Market Musings 22/8/2012

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Market Musings 13/8/2012

Since my last update Insulation giant Kingspan announced two acquisitions, buying ThyssenKrupp’s European insulated panels business for €65m and a Middle East composite panels and roofing business, Rigidal, for $39m. These are sensible deals that strengthen Kingspan’s presence in those markets and the acquisition price paid for both is quite undemanding – the ThyssenKrupp business was acquired (if you strip out the €15m pension contribution) for 0.5x its gross assets, and while it is at present modestly loss-making (operating margins are -1.5%), once it is integrated into Kingspan’s existing European operations the synergies should see this rebound into profit, and with the former ThyssenKrupp business having achieved sales of €315m in the year to the end of March 2012 this deal could prove a very tidy bit of business for Kingspan in time. By this I mean that if , for example, the minus sign before its operating margin is replaced by a plus you’re looking at a 10% pre-tax ROI (ex the pension contribution), and given that Kingspan’s insulated panels business achieved trading margins of 6.7% in 2011 the returns over time will presumably be much higher than the example I provide above. As regards Rigidal, a price of 1x sales is undemanding for something that has, according to Kingspan, “an extensive route to market in the Gulf region”, which is an area that currently contributes a small fraction of Kingspan’s annual revenues.

 

(Disclaimer: I am a shareholder in PetroNeft plc) This morning saw another operations update from PetroNeft. Interest in every one of these updates centres on (i) production trends; and (ii) financing. There was no update today on (ii), while on (i), the company says production is ‘stable’ at 2,000bopd, and while this is lower than the 2,200bopd reported in June I am less concerned than I otherwise might be given that in the intervening period two wells were converted to water injectors for planned pressure support while other points of note include: drilling of the first of ten new production wells on the Arbuzovskoye oil field has commenced and is expected to come into production in September 2012; while the Arbuzovskoye No. 1 well is producing lower than normal output due to an electrical fault with a pump that is scheduled to be replaced. What this all means is that, at least in theory, PetroNeft shareholders could be looking forward to a short-term recovery in production which will either help with securing longer-term funding or make the stock more attractive to a potential suitor.

 

Elan Corporation announced plans to split the company into two units. Under the plan the group will split into one unit focused on its existing Tysabri blockbuster drug and mainly late-stage  projects, and another more early stage drug delivery business platform whose employees will, I assume, be highly incentivised to deliver on the R&D front in the short term given expected cash spend of $50-60m per annum and start up capital from Elan of $120-130m.

 

Harvey Nash, a UK staffer I’ve held in the past, issued a solid trading update this morning. Despite the ‘challenging environment’ it expects to report solid revenue (+15%) and profit (+6%) growth in the 6 months to the end of July. It’s a stock I like, offering the right sort of diversity for a staffer – geographic, industry and also a mix of permanent/temporary/outsourcing services for clients. I hope to do some work on this company soon with a view to seeing whether it’s worth buying back at current levels – while I know some of the newsflow out of the sector of late hasn’t been too encouraging, the low multiple HVN trades on mitigates against a lot of the macro risks.

 

Finally, I’m going to be travelling from tomorrow until Tuesday week, so you can expect some ‘radio silence’ from me until then. However, as always the markets will continue to churn out plenty of newsflow. The key things to watch out for over the coming days, at least from an Irish corporate perspective are:

 

(Disclaimer: I am a shareholder in CRH plc) CRH reports its interim results tomorrow. Many of its peers have updated the market in recent weeks, and the sector commentary has been full of reports of tough conditions in Europe but a better picture in the US. This narrative was pretty much mirrored in its trading update back in May. It will be interesting to see if there has been any changes in the trends noted across its operations, particularly in the US where there has recently been signs that things could be getting a bit softer, while another area of focus will be on the acquisition front – CRH reported H1 ‘acquisition and investment initiatives’ totaling €0.25bn in July, and more recently it has been linked with a potential large deal in India.

