Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Germany

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 16/8/11

with 4 comments

The main developments since my last blog have been vocal political opposition to the euro bonds I expressed doubts about yesterday, further weak economic readings from core Europe and from a corporate perspective, H1 2011 results from Ireland’s largest quoted company, CRH.


In Germany, the Deputy floor leader of the CDU said that euro bonds are “not right for now“, while reports have emerged that the CDU’s coalition partners, the more economically liberal-minded Free Democrats have threatened to walk if Germany supports their introduction. I welcome these developments, which hopefully will once more force governments to take tough decisions to get their own fiscal houses in order and reduce the massive debts they are bequeathing to future generations.


Staying with Germany, the country revealed weak Q2 GDP data earlier today, with growth of just 0.1% qoq well below consensus of +0.5% qoq.  This follows on from the similarly weak and below-consensus GDP reading from France a couple of days ago. The three things that immediately come to mind are as follows: (i) This further reduces the likelihood of further ECB rate hikes, which is good news for Irish households; (ii) Expect to see GDP downgrades for the Euro-area on the back of this; and (iii) As sell-side analysts often take their lead from economists’ forecasts, expect to see downward revisions to corporate earnings in due course.


(Disclaimer: I’m a shareholder in CRH plc) The ISEQ’s largest constituent, CRH, reported H1 results earlier this morning. EBITDA of €574m was slightly behind consensus of c.€580m. On the outlook, CRH says that it is focused on input cost recovery and maintaining “operational and commercial excellence” against a tough macroeconomic background. I was pleased to see a continued step up in year-to-date acquisition and development spend, which rose to €380m, up from the “approximately €0.3 billion” it reported on July 6. At the time of writing the shares are up 2%, which is probably a fair response given that the results contained few surprises. Presumably management will be embarking on a roadshow in both Europe and North America over the coming weeks which will give them an opportunity to sell the story to a few more investors, so it will be interesting to see how the price evolves over the near term.


(Disclaimer: I’m a shareholder in Trinity Mirror plc). There was an interesting article on the Proactive Investors website yesterday about Trinity Mirror. In notes issued after its H1 results, JP Morgan valued the company at 85p/share, while Citi reckon it’s worth 35p/share. Obviously, my views are skewed by the fact that I’m a shareholder in the company (!), but I can’t see how Citi can get to that valuation. At 35p a share, using Citi’s own numbers, this puts the group on less than 2x 2012 PE. While I note Citi’s comments about the pension deficit (yes, the reported deficit is £100m, but net of deferred tax this falls to £74m, or circa 29p a share), this works out at about 18 months profits, which is a relatively healthy position compared to many other plcs. Looking at the group’s other liabilities, in terms of Trinity Mirror’s net debt, at the H1 stage this was £262.2m, which is only 2.0x consensus EBITDA for 2011. Market consensus is pointing to net debt falling another £100m or so between now and the end of 2013. So, I wouldn’t use its liabilities as a stick to beat the group with. In any event, on the asset side, Trinity Mirror had freehold property valued at 72p a share as at 3 January 2010 (the latest annual report has yet to be published), which gives me more comfort on the valuation of the group. So, with the group continuing to deleverage and the pension deficit under control, I think the market should be starting to look at earnings multiples. As I’ve argued before, a mid single digit PE multiple (on what are depressed earnings, given the state of the advertising market) would get you to at least £1 a share, versus the current share price of 43.5p. As ever, be sure to do your own research!


Elsewhere, did you know that Argentina fines economists who publish unfavourable inflation estimates? Certain default advocates in Ireland are fond of quoting Argentinian economic data to “vindicate” their stance, so it is probably instructive to bear the question marks about the accuracy of these statistics in mind the next time you read about how “well” our South American friends have done since their default.

Written by Philip O'Sullivan

August 16, 2011 at 9:45 am

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