Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Greencore

Market Musings 24/8/2012

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Since my last update Greencore announced a bolt-on acquisition, buying a ready meal facility from the Hain Daniels Group. This will help support the market share gains the group has been achieving in that segment in the UK. Furthermore, it is encouraging to see this additional capacity has been delivered through acquisition rather than greenfield investment, given that any incremental industry capacity would give the multiples something with which to play food manufacturers off against each other.


Elsewhere in the food and beverage sector, Diageo released its full-year results. Davy provides a good summary of them here, while the presentation is also well worth a look. I’m a big fan of Diageo’s business model, which offers strong diversification both in terms of geography and product categories, and also a play on the emerging middle classes in the developing world. However, trading on a PE approaching 17x, it is not one for me at this point.


(Disclaimer: I am a shareholder in Abbey plc) Yesterday afternoon the independent directors of Abbey released their response document following the recent receipt of a mandatory offer from Gallagher Holdings. Unusually, the directors have opted to sit on the fence and not issue a firm recommendation to shareholders on whether or not they should accept this offer, preferring instead to set out the pros and cons of the proposed takeover. I can’t help but wonder if Abbey’s independent directors would have come down more on the side of the Gallagher bid had the offer being pitched much closer to the firm’s NAV.


(Disclaimer: I am a shareholder in RBS plc) The Financial Times reported that RBS is under investigation in the US over alleged dealings with Iran. Should RBS be shown to have broken the US’ rules, I assume the damage will be confined to a manageable sum, as we recently saw with Standard Chartered’s £215m fine. This would represent a third hit to the group after the IT debacle and LIBOR issues earlier this summer, but given the one-off (and, in two of the three cases, legacy) nature of these problems I wouldn’t be too concerned. Regular readers of this blog will be aware that I am presently taking a contrarian view on RBS and am considering raising my shareholding in the business, which is trading on less than 0.5x NAV and which is unloved as the market focuses on one-off issues instead of the recovery in profits that is clearly underway.


Staying with the banks, IBRC, which comprises the former Anglo Irish Bank and Irish Nationwide Building Society, released its interim results this morning. An examination of the IBRC loanbook reveals a grim picture, with 76% of loans (pre-provisions) at the end of H1 2012 classified as either past due or impaired (end 2011: 72%). In terms of the different segments of the loan book, the percentages classified as either past due or impaired are as follows: Commercial 76%, Residential 75%, Business Banking 79%, Residential Mortgages 59% and ‘Other Lending’ 80%. The elevated levels evident across all components of the loan book starkly illustrates the challenges facing the group (and, by extension, the Irish taxpayer).  Gross customer lending was -5.5% in the first 6 months of 2012 to €27.5bn, with the stock of loans -5.4% in Ireland, -6.4% in the UK and flat in the US (this may be down to USD strength). Provisions were €1.1bn in H1 2012, so still at worrying levels (the 2011 total was €1.6bn). On the operational side, IBRC continues to manage costs relatively tightly – operating expenses fell 18% year-on-year in H1 2012. However, the costs of running the bank are the least of our concerns. In terms of what the ultimate bill for IBRC will be, clearly, this is highly susceptible to macroeconomic and political factors over which the bank has no control. At the end of June it had €1.5bn in surplus regulatory capital, so for the time being at least management’s guidance that the final bill will come in below the Central Bank / Financial Regulator’s estimates looks OK but, clearly, the risks at this time appear to be skewed to the downside.

Written by Philip O'Sullivan

August 24, 2012 at 9:39 am

Market Musings 4/8/2012

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The past week has been quite hectic, with two weddings and the deadline for completing a 200 page report for the company I’m on an internship with as part of my MBA studies to safely negotiate. Hence, blogging has been a necessary casualty of my lack of free time. So, what has been happening since my last update?


(Disclaimer: I am a shareholder in Ryanair plc) Ryanair released its Q1 results. These contained few surprises. The company is sticking to its FY net income guidance of a range of €400-440m which is reasonable in light of the early stage of its financial year. However, with the likes of Easyjet and Aer Lingus recently upping their forecasts, allied to Europe’s biggest LCC’s form for low-balling guidance (it upgraded its guidance twice in its last financial year) and healthy passenger numbers, I suspect the risks to Ryanair’s profits lie to the upside.