 

Another firm reporting H1 results tomorrow is Dragon Oil.  It recently noted some minor production issues, but these should be resolved in the near term with the installation of sand screens. The company also recently upped its 2012 development well target to 16 wells from the previous 13, which gives further confidence that it will meet its medium term production goals. I don’t think there’s any real scope for any surprises tomorrow given how recently it last updated the market and its relatively ‘boring’ (at least where oil companies are concerned!) business model, and with the shares supported by the ongoing $200m buyback and trading at a reasonably big discount to NAV I wouldn’t have any major near-term concerns around the stock.

 

Next Monday Kingspan will report its interim results. The group issued a very solid trading update in May, despite what it described as a “subdued global construction market environment” and it will be interesting to see if it is noticing any changing trends across its world-wide operations since that update.

Market Musings 9/8/2012

Blogging has been interrupted this week by coursework and the Olympics, which have seen some amazing performances from Team Ireland. We’ve also seen an amazing performance from Kerry Group, as detailed in this morning’s H1 results.

 

To kick things off, as noted above Kerry released strong interim results this morning. Despite the disruption and costs of its ‘1 Kerry’ business transformation and ‘Kerryconnect’ IT programmes, the group managed to lift trading margins to 8.25% in H12012 versus 8.06% in the same period last year. Ingredients delivered this improvement, with Consumer Foods holding its margin steady despite the consumer headwinds. Kerry now expects earnings to rise 8-12% this year, an improvement from previous guidance of 7-10% growth. Other items of note in the release include an improvement in operating cashflow (€116.7m in H112 versus €104.6m in H111), while the group completed a €20m ingredients acquisition in Malaysia in H1 and since the period end has also agreed to acquire other ingredients businesses in China and Australia, which highlights the growing importance of Asia-Pacific (now 16.5% of total ingredients revenue) to the group. While this is all positive stuff, my main concern around Kerry is its rating – taking the mid-point of its earnings guidance it is trading on circa 17x earnings, which is pretty punchy for a stock carrying €1.3bn in net debt. Kerry is not one for me at that sort of a multiple.

 

In the pharma space Elan Corporation announced a big setback for its Alzheimer’s drug, which will see it take a $117m charge against it. This could have profound consequences for the stock, with some analysts reckoning that Elan could be taken over.

 

(Disclaimer: I am a shareholder in BP plc) The ‘Value Perspective’ team at Schroders posted an interesting piece about BP that shows how a contrarian approach can often reap serious rewards. I have gradually built up my stake in BP over a number of years, and used the Macondo weakness as an opportunity to ‘average down’ on my in costs as part of that. My rationale back then was that the dip in BP’s market cap between its pre-Macondo highs and post-Macondo lows was far in excess than the ‘worst case’ scenarios being sketched about how much the Gulf of Mexico spill would cost the group, coupled with research that showed previous large spills (such as Exxon Valdez) ultimately cost a lot less than what had been feared. Clearly not a ‘risk free’ punt, but it shows that straying from the investor herd can be a very profitable strategy. It’s a similar logic to what led me into Trinity Mirror (see below) at a time when the received wisdom was that ‘all newspapers are doomed’, hence you could pick up its stock for half-nothing.

 

Staying with matters BP-related, DCC made another sensible bolt-on acquisition, acquiring the former’s LPG distribution business in Britain. It perfectly complements DCC’s existing operations in that market, adding 87k tonnes of bulk and cylinder LPG to the existing network of 190k tonnes, giving DCC 25% of the UK LPG distribution market according to analysis by Davy.

 

(Disclaimer: I am a shareholder in CRH plc) CRH confirmed that it is in talks that could lead to it significantly increasing its presence in the Indian cement market. CRH expanding in India makes perfect sense, given that its cement consumption per capita, at 178kg, is the lowest of the BRICS (Brazil: 311kg, Russia: 350kg, China: 1380kg, South Africa: 217kg). I noted some commentary to the effect that CRH has no BRICS experience, but this is absolute nonsense given that the group already has a presence in three of them – China, Russia and India.

 

In the transport sector Aer Lingus released weak traffic stats for July, bringing to an end a run of strong data. It will be interesting to see if this is just a blip or the start of a new trend. Elsewhere African LCC FastJet is making some impressive progress, as this piece shows (I strongly recommend you view the video accompanying it).

