Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 6/9/2012

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The most interesting development I’ve noted this week has been the surge in bond issuance by corporates taking advantage of low yields to refinance at cheaper rates and also push out the weighted average maturity of their debt. No less than 3 of the 20 stocks I currently hold have been at this in recent days – Smurfit Kappa Group, France Telecom (which sold 10.5 year bonds yielding just 2.6%!) and RBS. While reducing interest bills and pushing out the maturity date for corporate debt piles are positive moves for plcs (e.g. a tailwind for earnings and lowered perceived risk), I can’t help but wonder if the recent spike in corporate bond sales points to a bubble in that market. Although, with central banks continuing to significantly influence sentiment towards bonds in general this is a bubble that may not pop for some time to come yet.

 

Switching to specific Irish corporate newsflow, full-year results from CPL Resources – the largest recruitment company in the country with a circa 40% market share – were released this morning. These revealed a resilient performance, with operating profits growing 39% to €10m, while earnings per share rose by a third (helped by a lower number of shares in issue following the recent tender offer). In terms of the outlook, while noting that the market remains “challenging”, management is confident of achieving “further profitable growth in the months ahead”. In all, this is a good set of numbers from CPL. My view on CPL Resources is positive, underpinned by a first-rate senior management team, dominant market share in its home market, a very strong balance sheet (net cash of €28.0m) and a diversified business model (both by geography and by sector).

 

(Disclaimer: I am a shareholder in Tesco plc) We saw some more distribution channel innovation at Tesco, with the roll-out of drive-through grocery pickups. It will be interesting to see if moves like this help to arrest the decline in Tesco’s UK market share.

 

In the energy sector, Providence Resources said its 80% owned Barryroe oil field offshore Cork may contain another 1.2bn barrels, bringing the total potential resource to 2.8bn (it should be noted that this is a P10 estimate).

 

(Disclaimer: I am a shareholder in Ryanair plc) In the transport space, easyJet said that it is to roll out allocated seating across its network from November. This is a significant move and it will be interesting to see if Ryanair, which has experimented with this, follows suit. Speaking of Ryanair, it reported its busiest ever month in August, carrying a record 8.9m passengers, up 9% year-on-year. There has been a lot of media attention given over to Ryanair’s falling load factors (-1ppt to 88%), but I am not especially concerned by that given the impact capacity redeployments (mainly from northern to southern Europe) have presumably had on traffic stats, so I prefer to focus on the positive momentum in total passengers carried. Elsewhere, Aer Lingus reported a fall in ‘mainline’ passengers carried for the second successive month, however, good capacity management kept loads in positive territory.

 

In the blogosphere Lewis looked at an interesting UK quoted manufacturing company, Renold.

Written by Philip O'Sullivan

September 6, 2012 at 10:58 am

Market Musings 4/9/2012

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Newsflow has been mercifully light today, which is a help as I’m working on a number of other projects at the moment. In this blog I look at this evening’s Irish Exchequer Returns data, results from Total Produce and a few other bits and pieces that caught my attention since my last update.

 

To kick off with the latest Irish Exchequer Returns data, covering the first 8 months of 2012, these show a big improvement in the reported deficit, which makes for great headlines, but, as I’ve previously cautioned around such releases, tells us little of value about the underlying picture. Total receipts (both current and capital) rose 12% relative to year-earlier levels, while total expenditure (on the same basis) was 14% lower. This produced an Exchequer deficit of €11.4bn versus €20.4bn in the same period last year. However, that deficit figure is meaningless unless you adjust for one-off items and timing issues. On the revenue side, the Exchequer coffers were swelled by €233m from the sale of Bank of Ireland stock last year, while there were no such one-off gains this time round. Recapitalising the listed financial institutions cost €7.6bn in the first 8 months of 2011, but only €1.3bn in the same period this year. So far in 2012 the State has injected €450m into the Insurance Compensation Fund (2011: nil), while Promissory Notes (at least on a reported basis) have cost €25m in the ytd versus €3.1bn last year. Summing these items means that to get the underlying deficit for the first 8 months of 2011 you have to reduce revenues by €0.2bn and lower spending by €10.7bn. This produces a ‘underling’ deficit of €9.5bn in the first 8 months of 2011. The same exercise for the year to date involves lowering total expenditure by €1.8bn, which produces an underlying deficit of €9.6bn between January and August 2012. So, while the headlines suggest the deficit has significantly improved, in reality the underlying fiscal position is in fact little changed. While total revenues have increased (by €2.7bn on a reported basis), this has been eaten up by items such as a €1.6bn increase in interest costs on the national debt, while voted (i.e. day-to-day, nothing to do with bank recaps or interest on the national debt) spending is €0.4bn above year-earlier levels, in contrast to claims that extraordinary levels of fiscal austerity are being imposed on the economy. So, a case of ‘a lot done, more to do’.

