Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Independent News & Media

Johnston Press (JPR.L) – Negative Equity

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As everyone who invested in Irish property over the past decade or so knows, equity is the difference between the value of your total assets and the value of your total liabilities. Another thing that every Irish property owner knows is that while the ‘value’ of your total assets can often be subject to wild swings either to the upside or downside, liabilities are much stickier. And as it is with property, so goes the traditional print media space, where investors have seen accountants significantly write down once extremely valuable newspaper assets, while debt levels have proven immune to such accounting adjustments.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc and Independent News & Media plc) I have previously profiled two newspaper groups with a presence in the UK and Ireland, Trinity Mirror and Independent News & Media, in detail. In both cases, concerns around debt levels and extremely challenging (due to both cyclical – the economy – and structural – the threat of new media) market conditions have been to the fore. While the economy remains a headwind, both have made significant progress in improving their balance sheets. Trinity Mirror is the exemplar in this regard, cutting net debt by a third between FY09 and FY11 (to £201m), without recourse to its shareholders, while over the same period its net assets have risen by 38% to £675m. Over the same period INM has cut its underlying net debt by 26% to €427m (its movement in net assets is not particularly meaningful due to the impact of the deconsolidation of its Australasian business and other disposals).

 

Today I look at one of their peers, Johnston Press (JPR), which has faced similar balance sheet and economic pressures in recent years. The group publishes 13 daily newspapers, ‘more than 230’ weekly newspapers, ‘glossy monthly lifestyle magazines’ and 223 local websites in the UK and Ireland. Its flagship brands are The Scotsman and the Yorkshire Post, while Irish followers of this blog will be familiar with titles such as the Leinster Leader and Kilkenny People.

 

It has faced what can only be described as savage pressure on revenues due to the recession. Between 2007 and 2011 its total advertising revenues declined by 47% to £231m. All categories have been impacted by this, with employment advertising -75%, property -62%, motors -49%, ‘other classified’ -26%, display -24% and Ireland -63% over that period. Revenue from newspaper sales has held up much better, falling only 7% to £96m, while over the same period its very profitable contract printing business has seen revenues fall 23%.

 

In total, the group saw revenues fall £234m over the 4 years to 2011. Half of this was offset through reduced operating expenses, but the remainder hit the bottom line, with operating profits falling over 60% over the period to £65m. The diminished profit outlook has seen JPR book impairments against its intangibles (chiefly, the print assets) totaling £720m since the start of 2006.

 

This brings us back to the housing analogy of the opening paragraph. Due mainly to the impairments noted above, the book value of JPR’s assets has fallen by nearly half – from £1.9bn to just under £1.0bn – since the end of 2007. At the same time, the company’s level of gearing has risen from 98% in FY07 to 126% at the end of last year. It should be noted that net debt, in absolute terms, has been falling (FY07: £671m, FY11: £359m), helped by share sales totaling £207m over the past 4 years. Despite that decline, at the end of last year net debt stood at 4.1x EBITDA, which is an uncomfortably high multiple.

 

Earlier this year the group agreed the amendment and extension of its finance facilities until 30 September 2015. While this facility reduces the near-term risks around the group, it does not come cheap, as shown in this extract from JPR’s H112 results release:

 

The maximum cash margin in the case of the bank facilities is LIBOR plus 5.0% and in the case of the loan notes, a
cash interest coupon of up to 10.3%. In addition to the cash margin, a payment-in-kind (PIK) margin of a maximum
rate of 4.0% will accumulate and is payable at the end of the facility. If the loan facilities are fully repaid prior to
31 December 2014, the rate at which the PIK margin accrued throughout the period of the agreement will be
recalculated at a substantially reduced rate.

 

Looking through JPR’s accounts shows the diminished flexibility imposed on the group by its borrowings. Between 2009 and 2011 it generated some £227m in operating cash flows, but of this 37% went on interest payments and another 58% on repaying borrowings, loan notes and reducing the bank overdraft. This leaves very little for investment, and I was unsurprised to see capex average only £3m per annum over the period, down from an average of £40m per annum over the preceding 3 years. Given the ‘incentive’ to repay (or, as seems more likely, refinance) the facilities before the end of 2014, I would expect to see more of the same over the coming years. Which means no dividends (extremely unlikely in any event given the large stock of debt outstanding), no (meaningful, at least) acquisitions and limited resources (as I see it) for the group to effectively execute its digital-led strategy. On that note, while digital represents the great hope for traditional media, monetising it is proving a challenging task – in FY11 digital advertising contributed only £18.4m of JPR’s revenues, a rise of circa 20% on 2007 levels.

