Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Bank of Ireland

Market Musings 15/9/2012

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It’s been an eventful few days since my last ‘general’ round-up on what’s been happening in the markets, with the Federal Reserve further opening the monetary sluices and continued positive developments around Ireland Inc (a well received sale of bills, positive noises from the IMF, soaring bond prices etc.)


For me, the central message to take from these markets at this time is that the monetary authorities on both sides of the Atlantic stand ready to do ‘whatever it takes‘ on the policy front. This is unambiguously bullish for a number of asset classes, in particular equities (in general) and commodities (including gold, which I’ve been a bull on for some time), however, it also has other consequences that are worth bearing in mind. While the growth outlook is concern enough in itself, the main overall threat in the system (in my view) remains on the prices front, as an enthralling battle takes place between the forces of inflation (central banks’ printing presses) and deflation (private sector deleveraging). Which force is likely to prevail? The old rule of “Don’t bet against the Fed” comes to mind. This to my mind puts the onus on investors to position themselves accordingly. We have seen from the share price reactions to Helicopter Ben’s latest move how they should do this, with mining stocks (e.g. commodity plays) surging, financials pushing higher (anything that pushes up asset prices a positive, while the funding outlook is improved) and a lift in those highly leveraged stocks operating well within covenants and who may take the opportunity to refinance at even lower rates as yields are pushed down elsewhere by central bank intervention (a good example being Smurfit Kappa Group, which I hold, whose balance sheet is to my mind still very much misunderstood by the market, and which rose 13% on 11 times average daily volume in Dublin yesterday as more investors wake up to to the story). Of course, it is also worth bearing in mind that higher commodity prices are likely to hurt a lot of stocks that are price takers on the input side and who will struggle, due to the tough economic backdrop, to pass on higher input prices to consumers.


In terms of my own response to all of this, I have been stepping up my exposure to financials, trebling my stake in Bank of Ireland and significantly increasing my exposure to RBS (which is now my third-largest portfolio position). The recent surge in the value of Irish government bonds prompted my Bank of Ireland move, given that BKIR held €5,945m worth of them at the end of June (up to €1.5bn of which were acquired following the LTRO earlier this year). As the notes to BKIR’s interim results show (see page 99), the vast majority of these are in the books on a ‘Level 1’ fair value basis, i.e. “valued using quoted market prices in active markets”. Given the recent lift in Irish bond prices, this should have a positive impact on Bank of Ireland’s NAV, given that “any change in fair value is treated as a movement in the [available for sale] reserve in Stockholder’s equity”. Elsewhere, in the case of RBS, the IPO of its Direct Line business and recent moves towards agreeing financial settlements for Libor and IT issues indicate that the narrative around the group may be about to radically shift, as I noted in a recent blog post.


(Disclaimer: I am a shareholder in Datalex plc) In other news, travel software company Datalex confirmed that interim CEO Aidan Brogan is to get the job on a permanent basis. This is a sensible decision. Aidan has been with the firm for almost 20 years, and his strong background in sales is likely to help Datalex build on its growing list of clients.


Elsewhere in the TMT space, Johnston Press has reportedly delayed its relaunch programme. You can read my recent piece on the firm here.


(Disclaimer: I am a shareholder in France Telecom plc) And in other TMT news, the team in aviate came up with an interesting angle on Apple’s latest toy, namely that “in the European launch only Deutsche Telkom and France Telecom were given the hallowed LTE version of the iPhone 5“. I must confess that what I know about ‘fashionable’ mobile phones could fit on the back of a postage stamp, so hopefully one of my kind readers will let me know if this is a significant advantage over other carriers or not!


In the energy sector, consolidation has been a big theme this year, as cash-rich majors have snapped up financially constrained small cap names with proven resources. This clip suggests that the trend has further to run (and indeed, assuming the latest QE moves push up oil prices, this will provide the large caps with even more cash to play around with).


In the blogosphere, Lewis profiled Impellam. Elsewhere, John took a good look at Rolls-Royce.

Written by Philip O'Sullivan

September 15, 2012 at 12:01 pm

Market Musings 10/9/2012

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This is a bit of a hotchpotch of what has been catching my eye over the past few days.


To kick off with construction, Abbey announced the results of the mandatory offer from Gallagher Holdings. The latter has raised its stake in the housebuilder by 10.7ppt to 72.6%. This is not enough to force a compulsory acquisition of the balance of the shares, so the stock will retain its listing. In the run up to the deadline, I had struggled about what decision to take about my own holding in the company. While the bid from Gallagher represented a nice exit price on a stock I purchased for only €4.60 a share, it was pitched at a disappointingly wide discount to NAV. In the end, I elected to take the cash, on the grounds that I didn’t want to stick around in a stock that has now arguably moved from ‘quite illiquid’ to ‘extremely illiquid’ (!), which makes it unappealing to many institutional investors. However, I may well re-enter the sector in the not too distant future given that the long-term drivers of growth are very much intact (a very old housing stock, net inward migration, severe pressure on housing in the South-East of England).


