Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

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Market Musings 23/9/11

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College deadlines and Arthur’s Day both conspired to prevent me from updating this blog yesterday, which is a pity given the volume of interesting snippets that I’ve come across since Wednesday.


I was amused to see this philosophical take on the recent UK riots by the CEO of JD Sports:


As the riots showed, there is a strong demand for our products on the High Street

Long-term trends in alcohol consumption is something that has interested me in the past. We’ve seen traditional beers lose market share to spirits, cider and wine for many years now, which has clear implications for the likes of Guinness owner Diageo and Bulmers/Magners owner C&C. This chart from Mike McDonough shows that growth in wine spend in the US has outstripped beer over the past decade.


This is an interesting article – BT’s copper wiring is worth more than the group’s enterprise value.


Staying with the US, this is a very effective table explaining the US fiscal position in household budget terms. Elsewhere in the States, I note that unemployment among the over-55s stands at levels not seen for six decades.


Following on from my last blog, one of my readers sent me this link to some interesting pointers on “Full Tilt Ponzi“.


Turning to corporate newsflow, we saw some very strong results from Origin Enterprises yesterday. Earnings growth of 16% was well ahead of consensus of circa 10%. Origin’s outlook statement was more qualitative than quantitative, as you’d expect given its FY12 has only just started. However, it is clear that things are looking up for this company, which is perfectly placed to benefit from the positive conditions in the agri sector.


I note that Easyjet increased its full-year PBT guidance from £200-230m to £240-250m yesterday. The company also declared a £150m special dividend. From an Irish perspective there is obvious positive read-through for Ryanair’s quarterly results in November.


Speaking of upgrades, Goodbody Stockbrokers raised its forecast for Irish 2011 GDP growth from 0.5% to 1.3%, with the GNP forecast moving from -1.0% to 0%. This revision is solely down to net exports, with domestic demand remaining weak.


DCC announced a great deal in the energy space this morning, which will go a long way towards meeting its ambitions of securing 20% of the UK fuel market. Assuming that today’s acquisition and the previously announced Pace deal both secure regulatory approval, these will take the volume of fuel that DCC distributes each year to over 9bn litres. DCC has a consistent track record of delivering high returns from its energy business, and it is one of my preferred stocks at the moment.

Market Musings 21/9/11

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Since my last update we’ve seen alleged Ponzi schemes, gold bullion vaults that are running out of space, a deterioration in Ireland’s competitive position and quite a bit of Irish corporate newsflow.


Given the perilous state of public finances across the Western World, wholesale reform of welfare systems is something that is an inevitability, regardless of the ideological persuasion of governments. This chart by the always brilliant “Tyler Durden” (!) at Zerohedge gives a clue about the inverted welfare pyramid that is forming in developed economies as demographics turn nasty. RTE’s Emma McNamara tweeted the following this morning:


Irish Life’s Gerry Hassett: Workers to retirees 6:1 now; will be 2:1 in 20 years. 



…which goes to show that Ireland is no different. Speaking of Ireland, Ronan Lyons had an interesting piece on welfare spending yesterday. He identifies one way of saving €700m, but as is inferred by the opening paragraphs of his blogpost, Ireland needs an 11 digit fiscal adjustment, not a 9 digit one.


The Open Republic Institute collates Irish data for the Economic Freedom of the World report. It reveals that Ireland has plummeted 14 places in just a year to become only the 25th most free economy. This is a very worrying development, especially given the way FDI migrates to freer countries, and the way Ireland urgently needs more investment to kick-start the economy.


(Disclaimer: I’m a shareholder in PetroNeft plc). We got a good bit of newsflow from PetroNeft in the past 48 hours. Firstly, the company reported a mixed set of interim results yesterday, but it has followed this up with the announcement this morning that it has discovered a new oil field. For me, PetroNeft has been a Jekyll and Hyde story this year, with production undershooting but new discoveries seeing upward revisions to reserves. This isn’t as bad as it could be – I much prefer the way things are to, say, if PetroNeft was exceeding production targets but cutting estimates of its reserves! However, if management can iron out the production shortcomings we could see a big upward move in the share price (PetroNeft is ridiculously cheap on an EV/BOE basis). It’s a stock I’d definitely consider buying more of.


We saw some more share buyback activity on the ISEQ yesterday, with Fyffes the latest plc to buy its own shares this year. It joins Ryanair, Abbey and United Drug in doing so. The trade-off to more share buybacks by Irish plcs, however, is that it suggests reluctance towards stepping up M&A activity in these uncertain times.


