Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Greece

Market Musings 14/1/2012

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From  a macro perspective, a few things have caught my attention in recent days. The British government published details of the 16 million square metres of property and land it owns across the UK – six times the area of the City of London. With significant excess capacity (550 of the 13,900 properties are vacant – while reading the article it’s clear that many of the ‘occupied’ ones are far from fully utilised) I assume that this will be an area of focus for generating new revenues / saving money for the Exchequer.


Now here’s something worth looking at – UK hedge fund Toscafund believes that a Greek exit from the eurozone would result in European social unrest, hyperinflation and a military coup.


Switching to equities, the UK retail sector is something that I’ve written extensively about in the past. Following this week’s sharp share price fall by Tesco, a lot of people are asking whether now is the time to pull the trigger and buy into the sector. Here are some perspectives from John Kingham, who asks: Are Marks & Spencer Shares Good Value? and John McElligott, who writes about many of the UK’s biggest listed companies in that space. I should add that I added some UK consumer exposure into my portfolio recently, having acquired a stake in pub group Marston’s, which I’ve written about before here.


Staying with UK equities, Calum has written a good piece on the listed housebuilders, that’s worth a read.


(Disclaimer: I am a shareholder in RBS plc) RBS has been in the spotlight in recent days. It announced 3,500 redundancies, with 950 jobs going at its Irish operation, Ulster Bank. While obviously these job losses are a tragedy for those involved, they are far from unexpected given the well-documented macro challenges facing the group. With almost indecent haste some brokers, including Seymour Pierce, have been rushing to give the shares a push on the back of the restructuring, and the price motored ahead on the back of this, closing at 24.1p on Friday having finished the previous week at 20.5p. I have a well-below-water legacy position in RBS but I won’t be rushing to add to it (or ‘average down’!) just yet – I would want to see a much brighter macro outlook before I’d consider doing that.


(Disclaimer: I am a shareholder in Ryanair plc) Ryanair announced a 25c per passenger charge to cover what it describes as a “new EU eco-looney tax“. Based on its current run-rate of 76m passengers a year this will raise at least €19m per annum. What’s significant about it is that it serves as a reminder that even an extra 25c in revenue per passenger can produce a chunky bit of change for Europe’s largest low cost carrier. I should also point out that Ryanair’s ‘fill the plane’ pricing model and its young fleet of aircraft means that it will always have a lower per passenger charge than its European competitors where green taxes like this are concerned, which underlines its competitive advantage. Staying with airlines, I was interested to read in Friday’s FT that of the 1.2bn people in India, only 55m flew in an airplane last year. Now that’s what I call a growth opportunity!


In the energy sector, Dragon Oil announced that it exited 2011 producing 71,751 barrels of oil per day, which is slightly ahead of its 70k target. Elsewhere, I found two pieces of interest in this oil sector note by Edison. The first is the chart on page 3 which rates oil stocks on an EV/BOE basis – this shows that some companies’ oil reserves are being valued at close to nothing (or in some cases less than nothing). The obvious health warning on that chart being that investors need to look at the companies’ ability to bring those reserves into production in a shareholder friendly way before rushing into all of those names. The second thing of note in the report is the question the analysts pose about the potential for consolidation in the sector, which echoes Paul Curtis’ views from two weeks ago.


(Disclaimer: I am an indirect shareholder in DCC) In the support services space, NCB published a research note on DCC. While they have trimmed their price target, they are retaining their buy recommendation, which I agree with – DCC is very cheap given its undoubted quality, stable business model and proven track record of creating shareholder value.

Written by Philip O'Sullivan

January 14, 2012 at 4:15 pm

Market Musings 14/12/11

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(Disclaimer: I am a shareholder in CRH plc) There was a good bit of newsflow around CRH and its peers in recent days. In the US, Martin Marietta made a $5bn hostile bid for Vulcan Materials.  If the deal goes through, on paper the combined entity will have 15% of the US aggregates market, compared with 6% for its nearest competitor, CRH. However, in reality I expect forced sales from the combined entity to satisfy regulatory concerns, which will present opportunities for CRH to add to its portfolio of assets in North America at very attractive prices (given the paucity of alternative buyers in the market for heavyside assets). In terms of the implications of the deal for CRH’s valuation, I was interested to read a note from Merrill Lynch which said if the Martin Marietta-Vulcan bid multiple is applied to CRH’s US aggregates unit, the rest of CRH is trading on only 2x EV/EBITDA…”or, looked at alternatively, CRH’s share price should be €25 if we apply this 20x multiple in any sum of the parts calculation”. At the time of writing CRH’s share price is €13.35.


