Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘CPL Resources

Market Musings 6/9/2012

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


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


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


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


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


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

Written by Philip O'Sullivan

September 6, 2012 at 10:58 am

Market Musings 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 16/4/2012

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This blog has sadly become something of a casualty of late as the main body of my exams are now less than three weeks away and I also have two articles for Business & Finance magazine due in the middle of this week!


(Disclaimer: I am a shareholder in France Telecom plc) There was quite a bit of news around France Telecom since my last update. First, the operator finalised the terms of its buyout of Egypt’s Mobinil. This was something I already had penciled into my forecasts for the company, so no surprise there. However, what did surprise me was another story I spotted involving France Telecom, which said that the European Commission is investigating whether France’s telecom regulator was too generous in setting the rates it allows new mobile operator Iliad to charge other companies for calls into its network. While we’ll wait and see what comes of that, anything that undermines Iliad’s Ryanair-style entry into the French mobile market would be good news for France Telecom (yes, I am speaking from a  hopelessly conflicted viewpoint!)


Seeing as I’ve mentioned Ryanair, I was also interested to read that Qantas has made the world’s first commercial biofuel flight. This is an interesting development which I’ll be keeping tabs on, especially given that the modest ‘carbon footprint’ involved would certainly help offset some of the EU’s carbon taxes if it was to be rolled out in an economical way in this part of the world.


In other energy sector related news, Dragon Oil issued an interim management statement this morning, in which it revealed average Q1 production of 70.6kbopd (the 2011 average was 61.5kbopd), and retained its 2012 gross output growth target of 15%. I didn’t see any ‘new news’ within the statement, but with the group having reached its 2012 output growth target of 15% in Q1, I am guessing that the risks on the production front lie to the upside for Dragon Oil.


(Disclaimer: I am a shareholder in Independent News & Media plc) In Friday’s Irish Times former INM director Leslie Buckley called for regime change at the publisher (see here and here). Expectations of a showdown at the AGM remain undiminished. But, of course, one would prefer if the dirty linen wasn’t aired in public, regardless of the grievances involved.


(Disclaimer: I am a shareholder in Abbey plc and PetroNeft plc) While reading Edinburgh based microcap fund Nettle Capital’s Q1 2012 factsheet I was interested to learn that they hold Irish listed Abbey, CPL Resources and PetroNeft in their European fund. Great minds and all that!


Speaking of Abbey, UK housebuilder Telford Homes issued a strong trading update earlier today in which it said profits would beat expectations due to strong demand. Encouragingly, it has acquired sites that add 1,200 properties to the development pipeline over the past year, which is a vote of confidence in the outlook for the industry. Given Telford’s focus on the south-east of England, which is Abbey’s main area of operations, the read-through for Abbey from this is positive.


Switching to macro news, the OECD said that Ireland may need a mini-budget to meet its fiscal targets. This comes as no surprise to me, given my bearish view on the state of the public finances. I despair at the lack of a proper national debate about the fiscal crisis – which has left the door wide open for populist politicians and other vested interests to pretend that this mess can be easily solved through levying punitive taxes on some imaginary army of fabulously wealthy individuals.


Cormac Lucey, whose views on both politics and economics I rate very highly, makes a powerful case for why Ireland should reject the forthcoming fiscal treaty.


On a lighter note, as a current MBA student at Smurfit, I’ve been thrilled to read of the Smurfit rugby team‘s exploits at the MBA Rugby World Cup in North Carolina – having taken a host of scalps along the way (Duke, Columbia, London Business School, Wharton) the icing on the cake came overnight with the Irish team defeating Harvard University to become world champions for a record tenth time. Congratulations in particular to my classmates Justin Thomas, John O’Loughlin, John MacMahon, Donnchadh Casey, Conor Price, David Pierce and Conor Beirne who were all part of the squad.