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the blogosphere Lewis has turned bullish on Trinity Mirror following last week’s strong interim results. Regular readers of this blog know I’ve been a bull on the stock for months, and it’s nice to see the thesis finally playing out – there’s a lesson there in terms of sticking to your guns in the absence of any ‘new’ information that might challenge a conviction.

 

To finish up, here are two good pieces that grabbed my attention this week – the first challenges the received wisdom about Thatcher’s policies towards Britain’s coal mines, the second explores Ireland’s craft beer revolution.

Market Musings 21/7/2012

Since my last update the latest corporate developments have been mostly about Irish companies looking to either move in or move out of other countries. Let’s examine what’s been going on.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM confirmed that it has received “informal and unsolicited expressions of interest” for its South African business. With the group’s main lender having reportedly categorised INM as one of its “most challenged corporate relationships“, divestments to strengthen its balance sheet appear to be a must. At the end of 2011 INM had net debt of €427m. If INM were to offload South Africa and its APN stake for €350m (based on media reports on South Africa could fetch and the current market value of APN), this would cut net debt to circa €75m. Add in the €125m current market cap INM is on and it would have an enterprise value of €200m against which the firm would have All-Ireland assets which produced sales and operating profits of €363m and €46m respectively in 2011, which was clearly a tough year for the media sector here. While you would have to adjust the above profits for INM’s group overhead costs, it seems to me that the market is applying a very low multiple to its Island of Ireland division. Divesting its overseas units should draw attention to this and potentially lead to a dramatic re-rating for INM.

 

DCC issued a solid trading update on Friday, which revealed that its Q1 performance was “ahead of budget”. However, management is sticking to its previous full-year earnings guidance, which is reasonable given how heavily skewed its profits are towards the second half of its financial year. To me there was little in the release to change the narrative around the company – DCC’s proposition to investors is a strong balance sheet and a good mix of assets, yielding consistently high returns, trading on an undemanding multiple.

 

(Disclaimer: I am a shareholder in CRH plc) Press reports suggest that CRH may be considering a €1bn+ deal in India. The cement assets in question have a combined capacity of 9.8m tonnes and they would more than treble CRH’s presence in the market if acquired. We’ll have to wait and see if there’s more to this story.

 

(Disclaimer: I am a shareholder in Marston’s plc) TMF’s Tony Luckett wrote an interesting piece on the UK pub sector – only the strong will survive. In it he cites research from CAMRA,  suggesting that the pace of pub closures in the UK may be leveling off. This is an encouraging claim, and it’s something that I’ll keep an eye on to see if the trend continues to improve.

 

(Disclaimer: I am a shareholder in AIB, PTSB and RBS) The Irish banking sector was in focus in recent days. PTSB gave a non-update on its restructuring plans, which contained nothing that wasn’t already in the public domain. My view on PTSB remains that, unless it can heroically engineer a large-scale recapitalisation to pave the way for a step-up in its lending capacity, it is very likely to remain a marginal player in the Irish banking market. I struggle to see why it wasn’t shunted into AIB. Today’s press asks if RBS’ Ulster Bank is gearing up to leave Ireland – I would think this extremely unlikely given the difficulties that would be involved, particularly in terms of time and costs – the problems of moral hazard, deposit flight, extricating the bank out of lengthy contracts, redundancies and so on would make this a very messy process (think of the hassle Lloyds has had with BOSI). I suspect that while Ireland is going to be down the pecking order in terms of capital allocation from RBS’ head office over the coming years, the much lower competition relative to before in the banking sector here means that margins on new lending should be quite attractive whenever the domestic economy and the financial system are restored to vigour. As the third biggest bank in Ireland, RBS should find itself well placed to exploit this future opportunity.

 

In the insurance sector FBD Holdings appointed UK firm Shore Capital as its new joint broker following the sad demise of Bloxham. This is a curious move given that FBD’s core operations are all in Ireland – might FBD be considering a push into Britain?

