Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Irish Life & Permanent

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 1/5/2012

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I found a few minutes to sneak in a quick update before the first of my exams so here is what has been grabbing my attention in recent days:


Aer Lingus announced that Etihad has purchased a 2.987% stake in the company. The statement from the company says that Etihad will not purchase any more shares in the carrier, pending the outcome of discussions on reciprocal code-share opportunities and “additional commercial and cost opportunities to develop a closer working relationship in areas such as joint procurement”. We’ll watch this space!


In other airline sector news, there was a very unusual development as Delta Air Lines bought an oil refinery in an attempt to reduce its costs. It’s a gutsy strategy, given that the skill-set needed to run an airline is presumably rather different to that needed to run an refining business, but I wish them well.


(Disclaimer: I am a shareholder in Independent News & Media plc) Smith & Williamson’s Mark Pignatelli (who’s long the stock) made a few interesting comments about Independent News & Media. While I’ll refrain from commenting on his bullish remark about INM being “probably the cheapest stock in Europe” , I concur with his observation about INM fixing its balance sheet and the flow through (hopefully) from a recovery in the Irish economy. I recently wrote about the desirability of INM selling its Australasian media interests, while the operating leverage inherent in INM (which hopefully will be amplified with Vincent Crowley, a man known for his cost-cutting instincts, now at the helm) should hopefully mean a significant recovery in earnings once advertising expenditure starts to pick-up.


(Disclaimer: I am a shareholder in Trinity Mirror plc) Elsewhere in the media space, Press Gazette did up a good piece on the UK local newspaper market. They found that 242 UK local newspapers have closed in the past 7 years, which to put into context compares with the 238 paid titles the largest local newspaper group, Johnston Press, publishes. Trinity Mirror publishes 130.


(Disclaimer: I am a shareholder in BP plc) BP released its Q1 results this morning. While the underlying replacement cost profit of $4.8bn lagged the Reuters consensus ($5.1bn), I’m not too concerned about it  – as management state today, BP continues to make good progress towards meeting its strategic objectives, so one quarterly earnings miss doesn’t prompt much nervousness on my part. The company has been on my watchlist for a while and I would view any share price weakness on the back of this as a buying opportunity.


Insurer FBD issued a very solid trading statement ahead of its AGM yesterday. While the “very competitive” Irish insurance market continues to soften, in line with domestic economic activity, FBD is more than holding its own, with operating profit in its underwriting operations “ahead of the prior year and marginally ahead of expectation”. I also note positive noises about the firm’s capital base. Management is for the moment (and is right to, given we’re not even half-way through the year) sticking to its full-year operating EPS guidance of 145-155c, but barring any adverse claims events I wouldn’t be surprised to see upgrades as the year progresses due to: (i) the benefits of the cost take-out programmes in recent years; (ii) FBD’s successful internet strategy; (iii) supportive conditions in its core agri customer base; and (iv) the expansion of its broker channel.


(Disclaimer: I am a shareholder in Bank of Ireland plc, AIB plc and Irish Life & Permanent plc) Staying with the financial sector, I was pleased to read that deposits at Ireland’s covered banks rose 1% month-on-month in March. Total covered bank deposits are now at their highest level since February 2011. This represents a nice vote of confidence in the sector. In terms of AIB, I see that it is not going to pay a cash dividend on preference shares to the NPRFC, which means that it will instead issue more shares to 99.8% shareholder, the State (i.e. the Irish taxpayers).


Hugh Hendry’s latest letter has been posted onto Scribd.


From a macro perspective, I was interested, but not terribly surprised, to read that Ireland’s government deficit over the past 2 years equals Slovakia’s entire GDP. Our deficit for 2011 alone was greater than the size of Cyprus’ economy. I find it increasingly difficult to comprehend how anyone could believe Ireland’s fiscal strategy is sustainable.


In the blogosphere, Lewis wrote an interesting piece on Cambrian that’s worth checking out, while Richard wrote a blog post on Churchill China that brought back memories from the time I covered Waterford Wedgwood as a sell-side analyst.

