Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘DS Smith

Market Musings 2/2/2012

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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.


Market Musings 19/1/2012

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The past few days have been pretty hectic as I’ve started a full slate of new subjects as part of my MBA at the Smurfit Business School. So, this blog is really more of a catch up of what’s been going on.


The main news, for Irish retail investors, has been that two of the microcap plcs in Dublin look like they’ll soon be delisted. Siteserv responded to media reports that it was putting itself up for sale, and given the mountain of debt attached to it I expect that shareholders will be left more or less empty-handed. Like Siteserv, Readymix has been through the wars in recent years due to the difficult macro backdrop here, but its shareholders must be pleasantly surprised to have woken up this morning to news that majority shareholder Cemex has made a preliminary 22c/share offer for it. My advice would be to take the money and run – the share price was only 3c/share before today and the outlook for the Irish construction industry is unlikely to get significantly better for a long time to come.


(Disclaimer: I have an indirect shareholding in DCC plc) DCC cut full-year earnings guidance again due to better than expected weather. I have to admit to feeling like I’d egg on my face given my unequivocal endorsement of the company just before this warning, but with the shares currently trading above where they were at before I expressed my bullish sentiments it’s clear that the market is, like myself, taking the view that it would be unfair to blame a company for a very mild winter.


(Disclaimer: I am a shareholder in Marston’s plc) C&C issued a solid trading statement in which it said that operating profits for the full year would be in-line with previous guidance at €110m. Elsewhere in the broader alcoholic drinks space, UK pub groups Greene King and JD Wetherspoon both issued strong Christmas trading updates, buoyed by easy comparatives. This gives me optimism that the most recent addition to my portfolio, pub group Marston’s, has seen a similar performance.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) There was significant M&A activity in the European packaging space, with DS Smith bidding €1.6bn for SCA’s packaging business. As Davy’s Barry Dixon notes, if you apply the 6.3x EV/EBITDA SCA bid multiple to Smurfit you get an equity value of over €15 (yesterday’s closing SKG price: €5.58). Assuming it goes through, the deal would give a combined DS Smith – SCA 18-19% market share in Europe, just behind Smurfit Kappa Group’s 20%. In my view, this deal is a clear positive for the packaging sector, which is notoriously undisciplined when it comes to pricing. The more consolidation there is, the better, as the larger players will presumably encourage more rational pricing strategies.


SmI’ve expressed my admiration for fund manager Hugh Hendry before. I’ve also expressed my fears about the Chinese economy before. If you put the two of them together you see how Hugh Hendry’s fund, Eclectica, made 46% last year by betting against the Chinese economy. Oh, and speaking of the Chinese economy


Motorists – have you ever wondered about where the money you pay for petrol goes?


Speaking of taxes, the Irish government is planning to introduce a new broadcasting tax. In my view this is a blatant pitch by The Labour Party to cosy up to the State broadcaster, despite this being: (i) The 21st century, in which people can access information and content from all over the world at the click of a button; (ii) A model that sustains a State broadcaster that in addition to snaffling most of the taxes raised in this space also hoovers up private advertising revenue thus keeping Ireland’s privately owned media on life support; (iii) an era where the very notion of State-owned broadcasting agencies seems horribly antiquated – at best, and a possible threat to democracy – at worst; and (iv) an age in which people are consuming ever smaller amounts of traditional media. Presumably whenever the Minister goes on jollies to foreign countries he tells their political and business elite that Ireland is aiming to be a leader in digital media, while at the same time hitting Ireland’s YouTube generation with a tax to pay for inflated salaries at RTE.


In the blogosphere, Wexboy has commenced an interesting valuation project in which he looks at the stocks listed in Dublin. Well worth checking out.

Written by Philip O'Sullivan

January 19, 2012 at 9:14 am

Market Musings 7/10/11

with 3 comments

It’s been an extremely busy couple of days in terms of college work, so I’ve been reluctantly neglecting this blog. Hopefully this “catch-up” post will bring me up to speed with all the major newsflow! In this blog I focus on Ireland’s public finances, downgrades (both corporate and sovereign) and some interesting company pointers.