 

In terms of the valuation, at first glance Johnston Press appears very cheap, trading on less than 2x prospective earnings at its current share price (5.85 pence). However, it is important to note that the group comes with considerable net debt (£332m at the end of July) and a large pension deficit (£102m at the end of June). I ran a DCF valuation on the group using my usual 10% discount rate and applied a -2% terminal growth rate, which produced a negative equity value of -27.5 pence a share. However, it should be noted that this estimate is extremely susceptible to changes in the inputs – for example, every £10m move in the pension deficit moves my equity value by 1.6p. Excluding the pension deficit altogether (I always include it in my DCF calculations) produces a valuation of circa -11p a share. But if Johnston Press really has a negative equity value (in practice, zero, given that a share price can’t go below that!), then why is the share price at 5.85p and not closer to zero? I imagine that investors are betting on an eventual cyclical recovery in advertising, and I can understand why they would be making that bet – as I note above, while advertising revenue has effectively halved from the peak, newspaper sales has fallen by less than a tenth over the same time period, which to me indicates significant operating leverage that could accelerate debt paydown and transform the share price outlook if advertising was to stage a recovery.

 

Overall, my sense is this – if there is life in traditional print media (and I believe there is, hence why I’m long two stocks in the sector), Johnston Press represents a very high risk way of playing that theme. I feel that its hands are tied by its legacy debts, which limits the scope for investment, and there is a danger that equity investors could be significantly diluted (the firm has already agreed to issue warrants totaling 12.5% of its share capital to its lenders). Of course, were the outlook to improve, then the implied equity valuation would recover in tandem with that. However, at this time I see nothing in JPR to justify adding it to my portfolio either instead of or alongside my existing UK print media holding, Trinity Mirror. Both stocks are exposed to the same macro trends, but their balance sheet positions are fundamentally different – at the end of FY11, JPR’s net debt / EBITDA was 4.1x, while for Trinity Mirror it was just 1.6x. My thesis for some time, given the structural long-term decline that is underway in the print media sector, is that the financially strongest will be able to mitigate against a shrinking revenue pie with market share gains as weaker competitors close underperforming titles. Given that stance, I am happy to be a shareholder in the UK’s biggest regional press publisher, and not in the third biggest one.

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Written by Philip O'Sullivan

September 9, 2012 at 6:02 pm

Market Musings 3/9/2012

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(Disclaimer: I am a shareholder in Abbey plc) While the macro outlook is challenging, it is interesting to see that two UK focused housebuilders have been the subject of takeover approaches from management in recent weeks. An investment vehicle controlled by Abbey’s Executive Chairman now owns nearly 62% of the company’s shares, with its offer remaining open for acceptances until 1pm (Dublin time) on 7 September 2012. Elsewhere, the Chairman of Redrow has also made a preliminary approach to buy out the firm using a consortium comprising his own investment vehicle and two funds. When management teams, who presumably (!) have access to better information than the likes of you and me, are making such moves, this suggests to me that there is decent value still to be had in the sector.

 

Staying with UK stocks, I sold out of Marston’s this morning. My reasons for doing so were twofold. Firstly, the three catalysts that had been identified for the stock (The Queen’s Jubilee, Euro 2012 and The Olympics) are all over and I am guessing that the regular newsflow from the many quoted UK pub groups means that the impact of these have all been priced in. Secondly, the shares have increased by over 25% (in euro terms) since I added it to the portfolio earlier this year. You can read about why I was originally attracted to Marston’s here. In terms of where the proceeds are being recycled into (Harvey Nash plc), I will upload a blog later today outlining my rationale for the inclusion of ‘an old friend’ back in the portfolio.

 

In other food & beverage sector news, tropical produce importer Fyffes today raised its full-year adjusted EBITA guidance to a range of €28-33m versus the previous €25-30m. This improved outlook is based on decent organic growth and FX effects in H1 2012. Extrapolating from the adjusted EBITA of €23.3m Fyffes achieved in the first half of the year and adjusted diluted EPS of 6.48c in the same period, this points to full-year earnings of at least 8.5c, putting the stock on less than 6x earnings, so clearly cheap. Its sister company, Total Produce, which I hold, reports its interim results tomorrow.

