Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Glanbia

Market Musings 29/8/2012

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It has been another busy day on the results front in Ireland.

 

To start things off, Paddy Power released strong H1 results, with earnings rising 25%. This was despite start-up losses of €6.3m for four new online ventures and some adverse sports results. Net revenue increased in all five divisions (Online, Online Australia, Irish Retail, UK Retail and Telephone) by between 13 and 47%, which is an impressive performance. Also impressive is its branding efforts – in the year to date Paddy Power has increased its Facebook fans by 445% to 251k, Twitter followers by 308% to 133k and YouTube views by 186% to 13m. This gives the group an expanded audience to market its online offering to. As noted above, Paddy Power is investing heavily in improving its offering, particularly on the online side, while it is expanding into new markets. This increased investment is presumably why we aren’t seeing an upgrade to full year earnings guidance today from management despite the strong momentum evident across the group, however, as this investment enhances the longer-term profit outlook for the group investors shouldn’t be particularly concerned about it.

 

Grafton also released its interim results this morning. Reported revenues climbed 5%, but self-help measures on the cost side meant that operating profits increased by just over 19%. In addition, the group’s cash flow generation was impressive – Grafton generated operating cash flow of €55m, well ahead of its €30m in operating profits, as it reduced investment in working capital by €13.5m – a particularly impressive achievement given the increase in revenue. Net debt has reduced by €25m in the year to date to just €201m. There were significant variations in terms of the performance of Grafton’s main operating units. In the UK, revenues and operating profits rose 4% and 12% in constant currency terms, despite a tough market backdrop. In its small Belgian business, which accounts for circa 1.5% of group revenues, profits were flat despite a big increase (albeit off a small base) in sales. In Ireland, conditions remain very challenging – despite many of its competitors having reduced their presence in the market, Grafton’s merchanting revenues were -9% in H1 2012 while retailing revenue fell by 12% in the same period. Cost reduction measures helped to soften the impact on the bottom line. In all, the key message from these results for me is that Grafton is doing all the right things on the cash generation and cost fronts, but the benefits of this are being tempered by difficult end-markets.

 

Switching to food, Glanbia made two announcements this morning. The first being its interim results, which revealed a strong performance on the nutrition side allied to favourable currency effects (reporting earnings were +8.4%, but just +1.3% in constant currency terms). Management has hiked its full year (constant currency) earnings growth outlook from the previous 5-7% range to 8-10%. The second announcement relates to the restructuring of its Dairy Ireland business. Assuming it gets cleared by the various stakeholders, there may be a near-term share price overhang as the Co-op (Glanbia’s biggest shareholder) sells a total of 6% of its stock, while there may be further downward pressure as the Co-op distributes a further 7% of the company to farmers, some of whom may sell their shares. However, in the longer term the market should reward the improved liquidity, free-float and stability of earnings arising from this restructuring of Glanbia’s Irish dairy business.

 

In the financial sector, KBC reduced its 1 year Irish deposit rate by 30bps. This is positive news for banks operating in Ireland as it should help making the task of rebuilding net interest margins across the sector a little easier.

 

(Disclaimer: I am a shareholder in PTSB plc) Speaking of Irish banks’ margins, interim results this morning from PTSB reveal a sharp decline in the NIM since the start of the year. In 2011 PTSB’s net interest margin was 92bps, but this has fallen to 76bps in H1 2012, due mainly to higher deposit costs. Total customer accounts and deposits have increased by €2.2bn in the year to date, with the majority of this due to corporate deposits (the vast majority, if you exclude the customer balances received following the acquisition of Northern Rock’s Irish deposit book), which is a welcome development. PTSB’s LDR fell to 190% at end-June from 227% at end-2011, so still unsustainably high but moving in the right direction at least. Asset quality deteriorated further since the start of the year, with 14.1% of mortgages in arrears of greater than 90 days at the end of June (12.0% at end-2011). The weighted average loan-to-value across PTSB’s mortgage book is 113%, with Irish owner-occupied at 115% and Irish buy-to-let at 137% (UK owner-occupied is 86% while UK BTL is 87%), which points to further pain ahead for the bank. In terms of self-help measures, operating expenses at PTSB were flat year-on-year at €136m, but even a significant reduction in this would be a drop in the ocean compared to the challenges in the loan book. One potential source of optimism is its excess capital – the total capital ratio was 21.5% at the end of June, well above the Central Bank’s minimum target of 10.5%. However, while the excess funds, at €2.2bn, are more than twice the group’s market capitalisation, further impairment charges will eat into this.

Written by Philip O'Sullivan

August 29, 2012 at 11:15 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 24/7/2012

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Since my last  update the Eurozone’s pressures have again bubbled to the surface, knocking share valuations and pushing down the value of the euro. However, troubles can often lead to opportunities elsewhere, and some of the shares on my buy list are now offering a lower entry price along with a superior potential kicker to earnings from FX than before.

