Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 2/7/2012

with 2 comments

(Disclaimer: I am a shareholder in RBS plc) Since my last update, there was a lot of talk about the likely fall-out from the Libor scandal. Cormac Leech at Liberum Capital sketched out a scenario showing that RBS could be on the hook for £6bn, which is roughly a quarter of its market capitalisation. Yesterday it was reported that the group could be facing a fine of £150m. Obviously time will tell what the ultimate costs of this will be, but it will likely prove a significant overhang on certain UK financial stocks (in particular, RBS and Barclays) for some while yet, which is why I see no reason to rush into buying more RBS shares (my existing position is only 40bps of my portfolio).

 

Speaking of UK equities, Schroders wrote a bearish piece on BSkyB – I was struck by this line:

 

[The] incredibly favourable dynamics it enjoyed until recently will not be the same going forward – potentially leaving investors who paid up for the high expectations of the past a little disappointed. Value investors will of course not need reminding of the reverse point – if you buy a business when expectations are low, the potential for nasty surprises of the kind BSkyB has encountered to permanently hurt your investment is greatly reduced.

 

Warren Buffett’s recommendation for investors to be fearful when others are greedy and greedy when others are fearful comes to mind!

 

Irish headquartered conglomerate made a €7m bolt-on acquisition in Sweden. Obviously this is small from a group context, but it does serve to remind one of DCC’s impressive track record when it comes to both buying and (in particular) selling businesses. It’s a stock I really have to find the time to look at in more detail.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) Last week saw the release of 2011 port tonnage data from Ireland’s Central Statistics Office. While there wasn’t anything particularly surprising in the overall data (remember, a lot of the results are inferred in other data releases such as external trade throughout the year), there are a number of points of note for listed marine transport firm Irish Continental Group. For starters, from an Ireland Inc perspective, total tonnage handled at Irish ports in 2011 was 45.1m tonnes, which is 17% below the all-time high of 54.1m in 2007. However, within that we see exports set a new all-time high in 2011 (15.24m tonnes), and are now 0.1% above the previous peak (coincidentally, also in 2007). Imports, which are an indication (to a certain extent) of domestic activity, at 29.8m tonnes in 2011 are 23% below peak (2007) levels. Within the Republic of Ireland freight market ICG operates in the Ro-Ro (Roll On – Roll Off, i.e. trucks) and Lo-Lo (Load On – Load Off, i.e. containers) segments at both Dublin and Rosslare ports. Those two ports handled 99% (Dublin 81%, Rosslare 18%) of all Ro-Ro freight and 69% (all Dublin) of all Lo-Lo freight in Ireland in 2011 and are poised to be the main beneficiaries of any future improvement in trade volumes. On the passenger side, some 2.9m passengers (excluding cruise ship passengers) used port facilities here in 2011, 132k of which passed through Cork. Many of those passengers would have traveled on the now-closed Swansea-Cork service operated by Fastnet Line, and some of this traffic will presumably transfer to the Rosslare-Pembroke (operated by ICG) and Rosslare-Fishguard (Stena) routes. Given that ICG has been estimated to have operating leverage of 75% (i.e. for every €1 of incremental revenue it receives, €0.75 drops to the bottom line), any pick-up in activity would have a dramatic effect on its profitability.

 

Penny stock investors may be interested in Prime Active Capital’s results, released late on Friday afternoon. Conditions are pretty tough for the group, which says: “This has become a tough business and is likely to remain that way for the foreseeable future even as we continue to reduce costs”.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc) Speaking of penny stocks, yesterday’s Sunday Independent ran a piece saying that AIB has “held meetings with potential US and Asian investors about the sale of a stake in the bank”.  I imagine that any discussions would be highly preliminary in nature, given the number of ‘known unknowns’ the group faces, not least on the impairments front.

 

In the blogosphere, Calum did an excellent analysis of the key metrics in the UK pub sector that’s worth checking out.

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Written by Philip O'Sullivan

July 2, 2012 at 8:22 am

2 Responses

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  1. The chunk on BskyB is one I often struggle with.

    If we take the inverse, the implication is that companies with crappy structural conditions, regulatory headwinds and weak competitive positions will be cheap. But who wants to buy those? We all want to buy attractive, strong companies now!

    The upshot is to never pay too much I suppose, which I guess is my mantra. The difficult bit is quantifying just how much you should pay for those structural strengths or that niche power. I suspect I err on the conservative side in the valuation of those factors, which is why I don’t own as many true quality stocks as most. If they fit all my other criteria I tend to assume that, since they succeed in spite of not having those obvious advantages, it’s just one stumbling block removed!

    Not sure I’m making a great deal of sense; thinking out loud as usual!

    Thanks for the regular blogging, though, thought-provoking is always good for me.

    Lewis

    July 2, 2012 at 2:05 pm

    • Hey Lewis – thanks for stopping by. That really is the million dollar question – I think the only answer to it is as you say yourself – be disciplined in how much you’re willing to pay up to buy those assets so as to reduce your downside risk. To that you have to add ‘what if’ scenarios – something I’ve learned the hard way from Uniq (where I convinced myself that the pension issue would be solved through cutting entitlements as opposed to the fund cannibalising the plc) and from certain Irish financials (where I learned not to take other peoples’ estimates of impairment losses at face value). One method of doing this is, where applicable, to also incorporate a SOTP analysis as part of the investment appraisal – what if one division was written down to zero – where would that leave the valuation? etc.

      Philip O'Sullivan

      July 2, 2012 at 4:20 pm


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