In the food sector, Investec argues that Premier Foods faces ‘death or glory’ by 2014. Elsewhere, NCB issued very different (in tone) reports on Aryzta and its majority-owned associate, Origin Enterprises. On Origin, NCB argues that weather and FX should provide a tailwind to earnings, while on Aryzta, NCB makes a persuasive argument that it may not hit its 400 cent earnings target for 2013.


(Disclaimer: I am a shareholder in Harvey Nash plc) In the recruitment space, SThree released an interim management statement that revealed slowing growth. On an annual basis its gross profits rose 6% in Q3 2012 (in constant currency terms) of its financial year (i.e. to end-August), down from +15% in Q1 and +9% in Q2. Drilling down into the numbers we see it has experienced weakness in both the UK & Ireland and ICT, with other areas performing more resiliently. The slowdown in the headline growth rate was, unsurprisingly, explained by “the difficult macro economic backdrop”, but SThree’s resilient overall performance highlights once more the importance at this time of choosing recruitment stocks that offer diversification (both by industry segment and geographic), an attractive dividend and a strong balance sheet. This is what attracted me to recently buy into one of its peers, Harvey Nash. I hope to find the time to research all of the stocks in the sector that fit this bill over the next while.


(Disclaimer: I am a shareholder in Bank of Ireland plc and RBS plc) There were a few items of note in the financials space. I saw a very bullish MarketWatch piece on Bank of Ireland, which served as a reminder that while a lot of the domestic commentary is ‘doom and gloom’ oriented, many international observers are bulled up on Ireland Inc (Franklin Templeton’s bold Irish sovereign debt move is a good example of this, as is this favourable coverage from CNBC). In other sector news, RBS is planning to shut down its precious metals trading unit, while it has also ceased commodities research. The FT also reported that it is nearing a Libor settlement with US and UK authorities, which would remove another legacy overhang from the group, which remains on my watch list. Finally, I offloaded my second biggest holding, Standard Life, which has had a great run of late and is no longer (in my view) in ‘cheap’ territory.


(Disclaimer: I am a shareholder in Trinity Mirror plc) I was pleased to see that new Trinity Mirror CEO Simon Fox has been set very demanding bonus targets based on the share price performance of the group. It is good to see a remuneration committee flex its muscles in this regard, especially in a way that ensures investors’ and management’s interests are very highly aligned.


In the blogosphere, John Kingham says: “When I look at BT I see a company and an investment that screams mediocrity“.

Written by Philip O'Sullivan

September 10, 2012 at 2:40 pm

Market Musings 27/8/2012

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(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.

Written by Philip O'Sullivan

August 27, 2012 at 10:46 am

Bank of Ireland: H1 Results Thoughts

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(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!

Written by Philip O'Sullivan

August 10, 2012 at 9:21 am

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

Market Musings 16/7/2012

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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.

Written by Philip O'Sullivan

July 16, 2012 at 7:50 am

Market Musings 13/7/2012

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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!

Written by Philip O'Sullivan

July 13, 2012 at 9:17 am

Market Musings 29/6/2012

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It’s been an incredibly busy 48 hours since my last update. Let’s run through what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) We saw a lot of news out of the Irish financials. Bank of Ireland issued a couple of updates. The first related to the Irish mortgage market, where the group revealed that its share of new lending has increased to 40%, while it did not indicate (emphasis) any change in the pace of arrears relative to its previously stated expectations. Its second update, released yesterday, brought confirmation that Bank of Ireland has completed its €10bn divestment programme within PCAR base case assumptions. This comes as no surprise (the group had previously disclosed that it was 97% of the way through this) but it is an incremental positive and reaffirms my previously expressed view that Bank of Ireland is doing an excellent job at managing the factors it has control over. Bank of Ireland’s main domestic competitor, AIB, released an AGM statement yesterday, the key points of which are: (i) Its non-core business is performing better than expected; (ii) The integration of EBS is going well; and (iii) AIB’s share of the mortgage market is now 35%. On the last point, adding in Bank of Ireland’s share noted above means that 75% of  Irish new mortgages are being issued by AIB and Bank of Ireland – so, essentially a duopoly market. Smallcap IFG’s AGM statement revealed a good start to the year for its core UK and Irish operations, while management said it is going to review its options post the sale of its international unit. Elsewhere, NAMA repaid another €2bn of bonds,  taking its total debt paydown in the past 2 years to circa €3.5bn. At the end of 2011 NAMA had €29.1bn of debt securities in issue, along with another €1.6bn of a subordinated equity instrument. Overnight we heard news of a ‘breakthrough‘ agreement on Ireland’s debt burden which may have significant effects on the banks here. However, I would echo the caution expressed by Constantin Gurdgiev here, namely “we cannot tell how positive it is yet”.