 

The euro fell to a 2 year low against the US dollar and an 11 year low against the Yen. The key Irish stocks who benefit from a stronger USD relative to the euro include: CRH (which I’m a shareholder in), Kerry, United Drug, Glanbia and Kingspan. There are no Irish plcs with a material exposure to Japan. Another consequence of this turmoil is that yields on many ‘safe’ Eurozone countries have fallen into negative territory, which I find difficult to reconcile given how many non-financial corporates, whose balance sheets have seldom been stronger, are offering well covered attractive dividend yields. On this note, I was unsurprised to see that dividend payouts by UK plcs hit a record high in Q2 of this year.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) There was an interesting post on TMF examining “12 shares the market has thrashed this year“. Of the ‘dirty dozen’ I hold TNI, and I concur with the author’s views on it – it’s capitalised at £70m, generated free cashflow of £55m last year (I forecast that it will generate a similar amount this year, putting it on a free cashflow yield of circa 80%!) and as it continues to pay down debt (net debt has fallen from £300m in FY09 to £200m by end-FY11) I see a significant wealth transfer from debt holders to equity holders. While it does have a pension deficit (£230m at end-FY11) this is substantially covered by freehold property with a book value of £177m. It’s a stock I like – on my model it will be debt free by 2015 and generating (I conservatively assume a continued decline in revenues for the newspaper sector i.e. no recovery in advertising and/or circulation revenues) free cash of £35-40m by then – a 50%-60% free cash flow yield based on where the share price is currently at.

 

China has been rocked by another wave of problems around domestically produced baby formula. The sector there has struggled following the 2008 scandal, which has (understandably) directed Chinese consumers towards foreign brands. This is positive news for Ireland, whose share of global infant formula production is approaching 20%. The key beneficiaries from a plc perspective here are Kerry Group and Glanbia.

 

Dragon Oil issued a trading update this morning. Due to sand ingress issues it has trimmed 2012 production growth guidance to 10-15% from the previous 15%, but importantly it has retained its medium term output forecast. The firm is increasing the number of wells it proposes to drill this year to compensate for production delays, which is a positive. While the firm has been expanding into the exploration area, acquiring interests in blocks in Iraq and Tunisia, I can’t help but wonder if Dragon should be using its $1.7bn cash pile to buy up financially constrained smallcaps with proven reserves, many of which are trading on bargain basement prices, rather than engage in more speculative exploration activity.

 

(Disclaimer: I am a shareholder in Tesco plc) I was pleased to see a marked improvement in signage and merchandising in my local Tesco last weekend – on previous visits to the store I found that there was often no correlation between signs and what was actually on the shelves, so perhaps this is an indication that management is delivering on its promise to improve the customer experience in this part of the world. Obviously I’m basing this hunch on a sample of 1 store in a vast network of outlets, but if you’ve noticed similar or divergent trends please feel free to post them in the comments section.

 

Finally, I am pleased this morning to read that Ireland is proposing to reduce its number of parliamentarians and axe over a quarter of the smallest local councils. Even after this move, the country will still be over-represented at a national level – 158 TDs (MPs) and 60 Senators is still far too much for a country of our size (the 2 European countries closest to us in population terms, Norway and Croatia, have unicameral parliaments with 169 and 151 MPs respectively). Hopefully the people will vote to axe the Senate in next year’s referendum to remove this anomaly.

Written by Philip O'Sullivan

July 24, 2012 at 8:40 am

Market Musings 27/6/2012

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The big news from corporate Ireland this morning is C&C’s Q1 interim management statement. In its first projection for the current financial year, the company sees FY operating profits of €112-118m (last year: €111m). Its core cider brands struggled in Q1, due to poor weather and tough comparatives, but other parts of its portfolio are performing strongly. Regular readers of this blog will recall that a few months ago I wrote that Tennent’s lager appeared to be making headway in pubs here, and this morning C&C revealed a near-50% increase in Tennent’s sales in Ireland as the brand is now available in 1,200 pubs (16% of the total). Overall, this is a pretty much as-expected statement from C&C, but at this early stage of the year it’s hard to make a definitive call on the full-year outlook (who knows, we could have an excellent July and August on the weather front!). On a more fundamental view, the group has an extremely strong balance sheet (net cash was €68m at the end of its last financial year) and has been doing a good job of managing its portfolio of brands in challenging consumer conditions of late. It’s a stock I like.