This morning Paddy Power announced that it is entering the North American market after signing a B2B deal with the British Columbia Lottery Corporation. This is an excellent deal that highlights once more Paddy Power’s superior infrastructure – it follows another B2B deal with France’s PMU and showcases Paddy Power’s evolution into a business with both B2B and B2C offerings. As cash-strapped governments the world over relax gambling rules in an effort to find new streams of taxable revenue, this will present a clear structural growth opportunity for Paddy Power to win more deals of this kind.


We saw a couple of updates from firms exposed to the UK housing market this week. Carpetright’s H1 results looked reasonably OK (all things considered, given the difficult UK consumer backdrop) to me. There were no major surprises in the statement, with like-for-like revenues -2.4% while the dividend was suspended (as previously flagged). Elsewhere, Travis Perkins released a very solid trading update, in which management said the group is on track to meet profit and net debt targets for the full-year.


(Disclaimer: I am a shareholder in Datalex plc) Following the recent positive news of a resolution of its litigation with Flight Centre, Datalex was upgraded to ‘Outperform’ at Davy. The company issued a stock exchange release which said it would book a $2m exceptional item regarding this settlement. I was pleased to see the firm also state in the release that its EBITDA and net cash guidance for FY11 remains unchanged.


(Disclaimer: I am a shareholder in Ryanair plc) Staying in the broader travel sector, this is more bad news for tour operators – Ryanair is to open a new base at Palma.


Stockbroker Brewin Dolphin published a list of 15 stocks for own for the next 4 years (i.e. 15 for 2015).


Speaking of stockbroker recommendations, Dolmen upped its price target on Cove Energy to 200p/share. That’s 100% upside from where the stock was trading earlier today!


(Disclaimer: I am a shareholder in Irish Continental Group plc) And speaking of broker notes that caught my eye, I saw an excellent 30 page note from Merrion’s Gerard Moore today on ICG – “Cash Machine”. For income investors, this part is particularly interesting:


“Even in a stressed scenario we estimate ICG could comfortably pay a dividend of €1 (Yield 7%) and in our core scenario ICG could increase the dividend to €1.23 in FY 12 (Yield 9%) and €1.98 in FY 13 (Yield 14%), while remaining debt free“.


Switching to macro news, economist and Bloomberg Brief contributor Michael McDonough has been doing a great job in charting the decline in the Chinese housing market. This chart captures the trend in house prices there. And as we’ve seen in Ireland, such moves bode ill for China’s financial institutions and the wider economy.


Greece’s January – November budget deficit? €20.52bn. Ireland’s budget deficit for the same period? €21.37bn

Market Musings 24/11/11

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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 7/11/11

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The past couple of days have been rather busy due to college and work commitments, which from this blog’s perspective is a pity in that I wasn’t able to provide the sort of timely analysis that I normally try to do. We’ve seen a lot of troubling economic developments around the world, but against that we’re also seeing some positive signs from corporates and from the Sage of Omaha. Let’s drill down into what’s been happening.


(Disclaimer: I am a shareholder in Ryanair plc) Ryanair reported a very good set of numbers earlier today. Encouragingly, the group raised its full-year net income forecast by 10% to €440m. The market gave all of this the thumbs up, with the shares finishing up 5.1% in Dublin this evening. You can see an interview with Ryanair CEO Michael O’Leary here. Overall, it is a testament to the resilience of Ryanair’s business model that it is able to churn out a performance like this in such an extraordinarily challenging market. Elsewhere in the airline sector, Aer Lingus released decent traffic stats this morning, with good capacity management seeing load factors rise 2.1ppt in October.


Greencore’s share price jumped nearly 10% just before the close on Friday, leading me to wonder aloud if the weekend papers were going to contain any major news on the stock. In the event, the Sunday Times said that the fund behind the recent approach for the company looks to be US private equity firm Clayton Dubilier & Rice, which counts former Tesco supremo Sir Terry Leahy among its team. One to keep an eye on.


