Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 24/4/2012

with 3 comments

The main interest this morning is Bank of Ireland’s IMS (more of which anon), but we’ve also seen some interesting developments in other sectors that merit some attention.


(Disclaimer: I am a shareholder in Independent News & Media plc) Macquarie says Gavin O’Reilly’s departure from INM could be a precursor to a sale of its stake in APN. Such a move would, in my view, make a lot of sense – assuming INM can secure an exit price far in excess of its current market value. Last night INM’s shareholding in APN News & Media was valued at €126m, compared to INM’s market cap of €140m. INM’s recent results statement revealed that “as at 31/12/2011 INM carried its investment in APN on its Balance Sheet at an amount of €255.1m or A$1.68 per APN share held”. I appreciate that this is a very crude analysis, but if you were to split the difference between the market value and book value of the APN (i.e. €190.6m, putting APN on the sort of valuation it traded at last summer – which is not unthinkable given that such a sale would put a big chunk of Australasian media assets potentially in play) and INM received these proceeds (let’s ignore any tax implications for the sake of keeping things simple – in any event, presumably, a disposal would be done in a tax efficient manner), it would have the effect of reducing INM’s end-2011 net debt of €426.8m by 45%. In terms of the cashflow effects, INM’s only cashflow from APN is the dividend it receives from the group (€15.8m in 2011), which would cease in the event of a disposal. So, for arguments sake, based off the 2011 results this would put INM on trailing net debt of €236m and EBITDA of €86m (i.e. the €102.2m reported EBITDA less the APN dividend) – a very manageable net debt/EBITDA ratio of 2.7x, not least given how advertising markets are some way off a recovery in its home market. This is also a far superior situation to the net debt / EBITDA ratio of 4.2x INM reported in 2011 – and I think it’s safe to say that measures to dramatically improve INM’s balance sheet such as the above would see a marked improvement in the group’s share price.


(Disclaimer: I am a shareholder in Bank of Ireland plc) We had an IMS from Bank of Ireland this morning. As regular blog readers are aware, my focus where the Irish financials are concerned is fixed on deposit 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) End-Q112 deposits of €70bn are more or less in line with the €71bn at end-2011, while the LDR has improved to 142% from 144% at end-2011; (ii) net interest margins are expected to improve in H212 due to lower ELG participation, repricing of the loan book and reduced deposit pricing; (iii) the group continues to make good progress on deleveraging, and has completed / contracted divestments to date of €9.5bn, 95% of its PCAR target, at an average discount of 7.6% (by end 2011 the figures were €8.6bn sold at an average discount of 7.1%). The updated divestment figure remains within the PCAR base case assumptions. Bank of Ireland says: “redemptions and repayments in our other portfolios remain in line with our expectations”; (iv) On impairments, BKIR says: “we maintain our expectation that impairment charges will reduce from the elevated levels experienced in 2011”. The Bank notes that “domestic economic indicators remain weak, unemployment remains elevated, and residential property prices do not appear, as yet, to have fully stabilised”, while Eurozone concerns have heightened – this is no surprise given what we know from recent economic data releases and so on, and I suspect this has been priced in given recent declines in the BKIR share price from its 2012 peak. Overall, I view Bank of Ireland’s IMS as ‘solid’ – in terms of the factors it has control over it is meeting its goals, and while the macro picture remains challenging, it is well placed to capitalise once that situation improves. I remain a happy holder, and would certainly consider adding to my position over time.


(Disclaimer: I am a shareholder in Marston’s plc) I was pleased to see a solid trading update from UK pub group Greene King, which presumably bodes well for Marston’s. Speaking of pub groups: According to the British Beer and Pub Association, there are 51,158 pubs in the UK. Of the listed pub groups, Enterprise Inns has c. 6,250 pubs (12.2%)Punch 5,000 (9.8%)Marston’s 2,150 (4.2%), Greene King 2,000 (3.9%), Mitchells & Butlers 1,600 (3.1%)Spirit 803 (1.6%)Wetherspoon 800 (1.6%), Fuller’s 360 (0.7%) and Young’s 241 (0.5%). I see the market share of these large players steadily increasing over time as smaller operators exit the market.


Speaking of UK plcs, here’s some cheer for income investors – FTSE dividends jump to a record level.


In the food sector, I was interested to read that Nestlé is paying a hefty 5x revenues for Pfizer’s infant nutrition unit. There is bullish read-through for Ireland’s Glanbia and Kerry from that transaction – Ingredients account for 69% & 77% of Kerry Group’s sales & trading profits respectively, while for Glanbia it’s 49% & 67% of underlying sales & EBIT. Clearly, infant nutrition is only a portion of Kerry & Glanbia’s ingredients operations, but this is still supportive from a valuation angle.


To finish up with some macro news, Eurostat provided us with the 2011 fiscal details on EU member states. Ireland, despite all the talk of austerity, was bottom of the list, running up a frightening deficit of 13.1% of GDP last year. The underlying (ex bank recaps) deficit was 9.4%. Greece was the next worst on 9.1%. So, to emphasise, even after stripping out the cost of bank recaps Ireland had the worst deficit in the EU last year. Yet listening to some politicians and pundits here one would be forgiven for thinking that we’re experiencing severe austerity measures relative to what other EU citizens are putting up with.


Written by Philip O'Sullivan

April 24, 2012 at 6:29 am

3 Responses

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  1. […] sheet and the flow through (hopefully) from a recovery in the Irish economy. I recently wrote about the desirability of INM selling its Australasian media interests, while the operating leverage inherent in INM (which hopefully will be amplified with Vincent […]

  2. […] but the high-margin nutrition space is clearly going from strength to strength, as evidenced by Nestle’s recent $12bn deal for Pfizer’s infant formula business. I took profits in this name earlier in 2012, and would look to buy back in on any […]

  3. […] long argued here that it should sell APN News & Media, which would transform its balance sheet (net debt / EBITDA would drop to only 2.7x under one scenario I have outlined). Finally, I have no view on the impact of Denis O’Brien or indeed any other individual […]

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