Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Irish housing

Market Musings 26/5/2012

with one comment

It’s been more or less all about the macro picture since my last update.


(Disclaimer: I am a shareholder in Ryanair plc) DAA, which operates Dublin, Cork and Shannon Airports (which collectively handle 96% of all air traffic into the Republic of Ireland) released its 2011 annual report. Total passenger numbers rose 1% last year (to 22.7m), a welcome rise after two successive years of 13% annual declines. Within the statement, the commentary from the CEO starkly illustrated the importance of Aer Lingus (including Aer Lingus Regional) and Ryanair to air travel into Ireland. The two Irish listed airlines in total commanded an 80% market share at Dublin Airport (AL 41%, RYA 39%), an 84% market share at Cork Airport (AL 56%, RYA 28%) and a 64% market share at Shannon Airport (AL 36%, RYA 28%).


(Disclaimer: I am a shareholder in France Telecom plc) Reuters ran an interesting article that said some European phone companies are cutting back on handset subsidies for their customers. It cited research by Bernstein which said European telcos spent €13bn on such subsidies in 2011, more than they invested in infrastructure during the year. My only telco holding is France Telecom, and while the article doesn’t suggest that it is minded to jump on this bandwagon (quite the opposite) I hope it has a change of heart, not least given recent guidance that it will miss its medium-term cash generation targets.


(Disclaimer: I am a shareholder in Bank of Ireland plc) I was pleased to see that Harris has increased its stake in Bank of Ireland by over 100 million shares. While the amount of money involved (~€10m) is not particularly significant for Harris, it nonetheless is a welcome vote of confidence at a time when nervousness around the PIIGS is understandably elevated.


Staying with the financial sector, there were a couple of interesting publications on the Irish housing market in recent days. NCB released a report entitled: Is the decline in Irish house prices over? which projected a further decline in national house prices of up to 20%, but noted wide regional differences – the scenario sketched on pages 7 and 8 says that it could take up to eleven and a half years to clear the stock of excess housing units in the border region. Elsewhere, the CSO said that residential prices in the Dublin market rose 0.5% month-on-month in April, a second consecutive month of gains, while residential prices outside of Dublin declined 2.0% mom – the 20th consecutive monthly decline. All of that brought to mind the regional variances I noted in the report I wrote for last year – A Tale of Two Irelands. Yesterday the Central Bank released its latest mortgage arrears data (for Q1 2012) which show that 1 in 10 mortgages (by volume) are in arrears, while a further 5% of all mortgages have been restructured (and are not in arrears). There doesn’t appear to be much of a slowdown in the pace of arrears growth – 7.2% of all mortgages were in arrears at the end of Q2 2011, 8.1% in Q3 2011, 9.2% in Q4 2011 and 10.2% at the end of Q1 2012. Thus far the CSO says that residential property prices have fallen from peak levels by 57% in Dublin and by 47% in the rest of Ireland. However, these reports suggest to me that the rest of Ireland might play catch-up over the coming quarters.


(Disclaimer: I am a shareholder in Independent News & Media plc) Someone posted an interesting comment on my case study on Independent News & Media  the other day which I thought I should highlight here given that it raises some good points:


Hi Philip,

Thanks for the article above, I enjoyed reading it. I am only new to the markets really and am trying to learn as much as I can so please excuse any stupid questions. I was wondering if you feel that another rights issue might be on the agenda for INM in order to further ease the debt situation? I have read of this being a possibility lately and this would make me worry about an investment here. On the other hand I am very tempted to buy when I look at the revenue streams & other assets (APN & S.A).

Also, do you have any views on the impact of Denis O’Brien’s recent purchases (up to 29.9%) of INM and what this may mean for the company?


To take those queries in turn – while INM’s debt position is somewhat troubling – net debt/EBITDA was a chunky 4.2x at the end of FY11 – I don’t see a rights issue on the agenda at the moment given: (i) the headroom it has before its debt maturity (May 2014 – although the group understandably wants to refinance before then); (ii) its compliance with covenants; (iii) its depressed share price; and (iv) as you rightly point out, the ‘levers’ INM has in terms of selling other assets. The group has exited India and Britain in recent years, and I’ve long argued here that it should sell APN News & Media, which would transform its balance sheet (net debt / EBITDA would drop to only 2.7x under one scenario I have outlined). Finally, I have no view on the impact of Denis O’Brien or indeed any other individual investor, given that I’m in no position to know what his precise intentions for the group are.


In the blogosphere, Lewis continued his valuable series of posts on UK plcs with a feature on listed pawnbroker H&T and a look at the lessons he learned from his holding in Morson, which has just received a takeover approach from its largest shareholder.  His concluding line from the Morson piece – “it’s the losses that are teaching me the most throughout this blogging process” – while wince-inducing, is something that I would endorse. Any fool can make money in a rising market, but it takes skill and plenty of experience of both good times and bad to navigate more challenging conditions.


Finally, did you know that 1 in 5 McDonald’s hamburgers consumed in Europe are made with Irish beef? Or that the British motor insurance industry has suffered underwriting losses in each of the past 17 years?

