Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Johnston Press

Market Musings 15/9/2012

with 2 comments

It’s been an eventful few days since my last ‘general’ round-up on what’s been happening in the markets, with the Federal Reserve further opening the monetary sluices and continued positive developments around Ireland Inc (a well received sale of bills, positive noises from the IMF, soaring bond prices etc.)


For me, the central message to take from these markets at this time is that the monetary authorities on both sides of the Atlantic stand ready to do ‘whatever it takes‘ on the policy front. This is unambiguously bullish for a number of asset classes, in particular equities (in general) and commodities (including gold, which I’ve been a bull on for some time), however, it also has other consequences that are worth bearing in mind. While the growth outlook is concern enough in itself, the main overall threat in the system (in my view) remains on the prices front, as an enthralling battle takes place between the forces of inflation (central banks’ printing presses) and deflation (private sector deleveraging). Which force is likely to prevail? The old rule of “Don’t bet against the Fed” comes to mind. This to my mind puts the onus on investors to position themselves accordingly. We have seen from the share price reactions to Helicopter Ben’s latest move how they should do this, with mining stocks (e.g. commodity plays) surging, financials pushing higher (anything that pushes up asset prices a positive, while the funding outlook is improved) and a lift in those highly leveraged stocks operating well within covenants and who may take the opportunity to refinance at even lower rates as yields are pushed down elsewhere by central bank intervention (a good example being Smurfit Kappa Group, which I hold, whose balance sheet is to my mind still very much misunderstood by the market, and which rose 13% on 11 times average daily volume in Dublin yesterday as more investors wake up to to the story). Of course, it is also worth bearing in mind that higher commodity prices are likely to hurt a lot of stocks that are price takers on the input side and who will struggle, due to the tough economic backdrop, to pass on higher input prices to consumers.


In terms of my own response to all of this, I have been stepping up my exposure to financials, trebling my stake in Bank of Ireland and significantly increasing my exposure to RBS (which is now my third-largest portfolio position). The recent surge in the value of Irish government bonds prompted my Bank of Ireland move, given that BKIR held €5,945m worth of them at the end of June (up to €1.5bn of which were acquired following the LTRO earlier this year). As the notes to BKIR’s interim results show (see page 99), the vast majority of these are in the books on a ‘Level 1’ fair value basis, i.e. “valued using quoted market prices in active markets”. Given the recent lift in Irish bond prices, this should have a positive impact on Bank of Ireland’s NAV, given that “any change in fair value is treated as a movement in the [available for sale] reserve in Stockholder’s equity”. Elsewhere, in the case of RBS, the IPO of its Direct Line business and recent moves towards agreeing financial settlements for Libor and IT issues indicate that the narrative around the group may be about to radically shift, as I noted in a recent blog post.


(Disclaimer: I am a shareholder in Datalex plc) In other news, travel software company Datalex confirmed that interim CEO Aidan Brogan is to get the job on a permanent basis. This is a sensible decision. Aidan has been with the firm for almost 20 years, and his strong background in sales is likely to help Datalex build on its growing list of clients.


Elsewhere in the TMT space, Johnston Press has reportedly delayed its relaunch programme. You can read my recent piece on the firm here.


(Disclaimer: I am a shareholder in France Telecom plc) And in other TMT news, the team in aviate came up with an interesting angle on Apple’s latest toy, namely that “in the European launch only Deutsche Telkom and France Telecom were given the hallowed LTE version of the iPhone 5“. I must confess that what I know about ‘fashionable’ mobile phones could fit on the back of a postage stamp, so hopefully one of my kind readers will let me know if this is a significant advantage over other carriers or not!


In the energy sector, consolidation has been a big theme this year, as cash-rich majors have snapped up financially constrained small cap names with proven resources. This clip suggests that the trend has further to run (and indeed, assuming the latest QE moves push up oil prices, this will provide the large caps with even more cash to play around with).


In the blogosphere, Lewis profiled Impellam. Elsewhere, John took a good look at Rolls-Royce.

Written by Philip O'Sullivan

September 15, 2012 at 12:01 pm

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.