Market Musings 26/4/2012

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The next couple of weeks are likely to be very quiet on the blog as I face into the main body of exams on the MBA. Sadly, the volume of newsflow is proving to be anything but quiet!


(Disclaimer: I am a shareholder in Irish Life & Permanent plc) It was confirmed today that IL&P’s permanent tsb unit will have an independent future,  following months of uncertainty. The bank will submit a restructuring plan to the European Commission before the end of June, with the group splitting into three – CHL (UK loans), which has a loan book of €7.1bn, permanent tsb (the ‘good bank’, with the healthier loans), which has a loan book of €14.2bn, and AMU (Asset Management Unit, the ‘bad bank’), which has a loan book of €12.5bn. I suspect that the sale process for the UK loan book will be re-started once the Commission approves the restructuring, while for the rest of the loan book there are some significant questions outstanding on both capital and funding. In all, I think it’s too early to take a view on whether or not IL&P is worth buying at these levels.


(Disclaimer: I am a shareholder in Abbey plc) Switching to the construction sector, I’ve recently noted improving newsflow from the UK housebuilders, which bodes well for Irish listed (but chiefly south-east England focused) Abbey plc. One of its peers, Redrow, announced that it is launching a placing and open offer to raise £80m to help fund an expansion of its housebuilding operations. ‘So what?’, you might well ask. Well, what makes this noteworthy is that the placing is being done at an 11% premium to where the shares closed at the day before the announcement was made, with the placing fully underwritten by the Chairman. If he wasn’t bulled up on the prospects for the UK housing market, he wouldn’t be comfortable to underwrite a placing at a premium to the market price.  Another UK housebuilder, Taylor Wimpey, earlier today said: “UK housing market conditions remain stable and the Group is trading at the upper end of our expectations“. In all, the newsflow from this sector continues to get better.


(Disclaimer: I am a shareholder in CRH plc) Elsewhere, I was pleased to read confirmation that Semapa will pay CRH €574m for its 49% stake in Secil. This will cut the group’s net debt / EBITDA ratio to 1.5x or so by end-2012, which underlines CRH’s capacity for a step-up in M&A activity.


(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) In the TMT sector, regional newspaper group Johnston Press published its 2011 results yesterday. These revealed continued difficult conditions in Ireland, with advertising revenues dropping 19.1% in 2011, which was the same rate of decline as in 2010. In terms of the read-through for INM, this comes as little surprise (INM referred to “very challenging trading conditions” in Ireland in its 2011 results on March 22), but I do suspect (emphasis) that the parts of the country where Johnston Press’ portfolio of Irish assets are located are doing worse (from an economic perspective) than where INM’s portfolio of Irish regional assets is located. From the perspective of Trinity Mirror, I note comments from Johnston Press that it is moving a number of daily publications to weekly editions, which fits with my narrative of the UK newspaper sector becoming right-sized. Elsewhere, I was pleased to see share purchases in Independent News & Media by both the new chairman and the new CEO.


Elsewhere, regular blog readers will know that Playtech has been a constant thorn in my side in the 18 months or so since I bought into it. I was delighted to take the opportunity to sell out of it on Tuesday afternoon at 381p/share, clearing all of 1p/share profit (in constant currency terms) relative to my entry level. I’m mulling over what to do with the proceeds and some other cash reserves – I have 20 live positions in the portfolio which is just about as many as I can safely manage given the other pressures on my time. What I would like to buy is more exposure to sterling denominated assets (given the near-term political uncertainty in Euroland) so I’m considering raising my existing shareholding in one or more of Trinity Mirror, RBS and BP.


Pharma group Elan posted “solid” Q1 results earlier today, with management saying that it’s on track to achieve its full-year financial guidance.


The Cove Energy takeover story took another twist as Royal Dutch Shell made a recommended cash offer for the company. As noted before, the sale of Cove will mean a nice windfall for a lot of Irish private investors.

