Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 2/5/2012

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Time to take a break from the study and check up on what’s happening in the markets.


This evening Ireland’s Department of Finance released the latest set of Exchequer Returns data, covering the first four months of the year. As happened last month, a lot of commentators seem to be getting very excited about the headline improvement in the deficit. For the first 4 months of 2012 the deficit was €7.1bn versus €9.9bn in the same period of last year. So, a €2.8bn improvement. Actually, no it isn’t. Because there are a number of one-off cash items that need to be adjusted for. Three in particular. Last year’s deficit included a €3.1bn promissory note payment which doesn’t feature in this year’s computation. This year’s deficit includes an outlay of €0.4bn representing a loan to the insurance compensation fund, while this year’s tax receipts are flattered by the receipt of €250m in late corporation tax payments from the end of last year which were received in January. So the Jan-April 2012 headline deficit is a net €150m worse than it should be, making for an underlying deficit of €7.0bn, while the Jan-April 2011 underlying deficit was €6.8bn. In other words, the underlying deficit is marginally worse than it was this time last year. Another important point to note is that voted spending, which is the discretionary part of government expenditure was €15.1bn in the first four months of 2012 versus €14.8bn in the same period last year. So, government discretionary spending is on the rise. And to think that some politicians and commentators maintain that we’re living in an era of savage austerity!


Retailer French Connection, a favourite among the UK value investor community, put a fifth of its stores up for sale. It’s not one that I particularly like given my bearish tack towards UK retail in general and my concerns about leases. The retailer’s 2012 annual report reveals operating lease payments on property of £28.1m and total property lease commitments of £217.2m, the vast majority (>80%) of which expire in over five years time. These are pretty chunky numbers for a company that made pre-tax profits of £5.0m last year. I appreciate that it has net cash of £34.2m but even this isn’t enough to allay my nervousness.


Playtech, which I recently sold out of, released a solid Q1 update this morning. Within it management announced that it is not to pursue the recently announced related party acquisition, opting instead for a licensing deal, while the company is also to pay the chairman £500k to buy out his share options, so that he can be considered independent for the purposes of the UK Corporate Governance Code. Overall, there’s nothing in it that I can see to make me reconsider my recent selling decision.


Kerry Group issued a trading statement at 12pm today in which it maintained FY earnings guidance despite challenging conditions in the Irish and UK consumer foods markets. On the conference call that followed the release management hinted that input price pressures should ease as the year progresses, which is a positive, but of course we’ll have to see if this benefit is countered by still fragile economic conditions in many of its key markets.


(Disclaimer: I am a shareholder in Independent News & Media plc) Australasian media group APN issued a trading update in which the group guided that H1 profit will be marginally behind prior-year levels due to weakness in New Zealand in particular. The group has initiated a strategic review of its assets in that market which could potentially lead to a sale of all of its New Zealand assets. I have previously argued that INM should sell out of APN altogether and if there is buying interest in media assets in that part of the world (as APN acknowledges) I would contend that now would appear to be a good time to try to kick something off.


Bloomberg published an interesting comparison on the Irish and Spanish property crashes.


Written by Philip O'Sullivan

May 2, 2012 at 5:28 pm

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