit down and draft our thoughts for how the markets will behave in 2012, and what stocks we’d like to own to play some of those themes. Given resource limitations (I don’t know of any blogger who has a team of analysts working for them!), there will, I’m sure, be quite a bit of selection bias in the names we highlight – generally speaking, people invest in what they know! I illustrate that perfectly by choosing 5 Irish listed names in my core picks, although all of them are firms with a distinct international dimension (none of them could be described as plays on the Irish domestic economy). But despite the selection bias I do think that this is a worthwhile exercise, and one that will no doubt contribute to idea generation. As ever, readers are strongly advised to do their own research and consult a professional financial adviser if they want to invest their own money.


2012: The Macro Call


Looking ahead to next year, I see no grounds to assume that the macro situation will be materially different to that which we saw in 2011. Sclerotic growth across the leading Western economies, limited credit availability, rising unemployment, political uncertainty and austerity are all likely to be key themes over the coming 12 months. Added to the mix is likely to be a pronounced deterioration in the Chinese economy. I am gravely concerned at the rise in economic nationalism and see further policy incoherence at a European level as countries pull in different directions. However, my sense is that the euro will survive, given that its failure would lead to a deep and prolonged depression on a scale not seen for close to a century. That said, its survival will come at the expense of a weaker euro as monetary policy here is loosened to ensure its survival (given the lack of political consensus on how to fix the issue, I don’t see a solution that doesn’t involve some form of quantitative easing).


For me there are five key tactics to mitigate against this pressure:


  1. Choose firms with strong balance sheets
  2. Choose defensives over cyclicals
  3. Choose firms with significant exposure to markets outside of the Eurozone
  4. Hedge against inflationary pressures / political risk
  5. Choose firms with attractive and well-covered dividends.


This screen leads me to highlight 6 ‘core’ conviction investments as being particularly interesting at this time. I’ve also looked at 6 more speculative plays for people with an appetite for risk. In today’s blog I outline my six conviction picks for 2012. In the next one, I will outline my six speculative plays – PetroNeft, Marston’s, Bank of Ireland, Petroceltic, Ladbrokes and Aer Lingus. Some of my readers suggested a number of other names that didn’t make the cut for a variety of reasons (French Connection, LoQ, Software Radio Technology, Sportingbet, Orosur Mining, Soco International, C&C, St. Ives, De La Rue, M&S, Tullett Prebon, Antofagasta, Morgan Sindall, ICON, CRH, élan, Ocado), which I hope to tackle in other blogs over the coming year.


Six Conviction Picks for 2012


Origin Enterprises (Current Price €3.05, Market Cap €406m)


Origin has successfully repositioned its business model over the past few years, merging its fishmeal and food operations (both of which are now treated as associates) and focusing on its core agri-services business. Its recent trading update revealed a positive start to the FY12 financial year (to end-July). Origin will also benefit from a full-year contribution from the businesses acquired last year (UAP and Rigby Taylor) and the integration benefits they provide. The firm has significant firepower to expand its businesses over the coming year, helped by a strong balance sheet, while it also has the option to raise extra capital through selling off one or more of its JVs. Trading on less than 6.5x forward earnings and with a net debt / EBITDA of less than 1x, this stock is overdue a re-rating.


Balance sheet strength: High, with net debt of less than 1x EBITDA.

Defensive/Cyclical: Defensive.

Non-EZ exposure: Just under 60% of Origin’s FY11 revenue came from the UK. Most of the 17.5% Origin says came from the “rest of the world” (i.e. outside of the UK and Ireland) comes from Norway, Poland and the Ukraine.

Dividend yield and cover: Origin yields 3.6% covered just over 4x.


