Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Delta Air Lines

Market Musings 19/9/2012

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It’s been a busy couple of days on the newsflow front, with a lot of the Irish smallcap exploration names prominent in this regard. Let’s round up on what has been happening since my last update.

 

To kick off with the energy sector, Kentz was awarded a $50m shutdown services and operations support contract by Exxon in Sakhalin, far-east Russia.

 

 

(Disclaimer: I am a shareholder in PetroNeft plc) Siberian oil producer PetroNeft released a reassuring update this morning, which revealed that output is steady at 2,000 barrels of oil per day, while early results from the Arbuzovskoye well 101, the first of ten planned new production wells on the Arbuzovskoye oil field, are encouraging. We should see a marked pick-up in newsflow from this stock over the coming months as the Arbuzovskoye campaign gathers momentum.

 

Elsewhere, Petrel Resources announced a “new start” in Iraq, with a new team in place that will “work with national and regional authorities in Iraq to identify projects in which Petrel can be involved”.

 

Providence Resources provided an update on its Rathlin Basin acreage. While this project is very much at an early stage, the company has identified a number of anomalies that it will now focus on evaluating.

 

In other resources related news, there was an interesting backward integration move by Samsung, which has invested in a gold mine in exchange for getting a cut of the output. This follows Delta Air Line’s recent purchase of an oil refinery, and may mark a shift by companies to ensure greater security of supply of key inputs and/or margin capture by buying key suppliers.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) There was further M&A activity in the European packaging sector, with Mondi acquiring Duropack’s German and Czech operations for €125m. This is extremely welcome on two counts. Firstly, the European packaging sector has traditionally suffered from overcapacity and volatile pricing, but as I have previously noted, in recent times there has been a wave of consolidation in the industry. This should lead to more rational pricing and supply policies going forward, which will lift profitability across the sector. Secondly, from a Smurfit Kappa Group perspective, the multiples these deals are being done at highlight the value in the stock. As Davy note, using the Mondi-Duropack multiple would imply an equity value of €11.30 a share on SKG, well ahead of the €7.60 it is trading at this morning.

 

In other Smurfit Kappa news, following a recent similar move the company announced the sale of €250m worth of senior secured floating rate notes due 2020. The proceeds will be used to pre-pay term loans maturing in 2016/17 and while they will not make a significant dent in interest costs (the new notes will pay 3 month Euribor +350bps, versus the 3 month Euribor +362.5-387.5bps the term notes pay) they do push out the average maturity of the group’s debt, thus reducing the risk around the company and giving it enhanced financial flexibility.

 

In the food sector, Origin Enterprises released its full-year results this morning. These revealed a solid performance by its core agri-services business, with like-for-like operating profits up 7%. Net debt has fallen sharply to €68m compared with €92m a year earlier, which reflects the strong cash flow generation of the business (free cash flow was circa €70m, which implies a FCF yield of 12% or thereabouts). Given this, management has upped the dividend by 36%, which moves dividend cover from last year’s 4x to 3x now. Overall, these are solid results from Origin and shareholders (not least its majority owner Aryzta) will no doubt welcome the significant increase in the dividend.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) There was some unexpected fall-out from the Irish Daily Star’s (appalling) decision to publish pictures of the Duchess of Cambridge, with 50% owner Richard Desmond saying that he would take “immediate steps to close down the joint venture“. This is easier said than done, given the troubles this would involve with redundancies, property leases, a loss of profits and printing contracts. While there has been speculation that this could be a stroke by Desmond to replace a 50% owned JV with his 100% owned UK Daily Star in the Irish market, I can’t see INM abandoning its sole presence in the national daily tabloid space. So, either this dispute is settled amicably (perhaps with INM agreeing a call option to buy out Desmond?) or not, in which case INM will likely launch a new tabloid (using a different title, as Desmond owns the rights to the Daily Star name) which should be able to more than hold its own against any imported competitor whose relevance to the Irish market could well prove to be uncertain.

 

In the blogosphere, Lewis looked at Wincanton, with his blog providing enough to persuade me that I don’t need to look at it in more detail!

