Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 5/8/2012

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It looks like it’s going to be a quiet week ahead for scheduled Irish plc news, with H1 results from Kerry (Thursday) & Bank of Ireland (Friday) set to provide the main interest. I preview both of those below, along with providing a round-up of the other things that have caught my attention since I last blogged.


(Disclaimer: I am a shareholder in Bank of Ireland plc and AIB plc) The Sunday Independent’s Tom Lyons reported that AIB may receive as little as 50c in the euro from a sale of a portfolio of its relatively “better” quality Irish loans. While this certainly reflects the deterioration in the Irish property market, at the same time I can’t help but wonder if AIB’s relative heel-dragging on deleveraging may significantly cost the bank. The Irish financials were directed to offload billions of euro of loan assets, and of Ireland’s two main listed banks Bank of Ireland completed this task while incurring only an 8% average haircut, while AIB is only circa 70% of the way through its programme, with reports of 50% haircuts such as the above raising concerns for me on what the final bill may prove to be.


Speaking of Irish banks, Bank of Ireland issues its interim results on Friday. Given recent updates from AIB and RBS (Ulster Bank) I don’t think there’s going to be a lot of surprises in the statement. The main interest for me will be around the margin (AIB’s was weak, but Bank of Ireland has a chunky UK exposure so it should outperform), deposits (these should be comfortably higher given recent indications from the Central Bank on how the ‘covered banks’ are doing in this area), arrears and costs (I assume Bank of Ireland will follow the rest of the industry and announce more action on this front). In terms of my view on Bank of Ireland, given the economic backdrop I think things are almost certain to get worse before they get better, but I think a lot of this is baked into the share price which is trading at a circa 50% discount to what the brokers I’ve seen have penciled in for end-2013 NAV. That said, a firm catalyst for narrowing that gap is hard to identify with any degree of conviction. For me it’s a hold for now.


(Disclaimer: I am a shareholder in RBS plc) Sticking with the financials, I was pleasantly surprised to read that several banks, including Brazil’s Itau Unibanco, may be looking at a bid for RBS’ Citizens unit in the US. With RBS planning a sale of its Direct Line business later this year, any bidding war for another division in the group, assuming one materialises, would clearly be very shareholder-friendly.


Kerry Group reports its interim numbers on Thursday. The last update from the firm was its interim management statement back in May, in which the group guided EPS growth of 7-10% in 2012 (after the 11.1% seen in 2011). With several major global food companies having indicated slowing trends of late, Kerry is unlikely to report any different trends given that it is a key supplier into them. Therefore, the extent to which it can mitigate any pressure from this source with action on the cost side will be interesting to watch (last year Kerry made a number of acquisitions, notably Cargill’s flavours business and SuCrest, along with a string of other bolt-on deals, so presumably their integration has opened up multiple cost take-out opportunities across its global operations). In any event, with Kerry trading on a mid-teen PE multiple (and >10x EV/EBITDA), it’s not a stock I have any desire to own around here. Don’t get me wrong – Kerry deserves to be trading on such a multiple, but in my view the implied upside from here is too low for me to have any interest in buying it at these levels.


The London Olympics have seen some heroic performances so far from Team Ireland, and this week should hopefully see a few medals being secured by the team to leave behind a strong legacy from these games. Speaking of Olympic legacies, Beijing has shown how not to do it, with many of its facilities lying idle some four years on.


Written by Philip O'Sullivan

August 5, 2012 at 7:36 pm

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