(Disclaimer: I am a shareholder in Total Produce) Staying with the food space, John McElligott posted a great blog earlier today on the UK retailers and also Irish headquartered fruit and vegetable distributor Total Produce. I’m a big fan of TOT for some of the reasons John touches on – a very defensive business model, high cash generation, a strong balance sheet and enormous scope for the group to expand through acquisition in the extremely fragmented European produce distribution space (where TOT is the biggest player despite having only 5% market share!).


An interesting development – Warren Buffett invested $23.9 billion in the third quarter, the most in at least 15 years.


To return to a regular theme on this blog – if you want to know how grim things are getting in China, read this.


Europe’s woes continue to rumble on. Earlier today Morgan Stanley downgraded European equities to underweight, citing deteriorating growth, falling corporate margins, poor policy responses and leading indicators. The only Irish stocks in Morgan Stanley’s European model portfolio are Tullow Oil (rated overweight by MS) and Ryanair (underweight). Italy has come under extreme pressure today, with political instability not helping matters. Summing up the gravity of the situation, Nordea in a note released earlier today warned that:


The printing press at the ECB increasingly seems to be the only weapon left to save the Euro area from meeting its Waterloo in Rome.

And finally, on a lighter note, Twitter has provided some good chuckles in recent days, such as:


From @Makrotrader in Sweden: “I really really like Tzatziki. But I will boycott that as well. It is over. No more Greece. Good thing they don´t have good wines


and from @drmarkperry in Ireland: “I wouldn’t buy stock in Groupon with an 80% group discount coupon

Market Musings 4/11/11

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It has been an extraordinary 48 hours since my last update. Greece’s government flip-flopped on the referendum issue which has given some relief to markets, at the expense of underlining again just how incompetent the Eurozone’s political leadership is. We’ve seen a huge amount of corporate newsflow and further updates on the Irish government’s fiscal strategy.


UK retailers have attracted my attention quite a bit since the start of the year. Regular readers will know how bearish I am on the sector, so while this isn’t an area I’d look to invest in, Lewis at Expecting Value did a good piece on some of the listed REITs that are one way to get exposure to the UK consumer. Elsewhere, Bloomberg published an interesting article about how more companies are hiring lease-breaking specialists, which bodes ill for the UK REIT sector in general.


(Disclaimer: I am a shareholder in RBS plc) Speaking of the UK, RBS released results this morning that were behind expectations, but despite this analysts seem to be taking a glass half-full approach to the stock. I’ve a legacy position in RBS that is horribly underwater, and I have to admit that I have been toying with the idea of doubling/trebling/quadrupling (!) up on my holding in an effort to claw back losses. However, my fears about RBS’ potential losses on European sovereign debt have made me hesitant up to now. It might be one to play once the Euro-madness abates. I’ll wait and see.


Closer to home, the Irish government published its Exchequer Returns data for the first 10 months of the year. The deficit came in at €22.2bn (roughly 15% of GDP) versus €14.4bn in the same period last year. Total Irish government voted spending was only -0.5% in the first 10 months of 2011 versus the same period in 2010. So much for “austerity”. Even more ominously, Ireland’s Exchequer deficit for the first 10 months of 2011 is equal to 83% of the entire tax take during that period. Leading on from this, the Irish government is raising its fiscal consolidation target to €3.8bn from the previous €3.6bn. This should come as no surprise to my readers, given that I sketched the reasons why this was certain to happen here.


The airline sector has thrown up a lot of interesting pointers in the past few days. Aer Lingus says it expects to report full year 2011 operating profit “at the upper end of the range of current market expectations“, which continues the more positive narrative I’ve remarked on before. Elsewhere, IAG (British Airways + Iberia) has announced that it is to buy BMI. This raises an interesting question as IAG currently has 44% of Heathrow slots while BMI has 8.5%. Should competition authorities compel IAG/BMI to shed some of these, I wonder if Aer Lingus would consider putting some of its vast cash pile to work and buy some slot pairs? As things stand Aer Lingus has the 4th highest number of slots (roughly 4%) at Heathrow, behind IAG, BMI and Virgin Atlantic.