 

And finally, if you’ve ever wanted to learn more about money and banking, UCD’s top-rated Professor Karl Whelan has very kindly put up his lecture slides from a course on this very topic.

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Market Musings 1/5/2012

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I found a few minutes to sneak in a quick update before the first of my exams so here is what has been grabbing my attention in recent days:

 

Aer Lingus announced that Etihad has purchased a 2.987% stake in the company. The statement from the company says that Etihad will not purchase any more shares in the carrier, pending the outcome of discussions on reciprocal code-share opportunities and “additional commercial and cost opportunities to develop a closer working relationship in areas such as joint procurement”. We’ll watch this space!

 

In other airline sector news, there was a very unusual development as Delta Air Lines bought an oil refinery in an attempt to reduce its costs. It’s a gutsy strategy, given that the skill-set needed to run an airline is presumably rather different to that needed to run an refining business, but I wish them well.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Smith & Williamson’s Mark Pignatelli (who’s long the stock) made a few interesting comments about Independent News & Media. While I’ll refrain from commenting on his bullish remark about INM being “probably the cheapest stock in Europe” , I concur with his observation about INM fixing its balance sheet and the flow through (hopefully) from a recovery in the Irish economy. I recently wrote about the desirability of INM selling its Australasian media interests, while the operating leverage inherent in INM (which hopefully will be amplified with Vincent Crowley, a man known for his cost-cutting instincts, now at the helm) should hopefully mean a significant recovery in earnings once advertising expenditure starts to pick-up.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) Elsewhere in the media space, Press Gazette did up a good piece on the UK local newspaper market. They found that 242 UK local newspapers have closed in the past 7 years, which to put into context compares with the 238 paid titles the largest local newspaper group, Johnston Press, publishes. Trinity Mirror publishes 130.

 

(Disclaimer: I am a shareholder in BP plc) BP released its Q1 results this morning. While the underlying replacement cost profit of $4.8bn lagged the Reuters consensus ($5.1bn), I’m not too concerned about it  – as management state today, BP continues to make good progress towards meeting its strategic objectives, so one quarterly earnings miss doesn’t prompt much nervousness on my part. The company has been on my watchlist for a while and I would view any share price weakness on the back of this as a buying opportunity.

 

Insurer FBD issued a very solid trading statement ahead of its AGM yesterday. While the “very competitive” Irish insurance market continues to soften, in line with domestic economic activity, FBD is more than holding its own, with operating profit in its underwriting operations “ahead of the prior year and marginally ahead of expectation”. I also note positive noises about the firm’s capital base. Management is for the moment (and is right to, given we’re not even half-way through the year) sticking to its full-year operating EPS guidance of 145-155c, but barring any adverse claims events I wouldn’t be surprised to see upgrades as the year progresses due to: (i) the benefits of the cost take-out programmes in recent years; (ii) FBD’s successful internet strategy; (iii) supportive conditions in its core agri customer base; and (iv) the expansion of its broker channel.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc, AIB plc and Irish Life & Permanent plc) Staying with the financial sector, I was pleased to read that deposits at Ireland’s covered banks rose 1% month-on-month in March. Total covered bank deposits are now at their highest level since February 2011. This represents a nice vote of confidence in the sector. In terms of AIB, I see that it is not going to pay a cash dividend on preference shares to the NPRFC, which means that it will instead issue more shares to 99.8% shareholder, the State (i.e. the Irish taxpayers).

 

Hugh Hendry’s latest letter has been posted onto Scribd.

 

From a macro perspective, I was interested, but not terribly surprised, to read that Ireland’s government deficit over the past 2 years equals Slovakia’s entire GDP. Our deficit for 2011 alone was greater than the size of Cyprus’ economy. I find it increasingly difficult to comprehend how anyone could believe Ireland’s fiscal strategy is sustainable.

 

In the blogosphere, Lewis wrote an interesting piece on Cambrian that’s worth checking out, while Richard wrote a blog post on Churchill China that brought back memories from the time I covered Waterford Wedgwood as a sell-side analyst.

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