Posts Tagged ‘France Telecom’
It’s been an eventful few days since my last ‘general’ round-up on what’s been happening in the markets, with the Federal Reserve further opening the monetary sluices and continued positive developments around Ireland Inc (a well received sale of bills, positive noises from the IMF, soaring bond prices etc.)
For me, the central message to take from these markets at this time is that the monetary authorities on both sides of the Atlantic stand ready to do ‘whatever it takes‘ on the policy front. This is unambiguously bullish for a number of asset classes, in particular equities (in general) and commodities (including gold, which I’ve been a bull on for some time), however, it also has other consequences that are worth bearing in mind. While the growth outlook is concern enough in itself, the main overall threat in the system (in my view) remains on the prices front, as an enthralling battle takes place between the forces of inflation (central banks’ printing presses) and deflation (private sector deleveraging). Which force is likely to prevail? The old rule of “Don’t bet against the Fed” comes to mind. This to my mind puts the onus on investors to position themselves accordingly. We have seen from the share price reactions to Helicopter Ben’s latest move how they should do this, with mining stocks (e.g. commodity plays) surging, financials pushing higher (anything that pushes up asset prices a positive, while the funding outlook is improved) and a lift in those highly leveraged stocks operating well within covenants and who may take the opportunity to refinance at even lower rates as yields are pushed down elsewhere by central bank intervention (a good example being Smurfit Kappa Group, which I hold, whose balance sheet is to my mind still very much misunderstood by the market, and which rose 13% on 11 times average daily volume in Dublin yesterday as more investors wake up to to the story). Of course, it is also worth bearing in mind that higher commodity prices are likely to hurt a lot of stocks that are price takers on the input side and who will struggle, due to the tough economic backdrop, to pass on higher input prices to consumers.
In terms of my own response to all of this, I have been stepping up my exposure to financials, trebling my stake in Bank of Ireland and significantly increasing my exposure to RBS (which is now my third-largest portfolio position). The recent surge in the value of Irish government bonds prompted my Bank of Ireland move, given that BKIR held €5,945m worth of them at the end of June (up to €1.5bn of which were acquired following the LTRO earlier this year). As the notes to BKIR’s interim results show (see page 99), the vast majority of these are in the books on a ‘Level 1’ fair value basis, i.e. “valued using quoted market prices in active markets”. Given the recent lift in Irish bond prices, this should have a positive impact on Bank of Ireland’s NAV, given that “any change in fair value is treated as a movement in the [available for sale] reserve in Stockholder’s equity”. Elsewhere, in the case of RBS, the IPO of its Direct Line business and recent moves towards agreeing financial settlements for Libor and IT issues indicate that the narrative around the group may be about to radically shift, as I noted in a recent blog post.
(Disclaimer: I am a shareholder in Datalex plc) In other news, travel software company Datalex confirmed that interim CEO Aidan Brogan is to get the job on a permanent basis. This is a sensible decision. Aidan has been with the firm for almost 20 years, and his strong background in sales is likely to help Datalex build on its growing list of clients.
(Disclaimer: I am a shareholder in France Telecom plc) And in other TMT news, the team in aviate came up with an interesting angle on Apple’s latest toy, namely that “in the European launch only Deutsche Telkom and France Telecom were given the hallowed LTE version of the iPhone 5“. I must confess that what I know about ‘fashionable’ mobile phones could fit on the back of a postage stamp, so hopefully one of my kind readers will let me know if this is a significant advantage over other carriers or not!
In the energy sector, consolidation has been a big theme this year, as cash-rich majors have snapped up financially constrained small cap names with proven resources. This clip suggests that the trend has further to run (and indeed, assuming the latest QE moves push up oil prices, this will provide the large caps with even more cash to play around with).
