Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Fitch

Market Musings 24/11/11

with 2 comments

I was thinking that I should have something special for this entry, which is my 100th blog post, but in the event the Eurozone has provided all the fireworks.


If you want proof of how the Eurozone crisis has spread from the periphery to the so-called “safe” core, look at yesterday’s German bund auction, described by Monument’s Ostwald as “a complete and utter disaster. If Germany can’t find buyers for its 10 year issuance, what hope has the rest of the currency union? I don’t know about the rest of you, but I prefer being invested in financially strong blue-chips with strong franchises and also commodities over Euro government debt. Staying with the now-troubled “core”, Fitch warned yesterday that its AAA rating on France could be at risk. Elsewhere in the Eurozone, Greece’s Central Bank warns that the country is on its last chance to stay in the single currency. On the plus side, when the Greeks bring back the drachma at least we can all enjoy cheap holidays over there!


Speaking of commodities – a lot of people have been saying to me that they think gold is in bubble territory. For a contrarian view, this tweet from Goldcore is interesting: “Lack of coverage of gold in [the] media is symptomatic of bull market in its infancy as animal spirits & public participation remain negligible“.


My bearish view on consumer facing stocks in the UK means that high quality companies such as Grafton, Wolseley (which I’ve traded before), SIG and Travis Perkins that would ordinarily be contenders for inclusion in my fund aren’t getting a look-in these days. However, one report I recently came across highlights the long-term structural driver for builders’ merchants, namely, that 55% of UK housing was built before 1970 (see Table 2.4 on page 54). Once I’m satisfied that we’re at the low point in the cycle, I will look to buy some exposure to this sector.


Some other interesting data points – the FT had an interesting report on UK university endowments, which showed that Cambridge has built up a £4.0bn fund, Oxford a £3.3bn one, while the remaining 163 other UK universities ‘only’ have £2.0bn. I assume, given the propensity for short-termism in Ireland’s public sector and political establishment, that none of our universities have established the type of meaningful reserves that would propel them into the top tier internationally. Yet the talking heads here persist with the myth that Ireland has a ‘world-class’ education system, despite, for example, our failure to produce a single Nobel Prize winner in any scientific field since Ernest Walton in 1951. Or the fact that no Irish university ranks in the top 200 globally, as per the Academic Ranking of World Universities 2011.


And another data point – I also read in the FT that UK households now dump ‘only’ 7.2m tonnes of food waste annually, 13% below 2006/07 levels, as hard-pressed families embrace thrift.


(Disclaimer: I am a shareholder in Playtech plc) Turning to corporate newsflow, Playtech continues to be a source of extreme annoyance for me. Yesterday it announced a £100m placing, plans for more M&A/jv activity and a new dividend policy. Ivor Jones at Numis makes some good comments about it here which sums up my views about all of this. I also note that the CEO of William Hill, one of Playtech’s largest customers (if not the largest) has been blogging about his sense of annoyance towards Playtech’s CEO. My patience with this company is close to exhaustion.


(Disclaimer: I am a shareholder in PetroNeft plc) I was pleased to see Peel Hunt initiate coverage on PetroNeft with a “Buy” recommendation and 54p price target (150% upside to this morning’s price!). However, near term performance from the Siberian oil producer, as I’ve noted before, will hinge on the results from its hydraulic fracturing programme at the Lineynoye oil field.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) I am intrigued by news that Smurfit has invested in a packaging plant in Russia. Details remain sketchy but I assume that this investment – if confirmed – will not materially alter its debt-reduction plans.

Written by Philip O'Sullivan

November 24, 2011 at 10:18 am

Market Musings 15/7/11

with one comment

It’s been an extremely busy few days, both in terms of the financial markets and also in terms of preparations for my honeymoon – at this stage, however, the jungles of Borneo look safer than most risk assets! So what has been catching my attention?


Goldbugs have been amazed, and rightly so, by this exchange between Congressman Ron Paul, who has spent his career fighting for sound money and economic discipline, and Ben Bernanke, who has not. While the entire video is worth watching (let’s be honest, I think anything involving Dr. Paul is worth watching!), the part starting at 4.25 to the end is truly astonishing.



Fitch downgraded Greece by 3 notches to CCC. Just as we had here earlier this week, there was a chorus of discontent from local politicians, central bankers and the European Commission, but who could blame Fitch for this move? According to its own definition, CCC means:  “currently vulnerable and dependent on favorable economic conditions to meet its commitments“. That said, I don’t think that Fitch’s new rating quite covers the mess Greece is in.


I raised an eyebrow when I spotted the normally very good James Mackintosh express surprise that Ireland’s ISEQ index was in positive territory the day after the sovereign was downgraded to junk status. Firstly, movements in the ISEQ are meaningless, as 30% of its market cap is comprised of only 2 stocks – CRH and Ryanair. Secondly, the majority of the profits generated by companies listed on the ISEQ come from outside of Ireland. Indeed, on my numbers not 1 of the 10 biggest ISEQ names (which at the time of writing are: Tullow, CRH, Kerry, Ryanair, Dragon, Aryzta, Smurfit Kappa, DCC, Paddy Power and Glanbia) have Ireland as their main profit centre!


