Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 21/7/2012

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Since my last update the latest corporate developments have been mostly about Irish companies looking to either move in or move out of other countries. Let’s examine what’s been going on.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM confirmed that it has received “informal and unsolicited expressions of interest” for its South African business. With the group’s main lender having reportedly categorised INM as one of its “most challenged corporate relationships“, divestments to strengthen its balance sheet appear to be a must. At the end of 2011 INM had net debt of €427m. If INM were to offload South Africa and its APN stake for €350m (based on media reports on South Africa could fetch and the current market value of APN), this would cut net debt to circa €75m. Add in the €125m current market cap INM is on and it would have an enterprise value of €200m against which the firm would have All-Ireland assets which produced sales and operating profits of €363m and €46m respectively in 2011, which was clearly a tough year for the media sector here. While you would have to adjust the above profits for INM’s group overhead costs, it seems to me that the market is applying a very low multiple to its Island of Ireland division. Divesting its overseas units should draw attention to this and potentially lead to a dramatic re-rating for INM.

 

DCC issued a solid trading update on Friday, which revealed that its Q1 performance was “ahead of budget”. However, management is sticking to its previous full-year earnings guidance, which is reasonable given how heavily skewed its profits are towards the second half of its financial year. To me there was little in the release to change the narrative around the company – DCC’s proposition to investors is a strong balance sheet and a good mix of assets, yielding consistently high returns, trading on an undemanding multiple.

 

(Disclaimer: I am a shareholder in CRH plc) Press reports suggest that CRH may be considering a €1bn+ deal in India. The cement assets in question have a combined capacity of 9.8m tonnes and they would more than treble CRH’s presence in the market if acquired. We’ll have to wait and see if there’s more to this story.

 

(Disclaimer: I am a shareholder in Marston’s plc) TMF’s Tony Luckett wrote an interesting piece on the UK pub sector – only the strong will survive. In it he cites research from CAMRA,  suggesting that the pace of pub closures in the UK may be leveling off. This is an encouraging claim, and it’s something that I’ll keep an eye on to see if the trend continues to improve.

 

(Disclaimer: I am a shareholder in AIB, PTSB and RBS) The Irish banking sector was in focus in recent days. PTSB gave a non-update on its restructuring plans, which contained nothing that wasn’t already in the public domain. My view on PTSB remains that, unless it can heroically engineer a large-scale recapitalisation to pave the way for a step-up in its lending capacity, it is very likely to remain a marginal player in the Irish banking market. I struggle to see why it wasn’t shunted into AIB. Today’s press asks if RBS’ Ulster Bank is gearing up to leave Ireland – I would think this extremely unlikely given the difficulties that would be involved, particularly in terms of time and costs – the problems of moral hazard, deposit flight, extricating the bank out of lengthy contracts, redundancies and so on would make this a very messy process (think of the hassle Lloyds has had with BOSI). I suspect that while Ireland is going to be down the pecking order in terms of capital allocation from RBS’ head office over the coming years, the much lower competition relative to before in the banking sector here means that margins on new lending should be quite attractive whenever the domestic economy and the financial system are restored to vigour. As the third biggest bank in Ireland, RBS should find itself well placed to exploit this future opportunity.

 

In the insurance sector FBD Holdings appointed UK firm Shore Capital as its new joint broker following the sad demise of Bloxham. This is a curious move given that FBD’s core operations are all in Ireland – might FBD be considering a push into Britain?

 

And finally – I was interested to read that 48 tonnes of silver bullion were recovered from a shipwreck off the west coast of Ireland.

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Written by Philip O'Sullivan

July 21, 2012 at 1:37 pm

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