 

And finally – I was interested to read that 48 tonnes of silver bullion were recovered from a shipwreck off the west coast of Ireland.

Market Musings 5/7/2012

It’s been a very busy few days on the newsflow front, so once more this blog represents a catch-up on what’s been happening on a sector-by-sector basis.

 

(Disclaimer: I am a shareholder in CRH plc) CRH issued a development update in which it revealed €0.25bn of investment and acquisition initiatives in H1 2012.

 

(Disclaimer: I am a shareholder in Datalex plc) We got some more information on Datalex’s partnership with SITA, which was first disclosed in Datalex’s recent results. Given SITA’s large scale relative to the Irish based travel software provider, this could prove to be very significant for Datalex. I’m still quite bullish on Datalex and see more upside for it from here given how scalable its business model is, and on this note partnerships such as the one with SITA should help open doors for it with more travel companies.

 

(Disclaimer: I am a shareholder in Ryanair plc) Speaking of travel companies, we saw traffic stats released this week by both Ryanair and Aer Lingus. For Ryanair, its June passenger stats provide us with the full picture for Q1 of its financial year. Europe’s biggest LCC carried 5.7% more passengers in Q1 relative to year earlier levels. This compares with guidance of 7% growth in H1, and it should be noted that Q2 is the key period for Ryanair during the year. Aer Lingus’ June passenger stats, released this morning, reveal another strong performance, particularly on the long-haul side, where load factors rose 9ppt to 92.4%.

 

Donegal Creameries issued an AGM statement that revealed a “satisfactory” performance, with management sticking to full-year earnings guidance.

 

TMF wrote a piece on “five smallcaps that could double“. Of the five, I hold Datong, and given its most recently reported NAV of 72.7p a share is well above its share price at the time of writing (31.0p) I think its inclusion on the list is more than warranted, provided that it can deliver on its promises of a recovery in revenues and earnings.

 

Switching to macro news, taking advantage of the enthusiasm that followed the recent EU summit (although the finer details still need to be worked out), Ireland’s NTMA is issuing €500m of 3 month treasury bills today. Obviously, the amount is very small relative to Ireland’s funding needs (and existing stock of debt), and the maturity is short term (and falls within the Troika’s programme, which removes a lot of the risk for buyers), so while it is a welcome development it is hardly a game-changer for Ireland.

 

Speaking of welcome developments for Ireland, according to Reuters some currency strategists expect sterling to rise against the euro, which is good news on a number of different levels. It makes Irish exports into the UK (which buys a sixth of our exports) more competitive, while for Irish plcs that generate a significant proportion of their revenues in sterling (e.g. Paddy Power, Kingspan, Kerry and DCC) but who report in euro this provides a tailwind for earnings.

 

But to move from welcome developments to unwelcome ones, Ireland’s H1 2012 Exchequer Returns reveal continued grounds for concern about the government’s fiscal trajectory. While much of the media commentary has focused on where the numbers are at relative to expectations, the reality is that there has been no underlying improvement in Ireland’s fiscal position. If you strip out significant one-off items, such as the promissory note, the cost of acquiring Irish Life and the loan to the insurance compensation fund, the underlying deficit for H1 2012, at €7.7bn, is only 1% below the underlying deficit for H1 2011. Annualising that means that Ireland is running an underlying deficit of over €3,000 a year for every man, woman and child in the State.

 

I recently reviewed how my 2012 investment picks have performed. Many of my friends in the UK and Irish investment blogosphere have followed suit, namely: John Kingham, Mark Carter, Wexboy, Mr. Contrarian and Expecting Value. Of course, none of us can be said to be investing with a 6 month time horizon in mind, but at the same time it is useful to revisit how portfolios have performed with a view to discerning what, if any, takeaways can be taken from that in order to refine the investment strategy going forward.

 

Speaking of the blogosphere, Calum did an excellent write-up of Dairy Crest that’s worth checking out.

 

And finally, here is the trailer for the Bollywood film that was partly filmed in Dublin.