In the betting space, Boylesports has bought William Hill’s retail estate in Ireland. While this is only a small number of shops, it is likely to be an incremental positive for Paddy Power, as the fewer people there are making odds, the less competition. I’d an interesting discussion about this on Twitter with a number of my “followers”, and it was interesting to have the Boylesports PR person join the debate, which goes to show that they are very clued in to social media, so well done to Nicola McGeady for her attentiveness!


The ECB’s 25bps rate cut is a small positive for Ireland. I’ve previously done up some back of the envelope calculations on how positive this is, if any of my readers have better data please send it on.


(Disclaimer: I am a shareholder in Datong plc). One of the smallest positions in my investment fund is Leeds based spy gadget maker Datong plc. When I first invested in them I did rather take it for granted that the equipment they produce would be used against ‘Johnny Taleban’ et al. However, I was intrigued to read that London’s Metropolitan Police uses some of its kit to, ahem, “eavesdrop” on people in the UK. Not that this story has done Datong any harm, given that its share price has shot up following this news. No such thing as bad publicity I guess!

Market Musings 2/11/11

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Obviously, events since my last update have been dominated by the staggering behaviour of the Greek authorities. Greece’s decision to hold a referendum now ratchets up the risk factor considerably, and it was no surprise to see markets get hosed yesterday. Even more ominously, the decision by the Greek political leadership to sack the heads of all three branches of the armed forces has raised fears in some quarters that Greece may return to its days of military rule before the crisis is out. As a postscript, RBS made a Freudian slip in a morning note issued yesterday, saying that it sees the Greek vote as “a major negative for Greece and the rest of the momentary union”!


Elsewhere, UK retail sector weakness is a theme that has been well-covered on this blog. An update from JJB Sports in which it disclosed an 18% decline in H1 like-for-like sales does nothing to lift the gloom. Today Next revealed that while its High Street stores have seen sales go into reverse, internet sales are performing resiliently. To me this again highlights the disruptive impact of the internet and the negative consequences it is having for the High Street, which is something I’ve touched on before.


Speaking of gloom, Danske Bank reported that 9 month losses at its Republic of Ireland unit, National Irish Bank, widened to €600m from €468m in the same period last year. This rise highlights how weak the domestic economy remains, despite headline growth rates being flattered by a resilient export performance (which is mostly led by multinationals).


(Disclaimer: I am a shareholder in Irish Continental Group plc) Staying with the domestic economy, I was unsurprised to see the  taxpayer subsidised Swansea-Cork ferry service go into examinership. This is an inevitable consequence of government – both national and local – going overboard. The six counties of Munster (population 1.2m) have four airports, and there is a perfectly good road connection between Rosslare on the east coast (from which ICG provides a Rosslare-Pembroke service at no cost to the taxpayer) and Fastnet Line’s catchment area. Is it any wonder that Cork and Shannon airports lose money when the State is happy to subsidise economically unviable competitors? The Exchequer just cannot keep bleeding taxpayers’ money. There just isn’t the need for a Swansea-Cork service on top of what’s already there – if there was, its operator wouldn’t be going into examinership despite having received so much taxpayer support.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) Turning to Irish corporate news, this day next week sees Q3 results from Smurfit Kappa Group. The broker notes I’ve received today that preview next week’s numbers all point out – rightly, in my view – that the stock is cheap. However, I was struck by the revelation in a note by the always-excellent David O’Brien at Goodbody that the range of estimates in the market for Q3 EBITDA is €238-266m. Given such an unusually wide range I wonder there’s a good chance that more than a few investors will be disappointed, unless, of course, the company produces blow-out numbers. If it doesn’t, this could mean that the most important aspects of the results release, namely (i) progress on debt paydown; and (ii) commentary on the outlook, given the challenging economic backdrop, could be overlooked by some investors, which would be a pity.


In the past few minutes Kerry Group has released an interim management statement. Management has reiterated the company’s FY goal of 8-12% growth in earnings per share. I don’t see anything in the IMS to move the price one way or the other. As far as I can see the performance across business units is as expected and there is no new M&A news.

Market Musings 3/10/11

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There have been so many points of interest on the markets today. Chief among them being the latest episode of a Greek tragedy that has dragged on so long and featured so many twists and (u-)turns that it raises fundamental questions about the ability of Europe’s political leadership. We’ve seen deteriorating economic indicators across many leading markets that I discuss below, while I’ve also seen some interesting posts on other blogs which I’m delighted to share with you.


