Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 16/6/2012

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After a relatively quiet 2012 on the M&A front, at least where Irish stocks are concerned, it’s nice to be able to write a blog where ‘buying and selling’ is a key theme.


United Drug splashed out €30m on buying Dublin warehousing and office buildings. While it’s good to see deals like this happening in Ireland again more generally, from a UDG specific view it’s a prudent measure that saves €750k a year (which was due to increase by 15% in 2014 and by the same percentage every five years on the lease thereafter).


Food ingredients group Glanbia has seen its share price tumble by circa 10% so far this month. One possible explanation for this is the chance of a secondary placing of stock by its majority shareholder, the Glanbia Co-op, to fund a €150-200m milk processing plant to cater for the expected significant increase in output that will accompany the lifting of EU quotas. Speaking of plants, Greencore offloaded the Minsterley facility, acquired as part of its takeover of Uniq plc, for £4.3m to Muller. This is obviously immaterial in a group context, but highlights the rapid pace at which management at Greencore have integrated Uniq.


(Disclaimer: I am a shareholder in Independent News & Media plc) Following on from my recent blog about INM’s South African unit, The Irish Times ran a piece covering local sentiment towards a possible deal. While I’ve long argued that the minority stake in APN should be the preferred asset for disposal, the increased chatter around INM’s South African unit suggests that it’s likely to be a different southern hemisphere business that is offloaded by the group. Speaking of INM and the southern hemisphere, the group also announced that it will delist from the New Zealand stock exchange, a ‘low hanging fruit’ cost-cutting move that should have happened years ago in my view.


Given that we’re about 5 years into Ireland’s economic disaster I had a look at Sharewatch’s handy table of prices of ISEQ listed stocks to see which of them are trading on share prices that are one-third or less of their levels from the summer of 2007. While it was no surprise to see the banks at the bottom of the pile, it was a little surprising to see quality names such as C&C, Kingspan, Grafton and FBD also down there. I assume Kingspan and Grafton are affected by the “Ireland discount”, yet both make the vast majority of their profits (KSP: >95%, GN5: >90%) overseas.


The incomparable Zerohedge posted an interesting chart showing global banks’ LDRs. I was surprised to see the Nordic banks so high up the chart, and given the risks around wholesale funding costs I would be (at first glance – I don’t follow the Scandinavian financials closely) instinctively nervous of them for that reason. For reference, of Ireland’s remaining listed banks, their LDRs at the end of 2011 were: AIB 136%, Bank of Ireland 144% and Permanent TSB 227%.


One of the highlights of the UK and Ireland investment blogosphere for me is the healthy debates that take place within it. It’s always useful to have one’s assumptions tested, not least given that it reduces the risk of destructive phenomena such as groupthink from creeping in. One of the regular topics of discussion is what should be counted within a firm’s enterprise value. For me I always add the pension deficit (or surplus) to the market cap and net debt (or cash), but there are dissenters who say – and I appreciate that this is a perfectly arguable point – that the efficient market hypothesis tells us that the share price (and by extension the market cap) already discounts factors such as the pension deficit and other obligations such as leases. However, given the polarised views about “whether pensions matter”, or whether leases should be viewed as a mere operating expense rather than a financial claim, along with investors’ cognitive biases (which we’re all guilty of) and other human errors, I don’t subscribe to the view that the share price tells us more or less everything. Lewis at Expecting Value wrote an interesting piece analysing the EVs of both Trinity Mirror (which I am a shareholder in) and Debenhams, which to me highlighted both the latter’s enormous operating lease liability, while for the former I was struck by the thought that any improvement in the outlook either for advertising or its inherent cashflow generation could lead to a very significant (in percentage terms) re-rating of the stock (and, of course, vice versa). Anyways, this is a debate that I’m sure will continue to run – and if you’ve any views on this issue, please post them in the comments section.


Written by Philip O'Sullivan

June 16, 2012 at 7:42 am

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