Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 9/8/2012

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Blogging has been interrupted this week by coursework and the Olympics, which have seen some amazing performances from Team Ireland. We’ve also seen an amazing performance from Kerry Group, as detailed in this morning’s H1 results.


To kick things off, as noted above Kerry released strong interim results this morning. Despite the disruption and costs of its ‘1 Kerry’ business transformation and ‘Kerryconnect’ IT programmes, the group managed to lift trading margins to 8.25% in H12012 versus 8.06% in the same period last year. Ingredients delivered this improvement, with Consumer Foods holding its margin steady despite the consumer headwinds. Kerry now expects earnings to rise 8-12% this year, an improvement from previous guidance of 7-10% growth. Other items of note in the release include an improvement in operating cashflow (€116.7m in H112 versus €104.6m in H111), while the group completed a €20m ingredients acquisition in Malaysia in H1 and since the period end has also agreed to acquire other ingredients businesses in China and Australia, which highlights the growing importance of Asia-Pacific (now 16.5% of total ingredients revenue) to the group. While this is all positive stuff, my main concern around Kerry is its rating – taking the mid-point of its earnings guidance it is trading on circa 17x earnings, which is pretty punchy for a stock carrying €1.3bn in net debt. Kerry is not one for me at that sort of a multiple.


In the pharma space Elan Corporation announced a big setback for its Alzheimer’s drug, which will see it take a $117m charge against it. This could have profound consequences for the stock, with some analysts reckoning that Elan could be taken over.


(Disclaimer: I am a shareholder in BP plc) The ‘Value Perspective’ team at Schroders posted an interesting piece about BP that shows how a contrarian approach can often reap serious rewards. I have gradually built up my stake in BP over a number of years, and used the Macondo weakness as an opportunity to ‘average down’ on my in costs as part of that. My rationale back then was that the dip in BP’s market cap between its pre-Macondo highs and post-Macondo lows was far in excess than the ‘worst case’ scenarios being sketched about how much the Gulf of Mexico spill would cost the group, coupled with research that showed previous large spills (such as Exxon Valdez) ultimately cost a lot less than what had been feared. Clearly not a ‘risk free’ punt, but it shows that straying from the investor herd can be a very profitable strategy. It’s a similar logic to what led me into Trinity Mirror (see below) at a time when the received wisdom was that ‘all newspapers are doomed’, hence you could pick up its stock for half-nothing.


Staying with matters BP-related, DCC made another sensible bolt-on acquisition, acquiring the former’s LPG distribution business in Britain. It perfectly complements DCC’s existing operations in that market, adding 87k tonnes of bulk and cylinder LPG to the existing network of 190k tonnes, giving DCC 25% of the UK LPG distribution market according to analysis by Davy.


(Disclaimer: I am a shareholder in CRH plc) CRH confirmed that it is in talks that could lead to it significantly increasing its presence in the Indian cement market. CRH expanding in India makes perfect sense, given that its cement consumption per capita, at 178kg, is the lowest of the BRICS (Brazil: 311kg, Russia: 350kg, China: 1380kg, South Africa: 217kg). I noted some commentary to the effect that CRH has no BRICS experience, but this is absolute nonsense given that the group already has a presence in three of them – China, Russia and India.


In the transport sector Aer Lingus released weak traffic stats for July, bringing to an end a run of strong data. It will be interesting to see if this is just a blip or the start of a new trend. Elsewhere African LCC FastJet is making some impressive progress, as this piece shows (I strongly recommend you view the video accompanying it).


(Disclaimer: I am a shareholder in Trinity Mirror plc) In the blogosphere Lewis has turned bullish on Trinity Mirror following last week’s strong interim results. Regular readers of this blog know I’ve been a bull on the stock for months, and it’s nice to see the thesis finally playing out – there’s a lesson there in terms of sticking to your guns in the absence of any ‘new’ information that might challenge a conviction.


To finish up, here are two good pieces that grabbed my attention this week – the first challenges the received wisdom about Thatcher’s policies towards Britain’s coal mines, the second explores Ireland’s craft beer revolution.


Written by Philip O'Sullivan

August 9, 2012 at 3:30 pm

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