Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘HMV

Market Musings 22/1/2012

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Gambling, alcohol, weapons and fossil fuels all feature prominently in this blog, which tells me that ethical investment funds are probably not for me!


(Disclaimer: I am a shareholder in PetroNeft plc) In terms of the oil sector, I felt quite ill on Thursday as I watched PetroNeft’s share price implode on significant volumes. The damage was done by one of its larger shareholders, investment fund Bluegold, dumping its shareholding. I don’t believe that this trade is any specific reflection on PetroNeft as Bluegold has also in recent days sold down positions in Petroceltic, Deo Petroleum and Mediterranean Oil & Gas. I also note this Reuters report from late last year. Unfortunately, the problem for small-cap oilies in general is that there is a view doing the rounds that they are unable to tap funding in these challenging times, so there seems to be a paucity of buyers to step into the breach. However, I can’t help but wonder if small-cap E&P names will resemble coiled springs whose share prices are ready to explode higher until either (i) sentiment and/or the funding environment changes or (ii) large-cap oil stocks start bidding for them as a way of bolstering their reserves at relatively inexpensive prices. Time will tell if my hunch is correct.


Staying with the broader energy sector, Kentz, which I previously was a shareholder in, released a solid trading update. Management see sales and profits marginally ahead of consensus, while net cash at the end of 2011 was an impressive $223m. One that I still have on my watchlist.


(Disclaimer: I am a shareholder in Playtech plc) In the betting space William Hill issued a trading update which contained two things that caught my attention. Firstly, the company said that it is to write down its telephone betting business’ book value (£47m) to zero. Internet displacement strikes again! This leads me on to the second thing that I was interested to learn – in 2011 net revenue in its online unit, which Playtech is a minority shareholder in, grew at over 20% for the second year running. While this was broadly in line with what the brokers I follow were expecting, it is nonetheless reassuring. However, my stance remains that I will look to exit Playtech at a suitable opportunity.


Moving from the bookies to the pub, Richard Beddard did up a good post on Greene King. Regular readers will know that I recently bought shares in one of its competitors, Marston’s. I quite like MARS, well, obviously – I wouldn’t have bought shares in it otherwise! – but I note that Richard also did up a relatively cautious piece on it two years ago which serves as a useful Devil’s Advocate view for when I get around to doing a proper write-up on why I pulled the trigger on it. For now, here is a summary on why I bought Marston’s.


(Disclaimer: I am a shareholder in Irish Life & Permanent plc) The Troika gave Ireland another pat on the back during the week. This has been extensively covered elsewhere, so I don’t propose to go through it in detail here. What did catch my attention from an equity investor’s perspective was the Department of Finance’s comments about Irish Life & Permanent in its press release following the visit. The government will make a decision on IL&P’s “future direction” by the end of April, which tells me that a relaunch of the previously aborted sale process around Irish Life will likely go ahead in the near future, possibly as early as when contracts are agreed with AIB to finalise Irish Life as the latter’s new insurance jv partner. The recap of Irish Life & Permanent is due to be completed by the end of June, so whether the money comes from private sources (through a sale of Irish Life) or the State will be known by then. We’ll also know for once and for all if PTSB has a future as a standalone entity. I’ve a piece covering all of these issues in more detail here.


HMV, which I’ve written extensively about before, announced a debt deal and improved supplier terms. While the announcement was greeted with euphoria, I don’t see it changing my view (terminal) on the outlook for its business model.


As noted before, my old friend Wexboy has launched an ambitious, and very worthy, undertaking – The Great Irish Share Valuation Project. While I prefer to plod through the Irish and UK markets (with the occasional overseas name thrown in) on a case study-by-case study basis, I like his use of an excel file to plot his recommendations. Here’s a downloadable summary of my views on the stocks I’ve covered in detail on this blog.


There has been a lot of media coverage of the upcoming referendum on independence for Scotland. The debate seems to be heavily based around economic matters, which is no surprise given the large transfers Scotland receives from England. I note a report in last weekend’s Financial Times which said that including its geographical share of oil revenues Scotland would have run a 10.6% fiscal deficit in 2010. It’s worth noting that Greece’s deficit in the same year was -10.5%. For years Alex Salmond said Ireland was a key part of his economic model for an independent Scotland. Looking at Scotland’s fiscal position he may get his wish.