Written by Philip O'Sullivan

April 16, 2012 at 7:24 am

Market Musings 19/3/2012

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Now that I’ve returned from my travels, this is the first of what’s likely to be three catch-up blogs. In this one I’m going to review the main developments over the past week across the universe of stocks I follow, in the second one I’ll examine the key ‘Chinese takeaways’ from my trip and in the third I hope to catch up on what my peers in the Blogosophere and the media have been saying recently.


(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector, Trinity Mirror issued FY2011 results. Going into them I had forecast revenues of £731.0m, EBIT of £99.6m and net debt of £195.8m. In the event, these came in at £746.6m, £92.4m (the main variance here was that exceptional items were c. £5m worse than expected) and £200.7m respectively. One thing that did catch me offside was the pension deficit – this widened to £230m from £161m in FY2010. This is a very material move – the deterioration is the equivalent of 27 pence per share, which compares with Trinity Mirror’s current share price (at the time of writing) of 36.5p. Updating my DCF based valuation model produces an equity value of just 13p per share, which represents 63% downside from current levels. However, this valuation is extremely sensitive to movements in the pension deficit – a 10% move in the pension deficit moves the price target by 9p. I would also note: (i) the strong asset backing (freehold property had a book value of 72p/share in 2010); (ii) the further self-help moves the group could implement on the cost side; and (iii) the reasonably strong cash flows (operating cashflow was £76m last year), which give me confidence that the group can nuke its net debt over the coming 3-4 years. Overall, for me Trinity Mirror is downgraded to a hold.


(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, Aryzta posted its H1 results. There wasn’t a whole lot in it for me, with management saying: “our EPS guidance of 338 cent for FY12 and 400+ cent for FY13 remains unchanged”. Elsewhere, Total Produce announced this morning that it is to be included in the ISEQ 20 indices, which may prompt some modest index buying.


(Disclaimer: I am a shareholder in Playtech plc) In the technology sector, there were reports that Playtech and William Hill are to open talks on their WHO joint venture shortly. From my perspective, the best option for both parties is for William Hill to buy Playtech out (given the difficult working relationship, William Hill’s online needs, Playtech’s balance sheet being significantly strengthened at a time when it’s looking to do deals etc.), a theme explored by IC here. Playtech also issued FY2011 results, which revealed a strong performance (revenues +46%, gross income +41%), while net cash was a healthy €137.3m. Management also signaled that the group has made a strong start to 2012, and that the company has made progress towards achieving a full listing. Playtech’s share price has surged in the past week, tipping 350p and bringing it closer to my breakeven level (~380p). I remain an ‘unhappy holder’ of Playtech but will be ‘less unhappy’ if I can get out of the position flat or slightly up.


In the energy space, Tullow’s FY2011 results contained few surprises, save for a big ramp up in the dividend (from 6p to 12p). That said, the implied yield is only ~1%, so hardly anything to get excited about.


In the recruitment sector, CPL Resources acquired a Swedish firm, ERHAB. While no details of the consideration paid were released, I would expect it to have been very modest – high six figure / low seven figure territory – given CPL’s past form and its understanding that when you buy a recruitment firm you buy a business whose assets walk out the door at 5pm every evening. Hence, this is likely to be about buying a small number of individuals and then investing in building a strong team around them to increase ERHAB’s share of the market. It’s a model that has worked well for CPL both at home (CPL is the largest recruitment firm in Ireland, and has successfully evolved from being a niche IT recruitment specialist – e.g. CPL = ‘Computer Placement Limited’ – into a diversified operator) and abroad (CPL generated 33% of its permanent fees outside of Ireland in FY2011).


Finally, Siteserv has agreed to be sold to a vehicle owned by businessman Mr. Denis O’Brien. Under the terms of the proposed deal, shareholders will receive approximately 3.92c / share. I find this a little surprising given that the scale of Siteserv’s debts might have been expected to result in no consideration going to equity holders. However, IBRC (the former Anglo Irish Bank) seems happy with this arrangement. Overall, it seems the ISEQ is going to lose yet another company.

Written by Philip O'Sullivan

March 19, 2012 at 11:48 am

Market Musings 28/1/2012

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We’ve been hit with a tsunami of corporate newsflow in recent days, with airlines and financial stocks in the spotlight. Let’s run through what’s been happening since my last update.


