Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 28/2/2012

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The main Irish business news since my last update has been the release of results from a number of the largest plcs here. Let’s run through what the implications of those are and then look at what else has been happening in the wider market.

 

Yesterday brought FY2011 results from Kingspan. At a headline level, these results were pretty good, with EBIT of €91m coming in ahead of guidance of €82-85m. Free cashflow generation was also impressive, rising to €76.9m last year from 2010’s €39.9m due to rising profits and improved working capital management. Net debt finished the year at only €170m, up circa €50m yoy but a very good performance in light of net acquisition spend of €107m over the year and a near trebling in the cash cost of dividends (€17.3m vs. €6.8m). The all-important outlook statement was encouraging, in particular the reference to improving non-residential markets in the US and UK, which are of critical importance to the group. Overall, a combination of an excellent operating performance and a reassuring outlook bodes well for Kingspan.

 

(Disclaimer: I am a shareholder in CRH plc) Staying within the construction sector, today saw materials behemoth CRH report FY2011 results. Going into these results the market had been anticipating a beat relative to guidance, given positive sector newsflow in recent weeks (helped by easy comps due to benign weather this winter), and CRH did not disappoint, producing EBITDA of €1.66bn relative to guidance of “approximately €1.6bn”. Like Kingspan, CRH’s outlook statement is pretty reassuring, with references to improving trading conditions in the US, while Europe, unsurprisingly, remains uncertain. While news of improving end-markets in the US is welcome, and management expect the group to make progress in 2012, I think the ‘recovery theme’ will be augmented by M&A, given that CRH’s sector-leading balance sheet gives it considerable flexibility to pick up assets at a time when many of its competitors lack the financial firepower to bid against it, thus facilitating deals being done at very attractive multiples.

 

Switching to the transport sector, Aer Lingus posted solid FY2011 results this morning. Despite extensive commentary within the results release, there was, however, no real update on the IASS pension issue, which in my view has been a big driver (alongside very impressive traffic stats) behind Aer Lingus’ recent strong performance. In terms of the outlook, the group says it expects that it “will remain significantly profitable albeit below 2011 levels”. Management have done an excellent job on capacity and yield management in recent times, but fuel is a big headwind, with the fragile Irish economy making it tricky to push yields higher to compensate for this.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc) In the financial space, I was interested to read that BKIR’s UK deposits will no longer be covered under the ELG from March 30 onwards. This is quite significant in light of the impact the cost of the ELG (€449m in 2011) has on BKIR’s pre-provision profits (€411m in 2011), although bear in mind that this news only relates to a portion of the group’s deposit base. The sooner BKIR can extricate itself from the ELG, the better, although granted the group’s ability to do so is heavily dependent on macro factors over which it has minimal influence.

 

(Disclaimer: I am a shareholder in BP plc) In the energy sector, Thailand’s PTT trumped Shell’s bid for Cove Energy. In my last market round-up I mentioned that a lot of  Irish investors will clean up from Cove’s takeover. The Irish Times reckons they’ll split £100m between them – an estimate that could prove light if speculation of a counter-bid is proven correct. Meanwhile, here’s a drum that I’ve been banging for a while – Ernst & Young says thatdifficult funding dynamics should result in [the energy sector] remaining a hotbed of M&A activity for much of 2012“. And where is this going to be concentrated? The small-cap space, due to the challenging funding environment. In other sector news, the fraccing revolution is transforming the sector internationally, and this is helping to put downward pressure on gas prices at a time when cheaper energy is badly needed. I was pleased to read that Northern Alaska may hold as much as 80 trillion cubic feet of gas – that’s the equivalent of 80 Corrib gas fields. Finally, I was pleased to read further reports that BP is moving to conclude the post-Macondo litigation. The sooner that is resolved, the better.

 

In the macro arena, The Economist ran a good piece on Argentina’s dodgy “official statistics”. This should be borne in mind the next time you see these data being used by someone to support an argument that Ireland should try to emulate the economic policies of our Latin American friends over the past 20 years or so.

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Written by Philip O'Sullivan

February 28, 2012 at 10:22 am

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