Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘C&C

Market Musings 22/8/2012

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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.


Market Musings 27/6/2012

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The big news from corporate Ireland this morning is C&C’s Q1 interim management statement. In its first projection for the current financial year, the company sees FY operating profits of €112-118m (last year: €111m). Its core cider brands struggled in Q1, due to poor weather and tough comparatives, but other parts of its portfolio are performing strongly. Regular readers of this blog will recall that a few months ago I wrote that Tennent’s lager appeared to be making headway in pubs here, and this morning C&C revealed a near-50% increase in Tennent’s sales in Ireland as the brand is now available in 1,200 pubs (16% of the total). Overall, this is a pretty much as-expected statement from C&C, but at this early stage of the year it’s hard to make a definitive call on the full-year outlook (who knows, we could have an excellent July and August on the weather front!). On a more fundamental view, the group has an extremely strong balance sheet (net cash was €68m at the end of its last financial year) and has been doing a good job of managing its portfolio of brands in challenging consumer conditions of late. It’s a stock I like.


Elsewhere in the food sector, Glanbia confirmed what’s already in the public domain about the potential restructuring of its Dairy Ingredients Ireland operation, namely that it’s plotting to establish a jv with its majority shareholder, the Glanbia Co-op, to manage this business, which is set to experience a dramatic increase in volumes once EU milk quotas are lifted from 2015. This restructuring would be a positive move for all parties concerned, in that it would free up additional capital for the plc to support its push into the high-growth, high-margin ingredients space while giving the JV the freedom to pursue a strategy that could feasibly create a northern hemisphere version of New Zealand powerhouse Fonterra.


(Disclaimer: I am a shareholder in Independent News & Media plc) In the media space, we saw a battle for control of Australia’s Fairfax media group, which could have consequences for INM’s Australasian associate APN News & Media. Elsewhere, UTV Media lost out to Global Radio in the bidding war for GMG’s radio portfolio. However, as I said a few days ago, this has given rise to serious competition concerns, which could potentially lead to other acquisition opportunities for UTV Media et al.


In the healthcare space, United Drug made a £13m bolt-on acquisition of a UK medical communications company, which will fit perfectly within its Sales, Marketing & Medical division. This transaction is obviously small from a group context, but nonetheless helps to further diversify United Drug’s revenue streams.


(Disclaimer: I am a shareholder in BP plc) Oil behemoth BP did some further portfolio management in recent days, offloading assets in Wyoming and the North Sea for a combined $1.3bn. Throw in the $20-30bn it is likely to receive from a successful sale of its economic interest in TNK-BP and the firm will have a significant war chest to make further acquisitions (or fund a chunky special dividend) with.


(Disclaimer: I am a shareholder in RBS plc) The worst of the IT problems that have dogged RBS in recent days appear to be behind the group, and attention is now switching to the fallout. Reuters spoke of a £100m+ bill, but this may prove extraordinarily ambitious, with reports of people being kept imprisoned due to bail money not being processed properly and patients’ medical treatment being imperiled coming to light. Doubtless RBS will be writing a lot of cheques to assuage public anger following this foul-up.


There was a lot of excitement around Irish house prices since my last blog post, with the release of official data that show Dublin residential property prices have advanced (marginally) on a month-on-month basis for each of the past three months (national prices were +0.2% mom in May, -15.3% yoy). Despite this recent improvement, residential prices in Dublin, which is going to be the part of the country that leads the market, are still -17.5% on an annual basis (and 57% below the peak) so it seems a little premature to bring out the champagne bottles. The ongoing difficulties in the domestic economy are likely to hold back property prices for some time to come yet, while this December’s budget should bring in further tax increases, not least given that the government has repeatedly demonstrated a lack of willingness to right-size public spending, which will further limit peoples’ ability to service mortgages. Add a lack of mortgage credit availability into the mix and I don’t see any obvious catalyst for a sustained improvement in Irish property prices in the near term.


In the blogosphere, Lewis wrote about Dart Group, perennial favourite of the value investing blogosphere (albeit not one for me – given that I already have exposure to some of its competitors e.g. Ryanair and Total Produce).