 

One potential positive for Ireland Inc, however, is news that at least two European insurance IPOs are planned for later this year – Direct Line and Talanx. Assuming they get off OK it will bode well for the prospects of a sale of the State-owned Irish Life and, in time, (State-owned) IBRC’s 49% shareholding in the old Quinn Insurance business.

 

(Disclaimer: I am a shareholder in Total Produce plc) Total Produce released its interim results this morning. These revealed a 6.7% increase in earnings, while management hiked the dividend by +5% and raised the full-year guided earnings to the “upper end” of the previous 7-8c range.  This is all good stuff, and I suspect the risks for Total Produce lie to the upside as we move towards the end of the financial year. I remain a very happy holder of the stock, and given that it trades on only about 5.5x earnings and has a bulletproof business model, I would consider adding to my position.

 

Staying with the food and beverage sector, UK pub group Greene King said that the Olympics made no difference to its performance. While its overall reported like-for-like sales growth, at 5.1%, is commendable, its comments on the games strengthens my conviction around my recent disposal of shares in one of its peers, Marston’s, after the last of the three clearly identifiable potential catalysts for the sector (Euro 2012, Olympics, Jubilee) had played out.

 

Botswana Diamonds, which I recently profiled, issued an upbeat prospecting update this morning. The shares closed +17.7% in London, so clearly the market liked the look of them. It’s one of the stocks I have on the watchlist at this time.

 

Switching to the support services sector, the venerable Paul Scott profiled UK staffer Staffline. You can read my profile of one of its peers, Harvey Nash, here.

 

Another support services company, albeit a rather different beast, DCC, announced the acquisition of Statoil’s industrial LPG business in Sweden and Norway. This is a sensible bolt-on deal that strengthens DCC’s position in the Scandinavian region.

Harvey Nash (HVN.L) – Recruiting Shareholders

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(This is the eighteenth installment in my series of case studies on the shares that have featured in my portfolio. To see the other seventeen articles, on Smurfit Kappa GroupBank of IrelandAIBRBSMarston’sFrance TelecomRyanairPetroNeftIrish Continental GroupIndependent News & MediaTotal ProduceAbbeyGlanbiaIrish Life & PermanentDatalexTrinity Mirror and Datong, click on the company names. I remain an investor in all of the above stocks, save for Marston’s and Glanbia)

 

One of the most interesting market sectors for me is recruitment. As with other professional services’ business models, it has some unusual characteristics – its principal assets walk out the door each evening, it has minimal capex requirements (a rented office, phone line and computer will suffice for most employees where tangible assets are concerned) and while its core business is, clearly, very cyclical, companies in the space can reduce volatility through measures such as diversification across different segments of the labour market or by adding recurring revenue offerings such as managed services (payroll etc.) to clients.

 

I’ve held two UK listed recruitment stocks in the past, namely Imprint (which is no longer quoted) and Harvey Nash. I sold out of the latter last year when its shares were trading above 70p. With the price now back in the low 50s, I figured that it was time to update the model and investigate whether or not I should be buying back into it.

 

To start, let’s look at Harvey Nash’s business model. To say it is a diversified one wouldn’t quite cover it – the group has 40 offices in Europe, North America and Asia. As slides 24 through 26 of this presentation show, just under half of its gross profits come from Europe, with 39% from the UK (which includes Asia!) and 12% coming from the US. Outside of geographic diversity, it is also quite diverse where sectoral exposure is concerned. Some 22% of gross profits come from executive search, 17% from permanent recruitment, 34% from contract & temporary, 19% from offshoring & outsourcing and 8% from managed services. The latter three are clearly ‘stickier’ than the first two, which are more reliant on one-off revenues. The group also operates across a wide range of industries. So, with different revenue streams across multiple industries in three continents, Harvey Nash doesn’t have anything like the degree of volatility a staffer focused on just one or two segments and/or markets would have.