Written by Philip O'Sullivan

September 9, 2012 at 6:02 pm

Market Musings 10/7/2012

with 2 comments

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

Market Musings 20/6/2012

with one comment

(Disclaimer: I am a shareholder in Ryanair plc) The main news since my last blog has been Ryanair’s €1.30/share indicative offer for Aer Lingus. The approach, which values AERL at €694m, marks the third time Europe’s biggest LCC has made an approach for the Irish flag carrier. At the time of writing Aer Lingus shares have risen 22% to €1.15, which is 11% below the indicated bid price from Ryanair, which suggests that the market is not convinced that Ryanair has a high chance of succeeding in this move.


In terms of possible motives for this development, there are a number which come to mind. These include: (i) A sincere move by Ryanair to secure a dominant presence in the Irish market (as I recently noted, the combined RYA-AERL share at the three main airports – which handle 96% of all air traffic in and out of Ireland – here is well over 70%); (ii) A move to force Etihad, which recently revealed that it has a near-3% stake in Aer Lingus, to counter-bid for the government’s 25% stake in the carrier (as a non-EU airline Etihad cannot own more than 49.9% of Aer Lingus); (iii) A move to scare Etihad out of increasing its stake in AERL, by reminding it that Ryanair’s 29.8% stake in Aer Lingus is enough to block special resolutions at AGMs and EGMs; (iv) Mischief-making by O’Leary, which may sound ridiculous but then again making an approach for a firm with a significant potential pension issue (of sorts) is an unusual move; (v) a possible move to frustrate the Competition Commission investigation into its AERL stake and/or (vi) O’Leary views the acquisition of AERL as a key part of his entry strategy onto the Transatlantic market, which he has long talked about entering.


From my perspective as a shareholder in RYA, I would prefer if the carrier doesn’t pursue this course of action. It has considerable scope to grow organically within the European market, where it has only an 11% share, armed with a proven business model in a competitive landscape where several airlines have gone bust in the year to date and many others are constrained by stretched balance sheets, tough economic conditions and still elevated (despite the recent drop) oil prices. I don’t see the strategic rationale of adding a carrier with a fundamentally different business model to Ryanair.


(Disclaimer: I am a shareholder in France Telecom plc) I was dismayed to read that France is considering the introduction of a dividend tax, which is likely to hit big payout companies such as France Telecom. I’m philosophically opposed to such measures in general, given that they amount to double taxation, which along with similar measures such as the taxation of interest income they also serve to discourage savings and investments, at a time when ageing populations mean that Western governments should be doing more to encourage people to provide for the future. From a specific FTE perspective, it also reduces further the attraction of holding the stock, and it remains a position that I will look to exit in the short term.


(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) Newspaper publisher Johnston Press is to close one of its Irish regional titles, the Offaly Express newspaper. I’ve previously noted that profitable publishers such as INM and TNI are likely to gain market share as more ‘financially challenged’ peers close titles.


(Disclaimer: I am a shareholder in Bank of Ireland plc) Bank of Ireland this morning announced, as expected, the appointment of Archie Kane as its new Governor (Chairman). It also announced that heavyweight investors Wilbur Ross and Prem Watsa would be joining the board, which is a welcome move given their considerable experience will no doubt prove a big help for the board.


This is a scary (if predictable) chart – ECB lending by country.


Meanwhile, the US Navy is spending $42bn on a new class of aircraft carriers.

Written by Philip O'Sullivan

June 20, 2012 at 9:09 am

Market Musings 1/5/2012

with one comment

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

with 2 comments

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 22/4/2012

with 4 comments

Given events over the past few days it’s no surprise that this blog is once more focused on the TMT sector.