Elsewhere, as noted above Aer Lingus upgraded its FY earnings outlook in its interim results. Having previously said that 2012 profits “should match” the 2011 out-turn, it now says they will “at least match” last year’s performance. One aspect of the Aer Lingus results release that was particularly encouraging was the long haul performance – compared to the same period last year, in H1 2012 Aer Lingus’ long haul passenger numbers, load factors and yields all increased by 11.0%, 5.0% and 9.0% respectively. This is a magnificent performance given the tough economic backdrop and illustrates the success of Aer Lingus’ moves to leverage Dublin and Shannon, the only airports in Europe offering US pre-clearance, to win transatlantic customers whose journeys originated in other parts of Europe. This means that news of United Airlines terminating its Madrid-Dulles JV with Aer Lingus is not particularly concerning given that Aer Lingus clearly has sufficient demand to justify redeploying the Airbus A330 currently on the JV route to its own branded Ireland – North America routes.


(Disclaimer: I am a shareholder in BP plc) In the energy space BP released its interim results. Market reaction was extremely downbeat, but I am (perhaps foolishly?) taking a contrarian view to this and assuming that its run of disappointments means that management will either: (i) come up with shareholder-friendly goodies (a large buyback, chunkier dividends, sensible M&A) to revitalise the share price; or (ii) come under irresistible pressure from investors to unlock the value in the firm through a break-up of the company.


(Disclaimer: I am a shareholder in Trinity Mirror plc) In the TMT segment Trinity Mirror erupted this week, with its share price gaining circa 40%, helped by strong interim results. Regular readers of this blog will know that I’ve been an uber-bull on this name for a while, based on my view that it offers a compelling mix of: (i) Very strong cashflows; (ii) Substantial tangible asset backing; (iii) Rapid deleveraging facilitating a re-rating for the equity component of the EV; and (iv) An absurdly low (and unwarranted) valuation. I’m pleased to see that my central thesis is playing out, with the first six months of 2012 bringing a £60.5m reduction in its combined net debt and pension deficit, an amount equal to 75% of what TNI’s market cap stood at on Tuesday. The catapulting of its share price since then indicates that the market may be starting to wake up to this reality. I suspect the TNI story has a lot further to run – if you annualise the H1 earnings the stock is trading on a forward PE multiple of only 2.3x!


In the food sector Greencore issued an upbeat trading statement which revealed healthy underlying volume growth allied to management expressing confidence that it can meet full-year earnings expectations.


(Disclaimer: I am a shareholder in AIB plc and RBS plc) Switching to financials, I was surprised to read criticism of AIB’s announcement that it is to close a number of branches as part of its efforts to right-size its cost base. As its recent interim results showed, AIB is currently loss-making before you even take provisions into account – which is a clearly unsustainable position. Moreover, the vast majority of transactions these days are done using ATMs, cards and internet banking. Due to all of this, AIB (and indeed its domestic competitors) simply does not need as many branches as it did before.


Elsewhere, RBS issued an in-line set of interim results. While LIBOR, IT problems and a daft total nationalisation suggestion by elements within the British government have dominated headlines around the group, it is continuing to make impressive progress in terms of repairing its balance sheet. Investec’s Ian Gordon makes some good points around the numbers (and indeed the outlook for RBS) here. One aspect of the results that I found concerning was Ulster Bank’s impairments. RBS’ Irish unit saw impairments widen to £323m in Q2 2012 from £269m a year earlier, with mortgages to blame for this worsening trend. This has ominous read-through for the other banks operating in the Irish market.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) In the packaging space Smurfit posted another great set of results, with Q2 EBITDA of €255m coming in right at the top of the range of analyst expectations (€236-255m). Management reaffirmed its full-year EBITDA and net debt targets, but I suspect the risk to both is to the upside given that the two largest European packaging firms, Smurfit and DS Smith, have both recently announced chunky price increases.


(Disclaimer: I am a shareholder in Abbey plc) There was more good news for my portfolio from the construction sector, with Abbey’s majority shareholder, Charles Gallagher, making an offer to buy out the minority shareholders in the company. The price being offered isn’t exactly stellar, at 0.86x trailing book value, but it’s one I’m happy to accept given that it represents a 42% return on what I paid for the shares in 2009. If only the rest of my investments worked out so well!