Market Musings 18/5/2012

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 9/5/2012

Since my last update markets have been rocky on the back of election results in France and Greece in particular. Notwithstanding this present volatility, however, I don’t see this as a game-changer, given that Hollande was the front-runner for the French presidency for quite some time before the election, while Greece has for so long been anything but well-behaved that the election of a large number of cranks to its parliament is unlikely to result in any deviation from the Hellenic Republic’s recent record when it comes to compliance with sound economic policies. What the pullback in the market means for me, if anything, is that some of the stocks I was looking to buy are now more attractively priced, but more on this anon.

 

(Disclaimer: I am a shareholder in CRH plc) We got an interim management statement this morning from CRH. I, and indeed all of the brokers whose preview notes I saw ahead of this announcement, had expected the company to guide that H1 EBITDA would increase compared to year-earlier levels on the back of improving trends in North America and the benefits of cost take-out programmes. In the event, the company is guiding “overall EBITDA in the less significant first half of the year to be close to last year’s level”. While the firm is sticking with its “overall like-for-like sales growth in 2012 and a year of progress for CRH” full-year guidance, I think this is a disappointing statement in light of more upbeat releases from peers in recent times. Other points of note within the statement include: (i) Regional performance as expected, with “a firmer tone in construction markets in the United States” and a weaker economic backdrop in Europe; and (ii) Development spend appears somewhat underwhelming – CRH said it spent €230m on 13 acquisitions and investments in the year to date. This compares with the €186m spent in H12011. Given CRH’s strong balance sheet, I would have hoped that the company would have stepped up its development spend more significantly by now. Overall, I see little in this statement to get enthusiastic about.

 

Elsewhere, United Drug issued its H1 numbers this morning. Going into it I had expected the group to have faced headwinds due to the impact of healthcare cutbacks, in the event the group unveiled a robust performance, achieving both topline growth and an impressive (8%) increase in earnings per share. Management is sticking to its full-year guidance of 4-8% growth in EPS, but given the H1 performance I suspect the risks to United Drug’s numbers lie to the upside.

 

Tullow Oil saw its share price close up over 3% yesterday on the back of a chunky oil discovery in Kenya. The company’s strike rate when it comes to finding new resources is to my knowledge unparalleled in the industry, and  is a testament to the outstanding team built around exploration director Angus McCoss.

 

(Disclaimer: I am a shareholder in BP plc) Speaking of oil stocks, I followed through on my recent commitment to add to my sterling denominated assets and I doubled my position in BP at 420p yesterday. While I appreciate that the oil price is under pressure at this time, for me I think there is a hell of a lot of downside risk priced into BP at these levels (just under 6x PE), while the prospective dividend yield of 5.4% is particularly attractive relative to the poor returns presently available from traditional ‘income assets’.

 

One of my Twitter ‘followers’ asked me if I was concerned about the FX risk after I loaded up on BP shares yesterday. I replied that I was bearish on the euro both in the short-term (due to the market’s nervousness around France, Greece and Ireland) and the long-term (due to growing policy incoherence at the EU level as more and more of the architects of the present strategy are being rejected at the ballot box). For this reason I’ve been buying exposure to sterling both through equities and by moving cash from euro into sterling.

 

(Disclaimer: I am a shareholder in RBS plc) Following its recent Q1 results, RBS CEO Stephen Hester gave an interview that contained a few interesting nuggets. I have to say I’m really getting a sense that the bank has turned the corner, as illustrated by some of Hester’s comments in that clip.

 

(Disclaimer: I am a shareholder in France Telecom plc) In the telco space, Mexican billionaire Carlos Slim’s America Movil bid to raise its stake in Holland’s KPN. With Hutchison Whampoa reportedly prowling round Ireland’s eircom, not long after it bought Orange Austria from France Telecom, who also sold Orange Suisse to private equity firm Apax, this pick-up in M&A activity is presumably bullish for sector valuations. France Telecom is trading at a small discount to my valuation on the company, and I am monitoring the share price closely with a view to exiting the position. Hopefully these developments mean that I can escape from it sooner rather than later!