(Disclaimer: I am a shareholder in Ryanair plc) The main scheduled corporate newsflow in Ireland this coming week is Ryanair’s Q3 results on Monday. Bloxham’s Joe Gill provides an excellent preview of them here. In addition to the results, one thing that could act as a catalyst for Ryanair’s share price is news that a key competitor, Spanair, has gone bust. Spanair carried more than 13m passengers in Spain in 2010, which is roughly half of what Ryanair carried in the same time period in that market. Given that Spain accounts for circa 35% of Ryanair’s annual passengers, this news is a clear positive for the stock in my view. Elsewhere, The Irish Times‘ Conor Pope has a very interesting piece on what life in Ryanair HQ is like here.


(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) There was also a lot of chatter around Ireland’s financial sector. The NTMA said that domestic deposits have stabilised, which is consistent with the most recent updates from both AIB and Bank of Ireland. The recent deposit trends represent a good vote of confidence in the sector. Speaking of votes of confidence in Ireland’s financial sector, Investec announced that it has agreed to buy NCB. Elsewhere, Ireland’s richest man, Denis O’Brien, says that he would consider buying shares in Bank of Ireland.


In the support services space, Ireland’s biggest recruitment firm, CPL Resources, reported strong results despite what it rightly says are “very challenging trading conditions”.  I like CPL a lot, given its excellent management team, market dominance and proven track record. I don’t really have space for it in the portfolio at the moment though, and in any event I already have a leveraged play on Ireland Inc in the shape of Bank of Ireland (my other Irish financial holdings account for an embarrassingly small share of my portfolio), so it’s not one I’d be rushing to buy just yet.


(Disclaimer: I am a shareholder in Marston’s plc) In the pub sector we had strong Christmas trading updates from Marston’s, the most recent addition to my portfolio, and also Fuller, Smith & Turner. While the comparatives are obviously helped by the extreme weather conditions in winter 2010, the positive signals from the sector are nonetheless very encouraging.


Switching to macro matters, I have written before about the sorry state of America’s public finances. Two videos that I spotted in recent days really put the US’ problems in this regard in perspective. In the first clip, you can see where so much of the deficit has ended up being ‘invested’ in. The second video features a rant by Rick Santelli that fiscal conservatives will approve of.


In the blogosphere, John McElligott makes a good case for investing in Dart Group, while Mark Carter has a very interesting piece on how the higher risk stocks have been outperforming. I can particularly relate to Mark’s blog, as I’ve been finding so far this year that the stuff I would like to boot out of the portfolio are doing nothing, while the ones I want to buy more of are flying. If only it was the other way around!

Market Musings 9/12/11

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The main event since my last blog has been the European summit. Markets pushed a bit higher today and it was interesting to once more see the banks leading the way. If a proper resolution to the Euromess can be found, I suspect banks will be the area to own and hence I’m thinking about increasing my financials exposure. That said, I am reminded of the words of John McElligott in an interview I conducted with him for Business & Finance, in which he said: “Investing in the banking sector is considerably more speculative, if not outright madness“. As for whether or not the latest summit will solve the bloc’s problems, well, if the proposals are put to the Irish people in a referendum I suspect that you would be more likely to see Elvis Presley riding Shergar than see Ireland vote Yes to any European treaty.


(Disclaimer: I am a shareholder in Abbey plc) Housebuilder Abbey released H1 numbers earlier this week which came in behind market consensus and prompted a round of downward revisions to forecasts across the stockbroking community. Not that this miss particularly concerns me, as the difficult housing market conditions that caused the miss is hardly ‘new news’. In any event, for me, Abbey is a compelling story. Its balance sheet is in fantastic shape, with cash and cash equivalents at the end of November of €74m. That’s equal to €3.37 a share, or 66% of the current share price! The company has no debt and its pension scheme is in surplus (to the tune of €3m). Based on tonight’s closing price of €5.15, the company is trading at a discount of 30% to its NAV (€7.35). Its financial strength gives it considerable flexibility in terms of being able to grow its landbank (which the company has been doing, albeit to a modest extent, in recent times), while the company has also been returning money to shareholders through a share buyback (in the past 13 months it has bought back 11% of its shares) as well as paying dividends (8c a share, making a 1.6% yield). While housing market conditions remain challenging across its areas of operation (Southern England, Leinster, Prague), Abbey’s obvious financial strength means that it has the staying power, and more importantly, the firepower, to capitalise on any recovery. 