Written by Philip O'Sullivan

April 26, 2012 at 4:34 pm

Market Musings 2/4/2012

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Just when I thought the volume of newsflow would ease off as we reached the end of the results season, we get another slew of trading updates, placings and news of commercial opportunities!


(Disclaimer: I am a shareholder in Irish Life & Permanent plc) IL&P’s results this morning contained few surprises given prior guidance provided by management on impairments and arrears. The loan-to-deposit ratio improved to 227% last year from 249% in 2010, and this is of course miles offside the Central Bank’s target of 122.5% by the end of 2013 (I should note that €500m of deposits from Northern Rock moved into ptsb after the year-end). The net interest margin rose 10bps yoy to 0.96%, helped by rising variable mortgage rates and a greater reliance on low-cost ECB funding. We’ll know by the end of this month what the State’s intentions for the future of the banking unit is. Until we get some clarity on that, I remain inclined to steer clear of the stock (my current position is a residual legacy holding that scarcely seems worth the effort of selling!)


(Disclaimer: I am a shareholder in Datalex plc) Friday’s results from Datalex were rather lost in a deluge of news from the financials sector along with Ryanair’s chunky share buyback. Going into them I had forecast revenue, EBITDA and cash of $28.6m, $4.6m and $12.9m respectively. In the event these came in at $28.0m, $4.3m and $12.5m, so a little bit behind me but bang in line with what brokers Davy (revenue of $28.0m, EBITDA of $4.3m) and Goodbody (revenue of $28.5m, EBITDA of $4.3m) had forecast. In terms of my model, not a lot has changed. I now expect revenues of $29.3m and EBITDA of $5.3m in 2012, which is perhaps too conservative given that the company will have at least eight new paying clients this year. Against that I’m a little nervous of how the tough economic backdrop could be impacting demand for a number of its existing clients. Here I would point to the $0.4m provision Datalex booked in its 2011 accounts against its receivable from Spanair, which ceased trading in January. In any event, the model now spits out a valuation of 62c/share (versus the previous 64c / share), which is 24% above where the shares closed at on Friday (50c). Datalex is certainly cheap, at 6.4x 2012 EV/EBITDA (on my estimates) and with the balance sheet bolstered by gross cash of $12.5m (just over a quarter of the market cap) it’s not a stock I’d lose any sleep over. I’m happy to stay long, and would probably top up my position if I realise some gains elsewhere in the portfolio (I’ve as much total market exposure as I’m comfortable with for now).


(Disclaimer: I am a shareholder in Playtech plc) Elsewhere in the TMT sector, I note that Playtech is one of three firms shortlisted to provide an online betting platform for Greece’s OPAP, which is Europe’s biggest betting firm. While we’ll wait and see what the outcome of this process is, it’s encouraging to have seen a consistent stream of good news from Playtech of late.


(Disclaimer: I am a shareholder in France Telecom plc) In the final bit of TMT related news, I was interested to read that France Telecom’s new low-cost competitor in the French mobile space, Free, appears to be having serious teething problems. This is presumably deleterious to Free’s customer acquisition strategy, and by extension bullish for the likes of France Telecom and Vivendi. I wrote a recent detailed piece on France Telecom here.


In the healthcare space, Merrion Pharma released results on Friday afternoon. With revenues, EPS and net cash all declining, the results looked just like you’d expect results put out just before the weekend kicks off to look!


(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, I picked up a story from the South African media that said the third biggest shareholder in Capespan, Bidvest, has given up on plans to boost its stake in the firm. The article speculated that either of the two biggest shareholders, Zedar and Total Produce, may buy out Bidvest. Given the strategic importance of Capespan to Total Produce, I would welcome an increase in TOT’s stake in the firm.


(Disclaimer: I am a shareholder in PetroNeft) Switching to the energy sector, PetroNeft issued a reassuring update this morning. Following a recent run of disappointments, it was good to see a 36% increase in its reserves while output was steady at 2,300 bopd. So, no surprise to see the shares open strongly this morning. Elsewhere, Providence announced that it is raising $100m to help commercialise its recent oil find offshore Cork and pay down convertible debt.