Written by Philip O'Sullivan

May 26, 2012 at 6:28 am

Market Musings 5/1/2012

with one comment

Ireland released its final set of Exchequer Returns data for 2011. The deficit works out at €5,439 for every person in the country. Regular readers of the blog will know well my sense of horror at this position and my view that the fiscal jaws need to be closed a lot faster (and tighter) than what the government’s medium term fiscal strategy proposes. In terms of the public finances, I have noticed over the past year a tendency on the part of certain commentators to suggest that the public finances are in the state they’re in purely because of the cost of bank recaps. While there is no denying that these play a role, let’s take a proper look at what the underlying fiscal position is, based on Exchequer Returns data for 2011.


  1. Total receipts for the year came to €36.8bn. Total current expenditure came to €48.0bn, leaving a deficit on the current account of €11.2bn.
  2. On the capital side, total receipts were €2.5bn and total expenditure came to €16.2bn. This produced a deficit on the capital account of €13.7bn.
  3. The total reported Exchequer deficit for the year was €24.9bn, which is the product of the result of (1) and (2) above.
  4. Contained within the Exchequer’s €36.8bn receipts for the year as a whole are the following: Income from the various guarantee schemes (paid by the banks) of €1.2bn; proceeds of €1.0bn from selling Bank of Ireland shares and bank recap fees of €0.05bn. So a ballpark €2.25bn in revenue came from the banks, leaving underlying revenues at €34.5bn. I am ignoring other taxes paid by the banks as these would have been paid anyway.
  5. Contained with the Exchequer’s €64.2bn spending for the year as a whole are the following: Acquisition of shares in IL&P €2.3bn; Promissory Notes €3.1bn; Bank Recap payments €5.3bn; Contribution to Credit Resolution Fund €0.25bn. This gives a ballpark direct cost of €11bn from the banks, or slightly more than one-sixth of total expenditure. Stripping out this leaves underlying expenditure at €53.2bn.
  6. Taking (5) away from (4) above produces an underlying deficit for the year of €18.7bn. Put another way, roughly 75% of the Exchequer Deficit for 2011 was not directly caused by the cost of bank recaps. Now, obviously, some of the deficit was indirectly caused by the banks e.g. interest payments on borrowings used to bail them out in previous years, while in addition the effect of the banks’ implosion on the state of the economy is clearly very material.


The above analysis is merely offered as a way of illustrating that there are more moving parts to our fiscal position than simply “bailing out the banks”.


Staying on the fiscal theme, Britain’s Defence Secretary says the debt crisis should be considered the greatest strategic threat to the future security of the West. Across the Atlantic, the US is reportedly considering ending its policy of having the resources to fight two major ground wars simultaneously, which is no surprise given the country’s ugly fiscal position. One of the most striking things about the US’ overseas military deployments is how lopsided they are – it makes no sense for the US to have 80 times more troops in Europe than it has in Africa, and neither does it make any sense to have nearly twice as many troops in Germany than in South Korea.


Following on from the bearish tack on Irish house prices I expressed in my last blog, here’s a fine piece by Cormac Lucey on the outlook for same.


Some 500 hedge funds have been attracted to Malta. Given our shared EU membership and the collapse in property costs here, there is no reason why Ireland shouldn’t be trying to attract these sort of companies to the IFSC.


This is an interesting article – Sweden shows Europe how to cut debt and weather the recession.


(Disclaimer: I am a shareholder in Ryanair plc) Switching to equities, Ryanair issued December passenger stats today. Reported traffic was -5%, in line with company guidance for winter of a decline of approximately 5%. However, given that November’s statistics were better than expected, at -8% versus company expectations of -10%, I wonder if there is some potential for outperformance on the passenger side as we head towards Ryanair’s financial year-end in March.


Finally, in the blogosphere John McElligott asks if Eurozone equities offer good value here. In the interests of transparency I should disclose that I own most of the stocks he identifies as being cheap in Ireland, namely: Bank of Ireland, Independent News & Media, Total Produce and Abbey.

Written by Philip O'Sullivan

January 5, 2012 at 5:32 pm

Market Musings 4/10/11

with 2 comments

It’s been an another extraordinary day on the markets. The S&P 500 officially went into bear market territory earlier today, as markets remain nervous about the European debt crisis. Most of Europe’s leading indices were down 2-3% today, while my own portfolio had one of its worst days ever, shedding a whopping 4.6%, with PetroNeft (-18%) – which I’d only recently doubled my shareholding in! – doing most of the damage there.


While markets have been focused on Greece in recent days, legendary investor Marc Faber continues a theme I’ve been warning about for some time – forget the EU debt crisis, a China meltdown is the real threat.


(Disclaimer: I am a shareholder in CRH plc and ICG plc) Most investment banks have been pushing a similar line to what Deutsche Bank writes in its latest update. It says: “We see GDP declining in the euro area over the next two quarters, expanding only sluggishly in the US“. Merrion’s Ross McEvoy sums up both schools of thought in the markets at this time in his latest quarterly update, published earlier today. McEvoy says the “tug of war” over whether this is “a double-dip or just a soft patch” will continue to year end. Based on his prediction of “subdued growth” he likes European equities here and recommends CRH, ICG, Henkel, Ericsson, Bayer, Axel Springer, Weir, Anglo American, Infineon and Kingfisher as long ideas.