(Disclaimer: I am a shareholder in Ryanair plc) Aer Lingus released strong passenger statistics for November, which continues the positive narrative from the company that I’ve been tracking in recent times. It also mirrors Ryanair’s better-than-expected passenger stats for the same month, which along with the recent upgrade to earnings guidance from Europe’s largest LCC has helped give the shares a lift in recent times.


Value guru Richard Beddard asked if I was familiar with CPL Resources, Ireland’s leading staffer. It’s a stock I covered in my analyst days, and one I have great admiration for. Just by way of background, the company was founded by CEO Anne Heraty in 1989. Its name comes from Computer Placement Limited, which underlines its technology recruitment origins. It has, however, expanded into multiple other business areas over the years through a series of smart acquisitions. CPL has been very disciplined on the M&A front, preferring to spend six or low seven digit sums of money for businesses, as it understands that when you buy a staffer you’re buying a business whose assets walk out the door at 5pm every evening. So, the M&A strategy has been about buying a good group of people in a particular niche and then investing in growing that team so that if anyone leaves there is ample strength in depth to compensate for their departure.


The group has a dominant position in the recruitment market in Ireland (it’s particularly strong in the multinational space, so while the domestic economy’s troubles have hurt it, CPL has plenty of other domestic revenue streams), and it has a decent overseas business with offices in the UK, the Czech Republic, Slovakia, Poland, Hungary, Bulgaria and Spain. In its 2011 financial year the company generated 33% of its profits outside of Ireland.


CPL’s business is not just about placing candidates. It has also built up a decent operation providing outsourced functions to companies such as payroll, training, and HR services. This provides it with a lot of recurring revenue, while its strength in temporary placements delivers similar results (for staffers, permanent placements generate a once-off fee, while temporary placements generate recurring fees so long as the candidate is in situ).


Given the M&A discipline noted above, its limited capex requirements and its record of consistently generating profits the company has been an impressive cash generator over the years. At the end of FY11 (end-June) the company had €46m in net cash. Management elected to return €20m of this to shareholders through a tender offer at €3 a share.


In terms of the valuation, post the completion of the tender offer CPL has 30,545,159 shares in issue. Based on its closing price this evening of €2.70 this gives it a market cap of €82.5m. Taking net cash as €26m (i.e. the end-FY11 net cash less €20m for the tender offer), this gives an enterprise value of €56.5m. Which is just under 7x its FY11 EBITDA. In its most recent update management said that it expects “further profitable growth in the six  months to 31 December 2011. This is an industry with limited visibility on future earnings, so even if you conservatively assume that the current dislocation means that FY12 profits will be flat, the question you must ask yourself is this: “Does a recruiter with diversified earnings streams (both by industry and geography), a very strong balance sheet, an excellent and experienced management team and a proven track record going back over 20 years merit an EV/EBITDA rating above 7x at this stage of the cycle?” The answer for me is a yes.

Written by Philip O'Sullivan

December 9, 2011 at 8:39 pm

Market Musings 12/9/11

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Blogging has been light due to a combination of light newsflow, a ‘choke-point’ in terms of readings to do for my MBA and, most importantly, my having to go to Cork over the weekend to attend the wedding of some dear friends!


So, what has been grabbing my attention since Friday?


From a corporate perspective, this week is all about builders and consumer facing stocks in the UK, with results due from Next, Kingfisher, Dunelm, Barratt Developments and Galliford Try. For a more complete overview of the week ahead, click here. In Ireland, watch out for results from CPL Resources on Wednesday. CPL is Ireland’s biggest recruitment company, hence its comments on the state of the labour market here will be particularly instructive.