This is an interesting statistic – US online advertising spending will surpass print ad spending for the first time in 2012.


Did you hear about the $300bn of 1934 US gov bonds that were “found” in a crashed plane in a Philippines jungle?


Speaking of finds, did you hear about the cannon with a range of 14.5km that was discovered in Northern Ireland?


Market Musings 9/1/2012

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Newsflow is still light enough, which is good news from the perspective of getting some articles written for Business & Finance and also in terms of getting ready for my return to Smurfit for the start of the new term.


(Disclaimer: I am a shareholder in Independent News & Media plc) I was interested to read that legendary Irish investor Dermot Desmond has been increasing his shareholding in INM. This confirms press reports before Christmas.


(Disclaimer: I am a shareholder in Ryanair plc and Irish Continental Group plc) In the transport sector, Aer Lingus announced that it carried 9.775m passengers last year, a 0.5% increase on year-earlier levels. This performance, against the backdrop of a very weak Irish economy, is a credit to the yield and traffic optimisation measures implemented by CEO Christoph Mueller. Its Irish peer Ryanair made some encouraging comments at Davy’s New York conference, as did marine transport group ICG.


Given my previous remarks about Ireland’s glut of airports, you can imagine how I felt on reading that only 110 people a day use State-subsidised Donegal Airport. Yet another example of taxpayers’ money being well spent by politicians!


Switching to retail, this morning brought yet another grim update from HMV, which said that HMV Retail’s like-for-like sales were -9.8% in the 9 weeks to 31 December.


In the pharma space, Irish microcap AGI Therapeutics announced that it has received a recommended cash offer from Aravis today. Elsewhere, CRO Icon inked a partnership deal with Shire.

Written by Philip O'Sullivan

January 9, 2012 at 11:07 am

Market Musings 19/12/11

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Earlier this year when I kicked off this blog one of the first themes that appeared on it was the fragility of UK retail. I wrote quite a bit about the structural and cyclical pressures facing HMV in particular. This morning the music and games retailer issued grim H1 results. Within the statement, management revealed that net cash flow pre-disposals was -£29.6m, while HMV Retail’s like-for-like sales were -11.9%. With underlying net debt of £163.7m (it would have been £200m had the £36.6m proceeds from the sale of Waterstone’s and HMV Canada not come through during the period) and heavy losses (H1 EBITDA was -£30.0m) this is not one for me. As a postscript, I note that legendary retail guru Nick Bubb has tweeted the following:


HMV said that “The Inbetweeners” DVD will be their best seller of all time! And they will sell 2m headphones this year


They’ll need to sell a lot more headphones to fix their balance sheet!


Apart from HMV shares, another thing that’s not for me is UK property. Rightmove says that house prices in England and Wales have fallen a remarkable 2.7% this month, while it sees a “challenging” 2012.


(Disclaimer: I am a shareholder in Bank of Ireland plc) I was pleased to read another positive update from Bank of Ireland this morning. The group has sold part of its UK and American loanbook (Burdale) to Wells Fargo for a minimal haircut (0.8% of Burdale’s drawn down balances), while it also announced that “loan redemptions and repayments remain in line with our expectations and deposits have increased since 31 October 2011“. The point on deposits is particularly encouraging as I would have imagined that recent Eurozone turmoil would have seen some outflows. Elsewhere within the statement Bank of Ireland says that in terms of the deleveraging completed to date and what’s yet to complete under the 2011 PLAR/PCAR, it sees this being done “within the overall base case discount assumptions used as part of the 2011 PCAR”, which has positive implications for the Bank’s capital position.


I have been tracking the Irish financials for some time, encouraged by positive noises on NIM and deposit trends. While acknowledging that the risks to the euro make this sector a highly speculative one, based on recent improving signs from the Irish banks and my gut feeling that the ECB will ultimately have to deploy its bazooka to save the euro (as all other options will, I believe, result in political bottlenecks) I am happy to increase my exposure to it. Hence, this morning I have quintupled my shareholding in Bank of Ireland (note that this takes its share of the portfolio to nearly 2%, so it’s still a relatively small position).


