Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘France Telecom

Market Musings 15/9/2012

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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.

 

Elsewhere in the TMT space, Johnston Press has reportedly delayed its relaunch programme. You can read my recent piece on the firm here.

 

(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).

 

In the blogosphere, Lewis profiled Impellam. Elsewhere, John took a good look at Rolls-Royce.

Written by Philip O'Sullivan

September 15, 2012 at 12:01 pm

Market Musings 31/8/2012

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(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!

Written by Philip O'Sullivan

August 31, 2012 at 8:06 am

Market Musings 27/7/2012

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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.

 

(Disclaimer: I am a shareholder in Marston’s plc) UK pub group Marston’s released a solid trading update, which revealed a satisfactory performance despite the recent wet weather.

 

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.

Market Musings 18/7/2012

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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 positionthe 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.

Written by Philip O'Sullivan

July 18, 2012 at 8:48 am

Market Musings 20/6/2012

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(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.

 

Meanwhile, the US Navy is spending $42bn on a new class of aircraft carriers.

Written by Philip O'Sullivan

June 20, 2012 at 9:09 am

Market Musings 19/6/2012

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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).

Written by Philip O'Sullivan

June 19, 2012 at 7:52 am

Market Musings 13/6/2012

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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.

Market Musings 7/6/2012

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Markets have been extremely volatile in recent days due to a combination of ratings agency downgrades, dodgy economic signs and a view by some investors (this one included) that the worse things get from a macro perspective, the more likely it will be that Central Banks introduce further quantitative easing.

 

This brings to mind something that I have been meaning to mention for a while – I often get queries from people about “what my X month price target for XYZ stock is”. The simple truth is that nobody, except perhaps a market maker in the most illiquid of stocks, has a clue about what price a stock will be trading at tomorrow, let alone in a few months. In a world where we cannot rely on meteorologists to call tomorrow’s weather with 100% accuracy, it would be ill-advised to have that degree of confidence in someone who pontificates on the equity markets! For the record, whenever I express a ‘price target’ for a company, this is my estimate of the underlying equity value of the company, as opposed to a target I see it hitting in any specific timeframe. This is especially true in the current environment, where markets oscillate violently between ‘risk-on’ and ‘risk-off’. All I can do is stick to my central thesis for this year, which I wrote back in December, and which I see no reason to change, given how my thesis, shown below, has played out so far:

 

Looking ahead to [2012], I see no grounds to assume that the macro situation will be materially different to that which we saw in 2011. Sclerotic growth across the leading Western economies, limited credit availability, rising unemployment, political uncertainty and austerity are all likely to be key themes over the coming 12 months. Added to the mix is likely to be a pronounced deterioration in the Chinese economy. I am gravely concerned at the rise in economic nationalism and see further policy incoherence at a European level as countries pull in different directions. However, my sense is that the euro will survive, given that its failure would lead to a deep and prolonged depression on a scale not seen for close to a century. That said, its survival will come at the expense of a weaker euro as monetary policy here is loosened to ensure its survival (given the lack of political consensus on how to fix the issue, I don’t see a solution that doesn’t involve some form of quantitative easing).

 

For me there are five key tactics to mitigate against this pressure:

 

  1. Choose firms with strong balance sheets
  2. Choose defensives over cyclicals
  3. Choose firms with significant exposure to markets outside of the Eurozone
  4. Hedge against inflationary pressures / political risk
  5. Choose firms with attractive and well-covered dividends.

 

Moving on to corporate news, Dragon Oil, which I traded in-and-out of earlier this year, announced a $200m share buyback. Opinions vary on this move. Steve Markus, who I have great respect for, and who is a must-follow on Twitter, said he: “would rather have the cash!” I wonder if more shareholder value would have been delivered had Dragon cast an eye at some of the financially constrained smallcaps (particularly some of the ones you can find on AIM) that are trading at bargain basement prices. Another Irish listed oil stock, Tullow Oil, reported a chunky (31m of net pay) oil find offshore Côte d’Ivoire.

 

(Disclaimer: I am a shareholder in Ryanair plc) We had a lot of news from the airline sector. Aer Lingus released its latest traffic statistics this morning. These were unambiguously good numbers, with load factors +2.9ppt and flown passengers +2.4ppt. I was particularly impressed by the 12.7% rise in long-haul (transatlantic) passengers, a factor of the 10.5% increase in RPKs. Another Irish airline reporting a rise in passenger numbers was Ryanair, which revealed a 5% yoy increase to 7.51m in May, bringing Ryanair’s total number of passengers carried over the past 12 months to 76.6m.

 

In other airline sector news, it was reported today that Kerry Airport’s revenues fell 40% last year. Credit is due to local management, who, demonstrating the county’s well-earned (I may be showing my Cork bias here!) reputation for parsimony cut administration costs by an admirable 35% in response.  Some months ago I wrote of the need for airports in the south and west of Ireland to consolidate, and even after the government’s decision to cease funding for Galway and Sligo Airports I wonder if they’ll be the last to see their government support pulled. Indeed, in this regard I was interested to also read today that Spain is to at least partially close 30 of its 47 State run airports.