Written by Philip O'Sullivan

August 4, 2012 at 8:21 am

Market Musings 29/6/2012

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It’s been an incredibly busy 48 hours since my last update. Let’s run through what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) We saw a lot of news out of the Irish financials. Bank of Ireland issued a couple of updates. The first related to the Irish mortgage market, where the group revealed that its share of new lending has increased to 40%, while it did not indicate (emphasis) any change in the pace of arrears relative to its previously stated expectations. Its second update, released yesterday, brought confirmation that Bank of Ireland has completed its €10bn divestment programme within PCAR base case assumptions. This comes as no surprise (the group had previously disclosed that it was 97% of the way through this) but it is an incremental positive and reaffirms my previously expressed view that Bank of Ireland is doing an excellent job at managing the factors it has control over. Bank of Ireland’s main domestic competitor, AIB, released an AGM statement yesterday, the key points of which are: (i) Its non-core business is performing better than expected; (ii) The integration of EBS is going well; and (iii) AIB’s share of the mortgage market is now 35%. On the last point, adding in Bank of Ireland’s share noted above means that 75% of  Irish new mortgages are being issued by AIB and Bank of Ireland – so, essentially a duopoly market. Smallcap IFG’s AGM statement revealed a good start to the year for its core UK and Irish operations, while management said it is going to review its options post the sale of its international unit. Elsewhere, NAMA repaid another €2bn of bonds,  taking its total debt paydown in the past 2 years to circa €3.5bn. At the end of 2011 NAMA had €29.1bn of debt securities in issue, along with another €1.6bn of a subordinated equity instrument. Overnight we heard news of a ‘breakthrough‘ agreement on Ireland’s debt burden which may have significant effects on the banks here. However, I would echo the caution expressed by Constantin Gurdgiev here, namely “we cannot tell how positive it is yet”.


(Disclaimer: I am a shareholder in RBS plc) Switching to financials in other jurisdictions, the LIBOR investigation has had a significant impact on sector valuations in the UK. Also, the “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger” quote on page 19 of the FSA’s report should have a significant impact on what people put in work emails in future! From my perspective, my UK bank sector exposure is limited to a small position in RBS, which had already become smaller on the back of its IT problems. Yesterday’s 11.5% slump threatens to push the share price below £2 for the first time since the 1-for-10 reverse share consolidation. I’m still positive on the stock on a longer-term perspective, and am monitoring its current difficulties closely with a view to gauging if the risk/reward justifies topping up my position – although clearly this is not something I envisage happening in the immediate future.


(Disclaimer: I am a shareholder in PetroNeft plc) This morning’s 2011 results from PetroNeft give me few grounds for optimism. While management say that “production levels have been stabilised”, at 2,200bopd presently output is still below the 2,300bopd reported in early April and the 3,000bopd achieved at the end of 2011. I also note management’s comments that: “we have initiated discussions with a range of strategic investors about possible farm-outs, long term off-take agreements and potential equity or asset investments which in the long term would strengthen the Group’s financial position”. This ties in with the revelation that Macquarie wishes to reduce its $30m available loan facility to PetroNeft by $7.5m, “however they are giving the Group time to work this out “. Overall my sense is that a solution to the challenges PTR faces will likely prove to be unfriendly to existing shareholders, but assuming I’m right perhaps this is already reflected in the price as I note that the shares have opened higher this morning.


In the food sector, Greencore made what it described as a ‘platform acquisition’ in the US, buying Schau for £11m, or around 0.5x annual revenues. It also revealed a new $50m contract, which assuming a 6% margin should lead to around $3m in extra operating profits on a full-year basis. Overall, Greencore’s US business continues to make progress, but it is still a marginal player in a huge market – I wonder would the capital the group has tied up here be better deployed in strengthening its strong position in the UK instead of trying to build a sizeable operation in the States. In other Irish food company news, Origin Enterprises released a fascinating presentation about its agronomy operations. I’m very bullish on the long-term outlook for this business, which is underpinned by rising food consumption across the world, the lifting of EU quotas and food security issues.


In the support services sector, CPL Resources released an upbeat trading statement, featuring the word “strong” no less than three times, which bodes well for Ireland Inc.