Written by Philip O'Sullivan

April 2, 2012 at 8:10 am

Market Musings 30/3/2012

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Irish based market watchers have been hit with a Tsunami of news from the financial sector in the past couple of days, and with Irish Life & Permanent due to report its FY 2011 numbers on Monday there’s more to come.


(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) To take the Irish financials’ newsflow in chronological order, earlier this week we saw the Irish government buy Irish Life from IL&P for €1.3bn, which is the insurer’s NAV. This comes as no surprise given previous guidance that the IL&P recap question would be resolved by the end of April, which is something I’ve written about previously. In terms of IL&P as an investment proposition, well, we’ll have a better handle on things post Monday’s results, but taking the current market cap of €1.6bn and backing out the €1.3bn for the insurance arm this means the market is in theory valuing the banking unit (a loanbook in the UK and Ireland of circa €33.5bn by my estimates) at €0.3bn. This does look punchy to me in light of ptsb’s low NIM (97bps in H1 2011) and the very high impairment charges (€1.4bn in FY2011 alone). I’m inclined to wait until Monday before fully making my mind up, but I know what my gut is telling me!


IBRC (the old Anglo Irish Bank and Irish Nationwide Building Society) released FY 2011 results on Thursday morning which I’ve covered here.


That same day, smallcap IFG produced a lot of newsflow. Firstly, its FY 2011 results were in-line at the earnings level, while the dividend was hiked 10% and the company cut its net debt by 29%. Within 2 and a quarter hours, however, this news was completely overshadowed by news that it has agreed to sell its International division for a chunky €84m. This represents ~ 9x EBIT and 1.1x book. Based on where the share price closed at last night, IFG has a market cap of €183m and net debt of circa €11m. So an EV of €194m which equates to roughly 0.9x book and 7.2x EV/EBIT for the whole group. Stripping out the international division means there’s probably still some upside from here given that the UK business is a very attractive annuity-style operation with a strong market position in the SIPP space, while if the Irish losses can be eliminated the upside is even greater.


Late on Thursday brought news of an ‘Irish solution to an Irish problem’ (of sorts), where despite all the hype of recent days, Bank of Ireland, IBRC and the Irish government will conduct a repo agreement to tackle / kick the can down the road on (delete where applicable) the looming promissory note payment. For me, the winner from this will be Bank of Ireland, which assuming Ireland Inc doesn’t blow up over the next 12 months will get its hands on a margin of 135bps over ECB funding for holding a bond for a year. The loser from this is the government, and by extension the Irish people, because, as Constantin Gurdgiev illustrates, this transaction will add to the national debt.


This morning AIB issued its FY 2011 results. While all the headlines this morning are focusing on its reported net profit number, as I noted a few days ago I was always going to focus my attention on: (i) deposit trends; (ii) net interest margin progression; (iii) progress on deleveraging; and (iv) impairment guidance. On these, I was pleased to read that “deposits were stable from August onwards” last year, with the deposit base having increased by €1.5bn since the start of 2012. That isn’t a huge surprise given recent Central Bank data and peer commentary, however. In terms of the NIM, this appears to have improved of late. It was 1.03% for the full-year, having been 0.96% at the interim stage (I don’t know to what extent this has been distorted by EBS and Anglo, so not inclined to work out a H2 figure). Due to a combination of deleveraging and deposit transfers, AIB’s LDR has improved from 165% at end-2010 to 136% at end-2011, so well on track to meet the end-2013 target of 122.5%. Finally, credit quality continued to worsen in 2011 (provisions were €7.7bn vs. €7.1bn in 2010) and given the wretched state of the domestic economy I suspect we’re going to see another big number in 2012. Net net though, AIB’s results are probably as well as could be expected – certainly I don’t see any major surprises in there. In terms of the investment view though, I struggle to understand why people interested in trading the Irish financials would pay nearly 2x historic NAV for AIB when Bank of Ireland is trading on around a third of that level – on a forward basis!