There was a woeful article in the weekend press which speculated that Easyjet “may” bid for Aer Lingus. There are a number of glaring errors with this argument. For starters, Easyjet’s biggest shareholder, Stelios Haji-Ioannou, has repeatedly called for the carrier to curb expansion and focus on growing cash generation to fuel dividends. With himself and connected parties controlling at least 37% of Easyjet, it would be hard (if not impossible, as a takeover would presumably require a 75% “special resolution” majority) to get sufficient support for a takeover of Aer Lingus. Leaving that aside, from a strategic perspective, what would Easyjet want with a transatlantic business, Ryanair’s home turf (it has no presence in Ireland) and a big Heathrow (it has no presence at LHR) operation?


We’re nearing the endgame for Greece. This will have negative short-term implications for Ireland, but as I’ve argued before, if the Irish government were to cut spending deeper, and faster, this would remove a lot of the challenges we face.

Written by Philip O'Sullivan

September 12, 2011 at 6:42 am

Market Musings 11/7/11

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What a volatile session it has proved to be on the markets. My screen at time of writing (3.45pm) is a sea of red as macro concerns, particularly around Italy, intensify. It’s certainly a time where the term “Risk Off” comes to mind.


In a sign of the growing panic around peripheral Europe, Italy announced last night that it was considering curbing short selling following Friday’s fire-sale in Milan. Ireland banned the shorting of bank shares in September 2008, and we all know how well that turned out. Today has been a day where people have been rushing to safety, and I can’t help but wonder when Spain will become the next target of the market’s fury. This all provides a toxic near-term outlook for Eurozone equities. The European Union and ECB’s handling of the peripheral crisis has been a failure and there are few signs of positivity elsewhere, with the US soon to hit its debt limit, the UK finding out that its consumers have no money left and China about to discover that its pro-cyclical economic policies have fueled one of the biggest bubbles of all time. Some of my readers have teased me for always being bearish since I started this blog, but the reality is that the troubled macro backdrop that we have now has been an ever-present since I began writing this blog. Believe me, I would love to have something positive to talk about!


(Disclaimer: I’m a shareholder in Bank of Ireland plc) The Bank of Ireland rights issue circus really gets going this week. I was amused by this story in the Irish Independent, in which Harris Associates appears to have forgotten that major banks such as HSBC, RBS, Danske & KBC have operations here. There is a terminology for this sort of thing – “talking up your own book” (another term I like for this sort of thing is “getting high on your own supply”). Now don’t get me wrong, perhaps BKIR will be a big winner once the dust settles. I hope it is, mainly because this will allow the State (i.e. we the taxpayers) to recoup some or all of its “investment” into it. At the time of writing Bank of Ireland’s shares are trading just 0.7c above the 10c rights price. Last year’s rights issue (at 55c) represented a 64% discount, so in the absence of a generous discount it will be tricky to ensure a substantial private sector participation. If it doesn’t happen, then the €150m in expenses paid to advisers by BKIR for its capital raising will look even more ridiculous (given BKIR’s market cap is only €562m) than it currently does.


Bloxham has an Irish equity strategy note (“Tin Hats”) out today. Its key picks are DCC, ICG, Kerry & Paddy Power, which are selected due to their strong balance sheets, the potential for share buybacks/special dividends and limited dilution risk for shareholders. It also selects four microcap stocks, Abbey, CPL, Datalex and Total Produce, due to their attractive rating and long-term upside potential. I recently identified four Irish companies as my preferred stocks on the ISEQ and I note that 3 of the 4 make the Bloxham list for much the same reasons why I included them. And for the sake of full disclosure, of Bloxham’s 8 picks, I currently hold ICG, Abbey, Datalex and Total Produce.

Written by Philip O'Sullivan

July 11, 2011 at 3:02 pm

Market Musings 9/7/11

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Despite this supposedly being a “seasonally quiet time of year”, there has been plenty of interesting corporate and macro newsflow since I last shared my thoughts with you on Thursday.


