Market Musings 24/8/2012
Since my last update Greencore announced a bolt-on acquisition, buying a ready meal facility from the Hain Daniels Group. This will help support the market share gains the group has been achieving in that segment in the UK. Furthermore, it is encouraging to see this additional capacity has been delivered through acquisition rather than greenfield investment, given that any incremental industry capacity would give the multiples something with which to play food manufacturers off against each other.
Elsewhere in the food and beverage sector, Diageo released its full-year results. Davy provides a good summary of them here, while the presentation is also well worth a look. I’m a big fan of Diageo’s business model, which offers strong diversification both in terms of geography and product categories, and also a play on the emerging middle classes in the developing world. However, trading on a PE approaching 17x, it is not one for me at this point.
(Disclaimer: I am a shareholder in Abbey plc) Yesterday afternoon the independent directors of Abbey released their response document following the recent receipt of a mandatory offer from Gallagher Holdings. Unusually, the directors have opted to sit on the fence and not issue a firm recommendation to shareholders on whether or not they should accept this offer, preferring instead to set out the pros and cons of the proposed takeover. I can’t help but wonder if Abbey’s independent directors would have come down more on the side of the Gallagher bid had the offer being pitched much closer to the firm’s NAV.
(Disclaimer: I am a shareholder in RBS plc) The Financial Times reported that RBS is under investigation in the US over alleged dealings with Iran. Should RBS be shown to have broken the US’ rules, I assume the damage will be confined to a manageable sum, as we recently saw with Standard Chartered’s £215m fine. This would represent a third hit to the group after the IT debacle and LIBOR issues earlier this summer, but given the one-off (and, in two of the three cases, legacy) nature of these problems I wouldn’t be too concerned. Regular readers of this blog will be aware that I am presently taking a contrarian view on RBS and am considering raising my shareholding in the business, which is trading on less than 0.5x NAV and which is unloved as the market focuses on one-off issues instead of the recovery in profits that is clearly underway.
Staying with the banks, IBRC, which comprises the former Anglo Irish Bank and Irish Nationwide Building Society, released its interim results this morning. An examination of the IBRC loanbook reveals a grim picture, with 76% of loans (pre-provisions) at the end of H1 2012 classified as either past due or impaired (end 2011: 72%). In terms of the different segments of the loan book, the percentages classified as either past due or impaired are as follows: Commercial 76%, Residential 75%, Business Banking 79%, Residential Mortgages 59% and ‘Other Lending’ 80%. The elevated levels evident across all components of the loan book starkly illustrates the challenges facing the group (and, by extension, the Irish taxpayer). Gross customer lending was -5.5% in the first 6 months of 2012 to €27.5bn, with the stock of loans -5.4% in Ireland, -6.4% in the UK and flat in the US (this may be down to USD strength). Provisions were €1.1bn in H1 2012, so still at worrying levels (the 2011 total was €1.6bn). On the operational side, IBRC continues to manage costs relatively tightly – operating expenses fell 18% year-on-year in H1 2012. However, the costs of running the bank are the least of our concerns. In terms of what the ultimate bill for IBRC will be, clearly, this is highly susceptible to macroeconomic and political factors over which the bank has no control. At the end of June it had €1.5bn in surplus regulatory capital, so for the time being at least management’s guidance that the final bill will come in below the Central Bank / Financial Regulator’s estimates looks OK but, clearly, the risks at this time appear to be skewed to the downside.