Written by Philip O'Sullivan

June 27, 2012 at 8:10 am

Market Musings 28/5/2012

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Since my last blog post it’s been a case of the good (Irish plc updates), the bad (financial irregularities) and the ugly (Eurovision).


Origin Enterprises posted a solid Q3 trading update this morning. Underlying revenue is ahead by 7% in the year to date, led by a strong agronomy performance. Its main associates, Valeo Foods and Welcon performed solidly. In terms of the outlook, management says it is: “comfortable with consensus market estimates for an adjusted fully diluted earnings per share of circa 44.5 cent”. I suspect that the risks to that lie to the upside, given that all businesses were at least performing to expectations heading into Q4 (the second half of Origin’s financial year accounts for 85% of FY profits, so management may be playing it somewhat cautious). I like Origin – a lot. Management has done a great job in reshaping the business, merging non-core units with peers to create strong associate businesses that can be sold off in order to realise value in the future while investing capital to support its main farm-related operations, which tap into the structural themes of EU quota removal and rising food demand from emerging markets. One further attraction of its business model is that it is extremely cash generative, and likely to move into a net cash position possibly as early as end-2013 on my estimates (barring any large acquisitions), so if balance sheet safety is your thing, Origin is worth taking a look at.


Elsewhere in the food space Calum wrote an interesting blog about Hilton Food Group. On learning that it has 90% exposure to only two customers I became immediately nervous about it, due to the risk that margins could be squeezed ever-tighter by its key accounts.


Diageo bought Brazil’s leading premium spirits brand. While Diageo is not a stock I closely follow, I have noticed that it has been buying up more and more spirits brands, particularly those in emerging markets. Its focus on high-growth markets makes me wonder what Diageo’s longer-term intentions for its Irish beer brands – Guinness, Harp, Kilkenny and Smithwick’s – are. Were any of them to become available at some point in the future, I suspect the cash-rich C&C would be keen to acquire them, not least given the success it has had in cross-selling its cider brands since adding Tennent’s Lager to its portfolio.


(Disclaimer: I am a shareholder in Allied Irish Banks plc) The Financial Times reported that AIB is looking to sell €675m of loans which are primarily secured against Irish commercial real estate. Assuming the report is accurate, the pricing of this will be interesting as a gauge of what people are willing to pay for Irish loan assets at this time. I am in the process of building a model on AIB and I hope to share some detailed views on it with you in due course.


First Derivatives released strong results, with revenue and EBITDA rising 25% and 22% respectively in the year to end-February 2012. The statement contained a number of key positives, including news that its client base has now grown to “91 different investment banks, exchanges, brokers and hedge funds”; the revelation that the firm’s property assets (book value £15.5m) have been independently valued as having a market value of £18.9m; and the firm reported growth not just across all of its business segments (software and consulting) but also all of its key geographies (UK, rest of Europe, America and Australasia). In all, this reads like a company that’s doing all the right things.


The Central Bank of Ireland directed Bloxham Stockbrokers to cease all regulated activities. This is yet another setback for the image of Ireland Inc after a wave of financial scandals in recent years.


Merrion Pharmaceuticals said that its CEO is to step down.


Serial wasters of taxpayers’ money, Cork City Council, spent €259,000 commissioning a map that it has no plans to exhibit. Funny the way ‘austerity’ hasn’t seen a halt to white elephants like that.

Written by Philip O'Sullivan

May 28, 2012 at 5:18 pm

Market Musings 18/5/2012

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We’ve had a Tsunami of company updates since my last blog, so here’s a sector-by-sector wrap of what’s been going on.


C&C posted profits that were in line with guidance. The full-year dividend was raised by a chunky 24%, taking the payout ratio to 30%. On the conference call that followed the results management guided that it will raise this to 40% over time. C&C’s balance sheet is in great shape, with net cash hitting €68m last year. This gives the group considerable scope to launch share buy-backs, pay a special dividend or buy new brands – or in other words, it has a ‘nice problem’ of having to worry about what to do with its excess cash. C&C is a stock I’ve held in the past, but I’d want to do a bit more work on it before seeing if I’ve any room for it in the portfolio.


