Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 14/5/2012

with 4 comments

The past few days have been relatively quiet in terms of newsflow, but as this is due to change starting tomorrow with a significant number of results and trading updates expected before the end of next week from Irish plcs I thought I should do a quick blog on what’s been grabbing my attention of late.


(Disclaimer: I am a shareholder in Total Produce plc) To begin with the food sector, The Irish Times carried an interesting report from the Fyffes AGM at which management admitted that  it considers a re-merger with Total Produce “from time to time”, but has no current plans to execute one. A merger would have some positives – economies of scale, more institutional interest in a combined entity with a higher market cap etc. – but for me it would add a chunk of volatility into the Total Produce investment case that I would prefer to do without. I believe that Total Produce should stick to its stated task of consolidating Europe’s fragmented produce sector – leading Irish companies such as DCC and United Drug have demonstrated in their market segments that focused distribution firms can deliver consistently high returns over time. Why risk that narrative by adding a more volatile component?


I was pleased to see that the Irish Stock Exchange will next month be joined by a new entrant – Fastnet Oil & Gas is backed by Raglan Capital and some of the directors of Cove Energy, which was recently sold to Shell for £1.2bn. I suspect that this will attract a lot of private investor interest given the way Cove shareholders made out like bandits. I look forward to tracking its progress.


(Disclaimer: I am a shareholder in Allied Irish Banks plc). Today it was confirmed that AIB is to issue another 3.6bn shares to the Irish State in lieu of a €280m cash dividend on the NPRFC’s preference shares. This means that AIB will have 517bn (yes, billion, with a “b”!) shares in issue following this transaction. Given tonight’s closing price (7c), AIB is presently capitalised at €36bn, roughly twice its peak during the Celtic Tiger, when the bank also had significant operations in both the United States and Poland. This valuation is quite obviously ridiculous, especially when benchmarked against its closest domestic peer Bank of Ireland, capitalised at only €2.7bn. My only remaining shares in AIB are some legacy ‘staff shares’ that are horribly underwater and which I view as having value solely as a tax loss to offset against capital gains elsewhere in the portfolio at some future point.


In the construction space Irish builders merchant and timber distributors Brooks has been bought out of insolvency by Welsh timber firm Premier Forest Products. From a plc perspective, given that Brooks will operate from only 6 outlets post the transaction and the fact that the acquirer is a timber specialist, I assume that this is unlikely to form a base for Premier to build a substantial operation that would have a significant competitive impact on either Saint-Gobain or Grafton in this market.


Speaking of builders merchant groups, Travis Perkins released an IMS earlier today in which it stated that: “at a group level the outlook for the year remains unchanged and we remain confident of meeting consensus expectations”. In the first four months of the year Travis Perkins achieved like-for-like group in its UK general merchanting operations of +2.6% (specialist merchanting was +1.9%), which compares with the +1.7% achieved in the same period in that market by Grafton.


Fidelity investment director and columnist with the Daily Telegraph Tom Stevenson posted a great video on China, which mirrors many of my findings from my recent trip there.


(Disclaimer: I am a shareholder in Trinity Mirror plc) As ever the blogosphere has thrown up some interesting nuggets. John Kingham asks if Rolls-Royce shares are as attractive as the company, while Lewis did a great write-up on UK housebuilder Barratt Developments. Elsewhere, Paul Scott provided a very comprehensive review of Trinity Mirror’s AGM, which included some encouraging signals on the dividend (if income is your thing), but as ever my own bias towards strong balance sheets means I’d prefer to see it move towards a zero net debt position before reactivating distributions to shareholders. I am very tempted to increase my position in TNI following its recent good news around its net debt and pension deficit.


Written by Philip O'Sullivan

May 14, 2012 at 6:47 pm

4 Responses

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  1. Total Produce: I know it was a response to a shareholder question, but I’m still slightly suspicious about how this ended up as a ‘headline’ – maybe they’re floating the idea to test market reaction..? You know, I always thought the de-merger was financial engineering gone mad anyway – and even from that perspective, I couldn’t figure out how it made sense..! So I’ve always been for a Fyffes/Total Produce re-merger, and I think it would promise quick/significant cost savings & the potential for a much needed market re-rating. But you make a great point – Fyffes has a more risky business, so further fruit & veg distributorship consolidation is in theory much more attractive. However, some points I’d make:

    i) Even if Total Produce doubled its acquisitions pace, cost savings from acquisitions would be relatively glacial vs. those that could be quickly captured from a merger.
    ii) The bullshit every year or two from Fyffes about FX (i.e. the EUR/USD rate) is suspicious & ridiculous. Don’t they know how to hedge, or can’t they just train customers to accept monthly (+/-) price volatility?! That’s pretty much what Total Produce does anyway.
    iii) Yes, the Fyffes farms are a nightmare – they clearly aren’t fit to run them! So, despite my liking my farmland exposure (!), in this case I’d love to see a merger accompanied by a sale of the farms.
    iv) A merger makes perfect sense on a nil premium share basis. Therefore, Total Produce can capture merger savings AND its current cash pile is still available for European consolidation!


    May 14, 2012 at 7:16 pm

    • But if Total Produce had the choice between a merger with Fyffes and a merger with a group of produce distribution companies whose combined size was the same as Fyffes, which would you prefer?

      Philip O'Sullivan

      May 14, 2012 at 7:24 pm

      • Both…!! No, I totally agree – given that choice, I’d definitely opt for the produce distribution companies. Do you know of such a group..? 😉


        May 14, 2012 at 7:33 pm

  2. No, but given that many of TOT’s competitors are privately owned businesses that isn’t a surprise. I suspect that corporate finance houses throughout Europe (given the wide geographic spread of its operations) are pitching firms to them all the time. While I accept that Fyffes could offer a faster way to increase sales and profits, I’m much happier to put my money on the tortoise, instead of the hare!

    Philip O'Sullivan

    May 14, 2012 at 7:44 pm

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