 

(Disclaimer: I am a shareholder in Smurfit Kappa plc) There was a bit of news out of Smurfit Kappa Group since my last update. This morning it announced the launch of a senior secured notes offering, which will raise €200m and $250m, maturing in 2018. The proceeds will be used to repay all of the existing 7.75% senior subordinated notes due in 2015. Given the relatively low rates on offer for similar rated debt at this time, this should, I estimate, shave at least €7m from SKG’s annual interest bill, as well as extending the weighted average maturity of its debt, which reduces the perceived riskiness around the group. In all, a win-win move for Smurfit Kappa. Elsewhere, the group is to invest €28m in a new bag-in-box facility in Spain, which  is a further sign of how Smurfit Kappa’s improved financial position is giving it enhanced flexibility on both the M&A and capex fronts.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) It was confirmed that total Irish newspaper advertising declined 10% in the first 6 months of 2012. Annualising it, and putting in a little bit of a kicker for Christmas related spending, means that it’s still a circa €180m market, so not to be sniffed at despite the confident predictions of certain ‘new media’ devotees who assure me that ‘old media’ is completely toast. While I don’t for one moment dispute that old media is in long-term structural decline, my central thesis on the sector remains that it will not disappear for many years to come, with larger newspaper groups (such as INM) being able to mitigate against the effects of a shrinking market by gaining share as weaker competitors exit the industry. Of course, the extent to which equity investors can benefit from this depends on how successfully INM can prevail over its liabilities, and in this regard I was pleased to read reports of a third bidder entering the fray for INM’s South African unit. The more the merrier, clearly, as this should mean a satisfactory sale price for the business.

 

In the blogosphere, I was pleased to see the launch of two new blogs by Paul Curtis and Mark Murnane. I’ll be updating the blogroll later today – if there are any other investment and/or economics sites you think I should be following, please suggest them in the comments section below.

Written by Philip O'Sullivan

September 3, 2012 at 10:02 am

Market Musings 31/8/2012

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(Disclaimer: I am a shareholder in Irish Continental Group plc) The main news since my last update has been around ICG, whose shares have surged on the back of the announcement of a tender offer pitched at €18.50, or circa 15% above where they closed at on Wednesday. This announcement was contained in its interim results release, which revealed a resilient performance despite the macro headwinds. Revenues were flat, while good work on the cost side meant that EBITDA was only down €1.8m year-on-year in spite of a €4.5m increase in fuel costs. The company is also putting its balance sheet to work with its €111.5m tender offer, which I’m guessing should put net debt / EBITDA at circa 2x by the end of next year, so still undemanding. ICG has also announced the disposal of its Feederlink business for up to €29m, which looks like a great deal – 16x PBT. In all, yesterday’s news reaffirms my view on ICG – a very attractive business model (effectively a duopoly with Stena on the Irish Sea) with potent barriers to entry (capital, control of key port slots and other infrastructure), very strong cashflow generation with no major medium term capex requirements, huge operating leverage benefits once an eventual Irish recovery emerges and a fat dividend to boot.

 

Elsewhere, Kentz released good H1 results, with revenue +9%, PBT +36%, net cash +36% (to $241m)  while its backlog, at $2.54bn, is up 6% in the year to date. I’ve bought and sold Kentz before and would definitely consider putting it back into the portfolio at some stage – it’s a very well-managed business that is plugged into an area with buoyant long-term growth prospects where the long-term nature of work projects provides good visibility on revenues.

 

Switching to TMT stocks, betting software group Playtech released its H1 results yesterday morning, which revealed a very strong performance. It’s a stock I used to hold but which I sold on corporate governance grounds, which is a pity as I like the structural growth story around the sector, but not enough to hold a stock that has given me plenty of sleepless nights in the past!