(Disclaimer: I’m a shareholder in Abbey plc) Staying with Irish plcs, yesterday brought the release of housebuilder Abbey’s results. While there were a number of variances with what the brokers were forecasting on the revenue line and so on, its adjusted EPS of 41.4c was 3% ahead of consensus (Davy 42.0c, Goodbody 38.0c). Abbey’s net cash was €77.4m at end-FY11, or €3.37/share, an impressive out-turn after it spent €21.4m buying land and €8.5m on share buybacks.  So its net cash is 67% of its current market capitalisation, which implies that the market is valuing the rest of the group at €37.5m. Considering that the group is well run, debt free and carrying inventory (plots of land, part/wholly finished houses, materials) with a (audited in April of this year) book value of €83m (and obvious upside potential once the landbank is developed) and fixed assets of €22m, this looks too low even after taking the trade creditors of €30.8m into account. I think Abbey is cheap here.


And in other corporate Ireland news, DCC  moderated its FY earnings guidance (in constant currency terms) from “broadly in line with the prior year” to “broadly in line with to modestly behind the prior year” in an interim management statement issued earlier today. I wouldn’t lose sleep over this downward revision – Q1 (the period covered in the IMS) is a seasonally quiet time of the year (representing 15% of full-year profits) and a particularly cold winter (DCC’s guidance assumes a “normal winter”) would see earnings estimates revised sharply upwards. In any event, DCC is trading on less than 10x earnings, which is an inexpensive rating for a company of its quality, track record, impressive returns and balance sheet strength.


Kerry Group announced this afternoon that it has made an approach to Cargill Group for its flavors business.  Stockbrokers NCB tell me that they estimate that the unit has revenues of “around $200m”, so slapping an EV/Sales multiple of circa 1.5x on that would get you a €200-250m valuation, which is within Kerry’s existing facilities. NCB’s Darren Greenfield tells me that this would only take Kerry’s net debt/EBITDA to “around 2x” so there’s plenty more scope for it to make further acquisitions.


Some positive news for Ireland Inc – four private equity groups are leading the battle for Anglo Irish Bank’s US loanbook. This level of interest bodes well for the sale price.


The troika was in Dublin this week, to tell us that we’re meeting all of the targets set as part of the EU-IMF arrangement (I loathe the term “bailout”). That’s all fine and dandy, however, the markets are clearly saying that Ireland needs to start exceeding them.


Speaking of credibility, the EBA released the latest round of European banks’ stress tests this evening. Supposedly they only have a combined capital shortfall of €2.5bn, which incidentally is less than what Ireland had to put into Irish Nationwide Building Society alone. I have every expectation that this stress test will prove to be every bit as credible as its predecessors, with my suspicions only partially heightened by this excellent analysis by Tracy Alloway in the FT.

Written by Philip O'Sullivan

July 15, 2011 at 6:12 pm

Market Musings 13/6/11

with 4 comments

Haven’t been blogging for the past few days as my stag weekend successfully competed for my attention against the financial markets! While it was in London, I did my bit for Ireland Inc by flying Ryanair and staying in a hotel that is now under the control of NAMA.


As regular blog readers will know, I’ve been extremely cautious around equity markets for some time, and this caution has proved warranted. All of the ingredients remain in place for continued weak performance over the coming months, with concerns about the strength of the US economic recovery (not helped by weak jobs data), further evidence of a slowdown in China (note the decline in new loans in this article) and the ongoing European debt crisis showing no signs of going away. This is a good primer on the challenges the market faces.


In the US, I note that Fitch is threatening to downgrade its AAA rating if the country’s debt ceiling isn’t raised. I’ve previously noted that the Federal Government is running an unsustainable deficit of 10% of GDP, and again I ask how borrowing more is going to solve America’s debt problems. I suspect we’ll be hearing a lot more rhetoric like this before the year is out – not that America isn’t justified in complaining about its European allies. The Financial Times reported over the weekend that the US share of total NATO defence spending has climbed from 50% in 2001 to 75% today, with EU member states having slashed defence spending by $45bn in the past two years – that’s equivalent to Germany’s total annual spend. Elsewhere, expectations that QE3 will be launched by the Fed continue to rise, as evidenced by this chart.


The received wisdom about Spain being “different” to the rest of peripheral Europe continues despite alarming reports such as this.


The social networking bubble continues to baffle me, and I would concur with the views of Forrester’s Mulpuru about the valuation being applied to Groupon.