 

Turning to its performance in recent years, I should mention that I don’t look at staffers’ revenues when analysing their performance, as this can be distorted significantly by mix effects due to the different treatment of monies received for placing permanent and temporary / contract candidates. So, skipping down to the more meaningful profit lines reveals a resilient performance over the past 5 years. Gross profits in the year ending 31 January 2012 were 63% higher than in the year ended 31 January 2007, while over the same period operating profits grew 33%. Harvey Nash’s operating profits for the 12 months to the end of January 2012 (€9m) were double those achieved at the low point of the cycle (the financial year ended 31/1/10). Despite the economic headwinds, the group has retained a prudent balance sheet policy, reporting net cash in each of the previous 5 years. Loyal investors have also been rewarded by a dividend that has increased by a total of 166% over the past 5 years.

 

In terms of returns metrics, there are some interesting takeaways from these. Between FY07 and FY09, ROCE and ROE were very stable, consistently standing at circa 17% and circa 11% respectively. Once the downturn hit, these unsurprisingly nosedived in tandem with profits, to reach troughs of 2.9% and 1.4% respectively in FY10. Over the past two years these have started to recover back towards cyclical highs, reaching 13.9% and 9.2% in the 12 months to the end of January. Given that these are still some way off pre-economic crisis highs, I think this is a good point in the cycle to be revisiting the story.

 

So, with Harvey Nash’s track record where earnings, dividends and returns are concerned out of the way, what has the company been saying recently? Obviously, conditions are far from optimal, but the company has nonetheless sustained its positive momentum. In its June trading update, management said it was ‘delighted’ with the group’s performance in Q1 of its financial year, with revenues +18% and underlying operating profits +10%. More recently, in an update provided in the middle of August ahead of the release of H1 numbers on September 28, the company said it expects to ‘confirm a robust performance’ in H1, guiding a 15% rise in revenues and 7%+ uplift in operating profits. Another development revealed in that update was the revelation that the company has swung into a modest (£13m) net debt position, having had net cash of £5.2m at the end of January. This reversal is due to: (i) a £2.2m one-off spend on a new consolidated facility for its London operation; (ii) the €1.8m cost of a business acquired in Belgium; and (iii) investment in working capital to support the temporary labour business. None of these factors give me any cause for concern as: (i) the London facility will trim costs by £0.8m per annum, so a less than 3 year payback; (ii) the Belgian business was acquired for less than 3x PBT, which again points to a likely short payback period; and (iii) Harvey Nash guides that working capital investment will “return to more normalised levels over the next 18 months”. Moreover, the £13m net debt compares with existing bank facilities of £41m, which gives me more comfort.

 

In terms of the valuation, based on consensus EPS forecasts and this evening’s closing price (51.75p), Harvey Nash trades on 7.5x forward earnings. This compares very favourably with its UK quoted peers – Hays (13.2x), Robert Walters (26.4x) and Michael Page International (24.8x).

 

One of the key problems with staffers is forecasting their likely performance, given the short-term visibility that is inherent to the permanent hiring business. In my own model, in which I’ve plugged in what to me look like conservative assumptions, I can get to a valuation above £1 (£1.056 to be precise), or about double where Harvey Nash is now. Is that an unrealistic valuation? Well, when you look at the multiples its peers trade on, I don’t think it is at all. Also, while past performance is by no means a guarantee of future returns, HVN’s shares traded as high as 97p in mid-2011. Moreover, if I simply plug in the £13m net debt reported in the recent statement into the DCF-based model and ignore the expected unwinding of this, it spits out an 81p price target, which is close to 60% above where the shares now trade. The key near-term risk is, obviously, the macro backdrop, but three things make me relaxed about this, namely: (i) Harvey Nash is cheap in both absolute and relative terms; (ii) if the outlook deteriorates, the investment in working capital is likely to unwind faster, which would see the balance sheet strengthen as the income statement softens; and (iii) based on where the shares are trading now, the stock offers a well covered dividend of 5.6%.

