Market Musings 27/8/2012

(Disclaimer: I am a shareholder in AIB, Bank of Ireland and PTSB) Since my last update I was pleased to see that deposits at Ireland’s covered banks (AIB, Bank of Ireland, PTSB) were +10% year-on-year in July 2012. This is a helpful vote of confidence in the system, given that it suggests that overseas deposits (given the sclerotic domestic economic situation) are returning to the Irish financials.

 

Speaking of Ireland Inc, there has been an intense focus in recent days around the possible introduction of a property tax. Ronan Lyons, who is the most authoritative voice on the Irish property sector, has written a good piece outlining the different considerations around such a measure. I agree with him in principle that we should have such a tax, particularly given that too much of our tax revenues are dependent on flows instead of stock. I say ‘in principle’ because I have difficulty in seeing how Irish people can shoulder yet another tax at this time – we currently have a situation where more than 1 in 5 mortgages are in trouble, while more than 1 in 7 people in the labour force are out of work. Throw in the effects of rising taxes over the past few budgets and falling incomes and I think we could be facing a scenario of mass evasion / people (in many cases justifiably) pleading inability to pay similar to the household charge debacle from earlier this year. Some have argued that a modified ‘property tax’ taking into account incomes should be introduced, but that would in practice only amount to yet another income tax, which will act as a disincentive to work (given the already elevated marginal tax on incomes in Ireland).

 

In the energy sector, I was unsurprised to see a surge in applications for UK North Sea licences following the British government’s reversal of its previous anti-investment stance, which I had been critical of. I hope to do some work on the firms focused on the UK continental shelf (Xcite Energy in particular seems to have a lot of fans) over the coming weeks.

 

In the pharma space, there was an interesting article in The Irish Independent around the prospects for a sale of Elan Corporation that’s worth checking out.

 

(Disclaimer: I am a shareholder in Ryanair plc) In the airline sector, the Irish government made the astonishing revelation that it has yet to formally discuss a sale of its stake in Aer Lingus to Etihad. Considering that a sale of State assets has been agreed with the Troika as part of Ireland’s “bail-out” and Etihad having recently signaled that it may also bid for part of Ryanair’s stake, I would have imagined that Dublin wouldn’t have been slow out of the blocks to have proper talks with the Middle Eastern carrier. This is especially so given that Etihad can effectively only buy either the government’s stake or most of Ryanair’s holding, because even though as a non-EU carrier it can, in theory, buy up to 49% of Aer Lingus, in practice Irish stock exchange rules which say you have to bid for the whole company if you go above 29.9% rules this out for the time being at least (there are some ways of circumventing this, but they would likely prove cumbersome to execute in the short-term).

 

Finally, I was sorry to read that Calum has closed his blog. There is a dearth of high quality blogs in the UK and Ireland covering the stock market and the demise of yet another one is a great shame.

Market Musings 22/8/2012

Having been on holidays in Finland and Estonia for the past week, today’s update represents something of a ‘revision session’ as I look through what has been happening since my last update on the stocks that comprise my investment universe.

 

(Disclaimer: I am a shareholder in AIB plc) To start off with the banks, according to press reports, AIB is looking to reduce its pension deficit by transferring loan assets into it. This is a common-sense move by the bank, which reported a pension liability of €1.5bn at the end of June, and I wonder if it might provide some food for thought for other businesses that find themselves asset rich but cash poor.

