Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Donegal Creameries

Market Musings 5/7/2012

with 2 comments

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.

Written by Philip O'Sullivan

July 5, 2012 at 9:35 am

Market Musings 12/4/2012

with one comment

Both the brokers and the bloggers have provided most of the topics of interest to me in recent days, so let’s focus on them in this update.

 

(Disclaimer: I am a shareholder in Ryanair plc) Davy Stockbrokers downgraded LCC easyJet to ‘neutral’ yesterday on valuation grounds, saying that the stock is high enough. I wonder might this stance prompt some EZJ holders to switch into RYA, given the former’s recent outperformance?

 

Speaking of broker downgrades, NCB cut Kerry Group to ‘accumulate’ on valuation grounds yesterday. You can read their rationale for doing so in detail here – it’s similar to the one that prompted me to recently close out my position in Glanbia (at my €5.30/share valuation and forecasts for FY12 Glanbia would be on 9.3x EV/EBITDA, which to me is far from cheap in absolute terms). Staying with the food sector, Donegal Creameries issued what to me looked like solid enough 2011 numbers this morning. It’s not a stock I follow in detail, but I was interested in management’s comments about the rationalisation of Irish dairy processing capacity, which mirrors my previous scribblings on the issue and has clear implications for Kerry and Glanbia. Another thing that interested me was NCB’s morning note, which said that Donegal’s associate, Monaghan Mushrooms, is the world’s second biggest supplier of mushrooms!

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) I was pleased to see more capacity take-out in the European containerboard space this morning, with news of the imminent closure of two mills by Norway’s Peterson. As any student of economics knows, reducing supply in the industry will prove supportive of pricing in a segment where Smurfit Kappa Group has a circa one-third share of European kraftliner capacity. All other things being equal, a €10/tonne rise in kraftliner prices lifts Smurfit’s profits by circa €15m (which is pretty chunky considering consensus 2012 PBT is just under €290m)

 

(Disclaimer: I am a shareholder in Datalex plc) In the TMT sector, I was interested to read a post-results note by Goodbody analyst Colm Foley on Datalex plc. He’s opted for 2012 EBITDA and net cash of $6.1m and $15.5m respectively, which is comfortably ahead of my estimates of $5.3m and $13.0m. Of course, as a shareholder I’ve no objections if my estimates are proven to be too conservative! His PT is 70c (mine is 62c), which is well ahead the price at time of writing of 54c.

 

(Disclaimer: I am a shareholder in Tesco plc) In the blogosphere, Calum did up a detailed piece on Halfords that’s worth a look. He also noticed the latest quarterly letter from Kennox AM is out, which mentions a similar investment case for Tesco to the one that prompted me to recently put 6% of my portfolio into the stock. Elsewhere, Mark Carter did a cracking post asking: ‘How safe are blue chips?‘ which to me is an indictment both of index tracking funds and a lazy buy-and-hold strategy.

 

Here’s an interesting fact about how technological advancements are boosting efficiency – If a modern-day Macbook Air had the energy efficiency of 1991 computers, its battery charge would last 2.5 seconds.

Written by Philip O'Sullivan

April 12, 2012 at 2:15 pm

Market Musings 8/11/11

with one comment

It’s very hard to find the time to blog on consecutive days due to all of my various commitments, but given today’s extraordinary events involving so many Irish companies it would be remiss of me not to put aside some time to reflect on what has been going on.

 

(Disclaimer: I am a shareholder in CRH plc) The Irish Stock Exchange’s largest constituent, CRH, released a downbeat trading update today, with guidance coming in behind what a lot of brokers had penciled in, with the miss due to worse than expected margin pressures. However, despite this the shares rallied strongly, finishing the day up 4% after it also announced that from December 6 it will have a primary listing in London and a secondary listing in Dublin. This will put CRH into the FTSE 100 index from mid-December, so what we saw today was a lot of funds getting involved ahead of the inevitable “index buying” that will follow CRH’s FTSE 100 inclusion. The flipside of course is that this is an ominous development for the Irish Stock Exchange, which now looks a shadow of its former self.

 

Another chunky component of the ISEQ is DCC, which, as regular readers know, is a stock that I’m very fond of. Earlier today it issued H1 results that struck a reasonably downbeat tone, as expected, due to the warmer temperatures in the UK and Ireland in recent months. While DCC got a kicking today, declining 4.3% in Dublin, this reaction is unwarranted. Weather is clearly something that DCC has no control over, and had normal temperature levels manifested themselves, management would be rightly toasting a solid set of numbers. DCC is a conglomerate with 5 distinct businesses, and outside of Energy, where reported profits fell 38% for the reason outlined above, all 4 of its other divisions (Sercom +7%, Healthcare +1%, Environmental +12%, Food +11%) reported healthy profit growth, despite difficult economic conditions. Trading on less than 10x earnings, with a strong balance sheet and a proven record of generating consistently high returns, DCC looks like very good value here.