Switching to the political arena, following the recent EU summit much media attention focused, bizarrely, on how ‘isolated‘ the UK was following its decision to opt out of plans for further fiscal consolidation. I say ‘bizarrely’ because, outside of the political sphere (and even on that, support for the Tories has risen to its highest level in 18 months), it’s hard to see much evidence of downside for the UK arising from this. Sterling has strengthened against the euro to levels last seen in the first quarter of this year, while the performance of the FTSE 350 index, which is a much better guide for UK companies than the resource-heavy FTSE 100, looks to be tracking in-line with the Eurostoxx indices. Another bizarre aspect of the media coverage the UK’s decision has received is that many journalists appear to have completely missed the fact that most European countries are already significantly in breach of the Eurozone’s fiscal rules, as this handy graphic shows. So, the EU can propose as many fiscal rules as it likes, but when a majority of its members are significantly in breach of them, why should they be taken seriously?


In the US, I’m giddy with excitement to hear that Ron Paul is opening up a decent lead over his rivals in Iowa. A victory for Paul would put his policies of fiscal responsibility and sound money into the centre-stage where they belong. Speaking of giddiness, if you’ve 20 minutes to spare, why not watch this video of Ron Paul’s recent appearance on Jay Leno’s Tonight Show – from the standing ovation that greeted him when he came on stage to the cheers that all of his policy suggestions received, you can see why one American commentator was moved to write The passion for Ron Paul is reminiscent of the excitement then candidate Barack Obama was able to generate in 2008.

Written by Philip O'Sullivan

December 19, 2011 at 10:44 am

Market Musings 9/9/11

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Since my last update, we’ve seen the good (Tullow), the bad (ECB, Euroland, Obama’s jobs proposals) and the ugly (HMV).


On Tullow, one of my more thoughtful readers contacted me yesterday to ask about rumours of bid interest from CNOOC (China National Offshore Oil Corporation). This story continually does the rounds, and given both China’s thirst for oil reserves and Tullow’s spectacular oil finds in Ghana and Uganda (in particular) you can see why. However, while a “Chinese takeaway” is a credible endgame for Tullow, the story itself has appeared with so much frequency that one is reminded of the fable of the boy who cried wolf. So, I wouldn’t be punting on Tullow on the basis of the latest manifestation of this rumour. However, why I would consider punting on Tullow is its exploration activity. On this front, we received a reminder of Tullow’s proven skill in finding oil in new markets with news of a 72m net oil pay find in offshore French Guiana today. This is a shedload of oil. Goodbody’s Gerry Hennigan, who is one of the top oil analysts I’ve ever come across, puts today’s discovery into context:


“In comparison to [the] previous discovery in Ghana, 72m of net oil pay is considerable, Mahogany-1 and Mahogany-2 encountered 95m and 50m respectively”


And if that’s double-Dutch to you, this piece explains why Tullow’s Ghana find was huge.


In Euroland, we have seen both Greece being warned about its fiscal delinquency and the latest ECB meeting. On the latter, the euro has come under pressure as the European Central Bank has halted moves to hike rates, and indeed rate cuts in 2012 are increasingly being seen as a given.


Here’s Danske Bank on why the UK should be rated A+, not AAA.


Turning to the US, markets have given a lukewarm reaction to President Obama’s jobs plan. The best way America can grow employment is by giving companies the confidence to invest the trillions of dollars in cash they have sitting on corporate balance sheets, rather than having the Federal Government continue to spend money that it doesn’t have. The uncertainty caused by the unsustainable fiscal and monetary paths the Obama administration and Chairman Bernanke have respectively embarked upon does little to promote confidence.


Do you know who the 10 countries with the biggest gold reserves are?


(Disclaimer: I am a shareholder in Irish Continental Group plc) In terms of other corporate newsflow, Goodbody had a bullish note out on Greencore following its Uniq deal yesterday. They rate it as a “buy” with an 80c price target (c.33% upside). The broker is particularly positive on the food producer’s cashflow and 7.8% dividend yield. By my calculations, Greencore and Irish Continental Group (7.0% yield based on yesterday’s close) are the two highest yielding stocks listed on Dublin’s ISEQ Index. Something for income investors to think about.


Following yesterday’s grim updates from Dixons and Home Retail Group (which owns Argos and Homebase), the UK High Street Horror Show continued today with yet another set of eye-watering like-for-like sales numbers from HMV. The UK retail sector is not on my list of things I’d like to invest in at the moment!