(Disclaimer: I am a shareholder in Irish Continental Group plc) The main news since my last update has been around ICG, whose shares have surged on the back of the announcement of a tender offer pitched at €18.50, or circa 15% above where they closed at on Wednesday. This announcement was contained in its interim results release, which revealed a resilient performance despite the macro headwinds. Revenues were flat, while good work on the cost side meant that EBITDA was only down €1.8m year-on-year in spite of a €4.5m increase in fuel costs. The company is also putting its balance sheet to work with its €111.5m tender offer, which I’m guessing should put net debt / EBITDA at circa 2x by the end of next year, so still undemanding. ICG has also announced the disposal of its Feederlink business for up to €29m, which looks like a great deal – 16x PBT. In all, yesterday’s news reaffirms my view on ICG – a very attractive business model (effectively a duopoly with Stena on the Irish Sea) with potent barriers to entry (capital, control of key port slots and other infrastructure), very strong cashflow generation with no major medium term capex requirements, huge operating leverage benefits once an eventual Irish recovery emerges and a fat dividend to boot.
Elsewhere, Kentz released good H1 results, with revenue +9%, PBT +36%, net cash +36% (to $241m) while its backlog, at $2.54bn, is up 6% in the year to date. I’ve bought and sold Kentz before and would definitely consider putting it back into the portfolio at some stage – it’s a very well-managed business that is plugged into an area with buoyant long-term growth prospects where the long-term nature of work projects provides good visibility on revenues.
Switching to TMT stocks, betting software group Playtech released its H1 results yesterday morning, which revealed a very strong performance. It’s a stock I used to hold but which I sold on corporate governance grounds, which is a pity as I like the structural growth story around the sector, but not enough to hold a stock that has given me plenty of sleepless nights in the past!
(Disclaimer: I am a shareholder in Independent News & Media plc) INM released its interim results this morning. These revealed a 26% decline in operating profits to €25.4m on revenues that were 4% lower at €272.2m. Trading conditions are, unsurprisingly, described as ‘difficult’. I was, however, surprised by the sluggish progress on the deleveraging front. Net debt fell by €3.5m, or less than 1%, since the start of the year. Led by the drop in profitability, free cash flow halved to €12.7m (H1 2011: €23.0m), but most of this was eaten up by cash exceptional items. INM’s retirement benefit obligations widened to €187.8m by the end of June, from €147.0m at the end of 2011. A potential sale of its South African business would significantly improve INM’s balance sheet and save millions in annual interest costs, and on that note I was pleased to see the group confirm in the presentation accompanying the results that it has received 2 bids for that unit. In all, there is little to get exited about from this release. INM is under pressure due to the tough macro conditions, while its high leverage ratchets up the risks around the company. That is not to say that catalysts for a re-rating are difficult to identify. These include a sale (on reasonable terms) of the South Africa business, a recovery in its 30% owned associate APN’s share price, a resolution of its pension issues and an improvement in advertising conditions. However, identification and successful execution are, clearly, two different things, so I’m disinclined to increase my stake in INM (currently 120bps of my portfolio) for the time being at least.
(Disclaimer: I am a shareholder in France Telecom plc) There was further disappointing news from the French telecom sector, with Bouygues revealing that its profits in that area have sunk due to intense price competition from the new entrant, Iliad (whose results this morning have come in ahead of expectations). France Telecom is also being impacted by this pressure, but the impact is somewhat mitigated by Iliad’s use of FTE’s network. Speaking of FTE’s network, the group’s chairman was quoted by Reuters as saying they are in preliminary discussions with rivals about sharing 3G networks to reduce costs, which would be a welcome move.
Finally, smallcap financial IFG released its interim results today. These revealed a deterioration in profits in its continuing businesses, with UK profits falling due to falling SIPP volumes, investment in risk and compliance, and challenging conditions in the IFA space, while losses in Ireland have widened due to difficult economic conditions. The operating performance is, however, overshadowed by news of a £30m share buyback, which adds IFG to a growing list of firms (CPL, Abbey, Ryanair etc.) here that have launched similar measures in recent times. If only our plcs had the confidence to invest in growing their businesses through acquisition / greenfield initiatives that would (if done properly) augment their growth potential instead of engaging in de-equitisation. Oh well!
Blogging has been extremely light as I’m in the final stages of an internship as part of my MBA studies. However, newsflow has been anything but light! So, this blog represents a catch-up on what has caught my eye whenever I’ve been able to find the time to track what’s been happening in the markets this week.