 

(Disclaimer: I am a shareholder in CRH plc) Ireland’s biggest company, CRH, tempered its full-year guidance when it released interim results a few days ago. Having previously forecast that it anticipated “overall like-for-like sales growth in 2012 and a year of progress for CRH”, it now says: “we expect that EBITDA for the year as a whole will be similar to last year’s level”. Tougher macro conditions are to blame, which are clearly beyond the control of the group, although it is mitigating these pressures through cost take-out measures and a focus on cash generation (cash earnings per share, at 85.8c in H1 2012, was well above the 67.1c achieved in H1 2011). On the M&A front the group stepped up its activity here, agreeing to total consideration of €235m for 17 deals in the first six months of the year up from the €172m spent in the same period last year. Overall, the high implied rating that CRH trades on allied to tough end markets means it is difficult to see the shares push significantly higher from here in the short term. This is compounded by a paucity of obvious near-term catalysts for the stock – its next investor day isn’t until November and its next development update isn’t expected until early 2013. One thing that could change that is a substantial earnings-enhancing deal, but on the M&A front it should be noted that CRH’s style is to go for modest bolt-ons over spectacular large transactions (recent chatter around India notwithstanding).

 

Elsewhere in the construction space Kingspan released good H1 numbers, which came in ahead of market expectations. Encouragingly, there was a good lift in margins (up 100bps to 7.00%) which underlines the strength of this performance. That Kingspan is outperforming the market shouldn’t be seen as a big surprise, however, given that its insulation base gives it a structural edge over more cyclical building materials companies. The benefits of recent acquisitions, particularly as they are integrated into the business, points to a solid outlook for this firm despite the macro headwinds.

 

In the energy space Dragon Oil released solid interim results. Management is sticking to its medium-term targets, and given its track record few would argue with them. It was interesting to see Dragon Oil is bidding for licences in Afghanistan – these are located in the more stable northern region of the country.

 

In other resource sector news, Petroceltic announced a merger with Melrose Resources. I don’t follow either company closely, but on paper this looks like a sensible deal which creates a reasonably sized group focused on the Black Sea, North Africa and the Mediterranean Sea with a blend of production, development and exploration assets – hopefully a case of the whole being more than the sum of the parts.

 

(Disclaimer: I am a shareholder in PetroNeft plc) Wrapping up on what’s been happening in the energy sector, there was an interesting deal in Siberia which has read-through for PetroNeft. TNK-BP sold $400m worth of assets in the region at an implied price of $2.56 a barrel – this is 3x the implied value of PetroNeft, all of whose assets are located in the region.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) In the TMT sector INM’s 30% owned associate, Australasian media group APN, released its interim results. While its underlying performance was in-line, it took a huge (A$485m – a 70% write-down) charge against the value of its New Zealand print assets. This distracted from a stable topline (continuing operations’ revenues +1% yoy) while underlying operating costs fell 3.3% yoy to A$357m and finance costs were nearly 10% lower yoy. Net debt has fallen to A$470m from A$637m at the end of 2011, helped by the restructuring of the outdoor business. Ominously for INM, APN cut its interim dividend from A3.5c to A1.5c, so INM’s cashflow won’t be helped by lower dividends coming from the southern hemisphere this year.

 

In the healthcare segment there was a good bit of news from United Drug in recent days. In its Q3 IMS management revealed that it now expects 8-10% earnings growth in 2012, a big increase from the previous guidance of 4-8%. The company also said that it is considering moving its listing from Dublin to London, which surely increases the pressure on the Irish Stock Exchange to seek a deal with another European exchange before it loses any more top plcs. The group also bolstered its Packaging & Specialty division with the acquisition for $61m of Bilcare’s UK and US clinical supplies unit. This is a sensible deal which further enhances UDG’s presence in that space.

 

And finally, one thing that might provide a lift to my readers in Clonmel today is that C&C’s Magners appears to be making a big marketing push in Finland – in a few of the bars in Helsinki I visited (where a pint* can set you back nearly a tenner!) I noticed that all the bar staff were wearing Magners branded t-shirts and the bottled stuff was widely available. Cider is wildly popular in Scandinavia (Kopparberg hails from Sweden) – by way of illustration, in terms of draught most of the pubs I was in only had two taps – one for either Koff or Karhu and one for cider. Magners is also stocked by the Finnish alcoholic beverage retail monopoly, the charmingly named Alko. So, while I don’t claim to have conducted exhaustive field research (not least given the prices the pubs charged!) it does highlight that Magners is making progress outside of its traditional markets. In its FY12 results C&C revealed that, outside of Ireland and the UK, worldwide Magners volumes grew 28% over the past financial year, with circa 10% of Magners revenue now coming from outside of the British Isles.