 

Elsewhere in the food sector, Glanbia confirmed what’s already in the public domain about the potential restructuring of its Dairy Ingredients Ireland operation, namely that it’s plotting to establish a jv with its majority shareholder, the Glanbia Co-op, to manage this business, which is set to experience a dramatic increase in volumes once EU milk quotas are lifted from 2015. This restructuring would be a positive move for all parties concerned, in that it would free up additional capital for the plc to support its push into the high-growth, high-margin ingredients space while giving the JV the freedom to pursue a strategy that could feasibly create a northern hemisphere version of New Zealand powerhouse Fonterra.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) In the media space, we saw a battle for control of Australia’s Fairfax media group, which could have consequences for INM’s Australasian associate APN News & Media. Elsewhere, UTV Media lost out to Global Radio in the bidding war for GMG’s radio portfolio. However, as I said a few days ago, this has given rise to serious competition concerns, which could potentially lead to other acquisition opportunities for UTV Media et al.

 

In the healthcare space, United Drug made a £13m bolt-on acquisition of a UK medical communications company, which will fit perfectly within its Sales, Marketing & Medical division. This transaction is obviously small from a group context, but nonetheless helps to further diversify United Drug’s revenue streams.

 

(Disclaimer: I am a shareholder in BP plc) Oil behemoth BP did some further portfolio management in recent days, offloading assets in Wyoming and the North Sea for a combined $1.3bn. Throw in the $20-30bn it is likely to receive from a successful sale of its economic interest in TNK-BP and the firm will have a significant war chest to make further acquisitions (or fund a chunky special dividend) with.

 

(Disclaimer: I am a shareholder in RBS plc) The worst of the IT problems that have dogged RBS in recent days appear to be behind the group, and attention is now switching to the fallout. Reuters spoke of a £100m+ bill, but this may prove extraordinarily ambitious, with reports of people being kept imprisoned due to bail money not being processed properly and patients’ medical treatment being imperiled coming to light. Doubtless RBS will be writing a lot of cheques to assuage public anger following this foul-up.

 

There was a lot of excitement around Irish house prices since my last blog post, with the release of official data that show Dublin residential property prices have advanced (marginally) on a month-on-month basis for each of the past three months (national prices were +0.2% mom in May, -15.3% yoy). Despite this recent improvement, residential prices in Dublin, which is going to be the part of the country that leads the market, are still -17.5% on an annual basis (and 57% below the peak) so it seems a little premature to bring out the champagne bottles. The ongoing difficulties in the domestic economy are likely to hold back property prices for some time to come yet, while this December’s budget should bring in further tax increases, not least given that the government has repeatedly demonstrated a lack of willingness to right-size public spending, which will further limit peoples’ ability to service mortgages. Add a lack of mortgage credit availability into the mix and I don’t see any obvious catalyst for a sustained improvement in Irish property prices in the near term.

 

In the blogosphere, Lewis wrote about Dart Group, perennial favourite of the value investing blogosphere (albeit not one for me – given that I already have exposure to some of its competitors e.g. Ryanair and Total Produce).

Written by Philip O'Sullivan

June 27, 2012 at 8:10 am

Market Musings 16/6/2012

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After a relatively quiet 2012 on the M&A front, at least where Irish stocks are concerned, it’s nice to be able to write a blog where ‘buying and selling’ is a key theme.

 

United Drug splashed out €30m on buying Dublin warehousing and office buildings. While it’s good to see deals like this happening in Ireland again more generally, from a UDG specific view it’s a prudent measure that saves €750k a year (which was due to increase by 15% in 2014 and by the same percentage every five years on the lease thereafter).

 

Food ingredients group Glanbia has seen its share price tumble by circa 10% so far this month. One possible explanation for this is the chance of a secondary placing of stock by its majority shareholder, the Glanbia Co-op, to fund a €150-200m milk processing plant to cater for the expected significant increase in output that will accompany the lifting of EU quotas. Speaking of plants, Greencore offloaded the Minsterley facility, acquired as part of its takeover of Uniq plc, for £4.3m to Muller. This is obviously immaterial in a group context, but highlights the rapid pace at which management at Greencore have integrated Uniq.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Following on from my recent blog about INM’s South African unit, The Irish Times ran a piece covering local sentiment towards a possible deal. While I’ve long argued that the minority stake in APN should be the preferred asset for disposal, the increased chatter around INM’s South African unit suggests that it’s likely to be a different southern hemisphere business that is offloaded by the group. Speaking of INM and the southern hemisphere, the group also announced that it will delist from the New Zealand stock exchange, a ‘low hanging fruit’ cost-cutting move that should have happened years ago in my view.

 

Given that we’re about 5 years into Ireland’s economic disaster I had a look at Sharewatch’s handy table of prices of ISEQ listed stocks to see which of them are trading on share prices that are one-third or less of their levels from the summer of 2007. While it was no surprise to see the banks at the bottom of the pile, it was a little surprising to see quality names such as C&C, Kingspan, Grafton and FBD also down there. I assume Kingspan and Grafton are affected by the “Ireland discount”, yet both make the vast majority of their profits (KSP: >95%, GN5: >90%) overseas.