 

In the macro space, the Adam Smith Institute, which is one of my favourite think tanks, happened upon this great chart which illustrates that Ireland is not the only country in Europe where many politicians and media commentators talk of ‘austerity’, while in reality government spending is in fact little changed compared to the past couple of years.

Market Musings 6/5/2012

(Disclaimer: I am a shareholder in Independent News & Media) Since my last update, Denis O’Brien confirmed that he has increased his stake in Independent News & Media to 29.9%, which is the maximum level he can own without being compelled to bid for the balance of the company. The next largest shareholders are Sir Anthony J. O’Reilly on 13.3% and Dermot Desmond on 5.75%, so half of the company’s shares are held by those three individuals. This will presumably see the Irish Stock Exchange reduce its free float determination on INM and hence the company’s weighting, but if O’Brien’s purchases lead to deeper efforts to reform the group and lift profitability that will hardly matter to the rest of INM’s shareholders.

 

Aer Lingus announced that it is to pay its maiden dividend as a publicly quoted company. The 3c/share dividend works out at a 3.1% yield based on Friday’s closing price, and with management indicating a willingness to pay the same amount out in each of the next 2 years, that means people buying Aer Lingus at these levels get nearly a 10th of their money back in a little over 2 years, while in terms of the prospects for capital appreciation, Aer Lingus exited 2011 with net cash of €317.6m, which compares to a current market cap of €521m. So for only €204m or so you get Aer Lingus’ owned aircraft, Heathrow landing slots, earnings streams etc. Sounds pretty attractive to me.

 

Speaking of Aer Lingus shares, one outfit that holds some in its funds is Matterley. I’ve met Henry and George before and I’m a fan of their value-oriented approach. I see they’re still long Aer Lingus after correctly identifying the opportunity in it when it was (and this is astonishing when you think about it) trading at a discount to its net cash. Another Irish listed stock they hold is Dragon Oil, which I traded in and out of earlier this year.

 

In terms of what to expect over the coming days, we’ve a busy week ahead in Ireland in terms of scheduled corporate newsflow. In a nutshell here are what I’m expecting / looking out for:

 

• (Disclaimer: I am a shareholder in CRH plc) CRH trading update on Tuesday – This should be a bit of a mixed bag. Recent peer updates reveal improving trends in the United States, but patches of weakness in some of the group’s key European markets. Strong cost take-out efforts should see profitability rise compared to year-earlier levels. I will be looking for: (i) indications on how trading is going as we move into H2; and (ii) any sign of a pick-up in M&A activity.
• United Drug results on Wednesday – Health cutbacks should presumably mean the tone of these results is reasonably subdued, but its very strong balance sheet and proven willingness to invest in expanding its international operations means that there’s an outside chance of an M&A announcement to distract from the underlying performance.
• Glanbia trading update on Wednesday – Tough comparatives due to a blow-out 2011 will presumably mean that the headline growth rate will slow somewhat, but the underlying performance of the group should be quite resilient. Recent signs of a weakening in the dairy market won’t help, but the high-margin nutrition space is clearly going from strength to strength, as evidenced by Nestle’s recent $12bn deal for Pfizer’s infant formula business. I took profits in this name earlier in 2012, and would look to buy back in on any weakness.
• Fyffes trading update on Thursday – I’ll be watching this one for news on (i) pricing; (ii) share buybacks (possibly); and (iii) the success the group is having with passing on high fuel costs. There may well be some read-through for Total Produce, which regular readers know is a core holding (in every sense!) in my portfolio.
• Grafton trading update on Thursday – The main interest here will be on trading conditions in the UK and Ireland. The group has been carefully adding to its portfolio of operations through bolt-on deals in its key markets as well as in its nascent Belgian operation, so there may be an update on this also within the statement.
• Kingspan trading update on Thursday – The group smashed expectations in its FY2011 results, so I wouldn’t be surprised to see another good update from the company this week. While its structural growth qualities are not in any doubt due to its leading position in the insulation space, any sign of an improvement in cyclical demand could be a catalyst to push these shares significantly higher.
• (Disclaimer: I am a shareholder in PetroNeft plc) PetroNeft results on Friday – In my view, the main areas of interest in this release will be: (i) production levels, given recent disappointments on this front; and (ii) financing. What management says about these will presumably prompt a violent share price reaction – either to the upside or the downside!