(Disclaimer: I am a shareholder in both Trinity Mirror plc and Independent News & Media plc) On Friday Richard Beddard asked me why I didn’t appear to be particularly concerned about Trinity Mirror’s pension deficit. Regular readers of this blog know that pensions are always a concern for me – I always incorporate the pension deficit or surplus into my valuation models, while as a former shareholder in Uniq (now a part of Greencore) I know all too well what can happen if the pension deficit gets too big. In the case of Trinity Mirror, at the time of writing the company has a market cap of £79m, while it exited 2011 with a pension deficit of £230m and net debt of £200m. So net long-term liabilities of more than 5x its current market cap, which is certainly concerning. This concern is somewhat alleviated by its freehold property assets of £177m, while last year it generated after-tax operating cash flow of £75m. With well-documented cost take-out measures underway and the UK advertising market still tough, I think it’s reasonable to assume that as the cost measures flow through and advertising picks up that Trinity Mirror can hold cash generation reasonably steady for the next 2-3 years. With modest capex requirements for the business and no dividend payout, this should see net debt more or less eliminated by end-2015. While it’s tricky (if not impossible) to predict where the pension deficit will be by then, it only has to improve by £53m (for information, it deteriorated by £70m last year, so moves of this magnitude are not unthinkable) before it’s covered by the property interests. Obviously, a marked deterioration in the UK newspaper sector or adverse market moves that significantly impact the pension deficit pose risks to this thesis, but if I’m right, I should see the value of my TNI shareholding rally strongly from current levels. One thing that TNI observers may wonder about the above analysis is why I’ve left out the current discussions between the publisher and the pensions authorities in the UK about temporarily reducing payments into the scheme – all other things being equal, these cashflows will be used to nuke liabilities (i.e. less money going to fix the pension deficit = more money going to fix the net debt), and given that I treat net debt and pension deficits the same in my investment models it has little impact on my sentiment towards the company.


Speaking of media, I came across an interesting survey of advertising expenditure in Ireland, which is quite timely in light of recent developments in the media sector here. While digital is growing at a rapid rate, it is worth noting that ‘old media’ still accounts for the lion’s share of advertising expenditure. I accept fully that there are clear structural shifts underway in terms of where ad spend is migrating to and from, but I remain confident of my central thesis for both INM and TNI that even though the overall ‘pie’ is shrinking, they have the ability to counter this to at least some degree through market share gains as weaker competitors exit the market. INM, as it likes to remind people at every opportunity (!) “is the only profitable newspaper and media firm in the country“, and many of its titles, at both a national and local level, compete with financially challenged rivals. For Trinity Mirror, the firm’s 130 regional titles and  5 national papers appear to be well placed in terms of right-sizing the cost base (this list suggests that it has been more proactive to date at weeding out underperforming titles than its peers) while the well-documented challenges faced by rivals such as Johnston Press could see an acceleration in rival titles exiting the market in 2012/13.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Following the recent news that two Norwegian kraftliner mills have gone bust, another of Smurfit’s rivals, French containerboard producer Papeterie du Doubs, has gone into liquidation. All of this is supportive for pricing in an industry long known for its problems with overcapacity.


(Disclaimer: I am a shareholder in Playtech plc) In the betting space, William Hill’s IMS revealed a solid overall performance, led by its online division, where net revenues rose 33% (relative to a 12% increase in group net revenue). This has bullish read-through for the minority shareholder in the William Hill Online joint venture, Playtech, and it was no surprise to see PTEC’s shares gain 7% on Friday to close at 370p. This is just 10p below my breakeven level on a stock that has repeatedly disappointed me, and if I can get out of it at 380p or better it will be an escape of Harry Houdini proportions!


(Disclaimer: I am a shareholder in Ryanair plc) I was interested to read that Flybe has pulled out of Derry Airport in Northern Ireland. This will likely result in (very) modest gains for Ryanair, whose Derry-Liverpool and Derry-Birmingham routes will presumably pick up some traffic from Flybe’s discontinued Derry-Manchester service.


In the construction arena, Irish heating and plumbing supplier Harleston bought Heat Merchants and Tubs & Tiles, which came a little bit out of the blue for me given all the chatter linking Saint-Gobain to these assets. The future of the 11-strong chain of Brooks’ builder provider units remains unclear, so hopefully we’ll get some clarity on that this week.


(Disclaimer: I am a shareholder in Tesco plc) In the blogosphere, Valuhunter did up (with a little help!) an absolutely fantastic post on Tesco that’s well worth checking out.


Finally, if you ever feel like you’ve made a serious blunder in work, just remember that it could be worse – at least you haven’t accidentally fired every single one of your colleagues.

Written by Philip O'Sullivan

April 22, 2012 at 10:37 am

Market Musings 19/4/2012

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What an eventful 48 hours it’s been since my last update!