 

The incomparable Zerohedge posted an interesting chart showing global banks’ LDRs. I was surprised to see the Nordic banks so high up the chart, and given the risks around wholesale funding costs I would be (at first glance – I don’t follow the Scandinavian financials closely) instinctively nervous of them for that reason. For reference, of Ireland’s remaining listed banks, their LDRs at the end of 2011 were: AIB 136%, Bank of Ireland 144% and Permanent TSB 227%.

 

One of the highlights of the UK and Ireland investment blogosphere for me is the healthy debates that take place within it. It’s always useful to have one’s assumptions tested, not least given that it reduces the risk of destructive phenomena such as groupthink from creeping in. One of the regular topics of discussion is what should be counted within a firm’s enterprise value. For me I always add the pension deficit (or surplus) to the market cap and net debt (or cash), but there are dissenters who say – and I appreciate that this is a perfectly arguable point – that the efficient market hypothesis tells us that the share price (and by extension the market cap) already discounts factors such as the pension deficit and other obligations such as leases. However, given the polarised views about “whether pensions matter”, or whether leases should be viewed as a mere operating expense rather than a financial claim, along with investors’ cognitive biases (which we’re all guilty of) and other human errors, I don’t subscribe to the view that the share price tells us more or less everything. Lewis at Expecting Value wrote an interesting piece analysing the EVs of both Trinity Mirror (which I am a shareholder in) and Debenhams, which to me highlighted both the latter’s enormous operating lease liability, while for the former I was struck by the thought that any improvement in the outlook either for advertising or its inherent cashflow generation could lead to a very significant (in percentage terms) re-rating of the stock (and, of course, vice versa). Anyways, this is a debate that I’m sure will continue to run – and if you’ve any views on this issue, please post them in the comments section.

Written by Philip O'Sullivan

June 16, 2012 at 7:42 am

Market Musings 1/6/2012

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This is a bit of a ‘catch-up’ blog as I spent much of the past couple of days building a financial model for AIB to support my analysis on that stock.

 

(Disclaimer: I am a shareholder in BP plc and PetroNeft plc) The energy sector has seen some very interesting developments. Parkmead, a vehicle led by ex Dana Petroleum executives, agreed to buy DEO Petroleum for £12.7m earlier this week, which hopefully signals a resumption of the frenetic M&A activity within the sector that we saw earlier this year. Elsewhere, Dragon Oil entered the Iraqi market. While the award of one exploration licence is hardly a game-changer for the stock, it is encouraging to see it continue to execute on its strategy of geographic diversification. Going the other way is BP, which said this morning that it is to “pursue a potential sale of its interest in TNK-BP“. I am delighted to hear this news given that the venture seemed to be more trouble than it is worth. In other Russian oil sector news, PetroNeft announced that it has agreed a new $15m debt facility, while also saying that its output is “stable” at 2,200bopd (in its last update in early April output was running at 2,300bopd). PetroNeft’s shares moved higher on the back of the update as some investors had feared that a rights issue / placing would accompany any new facility, but of course it should be noted that $15m doesn’t go too far in this industry.

 

(Disclaimer: I am a shareholder in Datong plc) Yorkshire-based spy gadget maker Datong released solid H1 results. As previously guided, the first half of the year was unusually quiet, but very bullish guidance saw the shares initially gain well over 30%. The firm’s order intake during April and May was £3.1m, versus £1.2m in the same period last year, supporting management’s previous forecast of an unusually strong H2. Datong had net cash of £2.1m at the end of H1, or roughly 55% of its market capitalisation. NAV of £10m works out at 73 pence per share, a huge premium to the 28.5p the shares currently trade at. While management has been doing a good job in recent times, given Datong’s very poor liquidity and limited resources I can’t help but wonder if investors would be best served if the group were to sell itself off to a larger defence business.

 

In the support services space, Harvey Nash, a staffer I’ve held in the past, released a solid Q1 IMS today. Unsurprisingly, given recent positive signals from the US economy, it sees the strongest growth across its operations there, while the UK and continental Europe is slower. HVN remains on my watchlist, but for the time being I’m focusing on trying to realise value across my portfolio and reduce the number of positions I have as opposed to adding more names to it.

 

(Disclaimer: I am a shareholder in Abbey plc) In the construction space, London-focused housebuilder Telford Homes released a strong set of results, with profits coming in ahead of market expectations. The company raised its full-year dividend by 20% in a strong expression of confidence about the outlook, while in terms of its forecasts for this financial year management say they expect to report a “substantial increase in profit before tax”. Overall, the signs from the South-East England property market remain very robust and this has positive implications for Irish listed housebuilder Abbey, which derives the majority of its business from that part of the UK.