DCC (Current Price €18.53, Market Cap €1.6bn)


(Disclaimer: I have an indirect shareholding in DCC). “Consistency” is a word that comes to mind whenever I think of DCC. The company has delivered growth in EPS every year since its IPO in 1994. In this financial year (to end-March 2012) that record looks like it will draw to an end, with unusually mild weather putting pressure on earnings in its core energy division (60% of group profits).  The shares have struggled in recent times after management lowered guidance due to this weather effect, but as I’ve previously argued, this looks overdone. Profits in its four other divisions (IT, Food, Healthcare and Environmental) are all rising. The company has a consistent record of generating high ROCE (19.9% in 2010, 18.4% in 2009), helped by a solid track record of making astute investments across its business areas. While this financial year looks like a ‘blip’ due to abnormal weather, the next financial year should see a strong rebound in earnings, assuming a more ‘normal’ winter and the benefits from this year’s acquisitions.


Balance sheet strength: Very high. Net debt / EBITDA for the current year is likely to come in around 0.6x.

Defensive/Cyclical: The vast majority of DCC’s businesses are defensive.

Non-EZ exposure: 72% of DCC’s revenue comes from the UK, of the balance, while most of this is euro DCC has a presence in several non-EZ countries such as Sweden and Denmark, while it also has a small US business.

Dividend yield and cover: The shares currently yield 4.0% and are covered 2.7x.


Total Produce (Current Price €0.38, Market Cap €127m)


(Disclaimer: I am a shareholder in Total Produce plc) It’s hard to imagine a more defensive business than the one that distributes fruit and vegetables. Total Produce moves 250m cartons of the stuff around Europe each year, making it the largest player in the sector. Its strategy is simple – it aims to consolidate a highly fragmented industry (despite being the biggest player, it commands only about a 5% market share) and squeeze out higher margins through achieving synergies in a mature market. Trading on just over 5x next year’s earnings and yielding around 5%, its valuation is an anomaly. I see scope for a considerable step-up in M&A activity over the coming year that could lead to earnings upgrades, while further share buybacks (which would also be EPS enhancing) cannot be ruled out.


Balance sheet strength: I estimate that Total Produce will exit 2011 with net debt of around €70m, or 1.2x EBITDA.

Defensive/Cyclical: Very defensive

Non-EZ exposure: Roughly 50% of its H1 revenue was to the UK and “Scandinavia”, which in TOT’s case is mainly Sweden.

Dividend yield and cover: Currently yielding 5%, the dividend is 4x covered.


Irish Continental Group (Current Price €14.71, Market Cap €366m)


(Disclaimer: I am a shareholder in Irish Continental Group plc) It’s relatively plain sailing for marine transport operator ICG. While market conditions remain tough, competitors are exiting the market, which is helping ICG to gain market share. In the first 9 months of 2011 revenues in the Ferry division were flat, while Container & Terminal revenues were up just under 10%. A higher oil price hasn’t helped the bottom line, but the firm should still do about €50m of EBITDA this year (it did €40m in the first 9 months of 2011). I estimate that it’ll finish the year with net debt of only €5m or so, which highlights its balance sheet strength. At the rate at which it’s throwing off cash, I wouldn’t be surprised to see talk of a special dividend (or a rise in what’s already the 2nd highest yield on the ISEQ at 6.8%) over the next year or two.


Balance sheet strength: ICG is virtually debt free

Defensive/Cyclical: Like Ryanair, I would argue that it’s at the defensive end of what is a cyclical industry.

Non-EZ exposure: 23% of its 2010 revenue came from the UK

Dividend yield and cover: 6.8% yield covered about 1.7x by free cashflow. This cover will rise sharply once volumes pick up.


Ryanair (Current Price €3.75, Market Cap €5.5bn)


(Disclaimer: I am a shareholder in Ryanair) With consumers watching every penny, this is music to the ears of cut price airlines like Ryanair. Last month the carrier raised its full-year earnings guidance by 10% as passenger numbers and yields (helped by a better mix of airports) continue to rise. The big catalyst for 2012 is likely to be  a special dividend worth as much as €500m. That’s equivalent to circa 9% of RYA’s current market cap.