Starting off with the eurozone, I had a bewildering conversation yesterday with someone who sees Eurobonds as the solution to the single currency bloc’s woes. I’ve repeatedly cautioned about their introduction, with the moral hazard angle and States’ need to cut debt, and not find creative ways to borrow more, underpinning my opposition. On the latter point, I endorse the FT’s James Mackintosh’s observation that: “There is no right level of debt, but consumers and investors clearly think [the] current level is too much. So [the government] lending push will fail“. This is a good analysis of the Eurobond issue which makes much the same argument I’ve been making for some months now.


Staying with the euro-area, today’s PMI numbers really highlight the deterioration in the European economy during the year to date. I also note continued ECB intervention in terms of buying peripheral countries’ debt, which touches on something I mentioned yesterday about the recent sharp move in Irish bond yields – namely, that you shouldn’t read too much into the improvement in Irish government bond yields, contrary to what some spin-merchants in the media here would have you believe.


Elsewhere, in a further sign of economic weakness in China, I note that Sotheby’s failed to sell all of the wine at a Hong Kong auction for the first time in 17 sales yesterday.


Speaking of economic weakness, UK house prices fell for a fifth straight month in September. Looking across the Atlantic, here’s a devastating summary of the Obama administration’s economic performance.


Turning to Ireland, I note Transport Minister Leo Varadkar’s remarks that “1 or 2” of Ireland’s 3 main airports would go bust if split into separate companies. Regular readers of this blog will know that I see consolidation of Ireland’s airports as inevitable – communities need to start preparing for this to happen now.


(Disclaimer: I am a shareholder in CRH plc and Glanbia plc) From an Irish corporate perspective, I note continued weakness in dairy price indices, which is a short-term negative for Glanbia. Goodbody’s Robert Eason spotted that CRH has sold another business, taking disposals announced and/or completed this year above €1bn, thus providing more firepower to a company that already has the strongest balance sheet in its industry.


In terms of the best of the blogosphere, Mark Carter had an interesting entry on Goal Soccer Centres. Despite its small (c. £50m) market cap, Goal is well followed by fund managers, as you can see from its list of significant shareholders. However, Mark’s analysis, and the fragile UK consumer backdrop, is enough to put me off the stock for now. Among Goal’s shareholders is blogger Sharecropper, who revealed a resilient ytd performance despite tough market conditions. John McElligott, who is always a pleasure to read, had a very good piece on the utility sector that’s worth a look. Those of you who love modelling shares need to read Expecting Value’s blog on the most effective use of DCFs – “The Matrix.


Today is German Unity Day, and among the pieces I’ve seen around that I was interested to read that West Germany considered bidding to “acquire” East Germany back in the 1960s. One of my favourite Twitter “feeds” is @schaefdogschaef, who is always good for providing caustic analysis of market developments. Today he laments:


Being at home 2day celebrating Germany’s unification. H. Kohl said those days it will cost the GER population not a Cent! Sounds familiar?!

Market Musings 27/9/11

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It’s been a very busy couple of days in terms of newsflow. Chief among this is that we’ve seen rumour after rumour about Greece, which hasn’t helped markets. I know it’s stating the obvious, but the sooner a proper resolution to its problems is reached the better.


There has also been a lot of talk about a medium-term return by Ireland to the debt markets. I find this to be fanciful given the troubled backdrop, and note that those excitedly pointing to the way our bond yields have fallen as a way to support this argument neglect to mention that this has been largely driven by ECB purchases of Eurozone bonds (totalling €156.5bn to date!) in the secondary markets. I don’t see Ireland returning to the debt markets before 2014 at the earliest in the absence of EU guarantees or some other mechanism underpinning new debt issuance. In addition, sentiment towards peripheral European countries won’t be helped if this prediction comes good – Pimco sees Europe slipping into recession next year.


I was amused to see “reassuring” comments from grandees in both France and Spain about their banking systems. We had similar pronouncements from some of the powers that be in Ireland before our banks blew up. Here’s then Financial Regulator Patrick Neary’s pitch to reassure the Irish population.