(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector,  News International raised the cover price of The Sun newspaper, which could (emphasis) pave the way for Trinity Mirror to follow suit with its Daily Mirror title.


In the blogosphere Lewis took a look at Plastics Capital, which is not a name I’m too familiar with and based on his blog not one I wish to become more acquainted with anytime soon! Speaking of blogs, FT Alphaville posted up UCD Professor Karl Whelan’s Target2 presentation. I was particularly struck by slide 20 – Eurozone countries’ net balances with the Eurosystem.


Finally, John Kingham looks at how his top tips for 2012 have performed in the year to date – I will outline how mine have done over the weekend.

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 23/5/2012

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It’s been a relatively quiet 48 hours on the newsflow front since my last update, but what little news we’ve seen has been pretty important. Let’s review what’s been happening in the market.


(Disclaimer: I am a shareholder in Ryanair plc) Swedish airline Skyways filed for bankruptcy, making it the second Scandinavian airline after Denmark’s Cimber Sterling to halt operations in a month. Skyways had two hubs, at Gothenburg and Stockholm, both of which are cities where Ryanair has a presence in (albeit not in the same airports) and I assume that Europe’s largest LCC will gain at least some benefit from its demise. Should Ryanair replicate its recent trick in Hungary, where it brought forward the opening of a new base at Budapest to exploit the demise of Malev, and step up its assault on the Scandinavian market, the benefit could be quite significant. Time will tell.


Greencore released very solid interim results, revealing that revenue from continuing activities increased by 9.3% with the all-important Convenience Foods division registering a 9.7% rise. Ahead of the results I said my main areas of focus were on: (i) the progress it was making with the integration of Uniq; (ii) how its expanded US operation is doing; and (iii) the balance sheet. On these points, Greencore says: “The integration of Uniq is progressing well and delivery is in line with our business case”, with the HQ and divisional cost reduction plans successfully executed, while it is “progressing well with the realisation of procurement benefits from our increased scale and with supply chain efficiencies”. In terms of the US, there was little specific detail provided in the statement, with much of the 14.3% revenue growth achieved in that market down to the On a Roll acquisition in December 2010. Switching to the balance sheet, net debt stood at £262.2m. £12.2m of that is attributable to seasonal working capital movements, leading to an ‘underlying’ net debt of £250m. Consensus net debt / EBITDA for FY12 is circa 2.9x, not too troublesome but at the same time towards the higher end of my own risk tolerance (in these troubled times), so it’s not one for me at the moment.


Fiordland raised its stake in IFG plc to just under 24%.


NAMA announced plans to invest €2bn in Ireland “to complete construction work in progress and develop greenfield sites”. This news has been enthusiastically welcomed in some quarters, but I’d be a little bit guarded on it. For starters, details remain a little sketchy, while I also wonder about NAMA’s ability to execute on such a significant step-up in this type of activity in the Irish market (last month it said that only €477m of ‘working and development capital’ approved by NAMA had been drawn down to date, with the majority of this being related to overseas projects). Furthermore this €2bn investment is spread between now and 2016, so the benefits of the plan will be spread over a number of years. My instinct, therefore, is to adopt a ‘wait and see’ approach.


The Cove Energy takeover battle took another twist, with PTT trumping Royal Dutch Shell’s offer.

Written by Philip O'Sullivan

May 23, 2012 at 2:24 pm

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Market Musings 20/5/2012

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After the huge volume of company updates we saw on Friday I’m hoping that this week will be a little quieter on the newsflow front. In this update I’m focusing on what to expect from this week’s main scheduled updates from across the universe of stocks I follow, along with one or two other nuggets of information that I found interesting.


(Disclaimer: I am a shareholder in Ryanair plc) Given that I have about 17% of my portfolio invested in Ryanair, tomorrow’s FY12 results from Europe’s biggest low cost carrier will be of particular interest to me. RYA guided in late January that it now expects to deliver net income of €480m, having previously upped its guidance by 10% to €440m back in November. With consensus standing at €494m (in my own model, for what it’s worth, I have €491.9m), it seems that the market expects an earnings beat from Ryanair. Of course, nobody trades the history, so all eyes will be on guidance for how RYA has performed since the start of its FY13 financial year, particularly on the yield side, along with any clues on special dividends (unlike most followers of the company I currently forecast two €500m payouts – in both FY13 and FY14 – but given the €106m it has spent on buying back its own shares recently, I’m starting to wonder if I should revise that to one special dividend and further share buybacks). I wouldn’t expect too much ‘new news’ on the cost side given that RYA has hedged 82% of its fuel needs for FY13 already.