We saw the latest set of Exchequer Returns from the Department of Finance earlier this week, providing a snapshop of Ireland’s public finances to the end of Q3. At first glance, my initial reaction was: “Austerity? What austerity?” Total voted expenditure by the Irish government in the first 9 months of 2011 was €33.4bn versus €33.2bn in the same period last year. And no, this does not include the €10.7bn paid to recapitalise Irish financial institutions in the year to date. Ireland borrowed €20bn in the first 9 months of the year, which will cost a ballpark €1bn a year in interest payments annually, or roughly double the year-to-date spend on the Department of Jobs, Enterprise and Innovation. The longer we delay the necessary fiscal consolidation the more of our budget will be eaten up by interest payments at the expense of frontline services. Seamus Coffey offers some good insights on the Exchequer Returns here.


Staying with Ireland Inc, I was delighted to provide some insights to Portugal’s leading weekly newspaper, Expresso, on Ireland’s economy and the recent move in our bond yields. Speaking of the Irish economy, I note that Dolmen sees a pick up in our GDP growth rate (2011: 0.5%, 2012: 1.1%, 2013: 1.75%) over the medium term. To put our changed fortunes into context, if Dolmen’s growth estimates are correct, by 2013 our GDP will have ‘recovered’ to 2005 levels. They do make the point that ECB rate cuts will help the beleaguered consumer sector, an argument that met with some derision on some social media sites. However, I think that this derision is a little misplaced. Assuming there are 200k tracker mortgages in Ireland and 50bps of ECB easing next year, this will save households nearly €400m in a full year, which is not to be sniffed at, but obviously it’s only an incremental positive when compared to the size of the Irish economy.


We also saw a host of downgrades this week. Moody’s added to Mr. Berlusconi’s problems with a three-notch downgrade of Italy’s credit rating. I smiled at this reaction from IG Index’s David Jones. Moody’s shocked the markets earlier today by downgrading a further 21 banks across the UK and Portugal, which surely has investors wondering about who’s next for the chop.


(Disclaimer: I’m a shareholder in Smurfit Kappa Group plc). On the corporate side, we had a lot of broker activity in the packaging sector. Goodbody’s Donal O’Neill initiated coverage on DS Smith, arguing that its recent price decline creates “an excellent opportunity to buy one of the highest quality names in the sector”. Today his colleague David O’Brien took an axe to DS Smith peer Smurfit Kappa’s numbers, but he softened the blow for this SKG shareholder by noting that there is “a lot [of the negatives] already in the share price”. On this note, Davy offered some interesting valuation perspectives on SKG in its morning wrap yesterday.


(Disclaimer: I’m a shareholder in Datong plc, Abbey plc and Trinity Mirror plc) Turning to UK companies, grim updates from Flybe and Mothercare served up further reminders of Britain’s difficult consumer backdrop, which is a theme I’ve noted throughout the year. I was aghast to see another disappointing update from spy gadget maker Datong, which hockeyed the share price. Mercifully it makes up less than 0.5% of my portfolio! On a more encouraging note, Panmure Gordon had a very interesting observation in their morning note today about Trinity Mirror. Panmure’s well-regarded media analyst Alex DeGroote speculates that, given recent movements in commodity prices, “there may be good news down the road on newsprint cost pressures”, adding that “for 18 months at least, publishers have had to contend with sharp increases in newsprint prices. Going into FY12, we imagine most analysts/investors have again priced in double-digit growth. This may prove over aggressive”. I’m hoping he’s right, but then, regular readers of this blog will be fully aware of my positive bias towards the stock. The last UK stock, albeit one with material Irish operations, I’ll refer to today is housebuilder Abbey, which provided a solid update to the market at its AGM earlier today.


Central Bankers were also in the news this week. The Bank of England is engaging in more quantitative easing, a tactic which Omid Melakan memorably describes as “The last refuge of failed economic empires and banana republics“. The BoE’s measures come to roughly £1,000 for every man, woman and child in the UK. Hardly a sustainable policy, or one that is sterling-friendly (something that Irish people considering moving money out of the euro need to think about).


To finish on a positive note, I see that strategists still foresee the best Q4 performance by stocks since 1998.

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