Aryzta issued a solid set of results yesterday. EPS came in about 2% ahead of consensus, while on the outlook the company says: “We believe FY 2012 consensus EPS appears reasonable and our stated earnings goals for 2013 are still attainable”. On the development side, Aryzta said it will spend €100m on three bolt-on acquisitions in Asia (Taiwan, Singapore) and the UK, along with building a new bakery in Malaysia. This development update highlights just how successfully the company has penetrated new markets across North America, Europe and Asia. Aryzta is cheap, trading on just over 8x its targeted FY13 earnings. However, it’s not one for me at this stage given that I see better value elsewhere.


(Disclaimer: I am a shareholder in Ryanair plc). I was also pleased to see a decent upward move in Ryanair – it has gained nearly 10% in the past week as oil has been carried out. It’s a useful reminder of the sensitivity of airlines to movements in energy prices, and also of its hedging qualities given the declines in some of my oil-related holdings! I note that the largest shareholder in its main competitor Easyjet is talking about setting up a new carrier, which marks the latest headache Stelios has caused for EZJ.


In terms of an overall market view, regular readers of this blog know that I am positive on equities. This stance is mainly driven by the the far more attractive yields relative to bonds and cash that shares offer and also the strength of corporate balance sheets relative to sovereigns.  I was pleased to see that legendary fund manager Crispin Odey is also favourably disposed towards equities.


Finally, I was interested to see that many Portuguese citizens are emigrating to the country’s former colonies in search of work.

Written by Philip O'Sullivan

September 27, 2011 at 2:01 pm

Market Musings 15/9/11

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There’s been a bit of a disconnect between the commentariat and the markets in the past 48 hours or so. Reading what many journalists and investors are saying on Twitter and other social media sites about the Eurozone crisis you get the sense that the world is about to end, but, as I’ve said before, Greece’s troubles are hardly “news” and, in any event, given the way markets have behaved in recent months I would argue that this debacle is already (at least largely) priced in. So, I’m not surprised to see a strong performance in share prices on both sides of the Atlantic yesterday, despite the gloomy commentary.


So what has been grabbing my attention? We’ve seen great results from CPL Resources, a positive development around Ireland’s debt position, some noise around Ryanair, privatisation murmurs here and a postponed IPO.


Turning firstly to CPL Resources, the company issued strong results yesterday, with EPS +57% to 19.2c, while the dividend was hiked by 25% to 5c. The group announced that it was putting some of its cash mountain to work, announcing a €20m share buyback, which is pretty material considering that the market cap before yesterday was a mere €93m. One of the best things about CPL for Irish investors is that, with its market leading position in the recruitment industry and presence across multiple sectors, it has a birds-eye view of labour market trends here. So, I was pleased to see management state that  “there are some positive signs emerging in the markets we serve”. In terms of my view on the stock, I really like the company. Its CEO and FD, Anne Heraty and Josephine Tierney respectively, are among the best executives you’ll find in any Irish plc. On the valuation, stripping out the net cash gives you an enterprise value of only €56m for CPL. This is an absurdly low valuation for a company with a dominant share of the Irish recruitment market, a strong management team and a proven track record. Obviously, labour market conditions are challenging, but don’t forget that a lot of CPL’s business comes from the multinational sector, which is doing rather well – as evidenced by buoyant merchandise trade data and a healthy IT sector.


The European Commission has decided to reduce the spread on the EFSF money lent to Ireland to zero. Some people seem to think that this means that the interest rate is now zero, so for their benefit this means that they are not charging Ireland any more than the EFSF has to pay to borrow it in the first place. While this is a positive, the estimated annual savings of up to €600m have to be viewed in the context of a deficit that will approach €20bn this year.


(Disclaimer: I am a shareholder in Ryanair plc) There was a bit of noise around Ryanair yesterday. Stockbrokers NCB cut their forecasts for the group on the back of a deteriorating economic outlook, which is completely reasonable, but I wonder if it’s already priced in given how far the shares have fallen in recent months. Elsewhere, Ryanair published an open letter to Aer Lingus’ Chairman setting out three measures that it believes will arrest the erosion of shareholder value that has taken place in recent years. I wonder how many of Aer Lingus’ shareholders believe the carrier should have hit Ryanair’s first takeover bid of €2.80 a share, given that Aer Lingus is currently trading at 66.6c.