(Disclaimer: I am a shareholder in RBS plc) Switching to financials in other jurisdictions, the LIBOR investigation has had a significant impact on sector valuations in the UK. Also, the “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger” quote on page 19 of the FSA’s report should have a significant impact on what people put in work emails in future! From my perspective, my UK bank sector exposure is limited to a small position in RBS, which had already become smaller on the back of its IT problems. Yesterday’s 11.5% slump threatens to push the share price below £2 for the first time since the 1-for-10 reverse share consolidation. I’m still positive on the stock on a longer-term perspective, and am monitoring its current difficulties closely with a view to gauging if the risk/reward justifies topping up my position – although clearly this is not something I envisage happening in the immediate future.


(Disclaimer: I am a shareholder in PetroNeft plc) This morning’s 2011 results from PetroNeft give me few grounds for optimism. While management say that “production levels have been stabilised”, at 2,200bopd presently output is still below the 2,300bopd reported in early April and the 3,000bopd achieved at the end of 2011. I also note management’s comments that: “we have initiated discussions with a range of strategic investors about possible farm-outs, long term off-take agreements and potential equity or asset investments which in the long term would strengthen the Group’s financial position”. This ties in with the revelation that Macquarie wishes to reduce its $30m available loan facility to PetroNeft by $7.5m, “however they are giving the Group time to work this out “. Overall my sense is that a solution to the challenges PTR faces will likely prove to be unfriendly to existing shareholders, but assuming I’m right perhaps this is already reflected in the price as I note that the shares have opened higher this morning.


In the food sector, Greencore made what it described as a ‘platform acquisition’ in the US, buying Schau for £11m, or around 0.5x annual revenues. It also revealed a new $50m contract, which assuming a 6% margin should lead to around $3m in extra operating profits on a full-year basis. Overall, Greencore’s US business continues to make progress, but it is still a marginal player in a huge market – I wonder would the capital the group has tied up here be better deployed in strengthening its strong position in the UK instead of trying to build a sizeable operation in the States. In other Irish food company news, Origin Enterprises released a fascinating presentation about its agronomy operations. I’m very bullish on the long-term outlook for this business, which is underpinned by rising food consumption across the world, the lifting of EU quotas and food security issues.


In the support services sector, CPL Resources released an upbeat trading statement, featuring the word “strong” no less than three times, which bodes well for Ireland Inc.


(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector,  News International raised the cover price of The Sun newspaper, which could (emphasis) pave the way for Trinity Mirror to follow suit with its Daily Mirror title.


In the blogosphere Lewis took a look at Plastics Capital, which is not a name I’m too familiar with and based on his blog not one I wish to become more acquainted with anytime soon! Speaking of blogs, FT Alphaville posted up UCD Professor Karl Whelan’s Target2 presentation. I was particularly struck by slide 20 – Eurozone countries’ net balances with the Eurosystem.


Finally, John Kingham looks at how his top tips for 2012 have performed in the year to date – I will outline how mine have done over the weekend.

Market Musings 20/6/2012

with one comment

(Disclaimer: I am a shareholder in Ryanair plc) The main news since my last blog has been Ryanair’s €1.30/share indicative offer for Aer Lingus. The approach, which values AERL at €694m, marks the third time Europe’s biggest LCC has made an approach for the Irish flag carrier. At the time of writing Aer Lingus shares have risen 22% to €1.15, which is 11% below the indicated bid price from Ryanair, which suggests that the market is not convinced that Ryanair has a high chance of succeeding in this move.


In terms of possible motives for this development, there are a number which come to mind. These include: (i) A sincere move by Ryanair to secure a dominant presence in the Irish market (as I recently noted, the combined RYA-AERL share at the three main airports – which handle 96% of all air traffic in and out of Ireland – here is well over 70%); (ii) A move to force Etihad, which recently revealed that it has a near-3% stake in Aer Lingus, to counter-bid for the government’s 25% stake in the carrier (as a non-EU airline Etihad cannot own more than 49.9% of Aer Lingus); (iii) A move to scare Etihad out of increasing its stake in AERL, by reminding it that Ryanair’s 29.8% stake in Aer Lingus is enough to block special resolutions at AGMs and EGMs; (iv) Mischief-making by O’Leary, which may sound ridiculous but then again making an approach for a firm with a significant potential pension issue (of sorts) is an unusual move; (v) a possible move to frustrate the Competition Commission investigation into its AERL stake and/or (vi) O’Leary views the acquisition of AERL as a key part of his entry strategy onto the Transatlantic market, which he has long talked about entering.