(Disclaimer: I am a shareholder in Allied Irish Banks plc and PTSB plc) There was a lot of news out of the Irish financials this week. AIB released its interim results this morning. Overall, AIB has made good progress on deleveraging and deposits, but more work is needed on margins and costs. To take those in turn, I was encouraged to see that the LDR has improved by 13 percentage points to 125% since the start of the year, helped by €3bn of deposit inflows and non-core loanbook disposals. However, the net interest margin has worsened to 1.24% (pre-ELG) from the 1.36% seen in H12011. Hence, it was no surprise to hear management guide that it will raise mortgage rates in the autumn. As things stand, AIB is currently loss-making before even taking provisions into account, and the group will have to address this through a combination of rate hikes and cost take-out measures. Elsewhere, PTSB revealed further details on its restructuring plans, but given its limited new lending ability and shrinking presence in the market I can’t see it being anything other than a marginal player for quite some time to come.
In the energy sector Providence Resources released an exciting update in which it revealed that there may be up to 1.6bn barrels of oil at its Barryroe Field, offshore Cork. Obviously it’s early days yet with this discovery, but it’s a stock that merits taking a look at. Once I’ve completed my internship it’s on my list of stocks to look at in more detail. Elsewhere, its Irish peer Tullow Oil released H1 results that contained few surprises given the level of detail provided in its recent trading update.
Sticking with food and beverage stocks, Glanbia announced the $60m acquisition of a US beverage firm, which looks a perfect fit for its nutrition operations. This is another example of Glanbia’s successful forward integration strategy, which looks well placed to deliver strong returns over time.
Another Irish firm on the M&A prowl was United Drug, which acquired a German headquartered contract sales outsourcing firm for €35m, which will fit well within its existing Sales, Marketing & Medical division. An EV/Sales multiple of 0.23x is undemanding for a firm like this, so it looks a good deal to me.
(Disclaimer: I am a shareholder in Ryanair plc) Low-cost carrier Easyjet upped its PBT guidance, despite euro weakness, to a range of 280-300m. Prior to that the consensus was £272m. I assume the read-through from this for Ryanair, which reports numbers on Monday, is positive given that the euro weakness is near-term bullish for it (it generates a third of revenues from the UK, while it hedges its fuel and related USD exposures).
In the construction space, UK builders merchant group Travis Perkins’ interim results revealed a slowing performance in Q2. Management doesn’t see growth returning until 2014, so it’s not a sector I see a pressing need to gain exposure to anytime soon.
(Disclaimer: I am a shareholder in France Telecom plc) There was a lot of news in the telecoms sector. Spain’s Telefonica followed the lead of KPN and cut its dividend. France Telecom released its interim results, in which the firm reiterated its full-year cashflow targets, which is somewhat reassuring. France Telecom is a stock I’ve been negative on for some time and which I am looking to exit in the near future due to its inflexible cost base, intense competitive pressures in its home market and my fear that it will cut its dividend.
In the media space UTV announced that it has broadened its partnership with the English Football Association to broadcast rights around the FA Cup, Charity Shield and selected England internationals.
Ireland’s Central Statistics Office released its latest data on Irish house prices, which provide few grounds for optimism. While a lot of the recent media commentary has focused on monthly moves, I prefer to look at prices on an annual basis, given that month-on-month moves can be distorted by the small number of transactions happening in the market at this time. The latest data show that Irish house prices declined by 14.4% year-on-year in June 2012. This is a fall of a greater magnitude than what we saw in June 2011 (-12.9% yoy) and June 2010 (-12.4% yoy). The picture in Dublin is even worse (prices -16.4% yoy in June 2012) which is particularly concerning given that the capital will lead the eventual recovery in Irish house prices (due to much tighter supply and it being the economic heart of the country). Overall, I reaffirm my view from last month, namely that I don’t see any obvious catalyst for a sustained improvement in Irish property prices in the near term.
One of the most interesting developments since my last update has been the number of European countries with negative bond yields. This has been explained as a flight to safety mixed with a currency play, but to me it represents more of a delusion of safety, given that many large European non-financial corporates, which are sitting on a mountain of cash, can offer investors the same currency exposure, a much higher yield and a stronger balance sheet than many sovereigns. Should there be any shift in sentiment away from ‘defensive’ assets such as European government bonds and towards equities, I think stock markets could push significantly higher from here as investors scramble to escape from what to me (and others) looks like a bubble in the bond market.