 

We also saw quite a bit of M&A activity involving Irish companies buying overseas businesses today. C&C acquired the #2 cider brand in the USA, Hornsby’s, in a deal worth up to €20m. Obviously this is a small deal, but at the same time it is one with huge potential. In addition to C&C being able to apply its resources in terms of a strong balance sheet and considerable experience in the UK and Ireland to this new US unit, Hornsby’s also offers a platform for C&C to cross-sell its Magners brand. From the C&C conference call it was revealed that Hornsby’s complements Magners in terms of price points, with Magners selling at the top end of the range – at $10.99 for a six pack versus $6.99-$7.99 for Hornsby’s, which tends to sell about $1 behind the market leader, Woodchuck.

 

Another Irish firm that announced a deal today was Donegal Creameries, which announced that it has bought a Scottish seed potato business. AJ Allan will grow Donegal’s potato output from 50,000 to 62,000 tonnes annually, and marks the ongoing re-positioning of the group following the recent sale of its liquid milk business.

 

For a perspective on how bad banks’ legacy loan books are in Ireland – Lloyds’ Irish portfolio is now 67% impaired.

 

My marketing professor recommended that I look at Seth Godin’s blog. One of the first blogs that I read on it was this one – Six questions for analyzing a website – which is a great read. If you run your own site, check it out.

 

In terms of other inspired works – Leigh Drogen’s excellent A Message To My Generation is one of the best things I’ve read in a long time.

Written by Philip O'Sullivan

November 8, 2011 at 7:53 pm

Market Musings 31/10/11

with 5 comments

I’ve had no end of distractions over the long weekend, which means that activity on the blog has been rather quiet. So what’s been going on?

 

Markets have given up some of the significant gains recorded after the EU summit last week. This comes as no surprise to me, given what I said about the movements having suggested that a lot of the move was due to short-covering.

 

With the Presidential election out of the way, the media’s focus will now turn to December’s budget. Hopefully the increased coverage will be matched by improved coverage – I was perplexed to read a headline stating that the “IMF says deeper cuts not needed in budget”. If you read through the article, what the IMF actually said was that the government does not need to go beyond cuts that would get to an 8.6% deficit for 2012. However, with growth projections for next year having been pared back of late, it is clear that a fiscal adjustment of more than what the government is currently targeting (€3.6bn) will be needed to get to an 8.6% deficit for next year. So, you can take the word “not” out of that headline! To briefly return to the Presidential election, I was amused to hear our new President suggest that his election represented a victory for socialism over Austrian economics. That “logic” is so woolly that it makes me wonder if most Irish politicians think “Austrian economics” means the Minister for Finance in Vienna!

 

Last Monday brought near-biblical flooding to parts of the east coast of Ireland. While such events are hardly unprecedented for insurers, I do note that the share price of the only listed Irish general insurer, FBD Holdings, is, at the time of writing, higher than it was before the floods. Given the extent of the damage wrought on Dublin and the surrounding areas, I wonder if there is some near-term downside risk to FBD’s share price. Management has yet to comment on what the likely financial impact of the floods will be.

 

(Disclaimer: I am a shareholder in Glanbia plc) Turning to the food sector, two things in this space have grabbed my attention. Firstly, data released by the CSO show that net subsidies accounted for 84.6% of agricultural income in Ireland in 2010. This is hardly sustainable. Elsewhere, in a very welcome move I see there has been more consolidation in the Irish dairy sector, with Connacht Gold buying Donegal Creameries’ milk business.  With milk quotas being phased out, Ireland has a tremendous opportunity to significantly boost output over the coming years. Concentrating the industry in the hands of a small number of well-resourced players (as New Zealand has done with Fonterra) will allow Irish firms such as Glanbia and Kerry Group (assuming they retain their dairy operations) play a key role in this structural growth story.

 

The Occupy Wall Street movement shows no signs of giving up their protest just yet. I was pleased to see Peter Schiff (who I’d the pleasure of meeting last year) engage with the protesters. If you’ve a spare 20 minutes, make yourself a cup of coffee and watch this video.

 

Bill Gross at PIMCO released an excellent update earlier today – Pennies from Heaven. Have a read.

 

In a recent blog I warned that last Thursday’s referendums would “have negative consequences for our freedoms if passed”. I’m pleased to see that the 30th amendment was defeated, despite threatening and arrogant rhetoric from our Minister for Justice, who hopefully will not stay in his job much longer.

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