Elsewhere, switching to the food sector, I note that PZ Cussons issued a profit warning on the back of social unrest in Nigeria. It made no specific mention of its JV in that market with Glanbia, Nutricima, but even if that is being impacted the effect on Glanbia’s profits is likely to be very modest – Glanbia’s JVs and Associates, which mainly comprise Nutricima, the Southwest Cheese jv in the States and the mozarella JV in Europe, in total contributed 14% of group EBIT in FY11, so any hit would likely be less than 1% at the earnings level.


(Disclaimer: I am a shareholder in Ryanair plc) I was pleased to see Ryanair buy back 15m shares yesterday for €4.45 apiece, taking recent share buybacks to €105.75m. In late January CEO Michael O’Leary said the carrier could spend up to €200m on buybacks, which should continue to help support the share price against the pressures of high oil prices.


(Disclaimer: I am a shareholder in Datalex plc) Speaking of the travel sector, booking engine software provider Datalex issued its FY 2011 results earlier this morning. The company delivered EBITDA (+42%) and net cash (+13%) growth as promised, while management sees further growth in 2012, despite the troubled macroeconomic backdrop. I was pleased to see the volume of new client wins in 2011, with 8 carriers signed up, including heavyweights Delta Airlines, United Airlines and Malaysian Airlines. Presumably the firm enters 2012 with a strong tailwind (!) given the 2011 contract wins will all be contributing a full 12 month’s revenue this year (that is, assuming that they all went live in 2011 – if any of them did not, they’ll still make initial contributions this year).


(Disclaimer: I am a shareholder in BP plc) In the energy space, earlier this week I noted reports that BP was teeing up some asset sales in the North Sea. I didn’t have to wait long to see this occur, with $400m of gas assets disposed of on Tuesday.


From a macro perspective, the ASDA income tracker in the UK, which I follow religiously, showed that families remain under severe pressure. The average UK household had £144 a week of discretionary income in February 2012, 6.3% below year-earlier levels. Is it any wonder that many UK retailers are under pressure?

Written by Philip O'Sullivan

March 30, 2012 at 7:37 am

Market Musings 1/3/2012

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It’s the calm before the storm as the volume of company newsflow has eased a little in recent days, but with a deluge of results due over the next week or two I think I’ll find plenty more to write about over the coming days.


(Disclaimer: I have an indirect shareholding in Dragon Oil plc) To start with the energy sector, Dragon Oil ended takeover talks with Bowleven, which rather takes the gloss of my recent narrative of how this will be a year for consolidation in the industry. Still, one swallow does not a summer make!


Turning to the food and beverage sector, Valuhunter did up a good piece on Molson Coors, which reminds me that I have to get around to doing up a piece on C&C one of these days. Speaking of alcohol, did you know that for a period Guinness was exported to the UK in custom-built ‘beer tankers’? Elsewhere, Glanbia, a stock I sold going into the results, released strong FY numbers, but cautioned that earnings momentum will slow in 2012 due to tougher conditions. I’ll post up a piece on Glanbia later today. Finally within this sector, Fyffes posted good numbers today, with results towards the upper end of guidance. It sees more progress in 2012 and hints at doing more share buybacks.


(Disclaimer: I am a shareholder in Irish Life & Permanent plc) In the financials space, IL&P said that it would record a big rise in impairment provisions when it releases its 2011 results. This cannot come as a surprise to anyone given recent commentary from the likes of RBS and Bank of Ireland.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) While it had been flagged at the time of the recent Q4 results, I was pleased to see Smurfit Kappa Group announce that it has successfully extended its debt maturities. This will help to further lower the risk profile of the stock, as well as increase management’s flexibility. So good news all round.


Here’s an interesting statistic – ITV says that, on average, people in the UK spend 4 hours and 2 minutes every day watching television.


(Disclaimer: I am a shareholder in Playtech plc) I was pleased to see news that Playtech has entered the Mexican market, partnering up with the country’s largest land based gaming operator. This is a further affirmation of the quality of the group’s product, but judging from the lacklustre share price performance it will need to do more to improve market sentiment towards the stock.