Another one of my thoughtful readers brought this new film to my attention. Looks good!

Written by Philip O'Sullivan

September 9, 2011 at 1:23 pm

Market Musings 8/6/11

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There has been a lot of commentary about the different “bailout” (citation needed) rates being applied to the loans going to battered economies around the world. I see that Egypt has secured 1.5% funding from the IMF, and poor Ireland is being stiffed by the European Union (translation: France), despite the fact that of the three bailout countries we’ve been the star pupil. An issue which again prompts me to wonder why the Irish government is supporting the IMF candidacy of Christine Lagarde, who supports tax-raising policies that would drive the final nail into our economy’s coffin.

From an Irish corporate newsflow perspective, yesterday brought updates from Aryzta and its 71% owned associate Origin Enterprises, both of which are listed on the ISEQ. Aryzta says that “underlying EPS guidance given at the half year stage still appears reasonable”, but notes both that “raw material inflation has continued & shows no signs of abating”, while it sees a “fragile recovery in consumer activity in most markets”. Origin, which is riding the crest of the agri-commodity boom, says it’s “comfortable with consensus market estimates of 10% FY growth in adjusted fully diluted EPS”. The contrasting tone in their statements is no surprise and reflects the inflationary trends I wrote about in the March edition of Business & Finance here.

The saga around HMV rumbles on, with UK lenders (and, by extension, the UK taxpayer) taking shares in the music retailer. I’ve blogged about HMV’s issues before, but with the company continuing to face serious structural (declining offline music sales, intense internet competition with effectively no barriers to entry thus limiting pricing power) and cyclical (a weak UK consumer environment) issues I have no desire at this point to add my name to the group’s shareholder register. Staying with the UK, Severfield-Rowen, a stock I’ve traded in the past, issued a trading statement ahead of its AGM today. Severfield is a good stock to watch as it’s a structural steel player hence it’s a leading indicator for the UK construction industry (as its products are one of the first things to go into any major building project). It’s saying that  “a broad recovery of the UK market remains distant“. Elsewhere, Moody’s says the UK’s Aaa rating will be at risk if the govt misses debt reduction targets.

On the M&A front, I saw that US packaging firm International Paper offered $30.60/share for its domestic peer Temple-Inland. This comes on the back of the recent $3.5bn Rock-Tenn/Smurfit-Stone deal in the same sector, and hopefully this will give a decent lift to valuations of European firms in the industry such as Ireland’s Smurfit Kappa (Disclaimer: which I am a shareholder of).

Remember the Russian spy ring that used fake Irish passports? One of them is now launching a career in venture capital.

Some grim news from the US housing market: 66% of Las Vegas mortgages are underwater, 27.7% of total US housing debt has negative and near-negative equity.

Regular readers of my blog will know that I’m extremely bearish on China. The reasons for this stance have been well-discussed before – a construction bubble, widespread instances of accounting irregularities, environmentally ruinous development, government interference in the economy, corruption etc. But today I’ve a new one to add to the mix – flooding of Biblical proportions.

Finally, two snippets for the gold bugs: (1) George Soros sold $800m worth of gold in the first quarter of 2011; and (2) Several Irish people have asked me if we should re-launch the old Irish punt, backed up by our gold holdings. Sadly, I must inform you that our Central Bank holds a mere €200m of gold, the vast majority of which is curiously stored in the Bank of England!

Written by Philip O'Sullivan

June 8, 2011 at 2:06 pm

Market Musings 25/03/2011

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I haven’t been blogging the past few days because I had to finish off two articles for Business & Finance magazine. So I thought I should do a reprise of the things that interested me since my last blog.

HMV is something that has caught my eye a bit in recent months. Its shares have tanked in recent times on concerns about its debt pile (the group said on March 1 that: “it does not expect to meet certain of its covenant testswhen they are next tested by reference to its full year results”) and also the structural decline in offline music sales. On the latter point I wandered into its Grafton Street store in Dublin a few days ago and was struck by how little – I guesstimate less than 20% – of the floorspace on the ground floor was given over to music. This morning the company said that “it is exploring strategic options in respect of Waterstone’s and HMV Canada”. Assuming they can find buyers for these assets, this will help alleviate its debt worries, but the structural challenges will remain. As I write the company has an enterprise value (market cap + net debt) of £137m, significantly less than 10% of its annual revenues. There might be some value if the company adopts a more successful internet strategy, closes a lot more stores than it currently plans to do and successfully sells the assets referred to in today’s RNS (thus negating a need for an emergency rights issue), but for the time being there is too much uncertainty around its prospects to entice me.