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM released its interim results this morning. These revealed a 26% decline in operating profits to €25.4m on revenues that were 4% lower at €272.2m. Trading conditions are, unsurprisingly, described as ‘difficult’. I was, however, surprised by the sluggish progress on the deleveraging front. Net debt fell by €3.5m, or less than 1%, since the start of the year. Led by the drop in profitability, free cash flow halved to €12.7m (H1 2011: €23.0m), but most of this was eaten up by cash exceptional items. INM’s retirement benefit obligations widened to €187.8m by the end of June, from €147.0m at the end of 2011. A potential sale of its South African business would significantly improve INM’s balance sheet and save millions in annual interest costs, and on that note I was pleased to see the group confirm in the presentation accompanying the results that it has received 2 bids for that unit. In all, there is little to get exited about from this release. INM is under pressure due to the tough macro conditions, while its high leverage ratchets up the risks around the company. That is not to say that catalysts for a re-rating are difficult to identify. These include a sale (on reasonable terms) of the South Africa business, a recovery in its 30% owned associate APN’s share price, a resolution of its pension issues and an improvement in advertising conditions. However, identification and successful execution are, clearly, two different things, so I’m disinclined to increase my stake in INM (currently 120bps of my portfolio) for the time being at least.

 

(Disclaimer: I am a shareholder in France Telecom plc) There was further disappointing news from the French telecom sector, with Bouygues revealing that its profits in that area have sunk due to intense price competition from the new entrant, Iliad (whose results this morning have come in ahead of expectations). France Telecom is also being impacted by this pressure, but the impact is somewhat mitigated by Iliad’s use of FTE’s network. Speaking of FTE’s network, the group’s chairman was quoted by Reuters as saying they are in preliminary discussions with rivals about sharing 3G networks to reduce costs, which would be a welcome move.

 

Finally, smallcap financial IFG released its interim results today. These revealed a deterioration in profits in its continuing businesses, with UK profits falling due to falling SIPP volumes, investment in risk and compliance, and challenging conditions in the IFA space, while losses in Ireland have widened due to difficult economic conditions. The operating performance is, however, overshadowed by news of a £30m share buyback, which adds IFG to a growing list of firms (CPL, Abbey, Ryanair etc.) here that have launched similar measures in recent times. If only our plcs had the confidence to invest in growing their businesses through acquisition / greenfield initiatives that would (if done properly) augment their growth potential instead of engaging in de-equitisation. Oh well!

Written by Philip O'Sullivan

August 31, 2012 at 8:06 am

Market Musings 28/8/2012

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It has been a busy day on the results front in Ireland, particularly in the TMT sector.

 

To kick off, UTV Media, which has interests in the radio (local stations in the UK and Ireland, and the national talkSPORT station in the UK), television (the ‘Channel 3’ – ITV – franchise for Ulster) and new media (website design, marketing, broadband) segments, released its interim results this morning. This revealed a resilient performance in what are, clearly, challenging end-markets, with revenues and pre-tax profits climbing 4% and 3% respectively. The group continues to make impressive progress in terms of strengthening its financial position, cutting net debt by 21% over the past year to £50.0m. Across the group, UK radio revenues powered ahead, helped by the benefits of Euro 2012. Irish radio significantly outperformed, rising 4% in local currency terms, despite an estimated 10% fall in total Irish radio advertising in the first 6 months of 2012. The reason for this outperformance is that UTV’s Irish stations are all focused on the key urban markets on the Island of Ireland, which gives it a relatively more attractive proposition to offer to advertisers. On the television side, revenues and profits were down, with weak Irish advertising conditions to blame. With regard to the small new media business, margins were under pressure due to ‘competitive pricing’. In terms of the outlook, it looks like the rest of the year will see similar trends to the above, with outperformance on the radio side, underperformance in television and modest topline growth in new media. Not that investors should be too perturbed by this, as UTV is doing a decent enough job despite the challenging macro backdrop.

 

(Disclaimer: I am a shareholder in Datalex plc) I was pleased to see Datalex release very strong interim results today. Reflecting last year’s new contract wins (including Air China and SITA), revenues rose 18% to $15.7m. Reflecting the operating leverage inherent in Datalex’s model, nearly all of this  translated into profits – I note that in the first 6 months of 2012 Datalex generated gross profits of $2.8m, 82% of the total for the whole of 2011! This positive momentum should be sustained into 2013, with the likes of Indonesia’s Garuda and Fiji’s Air Pacific having gone live since the start of the year, while a number of other carriers including Delta are scheduled to go live later this year. On the balance sheet front, Datalex is guiding a 20%+ rise in cash reserves in 2012. Overall, these are excellent results, and continued good news on the new client wins front bodes well for the future. I’m not surprised to see the shares shoot higher in Dublin today.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM completed the restructuring of its board, with the election of four new directors and the appointment of a new Chairman and Senior Independent Director. With this out of the way, hopefully the focus can move on to the more crucial issue of repairing the firm’s balance sheet, and on this front the Irish advertising trends noted by UTV must surely bode ill for INM.