 

In the construction space, Grafton put Irish DIY chain Atlantic Homecare into examinership. This is a smart move by management as it should allow it to close underperforming stores and save on the rent bill.

 

(Disclaimer: I am a shareholder in France Telecom plc and Independent News & Media plc) In the TMT sector, France Telecom’s unions were unsuccessful in their moves to force a dividend cut. However, I fear that this may prove to be round one in this battle, given the potential for increased political interference in the company, a concern I’ve previously noted.  In other TMT sector news, it was confirmed that Dermot Desmond has increased his stake in Independent News & Media ahead of tomorrow’s AGM. With yet another INM non-exec confirming their resignation, it will be interesting to see what new faces are co-opted to fill the gaps on the board after a wave of recent departures.

Written by Philip O'Sullivan

June 7, 2012 at 7:38 pm

Market Musings 26/5/2012

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It’s been more or less all about the macro picture since my last update.

 

(Disclaimer: I am a shareholder in Ryanair plc) DAA, which operates Dublin, Cork and Shannon Airports (which collectively handle 96% of all air traffic into the Republic of Ireland) released its 2011 annual report. Total passenger numbers rose 1% last year (to 22.7m), a welcome rise after two successive years of 13% annual declines. Within the statement, the commentary from the CEO starkly illustrated the importance of Aer Lingus (including Aer Lingus Regional) and Ryanair to air travel into Ireland. The two Irish listed airlines in total commanded an 80% market share at Dublin Airport (AL 41%, RYA 39%), an 84% market share at Cork Airport (AL 56%, RYA 28%) and a 64% market share at Shannon Airport (AL 36%, RYA 28%).

 

(Disclaimer: I am a shareholder in France Telecom plc) Reuters ran an interesting article that said some European phone companies are cutting back on handset subsidies for their customers. It cited research by Bernstein which said European telcos spent €13bn on such subsidies in 2011, more than they invested in infrastructure during the year. My only telco holding is France Telecom, and while the article doesn’t suggest that it is minded to jump on this bandwagon (quite the opposite) I hope it has a change of heart, not least given recent guidance that it will miss its medium-term cash generation targets.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc) I was pleased to see that Harris has increased its stake in Bank of Ireland by over 100 million shares. While the amount of money involved (~€10m) is not particularly significant for Harris, it nonetheless is a welcome vote of confidence at a time when nervousness around the PIIGS is understandably elevated.

 

Staying with the financial sector, there were a couple of interesting publications on the Irish housing market in recent days. NCB released a report entitled: Is the decline in Irish house prices over? which projected a further decline in national house prices of up to 20%, but noted wide regional differences – the scenario sketched on pages 7 and 8 says that it could take up to eleven and a half years to clear the stock of excess housing units in the border region. Elsewhere, the CSO said that residential prices in the Dublin market rose 0.5% month-on-month in April, a second consecutive month of gains, while residential prices outside of Dublin declined 2.0% mom – the 20th consecutive monthly decline. All of that brought to mind the regional variances I noted in the report I wrote for Daft.ie last year – A Tale of Two Irelands. Yesterday the Central Bank released its latest mortgage arrears data (for Q1 2012) which show that 1 in 10 mortgages (by volume) are in arrears, while a further 5% of all mortgages have been restructured (and are not in arrears). There doesn’t appear to be much of a slowdown in the pace of arrears growth – 7.2% of all mortgages were in arrears at the end of Q2 2011, 8.1% in Q3 2011, 9.2% in Q4 2011 and 10.2% at the end of Q1 2012. Thus far the CSO says that residential property prices have fallen from peak levels by 57% in Dublin and by 47% in the rest of Ireland. However, these reports suggest to me that the rest of Ireland might play catch-up over the coming quarters.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Someone posted an interesting comment on my case study on Independent News & Media  the other day which I thought I should highlight here given that it raises some good points:

 

Hi Philip,

Thanks for the article above, I enjoyed reading it. I am only new to the markets really and am trying to learn as much as I can so please excuse any stupid questions. I was wondering if you feel that another rights issue might be on the agenda for INM in order to further ease the debt situation? I have read of this being a possibility lately and this would make me worry about an investment here. On the other hand I am very tempted to buy when I look at the revenue streams & other assets (APN & S.A).

Also, do you have any views on the impact of Denis O’Brien’s recent purchases (up to 29.9%) of INM and what this may mean for the company?

 

To take those queries in turn – while INM’s debt position is somewhat troubling – net debt/EBITDA was a chunky 4.2x at the end of FY11 – I don’t see a rights issue on the agenda at the moment given: (i) the headroom it has before its debt maturity (May 2014 – although the group understandably wants to refinance before then); (ii) its compliance with covenants; (iii) its depressed share price; and (iv) as you rightly point out, the ‘levers’ INM has in terms of selling other assets. The group has exited India and Britain in recent years, and I’ve long argued here that it should sell APN News & Media, which would transform its balance sheet (net debt / EBITDA would drop to only 2.7x under one scenario I have outlined). Finally, I have no view on the impact of Denis O’Brien or indeed any other individual investor, given that I’m in no position to know what his precise intentions for the group are.