(Disclaimer: I am a shareholder in Irish Life & Permanent plc) Another company updating the market this week is Irish Life & Permanent, which holds its AGM on Tuesday. I’m assuming that it will repeat the practice of previous years and release an interim management statement at 7am that morning. Following the announced sale of its insurance unit to the State, and news that the State is positively disposed to its restructuring plans, I assume that interest will be centred on: (i) the provision of more information on how the post-restructuring ptsb banking unit will operate; (ii) arrears and impairment trends in the loanbooks; and (iii) any hint of a possible re-start of the sale process around the UK buy-to-let mortgage book.


Food manufacturing group Greencore will release its H1 results on Tuesday. The main attention here will be on the integration of Uniq, current trends in the UK convenience food space and how well its (still relatively small) US business is performing. Trading on a PE of circa 6x and yielding around 6%, Greencore looks cheap but I dislike its chunky net debt.


(Disclaimer: I am a shareholder in Marston’s plc). With all the market noise on Friday, I didn’t get a chance to properly review the presentations that accompanied some of the results statements that came out that day until yesterday. One that really stood out for me was pub group Marston’s – happily, for all the right reasons. In the group’s interim results presentation management outlined a number of key positives, including: (i) slide 8 illustrates the positive trends in operating margins, which have risen 90bps in 4 years despite the economic headwinds, which underlines the successful execution of the firm’s growth strategy; (ii) slide 37 shows that the firm is comfortably within all of its debt covenants; (iii) slide 19 illustrates just how well the firm’s investment policy is paying off, with targeted ROI from new-builds of 16.5%; (iv) slide 25 shows how the learning effects from this strategy is paying off, with returns on more recently completed establishments standing at 18.5%; and (v) slide 38 shows that the firm has no significant near-term debt maturities, which gives it welcome breathing space. In all, I found Marston’s presentation to be very comforting and remain a happy holder.


The government announced that the keel has been laid for the first of the Irish Naval Service’s two new offshore patrol vessels. At 90m long these will be the largest ever vessels operated by the INS, and they are due to be delivered in 2014 and 2015 to replace two of the three Emer class vessels (commissioned in 1978, 1979 and 1980 respectively). In Department of Defence briefing notes prepared for the Minister after he took up his post early last year these were the only significant planned procurement items alluded to, which reflects the present financial constraints. However, by 2015, after the delivery of the OPVs, of the INS’ eight strong flotilla three will have been in service for over 30 years, so this is an area that will have to be revisited by the Minister before long.

Written by Philip O'Sullivan

May 20, 2012 at 12:40 pm

Market Musings 17/4/2012

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Having had a rather productive day in terms of college and making the final edits to my articles for the next issue of B&F I thought I’d “treat myself” to writing a short blog on what has been grabbing my attention in the past 24 hours or so.


(Disclaimer: I am a shareholder in Ryanair plc) To start with, I was interested to read in Bloxham’s morning wrap that political wrangling may harm Boeing sales – might this further delay a future Ryanair mega-order of new aircraft and increase the likelihood that Europe’s biggest low-cost carrier will pay a second €500m special dividend in addition to the one widely expected in RYA’s FY13 financial year? My own estimates for Ryanair have the carrier paying €500m out in each of FY13 and FY14, so let’s see how this dispute plays out.


(Disclaimer: I am a shareholder in Playtech plc) In the TMT space, UTV Media issued an update in which it revealed a significant contract win for its talkSPORT franchise – under the terms of the deal talkSPORT becomes the Premier League’s global audio partner, meaning that it will broadcast commentary outside of Europe on all 380 Barclays Premier League games in multiple languages. This could well prove to be a very significant win for UTV over time. Elsewhere, Playtech announced that it is to buy even more assets from Teddy Sagi, paying him over  €100m for B2B, B2C and property holdings. Given well-documented concerns about deals of this nature (Sagi is presumably in the Guinness Book of Records for the most related party deals with a single plc in history) it was no surprise to me to see the shares move lower today. I really have only myself to blame though, having previously whined about how the stock has repeatedly left me feeling “legged over” (!) but at the same time holding on to it in the hope that I could sell it higher up. There’s a lesson in that for investors everywhere.