Market Musings 26/4/2012

The next couple of weeks are likely to be very quiet on the blog as I face into the main body of exams on the MBA. Sadly, the volume of newsflow is proving to be anything but quiet!

 

(Disclaimer: I am a shareholder in Irish Life & Permanent plc) It was confirmed today that IL&P’s permanent tsb unit will have an independent future,  following months of uncertainty. The bank will submit a restructuring plan to the European Commission before the end of June, with the group splitting into three – CHL (UK loans), which has a loan book of €7.1bn, permanent tsb (the ‘good bank’, with the healthier loans), which has a loan book of €14.2bn, and AMU (Asset Management Unit, the ‘bad bank’), which has a loan book of €12.5bn. I suspect that the sale process for the UK loan book will be re-started once the Commission approves the restructuring, while for the rest of the loan book there are some significant questions outstanding on both capital and funding. In all, I think it’s too early to take a view on whether or not IL&P is worth buying at these levels.

 

(Disclaimer: I am a shareholder in Abbey plc) Switching to the construction sector, I’ve recently noted improving newsflow from the UK housebuilders, which bodes well for Irish listed (but chiefly south-east England focused) Abbey plc. One of its peers, Redrow, announced that it is launching a placing and open offer to raise £80m to help fund an expansion of its housebuilding operations. ‘So what?’, you might well ask. Well, what makes this noteworthy is that the placing is being done at an 11% premium to where the shares closed at the day before the announcement was made, with the placing fully underwritten by the Chairman. If he wasn’t bulled up on the prospects for the UK housing market, he wouldn’t be comfortable to underwrite a placing at a premium to the market price.  Another UK housebuilder, Taylor Wimpey, earlier today said: “UK housing market conditions remain stable and the Group is trading at the upper end of our expectations“. In all, the newsflow from this sector continues to get better.

 

(Disclaimer: I am a shareholder in CRH plc) Elsewhere, I was pleased to read confirmation that Semapa will pay CRH €574m for its 49% stake in Secil. This will cut the group’s net debt / EBITDA ratio to 1.5x or so by end-2012, which underlines CRH’s capacity for a step-up in M&A activity.

 

(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) In the TMT sector, regional newspaper group Johnston Press published its 2011 results yesterday. These revealed continued difficult conditions in Ireland, with advertising revenues dropping 19.1% in 2011, which was the same rate of decline as in 2010. In terms of the read-through for INM, this comes as little surprise (INM referred to “very challenging trading conditions” in Ireland in its 2011 results on March 22), but I do suspect (emphasis) that the parts of the country where Johnston Press’ portfolio of Irish assets are located are doing worse (from an economic perspective) than where INM’s portfolio of Irish regional assets is located. From the perspective of Trinity Mirror, I note comments from Johnston Press that it is moving a number of daily publications to weekly editions, which fits with my narrative of the UK newspaper sector becoming right-sized. Elsewhere, I was pleased to see share purchases in Independent News & Media by both the new chairman and the new CEO.

 

Elsewhere, regular blog readers will know that Playtech has been a constant thorn in my side in the 18 months or so since I bought into it. I was delighted to take the opportunity to sell out of it on Tuesday afternoon at 381p/share, clearing all of 1p/share profit (in constant currency terms) relative to my entry level. I’m mulling over what to do with the proceeds and some other cash reserves – I have 20 live positions in the portfolio which is just about as many as I can safely manage given the other pressures on my time. What I would like to buy is more exposure to sterling denominated assets (given the near-term political uncertainty in Euroland) so I’m considering raising my existing shareholding in one or more of Trinity Mirror, RBS and BP.

 

Pharma group Elan posted “solid” Q1 results earlier today, with management saying that it’s on track to achieve its full-year financial guidance.

 

The Cove Energy takeover story took another twist as Royal Dutch Shell made a recommended cash offer for the company. As noted before, the sale of Cove will mean a nice windfall for a lot of Irish private investors.

