Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 24/2/2012

with 5 comments

It’s been a very hectic few days in terms of newsflow. Let’s recap on what’s been happening:

 

To kick off with the food sector, Kerry Group issued solid FY11 results, with earnings coming in towards the top end of its guided range. Management sees a healthy 7-10% growth in earnings in 2012, but I wouldn’t be surprised if that forecast is augmented by acquisition activity over the coming months.

 

(Disclaimer: I am a shareholder in RBS plc) The financial sector also featured heavily in recent days. Bloomberg posted a very bullish piece on the outlook for Dublin’s commercial real estate sector, which has positive read-through for the domestic banks here along with RBS and, let’s not forget, NAMA. Speaking of RBS, the bank issued full-year results yesterday that had a few interesting pointers for Ireland Inc. Total impairments at its Ulster Bank unit fell 4% yoy in 2011, although mortgage impairments were nearly 2x 2010 levels last year (£570m vs £294m). In terms of the operating performance, the NIM declined by 7bps to 1.77%, which is not bad, while operating profits were 10% lower at £360m. While I suspect that impairments for the sector have peaked in Ireland, there will definitely be a big change in the mix of impairments in 2012 as residential mortgage books deteriorate further due to the underlying economic fundamentals here.

 

(Disclaimer: I am a shareholder in CRH plc) Turning to the construction sector, CRH announced a number of management changes at its US operations. This is an important development, as (i) it shows the management cadre’s experience and strength in depth; which (ii) offsets the effect of departures to rivals e.g. Summit Materials. CRH also announced that Nicky Hartery will take over as its next Chairman in May. Elsewhere, as expected Readymix agreed to a takeover by its biggest shareholder, Cemex.

 

(Disclaimer: I have an indirect shareholding in Dragon Oil) In the energy space, Dragon Oil issued FY11 results that contained few surprises given the detailed guidance provided by management in the run-up to them. Elsewhere, Shell offered $1.6bn or £1.95/share for Cove Energy, which should mean a nice windfall for a lot of Irish private investors. I’ve written before about how I believe one of the themes in the energy space this year will be cash-rich large caps picking up small caps, and Shell’s move for Cove continues a narrative that also features Dragon Oil’s approach for Bowleven and Premier Oil’s acquisition of EnCore.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) I was interested to see that HSBC is forecasting significant growth in Irish trade volumes over the coming 10-15 years. Should this come to pass, a key beneficiary of it will be ICG, which is a major player in both LoLo (containers) and RoRo (trucks) freight here.

 

(Disclaimer: I am a shareholder in France Telecom plc, Independent News & Media plc and Datong plc) Switching to the TMT sector, I was unsurprised to read that France Telecom has cut its dividend. It’s a stock I really need to do some work on to see if there’s merit in keeping it in my portfolio or not. Elsewhere, Datong issued a statement at its AGM yesterday that revealed good progress on cost takeout and optimism on sales growth for the full-year. On the other side of the world, Independent News & Media’s Australasian associate APN posted in-line underlying profits for FY11. There were some boardroom ructions at UTV Media, which I suspect could put the company into play especially given how concentrated the share register is. The firm’s biggest shareholder, TVC Holdings, posted this response to yesterday’s developments.

 

In the blogosphere, John Kingham did up an interesting piece on Centaur Media, with a focus on its intangible assets. Speaking of intangibles, Lewis did a good article on Communisis that’s well worth a read. He also wrote a piece on Haynes Publishing that’s worth checking out. Wexboy completed (at least for now!) his impressive Great Irish Share Valuation Project.

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5 Responses

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  1. Hey Phil, also a shareholder in RBS, so read your comments with interest…The NIM caught my eye also as a cause for concern…Deposits decimation the big issue though. Do you see a future for the bank in the South of Ireland?

    Damian Walsh

    February 24, 2012 at 3:18 pm

    • NIM meant to say a cause for optimism!!

      Damian Walsh

      February 24, 2012 at 3:18 pm

      • Hi Damian, thanks for visiting, and commenting! To take your points in turn – the NIM performance was indeed a cause for optimism – by keeping the decline to only 7bps this compares favourably with the 16bps decline (to 1.33%, before government guarantee charges) for Bank of Ireland in the same period.

        I suspect deposits at Ulster have stabilised somewhat, as the £1.6bn decline in 2011 was attributed to a £2bn outflow of ratings-sensitive corporate deposits. Given the high rate of precautionary saving in Ireland and the retail-heavy deposit base, I think this year should see a pick-up in deposits in Ulster Bank.

        As regards Ulster’s future, my read of the situation is that it has a future, albeit a scaled back one compared to the Celtic Tiger days (as evidenced by the significant job loss news some time ago). The number of participants in the Irish banking market has shrunk, and this combined with more prudent capital rules should see Ireland become a relatively high-profit margin market for lenders in the medium term. Ulster, as one of the survivors, is well placed to benefit from this.

        Philip O'Sullivan

        February 24, 2012 at 6:02 pm

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