In the construction space, it appears that the second largest builders merchant chain in Ireland may be carved up between Saint-Gobain and Grafton. Given that Saint-Gobain is quite a rational competitor for Grafton et al in the UK, I wouldn’t see any negative read-through for Grafton if Saint-Gobain were to materially step up its presence in this market.


Greencore bought a convenience food manufacturing business in the US, bolstering its presence in that market. They are paying $36.0m for the business, representing historic EV/Sales, EV/EBITDA and P/B multiples of 0.55x, 6.3x and 1.8x which to me look reasonable enough. Obviously the main focus for Greencore remains its UK operation, but for information on the conference call Greencore said that post the acquisition total USA sales will be pro-forma approximately £160m, which on a back-of-the-envelope calculation represents around 14% of group revenues. Greencore USA’s key clients include Ahold, Delhaize and 7-Eleven – while I don’t want to detract from those impressive customers, I note that these are not (obviously) clients of Greencore in the UK – I wonder if it could better improve its competitive position by emulating fellow Irish food stock Aryzta and ‘following the client’ – Aryzta has become a key supplier to McDonalds across at least two continents, for example. Building a relationship like that would reduce the risk for Greencore of having its margins crushed by its customers, given that it is in their customers’ interest to ensure that their suppliers are in good financial shape.


(Disclaimer: I am a shareholder in BP plc) Switching to macro news, regular readers of this blog will know that I’m unmoved by some of the more bullish commentary from certain quarters in this country about the Argentine economy, partly because of my first hand experience of having traveled through the country last year and having spoken to locals about the severe hardship many of them are experiencing, and partly because the Argentine government’s flair for doctoring statistics means that one should take any reports based on government produced data with a pinch of salt. Anyways, the latest development there is that the government has moved to nationalise YPF, a development which presumably serves to inform overseas investors that they would have to be out of their mind to put money into Argentina. Whatever about any short-term gains from YPF, how does driving away FDI help aid Argentina in the longer term? I am a little concerned about BP’s $7bn stake in Pan American Energy, especially given the war of words between Argentina and the UK over the Falkland Islands. Wexboy picks up the baton and beats Argentina’s crazed politicians with it here.


Finally, reports that the Irish Central Bank is to buy the half-built shell of what had been intended to be a future headquarters for Anglo Irish Bank are to be welcomed, given that it removes an eyesore on the quays that greets many of the 1.7m ferry passengers that use Dublin Port each year (not to mention those of us who live in that part of town!). Now, if NAMA could have similar results with the rest of its portfolio we’d be having some real progress!

Written by Philip O'Sullivan

April 17, 2012 at 6:14 pm

Market Musings 12/2/2012

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As the reporting season starts to really get going it’s no surprise that we’ve seen a lot of newsflow right across the market. Let’s run through what’s been happening on a sector-by-sector basis, and what the read-through for companies yet to report their numbers is.


(Disclaimer: I am a shareholder in CRH plc) Kicking off with the construction sector, I was interested to read that some of CRH’s major peers on both sides of the Atlantic have posted consensus-beating results. HeidelbergCement reported Q4 EBITDA of €639m, well ahead of consensus of €580m, while in the US Beacon Roofing reported EPS of 41c versus expectations of 29c. Just by way of a reminder, CRH’s geographic split is 50% North America, 35% Europe and 15% emerging markets. Based on recent sector results I suspect the risks to CRH’s full-year results on February 28 lie to the upside.


In the food and beverage sector, Diageo revealed that Guinness is recording strong growth in emerging markets, with volumes in Africa increasing by 8% while Asia-Pacific volumes rose 13%. Having had a few pints in a bar in Kuching on the island of Borneo last year, I can indeed confirm that Guinness is making headway in emerging markets! Elsewhere, Greencore announced a very impressive underlying sales performance, recording growth on this measure of 11.2% in the 17 weeks to 27 January. International Flavors & Fragrances, a major competitor of Kerry Group’s Ingredients & Flavours division, reported very strong results that bode well for Kerry’s FY results on February 21. Kerry has previously guided 8-12% growth in earnings for 2011, led by a strong performance by Ingredients & Flavours.