 

* Actually, being good Europeans the Finns sold 0.5 litre drinks in pint glasses.

Bank of Ireland: H1 Results Thoughts

(Disclaimer: I am a shareholder in Bank of Ireland plc and AIB plc) The main news, at least from an Irish plc perspective, today is Bank of Ireland’s interim results. Six months ago, when the group issued its FY2011 numbers, I wrote that: “[The] results are a bit of a mixed bag, and to tell the truth, they are a little bit worse than what I had expected“. This morning’s interim numbers have produced a similar reaction from me.

 

It should be noted that, particularly at this troubled time, but it’s also generally true, that banks’ results are always subject to a certain degree of volatility given the vast number of moving parts at play. This makes forecasting numbers with a high degree of accuracy a challenging task – how, to take two examples, is one supposed to adequately model for either: (i) the accounting impact of fair value movements in derivatives that economically hedge the Group’s balance sheet; or (ii) economic assumption changes for Bank of Ireland’s life assurance unit. These two items combined had a €59m positive impact on Bank of Ireland’s bottom line, and were indeed equal to circa 100% of its H1 2012 pre-provision profits!

 

With this in mind, when I look at the Irish banks I run through a check-list of five key items to see how they are performing against all of them. I find that a more useful method of evaluating their performance than simply focusing on headline numbers that can be heavily influenced by accounting adjustments, such as those mentioned above, that have limited read-through for the underlying performance of the group. Obviously, in the longer term the headline numbers themselves will take on more relevance, but given the present volatility their usefulness is, in my view, somewhat limited.

 

The five key areas of interest to me are: (i) Trends in pre-provision profits; (ii) Trends in deposits; (iii) Trends in the net interest margin; (iv) Progress on deleveraging; and (v) Trends in impairments. Below I evaluate Bank of Ireland’s performance on all five metrics.

 

To start with trends in pre-provision profits – here Bank of Ireland saw a 65% decline to €58m relative to H12011. This was all down to the margin. Net interest income slid by €177m (-17%), which more than offset the positive trends seen in all of the other line items between it and pre-provision profits, namely: government guarantee fees (a €25m reduction year-on-year), net other income (a €43m improvement year-on-year), operating expenses (a €1m reduction year-on-year). The conclusion from me from examining the trend in pre-provision profits is that Bank of Ireland is doing a good job on the levers it has control over.

 

Next we look at deposits. Earlier this month AIB said that its customer deposits rose €2.9bn (+5%) in H1 2012. I would have expected at least the same again from Bank of Ireland. However, BKIR’s Irish retail deposits have actually fallen by €1bn in the first six months of the year. This was more than offset by a €2bn rise in UK retail deposits, while other deposit headings remain stable. This relative underperformance may well be explained by Bank of Ireland having recently taken (necessary) steps to lead price reductions in deposit rates here, so there could be an element of savers ‘shopping around’ going on. With other banks having followed BKIR’s lead, hopefully it will win back some of this money over time. However, my conclusion from Bank of Ireland’s deposit trends is that, while not a major cause for concern, they will need to improve their performance here to help strengthen its funding base.

 

The net interest margin is a source of disappointment to me. At 1.20% it is 13bps lower than year-earlier levels and below the 1.24% reported by AIB in the first half of 2012. Action to reduce the level of deposits covered by the Irish government’s ELG scheme means that margins after taking that into account are 0.88% for Bank of Ireland and 0.90% for AIB. Given that Bank of Ireland has a arguably superior mix of loan exposures to AIB, this margin underperformance is as surprising as it is disappointing.

 

Deleveraging is something that will, thankfully, no longer be an area of particular attention come 2013. Bank of Ireland has already met its PCAR targets, having offloaded €10bn of loans more than a year ahead of target. The other pillar bank, AIB, in contrast, is only 70% of the way through this process. So, top marks to Bank of Ireland here.