Balance sheet strength: Very strong. Depending on the timing of the special dividend, the company could be in a net cash position as early as the middle of the 2012 calendar year.

Defensive/Cyclical: Probably the most defensive stock in a cyclical industry!

Non-EZ exposure:33% of Ryanair’s FY11 revenues were non-euro (primarily sterling)

Dividend yield and cover: Special dividend equivalent to a 9% yield likely in the next financial year.


Gold (Current Price $1,608/ounce)


With central banks busily debasing currencies across the West, a strategy that will only result in more inflation, that would normally be reason enough to hold gold, given its proven qualities as a hedge against rising prices. In these testing times another reason to hold it is as an ‘insurance’ against the really ugly political and economic risks we face – including the possibility of an all-out collapse of the euro. And if that happens – what would you rather own? Something that has been a store of value for thousands of years, or a new Irish currency? This video provides an excellent overview of the merits of owning gold as part of a diversified investment strategy.


* All share prices and market cap details taken from the Irish Stock Exchange website. Gold price from here.


Written by Philip O'Sullivan

December 23, 2011 at 10:58 am

15 Responses

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  1. […] Philip O’Sullivan has set some of us a good challenge to start 2012 with a bang. Xmas is going pretty well so far though, so I might letting the side down a little between now and New Year’s! We’ll see, maybe I’ll even manage to throw in a little macro commentary for once! […]

  2. […] my last blog I wrote about my 6 conviction longs for 2012, namely Origin Enterprises, DCC, Irish Continental […]

  3. […] O’Sullivan kicked us all off here with his list of picks for 2012, and so far I’ve seen John Kingham and Mark Carter join in with […]

  4. […] for much of the past week and having prioritised what little writing time I had on my 2012 outlook (part I and part II), this blog represents a ‘catch up’ on what’s been happening since my […]

  5. I’ll take French Connection ( FCUK.L) and Titon Holdings ( TON.L ) as my 2 picks for 2012. Both are Ben Graham net net companies with TON holding freehold property on the balance sheet as well. Fixed assets and going concern value for both companies are valued at minus.!/MarketSwingsSto

    Marcel Springorum

    December 31, 2011 at 8:50 pm

    • While I don’t know a whole lot about it, I would be a bit nervous on Titon given the 20% cut in the final dividend, downbeat outlook statement and falling cash balances. On FCCN – I can’t open the 2011 annual report for some reason on this computer, but I suspect given that at the H1 stage PPE was only £7.5m on the balance sheet that they have massive leasehold liabilities, a suspicion heightened by this google search result:

      Given the fragile UK retail backdrop, FCCN doesn’t look like one for me.

      Philip O'Sullivan

      January 1, 2012 at 2:38 pm

      • Thanks for your response Philip. I guess most people would share your view but that is why the companies are trading as net nets – unloved and unwanted. :O) Trading will turn at some stage though and the prices will rise. The thing about net net investing is that any catalyst can move the price up. For example an improvement in trading ( especially earnings though net net investing is more asset focused than earnings focused ), a bid, a large new investor coming aboard, a return of capital, an asset disposal etc etc. Basically the companies are priced to fail but many such companies survive. If your response is one of the general market then I know that I am on the right track. How else could companies be so cheap if everyone wanted them. :O)

        Regarding TON it is a weak business with low average operating profits, declining margins, static sales and large working capital to sales. However asset value is worth much more than the current share price. Having said that I’d probably sell, depending on how the business is doing at that stage, at around 50p for a 60% profit.

        FCCN have large operational gearing so depending on the change in revenue the bottomline could swing quite a bit. A large part of the fixed costs are the leaseholds. That’s an interesting link that you posted as it must be one of the few properties that made such a profit margin over the same 6 year period.

        One thing about net net investing is that you should be somewhat diversified. Out of that basket you’ll find that one or two will do exceptionally well and the rest sort of sit there. At least that has been my experience. I have a list of about 30 UK net net stocks but I only hold 3 of those myself – all pay a dividend and all will no doubt take time to come good ( maybe more than 1 year but I’m ok with that ).