 

In summary, I view Harvey Nash as a case of strong track record+ diversified business model + attractive, well-covered dividend + inexpensive (both in absolute terms & relative to its peers) valuation. To this end, I have bought back into the stock today.

Written by Philip O'Sullivan

September 3, 2012 at 4:25 pm

Posted in Sector Focus

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Market Musings 3/9/2012

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(Disclaimer: I am a shareholder in Abbey plc) While the macro outlook is challenging, it is interesting to see that two UK focused housebuilders have been the subject of takeover approaches from management in recent weeks. An investment vehicle controlled by Abbey’s Executive Chairman now owns nearly 62% of the company’s shares, with its offer remaining open for acceptances until 1pm (Dublin time) on 7 September 2012. Elsewhere, the Chairman of Redrow has also made a preliminary approach to buy out the firm using a consortium comprising his own investment vehicle and two funds. When management teams, who presumably (!) have access to better information than the likes of you and me, are making such moves, this suggests to me that there is decent value still to be had in the sector.

 

Staying with UK stocks, I sold out of Marston’s this morning. My reasons for doing so were twofold. Firstly, the three catalysts that had been identified for the stock (The Queen’s Jubilee, Euro 2012 and The Olympics) are all over and I am guessing that the regular newsflow from the many quoted UK pub groups means that the impact of these have all been priced in. Secondly, the shares have increased by over 25% (in euro terms) since I added it to the portfolio earlier this year. You can read about why I was originally attracted to Marston’s here. In terms of where the proceeds are being recycled into (Harvey Nash plc), I will upload a blog later today outlining my rationale for the inclusion of ‘an old friend’ back in the portfolio.

 

In other food & beverage sector news, tropical produce importer Fyffes today raised its full-year adjusted EBITA guidance to a range of €28-33m versus the previous €25-30m. This improved outlook is based on decent organic growth and FX effects in H1 2012. Extrapolating from the adjusted EBITA of €23.3m Fyffes achieved in the first half of the year and adjusted diluted EPS of 6.48c in the same period, this points to full-year earnings of at least 8.5c, putting the stock on less than 6x earnings, so clearly cheap. Its sister company, Total Produce, which I hold, reports its interim results tomorrow.

 

(Disclaimer: I am a shareholder in Smurfit Kappa plc) There was a bit of news out of Smurfit Kappa Group since my last update. This morning it announced the launch of a senior secured notes offering, which will raise €200m and $250m, maturing in 2018. The proceeds will be used to repay all of the existing 7.75% senior subordinated notes due in 2015. Given the relatively low rates on offer for similar rated debt at this time, this should, I estimate, shave at least €7m from SKG’s annual interest bill, as well as extending the weighted average maturity of its debt, which reduces the perceived riskiness around the group. In all, a win-win move for Smurfit Kappa. Elsewhere, the group is to invest €28m in a new bag-in-box facility in Spain, which  is a further sign of how Smurfit Kappa’s improved financial position is giving it enhanced flexibility on both the M&A and capex fronts.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) It was confirmed that total Irish newspaper advertising declined 10% in the first 6 months of 2012. Annualising it, and putting in a little bit of a kicker for Christmas related spending, means that it’s still a circa €180m market, so not to be sniffed at despite the confident predictions of certain ‘new media’ devotees who assure me that ‘old media’ is completely toast. While I don’t for one moment dispute that old media is in long-term structural decline, my central thesis on the sector remains that it will not disappear for many years to come, with larger newspaper groups (such as INM) being able to mitigate against the effects of a shrinking market by gaining share as weaker competitors exit the industry. Of course, the extent to which equity investors can benefit from this depends on how successfully INM can prevail over its liabilities, and in this regard I was pleased to read reports of a third bidder entering the fray for INM’s South African unit. The more the merrier, clearly, as this should mean a satisfactory sale price for the business.

 

In the blogosphere, I was pleased to see the launch of two new blogs by Paul Curtis and Mark Murnane. I’ll be updating the blogroll later today – if there are any other investment and/or economics sites you think I should be following, please suggest them in the comments section below.