Finally, WordPress tells me that February was the ninth consecutive month in which the numbers of visitors to this blog increased. I’d like to thank you all for your support, and as ever please feel free to get in touch with suggestions on things you’d like me to cover on this site.

Written by Philip O'Sullivan

March 1, 2012 at 10:24 am

Market Musings 18/2/2012

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As has been the norm so far this month we’ve seen a lot of newsflow in recent days from right across the market. Let’s cover what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in France Telecom plc) In the telecoms space, I was interested to read that Deutsche Telekom is considering exiting its Everything Everywhere jv with France Telecom in the UK. It will be interesting to see how the latter responds, given that France Telecom has been exiting operations in Europe of late, selling its Austrian and Swiss businesses. Bernstein reckons that it is likely to IPO Everything Everywhere, which would be my preferred choice – France Telecom needs to slash its vast net debt (€30.3bn at the end of H1 2011) and this, along with the proceeds of the recent disposals, could put a chunky dent into it. With the French state, France Telecom’s biggest shareholder, losing its AAA rating from S&P earlier this year and Moody’s threatening to follow suit, I think heavily indebted corporates in that market are going to come under increasing pressure unless they can get their balance sheets in order. Against that I note that FTE is considering spending $2bn to buy out its Egyptian partner in that market, but the costs of that potential deal are significantly outweighed by the disposal proceeds outlined above.


In the construction sector, I was interested to read that the company that bought out Wolseley’s assets in the Irish market has been placed into examinership. While time will tell what the outcome of that process is, any closures would likely benefit Grafton, which has 67 merchanting outlets and 49 DIY retailing outlets in Ireland. Elsewhere in the sector Valuhunter did up a stonking blog on housebuilder Bellway in which he makes a very interesting observation – the UK benefits cap may lead to some internal migration as people move from the more expensive south-east of England to other regions. I am perplexed to read hand-wringing articles on the benefits cap such as this one – surely it is unreasonable to expect taxpayers to pay for people to live in the most expensive areas?


(Disclaimer: I am a shareholder in Total Produce plc) Switching to food companies, I was interested to read Indian media reports (this doesn’t appear to have been picked up by either the Irish media or any of the domestic brokers here yet) that Tata has ‘dissolved’ its joint venture with Total Produce. This is disappointing, as there’s no denying that the jv offered the greatest organic growth potential of all of Total Produce’s units. However, we have to frame that disappointment in the context that it was only a very small part of Total Produce’s business – I estimate only 1 or 2% of turnover.


(Disclaimer: I am a shareholder in PetroNeft and an indirect shareholder in Dragon Oil) In the energy sector, PetroNeft issued a ghastly trading update, in which it said production has slipped to 2.3kbopd versus 3kbopd at end-2011. This is eerily reminiscent of the technical problems that dogged the stock throughout 2011, and hence it was no surprise to see the share price close down nearly 40% yesterday. Sentiment will not be helped by an RNS posted after the market close by JP Morgan, which said that it has followed up its recent share sale by offloading a further 5m shares. JP Morgan has 6.8% of PetroNeft’s shares remaining, and were it to run its stake down to zero that would mean the market will have to digest about 8x the ADV. I can’t see a queue of buyers for that at the moment. Elsewhere, Dragon Oil said that it is considering making a bid for Bowleven. Contrarian Investor UK welcomes the return of M&A within the sector.


In the recruitment space, Harvey Nash issued a strong trading update. It’s one that I sold out of early last year – in hindsight, with very good timing – but I have been keeping an eye on it because I like its conservatism, diversification and excellent management team. While there is no denying that it’s cheap – it trades on a single digit PE and yields around 4.5%I suspect there will come a better time to buy Harvey Nash later this year – EPS momentum is set to fall off a cliff from the +16% in the 12 months to end-January 2012 to +4% in the current financial year, before accelerating once again to +34% in the 12 months to end-January 2014.