 

In the food and beverage sector, I was interested to learn that Ireland’s Glanbia produces 18% of global output of American-type cheese. Elsewhere, pub group Fuller, Smith & Turner’s full-year results revealed nothing new relative to what its peers have been saying of late, namely that the sector is betting on a positive impact on demand arising from the Jubilee, Olympics and Euro 2012.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector, there was a considerable amount of intrigue around Trinity Mirror. The group dispensed with the services of the editors of the Daily Mirror and Sunday Mirror, announcing that they will be merging the titles. Rival publication The Daily Telegraph claims that the departed pair were planning a bid for the group, with the support of an unnamed ‘wealthy figure’. Regardless of whether or not there’s any truth to that story, to me the stock is great value given its strong asset backing (freehold property worth 69p/share, or 2.5x the current share price) and its low rating (1.2x PE, 5.2x EV/EBIT on my estimates for FY12), while on the liability side it has made material progress in cutting net debt in the year-to-date, while the pension deficit is, I believe, very manageable. Hence, I’ve doubled my stake in Trinity Mirror today.

 

Turning to the macro space, this article served as a useful reminder of what often happens when countries impose capital controls.

 

In the blogosphere, Calum did a good write-up on BSkyB, but I would dissent from his conclusion about the valuation, chiefly because I’m disinclined to pay double-digit multiples for stocks when there are so many names trading on low single-digit multiples in this market. Lewis maintained his impressive blogging work-rate with a piece on Tullett Prebon. Like Lewis that isn’t an area I’m particularly familiar with, so despite being optically cheap my instinct is to stay on the sidelines.

Written by Philip O'Sullivan

June 1, 2012 at 10:30 am

Market Musings 18/5/2012

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We’ve had a Tsunami of company updates since my last blog, so here’s a sector-by-sector wrap of what’s been going on.

 

C&C posted profits that were in line with guidance. The full-year dividend was raised by a chunky 24%, taking the payout ratio to 30%. On the conference call that followed the results management guided that it will raise this to 40% over time. C&C’s balance sheet is in great shape, with net cash hitting €68m last year. This gives the group considerable scope to launch share buy-backs, pay a special dividend or buy new brands – or in other words, it has a ‘nice problem’ of having to worry about what to do with its excess cash. C&C is a stock I’ve held in the past, but I’d want to do a bit more work on it before seeing if I’ve any room for it in the portfolio.

 

(Disclaimer: I am a shareholder in Marston’s plc) Elsewhere in the beverage space, Marston’s posted excellent interim results yesterday. Group revenues were +7.6%, underlying PBT +14.7% and the H1 dividend was raised 5%. All divisions (managed houses, tenanted and franchised and brewing) reported a rise in sales and underlying profits. The group is delivering on its ‘F Plan’ (which it defines as food, families, females and forty/fifty somethings) targets, with an 11% rise in meals served. I’m a very happy holder of the stock.

 

In the energy space, Tullow Oil issued a bullish interim management statement, describing its year-to-date performance as “excellent”. Its year-to-date financials are in-line with expectations, but as ever the main excitement around the stock is based around its exploration activity, which has been yielding encouraging results from Kenya in particular of late.

 

Staying with the oil sector, my old pals Kentz posted a solid trading update this morning, saying the full-year performance would be “marginally ahead of expectations“. Its pipeline is in good shape, with the order backlog standing at $2.46bn at the end of April, up from $2.40bn at end-December.

 

(Disclaimer: I am a shareholder in CRH plc) CRH received net proceeds of €564.5m from the sale of its stake in Portuguese cement firm  Secil. As mentioned before, these funds will provide the group with considerably enhanced financial flexibility to expand through M&A over the coming years.

 

In the retail sector, French Connection was the subject of a lot of attention this week. Richard Beddard did an excellent series of posts on it, summarised here, to which I replied: “Leases and the brand (seems very stale to me) are the big worries I have”.  Those worries didn’t quite go far enough, with the firm posting a profit warning yesterday.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) We got a lot of news from the media space. UTV Media said that its year to date trading is in line with its expectations. Within the statement it was encouraging to see its Irish radio revenues move into positive territory. Elsewhere, INM said today that “advertising conditions remain challenging and erratic. Visibility remains short and susceptible to influence by macro-economic factors”. It added that net debt currently stands at circa €420m (end-2011: €426.8m). Not a lot to get enthusiastic about, especially on the net debt front, but of course much of the focus on INM is on recent moves in its share register and the intentions of new CEO Vincent Crowley.