Speaking of CRH, I note positive US construction data and also a marked improvement in Wolseley’s performance in the US, both of which are bullish for CRH’s North American operations.


Regular readers will recall that I poured scorn on the short-selling ban several European countries introduced for their banking stocks upon its introduction. None of you will therefore be surprised to read that a study by Instinet shows that it has done little to help European banks.


(Disclaimer: I am a shareholder in Playtech plc). I was pleased to see Paddy Power sign a multi-year deal with Playtech for its casino product. This represents a nice vote of confidence in Playtech, which is a stock I’ve struggled with in the past.


Turning to the Irish housing, I was interested to read Ronan Lyons’ call that we may be nearing the bottom of the market here. Readers of this blog will know how extremely pessimistic I am about Irish house prices. So, clearly, the starting positions for Ronan and I are rather different! I would disagree with his view that domestic banks here should stop deleveraging – they simply cannot access cheap funding to support such a move at this time (not to mention that to do so would be a breach of the terms of the EU-IMF arrangement). He’s right about the desirability of new banks coming in here (I’ve previously written about how HSBC and KBC in particular seem to be stepping up their presence in this market). Overall, I think we’re looking at 2013 at the earliest before house prices level off.


In terms of what other bloggers are writing, ValuhunterUK had a detailed piece on FTSE 250 stock Devro which is well worth a look.


I’ve also been expanding my writings into other “markets” – my first entry in the UCD Smurfit MBA blog was posted earlier today, while I was also interviewed about how our economy is doing by a Portuguese newspaper – assuming that gets posted online I’ll share it with you later this week.

Market Musings 25/9/11

with 3 comments

One of the spin-off benefits from the Rugby World Cup is that the early starts for fans in this part of the world means a extra few hours each weekend to get on top of things! So, what has been grabbing my attention since my last update?


We saw another “distressed property auction” in Dublin. While I wish the buyers well, my own instinct is that Irish house prices have further to fall. This is a view shared by Danske Bank (which owns National Irish Bank and Northern Bank). While some people have pointed to the high single digit yields properties at these auctions are clearing at as evidence of the “firesale” prices available in the Irish market, I would point out that an analysis that stops and ends at implied rental yields takes no account of the current elevated cost of borrowing. Nor does it take any account of the restricted credit supply in the market. Nor does it take into account the fewer government incentives for buyers relative to previous years. Nor does it take into account the fact that the domestic economy is still contracting. Nor does it mention the fact that taxes are going up this year and next year (at least). Nor does it mention the fact that you can buy equivalent properties in many advanced European economies for a lot less than what the so-called “distressed” properties here went for. Nor does it mention the fact that unemployment and emigration continue to rise. So, caveat emptor.


Speaking of buildings in Ireland, the latest government proposals on retrofitting insulation are positive for the likes of Kingspan. While I’m normally aghast at any government “incentives” – you only have to look at the property market to see how this can go horribly wrong – I think an expanded insulation scheme is a big win-win for Ireland at this time. For three key reasons. Firstly, Ireland has an army of unemployed builders to install the stuff. Secondly, as we import the vast majority of our energy, anything that will cut our import bill is a plus. Thirdly, we manufacture a lot of insulation here. You’ll note that these benefits stand in marked contrast to the previous Fianna Fáil administration’s bright idea of giving people grants to buy new cars – none of which are manufactured here.


Mike Bergen had some interesting comments about the Chinese housing market:

  • A 100 square meter apartment in China currently costs around 17 times average disposable income, according to Deutsche Bank
  • HSBC estimates that China’s housing stock is worth ~350% of GDP, in line with Japan’s residential real estate in 1990
  • Economist Stephen Green of Standard Chartered suggests that around 50% of China’s GDP is linked to the fate of the property market.
Regular readers of this blog will be aware of my grave concerns about the Chinese property market. Those new to this site should watch this YouTube video – which reveals that China has 64 million empty apartments – to see just how bad the situation is.
The Irish Times’ Ciaran Hancock had a spot-on article about the outlook for Irish broadcasters. The same bleak outlook applies to Ireland’s saturated newspaper market.
We had the latest rumblings regarding Greece overnight. I would share my old friend Makro Trader’s view that a collapse of the single currency will be avoided. This would cause complete chaos (some have even suggested civil war), and I think policymakers will deploy all necessary means to contain the problem. However, it’s hard to see a solution that doesn’t involve more debt being loaded onto the sovereigns (bearish for government bonds), inflationary monetary policies (bullish for gold and bearish for cash) and banks taking big write-downs (bearish for banks). Hence, it’s no surprise that I continue to advocate that investors stay defensively positioned as we move into Q4.

Written by Philip O'Sullivan

September 25, 2011 at 8:06 am

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