(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) The media sector has produced much excitement, with boardroom ructions and rumours of stakebuilding to the fore. This morning two large prints in INM – one for 10m shares, the other for 3m, were recorded. Combined this is equivalent to 2.4% of the company. RTE hints that the buyer is not connected to the three billionaires (Tony O’Reilly & family, Dermot Desmond and Denis O’Brien) on the INM register, which adds a further touch of intrigue to the stock. This evening it was confirmed that Gavin O’Reilly has stepped down as INM CEO, to be replaced by Vincent Crowley. I welcome Crowley’s appointment – I met him quite a few times when I covered INM as a sell-side analyst some years ago and was very impressed by him. He has a good reputation for tight cost management (earned at a time when the Irish economy was thriving and few executives here were as focused on cost take-out as he was back then) and any strong action by him on this front could see a decent re-rating for the stock, which is capitalised at only €134m. I take encouragement from INM’s statement this evening that Crowley “has the unanimous support of the Board”, which hopefully will put to rest the ugly (and very public) feuding that has made the underlying performance of the group something of a side-show for too long. In an ideal world this change will pave the way for the group to focus 100% on the main task at hand, i.e. maximising cash generation to fix the balance sheet and enhance shareholder value. Elsewhere in the media sector, in the UK DMGT’s trading update revealed weakening trends in the past three months, which doesn’t bode well for the likes of Trinity Mirror and Johnston Press.


(Disclaimer: I am a shareholder in Tesco plc) Tesco released its results and a strategy update. The results were in line, and management sees the 2012/13 performance (yes, I know it’s early days) meeting forecasts. On the strategy front, there was nothing new that I saw given the extensive media previews / leaks (delete where applicable) in the run up to the official announcement. Obviously time will tell if the strategic objectives are met, but I’m willing to give Tesco the benefit of the doubt given its proven track record, strong brand (I know some people dispute this, but I doubt they’d slap Tesco as a prefix to all sorts of new ventures if the brand wasn’t that good) and solid market positions in many of its key geographies. Many analysts seem to concur. Valuhunter did up a good piece on Tesco here that’s worth a look.


This is absolutely brilliant – check out Paddy Power’s comic-book style annual report.


For those of you who follow the oil sector, Dragon Oil’s CEO made some interesting comments about its future strategy in this video interview.


(Disclaimer: I am a shareholder in Abbey plc) Following on from recent upbeat comments from Telford Homes, Persimmon issued an IMS laden with news of rising orders, margins and cashflow. This all gives me further comfort on my position in Abbey.


On the macro front, I was interested to read that authorities zoned enough land for residential to accommodate double the population of Ireland. I’d love to find the genius who thought it would be a good idea to have local councils give an input into this process.


Speaking of housing, Chinese house prices fell in 46 of the 70 biggest cities month-on-month in March (in 37 out of the 70 on a year-on-year basis). I have repeatedly identified this area as a serious problem for China, most recently here.


And finally, here’s the IMF’s ultimate guide to which countries are the most vulnerable in terms of debt/leverage. No surprise to see Ireland is covered in red ink.

Written by Philip O'Sullivan

April 19, 2012 at 5:22 pm

Market Musings 8/3/2012

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It’s an unusually busy week on this blog due to a combination of it being results season and also my wish to ‘clear the decks’ from a work perspective before heading away on Saturday.


(Disclaimer: I am a shareholder in Irish Continental Group plc) ICG posted solid FY11 numbers this morning, reporting EBITDA of €49.1m on revenue of €273.3m (I had forecast €49.5m and €272.8m respectively). There really were few surprises within it, given both the simplicity (and predictability) of the business and detailed management guidance. While the company has struck a cautious tone in its outlook statement, I would be inclined to take that with a pinch of salt given both the early stage of the year we’re at, the uncertain financial consequences of competitors exiting the market and/or cutting capacity and some dodgy comparatives (due to the weather disruption in winter 2010/2011, this has presumably impacted on some of the annual comparatives provided today). Anyways, I’ve updated my model post these results, and this has resulted in my valuation for ICG falling from €18.30/share to €16.62/share. The main reasons for this are: (i) a deterioration in the net pension deficit (from €17.5m in 2010 to €32.5m in 2011), which equates to circa 60c/share, and (ii) rising fuel prices since I last updated the model, which add circa €8m to the fuel bill for 2012 (bringing it to €60m). While the implied upside from where the shares are currently trading is relatively muted, I have very conservative estimates put in for top line growth over the coming years – for example, my revenue forecast for 2015 is 14% below 2007 levels despite so much competitor capacity having been taken out of the market. Any positive surprises on this front should lead to material upgrades given the significant operating leverage (estimated at 75%) inherent in ICG’s business model.


