Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 26/5/2012

with one comment

It’s been more or less all about the macro picture since my last update.


(Disclaimer: I am a shareholder in Ryanair plc) DAA, which operates Dublin, Cork and Shannon Airports (which collectively handle 96% of all air traffic into the Republic of Ireland) released its 2011 annual report. Total passenger numbers rose 1% last year (to 22.7m), a welcome rise after two successive years of 13% annual declines. Within the statement, the commentary from the CEO starkly illustrated the importance of Aer Lingus (including Aer Lingus Regional) and Ryanair to air travel into Ireland. The two Irish listed airlines in total commanded an 80% market share at Dublin Airport (AL 41%, RYA 39%), an 84% market share at Cork Airport (AL 56%, RYA 28%) and a 64% market share at Shannon Airport (AL 36%, RYA 28%).


(Disclaimer: I am a shareholder in France Telecom plc) Reuters ran an interesting article that said some European phone companies are cutting back on handset subsidies for their customers. It cited research by Bernstein which said European telcos spent €13bn on such subsidies in 2011, more than they invested in infrastructure during the year. My only telco holding is France Telecom, and while the article doesn’t suggest that it is minded 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 targets.


(Disclaimer: I am a shareholder in Bank of Ireland plc) I was pleased to see that Harris has increased its stake in Bank of Ireland by over 100 million shares. While the amount of money involved (~€10m) is not particularly significant for Harris, it nonetheless is a welcome vote of confidence at a time when nervousness around the PIIGS is understandably elevated.


Staying with the financial sector, there were a couple of interesting publications on the Irish housing market in recent days. NCB released a report entitled: Is the decline in Irish house prices over? which projected a further decline in national house prices of up to 20%, but noted wide regional differences – the scenario sketched on pages 7 and 8 says that it could take up to eleven and a half years to clear the stock of excess housing units in the border region. Elsewhere, the CSO said that residential prices in the Dublin market rose 0.5% month-on-month in April, a second consecutive month of gains, while residential prices outside of Dublin declined 2.0% mom – the 20th consecutive monthly decline. All of that brought to mind the regional variances I noted in the report I wrote for last year – A Tale of Two Irelands. Yesterday the Central Bank released its latest mortgage arrears data (for Q1 2012) which show that 1 in 10 mortgages (by volume) are in arrears, while a further 5% of all mortgages have been restructured (and are not in arrears). There doesn’t appear to be much of a slowdown in the pace of arrears growth – 7.2% of all mortgages were in arrears at the end of Q2 2011, 8.1% in Q3 2011, 9.2% in Q4 2011 and 10.2% at the end of Q1 2012. Thus far the CSO says that residential property prices have fallen from peak levels by 57% in Dublin and by 47% in the rest of Ireland. However, these reports suggest to me that the rest of Ireland might play catch-up over the coming quarters.


(Disclaimer: I am a shareholder in Independent News & Media plc) Someone posted an interesting comment on my case study on Independent News & Media  the other day which I thought I should highlight here given that it raises some good points:


Hi Philip,

Thanks for the article above, I enjoyed reading it. I am only new to the markets really and am trying to learn as much as I can so please excuse any stupid questions. I was wondering if you feel that another rights issue might be on the agenda for INM in order to further ease the debt situation? I have read of this being a possibility lately and this would make me worry about an investment here. On the other hand I am very tempted to buy when I look at the revenue streams & other assets (APN & S.A).

Also, do you have any views on the impact of Denis O’Brien’s recent purchases (up to 29.9%) of INM and what this may mean for the company?


To take those queries in turn – while INM’s debt position is somewhat troubling – net debt/EBITDA was a chunky 4.2x at the end of FY11 – I don’t see a rights issue on the agenda at the moment given: (i) the headroom it has before its debt maturity (May 2014 – although the group understandably wants to refinance before then); (ii) its compliance with covenants; (iii) its depressed share price; and (iv) as you rightly point out, the ‘levers’ INM has in terms of selling other assets. The group has exited India and Britain in recent years, and I’ve 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 investor, given that I’m in no position to know what his precise intentions for the group are.


In the blogosphere, Lewis continued his valuable series of posts on UK plcs with a feature on listed pawnbroker H&T and a look at the lessons he learned from his holding in Morson, which has just received a takeover approach from its largest shareholder.  His concluding line from the Morson piece – “it’s the losses that are teaching me the most throughout this blogging process” – while wince-inducing, is something that I would endorse. Any fool can make money in a rising market, but it takes skill and plenty of experience of both good times and bad to navigate more challenging conditions.


Finally, did you know that 1 in 5 McDonald’s hamburgers consumed in Europe are made with Irish beef? Or that the British motor insurance industry has suffered underwriting losses in each of the past 17 years?


Written by Philip O'Sullivan

May 26, 2012 at 6:28 am

One Response

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  1. […] These include: (i) A sincere move by Ryanair to secure a dominant presence in the Irish market (as I recently noted, the combined RYA-AERL share at the three main airports – which handle 96%…); (ii) A move to force Etihad, which recently revealed that it has a near-3% stake in Aer Lingus, […]

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