 

In the betting sector, Paddy Power released a very strong trading update, with net revenue growth in the year to date accelerating to 28% from the 17% booked last year. The group is firing on all cylinders and remains the quality play in the betting space.

 

(Disclaimer: I am a shareholder in Total Produce plc) Irish headquartered food group Glanbia sold its Yoplait franchise back to the brand owner for $18m in cash. Its fellow Irish listed food stock Total Produce reaffirmed its full-year earnings target in a brief update issued earlier today.

 

(Disclaimer: I am a shareholder in Irish Continental Group plc and Datalex plc) In the transport space, ICG’s IMS revealed a weaker performance from the freight side, while passengers were marginally higher relative to year-earlier levels. This is the seasonally quiet period of the year so there isn’t a lot of read-through from today’s statement. Elsewhere, travel software firm Datalex issued an update this morning in which it said its performance is in line with its forecasts.

 

In the financial space, IFG posted a solid trading update. Since it agreed to sell its international business the main interest here is its UK and Irish operations. On this front, management says the UK is registering a “robust” performance, while Ireland is “performing well”. The company hints at the possibility of a special dividend post the completion of the sale of the international unit, so I’ll be watching that closely over the coming months.

 

(Disclaimer: I am an indirect shareholder in Facebook). To finish up with a word on the Facebook IPO, an investment fund I advise went long some Facebook in its IPO today at $40.10. This is very much a short-term trade around its IPO, given that Facebook is trading on 26x historic sales and 107x trailing earnings. Put another way, with a valuation of over $100 per Facebook user, I wouldn’t click the “like” button if someone suggested it as a long-term holding.

Market Musings 10/5/2012

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We’ve seen a deluge of trading updates in the past 24 hours or so. Let’s run through what new insights they’ve provided us with.

 

In the construction sector, Kingspan released a trading update today. The group has made a solid start to 2012, posting an 8% rise in sales in the first four months of the year, “of which Mainland Europe was up 9%, UK up 2% and North America up 10%”. Despite this impressive performance, I note that management caution that: “in general, the year opened with relatively more optimism regarding potential activity levels in some construction markets. This dissipated somewhat as we progressed through the first quarter with sentiment weaker now than at the beginning of the year”. As I’ve stated before, Kingspan has undoubted ‘structural growth’ qualities that set it apart from most construction related stocks, but I don’t see anything in this statement to warrant Kingspan shares pushing significantly ahead of their 13.0x forward earnings multiple in the short term.

 

Elsewhere, Grafton issued a trading statement this morning which revealed diverging trends across its operations. Its UK business appears to be gaining market share, but Irish conditions remain very challenging. It was interesting to see, despite many of its competitors having exited the market, that Grafton’s Irish retail (Woodie’s DIY, Atlantic Homecare) and merchanting (Heitons, Chadwicks) sales were -16% and -9% respectively in the first four months of 2012. This bodes ill for the state of the domestic economy.

 

Glanbia released a trading update yesterday that contained few surprises relative to my expectations. While management is sticking to its full-year guidance, the impact of tough comparatives is shown by a forecast of flat earnings in H1 relative to year-earlier levels. Within the different business areas, nutrition continues to perform strongly, posting a 9% jump in revenue in Q1 2012, but Dairy Ireland’s revenues fell 5% in the same period. Overall, this statement reinforces my view that I was right to ‘step out’ of Glanbia for a while.

 

In other food sector news, Fyffes upgraded its FY EBITA target to €25-30m from the previous €22-27m. This is a great performance by Fyffes in light of the headwind of high fuel prices in particular.

 

UTV Media announced that it has inked a new 5 year bank facility today, which to me reflects the very impressive progress the group has made in terms of rebuilding its balance sheet in recent years.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) I was delighted by Trinity Mirror’s interim management statement today. While advertising conditions remain under pressure, cash generation remains very strong, as evidenced by the £24m (11%) improvement in its net debt in the year to date. On top of that, the pension deficit has also seen a £54m positive movement since the end of 2011. The combined improvement in Trinity Mirror’s long-term liabilities is equivalent to 100% of its closing market capitalisation from yesterday. This also shows that my narrative around the company appears to be playing out.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Speaking of narratives, I was pleased to learn of another containerboard mill closure in Europe, which is supportive for pricing in an industry where Smurfit Kappa is king.

 

In the retail space, Clinton Cards went into administration yesterday. This is bad news for its employees, and for retail REITs – Clinton’s over 700 stores are to be found in most large shopping centres in the UK and Ireland.

 

In the blogosphere, Lewis came up with an interesting way of gauging fashion ‘trends’ – might this offer new insights into trading retail stocks?

