Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 14/1/2012

with 6 comments

From  a macro perspective, a few things have caught my attention in recent days. The British government published details of the 16 million square metres of property and land it owns across the UK – six times the area of the City of London. With significant excess capacity (550 of the 13,900 properties are vacant – while reading the article it’s clear that many of the ‘occupied’ ones are far from fully utilised) I assume that this will be an area of focus for generating new revenues / saving money for the Exchequer.


Now here’s something worth looking at – UK hedge fund Toscafund believes that a Greek exit from the eurozone would result in European social unrest, hyperinflation and a military coup.


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.


Staying with UK equities, Calum has written a good piece on the listed housebuilders, that’s worth a read.


(Disclaimer: I am a shareholder in RBS plc) RBS has been in the spotlight in recent days. It announced 3,500 redundancies, with 950 jobs going at its Irish operation, Ulster Bank. While obviously these job losses are a tragedy for those involved, they are far from unexpected given the well-documented macro challenges facing the group. With almost indecent haste some brokers, including Seymour Pierce, have been rushing to give the shares a push on the back of the restructuring, and the price motored ahead on the back of this, closing at 24.1p on Friday having finished the previous week at 20.5p. I have a well-below-water legacy position in RBS but I won’t be rushing to add to it (or ‘average down’!) just yet – I would want to see a much brighter macro outlook before I’d consider doing that.


(Disclaimer: I am a shareholder in Ryanair plc) Ryanair announced a 25c per passenger charge to cover what it describes as a “new EU eco-looney tax“. Based on its current run-rate of 76m passengers a year this will raise at least €19m per annum. What’s significant about it is that it serves as a reminder that even an extra 25c in revenue per passenger can produce a chunky bit of change for Europe’s largest low cost carrier. I should also point out that Ryanair’s ‘fill the plane’ pricing model and its young fleet of aircraft means that it will always have a lower per passenger charge than its European competitors where green taxes like this are concerned, which underlines its competitive advantage. Staying with airlines, I was interested to read in Friday’s FT that of the 1.2bn people in India, only 55m flew in an airplane last year. Now that’s what I call a growth opportunity!


In the energy sector, Dragon Oil announced that it exited 2011 producing 71,751 barrels of oil per day, which is slightly ahead of its 70k target. Elsewhere, I found two pieces of interest in this oil sector note by Edison. The first is the chart on page 3 which rates oil stocks on an EV/BOE basis – this shows that some companies’ oil reserves are being valued at close to nothing (or in some cases less than nothing). The obvious health warning on that chart being that investors need to look at the companies’ ability to bring those reserves into production in a shareholder friendly way before rushing into all of those names. The second thing of note in the report is the question the analysts pose about the potential for consolidation in the sector, which echoes Paul Curtis’ views from two weeks ago.


(Disclaimer: I am an indirect shareholder in DCC) In the support services space, NCB published a research note on DCC. While they have trimmed their price target, they are retaining their buy recommendation, which I agree with – DCC is very cheap given its undoubted quality, stable business model and proven track record of creating shareholder value.

Written by Philip O'Sullivan

January 14, 2012 at 4:15 pm

6 Responses

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  1. Hi Philip, thanks for the mention. On a different note to UK retailers, I see you mention Ryanair. Personally I’m bearish on airlines longer term as I’m a bit of a peak oiler. I haven’t really looked into it yet as I have other things to do, but have you thought about how increasing oil prices may or may not affect the budget airlines versus the premium ones? Or do you think this is not a concern in the next 10 year or so? I guess a good place to look would be what happened in the 140 dollar per barrel days of a few years ago…

    John Kingham

    January 14, 2012 at 7:32 pm

    • Hi John, thanks for visiting! For me RYA is a play on the special dividend which I see coming later this year – it wouldn’t be a core long-term holding, I view it as a ‘trading stock’. I have to do up a proper case study on Ryanair (as part of my series on all of the stocks in my portfolio) and when I do that I’ll put in a section with a stress test on earnings arising from oil prices (and FX).

      Philip O'Sullivan

      January 15, 2012 at 1:08 pm

  2. Interesting comments, Philip, and it’s given me a few things to think about.

    Mark Carter

    January 14, 2012 at 10:42 pm

    • John/Philip – some sectors I avoid like the plague (banks, airlines), and others I’m pretty wary of (oil/natural resources explorers). But there’s always a jewel gleaming among the rubble. Like Ryanair (RYA:ID). (And when economic growth dips, I think the chorus of RYA negative comments is ridiculous – sure, maybe people will take less flights overall, but I’m damn sure even more people will switch to RYA from other airlines).

      I find the natural hedge in my portfolio for RYA is an oil explorer, or even an oil major if you find a decent valuation (actually not so hard these days). Seem a bit of a rough and ready hedge?! Well, better to be roughly right than precisely wrong (as some of the investment banks discovered to their cost!), and I believe this is a genuinely good long term hedge to include in your portfolio.

      Two things to highlight: Choose an explorer with proved & probable reserves (so Petroneft (PTR:LN) is a great pick) as other explorers are far too uncorrelated/news-dependent, also don’t just pick an oil stock for the sake of it, we’re trying to generate alpha here! Get that right, and this could turn out beautifully – you sleep at night, forget the oil price, and have 2 best in class stocks set to fulfill their upside potential!


      January 16, 2012 at 3:10 pm

      • Hey Wexboy – I’m obviously conflicted (!) being long RYA and PTR, but I’d agree with your argument. What I’d add to it is as follows (breaking comments by stock)

        Ryanair – The carrier has demonstrated admirable flexibility both in terms of redeploying capacity (cutting ex-UK and Ireland flights, adding flights to sunnier climes) and managing capacity (grounding a record number of planes this winter). This has helped optimise yields, and has seen the carrier raise earnings forecasts despite the headwinds of a stubbornly high oil price and economic weakness in Europe.

        PetroNeft – Like a lot of smallcap oil stocks (as the report linked in my blog demonstrates) its reserves are valued at close to nothing, but with production set to be ramped up to 4-5kbopd by the end of Q1 2012 and the Macquarie facility in place, I think that PTR has the financing in place to execute on its strategy in a shareholder friendly (i.e. no more placings) way.

        Philip O'Sullivan

        January 16, 2012 at 4:02 pm

  3. […] due to better than expected weather. I have to admit to feeling like I’d egg on my face given my unequivocal endorsement of the company just before this warning, but with the shares currently trading above where they […]

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