Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 4/5/2012

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Happily most of the newsflow I’ve seen since my last update has involved encouraging Q1 updates, so let’s run through what’s been happening in the markets.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) I was delighted to see a blow-out set of Q1 numbers from SKG this morning.  EBITDA of €246m was well above analysts’ forecast range of €181-233m. Other points of note include an increase in the cost take-out goal (from €150m to over €200m), while management now expects to match 2011’s EBITDA outcome this year, which is ahead of what most analysts had expected given the poor state of many of its end markets. This is the latest in a series of encouraging announcements from the company, and I’m a very happy investor in the stock. The only potential negative I see at this time is the troublesome rise of economic nationalism in some Latin American markets. That region contributed 23% of SKG’s EBITDA in the first quarter of 2012, and I am somewhat concerned about its assets in Venezuela (where the government stole some of SKG’s property last year) and Argentina, where the president has been actively implementing insane economic policies of late. However, against that I note that most of SKG’s Latin American assets are located in more stable countries such as Mexico, Chile and Colombia.


(Disclaimer: I am a shareholder in RBS plc) Another firm to issue a Q1 update today was RBS. I will refrain from passing judgement on the overall group performance, as I’m in the process of building a model on the company as a precursor to a detailed case study, but from an Ireland Inc perspective I was interested to see what it had to say about Ulster Bank in particular. In the event, RBS says Ulster Bank “still faces exceedingly difficult market conditions”, with impairments continuing to rise in the residential mortgage book. The unit’s total impairments in Q1 2012 were £654m, compared to £570m in Q4 2011 (and £1294m in Q1 2011). Ulster Bank’s Q1 pre-impairment profit was -12.5% yoy. Overall, to me this reads like a ghastly performance by RBS’ Irish operation.


Staying with Irish financials, I was interested to read that financier Edmund Truell is raising up to £200m this month to put towards “deals in the European financial services or business administration sectors“. Interestingly, Truell is already the biggest shareholder (via the Fiordland investment vehicle) in Irish listed IFG, which is the biggest administrator of bespoke SIPPs in the UK market. His next moves will be interesting to watch.


Aer Lingus issued a strong Q1 interim management statement. Within it management upgraded full-year guidance from the “Our expectation for 2012 is that the Group will remain significantly profitable albeit below 2011 levels” provided at the time of the full-year results in February to the new guidance of “If current trends continue, Aer Lingus’ operating profit for 2012 should match that achieved in 2011“. Aer Lingus has done an excellent job of managing yields and capacity against the headwinds of a high oil price and very difficult economic conditions in its home market.


(Disclaimer: I am a shareholder in Ryanair plc) Elsewhere in the airline sector, one of the key themes I’ve been pushing in recent months has been the demise of and/or capacity reductions by numerous European carriers and the benefits that this translates into for Ireland’s relatively more efficient carriers.  Denmark’s Cimber Sterling, which carried 2m passengers in 2010, went bust this week. It operated out of Copenhagen, Aalborg and  Billund. Ryanair has a presence in Billund. Another carrier that has been slashing capacity is BMI Baby. It is pulling out of Ireland West-Knock, where its passengers will presumably switch to Ryanair and Flybe, and also out of Belfast, where its passengers will presumably switch to Aer Lingus, Easyjet, Thomas Cook and Flybe. Reduced competition is facilitating fare increases for Ryanair and Aer Lingus at this time.


(Disclaimer: I am a shareholder in France Telecom plc) Switching to the TMT sector, France Telecom issued its Q1 results. I was pleased to see the group reaffirm guidance of operating cashflows in 2012 of close to €8bn, but was less pleased to see the group pull back from its guidance for 2013-15. The stock trades at a discount to my estimated valuation on the company, but I am loath to raise my exposure to it, due to the deteriorating outlook noted above and the risk of elevated political interference (over and above Sarkozy’s meddling) going forward, assuming that France swings to the left in the second round of the upcoming presidential elections.


(Disclaimer: I am a shareholder in Total Produce plc) Total Produce made a small acquisition, buying a 50% stake in Flancare (Clonmel) Distribution Limited. As the target was in liquidation, I assume the consideration is very modest, but nonetheless take heart from the inference in the statement that these are very well-invested assets.


Written by Philip O'Sullivan

May 4, 2012 at 9:35 am

2 Responses

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  1. […] to jump on this bandwagon (quite the opposite) I hope it has a change of heart, not least given recent guidance that it will miss its medium-term cash generation […]

  2. […] in this battle, given the potential for increased political interference in the company, a concern I’ve previously noted.  In other TMT sector news, it was confirmed that Dermot Desmond has increased his stake in […]

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