Written by Philip O'Sullivan

May 10, 2012 at 10:05 am

Market Musings 6/5/2012

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(Disclaimer: I am a shareholder in Independent News & Media) Since my last update, Denis O’Brien confirmed that he has increased his stake in Independent News & Media to 29.9%, which is the maximum level he can own without being compelled to bid for the balance of the company. The next largest shareholders are Sir Anthony J. O’Reilly on 13.3% and Dermot Desmond on 5.75%, so half of the company’s shares are held by those three individuals. This will presumably see the Irish Stock Exchange reduce its free float determination on INM and hence the company’s weighting, but if O’Brien’s purchases lead to deeper efforts to reform the group and lift profitability that will hardly matter to the rest of INM’s shareholders.

 

Aer Lingus announced that it is to pay its maiden dividend as a publicly quoted company. The 3c/share dividend works out at a 3.1% yield based on Friday’s closing price, and with management indicating a willingness to pay the same amount out in each of the next 2 years, that means people buying Aer Lingus at these levels get nearly a 10th of their money back in a little over 2 years, while in terms of the prospects for capital appreciation, Aer Lingus exited 2011 with net cash of €317.6m, which compares to a current market cap of €521m. So for only €204m or so you get Aer Lingus’ owned aircraft, Heathrow landing slots, earnings streams etc. Sounds pretty attractive to me.

 

Speaking of Aer Lingus shares, one outfit that holds some in its funds is Matterley. I’ve met Henry and George before and I’m a fan of their value-oriented approach. I see they’re still long Aer Lingus after correctly identifying the opportunity in it when it was (and this is astonishing when you think about it) trading at a discount to its net cash. Another Irish listed stock they hold is Dragon Oil, which I traded in and out of earlier this year.

 

In terms of what to expect over the coming days, we’ve a busy week ahead in Ireland in terms of scheduled corporate newsflow. In a nutshell here are what I’m expecting / looking out for:

 

  • (Disclaimer: I am a shareholder in CRH plc) CRH trading update on Tuesday – This should be a bit of a mixed bag. Recent peer updates reveal improving trends in the United States, but patches of weakness in some of the group’s key European markets. Strong cost take-out efforts should see profitability rise compared to year-earlier levels. I will be looking for: (i) indications on how trading is going as we move into H2; and (ii) any sign of a pick-up in M&A activity.
  • United Drug results on Wednesday – Health cutbacks should presumably mean the tone of these results is reasonably subdued, but its very strong balance sheet and proven willingness to invest in expanding its international operations means that there’s an outside chance of an M&A announcement to distract from the underlying performance.
  • Glanbia trading update on Wednesday – Tough comparatives due to a blow-out 2011 will presumably mean that the headline growth rate will slow somewhat, but the underlying performance of the group should be quite resilient. Recent signs of a weakening in the dairy market won’t help, but the high-margin nutrition space is clearly going from strength to strength, as evidenced by Nestle’s recent $12bn deal for Pfizer’s infant formula business. I took profits in this name earlier in 2012, and would look to buy back in on any weakness.
  • Fyffes trading update on Thursday – I’ll be watching this one for news on (i) pricing; (ii) share buybacks (possibly); and (iii) the success the group is having with passing on high fuel costs. There may well be some read-through for Total Produce, which regular readers know is a core holding (in every sense!) in my portfolio.
  • Grafton trading update on Thursday – The main interest here will be on trading conditions in the UK and Ireland. The group has been carefully adding to its portfolio of operations through bolt-on deals in its key markets as well as in its nascent Belgian operation, so there may be an update on this also within the statement.
  • Kingspan trading update on Thursday – The group smashed expectations in its FY2011 results, so I wouldn’t be surprised to see another good update from the company this week. While its structural growth qualities are not in any doubt due to its leading position in the insulation space, any sign of an improvement in cyclical demand could be a catalyst to push these shares significantly higher.
  • (Disclaimer: I am a shareholder in PetroNeft plc) PetroNeft results on Friday – In my view, the main areas of interest in this release will be: (i) production levels, given recent disappointments on this front; and (ii) financing. What management says about these will presumably prompt a violent share price reaction – either to the upside or the downside!