        I’ll let you know when I am in Dublin though I don’t visit often and I’ll add your blog to the list.


        Marcel Springorum

        January 1, 2012 at 9:16 pm

  6. What’s the liquidity like in TON though? The market cap is so small that I imagine the spread would work against you when you’re trying to escape from it. On FCCN, I agree that the operational gearing would make a big impact, but my UK consumer view is so bearish that I fear we’re as likely to see operational gearing move the other way (i.e. sales dropping and the company unable to cut costs too deeply due to the constraints of its leases leading to a collapse in profits) – the recent FCCN like-for-like sales figures were especially concerning.

    Philip O'Sullivan

    January 1, 2012 at 10:03 pm

    • Yes, TON is an illiquid stock but I am used to dealing in illiquid stocks. Other people might not be. You can usually trade well inside the spread but of course market makers will turn the screw should people want to sell for some reason. With about 75p of tangible assets valued at 33p there is a large enough margin of safety for me. I held TON previously from about 25p and the current level was my buy target again.

      Re FCCN sure we could see another profit warning but maybe not. Who really knows. The shares are priced accordingly but if they fall more I will add more. The like for like figures were for UK/Europe retail which is a tough area now for FCCN but that is reflected in the price. The company is focusing on more wholesale and licensing income now which, I hope, will grow as a larger portion of profits over time as it is higher margin income.

      I am not comfortable holding a lot of the net nets I find but I am comfortable holding these two companies. We will see at the end of 2012 where the share prices are though they may take a little longer to come good.

      AGI on the Irish market is an interesting net net but very dependent on the drug they are developing so its more of a speculative net net as opposed to an investment. Ovoca gold looks interesting too, lots of cash, but I generally avoid O&G comps and miners as I prefer straight ahead operating businesses.

      TVC Holdings was my best ever Irish net net. I was buying at around 50c when AIB where selling there stake. It held Norkom whose balance sheet was half cash and the offer for Norkom send the price nicely higher. Those were the days. :O)

      Marcel Springorum

      January 2, 2012 at 9:37 pm

      • On FCCN, keep an eye out for Next’s update tomorrow, there could be some read-through from that. On TON, while 75p versus 33p looks attractive, when is the last time that its property assets were valued? One of my microcap positions, Datong, sold a premises for 50% below its book value last year – and this wasn’t a distressed sale – Datong was (and still is) in a net cash position.

        AGI is, as you rightly say, very much in the speculative camp. I’ve met management a few times but they’d need to come out with more positive updates to attract my interest. Don’t really know anything about Ovoca. If I was to do any work on an Irish gold play it would be Conroy, which has been upgrading its reserve estimates for the Monaghan field of late – might be worth a look.

        TVC is a great stock, and one I’ve blogged about before. It’s great value here. Shane Reihill has a great eye for investments and I’d trust him with my money.

        Philip O'Sullivan

        January 3, 2012 at 8:38 am

  7. I’d go along with the FCCN and TON sentiment. I’ve traded both before when they were net-nets back in 2008/9 and made a fair profit. My list for 2012 is here:


    January 6, 2012 at 6:03 pm

  8. […] the idea for this post came from Philip O'Sullivan, it seems apt to quote the first paragraph of his post at the start of mine by way of […]

  9. […] and ‘risk-off’. All I can do is stick to my central thesis for this year, which I wrote back in December, and which I see no reason to change, given how my thesis, shown below, has played out so […]

  10. […] my twelve preferred investments for 2012. I broke them down into two parts – my core ‘conviction picks‘ and a higher risk ‘speculative six‘ portfolio. In this blog I look at how they […]

  11. […] number of asset classes, in particular equities (in general) and commodities (including gold, which I’ve been a bull on for some time), however, it also has other consequences that are worth bearing in mind. While the growth outlook […]

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