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.