 

Impairments are clearly an area of focus for the Irish banks. Given the heroic achievements of Katie Taylor in yesterday’s Olympic boxing final, you’ll forgive me for the analogy that our financial system has suffered a ‘one-two combo’ in terms of being smacked first by land and development loans (now mainly housed in NAMA) up front and then a second blow from mortgage losses as unemployment has moved upwards. Total loan impairments in H1 2012 for Bank of Ireland were €941m versus €842m in H1 2011. Mortgages were to blame here, as impairments in that area rose to €310m from €159m a year ago. Consumer and SME impairments saw an improvement, while property and construction losses were flat. Given the troubled economic backdrop, I would imagine that losses will get worse before they get better, although I note management says: “While the Irish economy remains challenging and our impairment charges remain elevated, we expect the impairment charges to reduce from this level, trending to a more normalised level as the Irish economy recovers“. The ultimate impairment bill is, to use Mr. Rumsfeld’s parlance, a key ‘known unknown‘ for Bank of Ireland.

 

In all, as I said in the opening the results are a bit of a mixed bag, but overall the key negatives (deposits and margin)  outweigh the positives (good work on costs, no major surprises on the impairment front). I’m not surprised, therefore, to see the shares open weaker this morning. In terms of how I approach Bank of Ireland as an investment case, I think the market has already priced in a lot of the risks it faces, with the shares trading on less than half its expected end-2013 NAV per share. However, the regular occurrences of either flare-ups or grounds for optimism in the Eurozone crisis means that, for high-beta stocks like Bank of Ireland, the near-term outlook for its share price remains volatile. I remain of the view that there is longer-term upside in this name for patient investors, while for short-term traders its elevated levels of both liquidity (especially by Irish standards) and volatility makes it a great trading stock to punt around on in the intervening period. Mind you, this also means, in my opinion, that it’s not really one for widows and orphans!

Market Musings 5/8/2012

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.

Market Musings 4/8/2012

The past week has been quite hectic, with two weddings and the deadline for completing a 200 page report for the company I’m on an internship with as part of my MBA studies to safely negotiate. Hence, blogging has been a necessary casualty of my lack of free time. So, what has been happening since my last update?

 

(Disclaimer: I am a shareholder in Ryanair plc) Ryanair released its Q1 results. These contained few surprises. The company is sticking to its FY net income guidance of a range of €400-440m which is reasonable in light of the early stage of its financial year. However, with the likes of Easyjet and Aer Lingus recently upping their forecasts, allied to Europe’s biggest LCC’s form for low-balling guidance (it upgraded its guidance twice in its last financial year) and healthy passenger numbers, I suspect the risks to Ryanair’s profits lie to the upside.

 

Elsewhere, as noted above Aer Lingus upgraded its FY earnings outlook in its interim results. Having previously said that 2012 profits “should match” the 2011 out-turn, it now says they will “at least match” last year’s performance. One aspect of the Aer Lingus results release that was particularly encouraging was the long haul performance – compared to the same period last year, in H1 2012 Aer Lingus’ long haul passenger numbers, load factors and yields all increased by 11.0%, 5.0% and 9.0% respectively. This is a magnificent performance given the tough economic backdrop and illustrates the success of Aer Lingus’ moves to leverage Dublin and Shannon, the only airports in Europe offering US pre-clearance, to win transatlantic customers whose journeys originated in other parts of Europe. This means that news of United Airlines terminating its Madrid-Dulles JV with Aer Lingus is not particularly concerning given that Aer Lingus clearly has sufficient demand to justify redeploying the Airbus A330 currently on the JV route to its own branded Ireland – North America routes.