(Disclaimer: I am a shareholder in Marston’s plc) Elsewhere in the beverage space, Marston’s posted excellent interim results yesterday. Group revenues were +7.6%, underlying PBT +14.7% and the H1 dividend was raised 5%. All divisions (managed houses, tenanted and franchised and brewing) reported a rise in sales and underlying profits. The group is delivering on its ‘F Plan’ (which it defines as food, families, females and forty/fifty somethings) targets, with an 11% rise in meals served. I’m a very happy holder of the stock.


In the energy space, Tullow Oil issued a bullish interim management statement, describing its year-to-date performance as “excellent”. Its year-to-date financials are in-line with expectations, but as ever the main excitement around the stock is based around its exploration activity, which has been yielding encouraging results from Kenya in particular of late.


Staying with the oil sector, my old pals Kentz posted a solid trading update this morning, saying the full-year performance would be “marginally ahead of expectations“. Its pipeline is in good shape, with the order backlog standing at $2.46bn at the end of April, up from $2.40bn at end-December.


(Disclaimer: I am a shareholder in CRH plc) CRH received net proceeds of €564.5m from the sale of its stake in Portuguese cement firm  Secil. As mentioned before, these funds will provide the group with considerably enhanced financial flexibility to expand through M&A over the coming years.


In the retail sector, French Connection was the subject of a lot of attention this week. Richard Beddard did an excellent series of posts on it, summarised here, to which I replied: “Leases and the brand (seems very stale to me) are the big worries I have”.  Those worries didn’t quite go far enough, with the firm posting a profit warning yesterday.


(Disclaimer: I am a shareholder in Independent News & Media plc) We got a lot of news from the media space. UTV Media said that its year to date trading is in line with its expectations. Within the statement it was encouraging to see its Irish radio revenues move into positive territory. Elsewhere, INM said today that “advertising conditions remain challenging and erratic. Visibility remains short and susceptible to influence by macro-economic factors”. It added that net debt currently stands at circa €420m (end-2011: €426.8m). Not a lot to get enthusiastic about, especially on the net debt front, but of course much of the focus on INM is on recent moves in its share register and the intentions of new CEO Vincent Crowley.


In the betting sector, Paddy Power released a very strong trading update, with net revenue growth in the year to date accelerating to 28% from the 17% booked last year. The group is firing on all cylinders and remains the quality play in the betting space.


(Disclaimer: I am a shareholder in Total Produce plc) Irish headquartered food group Glanbia sold its Yoplait franchise back to the brand owner for $18m in cash. Its fellow Irish listed food stock Total Produce reaffirmed its full-year earnings target in a brief update issued earlier today.


(Disclaimer: I am a shareholder in Irish Continental Group plc and Datalex plc) In the transport space, ICG’s IMS revealed a weaker performance from the freight side, while passengers were marginally higher relative to year-earlier levels. This is the seasonally quiet period of the year so there isn’t a lot of read-through from today’s statement. Elsewhere, travel software firm Datalex issued an update this morning in which it said its performance is in line with its forecasts.


In the financial space, IFG posted a solid trading update. Since it agreed to sell its international business the main interest here is its UK and Irish operations. On this front, management says the UK is registering a “robust” performance, while Ireland is “performing well”. The company hints at the possibility of a special dividend post the completion of the sale of the international unit, so I’ll be watching that closely over the coming months.


(Disclaimer: I am an indirect shareholder in Facebook). To finish up with a word on the Facebook IPO, an investment fund I advise went long some Facebook in its IPO today at $40.10. This is very much a short-term trade around its IPO, given that Facebook is trading on 26x historic sales and 107x trailing earnings. Put another way, with a valuation of over $100 per Facebook user, I wouldn’t click the “like” button if someone suggested it as a long-term holding.

Market Musings 8/4/2012

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This blog has been quiet in recent days after my wife quite rightly insisted that we take advantage of the unusually good weather here in Ireland and head to the seaside for a short break. In addition to sunburn, one of the other things I got from the break was that the lack of internet connectivity where we were meant that I could spend a bit of time thinking about investing tactics, more of which anon.


