Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 1/5/2012

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I found a few minutes to sneak in a quick update before the first of my exams so here is what has been grabbing my attention in recent days:


Aer Lingus announced that Etihad has purchased a 2.987% stake in the company. The statement from the company says that Etihad will not purchase any more shares in the carrier, pending the outcome of discussions on reciprocal code-share opportunities and “additional commercial and cost opportunities to develop a closer working relationship in areas such as joint procurement”. We’ll watch this space!


In other airline sector news, there was a very unusual development as Delta Air Lines bought an oil refinery in an attempt to reduce its costs. It’s a gutsy strategy, given that the skill-set needed to run an airline is presumably rather different to that needed to run an refining business, but I wish them well.


(Disclaimer: I am a shareholder in Independent News & Media plc) Smith & Williamson’s Mark Pignatelli (who’s long the stock) made a few interesting comments about Independent News & Media. While I’ll refrain from commenting on his bullish remark about INM being “probably the cheapest stock in Europe” , I concur with his observation about INM fixing its balance 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 Crowley, a man known for his cost-cutting instincts, now at the helm) should hopefully mean a significant recovery in earnings once advertising expenditure starts to pick-up.


(Disclaimer: I am a shareholder in Trinity Mirror plc) Elsewhere in the media space, Press Gazette did up a good piece on the UK local newspaper market. They found that 242 UK local newspapers have closed in the past 7 years, which to put into context compares with the 238 paid titles the largest local newspaper group, Johnston Press, publishes. Trinity Mirror publishes 130.


(Disclaimer: I am a shareholder in BP plc) BP released its Q1 results this morning. While the underlying replacement cost profit of $4.8bn lagged the Reuters consensus ($5.1bn), I’m not too concerned about it  – as management state today, BP continues to make good progress towards meeting its strategic objectives, so one quarterly earnings miss doesn’t prompt much nervousness on my part. The company has been on my watchlist for a while and I would view any share price weakness on the back of this as a buying opportunity.


Insurer FBD issued a very solid trading statement ahead of its AGM yesterday. While the “very competitive” Irish insurance market continues to soften, in line with domestic economic activity, FBD is more than holding its own, with operating profit in its underwriting operations “ahead of the prior year and marginally ahead of expectation”. I also note positive noises about the firm’s capital base. Management is for the moment (and is right to, given we’re not even half-way through the year) sticking to its full-year operating EPS guidance of 145-155c, but barring any adverse claims events I wouldn’t be surprised to see upgrades as the year progresses due to: (i) the benefits of the cost take-out programmes in recent years; (ii) FBD’s successful internet strategy; (iii) supportive conditions in its core agri customer base; and (iv) the expansion of its broker channel.


(Disclaimer: I am a shareholder in Bank of Ireland plc, AIB plc and Irish Life & Permanent plc) Staying with the financial sector, I was pleased to read that deposits at Ireland’s covered banks rose 1% month-on-month in March. Total covered bank deposits are now at their highest level since February 2011. This represents a nice vote of confidence in the sector. In terms of AIB, I see that it is not going to pay a cash dividend on preference shares to the NPRFC, which means that it will instead issue more shares to 99.8% shareholder, the State (i.e. the Irish taxpayers).


Hugh Hendry’s latest letter has been posted onto Scribd.


From a macro perspective, I was interested, but not terribly surprised, to read that Ireland’s government deficit over the past 2 years equals Slovakia’s entire GDP. Our deficit for 2011 alone was greater than the size of Cyprus’ economy. I find it increasingly difficult to comprehend how anyone could believe Ireland’s fiscal strategy is sustainable.


In the blogosphere, Lewis wrote an interesting piece on Cambrian that’s worth checking out, while Richard wrote a blog post on Churchill China that brought back memories from the time I covered Waterford Wedgwood as a sell-side analyst.

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  1. […] traffic in and out of Ireland – here is well over 70%); (ii) A move to force Etihad, which recently revealed that it has a near-3% stake in Aer Lingus, to counter-bid for the carrier; (iii) A move to scare Etihad out of increasing its stake in AERL, […]

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