From my perspective as a shareholder in RYA, I would prefer if the carrier doesn’t pursue this course of action. It has considerable scope to grow organically within the European market, where it has only an 11% share, armed with a proven business model in a competitive landscape where several airlines have gone bust in the year to date and many others are constrained by stretched balance sheets, tough economic conditions and still elevated (despite the recent drop) oil prices. I don’t see the strategic rationale of adding a carrier with a fundamentally different business model to Ryanair.


(Disclaimer: I am a shareholder in France Telecom plc) I was dismayed to read that France is considering the introduction of a dividend tax, which is likely to hit big payout companies such as France Telecom. I’m philosophically opposed to such measures in general, given that they amount to double taxation, which along with similar measures such as the taxation of interest income they also serve to discourage savings and investments, at a time when ageing populations mean that Western governments should be doing more to encourage people to provide for the future. From a specific FTE perspective, it also reduces further the attraction of holding the stock, and it remains a position that I will look to exit in the short term.


(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) Newspaper publisher Johnston Press is to close one of its Irish regional titles, the Offaly Express newspaper. I’ve previously noted that profitable publishers such as INM and TNI are likely to gain market share as more ‘financially challenged’ peers close titles.


(Disclaimer: I am a shareholder in Bank of Ireland plc) Bank of Ireland this morning announced, as expected, the appointment of Archie Kane as its new Governor (Chairman). It also announced that heavyweight investors Wilbur Ross and Prem Watsa would be joining the board, which is a welcome move given their considerable experience will no doubt prove a big help for the board.


This is a scary (if predictable) chart – ECB lending by country.


Meanwhile, the US Navy is spending $42bn on a new class of aircraft carriers.

Written by Philip O'Sullivan

June 20, 2012 at 9:09 am

Market Musings 19/6/2012

with one comment

A big placing and reassuring company updates have given me plenty to contemplate since my last update.


(Disclaimer: I am a shareholder in Irish Continental Group plc) The big news from an Irish corporate perspective since I last blogged was yesterday’s €50m placing in ICG. Irish investment group One51 offloaded its 3m shares at €14.50 apiece, which was a much smaller discount than I would have expected in these difficult markets, but this narrow discount may be explained by ICG picking up 700k of those shares. Not that this necessarily represents a poor deal for ICG – the 700k shares bought back and cancelled at a cost of €10m will save €700k a year in dividend payments, so a 7% annual cash ‘return’ and circa 3% uplift to EPS arising from the lower number of shares in issue looks like a tidy bit of business. It also removes an overhang on the share register, for as regular readers of this blog are aware, I had been expecting One51 to exit this holding for some time. In terms of my reaction to this development, I am closely monitoring the ICG share price with a view to finding a suitable entry level to add to my existing holding.


Turning to the energy sector, Kentz issued a solid trading update this morning just ahead of its analyst jolly / site visit (delete where applicable) to South Africa. The key takeaways are that the group is trading in line with its recently provided guidance, while reassuringly saying that its pipeline gives it visibility on projects out to 2015. At the time of writing the shares are up 7%, which given that there is no change to guidance suggests that there may be at least some short covering going on in Kentz this morning.


(Disclaimer: I am a shareholder in Bank of Ireland plc) Shareholders in Bank of Ireland, as expected, voted overwhelmingly in favour of the transaction with IBRC. This deal should net the group €38.7m in profits.


(Disclaimer: I am a shareholder in France Telecom plc) Following intense speculation of a private equity bid for France Telecom’s UK mobile joint venture, Everything Everywhere, management reaffirmed its support for retaining the brand. However, the media hasn’t yet given up on this story, so we’ll watch this space.


In the blogosphere, I was delighted to see that Paul ‘Paulypilot’ Scott has set up his own blog, which is well worth checking out, while elsewhere Lewis at Expecting Value did a write-up on chocolatier Thornton’s, which is not one for me (my UK consumer facing holdings, Tesco and Marston’s, are far better equipped in my view to get through the ongoing headwinds facing the British economy).

Written by Philip O'Sullivan

June 19, 2012 at 7:52 am

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