Written by Philip O'Sullivan

May 6, 2012 at 4:31 pm

Market Musings 24/4/2012

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The main interest this morning is Bank of Ireland’s IMS (more of which anon), but we’ve also seen some interesting developments in other sectors that merit some attention.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Macquarie says Gavin O’Reilly’s departure from INM could be a precursor to a sale of its stake in APN. Such a move would, in my view, make a lot of sense – assuming INM can secure an exit price far in excess of its current market value. Last night INM’s shareholding in APN News & Media was valued at €126m, compared to INM’s market cap of €140m. INM’s recent results statement revealed that “as at 31/12/2011 INM carried its investment in APN on its Balance Sheet at an amount of €255.1m or A$1.68 per APN share held”. I appreciate that this is a very crude analysis, but if you were to split the difference between the market value and book value of the APN (i.e. €190.6m, putting APN on the sort of valuation it traded at last summer – which is not unthinkable given that such a sale would put a big chunk of Australasian media assets potentially in play) and INM received these proceeds (let’s ignore any tax implications for the sake of keeping things simple – in any event, presumably, a disposal would be done in a tax efficient manner), it would have the effect of reducing INM’s end-2011 net debt of €426.8m by 45%. In terms of the cashflow effects, INM’s only cashflow from APN is the dividend it receives from the group (€15.8m in 2011), which would cease in the event of a disposal. So, for arguments sake, based off the 2011 results this would put INM on trailing net debt of €236m and EBITDA of €86m (i.e. the €102.2m reported EBITDA less the APN dividend) – a very manageable net debt/EBITDA ratio of 2.7x, not least given how advertising markets are some way off a recovery in its home market. This is also a far superior situation to the net debt / EBITDA ratio of 4.2x INM reported in 2011 – and I think it’s safe to say that measures to dramatically improve INM’s balance sheet such as the above would see a marked improvement in the group’s share price.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc) We had an IMS from Bank of Ireland this morning. As regular blog readers are aware, my focus where the Irish financials are concerned is fixed on deposit trends, net interest margins, progress on deleveraging and impairment guidance. Two months ago BKIR’s FY2011 results revealed a bit of a mixed bag (in my view) on this front. Today’s statement revealed: (i) End-Q112 deposits of €70bn are more or less in line with the €71bn at end-2011, while the LDR has improved to 142% from 144% at end-2011; (ii) net interest margins are expected to improve in H212 due to lower ELG participation, repricing of the loan book and reduced deposit pricing; (iii) the group continues to make good progress on deleveraging, and has completed / contracted divestments to date of €9.5bn, 95% of its PCAR target, at an average discount of 7.6% (by end 2011 the figures were €8.6bn sold at an average discount of 7.1%). The updated divestment figure remains within the PCAR base case assumptions. Bank of Ireland says: “redemptions and repayments in our other portfolios remain in line with our expectations”; (iv) On impairments, BKIR says: “we maintain our expectation that impairment charges will reduce from the elevated levels experienced in 2011”. The Bank notes that “domestic economic indicators remain weak, unemployment remains elevated, and residential property prices do not appear, as yet, to have fully stabilised”, while Eurozone concerns have heightened – this is no surprise given what we know from recent economic data releases and so on, and I suspect this has been priced in given recent declines in the BKIR share price from its 2012 peak. Overall, I view Bank of Ireland’s IMS as ‘solid’ – in terms of the factors it has control over it is meeting its goals, and while the macro picture remains challenging, it is well placed to capitalise once that situation improves. I remain a happy holder, and would certainly consider adding to my position over time.

 

(Disclaimer: I am a shareholder in Marston’s plc) I was pleased to see a solid trading update from UK pub group Greene King, which presumably bodes well for Marston’s. Speaking of pub groups: According to the British Beer and Pub Association, there are 51,158 pubs in the UK. Of the listed pub groups, Enterprise Inns has c. 6,250 pubs (12.2%)Punch 5,000 (9.8%)Marston’s 2,150 (4.2%), Greene King 2,000 (3.9%), Mitchells & Butlers 1,600 (3.1%)Spirit 803 (1.6%)Wetherspoon 800 (1.6%), Fuller’s 360 (0.7%) and Young’s 241 (0.5%). I see the market share of these large players steadily increasing over time as smaller operators exit the market.

 

Speaking of UK plcs, here’s some cheer for income investors – FTSE dividends jump to a record level.

 

In the food sector, I was interested to read that Nestlé is paying a hefty 5x revenues for Pfizer’s infant nutrition unit. There is bullish read-through for Ireland’s Glanbia and Kerry from that transaction – Ingredients account for 69% & 77% of Kerry Group’s sales & trading profits respectively, while for Glanbia it’s 49% & 67% of underlying sales & EBIT. Clearly, infant nutrition is only a portion of Kerry & Glanbia’s ingredients operations, but this is still supportive from a valuation angle.

 

To finish up with some macro news, Eurostat provided us with the 2011 fiscal details on EU member states. Ireland, despite all the talk of austerity, was bottom of the list, running up a frightening deficit of 13.1% of GDP last year. The underlying (ex bank recaps) deficit was 9.4%. Greece was the next worst on 9.1%. So, to emphasise, even after stripping out the cost of bank recaps Ireland had the worst deficit in the EU last year. Yet listening to some politicians and pundits here one would be forgiven for thinking that we’re experiencing severe austerity measures relative to what other EU citizens are putting up with.

Written by Philip O'Sullivan

April 24, 2012 at 6:29 am

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