Market Musings 13/9/11

Since my last update, my attention has mainly been caught by some really excellent original research from some of the other bloggers covering UK and Irish equities, M&A activity and further signs of the ongoing stress around peripheral Europe.

 

One story I missed over the weekend with all the travelling was this report that Origin Enterprises has been on the receiving end of an approach from a private equity player. The suggested price, £400m, looks implausibly low given that this places the group on a PE ratio of only about 8x. The group, which is rapidly deleveraging, is worth a lot more than that given that it is well placed to benefit from the structural growth opportunity in farming due to its strong positions in the areas of agronomy and farm inputs. It should be noted that Origin is 71% owned by Aryzta.

 

While I’m dubious about the Origin story, one genuine M&A story is the news that Kerry Group has expanded its ingredients operations in the EMEA region with the purchase of SuCrest. This is the type of tasty bolt-on that Kerry is particularly good at doing, and serves as a useful reminder of its considerable scope to expand through acquisition.

 

IFG shares crashed 26% to €1.20 today after announcing that takeover talks with Bregal Capital have ended. This puts IFG on an PE ratio of circa 6x, which is simply too low for a company with annuity-style revenues and a very strong balance sheet. Of course, the obvious question is what the catalyst to drive the shares from here is going to be, but for patient, longer-term investors, you are unlikely to go wrong with this stock.

 

There were more signs of stress in peripheral Europe, which make the political response to date look even more ridiculous. Last night Bloomberg reported that the Greek default risk had soared to 98%, while the Greek 1 year bond yield stood at over 117%. Italy, meanwhile, looks like it is trying to sell off the family silver to China. France’s banks have been battered by concerns over their exposure to Europe’s weaker regions. This chart shows how the market is seemingly adopting a “one size fits all” approach to SocGen and BNP – I recall seeing similar identical trading patterns in the Irish banks once upon a time.

 

Bizarrely, despite the debt worries, many investors continue to favour government bonds over equities at a time when corporate balance sheets have never been stronger!

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) The wonderful Expecting Value blog had a great piece on regional newspaper group Johnston Press yesterday. Regular readers of this blog will know that my current preference in the UK media sector is Trinity Mirror. Comparing the two, I prefer Trinity Mirror due to its much stronger balance sheet (net debt + pension deficit at the H1 stage for TNI was £336m vs. £430m for JPR), better profitability (consensus EBIT figures for TNI and JPR for the current financial year stand at £97m and £73.8m respectively), and better brands (a mixture of national and regional versus regional).

 

(Disclaimer: I am a shareholder in Abbey plc) Another great blog is my only domestic peer (that I’m aware of) John McElligott’s “Value Stock Inquisition“. Yesterday he wrote a good piece on the UK listed housebuilders, concluding that while the sector is not yet right to buy into, Abbey looks the most attractive. He’s in good company with this view, see here for my previous musings on the stock.

 

Last, but certainly not least, UK Value Investor has a good analysis of BHP Billiton today that’s worth a read. I bought it for sub-£10 a share a few years ago and sold out at £17, so while I feel a bit foolish for missing its continued ascent since then, my bearish views on China mean that it’s not one I’m likely to buy into up here. Perhaps if it goes below £10 again it might look interesting to me.

Market Musings 12/04/11

Since my last installment we’ve seen further concerning news about the health of the UK economy, coupled with wobbles in the commodity market and further evidence that M&A activity is on the way back – in the more defensive sectors at least.

 

A series of updates from UK consumer oriented firms continued to support my caution around that market. Recruiter Michael Page said that market conditions “remain tough”, with public sector hiring demand “difficult”, while plant hire group Speedy Hire said that it remains cautious about the prospects for a short-term recovery. The BRC said that UK retail sales plunged by the most on record in March,

 

As I recently discussed in an article in Business & Finance magazine, one area that continues to benefit from positive commodity trends is agriculture. On this front, Carr’s Milling, a peer of Ireland’s Origin Enterprises, released an update which has a bullish read-across for Origin. Elsewhere, cocoa prices plunged after French special forces seized Laurent Gbagbo in the Ivory Coast, which should hopefully lead to a new chapter in that State’s troubled history. Hard commodities such as oil wobbled today after Goldmans cooled its view on them.

 

(Disclaimer: I am a shareholder in AIB plc). AIB released 2010 results earlier this morning, that showed the bank lost €10.2bn last year. The group says that: “business and market conditions remain challenging and the environment for operating income generation remains difficult”. While deposit outflows had been flagged last year, I still raised an eyebrow at the confirmation that customer deposits decreased by €22 billion in 2010 to €52 billion. The deposit outflow was most acute in capital markets (corporate deposits), where deposits were -65% vs -10% in AIB ROI & -24% in AIB UK. AIB’s LDR widened to 165% at end-2010 vs 123% at end-2009. In terms of the quality of the loan book, AIB’s “criticised loans” are now at 30.2% of total loans, while impaired loans are at 13.4% of total loans. On funding, at end-2010, AIB had ECB drawings of €25.2bn & another €11.4bn from Ireland’s central bank, a combined €36.6bn or 25% of the balance sheet. However, the Polish disposal and Anglo deposit acquisition will have cut that somewhat since the start of the year. All in all things look very grave for the bank, which is effectively on life support from the State for now.

 

On the M&A front, we had denials from both BHP Billiton and Woodside that they were in discussions over a $49bn deal, while Schneider Electric was rumoured to be planning a deal for Tyco (market cap $23bn) . There has been a lot of speculation about BP’s intentions for its troublesome TNK-BP operation, and I was interested in this article about it. In terms of deals that are going ahead, post AT&T/T-Mobile USA & Vivendi/SFR I had wondered if more telco M&A would come. Then Level 3 paid $3bn for Global Crossing. Elsewhere, Flowers Foods paid $165m for Tasty Baking, which continues the narrative of consolidation in the North American bakery market, a process which Ireland’s Aryzta has been very active in.

 

There was a bit of military newsflow that caught my eye this week. Firstly, data was released that show global military spending continues to rise, with the world’s biggest spender, the US, having raised its expenditure by 81% since 2001. The US Navy conducted its first test of a laser weapon at sea. Speaking of weapons, watch this video.

 

I do hope that I’m ultimately proven wrong, but the government here looks to be dithering every bit as much as its predecessor when it comes to pushing through reforms and fiscal consolidation. And reform is urgently needed. One example of this came in the shape of a recent Irish Times article which revealed that despite the failings in governance in many areas of the public sector in recent years, a mere 1 of the 300 external candidates for senior civil service positions in the past 3-and-a-half years was successful. Opening recruitment in the public sector to further outside competition can only be a positive in terms of incentivising better delivery of services. On the spending front, the government announced yet another “review” which simply wastes more time and thus will result in even more debt being loaded onto our battered economy. Speaking of our battered economy, Bank of Ireland became the latest forecaster to cut its estimates for GDP growth.

 

I’m rather sceptical on the BRIC economies at the moment, for reasons that deserve a blog all of its own. A couple of pieces of news caught my eye in this space which reinforced my suspicions. Firstly, George Soros said that inflation in China is “somewhat out of control“. This chart by Bloomberg economist Michael McDonough also tells a lot about the inflationary issues affecting these emerging markets. Finally, one of the biggest holders of US Treasurys is of course the People’s Bank of China, and I was interested in reading that a former PBOC official has described the US Treasury market as “a giant Ponzi scheme“. Elsewhere, Australian housing data looks to be turning negative – this is a trend worth keeping an eye on.