Before we get down to that, let’s catch up on what has grabbed my attention in recent days. Steve Baines, who is a must-follow on Twitter if you don’t already follow him, highlighted that a shortage of rigs is delaying planned drilling activity in East Africa. This may well be affecting one or more of the Irish businesses with a presence in the region, such as Tullow Oil, Cove Energy and Aminex. Speaking of the energy sector, one theme I’ve droned on about on this blog for some time is the step up in M&A activity within the space. Proactive Investors put together an interesting piece on how the North Sea is a hotbed of activity in this regard. On that note, I have been meaning to do quite a bit of work on Xcite Energy in particular, which is a favourite of some members of the wider ‘Twitterati and blogging community’. If any of you think there’s a more intriguing North Sea prospect that I should take a look at first, please post about it in the comments section below.


I was interested to see that Bank of America-Merrill Lynch has upgraded cider maker C&C to ‘buy’, citing long-term growth potential in new markets, including the USA, and its valuation as key attractions. Mind you, brokers like to upgrade C&C before the summer – if the weather’s hot C&C makes out like a bandit and the broker looks like a genius, and if the weather’s bad, the broker has a ready made excuse if the shares don’t perform. However, I’m sure this has nothing to do with the timing of the BoA-ML upgrade.


In terms of investing tactics, in between burning things on the barbecue and gorging on Easter Eggs I found time to reflect on my trading history, and the lessons I’ve gleaned from it, this weekend. I decided mainly to focus on the losses, because many of my ‘wins’ have come from times when the markets have been rising and it’s dangerous to try to discern the extent to which I ‘won’ because of where I specifically chose to place my chips and the contribution made by rising markets more generally. Also, focusing one’s attention on investment successes opens the door to hubris and all the potential pitfalls that brings. My reflections gave rise to several key learnings, namely:


Do your homework – In terms of destruction of value, the greatest concentration of losses in my portfolio stems from the Irish financials. I can only say that these losses are simply down to Neanderthal stupidity on my behalf. During the Celtic Tiger years, I watched as my bank shares soared in line with the economy. When the wheels came off it, I found myself severely lacking in terms of my understanding of just how exactly banks operate. However, despite this major gap in my knowledge set, I lazily decided to outsource this to others, and elected to take heed of bullish commentary about the prospects of a ‘soft landing’ for the Irish economy and also the banks’ capacity to absorb losses. Had I known then what I know now, I would have understood that even (in hindsight) conservative assumptions on losses on their domestic loanbooks would have seen the Irish banks’ capital base massively eroded, and this would have signaled loud and clear that I had to get out of them ASAP. As I say, I can blame nobody other than myself for this. Since then I have sought to build my own detailed models on companies to understand fully their financials. This exercise is in part manifested in the ‘Case Studies’ section of this website. This has imposed considerable discipline on my investing style, and prevented some of the kneejerk trades that I might otherwise have made.


Invest in what you know – A few weeks ago a dear American friend invited me to meet her parents, who were holidaying in Ireland. On learning that I had worked as a stockbroker before, her father discussed some of the shares in his portfolio with me. While I was unfamiliar with the ones he mentioned – I focus my attention on UK and Irish equities primarily – what impressed me was his deep understanding of the companies he is a shareholder in. This was mainly driven by the fact that many of the shares he owns are ones in companies located near to where he lives. As he outlined the range of products a manufacturing company he holds makes, I was reminded of two of Warren Buffett’s quotes – the first being to “never invest in a business you cannot understand“, the second (and I’m deliberately chopping off the end of it) being: “I never buy anything unless I can fill out on a piece of paper my reasons”. While my past experience of covering a range of industries from luxury goods (Waterford Wedgwood) to recruitment (CPL Resources), media (INM, UTV) and transport (ICG) to name but four of the sectors I covered while working as an equity research analyst means that I’ve been lucky enough to have gained exposure to plenty of industries, this advice certainly holds true for me also. I generally steer clear of pharma and biotech stocks (what I know about the science underpinning many of their products could probably fit on the back of a postage stamp!), while my near-Luddite status when it comes to technology means that I seldom venture into that sector. And how have I learned this? Mainly by losing money in stocks (that I still hold) such as Datalex and Datong.