Citigroup had a bearish presentation out during the week on the 8 shocks that “are about to slam the global economy”. Regular readers of my stuff in B&F will know that I’m quite cautious on the  market, largely due to the reasons Citi outlines, so I think their piece is worth looking at to get a quick snapshot of what could go wrong in the short term.  Speaking of perspectives, academics in the Harvard Business School have provided some insights into the effects of the Japanese earthquake that are worth looking at. I’ve a piece in the April edition of B&F (due out next week) on the lessons from that tragedy. And speaking of bearish presentations, check out this offering from Hugh Hendry.

I’m all for entrepreneurship, and Rolling Stone magazine had an interesting article on two young entrepreneurs that I found enthralling.

The bond market had a volatile week, with a lot of interest in peripheral Europe given that Portugal was firmly in the market’s crosshairs. There were some rumours that AIB might default on a coupon payment, which prompted this denial from the bank. Speaking of peripheral countries, I was interested to read that Ireland “is now a dead man walking in the dumbest game of chicken since the creation of the euro“. I was also intrigued by the enormous range of estimates about how much money Portugal needs, from €70bn to €130bn. Real finger in the air stuff.

Did you know that the USA and Ireland are 1st and 3rd in the OECD when it comes to taxing the rich?

The Moriarty Tribunal report came out during the week, and as RTE’s David Murphy (who I’ve a lot of time for) pointed out, it is a further blow to Ireland’s reputation as a place to do business in.

There were a number of broker notes out on Ireland’s larger plcs this week. Berenberg initiated coverage on CRH with a “buy” recommendation. Data compiled by Bloomberg show that of the 33 analysts who follow the stock, 11 rate it “buy”, 15 rate it “hold” and 7 rate it “sell”. There were conflicting broker notes out on Ryanair too. Morgan Stanley has something for the bulls – they see the the recent share decline as providing a buying opportunity, setting a €4.60 price target, while Credit Suisse is nervous on fuel and cut its PT to €3.30 from €4. Morgan Stanley also released its “Global Executive Brief” in which it outlined its main advice to investors – namely to stay cautious given risks such as (i) growth metrics that are near cyclical highs; (ii) earnings revisions that are deteriorating; and (iii) interest rate hikes.

The futility of attempts to interfere in the markets was shown by Egypt’s disastrous “stop-start-stop” reopening of its market after a 2 month halt. It brought back memories of the ban on shorting Irish financial stocks, which did little to halt the rout. The ISEF index of Irish financial shares closed at 4031.62 on September 18 2008 just before the ban was brought in. At the time of writing it’s at 305.39. Success!

The latest US housing data came out and it was disappointing. New home sales were -16.9% at 250k, some 40k below consensus. The last time the index was this weak JFK was in the White House. In the UK I was surprised by how weak the February retail sales data were – core sales were -1.0% mom versus expectations of a 0.6% decline.

The North Sea oil producers were in the spotlight this week between what I believe was a very ill-considered tax hike by Chancellor Osborne and Premier Oil’s results. Premier will not be too affected by the tax hike because it has $1.1bn of tax losses from its 2009 acquisition of Oilexco to use, so it’s in a better place than some of the other firms with exposure to the UK continental shelf.

There was an interesting article in today’s Irish Independent about Greencore, which I would go along with. The fragmented UK convenience food producer sector only serves to allow multiples crush suppliers’ margins. Consolidation needs to happen.

So, overall, not a lot of stuff to get enthusiastic about I would have thought. Yet at the time of writing the VIX index – or the “Fear Index” as it’s known – has improved for the seventh straight session. What will it take to get the markets to retreat from here? Citigroup’s presentation might provide a few useful clues.

Finally, I want one of these.

Written by Philip O'Sullivan

March 25, 2011 at 2:41 pm

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