Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 8/3/2012

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It’s an unusually busy week on this blog due to a combination of it being results season and also my wish to ‘clear the decks’ from a work perspective before heading away on Saturday.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) ICG posted solid FY11 numbers this morning, reporting EBITDA of €49.1m on revenue of €273.3m (I had forecast €49.5m and €272.8m respectively). There really were few surprises within it, given both the simplicity (and predictability) of the business and detailed management guidance. While the company has struck a cautious tone in its outlook statement, I would be inclined to take that with a pinch of salt given both the early stage of the year we’re at, the uncertain financial consequences of competitors exiting the market and/or cutting capacity and some dodgy comparatives (due to the weather disruption in winter 2010/2011, this has presumably impacted on some of the annual comparatives provided today). Anyways, I’ve updated my model post these results, and this has resulted in my valuation for ICG falling from €18.30/share to €16.62/share. The main reasons for this are: (i) a deterioration in the net pension deficit (from €17.5m in 2010 to €32.5m in 2011), which equates to circa 60c/share, and (ii) rising fuel prices since I last updated the model, which add circa €8m to the fuel bill for 2012 (bringing it to €60m). While the implied upside from where the shares are currently trading is relatively muted, I have very conservative estimates put in for top line growth over the coming years – for example, my revenue forecast for 2015 is 14% below 2007 levels despite so much competitor capacity having been taken out of the market. Any positive surprises on this front should lead to material upgrades given the significant operating leverage (estimated at 75%) inherent in ICG’s business model.

 

In the construction sector, Grafton issued solid 2011 results yesterday. At a headline level, the numbers were in-line with what market watchers were expecting. In terms of the outlook, management see further profit growth in 2012 in spite of challenging conditions in Ireland, and within this it was particularly encouraging to read that like-for-like sales in its core UK business were +4% yoy in both January and February.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group) Davy’s Barry Dixon wrote an interesting piece yesterday in which he highlighted Smurfit Kappa’s latest capex initiative. The company, as is its usual form, bought a second hand packaging machine on the cheap from a financially stretched (should that read “defeated”?!!) Italian firm. It’s now using that machine to replace two less efficient machines, which will be broken up and used for spare parts elsewhere in its operations, leaving Smurfit with more effficient, lower cost output while leaving production levels unchanged, thus allowing it to capture the extra margin. With Smurfit’s recent debt refinancing deal giving it enhanced financial flexibility, I wouldn’t be surprised to see Smurfit make further opportunistic purchases of strategic assets from distressed vendors in Euroland.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc and Independent News & Media plc) Lewis at Expecting Value posted a great piece on the wider print media sector in the UK and Ireland that’s well worth looking at. The only things I’d add to it is that INM’s “Island of Ireland” division is presumably crafted because post the sale of the UK Independent newspaper its UK division effectively comprised the Belfast Telegraph and a low-margin distribution business. Folding that into the Ireland division helps take out management overheads, while INM has exited the Indian market (it had previously owned a stake in Jagran Prakashan). I concur with Lewis that Trinity Mirror is the better UK newspaper play, given its (in my view) better quality portfolio of assets (e.g. national titles such as The Daily Mirror and The People).  I also think there’s more value in Trinity Mirror at these levels than INM, but the presence of several business-savvy billionaires on INM’s share register makes me wonder about the potential for shareholder-friendly corporate activity (e.g. a sale of APN News & Media at a minimum).

 

In the food sector, agronomy specialist Origin Enterprises posted good interim results this morning. Management says that the company is “on track to deliver full year consensus earnings expectations”. As H1 only makes up around 15% of Origin’s full-year profits, we’ll have to wait until later in the year to make a more definitive judgment on the outlook. However, I should say that I do like Origin given the structural growth drivers (removal of EU quotas, rising demand for agri products from emerging markets, modernisation of Eastern European agriculture) that will underpin the group’s growth long into the future.

 

Finally, on a lighter note, some wag has posted a video on YouTube saying that the Irish government is planning to sell County Cork in order to raise extra funds.

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Written by Philip O'Sullivan

March 8, 2012 at 10:54 am

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