Market Musings 28/2/2012

The main Irish business news since my last update has been the release of results from a number of the largest plcs here. Let’s run through what the implications of those are and then look at what else has been happening in the wider market.

 

Yesterday brought FY2011 results from Kingspan. At a headline level, these results were pretty good, with EBIT of €91m coming in ahead of guidance of €82-85m. Free cashflow generation was also impressive, rising to €76.9m last year from 2010’s €39.9m due to rising profits and improved working capital management. Net debt finished the year at only €170m, up circa €50m yoy but a very good performance in light of net acquisition spend of €107m over the year and a near trebling in the cash cost of dividends (€17.3m vs. €6.8m). The all-important outlook statement was encouraging, in particular the reference to improving non-residential markets in the US and UK, which are of critical importance to the group. Overall, a combination of an excellent operating performance and a reassuring outlook bodes well for Kingspan.

 

(Disclaimer: I am a shareholder in CRH plc) Staying within the construction sector, today saw materials behemoth CRH report FY2011 results. Going into these results the market had been anticipating a beat relative to guidance, given positive sector newsflow in recent weeks (helped by easy comps due to benign weather this winter), and CRH did not disappoint, producing EBITDA of €1.66bn relative to guidance of “approximately €1.6bn”. Like Kingspan, CRH’s outlook statement is pretty reassuring, with references to improving trading conditions in the US, while Europe, unsurprisingly, remains uncertain. While news of improving end-markets in the US is welcome, and management expect the group to make progress in 2012, I think the ‘recovery theme’ will be augmented by M&A, given that CRH’s sector-leading balance sheet gives it considerable flexibility to pick up assets at a time when many of its competitors lack the financial firepower to bid against it, thus facilitating deals being done at very attractive multiples.

 

Switching to the transport sector, Aer Lingus posted solid FY2011 results this morning. Despite extensive commentary within the results release, there was, however, no real update on the IASS pension issue, which in my view has been a big driver (alongside very impressive traffic stats) behind Aer Lingus’ recent strong performance. In terms of the outlook, the group says it expects that it “will remain significantly profitable albeit below 2011 levels”. Management have done an excellent job on capacity and yield management in recent times, but fuel is a big headwind, with the fragile Irish economy making it tricky to push yields higher to compensate for this.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc) In the financial space, I was interested to read that BKIR’s UK deposits will no longer be covered under the ELG from March 30 onwards. This is quite significant in light of the impact the cost of the ELG (€449m in 2011) has on BKIR’s pre-provision profits (€411m in 2011), although bear in mind that this news only relates to a portion of the group’s deposit base. The sooner BKIR can extricate itself from the ELG, the better, although granted the group’s ability to do so is heavily dependent on macro factors over which it has minimal influence.

 

(Disclaimer: I am a shareholder in BP plc) In the energy sector, Thailand’s PTT trumped Shell’s bid for Cove Energy. In my last market round-up I mentioned that a lot of  Irish investors will clean up from Cove’s takeover. The Irish Times reckons they’ll split £100m between them – an estimate that could prove light if speculation of a counter-bid is proven correct. Meanwhile, here’s a drum that I’ve been banging for a while – Ernst & Young says that “difficult funding dynamics should result in [the energy sector] remaining a hotbed of M&A activity for much of 2012“. And where is this going to be concentrated? The small-cap space, due to the challenging funding environment. In other sector news, the fraccing revolution is transforming the sector internationally, and this is helping to put downward pressure on gas prices at a time when cheaper energy is badly needed. I was pleased to read that Northern Alaska may hold as much as 80 trillion cubic feet of gas – that’s the equivalent of 80 Corrib gas fields. Finally, I was pleased to read further reports that BP is moving to conclude the post-Macondo litigation. The sooner that is resolved, the better.

 

In the macro arena, The Economist ran a good piece on Argentina’s dodgy “official statistics”. This should be borne in mind the next time you see these data being used by someone to support an argument that Ireland should try to emulate the economic policies of our Latin American friends over the past 20 years or so.