Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 30/3/2012

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Irish based market watchers have been hit with a Tsunami of news from the financial sector in the past couple of days, and with Irish Life & Permanent due to report its FY 2011 numbers on Monday there’s more to come.


(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) To take the Irish financials’ newsflow in chronological order, earlier this week we saw the Irish government buy Irish Life from IL&P for €1.3bn, which is the insurer’s NAV. This comes as no surprise given previous guidance that the IL&P recap question would be resolved by the end of April, which is something I’ve written about previously. In terms of IL&P as an investment proposition, well, we’ll have a better handle on things post Monday’s results, but taking the current market cap of €1.6bn and backing out the €1.3bn for the insurance arm this means the market is in theory valuing the banking unit (a loanbook in the UK and Ireland of circa €33.5bn by my estimates) at €0.3bn. This does look punchy to me in light of ptsb’s low NIM (97bps in H1 2011) and the very high impairment charges (€1.4bn in FY2011 alone). I’m inclined to wait until Monday before fully making my mind up, but I know what my gut is telling me!


IBRC (the old Anglo Irish Bank and Irish Nationwide Building Society) released FY 2011 results on Thursday morning which I’ve covered here.


That same day, smallcap IFG produced a lot of newsflow. Firstly, its FY 2011 results were in-line at the earnings level, while the dividend was hiked 10% and the company cut its net debt by 29%. Within 2 and a quarter hours, however, this news was completely overshadowed by news that it has agreed to sell its International division for a chunky €84m. This represents ~ 9x EBIT and 1.1x book. Based on where the share price closed at last night, IFG has a market cap of €183m and net debt of circa €11m. So an EV of €194m which equates to roughly 0.9x book and 7.2x EV/EBIT for the whole group. Stripping out the international division means there’s probably still some upside from here given that the UK business is a very attractive annuity-style operation with a strong market position in the SIPP space, while if the Irish losses can be eliminated the upside is even greater.


Late on Thursday brought news of an ‘Irish solution to an Irish problem’ (of sorts), where despite all the hype of recent days, Bank of Ireland, IBRC and the Irish government will conduct a repo agreement to tackle / kick the can down the road on (delete where applicable) the looming promissory note payment. For me, the winner from this will be Bank of Ireland, which assuming Ireland Inc doesn’t blow up over the next 12 months will get its hands on a margin of 135bps over ECB funding for holding a bond for a year. The loser from this is the government, and by extension the Irish people, because, as Constantin Gurdgiev illustrates, this transaction will add to the national debt.


This morning AIB issued its FY 2011 results. While all the headlines this morning are focusing on its reported net profit number, as I noted a few days ago I was always going to focus my attention on: (i) deposit trends; (ii) net interest margin progression; (iii) progress on deleveraging; and (iv) impairment guidance. On these, I was pleased to read that “deposits were stable from August onwards” last year, with the deposit base having increased by €1.5bn since the start of 2012. That isn’t a huge surprise given recent Central Bank data and peer commentary, however. In terms of the NIM, this appears to have improved of late. It was 1.03% for the full-year, having been 0.96% at the interim stage (I don’t know to what extent this has been distorted by EBS and Anglo, so not inclined to work out a H2 figure). Due to a combination of deleveraging and deposit transfers, AIB’s LDR has improved from 165% at end-2010 to 136% at end-2011, so well on track to meet the end-2013 target of 122.5%. Finally, credit quality continued to worsen in 2011 (provisions were €7.7bn vs. €7.1bn in 2010) and given the wretched state of the domestic economy I suspect we’re going to see another big number in 2012. Net net though, AIB’s results are probably as well as could be expected – certainly I don’t see any major surprises in there. In terms of the investment view though, I struggle to understand why people interested in trading the Irish financials would pay nearly 2x historic NAV for AIB when Bank of Ireland is trading on around a third of that level – on a forward basis!


Elsewhere, switching to the food sector, I note that PZ Cussons issued a profit warning on the back of social unrest in Nigeria. It made no specific mention of its JV in that market with Glanbia, Nutricima, but even if that is being impacted the effect on Glanbia’s profits is likely to be very modest – Glanbia’s JVs and Associates, which mainly comprise Nutricima, the Southwest Cheese jv in the States and the mozarella JV in Europe, in total contributed 14% of group EBIT in FY11, so any hit would likely be less than 1% at the earnings level.


(Disclaimer: I am a shareholder in Ryanair plc) I was pleased to see Ryanair buy back 15m shares yesterday for €4.45 apiece, taking recent share buybacks to €105.75m. In late January CEO Michael O’Leary said the carrier could spend up to €200m on buybacks, which should continue to help support the share price against the pressures of high oil prices.


(Disclaimer: I am a shareholder in Datalex plc) Speaking of the travel sector, booking engine software provider Datalex issued its FY 2011 results earlier this morning. The company delivered EBITDA (+42%) and net cash (+13%) growth as promised, while management sees further growth in 2012, despite the troubled macroeconomic backdrop. I was pleased to see the volume of new client wins in 2011, with 8 carriers signed up, including heavyweights Delta Airlines, United Airlines and Malaysian Airlines. Presumably the firm enters 2012 with a strong tailwind (!) given the 2011 contract wins will all be contributing a full 12 month’s revenue this year (that is, assuming that they all went live in 2011 – if any of them did not, they’ll still make initial contributions this year).


(Disclaimer: I am a shareholder in BP plc) In the energy space, earlier this week I noted reports that BP was teeing up some asset sales in the North Sea. I didn’t have to wait long to see this occur, with $400m of gas assets disposed of on Tuesday.


From a macro perspective, the ASDA income tracker in the UK, which I follow religiously, showed that families remain under severe pressure. The average UK household had £144 a week of discretionary income in February 2012, 6.3% below year-earlier levels. Is it any wonder that many UK retailers are under pressure?


Written by Philip O'Sullivan

March 30, 2012 at 7:37 am

One Response

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  1. […] I currently forecast two €500m payouts – in both FY13 and FY14 – but given the €106m it has spent on buying back its own shares recently, I’m starting to wonder if I should revise that to one special dividend and further share […]

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