 

(Disclaimer: I am a shareholder in BP plc) In the energy space BP released its interim results. Market reaction was extremely downbeat, but I am (perhaps foolishly?) taking a contrarian view to this and assuming that its run of disappointments means that management will either: (i) come up with shareholder-friendly goodies (a large buyback, chunkier dividends, sensible M&A) to revitalise the share price; or (ii) come under irresistible pressure from investors to unlock the value in the firm through a break-up of the company.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the TMT segment Trinity Mirror erupted this week, with its share price gaining circa 40%, helped by strong interim results. Regular readers of this blog will know that I’ve been an uber-bull on this name for a while, based on my view that it offers a compelling mix of: (i) Very strong cashflows; (ii) Substantial tangible asset backing; (iii) Rapid deleveraging facilitating a re-rating for the equity component of the EV; and (iv) An absurdly low (and unwarranted) valuation. I’m pleased to see that my central thesis is playing out, with the first six months of 2012 bringing a £60.5m reduction in its combined net debt and pension deficit, an amount equal to 75% of what TNI’s market cap stood at on Tuesday. The catapulting of its share price since then indicates that the market may be starting to wake up to this reality. I suspect the TNI story has a lot further to run – if you annualise the H1 earnings the stock is trading on a forward PE multiple of only 2.3x!

 

In the food sector Greencore issued an upbeat trading statement which revealed healthy underlying volume growth allied to management expressing confidence that it can meet full-year earnings expectations.

 

(Disclaimer: I am a shareholder in AIB plc and RBS plc) Switching to financials, I was surprised to read criticism of AIB’s announcement that it is to close a number of branches as part of its efforts to right-size its cost base. As its recent interim results showed, AIB is currently loss-making before you even take provisions into account – which is a clearly unsustainable position. Moreover, the vast majority of transactions these days are done using ATMs, cards and internet banking. Due to all of this, AIB (and indeed its domestic competitors) simply does not need as many branches as it did before.

 

Elsewhere, RBS issued an in-line set of interim results. While LIBOR, IT problems and a daft total nationalisation suggestion by elements within the British government have dominated headlines around the group, it is continuing to make impressive progress in terms of repairing its balance sheet. Investec’s Ian Gordon makes some good points around the numbers (and indeed the outlook for RBS) here. One aspect of the results that I found concerning was Ulster Bank’s impairments. RBS’ Irish unit saw impairments widen to £323m in Q2 2012 from £269m a year earlier, with mortgages to blame for this worsening trend. This has ominous read-through for the other banks operating in the Irish market.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) In the packaging space Smurfit posted another great set of results, with Q2 EBITDA of €255m coming in right at the top of the range of analyst expectations (€236-255m). Management reaffirmed its full-year EBITDA and net debt targets, but I suspect the risk to both is to the upside given that the two largest European packaging firms, Smurfit and DS Smith, have both recently announced chunky price increases.

 

(Disclaimer: I am a shareholder in Abbey plc) There was more good news for my portfolio from the construction sector, with Abbey’s majority shareholder, Charles Gallagher, making an offer to buy out the minority shareholders in the company. The price being offered isn’t exactly stellar, at 0.86x trailing book value, but it’s one I’m happy to accept given that it represents a 42% return on what I paid for the shares in 2009. If only the rest of my investments worked out so well!

Market Musings 27/7/2012

Blogging has been extremely light as I’m in the final stages of an internship as part of my MBA studies. However, newsflow has been anything but light! So, this blog represents a catch-up on what has caught my eye whenever I’ve been able to find the time to track what’s been happening in the markets this week.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc and PTSB plc) There was a lot of news out of the Irish financials this week. AIB released its interim results this morning. Overall, AIB has made good progress on deleveraging and deposits, but more work is needed on margins and costs. To take those in turn, I was encouraged to see that the LDR has improved by 13 percentage points to 125% since the start of the year, helped by €3bn of deposit inflows and non-core loanbook disposals. However, the net interest margin has worsened to 1.24% (pre-ELG) from the 1.36% seen in H12011. Hence, it was no surprise to hear management guide that it will raise mortgage rates in the autumn. As things stand, AIB is currently loss-making before even taking provisions into account, and the group will have to address this through a combination of rate hikes and cost take-out measures. Elsewhere,  PTSB revealed further details on its restructuring plans, but given its limited new lending ability and shrinking presence in the market I can’t see it being anything other than a marginal player for quite some time to come.