(Disclaimer: I am a shareholder in AIB plc, Bank of Ireland plc and Irish Life & Permanent plc) In the financials space, Danske Bank, which owns National Irish Bank, revealed that its Irish impairments and underlying profits both worsened in 2011. In contrast, KBC said that its Irish subsidiary saw impairment charges fall last year. We should get a clearer overview of the domestic situation when Bank of Ireland issues its full-year results on February 20th. Switching to our friends in the UK, there were a number of interesting data points that could suggest upside to the Irish banks’ deleveraging plans. Firstly, Barclays’ UK retail and business impairments fell 35% to £536m in 2011, making for a 44bps charge (2010: 70bps), which could enhance the attraction of any UK loan books in this segment that the Irish banks attempt to offload. Similarly, news that buy-to-let mortgages in the UK are enjoying something of a renaissance is positive news for Irish Life & Permanent in particular, given that IL&P has to sell its £6.4bn UK BTL-heavy loanbook as part of the PLAR requirements. Of course, time will tell how successful the divestments will ultimately be.


(Disclaimer: I am an indirect shareholder in Dragon Oil plc) As I alluded to recently, an investment fund that I am involved in has gone long Dragon Oil. A couple of days ago I came across this nice summary of the attractions of the company. Elsewhere, my Russian comrade on the MBA programme, Denis Shikunov, posted up E&Y’s 2011 Global Oil & Gas Transactions Review. I think we’ll be seeing a lot of M&A in this space during 2012, given the astonishingly cheap valuations to be found in the small-cap segment in particular.


In the blogosphere, Neonomic posted up an interesting analysis of housebuilder Barratt Developments. It’s a stock a lot of value investing bloggers like, but my preferred play in the sector, due to its bulletproof balance sheet and very inexpensive rating is Abbey. Elsewhere, John Kingham identified an interesting sounding net-net called Molins that’s worth taking a look at. Calum looked at Topps Tiles, which he rightly concludes is a leveraged play on an UK economic recovery. Wexboy posted up part IV of The Great Irish Share Valuation Project. Finally Kelpie Capital posted up a very good piece on Tesco, which is a stock I am strongly minded to purchase.

Market Musings 31/12/2011

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Having been on holidays down the country for much of the past week and having prioritised what little writing time I had on my 2012 outlook (part I and part II), this blog represents a ‘catch up’ on what’s been happening since my last wrap on December 20th. While this is traditionally a quiet time on the markets there have been incidents in the past where companies have tried to sneak out a profit warning just before Christmas or New Year’s Eve, but thankfully we didn’t see a repeat performance by any Irish plc this year!


To kick off with some macro news – in the UK, despite media reports of bumper Christmas sales in some areas, I note that consumer confidence indicators suggest that this optimism may be a little premature. It should be noted that base effects may impact on headline sales figures also, given last year’s weather-related disruption.


In the Eurozone, outgoing ECB board member Lorenzo Bini Smaghi said that QE could become an appropriate tool for the central bank to use if conditions worsen. I have previously stated my belief that the ECB will eventually resort to QE, so I’m not surprised by these comments.


This is an unbelievable statistic – Japan will raise more cash from debt issuance than taxes for a fourth year in a row. Given Japan’s demographics, I would be very reluctant to even consider investing in all but the most short-term Japanese government debt.


(Disclaimer: I am a shareholder in Playtech) The betting sector was in focus in recent days, following reports that the US is easing its hardline stance on internet gambling. We’ve seen reports like this before, so I’m inclined to be a little cautious around them. However, in the event of an easing of restrictions, this would have clear benefits for the likes of 888, Playtech, Digital Entertainment and Ireland’s Paddy Power (which has already inked B2B partnerships in France and Canada).


NCB published a great note on Greencore, noting that while it offers an attractive dividend yield, three key risks (cashflow, pension deficit, concentrated customer base) remain. As an aside, speaking of attractive dividend yields, just a point that keeps coming to mind whenever I dip into investment bulletin boards – it’s amazing how many “income investors” don’t understand that cash flow dividend cover is more important than the dividend yield when evaluating stocks from that perspective. I learned this the hard way as an undergraduate when I invested in Waterford Wedgwood, which was ‘yielding’ around 20% on paper. Within a short period of time the dividend was suspended and I ultimately lost most of my ‘investment’.  Had I been a few years younger it would truly have been a ‘schoolboy error’!