(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) I was interested to read that IBRC, the bad bank formerly known as Anglo Irish Bank, is “anxious” to take on the tracker mortgages that are causing so much hurt for AIB and IL&P. Bank of Ireland reports results on Monday that will hopefully give a lot of clues about the dynamics within the Irish market at this time. The key things to watch out for in BKIR’s results are pre-provision profits (most analysts expect €500m), deposit trends, net interest margins, progress on deleveraging and impairment guidance.


(Disclaimer: I am a shareholder in Independent News & Media) I recently did up a case study on Independent News & Media, in which I mentioned the problem of imploding newspaper circulations. I was interested to read that INM has just de-registered 12 of its regional titles from the industry’s official circulation auditor, ABC. I’m sure that there’s no correlation between the two!


(Disclaimer: I am a shareholder in Datong plc) I was interested to read a piece in Growth Company about a stock I hadn’t come across before – PSG Solutions. PSG is clearly a microcap, with a market cap of only £26m, but I was interested to learn that it has a unit called Audiotel that specialises in technical surveillance countermeasures. I wonder if it would be a good fit with Datong, whose surveillance capabilities are well documented. Partnering the two could give it a nice breadth of offerings to security agencies. If anyone has a view on this, why not post a comment below.

Market Musings 15/2/2012

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As has been the norm of late, while we’ve seen a lot of newsflow around the market, a lot of it is focused on peers of Ireland’s leading plcs. Let’s review what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) There has been a lot of news around the Irish financials in recent days. To start off with IL&P, I was interested to read that it has suspended the sale of its UK loanbook along with its subprime business. I find this move more than a little strange given the seemingly buoyant demand for BTL loanbooks in the UK (which is the vast majority of IL&P’s presence in that market) and the fact that IL&P hasn’t written any new business in the UK market since early 2008. The government should be accelerating disposals of non-core assets, not suspending them. Elsewhere, I recently wrote about AIB’s unjustified market valuation. The NPRF has now hired Goodbody Stockbrokers to look into it. Further on in this blog piece I’ve noted some of the consequences of the removal of EU milk quotas in 2015. One potential beneficiary of this, as Bloxham notes, is insurer FBD. Bank of Ireland reports its full-year results on February 20th. Davy have a preview of it here. What I’m looking for in the results are updates on deposits (have recent positive trends been sustained?), de-leveraging (has BKIR continued offloading loans at better-than-expected levels?), margins and the level of provisioning (this will be particularly interesting given recent results from the likes of KBC and Danske Bank).


(Disclaimer: I am a shareholder in Marston’s plc and Tesco plc) In the consumer sector, I read an interesting piece on Marston’s strategy in The Daily Express (yes, really!). It’s a strategy that is reaping rewards, given the group’s rising profitability at a time when UK consumer discretionary spending is under pressure. Speaking of the UK consumer, I bought a position in Tesco earlier this week. While time will tell if my purchase was a little premature, I find being able to pay a single-digit PE multiple and a circa 5% dividend yield for a hugely successful global franchise particularly compelling.


(Disclaimer: I am a shareholder in Glanbia plc) In the food sector, I was interested to read that Dairygold Co-op is contemplating a €130m investment in growing its milk processing capacity. This follows reports that Glanbia is looking into making a similar investment to exploit the structural growth opportunity arising from the removal of EU milk quotas in 2015. I attended a briefing by a Bord Bia executive recently who outlined that China will be a major buyer of Ireland’s expanded milk production so I’m not surprised by Dairygold CEO Jim Woulfe’s comments in the piece linked above. Speaking of emerging markets, Danone’s 2011 results revealed strong growth by its infant nutrition business in particular, which is no surprise given last year’s buoyant performance by Ireland’s Glanbia and Kerry Group (both of which have a significant presence in that area).


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) I was pleased to see S&P upgrade its credit rating on Smurfit Kappa Group to BB from BB- along with applying a stable outlook to it. While it’s not a major surprise given the progress the group has made in cutting its debt, I am pleased to see that the recent resumption of dividend payments by the group hasn’t dissuaded S&P from this move.