 

In the energy sector Providence Resources released an exciting update in which it revealed that there may be up to 1.6bn barrels of oil at its Barryroe Field, offshore Cork. Obviously it’s early days yet with this discovery, but it’s a stock that merits taking a look at. Once I’ve completed my internship it’s on my list of stocks to look at in more detail. Elsewhere, its Irish peer Tullow Oil released H1 results that contained few surprises given the level of detail provided in its recent trading update.

 

(Disclaimer: I am a shareholder in Marston’s plc) UK pub group Marston’s released a solid trading update, which revealed a satisfactory performance despite the recent wet weather.

 

Sticking with food and beverage stocks, Glanbia announced the $60m acquisition of a US beverage firm, which looks a perfect fit for its nutrition operations. This is another example of Glanbia’s successful forward integration strategy, which looks well placed to deliver strong returns over time.

 

Another Irish firm on the M&A prowl was United Drug, which acquired a German headquartered contract sales outsourcing firm for €35m, which will fit well within its existing Sales, Marketing & Medical division. An EV/Sales multiple of 0.23x is undemanding for a firm like this, so it looks a good deal to me.

 

(Disclaimer: I am a shareholder in Ryanair plc) Low-cost carrier Easyjet upped its PBT guidance, despite euro weakness, to a range of 280-300m. Prior to that the consensus was £272m. I assume the read-through from this for Ryanair, which reports numbers on Monday, is positive given that the euro weakness is near-term bullish for it (it generates a third of revenues from the UK, while it hedges its fuel and related USD exposures).

 

In the construction space, UK builders merchant group Travis Perkins’ interim results revealed a slowing performance in Q2. Management doesn’t see growth returning until 2014, so it’s not a sector I see a pressing need to gain exposure to anytime soon.

 

(Disclaimer: I am a shareholder in France Telecom plc) There was a lot of news in the telecoms sector. Spain’s Telefonica followed the lead of KPN and cut its dividend. France Telecom released its interim results, in which the firm reiterated its full-year cashflow targets, which is somewhat reassuring. France Telecom is a stock I’ve been negative on for some time and which I am looking to exit in the near future due to its inflexible cost base, intense competitive pressures in its home market and my fear that it will cut its dividend.

 

In the media space UTV announced that it has broadened its partnership with the English Football Association to broadcast rights around the FA Cup, Charity Shield and selected England internationals.

 

Ireland’s Central Statistics Office released its latest data on Irish house prices, which provide few grounds for optimism. While a lot of the recent media commentary has focused on monthly moves, I prefer to look at prices on an annual basis, given that month-on-month moves can be distorted by the small number of transactions happening in the market at this time. The latest data show that Irish house prices declined by 14.4% year-on-year in June 2012. This is a fall of a greater magnitude than what we saw in June 2011 (-12.9% yoy) and June 2010 (-12.4% yoy). The picture in Dublin is even worse (prices -16.4% yoy in June 2012) which is particularly concerning given that the capital will lead the eventual recovery in Irish house prices (due to much tighter supply and it being the economic heart of the country). Overall, I reaffirm my view from last month, namely that I don’t see any obvious catalyst for a sustained improvement in Irish property prices in the near term.

Market Musings 21/7/2012

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.

Market Musings 18/7/2012

One of the most interesting developments since my last update has been the number of European countries with negative bond yields. This has been explained as a flight to safety mixed with a currency play, but to me it represents more of a delusion of safety, given that many large European non-financial corporates, which are sitting on a mountain of cash, can offer investors the same currency exposure, a much higher yield and a stronger balance sheet than many sovereigns. Should there be any shift in sentiment away from ‘defensive’ assets such as European government bonds and towards equities, I think stock markets could push significantly higher from here as investors scramble to escape from what to me (and others) looks like a bubble in the bond market.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc) Following on from recent similar moves by its local peers, AIB announced that deposits gathered in the UK will no longer fall under the Irish government’s guarantee scheme. This is a welcome move for AIB as it will lower costs, but it is a less positive development for Ireland’s fiscal position – the State raised €547m from ELG fees in the first 6 months of 2012.