The IMF cut its global growth forecasts yesterday, which prompted frenzied commentary on financial sites and much of the media. However, this downgrade should not have come as a surprise to anyone given the blatantly obvious deterioration in the economic situation in most large countries in recent months.


(Disclaimer: I am a shareholder in France Telecom plc). I was pleased to see France Telecom engaging in more repositioning of its portfolio, with the planned sale of its Swiss unit and acquisition of a  firm in the (hilariously named) “Democratic Republic” of the Congo. I bought France Telecom years ago for around €17/share and have enjoyed fat dividends (current payout is €1.40/share) since then, so I’m not overly cross with its current share price (it’s just under €12 this morning). While I am pretty certain that the dividend will be cut in the medium term, I note that a dividend of, say, €1/share would mean a yield of 8.3%, which is pretty good by any measure.


Here’s Peter Schiff, who I had the pleasure of meeting last year, giving an economics masterclass to Congress last week. Schiff makes a good deal of money from trading gold, so he will no doubt be reading today of how gold bullion vaults are running out of space.


Things are getting worse for Full Tilt Poker. A US attorney has alleged that the firm was operating a Ponzi scheme.

Market Musings 29/6/11

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Even though not a lot of time has passed since my last update, there has been so much interesting  newsflow that I figured I should scribble it down before forgetting any of it!

The installation of Christine Lagarde as the new head of the IMF happened just seconds after I posted my blog yesterday. As I’ve said before, I view this development as an unwelcome one for Ireland, and my fears were heightened by President Sarkozy’s description of her success as “A victory for France, which suggests that the Franco-German policies which have failed to contain the problems in peripheral Europe might well become flavour of the month in the IMF, which had up to now been arguing for more sensible measures for countries such as Ireland.

Cider and beer producer C&C issued a trading statement earlier today. Within it, management reaffirmed FY guidance of operating profits in the €108-115m range, which I feel is a great achievement for a consumer discretionary company whose primary markets are the UK and Ireland. C&C’s core cider brands recorded 11% volume growth, but revenue lagged behind (+5.6%) as the firm cut prices and upped marketing spend to stimulate demand.

Another Irish food and beverage company, Kerry Group, issued a bullish long-term projection today. Management sees “in excess of 10% adjusted earnings per share growth on average per annum over the next five-years”, which few would bet against given its track record over many years, the structural growth story around nutrition globally and the ongoing margin improvement measures which have already begun to reap dividends.

(Disclaimer: I’m a shareholder in Ryanair plc) This is not a surprise given the carrier’s policies of maximising load factors and maintaining a young fleet, but it was nice to see Ryanair being confirmed as the greenest airline in the world.

Some positive news for Ireland Inc today – we were the second-largest net recipient of foreign direct investment from outside the EU last year.

(Disclaimer: I’m a shareholder in Playtech plc) Turning to other sectors, I read an interesting piece by Goodbody’s analyst Gavin Kelleher on the suspension of Full Tilt Poker’s licence by the authorities in Alderney. Before today, Full Tilt was the #2 online poker network with a c.19% market share (Pokerstars is #1 with c.40%). Kelleher believes that “European listed operators such as, Playtech and 888 should see a significant market share improvement…over the medium term” as gamblers transition to stronger brands with no regulatory uncertainties. In terms of the listed companies’ exposure to online poker as a % of total revenue: has 28%, Playtech 18%, 888 14.6%, Unibet 13.7%, Sportingbet 8.4%, Betfair 5.9%, William Hill 2.0%, Ladbrokes 1.9% and Paddy Power 3.8%. As an aside, one of the key attractions that Kelleher sees around Ireland’s Paddy Power is that it only operates in fully legal markets, which makes it less risky than some of its peers.

I was unsurprised to hear that Myspace is reportedly to be sold for as little as $35m. This being the same Myspace that News Corporation paid $580m for. It joins a long list of social networking stars who like Icarus have come crashing down to earth – remember how Bebo was bought by AOL for $810m in 2008 and sold to Criterion Capital Partners for less than $10m two years later.  Or Friends Reunited, bought by ITV for £120m in 2005 and sold for £25m to DC Thomson in 2009. At the time of writing Facebook and LinkedIn are valued at $70bn and $8bn. What will they be valued at 3 years from now?

Tomorrow is going to be a very interesting day on the markets. In addition to it being the month-end, which will prompt widespread attempts at marking-up by people looking to flatter their monthly performance, it also marks the end of QE2. I’ve posted a video which explains the folly of quantitative easing before. If you haven’t seen it before, click here.

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