(Disclaimer: I am a shareholder in Allied Irish Banks plc) Following on from recent similar moves by its local peers, AIB announced that deposits gathered in the UK will no longer fall under the Irish government’s guarantee scheme. This is a welcome move for AIB as it will lower costs, but it is a less positive development for Ireland’s fiscal position – the State raised €547m from ELG fees in the first 6 months of 2012.
(Disclaimer: I am a shareholder in Ryanair plc) There were a few developments in recent days around Ryanair’s takeover approach for Aer Lingus. Firstly, Europe’s largest LCC posted its offer document for the Irish flag carrier, which contained few surprises. Then the Irish Transport Minister said the government would review the bid based on four criteria, while this morning Aer Lingus rejected the offer, citing both competition and valuation grounds. With Aer Lingus this morning trading on an 18% discount to Ryanair’s bid price, the market continues to indicate a low probability of success for this approach.
(Disclaimer: I am a shareholder in France Telecom plc) There were some extraordinary developments in France yesterday, with the new government indicating that it is looking to block telecoms companies from laying off workers despite sliding revenues (Bouyges Telecom guides -10% this year, SFR expects revenues to weaken further after last year’s 3% decline, France Telecom sees average revenue -10% this year). Blocking companies from being able to right-size costs while allowing them be undercut by new entrants is a recipe for disaster.
The protracted takeover battle for Cove Energy appears to have reached the endpoint, with PTT winning out over Royal Dutch Shell.
In the blogosphere, Lewis has been furthering his knowledge of the UK motor retail sector, profiling Vertu.
And that’s about it in terms of what’s grabbed my attention since my last update! The main scheduled newsflow to watch out for here over the remainder of the week is DCC’s interim management statement on Friday, which I suspect should be pretty good due to the unusually poor weather we’ve been having in this part of the world.
(Disclaimer: I am a shareholder in Ryanair plc) The main news since my last blog has been Ryanair’s €1.30/share indicative offer for Aer Lingus. The approach, which values AERL at €694m, marks the third time Europe’s biggest LCC has made an approach for the Irish flag carrier. At the time of writing Aer Lingus shares have risen 22% to €1.15, which is 11% below the indicated bid price from Ryanair, which suggests that the market is not convinced that Ryanair has a high chance of succeeding in this move.
In terms of possible motives for this development, there are a number which come to mind. These include: (i) A sincere move by Ryanair to secure a dominant presence in the Irish market (as I recently noted, the combined RYA-AERL share at the three main airports – which handle 96% of all air traffic in and out of Ireland – here is well over 70%); (ii) A move to force Etihad, which recently revealed that it has a near-3% stake in Aer Lingus, to counter-bid for the government’s 25% stake in the carrier (as a non-EU airline Etihad cannot own more than 49.9% of Aer Lingus); (iii) A move to scare Etihad out of increasing its stake in AERL, by reminding it that Ryanair’s 29.8% stake in Aer Lingus is enough to block special resolutions at AGMs and EGMs; (iv) Mischief-making by O’Leary, which may sound ridiculous but then again making an approach for a firm with a significant potential pension issue (of sorts) is an unusual move; (v) a possible move to frustrate the Competition Commission investigation into its AERL stake and/or (vi) O’Leary views the acquisition of AERL as a key part of his entry strategy onto the Transatlantic market, which he has long talked about entering.
From my perspective as a shareholder in RYA, I would prefer if the carrier doesn’t pursue this course of action. It has considerable scope to grow organically within the European market, where it has only an 11% share, armed with a proven business model in a competitive landscape where several airlines have gone bust in the year to date and many others are constrained by stretched balance sheets, tough economic conditions and still elevated (despite the recent drop) oil prices. I don’t see the strategic rationale of adding a carrier with a fundamentally different business model to Ryanair.
(Disclaimer: I am a shareholder in France Telecom plc) I was dismayed to read that France is considering the introduction of a dividend tax, which is likely to hit big payout companies such as France Telecom. I’m philosophically opposed to such measures in general, given that they amount to double taxation, which along with similar measures such as the taxation of interest income they also serve to discourage savings and investments, at a time when ageing populations mean that Western governments should be doing more to encourage people to provide for the future. From a specific FTE perspective, it also reduces further the attraction of holding the stock, and it remains a position that I will look to exit in the short term.
