Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Twelve for 2012 – Part 2

with 8 comments

In my last blog I wrote about my 6 conviction longs for 2012, namely Origin Enterprises, DCC, Irish Continental Group, Total Produce, Ryanair and gold. Today, I’m writing about my 6 more speculative plays – these are higher risk and certainly not for all tastes. But I do think that the list offers a decent blend of stocks with potential catalysts for significant upside over the next year and deep value names. My speculative six are: PetroNeft, Marston’s, Bank of Ireland, Petroceltic, Ladbrokes and Aer Lingus. I go through my reasons for holding each of them below. Please note that share prices and market capitalisation information relates to the closing price on December 22nd, to make them consistent with the information provided in part 1 of my 2012 outlook. Also, 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.


PetroNeft (Price £0.1811, Market Capitalisation £75m)


(Disclaimer: I am a shareholder in PetroNeft plc) From a share price perspective PetroNeft had a shocking 2011, with its price tumbling as production rates fell short of expectations. Despite the technical problems it encountered, the company continues to reassure on the reserves front. In terms of 2P (proven and probable) reserves, PetroNeft had independently audited reserves of 82.905m at License Area 61 and 14,024m barrels at License Area 67 at the start of 2011. This is significantly above the total of 60.622m estimated at the start of 2008, and more importantly, recent updates from the company point to even more upgrades in the near term. Speaking of recent updates, management said earlier this month that the firm is on track to hit Q1 2012 production targets of 4-5kbopd, which suggests that it may be overcoming the technical problems that dogged the group earlier this year. If this comes to pass, the shares could be in for a re-rating. Regardless, the shares are in my view long overdue a re-rating. Trading on an EV/BOE of only $1.4 (based on current exchange rates and the net debt position at the end of H111) and with a $75m debt facility from Macquarie in place to support moves to increase output from its Western Siberia field, these shares offer great value here.


Marston’s (Price £0.8985, Market Capitalisation £513m) 


Optically Marston’s looks like an odd one for me to choose, given my bearish tack towards UK consumer facing stocks. However, when I asked my Twitter followers if there were any names they’d like me to look at, a particularly astute market watcher told me this was his key pick for 2012 because, as he put it: “I see the story as: organic growth + new pubs revenue & margin boost + stable financing structure = profit growth + re-rating”. This prompted me to visit the website and look through its most recent presentation, which showed strong growth in revenue, earnings and returns allied to improved dividend cover (a fantastic achievement given the macro backdrop). The balance sheet does raise a few concerns, with gross debt of just over £1bn and EBITDA of £131m. However, they are operating comfortably within covenants, while I draw more comfort from their record of holding revenues steady in recent years despite the headwinds of recession and increasing consumer switching to the off-trade. Furthermore, I draw more comfort from seeing that 75%+ of its borrowings have maturities of more than 5 years. In addition, Marston’s does have £1.6bn of freehold property on its balance sheet. That said, I was disappointed to see that last year operating cashflow of £182m was gobbled up by capex (£111.5m), dividends (£33m) and interest (£70.3m) leading to a marginal rise in net debt. However, an easing up on the capex (mostly the roll-out of new pubs) would facilitate chunky debt paydown and ideally see a proportionate increase in the equity component of the enterprise value.


Bank of Ireland (Price €0.08, Market Capitalisation €2.4bn)


(Disclaimer: I am a shareholder in Bank of Ireland). I recently upped my shareholding in Bank of Ireland after seeing a series of encouraging updates on its NIM, deposits and the impact of disposals on its core tier 1 ratio. To say that BKIR’s prospects are hugely influenced by factors outside of its control would be the understatement of the decade, but if the ECB deploys its bazooka (as I believe it will), the only Irish headquartered bank not under government control should be well placed to benefit from this. Management are to be commended on the good work they’ve been doing over the past year, now what they need is for policymakers to do what’s necessary to correct Europe’s broken economy. Given a market cap of €2.4bn and limited domestic competition, there is significant longer-term upside potential for this name, provided the macro conditions get easier.


