Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 12/2/2012

with 3 comments

As the reporting season starts to really get going it’s no surprise that we’ve seen a lot of newsflow right across the market. Let’s run through what’s been happening on a sector-by-sector basis, and what the read-through for companies yet to report their numbers is.

 

(Disclaimer: I am a shareholder in CRH plc) Kicking off with the construction sector, I was interested to read that some of CRH’s major peers on both sides of the Atlantic have posted consensus-beating results. HeidelbergCement reported Q4 EBITDA of €639m, well ahead of consensus of €580m, while in the US Beacon Roofing reported EPS of 41c versus expectations of 29c. Just by way of a reminder, CRH’s geographic split is 50% North America, 35% Europe and 15% emerging markets. Based on recent sector results I suspect the risks to CRH’s full-year results on February 28 lie to the upside.

 

In the food and beverage sector, Diageo revealed that Guinness is recording strong growth in emerging markets, with volumes in Africa increasing by 8% while Asia-Pacific volumes rose 13%. Having had a few pints in a bar in Kuching on the island of Borneo last year, I can indeed confirm that Guinness is making headway in emerging markets! Elsewhere, Greencore announced a very impressive underlying sales performance, recording growth on this measure of 11.2% in the 17 weeks to 27 January. International Flavors & Fragrances, a major competitor of Kerry Group’s Ingredients & Flavours division, reported very strong results that bode well for Kerry’s FY results on February 21. Kerry has previously guided 8-12% growth in earnings for 2011, led by a strong performance by Ingredients & Flavours.

 

(Disclaimer: I am a shareholder in AIB plc, Bank of Ireland plc and Irish Life & Permanent plc) In the financials space, Danske Bank, which owns National Irish Bank, revealed that its Irish impairments and underlying profits both worsened in 2011. In contrast, KBC said that its Irish subsidiary saw impairment charges fall last year. We should get a clearer overview of the domestic situation when Bank of Ireland issues its full-year results on February 20th. Switching to our friends in the UK, there were a number of interesting data points that could suggest upside to the Irish banks’ deleveraging plans. Firstly, Barclays’ UK retail and business impairments fell 35% to £536m in 2011, making for a 44bps charge (2010: 70bps), which could enhance the attraction of any UK loan books in this segment that the Irish banks attempt to offload. Similarly, news that buy-to-let mortgages in the UK are enjoying something of a renaissance is positive news for Irish Life & Permanent in particular, given that IL&P has to sell its £6.4bn UK BTL-heavy loanbook as part of the PLAR requirements. Of course, time will tell how successful the divestments will ultimately be.

 

(Disclaimer: I am an indirect shareholder in Dragon Oil plc) As I alluded to recently, an investment fund that I am involved in has gone long Dragon Oil. A couple of days ago I came across this nice summary of the attractions of the company. Elsewhere, my Russian comrade on the MBA programme, Denis Shikunov, posted up E&Y’s 2011 Global Oil & Gas Transactions Review. I think we’ll be seeing a lot of M&A in this space during 2012, given the astonishingly cheap valuations to be found in the small-cap segment in particular.

 

In the blogosphere, Neonomic posted up an interesting analysis of housebuilder Barratt Developments. It’s a stock a lot of value investing bloggers like, but my preferred play in the sector, due to its bulletproof balance sheet and very inexpensive rating is Abbey. Elsewhere, John Kingham identified an interesting sounding net-net called Molins that’s worth taking a look at. Calum looked at Topps Tiles, which he rightly concludes is a leveraged play on an UK economic recovery. Wexboy posted up part IV of The Great Irish Share Valuation Project. Finally Kelpie Capital posted up a very good piece on Tesco, which is a stock I am strongly minded to purchase.

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3 Responses

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  1. any views on the long delay in results from petroneft progress ? i convinced the companys back is to the wall financially and a possible very bad deal will result for the existing shareholders.

    john furlong

    February 13, 2012 at 1:49 pm

  2. Hi John

    Firstly, great to see you posting on this, you’re very welcome. Apologies for the delay in replying to you, I wanted to get the ICG post out of the way. Like yourself I am aware of the chatter around PTR’s financial position, and am as nervous about the uncertainty as you are. The Macquarie facility was due to have been reviewed last month, and we have heard nothing about it – this may, strangely enough, be a good thing as given that PTR is a listed company anything that could have a material impact on the financial position of the group has to be disclosed promptly to shareholders. However, the radio silence about this and limited information to date about the hydraulic fraccing programme is unhelpful. In addition to the above uncertainty, the shares have been killed by (i) Bluegold dumping a load of stock recently; and (ii) a general market view that small-caps in general are having serious difficulty in raising finance at the moment. A resolution of at least some of these could lead to a material re-rating of the firm’s shares.

    Against the above pressures I would note that the company’s oil reserves are being valued at next to nothing, which makes me wonder if the risks I identify above are more than priced in. Hence, I’m happy to remain long the stock, while noting the risks inherent to it.

    Philip O'Sullivan

    February 14, 2012 at 9:57 am

  3. […] UK loanbook along with its subprime business. I find this move more than a little strange given the seemingly buoyant demand for BTL loanbooks in the UK (which is the vast majority of IL&P’s presence in that […]


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