Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 20/2/2012

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It’s been a busy few days as I’ve had to prioritise finishing off two articles for Business & Finance magazine along with some assignments for college. However, with Irish ‘pillar bank’ BKIR reporting numbers today, I thought I should do a quick piece on those, along with the other things that have been competing for my attention of late.


(Disclaimer: I am a shareholder in Bank of Ireland plc) This morning Bank of Ireland reported its full-year results. Going into them I identified five key things to watch out for. Here’s how BKIR did on those measures: (i) Pre-provision profits – The Bank reported underlying profits of €411m in 2011, which came in behind the €0.5bn many of the Irish brokers had projected; (ii) Deposit trends – The Bank did well here, reporting customer deposits of €71bn, up from the €65bn reported at end-2010. Within that, retail customer deposits in Ireland increased by 2% while retail deposits in the UK increased by 25%; (iii) Net Interest Margin – this was an area of disappointment, falling 13bps in 2011 from the 1.46% recorded in 2010, while after adjusting for the costs of the ELG scheme it was just 1.01% in 2011 versus 1.24% the previous year. Management say that the “recovery in our net interest margins has become more difficult”; (iv) Progress on deleveraging – There was nothing really new on this, but BKIR has done a great job to date (contrary to what some of the permabears have been spinning). Having offloaded €8.6bn of non-core loans it is 86% of the way to meeting its divestment target to the end of 2013, while the disposals to date have been done at levels within the PCAR’s base case assumptions. These disposals have helped cut the LDR from 175% at end-2010 to 144% at end-2011; and (v) Impairments – the underlying bad debt charge worsened to €1,939m in 2011 versus €1,859m in 2010. While management sees the impairment charge falling over time, this forecast is clearly dependent on the performance of the economy.


In all, the results are a bit of a mixed bag, and to tell the truth, they are a little bit worse than what I had expected. However, with the shares up nearly 8% at the time of writing the market seems to be taking a different view to me! In terms of the valuation, there are a certain number of “known unknowns”  for Bank of Ireland, but with the shares currently trading at a level (15.1c) that is well below the forecasted trough TNAVs that are in the market (approximately 22-23c) the question for me is are the potential negatives priced in? My gut feeling is that they are, and I note an estimate from Goodbody this morning that if you apply the ‘adverse case’ scenario from the PCAR to their forecasts for Bank of Ireland that you get to a trough TNAV of 13.9c. Trading on less than 1.1x that multiple, I think that Bank of Ireland is worth holding on to at least.


Elsewhere, one stock I need to find the time to write about is C&C. The company may be known for its cider brands (of which the two best known ones are Bulmers in Ireland and Magners in the UK), but it also has quite a few non-cider brands in its portfolio, some of which it merely distributes, but it also owns Tennent’s Lager, the top-selling lager brand in Scotland and Northern Ireland. I have noticed Tennent’s encroaching into a number of the pubs near where I live (Dublin city centre) of late, and utilising the most scientific (!) sampling method available to me I, ahem, “asked Twitter” if this was a phenomenon other people are seeing. There was a wide range of views, but the most interesting thing I picked up was that some feel that Tennent’s, which is pitched at a lower price point than the premium brands, is making inroads with Ireland’s ‘squeezed middle, along with the likes of Diageo’s Tuborg and Gleeson’s Bavaria. It’ll be worth keeping an eye on C&C’s updates throughout the year to see what, if any, the financial impact of this is. Of course, it should not be ignored that some consumers could be trading down from C&C’s premium cider brands to cheaper alternatives too.


(Disclaimer: I am a shareholder in BP plc) Over the weekend I was pleased to see yet another one of BP’s partners in the Macondo well settle legal claims. As part of the settlement, Moex and BP have agreed to dismiss claims against each other. I have written extensively about how the gradual easing of the potential litigation liability has a materially positive impact on the outlook for BP’s valuation.


In the blogosphere, Macro and Cheese (!) did up an interesting piece on LTRO and the markets. This is a timely piece, given that markets have been pushing higher in the year to date despite underwhelming fundamentals, including the fact that, of the Eurostoxx 600 companies that have reported Q4 numbers, only 51% have met or exceeded forecasts (versus 69% of S&P 500 stocks). Furthermore, Q4 profit margins for S&P 500 companies declined 27 bps, or 52bps if you exclude Apple. What happens after the ECB’s second LTRO at end-February? My instinct is that we could see a pullback in markets, which is why I’ve been taking some profits recently.


Written by Philip O'Sullivan

February 20, 2012 at 9:48 am

3 Responses

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  1. […] trends, net interest margins, progress on deleveraging and impairment guidance. Two months ago BKIR’s FY2011 results revealed a bit of a mixed bag (in my view) on this front. Today’s statement revealed: (i) […]

  2. […] portfolio are performing strongly. Regular readers of this blog will recall that a few months ago I wrote that Tennent’s lager appeared to be making headway in pubs here, and this morning C&C revealed a near-50% increase in Tennent’s sales in Ireland as the […]

  3. […] Bank of Ireland’s interim results. Six months ago, when the group issued its FY2011 numbers, I wrote that: “[The] results are a bit of a mixed bag, and to tell the truth, they are a little bit […]

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