Petroceltic (Price £0.0825, Market Capitalisation £196m)


Petroceltic exited 2011 with more encouraging results from its Algerian gas fields and the approval of the farm-down of some assets to Enel, which will see it receive $103m in January. This has the twin effect of improving its funding position as it brings Algeria further down the road to production while also increasing the potential upside from its primary asset. Goodbody’s Gerry Hennigan, who is one of the top E&P analysts covering the UK and Ireland, has conservatively estimated an NAV for PCI of 13.9p (9.8p core and 4.1p high risk exploration). With the shares trading at a discount to core NAV, and recent newsflow encouraging, this looks like an attractive entry point, albeit with the obvious health warning that comes with pre-production E&Ps.


Ladbrokes (Price £1.234, Market Cap £1.1bn)


As with Marston’s above, this was one that a reader tipped as one to watch in 2012. There are a number of attractions to this stock. Firstly, assuming an 8p payout in 2012, the dividend is a pleasing 6.5%, covered nearly 2x. Secondly, the balance sheet is in good shape – Ladbrokes’ net debt was £433m at the end of September, which is about 1.7x EBITDA. Thirdly, the group has a significant revenue opportunity if it can get its online strategy right. In its H1 results presentation Ladbrokes showed that the market is broken down as follows: Retail 60%, Digital 27% and Multi-Channel 13%. Ladbrokes’ customer mix is 69% retail, 24% digital and 7% multi-channel. So, there is scope for the company to expand further into the online channel. Recent investment in boosting its mobile and internet operations should hopefully be rewarded in 2012. Two catalysts for the stock that should not be ignored are Euro 2012 and the London Olympics next summer.


Aer Lingus (Price €0.65, Market Cap €347m)


Under the leadership of CEO Christoph Mueller Aer Lingus has been recording strong performances of late, guiding a full-year profit out-turn towards the high end of market expectations. Aer Lingus’ valuation is anomalous – the company had net cash of €355m at the end of September and it is both profitable and cash generative. This anomaly is, in my view, driven by uncertainty about the IASS pension scheme (which Merrion has a great note about here). A resolution of that issue could pave the way for a significant re-rating of the stock in 2012.

Written by Philip O'Sullivan

December 30, 2011 at 6:09 pm

8 Responses

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  1. […] 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 last wrap […]

  2. […] while large cap players are throwing off a lot of cash. That got me thinking about PetroNeft, whose reserves are valued at circa $1.50/barrel, while the company has already done a lot of heavy lifting in terms of getting the infrastructure […]

  3. […] Switching to equities, the UK retail sector is something that I’ve written extensively about in the past. Following this week’s sharp share price fall by Tesco, a lot of people are asking whether now is the time to pull the trigger and buy into the sector. Here are some perspectives from John Kingham, who asks: Are Marks & Spencer Shares Good Value? and John McElligott, who writes about many of the UK’s biggest listed companies in that space. I should add that I added some UK consumer exposure into my portfolio recently, having acquired a stake in pub group Marston’s, which I’ve written about before here. […]

  4. Philip, I’m really impressed by the way you presented your cases here. I don’t feel like I have to have the brains of a Mike Burry to understand the investment case. Nicely done!

    Mark Carter

    January 14, 2012 at 11:09 pm

  5. […] Moving from the bookies to the pub, Richard Beddard did up a good post on Greene King. Regular readers will know that I recently bought shares in one of its competitors, Marston’s. I quite like MARS, well, obviously – I wouldn’t have bought shares in it otherwise! – but I note that Richard also did up a relatively cautious piece on it two years ago which serves as a useful Devil’s Advocate view for when I get around to doing a proper write-up on why I pulled the trigger on it. For now, here is a summary on why I bought Marston’s. […]

  6. […] Marston's were the second company I properly analysed – though I never did a writeup on them – and Philip O'Sullivan jogged my memory recently by suggesting I take another look at them. Firing back up my spreadsheets […]

  7. […] them down into two parts – my core ‘conviction picks‘ and a higher risk ‘speculative six‘ portfolio. In this blog I look at how they have performed, and examine what lessons are […]

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