 

In the blogosphere, Lewis continued his valuable series of posts on UK plcs with a feature on listed pawnbroker H&T and a look at the lessons he learned from his holding in Morson, which has just received a takeover approach from its largest shareholder.  His concluding line from the Morson piece – “it’s the losses that are teaching me the most throughout this blogging process” – while wince-inducing, is something that I would endorse. Any fool can make money in a rising market, but it takes skill and plenty of experience of both good times and bad to navigate more challenging conditions.

 

Finally, did you know that 1 in 5 McDonald’s hamburgers consumed in Europe are made with Irish beef? Or that the British motor insurance industry has suffered underwriting losses in each of the past 17 years?

Written by Philip O'Sullivan

May 26, 2012 at 6:28 am

Market Musings 9/5/2012

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Since my last update markets have been rocky on the back of election results in France and Greece in particular. Notwithstanding this present volatility, however, I don’t see this as a game-changer, given that Hollande was the front-runner for the French presidency for quite some time before the election, while Greece has for so long been anything but well-behaved that the election of a large number of cranks to its parliament is unlikely to result in any deviation from the Hellenic Republic’s recent record when it comes to compliance with sound economic policies. What the pullback in the market means for me, if anything, is that some of the stocks I was looking to buy are now more attractively priced, but more on this anon.

 

(Disclaimer: I am a shareholder in CRH plc) We got an interim management statement this morning from CRH. I, and indeed all of the brokers whose preview notes I saw ahead of this announcement, had expected the company to guide that H1 EBITDA would increase compared to year-earlier levels on the back of improving trends in North America and the benefits of cost take-out programmes. In the event, the company is guiding “overall EBITDA in the less significant first half of the year to be close to last year’s level”. While the firm is sticking with its “overall like-for-like sales growth in 2012 and a year of progress for CRH” full-year guidance, I think this is a disappointing statement in light of more upbeat releases from peers in recent times. Other points of note within the statement include: (i) Regional performance as expected, with “a firmer tone in construction markets in the United States” and a weaker economic backdrop in Europe; and (ii) Development spend appears somewhat underwhelming – CRH said it spent €230m on 13 acquisitions and investments in the year to date. This compares with the €186m spent in H12011. Given CRH’s strong balance sheet, I would have hoped that the company would have stepped up its development spend more significantly by now. Overall, I see little in this statement to get enthusiastic about.

 

Elsewhere, United Drug issued its H1 numbers this morning. Going into it I had expected the group to have faced headwinds due to the impact of healthcare cutbacks, in the event the group unveiled a robust performance, achieving both topline growth and an impressive (8%) increase in earnings per share. Management is sticking to its full-year guidance of 4-8% growth in EPS, but given the H1 performance I suspect the risks to United Drug’s numbers lie to the upside.

 

Tullow Oil saw its share price close up over 3% yesterday on the back of a chunky oil discovery in Kenya. The company’s strike rate when it comes to finding new resources is to my knowledge unparalleled in the industry, and  is a testament to the outstanding team built around exploration director Angus McCoss.

 

(Disclaimer: I am a shareholder in BP plc) Speaking of oil stocks, I followed through on my recent commitment to add to my sterling denominated assets and I doubled my position in BP at 420p yesterday. While I appreciate that the oil price is under pressure at this time, for me I think there is a hell of a lot of downside risk priced into BP at these levels (just under 6x PE), while the prospective dividend yield of 5.4% is particularly attractive relative to the poor returns presently available from traditional ‘income assets’.

 

One of my Twitter ‘followers’ asked me if I was concerned about the FX risk after I loaded up on BP shares yesterday. I replied that I was bearish on the euro both in the short-term (due to the market’s nervousness around France, Greece and Ireland) and the long-term (due to growing policy incoherence at the EU level as more and more of the architects of the present strategy are being rejected at the ballot box). For this reason I’ve been buying exposure to sterling both through equities and by moving cash from euro into sterling.

 

(Disclaimer: I am a shareholder in RBS plc) Following its recent Q1 results, RBS CEO Stephen Hester gave an interview that contained a few interesting nuggets. I have to say I’m really getting a sense that the bank has turned the corner, as illustrated by some of Hester’s comments in that clip.

 

(Disclaimer: I am a shareholder in France Telecom plc) In the telco space, Mexican billionaire Carlos Slim’s America Movil bid to raise its stake in Holland’s KPN. With Hutchison Whampoa reportedly prowling round Ireland’s eircom, not long after it bought Orange Austria from France Telecom, who also sold Orange Suisse to private equity firm Apax, this pick-up in M&A activity is presumably bullish for sector valuations. France Telecom is trading at a small discount to my valuation on the company, and I am monitoring the share price closely with a view to exiting the position. Hopefully these developments mean that I can escape from it sooner rather than later!

 

In the macro space, the Adam Smith Institute, which is one of my favourite think tanks, happened upon this great chart which illustrates that Ireland is not the only country in Europe where many politicians and media commentators talk of ‘austerity’, while in reality government spending is in fact little changed compared to the past couple of years.

Written by Philip O'Sullivan

May 9, 2012 at 7:36 am

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