(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) Newspaper publisher Johnston Press is to close one of its Irish regional titles, the Offaly Express newspaper. I’ve previously noted that profitable publishers such as INM and TNI are likely to gain market share as more ‘financially challenged’ peers close titles.
(Disclaimer: I am a shareholder in Bank of Ireland plc) Bank of Ireland this morning announced, as expected, the appointment of Archie Kane as its new Governor (Chairman). It also announced that heavyweight investors Wilbur Ross and Prem Watsa would be joining the board, which is a welcome move given their considerable experience will no doubt prove a big help for the board.
This is a scary (if predictable) chart – ECB lending by country.
A big placing and reassuring company updates have given me plenty to contemplate since my last update.
(Disclaimer: I am a shareholder in Irish Continental Group plc) The big news from an Irish corporate perspective since I last blogged was yesterday’s €50m placing in ICG. Irish investment group One51 offloaded its 3m shares at €14.50 apiece, which was a much smaller discount than I would have expected in these difficult markets, but this narrow discount may be explained by ICG picking up 700k of those shares. Not that this necessarily represents a poor deal for ICG – the 700k shares bought back and cancelled at a cost of €10m will save €700k a year in dividend payments, so a 7% annual cash ‘return’ and circa 3% uplift to EPS arising from the lower number of shares in issue looks like a tidy bit of business. It also removes an overhang on the share register, for as regular readers of this blog are aware, I had been expecting One51 to exit this holding for some time. In terms of my reaction to this development, I am closely monitoring the ICG share price with a view to finding a suitable entry level to add to my existing holding.
Turning to the energy sector, Kentz issued a solid trading update this morning just ahead of its analyst jolly / site visit (delete where applicable) to South Africa. The key takeaways are that the group is trading in line with its recently provided guidance, while reassuringly saying that its pipeline gives it visibility on projects out to 2015. At the time of writing the shares are up 7%, which given that there is no change to guidance suggests that there may be at least some short covering going on in Kentz this morning.
(Disclaimer: I am a shareholder in Bank of Ireland plc) Shareholders in Bank of Ireland, as expected, voted overwhelmingly in favour of the transaction with IBRC. This deal should net the group €38.7m in profits.
(Disclaimer: I am a shareholder in France Telecom plc) Following intense speculation of a private equity bid for France Telecom’s UK mobile joint venture, Everything Everywhere, management reaffirmed its support for retaining the brand. However, the media hasn’t yet given up on this story, so we’ll watch this space.
In the blogosphere, I was delighted to see that Paul ‘Paulypilot’ Scott has set up his own blog, which is well worth checking out, while elsewhere Lewis at Expecting Value did a write-up on chocolatier Thornton’s, which is not one for me (my UK consumer facing holdings, Tesco and Marston’s, are far better equipped in my view to get through the ongoing headwinds facing the British economy).
Since my last update Spain looks like it may shortly be joined by Cyprus in asking for a bailout, making it two more EU countries that have needed external assistance since Ireland voted yes to the “Stability” Treaty – I hope my country isn’t starting to become a contra-indicator!
(Disclaimer: I am a shareholder in Tesco plc) Tesco released its Q1 interim management statement earlier this week. While there was a lot of focus on the performance of individual markets, the bottom line is that Tesco is performing in line with market expectations and the outlook for the full-year remains unchanged. Across the group I was pleased to see an improvement in its Irish sales, which bodes well for the domestic economy here, while the slowdown in Tesco’s Chinese sales growth mirrors the well documented (not least on this blog) pressures in that market. In its key UK market, while conditions remain ‘challenging’, it was comforting to see management describe the performance there as being ‘as expected’. Overall, there’s little within the statement to alter my view on Tesco – it’s clearly going through a rough patch, but trading on less than 9x forward earnings and yielding 5%, and with a relatively strong balance sheet (net debt/EBITDAR was 2.84x at end-FY11) I see limited downside risk to the shares from here. Mind you, some investors have less patience than I, with some giving the CEO a mere 6 months to turn the UK performance around.
(Disclaimer: I am a shareholder in Bank of Ireland plc) We saw a positive update from Bank of Ireland earlier this morning, with the group announcing that it has sold another loan portfolio. To date the Bank is 97% of the way through its €10bn programme of divestments, and it is important to note that these sales have been completed within the PCAR base case assumptions. My recent case study on Bank of Ireland is here.