 

(Disclaimer: I am a shareholder in Ryanair plc) There were a few developments in recent days around Ryanair’s takeover approach for Aer Lingus. Firstly, Europe’s largest LCC posted its offer document for the Irish flag carrier, which contained few surprises. Then the Irish Transport Minister said the government would review the bid based on four criteria, while this morning Aer Lingus rejected the offer, citing both competition and valuation grounds. With Aer Lingus this morning trading on an 18% discount to Ryanair’s bid price, the market continues to indicate a low probability of success for this approach.

 

(Disclaimer: I am a shareholder in France Telecom plc) There were some extraordinary developments in France yesterday, with the new government indicating that it is looking to block telecoms companies from laying off workers despite sliding revenues (Bouyges Telecom guides -10% this year, SFR expects revenues to weaken further after last year’s 3% decline, France Telecom sees average revenue -10% this year). Blocking companies from being able to right-size costs while allowing them be undercut by new entrants is a recipe for disaster.

 

The protracted takeover battle for Cove Energy appears to have reached the endpoint, with PTT winning out over Royal Dutch Shell.

 

In the blogosphere, Lewis has been furthering his knowledge of the UK motor retail sector, profiling Vertu.

 

And that’s about it in terms of what’s grabbed my attention since my last update! The main scheduled newsflow to watch out for here over the remainder of the week is DCC’s interim management statement on Friday, which I suspect should be pretty good due to the unusually poor weather we’ve been having in this part of the world.

Market Musings 16/7/2012

Since my last update there have been quite a few developments around the banking sector. The Irish banks’ reliance on monetary authorities for funding rose marginally in June, but it remains 32% below peak (€187bn in February 2011) levels. Elsewhere, UBS put together an interesting table showing credit and deposit trends across Europe – the deleveraging process for households in Ireland is especially acute relative to other EU member states, while the deposit trends are disappointing, especially given the competitive rates the banks are offering to savers. On that note, with deposit rates looking set to continue to fall as the Irish banks work towards rebuilding their net interest margins, I wonder if this might lead to more deposits moving out of the country over time. Time will tell.

 

(Disclaimer: I am a shareholder in Bank of Ireland, AIB and Permanent TSB) Speaking of Irish banks, I had a look at the liquidity of their shares after noticing a few comments about abnormal price moves. Bank of Ireland has a free float of 85%, compared to the circa 0.2% of AIB and PTSB that is outside of State ownership, so it was no surprise to see that the average daily volume of shares traded in Dublin in Bank of Ireland (33m) is 44 times that of AIB (750k) and 98x PTSB (337k). Considering that, based on where PTSB’s share price closed on Friday (2.5c) the average daily volume traded in that stock is worth less than €10,000 you would want to be careful not to read too much into any daily movements in its share price. The same applies for AIB, where on the same criteria less than €50k worth of stock is traded each day in Dublin.

 

(Disclaimer: I am a shareholder in RBS plc) Elsewhere in the financial space RBS’ planned IPO of Direct Line was the subject of significant media coverage in recent days. Press reports over the weekend suggested that leading private equity firms are circling around RBS’s insurance operation, which generated operating profits of £454m on revenues of £4,072m last year. I think a trade or private equity sale of this business, which is valued at £3-4bn, would be in shareholders’ best interest – particularly given that, with 11 investment banks lined up to advise RBS on an IPO, the fees involved would be substantial if it goes down the listing route.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Switching to media, TCH announced that it is considering restructuring its debt. The group operates national and local newspapers along with several local radio stations and its quoted competitors include Independent News & Media, UTV Media and Johnston Press. Should any restructuring move lead to closures of underperforming assets there will presumably be opportunities for those three, along with TCH’s unquoted peers, to gain market share.