The banking sector in Ireland has caught my attention in recent times. While reading the new edition of Business & Finance magazine (in which I have articles on global markets and what Irish shares are worth buying these days) I was struck by how much advertising there was in it from overseas banks lending into the Irish market. Specifically, HSBC, KBC and Rabobank have all been stepping up their marketing in this country, which hopefully signals a genuine increased willingness to lend here from them. Given that most domestic “financial institutions” now resemble zombies from a Hammer horror film, the market opportunity for the foreign players is obvious. (Disclaimer: I’m a shareholder in Bank of Ireland plc) We also got the details on the Bank of Ireland rights issue, which aims to raise €1.9bn for the group. I was surprised that the rights price is 10c, which is only a 17% discount to Friday’s closing price. It will be interesting to see how many shareholders (by one estimate circa 60% of BKIR’s register is made up of retail investors) follow their money. The NPRF’s decision not to take up its option to buy a 15% stake in BKIR did not come as a surprise to me as it allows BKIR to dangle the “carrot” to investors that if they all take up their rights then the State shareholding will be capped at 29.2%. If none of them take up their rights then the State will be left with 69.7%.


Builders’ merchanting group Grafton issued a trading statement on Friday, which saw the shares get hockeyed, dropping 8.7% on the day. While I like the company and its business model, I think that Friday’s market reaction was warranted – it reported a big contrast between its performance in the UK (lfl sterling sales +4.7% in H1) versus Ireland (H1 sales -6%) – and the outlook for companies facing the UK consumer is deteriorating as we move into H2. And we all know about the outlook for consumer spending in Ireland!


We also got a trading update from CPL, which is Ireland’s biggest recruitment company. It says that profits for its financial year just ended will be “broadly in line with market expectations”, while the outlook statement was particularly encouraging given management’s long track record of caution when it comes to providing forecasts: “We are experiencing some signs of improvement across our various businesses, and our operations overseas are performing well.  We expect a further gradual improvement in market conditions in the coming months”. Good news for Irish job-seekers!


(Disclaimer: I’m a shareholder in Trinity Mirror plc) In my last blog I wrote about the mixed emotions I was feeling over my Trinity Mirror investment. Its share price has soared 18.3% this week on the back of the demise (of sorts – given that The Sun will likely now be printed on Sundays) of The News of the World. While the gains come on the back of low-life behaviour by certain individuals, I see plenty of happier reasons to believe that this stock has significant upside potential. For starters, its share price (50p) is about 30% below the 72p/share value of the group’s freehold property. It is also trading on a forward PE of circa 2x. Sure, the newspaper industry is in long-term structural decline, so a single-digit multiple is warranted, but with a decent enough balance sheet (the mean net debt/EBITDA forecast for the current financial year is only 1.6x) and chunky enough profits (both of which provide Trinity Mirror with staying power while many of its competitors go bust, which helps to at least partly offset the impact of the newspaper advertising market’s long-term structural contraction) coupled with advertising that looks to be near a cyclical low I think  that the group deserves to be trading at a price that is 2-3x higher than where it currently is.


I have previously written a lot about why I am bearish on China. Despite having held this conviction for some months, I am still amazed by some of the things I see about the construction bubble there. The excellent Tim du Toit at Eurosharelab posted some interesting charts from SocGen about the magnitude of infrastructure  spending in China, while this article from the New York Times that Derek Madden kindly brought to my attention featured this eye-popping passage:


“As municipal projects play out across China, spending on so-called fixed-asset investment — a crucial measure of building that is heavily weighted toward government and real estate projects — is now equal to nearly 70 percent of the nation’s gross domestic product. It is a ratio that no other large nation has approached in modern times.

Even Japan, at the peak of its building boom in the 1980s, reached only about 35 percent, and the figure has hovered around 20 percent for decades in the United States”

Written by Philip O'Sullivan

July 9, 2011 at 6:37 pm

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