 

Insurer FBD posted solid H1 results today. The numbers were in-line with expectations, while management is sticking to its FY guidance. Within the results it was interesting to see that FBD has reduced its exposure to government bonds by over 40% in the year to date – this is a sensible move given what I believe to be a bubble in government bonds in Europe – although its exposure to equities remains low, at just 4% of total underwriting investment assets.

 

United Drug announced another two acquisitionsDrug Safety Alliance (total consideration, including earn-outs, of $28m) and Synopia (total consideration, including earn-outs, of $12m). Both businesses will form part of United Drug’s Sales, Marketing & Medical division. These deals take the number of acquisitions the firm has made so far in 2012 to six (five operating businesses and one property acquisition), so bedding these down will presumably take up a lot of management’s time over the next while.

 

In the resource sector Petroceltic’s H1 release contained no material ‘new news’. Management is focused on successfully executing the merger with Melrose Resources.

 

And that’s pretty much all that’s caught my attention so far today. Tomorrow brings results from PTSB, Grafton, Paddy Power and Glanbia, which will no doubt provide much food for thought.

Written by Philip O'Sullivan

August 28, 2012 at 2:51 pm

Market Musings 22/8/2012

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Having been on holidays in Finland and Estonia for the past week, today’s update represents something of a ‘revision session’ as I look through what has been happening since my last update on the stocks that comprise my investment universe.

 

(Disclaimer: I am a shareholder in AIB plc) To start off with the banks, according to press reports, AIB is looking to reduce its pension deficit by transferring loan assets into it. This is a common-sense move by the bank, which reported a pension liability of €1.5bn at the end of June, and I wonder if it might provide some food for thought for other businesses that find themselves asset rich but cash poor.

 

(Disclaimer: I am a shareholder in CRH plc) Ireland’s biggest company, CRH, tempered its full-year guidance when it released interim results a few days ago. Having previously forecast that it anticipated “overall like-for-like sales growth in 2012 and a year of progress for CRH”, it now says: “we expect that EBITDA for the year as a whole will be similar to last year’s level”. Tougher macro conditions are to blame, which are clearly beyond the control of the group, although it is mitigating these pressures through cost take-out measures and a focus on cash generation (cash earnings per share, at 85.8c in H1 2012, was well above the 67.1c achieved in H1 2011). On the M&A front the group stepped up its activity here, agreeing to total consideration of €235m for 17 deals in the first six months of the year up from the €172m spent in the same period last year. Overall, the high implied rating that CRH trades on allied to tough end markets means it is difficult to see the shares push significantly higher from here in the short term. This is compounded by a paucity of obvious near-term catalysts for the stock – its next investor day isn’t until November and its next development update isn’t expected until early 2013. One thing that could change that is a substantial earnings-enhancing deal, but on the M&A front it should be noted that CRH’s style is to go for modest bolt-ons over spectacular large transactions (recent chatter around India notwithstanding).

 

Elsewhere in the construction space Kingspan released good H1 numbers, which came in ahead of market expectations. Encouragingly, there was a good lift in margins (up 100bps to 7.00%) which underlines the strength of this performance. That Kingspan is outperforming the market shouldn’t be seen as a big surprise, however, given that its insulation base gives it a structural edge over more cyclical building materials companies. The benefits of recent acquisitions, particularly as they are integrated into the business, points to a solid outlook for this firm despite the macro headwinds.

 

In the energy space Dragon Oil released solid interim results. Management is sticking to its medium-term targets, and given its track record few would argue with them. It was interesting to see Dragon Oil is bidding for licences in Afghanistan – these are located in the more stable northern region of the country.

 

In other resource sector news, Petroceltic announced a merger with Melrose Resources. I don’t follow either company closely, but on paper this looks like a sensible deal which creates a reasonably sized group focused on the Black Sea, North Africa and the Mediterranean Sea with a blend of production, development and exploration assets – hopefully a case of the whole being more than the sum of the parts.