Structural steel firm Severfield-Rowen dropped a bit of a clanger earlier this week, warning on profits due to cost over-runs on two projects. It is worth noting that, those two mishaps aside, the group is sticking to guidance of a: “strong order book, anticipated full capacity utilisation and good project mix in both the UK and India”. As Severfield-Rowen is a leading indicator for the commercial real estate sector, this update is somewhat reassuring from a macro perspective.
(Disclaimer: I am a shareholder in France Telecom plc) I was interested to read that France Telecom is preparing to exercise its call option and buy out the other shareholders in video sharing site Dailymotion. Assuming I’m reading the Alexa data correctly, it’s the 99th most visited site in the world, so hopefully FTE will be able to monetise this asset to a level that more than warrants this investment.
(Disclaimer: I am a shareholder in Independent News & Media plc) In a further twist to the ongoing INM saga, the company has lost yet another non-executive director, with David Reid-Scott, who only joined the board in December, standing down. INM’s board now has only four directors on it – Denis O’Brien’s associates Paul Connolly and Lucy Gaffney, along with Frank Murray and CEO Vincent Crowley.
In other media sector news, UTV is one of three parties linked with possible bids for GMG (Guardian Media Group) Radio. A price of £40-45m has been suggested for the assets, which is ballpark 1x sales. According to the RAJAR figures provided on the GMG website, its two brands, Real and Smooth had 46.4m listening hours in Q1 2012, which is a roughly 4% share of all radio, but of course it’s important to note that the share of commercial radio (BBC doesn’t carry advertising) would be around 10%. This compares with commercial radio shares of circa 8% for UTV and 37% for Global. I’m no expert on competition issues around media ownership in the UK, but I’m guessing that UTV would find it significantly easier to get clearance for a takeover of GMG Radio than Global would. UTV, which has a net debt / EBITDA multiple of only 1.9x (at end-FY11 the net debt and EBITDA figures were £54.7m and £28.3m respectively) would have no difficulty in funding a takeover of GMG Radio.
In the energy sector, the wave of M&A activity we’ve seen since the start of 2012 has continued, with Cairn Energy agreeing a $644m takeover of Nautical Petroleum, which is focused on the North Sea. Indeed, that region is a particular area of focus, so whenever I have the time I must put together a comprehensive ‘who’s who’ list of players in that area.
(Disclaimer: I am a shareholder in Datalex plc) We saw a lot of news from the airline sector. EasyJet founder Stelios has teamed up with Lonrho to develop an African LCC, FastJet. Elsewhere, Bloomberg ran an interesting article about how traditional airline booking engine providers such as Sabre and Amadeus are seen by some as: “obsolete middlemen who add costs”. Sentiments like this could open up opportunities for nimble operators such as Irish listed Datalex plc to win over more customers to add to an already impressive client list.
Argentina’s banks have lost one-third of their US dollar deposits as savers take flight. This is a further consequence of the crazy economic policies being implemented by President Fernández de Kirchner, which I’ve been writing about for some time. One of the main beneficiaries of this is Uruguay – when I traveled to Montevideo last year I was struck by just how many international banks had operations in that town – and I was not surprised to read of rising concerns in Argentina’s political elite about this. Is it any wonder, given the political backdrop, that Argentine households with at least $100,000 in assets hold 74% of their wealth offshore, according to estimates by the Boston Consulting Group. And to think that some people in Ireland think that we should be emulating Argentina’s economic policies!
It’s not just Ireland that has seen these sort of trends – median US household net worth declined by 38% between 2007 and 2010.
Staying with macro news, James McKeigue, who writes for Moneyweek, wrote an interesting piece (which mirrors more than a few of the readings I did for the supply chain management module of my MBA) some time ago about how more Western firms are reshoring operations from China. He flagged a similar article in The Atlantic earlier this week.
Closer to home, ignoring the 230,000 vacant housing units that are in Ireland, local authorities in County Cork are planning a 5,000 home new town. Given the enormous oversupply of homes in Ireland at this time, you’d wonder how such plans would even make it on to the drawing board, much less be given serious consideration.
In the blogosphere, Lewis took a look at Hornby, beloved of model railway enthusiasts everywhere.