Market Musings 8/2/2012

We’ve seen a deluge of corporate newsflow and interesting valuation pointers in the past 72 hours. Let’s run through what’s been happening on a sector-by-sector basis.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group) To kick off with the packaging sector, SKG delivered a slew of positive news this morning. In its Q4 results, management revealed that the group generated EBITDA of €245m, which is at the top of the range of estimates heading into the results. The company also announced that it is to reinstate the dividend, while it is also looking to extend its debt maturities. These are all very encouraging steps, and follow on from recent positive newsflow in the sector (both M&A and price increases).

 

(Disclaimer: I am a shareholder in AIB plc, Bank of Ireland plc, Irish Life & Permanent plc) Irish financial shares have registered very strong performances of late. While it is true that a number of large overseas investors are bulled up on an Irish recovery trade, I cannot see any justification for AIB to be capitalised at circa €50bn – more than double its peak during the Celtic Tiger years. Investors looking to play this ‘recovery trade’ should note that AIB’s locally quoted peers Bank of Ireland (market cap €4.3bn) and IL&P (market cap €2.1bn) are far more modestly valued (at least in relative terms!). Of the three, Bank of Ireland is by far my preferred stock, and for the sake of full disclosure I quintupled my position in it before Christmas at 8c/share. I’m not entirely sure that I’d be chasing it at these levels (14c) now though.

 

Continuing the recent run of positive newsflow from the Irish flag carrier, Aer Lingus issued strong traffic stats for January. Excluding its Regional operations, it carried 5.8% more passengers last month than it did a year ago.

 

Cemex indicated that it is willing to increase its possible offer for the minority of Readymix it doesn’t own by 14% to 25c.

 

Speaking of smallcaps, Bloxham made a few interesting valuation observations on TVCH, which has flashed up (rightly, in my view) on a lot of value investors’ screens. Elsewhere in the TMT sector DMGT issued an IMS that revealed still-challenging advertising conditions in the UK, the effect of which are being mostly offset by cover price increases.

 

In the healthcare sector United Drug released a positive trading update, in which management said it expected earnings to grow between 4 and 8% this year, which is a very good performance considering the difficult macro conditions and pressures on public budgets.

 

(Disclaimer: I am a shareholder in BP plc) BP released a good set of Q4 numbers, with profits ($5bn, +14% yoy) beating expectations ($4.88bn). The company hiked the dividend by 14%, which is very welcome. While Macondo is still clouding the outlook for the group somewhat, my gut feeling is that the risks on that front lie to the upside, given how the process has played out to date (relatively benign official reports, many of BP’s partners agreeing to pay some of the damages etc.). As an aside, Steve Baines, who is one of the more astute market watchers on Twitter, noted that the “planned 16% increase in BP capex to $22bn in FY12 shows that the oil service stocks are the place to be”. Which is why I have had Kentz on my watchlist for some time.

 

In the drink space, MillerCoors acquired the #3 US cider player. This follows C&C’s recent purchase of the #2 US cider player, Hornsby’s. While cider’s share of the US LAD market is tiny (circa 0.5%), in my view C&C’s €20m investment is a very worthwhile punt – a very modest increase in cider’s market share could deliver very impressive returns on investment.

 

A lot of journalists and politicians these days love to exclaim: Tax the rich! However, in Britain the top 5% of earners already contribute 47% of income tax. The top 1% pay 28%. How much more tax should these people be paying exactly?

 

The Irish government said that it will be culling the number of town councils here as part of a shake-up of local government. It is simply preposterous that Co. Tipperary has 2 county councils and 7 town councils – an average of 1 council for every 17,500 people!

 

And finally, in the blogosphere, Lewis posted up the second half of his very detailed analysis of Dairy Crest Group which I’d encourage you to have  a read of.

Market Musings 2/2/2012

We’ve seen a lot of company announcements, macro developments and a blockbuster IPO announcement since my last update.

 

(Disclaimer: I am a shareholder in Ryanair plc) To kick off, one of the bull points about Ryanair I noted the last time I mentioned the company was easing competitive pressures, due to the demise of Spanair and, as seems likely, the imminent downfall of Malev. Bloxham’s Joe Gill notes that in addition to Spanair three other European airlines have gone bust in the year to date – Cirrus, Air Alps and Czech Connect. The longer oil stays at these levels the less competition Ryanair will have to face over European skies.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Following the recent DS Smith – SCA deal, there has been more consolidation in the European packaging space. Subject to regulatory approval, Billerud is to pay €130m (7.2x EV/EBITDA) for UPM’s packaging assets. I read a broker note that said taking account of the synergies would put the multiple to 6.0x EV/EBITDA, which is about a 1/3rd premium to the EV/EBITDA multiple that Ireland’s Smurfit Kappa trades on. Leaving aside the valuation (and I think SKG is very cheap), these deals will help to lessen competitive pressure in the industry (and, one assumes, help pricing), so I view this as a win-win for Smurfit.

 

There was a lot of excitement around the Facebook IPO. Despite being an avid Facebook user, I have serious misgivings about this float. Facebook has 800m active users, so an implied valuation of $90bn values each of these at $112.50. I wouldn’t pay that much for a client base that mainly posts up pictures of crazy nights out and plays Farmville. Forbes has a good piece on the IPO here. And here’s an interesting piece on the merits of Facebook’s advertising service.

 

Irlandia Investments, the investment vehicle of the Ryan family (of Ryanair fame) appears to be giving Merrion Pharmaceuticals a dig-out.

 

I’ve previously written about Ireland’s glut of airports. Hence, I am not surprised to read that Galway Airport may cease trading over the coming days. Assuming it does close down, this will have a marginal benefit (the airport only handled 160,000 passengers in 2010) on Ireland West Airport Knock (83km away, according to Google Maps) and Shannon Airport (79km away).

 

(Disclaimer: I am a shareholder in Irish Continental Group plc) Staying with the transport space, part-taxpayer funded Fastnet Line confirmed that it is to close down. The company, which operated a loss-making ferry service between Cork and Swansea, had transported 153,000 passengers since its launch in 2010, many of whom would presumably have traveled on the private, unsubsidised and profitable Irish Continental Group’s service between Pembroke and Rosslare had Fastnet not been in operation. So, while Fastnet’s demise is obviously a blow to its workers, a lot of this business will undoubtedly transfer to another Irish company at no further cost to the taxpayer.

 

Speaking of taxpayers, this evening saw the release of the first set of Exchequer Returns for 2012. Some media outlets are shrieking excitedly about the 17% yoy increase in headline revenue, but this is flattered by a number of factors, such as the late payment of €261m of corporation taxes, expected in December, the effect of the USC on income tax receipts and also the relatively easy comparatives for VAT (retail sales were badly affected 12 months ago by adverse weather conditions). On the expenditure side, there are also a number of one-off items such as a €210m loan to the insurance compensation fund. In all, I wouldn’t read too much into what is just one month’s data.

 

In the blogosphere, John Kingham took quite a detailed look at Psion that’s worth a look (I don’t know enough about the technology to even begin to consider the merits of investing in it!). Elsewhere, Lewis did up a great piece on Dairy Crest that I’d also recommend you have a read of.

 

Finally, WordPress tells me that my blog (via several social media platforms) now has 1,000 followers. I’d like to thank you all for your ongoing support and, as ever, please feel free to email and tweet me suggestions on investment related subjects you’d like me to cover on this site.