 

(Disclaimer: I am a shareholder in PetroNeft plc) Wrapping up on what’s been happening in the energy sector, there was an interesting deal in Siberia which has read-through for PetroNeft. TNK-BP sold $400m worth of assets in the region at an implied price of $2.56 a barrel – this is 3x the implied value of PetroNeft, all of whose assets are located in the region.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) In the TMT sector INM’s 30% owned associate, Australasian media group APN, released its interim results. While its underlying performance was in-line, it took a huge (A$485m – a 70% write-down) charge against the value of its New Zealand print assets. This distracted from a stable topline (continuing operations’ revenues +1% yoy) while underlying operating costs fell 3.3% yoy to A$357m and finance costs were nearly 10% lower yoy. Net debt has fallen to A$470m from A$637m at the end of 2011, helped by the restructuring of the outdoor business. Ominously for INM, APN cut its interim dividend from A3.5c to A1.5c, so INM’s cashflow won’t be helped by lower dividends coming from the southern hemisphere this year.

 

In the healthcare segment there was a good bit of news from United Drug in recent days. In its Q3 IMS management revealed that it now expects 8-10% earnings growth in 2012, a big increase from the previous guidance of 4-8%. The company also said that it is considering moving its listing from Dublin to London, which surely increases the pressure on the Irish Stock Exchange to seek a deal with another European exchange before it loses any more top plcs. The group also bolstered its Packaging & Specialty division with the acquisition for $61m of Bilcare’s UK and US clinical supplies unit. This is a sensible deal which further enhances UDG’s presence in that space.

 

And finally, one thing that might provide a lift to my readers in Clonmel today is that C&C’s Magners appears to be making a big marketing push in Finland – in a few of the bars in Helsinki I visited (where a pint* can set you back nearly a tenner!) I noticed that all the bar staff were wearing Magners branded t-shirts and the bottled stuff was widely available. Cider is wildly popular in Scandinavia (Kopparberg hails from Sweden) – by way of illustration, in terms of draught most of the pubs I was in only had two taps – one for either Koff or Karhu and one for cider. Magners is also stocked by the Finnish alcoholic beverage retail monopoly, the charmingly named Alko. So, while I don’t claim to have conducted exhaustive field research (not least given the prices the pubs charged!) it does highlight that Magners is making progress outside of its traditional markets. In its FY12 results C&C revealed that, outside of Ireland and the UK, worldwide Magners volumes grew 28% over the past financial year, with circa 10% of Magners revenue now coming from outside of the British Isles.

 

* Actually, being good Europeans the Finns sold 0.5 litre drinks in pint glasses.

Market Musings 21/7/2012

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Since my last update the latest corporate developments have been mostly about Irish companies looking to either move in or move out of other countries. Let’s examine what’s been going on.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) INM confirmed that it has received “informal and unsolicited expressions of interest” for its South African business. With the group’s main lender having reportedly categorised INM as one of its “most challenged corporate relationships“, divestments to strengthen its balance sheet appear to be a must. At the end of 2011 INM had net debt of €427m. If INM were to offload South Africa and its APN stake for €350m (based on media reports on South Africa could fetch and the current market value of APN), this would cut net debt to circa €75m. Add in the €125m current market cap INM is on and it would have an enterprise value of €200m against which the firm would have All-Ireland assets which produced sales and operating profits of €363m and €46m respectively in 2011, which was clearly a tough year for the media sector here. While you would have to adjust the above profits for INM’s group overhead costs, it seems to me that the market is applying a very low multiple to its Island of Ireland division. Divesting its overseas units should draw attention to this and potentially lead to a dramatic re-rating for INM.

 

DCC issued a solid trading update on Friday, which revealed that its Q1 performance was “ahead of budget”. However, management is sticking to its previous full-year earnings guidance, which is reasonable given how heavily skewed its profits are towards the second half of its financial year. To me there was little in the release to change the narrative around the company – DCC’s proposition to investors is a strong balance sheet and a good mix of assets, yielding consistently high returns, trading on an undemanding multiple.

 

(Disclaimer: I am a shareholder in CRH plc) Press reports suggest that CRH may be considering a €1bn+ deal in India. The cement assets in question have a combined capacity of 9.8m tonnes and they would more than treble CRH’s presence in the market if acquired. We’ll have to wait and see if there’s more to this story.

 

(Disclaimer: I am a shareholder in Marston’s plc) TMF’s Tony Luckett wrote an interesting piece on the UK pub sector – only the strong will survive. In it he cites research from CAMRA,  suggesting that the pace of pub closures in the UK may be leveling off. This is an encouraging claim, and it’s something that I’ll keep an eye on to see if the trend continues to improve.