From an Irish corporate perspective, I note that shares in PetroNeft continue to drift after its disappointing operations update, following which Goodbody cut its NAV valuation (from 81.9p to 77.5p) and 2011 production (3.9k to 3.4k/day) forecasts.  I’ve been a shareholder in this stock for some time, and while I think it’s very cheap when measured on an EV/BOE basis, I can see from the share price that I’m not alone in being disappointed by poor production levels. Hopefully we’ll see improving output trends later on in the year.


Staying with corporate Ireland, I was pleased to see that the Irish Stock Exchange is to see its first new listing since – I believe – Merrion Pharma joined the market in December 2007. Continental Farmers Group counts Origin Enterprises plc as its largest shareholder and the board contains heavy hitters such as Peter Priestley and former UK Foreign Secretary Malcolm Rifkind. Given the structural drivers around the agri sector and with Origin’s agronomy expertise underpinning its assets, it looks like an interesting addition to the ESM. One to definitely keep an eye on.


I’m afraid to click on any links to stories relating to the Irish banks at the best of times, but this one is an important read.


And for the final corporate Ireland update, I note positive noises from Kingfisher and Michelmersh about Poland and the UK respectively, which bode well for CRH’s operations in those markets (Disclaimer: I’m a shareholder in CRH).


Finally, this is surreal – a James Bond parody featuring Tessa Jowell, Wikipedia’s Jimmy Wales & Ocado’s Jason Gissing

Market Musings 15/04/11

with one comment

It’s been a case of “as you were” since my last blog earlier this week, with the same narrative running through to today. Despite the narrative being a bearish one, I view this as positive, as it’s reassuring to see the market play out just as you expect it to. We’ve seen more wobbles on the commodity side as Goldman Sachs continue to reiterate their negative call on commodity prices. We’ve also seen further concerning data from the BRICs which strengthens my conviction that those are not markets to play for now. I have taken some money off the table, selling one of my “core holdings”, but I don’t see a compelling reason to top up any of my “trading positions” just yet.

(Disclaimer: I am a shareholder in Ryanair) The sector that will benefit the most from a sliding oil price is of course the airline sector. West Texas Crude fell 4.1% between the start of the week and last night’s close, and this has had a corresponding benefit on the likes of Aer Lingus (+8.8% in the same period) and Ryanair (+2.1%). The negative noises around the oil price and the world economy give me confidence that Ireland’s two listed airlines will outperform over the coming months.

Anyone who reads the papers knows that the US economy is very sick. Forecasters are downgrading their expectations for the US economy, which in turn will lead to downgrades for earnings estimates for stocks. These downgrades could well see global markets retrench over the quiet summer months. In my last Business & Finance article I asked if this is going to be a year where the old adage – “Sell in May and go away” applies. I suspect it will be. The US budget deal was heralded by those lacking in intellectual curiosity as a “historic agreement”.  But that’s just garbage. The amount of money the deal aims to save is $38.5bn. The US deficit over the past 12 months was $1.4trn. Complete drop in the ocean stuff. Citigroup takes up this narrative, warning on the prospects for the US dollar.

There was similar economic madness from the Irish authorities. The Minister for Public Expenditure and Reform, Brendan Howlin, said that the “stimulus” package his government is planning may be funded through higher taxes. In reality, the only thing that higher taxes will stimulate is higher unemployment.

The BRIC economies continue to cause concern for me. Especially China. I’ve previously banged the drum about the 64m empty apartments in the country, which makes Ireland’s property bubble look like “a modest overhang”. You can now add collapsing car sales and soaring inflation to the mix of things that make me bearish on China. Oh, and I almost forgot – to add to my narrative on the Chinese property market, Moody’s lowered its outlook for China’s property sector from “stable” to “negative”, saying that sales could fall as much as 30%.

Europe is still seeing severe problems, especially on the periphery. During the week the Greek 10 year bond yield went above 13% for the first time, with its spread over bunds at a Euro-era record. In an effort to address this lack of confidence, Greece plans to sell assets and cut spending, but will not restructure its debts.

The ratings agencies get little by way of enthusiasm here given their form for “closing the stable door after the horse has bolted”. However, Fitch’s decision to downgrade its ratings on Libya by three levels amused me given that Libya has no sovereign debt.

Bank of Ireland released full-year results, and while the absence of any detail on its capital raising means that many investors will wait on the sidelines until this is clarified, I was struck by the different trends it’s seeing relative to AIB. Firstly, BKIR’s deposits have been stable since November (AIB is still seeing outflows). Secondly, BKIR’s “challenged loans” were down sequentially in H2 2010, while AIB’s “criticised loans” were up sequentially in the same period. Thirdly, BKIR’s “impaired loans” stand at 9.2% (from 7.1% in H1), versus AIB’s, which are rising at a much faster rate – to 12.9% in H2 2010 (from 8.4% in H1).

Overall, very troubling macro developments. I suspect we’re in for a choppy few months in the markets.

Written by Philip O'Sullivan

April 15, 2011 at 10:46 am

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