Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 19/1/2012

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The past few days have been pretty hectic as I’ve started a full slate of new subjects as part of my MBA at the Smurfit Business School. So, this blog is really more of a catch up of what’s been going on.


The main news, for Irish retail investors, has been that two of the microcap plcs in Dublin look like they’ll soon be delisted. Siteserv responded to media reports that it was putting itself up for sale, and given the mountain of debt attached to it I expect that shareholders will be left more or less empty-handed. Like Siteserv, Readymix has been through the wars in recent years due to the difficult macro backdrop here, but its shareholders must be pleasantly surprised to have woken up this morning to news that majority shareholder Cemex has made a preliminary 22c/share offer for it. My advice would be to take the money and run – the share price was only 3c/share before today and the outlook for the Irish construction industry is unlikely to get significantly better for a long time to come.


(Disclaimer: I have an indirect shareholding in DCC plc) DCC cut full-year earnings guidance again 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 were at before I expressed my bullish sentiments it’s clear that the market is, like myself, taking the view that it would be unfair to blame a company for a very mild winter.


(Disclaimer: I am a shareholder in Marston’s plc) C&C issued a solid trading statement in which it said that operating profits for the full year would be in-line with previous guidance at €110m. Elsewhere in the broader alcoholic drinks space, UK pub groups Greene King and JD Wetherspoon both issued strong Christmas trading updates, buoyed by easy comparatives. This gives me optimism that the most recent addition to my portfolio, pub group Marston’s, has seen a similar performance.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) There was significant M&A activity in the European packaging space, with DS Smith bidding €1.6bn for SCA’s packaging business. As Davy’s Barry Dixon notes, if you apply the 6.3x EV/EBITDA SCA bid multiple to Smurfit you get an equity value of over €15 (yesterday’s closing SKG price: €5.58). Assuming it goes through, the deal would give a combined DS Smith – SCA 18-19% market share in Europe, just behind Smurfit Kappa Group’s 20%. In my view, this deal is a clear positive for the packaging sector, which is notoriously undisciplined when it comes to pricing. The more consolidation there is, the better, as the larger players will presumably encourage more rational pricing strategies.


SmI’ve expressed my admiration for fund manager Hugh Hendry before. I’ve also expressed my fears about the Chinese economy before. If you put the two of them together you see how Hugh Hendry’s fund, Eclectica, made 46% last year by betting against the Chinese economy. Oh, and speaking of the Chinese economy


Motorists – have you ever wondered about where the money you pay for petrol goes?


Speaking of taxes, the Irish government is planning to introduce a new broadcasting tax. In my view this is a blatant pitch by The Labour Party to cosy up to the State broadcaster, despite this being: (i) The 21st century, in which people can access information and content from all over the world at the click of a button; (ii) A model that sustains a State broadcaster that in addition to snaffling most of the taxes raised in this space also hoovers up private advertising revenue thus keeping Ireland’s privately owned media on life support; (iii) an era where the very notion of State-owned broadcasting agencies seems horribly antiquated – at best, and a possible threat to democracy – at worst; and (iv) an age in which people are consuming ever smaller amounts of traditional media. Presumably whenever the Minister goes on jollies to foreign countries he tells their political and business elite that Ireland is aiming to be a leader in digital media, while at the same time hitting Ireland’s YouTube generation with a tax to pay for inflated salaries at RTE.


In the blogosphere, Wexboy has commenced an interesting valuation project in which he looks at the stocks listed in Dublin. Well worth checking out.

Written by Philip O'Sullivan

January 19, 2012 at 9:14 am

One Response

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  1. […] I am a shareholder in Smurfit Kappa Group plc) Following the recent DS Smith – SCA deal, there has been more consolidation in the European packaging space. Subject to regulatory […]

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