 

(Disclaimer: I am a shareholder in AIB, PTSB and RBS) The Irish banking sector was in focus in recent days. PTSB gave a non-update on its restructuring plans, which contained nothing that wasn’t already in the public domain. My view on PTSB remains that, unless it can heroically engineer a large-scale recapitalisation to pave the way for a step-up in its lending capacity, it is very likely to remain a marginal player in the Irish banking market. I struggle to see why it wasn’t shunted into AIB. Today’s press asks if RBS’ Ulster Bank is gearing up to leave Ireland – I would think this extremely unlikely given the difficulties that would be involved, particularly in terms of time and costs – the problems of moral hazard, deposit flight, extricating the bank out of lengthy contracts, redundancies and so on would make this a very messy process (think of the hassle Lloyds has had with BOSI). I suspect that while Ireland is going to be down the pecking order in terms of capital allocation from RBS’ head office over the coming years, the much lower competition relative to before in the banking sector here means that margins on new lending should be quite attractive whenever the domestic economy and the financial system are restored to vigour. As the third biggest bank in Ireland, RBS should find itself well placed to exploit this future opportunity.

 

In the insurance sector FBD Holdings appointed UK firm Shore Capital as its new joint broker following the sad demise of Bloxham. This is a curious move given that FBD’s core operations are all in Ireland – might FBD be considering a push into Britain?

 

And finally – I was interested to read that 48 tonnes of silver bullion were recovered from a shipwreck off the west coast of Ireland.

Written by Philip O'Sullivan

July 21, 2012 at 1:37 pm

Market Musings 10/7/2012

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The past few days have been pretty quiet on the newsflow front, which has afforded me the opportunity to work on some financial models. I hope to publish a detailed case study on Smurfit Kappa Group later on this week, so those of you who follow the packaging sector might want to keep an eye out for that.

 

(Disclaimer: I am a shareholder in Abbey plc) This morning housebuilder Abbey released its FY12 results. While the tone was relatively subdued (it should be noted management has form for conservatism) the numbers themselves were pretty good. The firm completed 310 sales in the 12 months to the end of April, +2% year-on-year. Average selling prices were +4% across the group, as a 14% decline in Ireland, which now only represents circa 8% of turnover, was easily offset by a 7% increase in the UK, which accounts for circa 85% of revenue. The balance of Abbey’s activities are in the Czech Republic. Despite shelling out over €20m on share buybacks and landbank purchases, the group finished the year with net cash of €70.1m (56% of the current market cap), -€8.8m year-on-year. Overall, there’s nothing really in the statement for me to alter my narrative on the company, which is: Abbey is an exceptionally well run company, that is overwhelmingly exposed to the attractive South-East England market, with a very strong balance sheet, trading at an unwarranted 25% discount to its NAV. It’s cheap. I like it and would consider adding to my holding.

 

Since my last update, Aer Lingus says that it’s considering launching domestic flights in Britain. This serves to remind me of the value of the carrier’s Heathrow slots (it has the third highest number of take-off and landing slots and London’s busiest airport), and also of the opportunity it has to maximise the value of these through careful route management. If it secures the Heathrow-Edinburgh route, this will not be the first time Aer Lingus has operated routes originating and terminating outside of Ireland – it previously had a base at Gatwick Airport, while it currently flies a Washington DC – Madrid route on behalf of United Continental.

 

(Disclaimer: I am a shareholder in Independent News & Media) In the media space, following its recent shuttering of the Offaly Express, Johnston Press closed another Irish local title, Donegal on Sunday. As I’ve noted before, these unfortunate closures will by default result in market share gains for the likes of Independent News & Media, which publishes 13 local titles in Ireland.

 

In the blogosphere, John Kingham wrote a detailed case study on UTV Media, which he successfully traded in and out of. I covered the stock back in my analyst days (I feature in John’s case study!) and am quite impressed by the progress the company has made in terms of repairing its balance sheet. If only certain other Irish media groups were as successful when it comes to strengthening their financial position!

 

Speaking of case studies on highly indebted companies, Lewis took a peek at Premier Foods and rightly (in my view) concluded that the debt structure was unlikely to prove benign to equity investors.

Written by Philip O'Sullivan

July 10, 2012 at 8:20 am

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