Speaking of firms that the Irish government is a big shareholder in, I note that the State is hoping to sell a minority stake in electricity utility ESB. I think they’ll find it very difficult to find a buyer for anything less than a controlling stake, given the structural issues in the ESB. Predictably, this announcement led to much ideologically-driven debate yesterday. The problem with such a debate being that facts go out the window. The cost of electricity here is among the highest in the developed world, with a lot of this down to things like the ESB’s extraordinarily high staff costs. This is hardly good for the overall economy, and in particular the least well-off in society (which is something those on the centre-left who are aghast at the thought of selling any part of ESB should reflect upon).


Given the latest act in the Greek Tragedy, this article is worth a read: What happens when a nation goes bankrupt?


Finally, I note that Facebook has postponed its IPO to late 2012. Does this herald the end of the social media bubble I wrote about recently?

Written by Philip O'Sullivan

September 15, 2011 at 7:17 am

Market Musings 13/9/11

with 9 comments

Since my last update, my attention has mainly been caught by some really excellent original research from some of the other bloggers covering UK and Irish equities, M&A activity and further signs of the ongoing stress around peripheral Europe.


One story I missed over the weekend with all the travelling was this report that Origin Enterprises has been on the receiving end of an approach from a private equity player. The suggested price, £400m, looks implausibly low given that this places the group on a PE ratio of only about 8x. The group, which is rapidly deleveraging, is worth a lot more than that given that it is well placed to benefit from the structural growth opportunity in farming due to its strong positions in the areas of agronomy and farm inputs. It should be noted that Origin is 71% owned by Aryzta.


While I’m dubious about the Origin story, one genuine M&A story is the news that Kerry Group has expanded its ingredients operations in the EMEA region with the purchase of SuCrest. This is the type of tasty bolt-on that Kerry is particularly good at doing, and serves as a useful reminder of its considerable scope to expand through acquisition.


IFG shares crashed 26% to €1.20 today after announcing that takeover talks with Bregal Capital have ended. This puts IFG on an PE ratio of circa 6x, which is simply too low for a company with annuity-style revenues and a very strong balance sheet. Of course, the obvious question is what the catalyst to drive the shares from here is going to be, but for patient, longer-term investors, you are unlikely to go wrong with this stock.


There were more signs of stress in peripheral Europe, which make the political response to date look even more ridiculous. Last night Bloomberg reported that the Greek default risk had soared to 98%, while the Greek 1 year bond yield stood at over 117%. Italy, meanwhile, looks like it is trying to sell off the family silver to China. France’s banks have been battered by concerns over their exposure to Europe’s weaker regions. This chart shows how the market is seemingly adopting a “one size fits all” approach to SocGen and BNP – I recall seeing similar identical trading patterns in the Irish banks once upon a time.


Bizarrely, despite the debt worries, many investors continue to favour government bonds over equities at a time when corporate balance sheets have never been stronger!


(Disclaimer: I am a shareholder in Trinity Mirror plc) The wonderful Expecting Value blog had a great piece on regional newspaper group Johnston Press yesterday. Regular readers of this blog will know that my current preference in the UK media sector is Trinity Mirror. Comparing the two, I prefer Trinity Mirror due to its much stronger balance sheet (net debt + pension deficit at the H1 stage for TNI was £336m vs. £430m for JPR), better profitability (consensus EBIT figures for TNI and JPR for the current financial year stand at £97m and £73.8m respectively), and better brands (a mixture of national and regional versus regional).


(Disclaimer: I am a shareholder in Abbey plc) Another great blog is my only domestic peer (that I’m aware of) John McElligott’s “Value Stock Inquisition“. Yesterday he wrote a good piece on the UK listed housebuilders, concluding that while the sector is not yet right to buy into, Abbey looks the most attractive. He’s in good company with this view, see here for my previous musings on the stock.


Last, but certainly not least, UK Value Investor has a good analysis of BHP Billiton today that’s worth a read. I bought it for sub-£10 a share a few years ago and sold out at £17, so while I feel a bit foolish for missing its continued ascent since then, my bearish views on China mean that it’s not one I’m likely to buy into up here. Perhaps if it goes below £10 again it might look interesting to me.

Written by Philip O'Sullivan

September 13, 2011 at 5:47 pm

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