Written by Philip O'Sullivan

September 3, 2012 at 10:02 am

Market Musings 31/8/2012

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(Disclaimer: I am a shareholder in Irish Continental Group plc) The main news since my last update has been around ICG, whose shares have surged on the back of the announcement of a tender offer pitched at €18.50, or circa 15% above where they closed at on Wednesday. This announcement was contained in its interim results release, which revealed a resilient performance despite the macro headwinds. Revenues were flat, while good work on the cost side meant that EBITDA was only down €1.8m year-on-year in spite of a €4.5m increase in fuel costs. The company is also putting its balance sheet to work with its €111.5m tender offer, which I’m guessing should put net debt / EBITDA at circa 2x by the end of next year, so still undemanding. ICG has also announced the disposal of its Feederlink business for up to €29m, which looks like a great deal – 16x PBT. In all, yesterday’s news reaffirms my view on ICG – a very attractive business model (effectively a duopoly with Stena on the Irish Sea) with potent barriers to entry (capital, control of key port slots and other infrastructure), very strong cashflow generation with no major medium term capex requirements, huge operating leverage benefits once an eventual Irish recovery emerges and a fat dividend to boot.

 

Elsewhere, Kentz released good H1 results, with revenue +9%, PBT +36%, net cash +36% (to $241m)  while its backlog, at $2.54bn, is up 6% in the year to date. I’ve bought and sold Kentz before and would definitely consider putting it back into the portfolio at some stage – it’s a very well-managed business that is plugged into an area with buoyant long-term growth prospects where the long-term nature of work projects provides good visibility on revenues.

 

Switching to TMT stocks, betting software group Playtech released its H1 results yesterday morning, which revealed a very strong performance. It’s a stock I used to hold but which I sold on corporate governance grounds, which is a pity as I like the structural growth story around the sector, but not enough to hold a stock that has given me plenty of sleepless nights in the past!

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM released its interim results this morning. These revealed a 26% decline in operating profits to €25.4m on revenues that were 4% lower at €272.2m. Trading conditions are, unsurprisingly, described as ‘difficult’. I was, however, surprised by the sluggish progress on the deleveraging front. Net debt fell by €3.5m, or less than 1%, since the start of the year. Led by the drop in profitability, free cash flow halved to €12.7m (H1 2011: €23.0m), but most of this was eaten up by cash exceptional items. INM’s retirement benefit obligations widened to €187.8m by the end of June, from €147.0m at the end of 2011. A potential sale of its South African business would significantly improve INM’s balance sheet and save millions in annual interest costs, and on that note I was pleased to see the group confirm in the presentation accompanying the results that it has received 2 bids for that unit. In all, there is little to get exited about from this release. INM is under pressure due to the tough macro conditions, while its high leverage ratchets up the risks around the company. That is not to say that catalysts for a re-rating are difficult to identify. These include a sale (on reasonable terms) of the South Africa business, a recovery in its 30% owned associate APN’s share price, a resolution of its pension issues and an improvement in advertising conditions. However, identification and successful execution are, clearly, two different things, so I’m disinclined to increase my stake in INM (currently 120bps of my portfolio) for the time being at least.

 

(Disclaimer: I am a shareholder in France Telecom plc) There was further disappointing news from the French telecom sector, with Bouygues revealing that its profits in that area have sunk due to intense price competition from the new entrant, Iliad (whose results this morning have come in ahead of expectations). France Telecom is also being impacted by this pressure, but the impact is somewhat mitigated by Iliad’s use of FTE’s network. Speaking of FTE’s network, the group’s chairman was quoted by Reuters as saying they are in preliminary discussions with rivals about sharing 3G networks to reduce costs, which would be a welcome move.

 

Finally, smallcap financial IFG released its interim results today. These revealed a deterioration in profits in its continuing businesses, with UK profits falling due to falling SIPP volumes, investment in risk and compliance, and challenging conditions in the IFA space, while losses in Ireland have widened due to difficult economic conditions. The operating performance is, however, overshadowed by news of a £30m share buyback, which adds IFG to a growing list of firms (CPL, Abbey, Ryanair etc.) here that have launched similar measures in recent times. If only our plcs had the confidence to invest in growing their businesses through acquisition / greenfield initiatives that would (if done properly) augment their growth potential instead of engaging in de-equitisation. Oh well!