Finally, in the blogosphere, John McElligott ran a screen over the Japanese market that identified a few interesting names. Calum has been looking to the United States for inspiration, doing up great articles on Dreamworks Animation and Family Dollar Stores. John did a feature on Flybe which is worth checking out – my view on it is that if the investment case he sketches for Flybe is one you can buy into, then you should be looking at Aer Lingus, which ticks much the same boxes save for having an even stronger balance sheet and superior operating trends.

Written by Philip O'Sullivan

February 15, 2012 at 1:41 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 8/2/2012

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We’ve seen a deluge of corporate newsflow and interesting valuation pointers in the past 72 hours. Let’s run through what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) To kick off with the packaging sector, SKG delivered a slew of positive news this morning. In its Q4 results, management revealed that the group generated EBITDA of €245m, which is at the top of the range of estimates heading into the results. The company also announced that it is to reinstate the dividend, while it is also looking to extend its debt maturities. These are all very encouraging steps, and follow on from recent positive newsflow in the sector (both M&A and price increases).


(Disclaimer: I am a shareholder in AIB plc, Bank of Ireland plc, Irish Life & Permanent plc) Irish financial shares have registered very strong performances of late. While it is true that a number of large overseas investors are bulled up on an Irish recovery trade, I cannot see any justification for AIB to be capitalised at circa €50bn – more than double its peak during the Celtic Tiger years. Investors looking to play this ‘recovery trade’ should note that AIB’s locally quoted peers Bank of Ireland (market cap €4.3bn) and IL&P (market cap €2.1bn) are far more modestly valued (at least in relative terms!). Of the three, Bank of Ireland is by far my preferred stock, and for the sake of full disclosure I quintupled my position in it before Christmas at 8c/share. I’m not entirely sure that I’d be chasing it at these levels (14c) now though.


Continuing the recent run of positive newsflow from the Irish flag carrier, Aer Lingus issued strong traffic stats for January. Excluding its Regional operations, it carried 5.8% more passengers last month than it did a year ago.


Cemex indicated that it is willing to increase its possible offer for the minority of Readymix it doesn’t own by 14% to 25c.


Speaking of smallcaps, Bloxham made a few interesting valuation observations on TVCH, which has flashed up (rightly, in my view) on a lot of value investors’ screens. Elsewhere in the TMT sector DMGT issued an IMS that revealed still-challenging advertising conditions in the UK, the effect of which are being mostly offset by cover price increases.


In the healthcare sector United Drug released a positive trading update, in which management said it expected earnings to grow between 4 and 8% this year, which is a very good performance considering the difficult macro conditions and pressures on public budgets.


(Disclaimer: I am a shareholder in BP plc) BP released a good set of Q4 numbers, with profits ($5bn, +14% yoy) beating expectations ($4.88bn). The company hiked the dividend by 14%, which is very welcome. While Macondo is still clouding the outlook for the group somewhat, my gut feeling is that the risks on that front lie to the upside, given how the process has played out to date (relatively benign official reports, many of BP’s partners agreeing to pay some of the damages etc.). As an aside, Steve Baines, who is one of the more astute market watchers on Twitter, noted that the “planned 16% increase in BP capex to $22bn in FY12 shows that the oil service stocks are the place to be”. Which is why I have had Kentz on my watchlist for some time.


In the drink space, MillerCoors acquired the #3 US cider player. This follows C&C’s recent purchase of the #2 US cider player, Hornsby’s. While cider’s share of the US LAD market is tiny (circa 0.5%), in my view C&C’s €20m investment is a very worthwhile punt – a very modest increase in cider’s market share could deliver very impressive returns on investment.


A lot of journalists and politicians these days love to exclaim: Tax the rich! However, in Britain the top 5% of earners already contribute 47% of income tax. The top 1% pay 28%. How much more tax should these people be paying exactly?


The Irish government said that it will be culling the number of town councils here as part of a shake-up of local government. It is simply preposterous that Co. Tipperary has 2 county councils and 7 town councils – an average of 1 council for every 17,500 people!


And finally, in the blogosphere, Lewis posted up the second half of his very detailed analysis of Dairy Crest Group which I’d encourage you to have  a read of.

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