Don’t overestimate yourself – This goes back to the hubris issue I mentioned above. While some financial and economic commentators I’ve encountered both on- and off-line like to pretend they know it all, the reality is that if they did, they wouldn’t be spending their time pontificating on blogs. Certainly if I was as good an investor as I’d like to be, I would be living off my profits in the Cayman Islands!


Sometimes bad things happen to good people – In addition to trades that are mistimed, misjudged and misguided, there will always be some trades that blow up for factors one couldn’t be reasonably expected to foresee. My heavy losses to date on PetroNeft have been due (chiefly) to technical issues with oil extraction in Western Siberia. And my BP shares nosedived after Macondo – another event I couldn’t have forecast. Such is life. In ‘The Prince’ Machiavelli advised that: “If an injury has to be done to a man it should be so severe that his vengeance need not be feared“. Investors should modify that line and ensure that they’re never so financially exposed to a company that if something goes horribly wrong that it will do them severe damage.


Anyways, the above are just some of the things I reflected on while I was in County Wicklow over the weekend. They are not, of course, meant to be an exhaustive toolkit for investors, but certainly some of the reflections will be incorporated into my trading tactics over the coming months. If you’ve any similar pointers that you’ve picked up over the years, I’d love to hear them.

Written by Philip O'Sullivan

April 8, 2012 at 6:17 pm

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Market Musings 1/3/2012

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It’s the calm before the storm as the volume of company newsflow has eased a little in recent days, but with a deluge of results due over the next week or two I think I’ll find plenty more to write about over the coming days.


(Disclaimer: I have an indirect shareholding in Dragon Oil plc) To start with the energy sector, Dragon Oil ended takeover talks with Bowleven, which rather takes the gloss of my recent narrative of how this will be a year for consolidation in the industry. Still, one swallow does not a summer make!


Turning to the food and beverage sector, Valuhunter did up a good piece on Molson Coors, which reminds me that I have to get around to doing up a piece on C&C one of these days. Speaking of alcohol, did you know that for a period Guinness was exported to the UK in custom-built ‘beer tankers’? Elsewhere, Glanbia, a stock I sold going into the results, released strong FY numbers, but cautioned that earnings momentum will slow in 2012 due to tougher conditions. I’ll post up a piece on Glanbia later today. Finally within this sector, Fyffes posted good numbers today, with results towards the upper end of guidance. It sees more progress in 2012 and hints at doing more share buybacks.


(Disclaimer: I am a shareholder in Irish Life & Permanent plc) In the financials space, IL&P said that it would record a big rise in impairment provisions when it releases its 2011 results. This cannot come as a surprise to anyone given recent commentary from the likes of RBS and Bank of Ireland.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) While it had been flagged at the time of the recent Q4 results, I was pleased to see Smurfit Kappa Group announce that it has successfully extended its debt maturities. This will help to further lower the risk profile of the stock, as well as increase management’s flexibility. So good news all round.


Here’s an interesting statistic – ITV says that, on average, people in the UK spend 4 hours and 2 minutes every day watching television.


(Disclaimer: I am a shareholder in Playtech plc) I was pleased to see news that Playtech has entered the Mexican market, partnering up with the country’s largest land based gaming operator. This is a further affirmation of the quality of the group’s product, but judging from the lacklustre share price performance it will need to do more to improve market sentiment towards the stock.


Finally, WordPress tells me that February was the ninth consecutive month in which the numbers of visitors to this blog increased. I’d like to thank you all for your support, and as ever please feel free to get in touch with suggestions on things you’d like me to cover on this site.

Written by Philip O'Sullivan

March 1, 2012 at 10:24 am

Market Musings 20/2/2012

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It’s been a busy few days as I’ve had to prioritise finishing off two articles for Business & Finance magazine along with some assignments for college. However, with Irish ‘pillar bank’ BKIR reporting numbers today, I thought I should do a quick piece on those, along with the other things that have been competing for my attention of late.