 

(Disclaimer: I am a shareholder in BP plc)  In the energy space, I am concerned by a report that an Argentinian province is threatening to revoke a licence held by BP’s joint venture, Pan American Energy. The asset in question is Argentina’s largest oil field, while the recent nationalisation of Repsol’s business in that country shows that Argentine politicians are not above taking actions that will ultimately prove ruinous to FDI inflows.

 

Investors Chronicle’s John Ficenec wrote a good piece on the recruitment sector. I’ve been tempted by some of the cheap valuations in the sector of late but am torn by the macroeconomic headwinds. Of course, if there’s any hint of these abating the sector should significantly re-rate, but timing that entry point is easier said than done!

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector I note a report saying Total Produce has made a bolt-on acquisition in France. There’s no official word from the company, but assuming the report is accurate I’m guessing the business should add 1% to TOT’s topline with a slightly lower effect (due to: (i) finance costs; (ii) France having a 33.3% corporate tax rate, versus TOT’s current 19.3% effective rate; and (iii) synergy benefits will presumably be lower than they would be in areas where TOT has a more substantial presence) on earnings.

 

Finally, with the US Presidential election only a few months away, I was interested by the results I got on this questionnaire that matches your political views to those of the candidates – supposedly I’m 93% in-tune with Gary Johnson and 88% with Ron Paul! Why don’t you take the questionnaire and see where you stand.

Market Musings 13/7/2012

Newsflow has been relatively light in recent days but it’s essentially the calm before the storm as we move towards next month’s results season.

 

(Disclaimer: I am a shareholder in Marston’s plc) Since my last update we got some good news out of the UK pub sector. Both Young’s and JD Wetherspoon reported bumper sales during the Jubilee and Euro 2012 period, which presumably bodes well for their sector peers including Marston’s, which I hold. Assuming the London Olympics deliver another lift in sales, we could be looking at upgrades flowing through over the coming months.

 

(Disclaimer: I am a shareholder in Tesco plc) Speaking of UK consumer facing stocks, Shore Capital cut its forecasts for Tesco, citing concerns about its overseas operations. This is a new threat (at least for me) for the group, but I draw comfort from the comments from Shore’s highly rated analyst, Clive Black, about how its core UK business is stabilising.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) There was quite a bit about AIB in the press in recent days. Firstly, the group is reported to have sold a €300m loan portfolio, which is another step in meeting its PLAR requirements, although it should be noted that there is no information in the public domain yet about the discount that these loans were sold at. This morning there was an interview with AIB CEO David Duffy in The Irish Times that’s worth checking out. There’s more chatter in it about the possibility of external investors coming in to the share register from 2014, but I suspect they’ll need more than the ‘high single digit’ returns Duffy mentions to want to get involved – it’s not as if lower risk assets offering superior returns are particularly difficult to find these days. In any event, with AIB capitalised at €29.5bn at the time of writing while its stronger, equivalent sized peer Bank of Ireland is capitalised at just €2.7bn, I think a lot of investors looking at the Irish financials will be wondering why they should opt for AIB when they can buy into a company (i.e. Bank of Ireland) with similar macro exposure and risks (going forward) at a tenth of the price.

 

Switching to macro news, Argentina is the gift that keeps giving when it comes to dysfunctional economic policies. The latest plan by its President is to ban savers from purchasing US dollars. This follows other bizarre developments, such as prosecuting economists who query ‘official’ inflation estimates and restricting capital flows to the point where Mitsubishi and Porsche get paid in peanuts and wine respectively for their sales into Argentina. There’s also the pointless belligerence towards the Falkland Islands (not least given that Argentine military capabilities haven’t really moved on since 1982 while Britain has new Eurofighters, a Type 45 destroyer and a nuclear submarine in the area) and the theft of Repsol’s assets in the country to take into account. Again I find myself wondering aloud why some people here think we should be emulating Argentine policies!