Written by Philip O'Sullivan

August 31, 2012 at 8:06 am

Market Musings 29/8/2012

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It has been another busy day on the results front in Ireland.

 

To start things off, Paddy Power released strong H1 results, with earnings rising 25%. This was despite start-up losses of €6.3m for four new online ventures and some adverse sports results. Net revenue increased in all five divisions (Online, Online Australia, Irish Retail, UK Retail and Telephone) by between 13 and 47%, which is an impressive performance. Also impressive is its branding efforts – in the year to date Paddy Power has increased its Facebook fans by 445% to 251k, Twitter followers by 308% to 133k and YouTube views by 186% to 13m. This gives the group an expanded audience to market its online offering to. As noted above, Paddy Power is investing heavily in improving its offering, particularly on the online side, while it is expanding into new markets. This increased investment is presumably why we aren’t seeing an upgrade to full year earnings guidance today from management despite the strong momentum evident across the group, however, as this investment enhances the longer-term profit outlook for the group investors shouldn’t be particularly concerned about it.

 

Grafton also released its interim results this morning. Reported revenues climbed 5%, but self-help measures on the cost side meant that operating profits increased by just over 19%. In addition, the group’s cash flow generation was impressive – Grafton generated operating cash flow of €55m, well ahead of its €30m in operating profits, as it reduced investment in working capital by €13.5m – a particularly impressive achievement given the increase in revenue. Net debt has reduced by €25m in the year to date to just €201m. There were significant variations in terms of the performance of Grafton’s main operating units. In the UK, revenues and operating profits rose 4% and 12% in constant currency terms, despite a tough market backdrop. In its small Belgian business, which accounts for circa 1.5% of group revenues, profits were flat despite a big increase (albeit off a small base) in sales. In Ireland, conditions remain very challenging – despite many of its competitors having reduced their presence in the market, Grafton’s merchanting revenues were -9% in H1 2012 while retailing revenue fell by 12% in the same period. Cost reduction measures helped to soften the impact on the bottom line. In all, the key message from these results for me is that Grafton is doing all the right things on the cash generation and cost fronts, but the benefits of this are being tempered by difficult end-markets.

 

Switching to food, Glanbia made two announcements this morning. The first being its interim results, which revealed a strong performance on the nutrition side allied to favourable currency effects (reporting earnings were +8.4%, but just +1.3% in constant currency terms). Management has hiked its full year (constant currency) earnings growth outlook from the previous 5-7% range to 8-10%. The second announcement relates to the restructuring of its Dairy Ireland business. Assuming it gets cleared by the various stakeholders, there may be a near-term share price overhang as the Co-op (Glanbia’s biggest shareholder) sells a total of 6% of its stock, while there may be further downward pressure as the Co-op distributes a further 7% of the company to farmers, some of whom may sell their shares. However, in the longer term the market should reward the improved liquidity, free-float and stability of earnings arising from this restructuring of Glanbia’s Irish dairy business.

 

In the financial sector, KBC reduced its 1 year Irish deposit rate by 30bps. This is positive news for banks operating in Ireland as it should help making the task of rebuilding net interest margins across the sector a little easier.

 

(Disclaimer: I am a shareholder in PTSB plc) Speaking of Irish banks’ margins, interim results this morning from PTSB reveal a sharp decline in the NIM since the start of the year. In 2011 PTSB’s net interest margin was 92bps, but this has fallen to 76bps in H1 2012, due mainly to higher deposit costs. Total customer accounts and deposits have increased by €2.2bn in the year to date, with the majority of this due to corporate deposits (the vast majority, if you exclude the customer balances received following the acquisition of Northern Rock’s Irish deposit book), which is a welcome development. PTSB’s LDR fell to 190% at end-June from 227% at end-2011, so still unsustainably high but moving in the right direction at least. Asset quality deteriorated further since the start of the year, with 14.1% of mortgages in arrears of greater than 90 days at the end of June (12.0% at end-2011). The weighted average loan-to-value across PTSB’s mortgage book is 113%, with Irish owner-occupied at 115% and Irish buy-to-let at 137% (UK owner-occupied is 86% while UK BTL is 87%), which points to further pain ahead for the bank. In terms of self-help measures, operating expenses at PTSB were flat year-on-year at €136m, but even a significant reduction in this would be a drop in the ocean compared to the challenges in the loan book. One potential source of optimism is its excess capital – the total capital ratio was 21.5% at the end of June, well above the Central Bank’s minimum target of 10.5%. However, while the excess funds, at €2.2bn, are more than twice the group’s market capitalisation, further impairment charges will eat into this.