(Disclaimer: I am a shareholder in Bank of Ireland plc) This morning Bank of Ireland reported its full-year results. Going into them I identified five key things to watch out for. Here’s how BKIR did on those measures: (i) Pre-provision profits – The Bank reported underlying profits of €411m in 2011, which came in behind the €0.5bn many of the Irish brokers had projected; (ii) Deposit trends – The Bank did well here, reporting customer deposits of €71bn, up from the €65bn reported at end-2010. Within that, retail customer deposits in Ireland increased by 2% while retail deposits in the UK increased by 25%; (iii) Net Interest Margin – this was an area of disappointment, falling 13bps in 2011 from the 1.46% recorded in 2010, while after adjusting for the costs of the ELG scheme it was just 1.01% in 2011 versus 1.24% the previous year. Management say that the “recovery in our net interest margins has become more difficult”; (iv) Progress on deleveraging – There was nothing really new on this, but BKIR has done a great job to date (contrary to what some of the permabears have been spinning). Having offloaded €8.6bn of non-core loans it is 86% of the way to meeting its divestment target to the end of 2013, while the disposals to date have been done at levels within the PCAR’s base case assumptions. These disposals have helped cut the LDR from 175% at end-2010 to 144% at end-2011; and (v) Impairments – the underlying bad debt charge worsened to €1,939m in 2011 versus €1,859m in 2010. While management sees the impairment charge falling over time, this forecast is clearly dependent on the performance of the economy.


In all, 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. However, with the shares up nearly 8% at the time of writing the market seems to be taking a different view to me! In terms of the valuation, there are a certain number of “known unknowns”  for Bank of Ireland, but with the shares currently trading at a level (15.1c) that is well below the forecasted trough TNAVs that are in the market (approximately 22-23c) the question for me is are the potential negatives priced in? My gut feeling is that they are, and I note an estimate from Goodbody this morning that if you apply the ‘adverse case’ scenario from the PCAR to their forecasts for Bank of Ireland that you get to a trough TNAV of 13.9c. Trading on less than 1.1x that multiple, I think that Bank of Ireland is worth holding on to at least.


Elsewhere, one stock I need to find the time to write about is C&C. The company may be known for its cider brands (of which the two best known ones are Bulmers in Ireland and Magners in the UK), but it also has quite a few non-cider brands in its portfolio, some of which it merely distributes, but it also owns Tennent’s Lager, the top-selling lager brand in Scotland and Northern Ireland. I have noticed Tennent’s encroaching into a number of the pubs near where I live (Dublin city centre) of late, and utilising the most scientific (!) sampling method available to me I, ahem, “asked Twitter” if this was a phenomenon other people are seeing. There was a wide range of views, but the most interesting thing I picked up was that some feel that Tennent’s, which is pitched at a lower price point than the premium brands, is making inroads with Ireland’s ‘squeezed middle, along with the likes of Diageo’s Tuborg and Gleeson’s Bavaria. It’ll be worth keeping an eye on C&C’s updates throughout the year to see what, if any, the financial impact of this is. Of course, it should not be ignored that some consumers could be trading down from C&C’s premium cider brands to cheaper alternatives too.


(Disclaimer: I am a shareholder in BP plc) Over the weekend I was pleased to see yet another one of BP’s partners in the Macondo well settle legal claims. As part of the settlement, Moex and BP have agreed to dismiss claims against each other. I have written extensively about how the gradual easing of the potential litigation liability has a materially positive impact on the outlook for BP’s valuation.


In the blogosphere, Macro and Cheese (!) did up an interesting piece on LTRO and the markets. This is a timely piece, given that markets have been pushing higher in the year to date despite underwhelming fundamentals, including the fact that, of the Eurostoxx 600 companies that have reported Q4 numbers, only 51% have met or exceeded forecasts (versus 69% of S&P 500 stocks). Furthermore, Q4 profit margins for S&P 500 companies declined 27 bps, or 52bps if you exclude Apple. What happens after the ECB’s second LTRO at end-February? My instinct is that we could see a pullback in markets, which is why I’ve been taking some profits recently.

Written by Philip O'Sullivan

February 20, 2012 at 9:48 am

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