(Disclaimer: I am a shareholder in Total Produce plc) Elsewhere, Total Produce did a bit of housekeeping among its portfolio of investments, swapping its stake in its international jv with Capespan for a bigger shareholding in the South African firm and €8.5m in cash.


(Disclaimer: I am a shareholder in CRH plc) I note that CRH has made yet another bolt-on acquisition, this time in the US, which is the latest example of the firm putting its industry-leading balance sheet to work. I note also the slide in the value of the euro against the dollar to a 15 month lowthis is positive for CRH, which reports in euro and generates 45% of its EBITDA from its Americas division.


(Disclaimer: I am a shareholder in AIB, Bank of Ireland and Irish Life & Permanent) I was pleased to learn that Ireland has lifted its ban on short-selling financial shares. This is a long-overdue move, although the ban did illustrate, as I have shown before, the futility of such restrictions. This may focus some attention on the anomalous valuation of Ireland’s two largest quoted banks – Bank of Ireland (market cap €2.5bn) and its weaker rival AIB (market cap €35.4bn).


Finally, I wish all of my readers a happy, healthy and prosperous 2012!

Market Musings 12/12/11

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With Christmas fast approaching, there isn’t a huge amount of corporate news to keep on top of. I’ve 2 assignments and an exam to complete between now and December 19, and I’ll be releasing my tips for 2012 after that. In this short blog I round up all of the major newsflow that I’ve seen in the past 72 hours.


(Disclaimer: I am a shareholder in PetroNeft plc) Interactive Investor ran an interesting interview with PetroNeft CEO Dennis Francis. In it he ruled out a rights issue (which is positive news given how beaten up the share price is), and talked about how his priority is to grow output levels. While he touched on the issue of acquisitions, I got the distinct impression that he would prefer to maximise output from Licence 61 and Licence 67 (its current areas of operations) rather than buy other development assets. This is clearly a lower-risk (and more shareholder-friendly in the short-to-medium term) strategy. So, some positive noises there.


According to a report in the weekend press, Greencore is facing a hit of up to €4m due to an associate going into receivership. While this is clearly a setback, it is relatively minor (and one-off) so I don’t think it does anything to change my investment view on it. If you want a even more downbeat investment view on Greencore, read this two-parter from Wexboy (Part I and Part II).


(Disclaimer: I am an indirect shareholder in DCC plc) Staying with the food sector, DCC, Valeo (which is an associate of Origin Enterprises plc) and Boyne Valley are all said to be interested in buying Premier Foods’ €30-40m rated Irish business. Premier’s Irish brands comprise Erin, Chivers, Gateaux and McDonnells, while the Irish operation also sells some of Premier’s UK brands along with some agency brands. While I don’t know anything about Boyne Valley, at first glance it looks like Premier Foods’ Irish business would be a great fit for either DCC or Valeo.


(Disclaimer: I am a shareholder in Datalex plc) Australia’s Flight Centre has announced that it has settled its long-running legal dispute with Datalex. While no details of the settlement were disclosed, save for the matter having been resolved to their ‘mutual satisfaction’, it removes an overhang that has dogged Datalex since Flight Centre announced that it was suing it for $15m back in 2009.


Some fantastic news from the United States – according to Iowa Electronic Markets (real money futures) data, Ron Paul is now the favourite to win the Iowa Caucus in the New Year. This will put his message of sound money and fiscal responsibility – a gospel that needs to be preached throughout the West – firmly in the spotlight. To illustrate the mess the US is presently in, I was interested to read that only twice as many Americans hold passports than the number that are on food stamps.


Finally, NAMA expects to make operating profits (pre-bad debt charges) of €600m this year. Recent positive noises on the prospect for disposals in the UK and also tax changes here (stamp duty on commercial property cut from 6% to 2%, no CGT on purchases to end-2013 if held for 7 years) have improved the outlook for this entity, and will hopefully see it offload its portfolio sooner rather than later.

Written by Philip O'Sullivan

December 12, 2011 at 4:33 pm

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