Written by Philip O'Sullivan

August 29, 2012 at 11:15 am

Market Musings 28/8/2012

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It has been a busy day on the results front in Ireland, particularly in the TMT sector.

 

To kick off, UTV Media, which has interests in the radio (local stations in the UK and Ireland, and the national talkSPORT station in the UK), television (the ‘Channel 3’ – ITV – franchise for Ulster) and new media (website design, marketing, broadband) segments, released its interim results this morning. This revealed a resilient performance in what are, clearly, challenging end-markets, with revenues and pre-tax profits climbing 4% and 3% respectively. The group continues to make impressive progress in terms of strengthening its financial position, cutting net debt by 21% over the past year to £50.0m. Across the group, UK radio revenues powered ahead, helped by the benefits of Euro 2012. Irish radio significantly outperformed, rising 4% in local currency terms, despite an estimated 10% fall in total Irish radio advertising in the first 6 months of 2012. The reason for this outperformance is that UTV’s Irish stations are all focused on the key urban markets on the Island of Ireland, which gives it a relatively more attractive proposition to offer to advertisers. On the television side, revenues and profits were down, with weak Irish advertising conditions to blame. With regard to the small new media business, margins were under pressure due to ‘competitive pricing’. In terms of the outlook, it looks like the rest of the year will see similar trends to the above, with outperformance on the radio side, underperformance in television and modest topline growth in new media. Not that investors should be too perturbed by this, as UTV is doing a decent enough job despite the challenging macro backdrop.

 

(Disclaimer: I am a shareholder in Datalex plc) I was pleased to see Datalex release very strong interim results today. Reflecting last year’s new contract wins (including Air China and SITA), revenues rose 18% to $15.7m. Reflecting the operating leverage inherent in Datalex’s model, nearly all of this  translated into profits – I note that in the first 6 months of 2012 Datalex generated gross profits of $2.8m, 82% of the total for the whole of 2011! This positive momentum should be sustained into 2013, with the likes of Indonesia’s Garuda and Fiji’s Air Pacific having gone live since the start of the year, while a number of other carriers including Delta are scheduled to go live later this year. On the balance sheet front, Datalex is guiding a 20%+ rise in cash reserves in 2012. Overall, these are excellent results, and continued good news on the new client wins front bodes well for the future. I’m not surprised to see the shares shoot higher in Dublin today.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM completed the restructuring of its board, with the election of four new directors and the appointment of a new Chairman and Senior Independent Director. With this out of the way, hopefully the focus can move on to the more crucial issue of repairing the firm’s balance sheet, and on this front the Irish advertising trends noted by UTV must surely bode ill for INM.

 

Insurer FBD posted solid H1 results today. The numbers were in-line with expectations, while management is sticking to its FY guidance. Within the results it was interesting to see that FBD has reduced its exposure to government bonds by over 40% in the year to date – this is a sensible move given what I believe to be a bubble in government bonds in Europe – although its exposure to equities remains low, at just 4% of total underwriting investment assets.

 

United Drug announced another two acquisitionsDrug Safety Alliance (total consideration, including earn-outs, of $28m) and Synopia (total consideration, including earn-outs, of $12m). Both businesses will form part of United Drug’s Sales, Marketing & Medical division. These deals take the number of acquisitions the firm has made so far in 2012 to six (five operating businesses and one property acquisition), so bedding these down will presumably take up a lot of management’s time over the next while.

 

In the resource sector Petroceltic’s H1 release contained no material ‘new news’. Management is focused on successfully executing the merger with Melrose Resources.

 

And that’s pretty much all that’s caught my attention so far today. Tomorrow brings results from PTSB, Grafton, Paddy Power and Glanbia, which will no doubt provide much food for thought.

Written by Philip O'Sullivan

August 28, 2012 at 2:51 pm

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