In the construction sector, Grafton issued solid 2011 results yesterday. At a headline level, the numbers were in-line with what market watchers were expecting. In terms of the outlook, management see further profit growth in 2012 in spite of challenging conditions in Ireland, and within this it was particularly encouraging to read that like-for-like sales in its core UK business were +4% yoy in both January and February.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) Davy’s Barry Dixon wrote an interesting piece yesterday in which he highlighted Smurfit Kappa’s latest capex initiative. The company, as is its usual form, bought a second hand packaging machine on the cheap from a financially stretched (should that read “defeated”?!!) Italian firm. It’s now using that machine to replace two less efficient machines, which will be broken up and used for spare parts elsewhere in its operations, leaving Smurfit with more effficient, lower cost output while leaving production levels unchanged, thus allowing it to capture the extra margin. With Smurfit’s recent debt refinancing deal giving it enhanced financial flexibility, I wouldn’t be surprised to see Smurfit make further opportunistic purchases of strategic assets from distressed vendors in Euroland.


(Disclaimer: I am a shareholder in Trinity Mirror plc and Independent News & Media plc) Lewis at Expecting Value posted a great piece on the wider print media sector in the UK and Ireland that’s well worth looking at. The only things I’d add to it is that INM’s “Island of Ireland” division is presumably crafted because post the sale of the UK Independent newspaper its UK division effectively comprised the Belfast Telegraph and a low-margin distribution business. Folding that into the Ireland division helps take out management overheads, while INM has exited the Indian market (it had previously owned a stake in Jagran Prakashan). I concur with Lewis that Trinity Mirror is the better UK newspaper play, given its (in my view) better quality portfolio of assets (e.g. national titles such as The Daily Mirror and The People).  I also think there’s more value in Trinity Mirror at these levels than INM, but the presence of several business-savvy billionaires on INM’s share register makes me wonder about the potential for shareholder-friendly corporate activity (e.g. a sale of APN News & Media at a minimum).


In the food sector, agronomy specialist Origin Enterprises posted good interim results this morning. Management says that the company is “on track to deliver full year consensus earnings expectations”. As H1 only makes up around 15% of Origin’s full-year profits, we’ll have to wait until later in the year to make a more definitive judgment on the outlook. However, I should say that I do like Origin given the structural growth drivers (removal of EU quotas, rising demand for agri products from emerging markets, modernisation of Eastern European agriculture) that will underpin the group’s growth long into the future.


Finally, on a lighter note, some wag has posted a video on YouTube saying that the Irish government is planning to sell County Cork in order to raise extra funds.

Written by Philip O'Sullivan

March 8, 2012 at 10:54 am

Market Musings 15/11/11

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This has been a quiet day (by the current standards!) in terms of corporate newsflow. Despite the lack of activity on that front, we’ve also seen the good and bad side of politics, along with the first of a number of my side-projects coming to fruition.


I got the latest UBS strategy report emailed across to me (I cannot stress enough how grateful I am to those of my readers who send me things like that!) this morning. I note that the investment bank has cut its 2012 FTSE earnings growth forecast from 3% to 0%, adding that it believes that investors are unlikely to pay-up for profits in the near term. On their numbers the FTSE’s 2012 dividend yield is a healthy 4.2%. This downward earnings revision surely can’t come as a surprise to anyone, given the general tone of trading updates in recent times, but with the FTSE PE ratio at undemanding levels (even when taking the downward risk to earnings estimates into account) I see no reason to reduce my UK exposure here, especially given the attractive yields on offer.


(Disclaimer: I am a shareholder in Trinity Mirror plc). Regional newspaper publisher Johnston Press reported improving UK advertising & circulation trends, helped by easier comparatives. This follows on from the recent positive update by Trinity Mirror and suggests that things are looking a little brighter for the sector, but as ever the fragile UK consumer backdrop cannot be ignored.


Now here’s something interesting – speculators have lifted bullish raw-material bets to a 7 week high.


I’ve provided the commentary for the latest report on the rental market by Ireland’s largest property website,


Some encouraging political news – Ron Paul, whose strong economic credentials I’ve noted before, looks like he could win the Iowa caucus, which would give a huge lift to his campaign. If you’re unfamiliar with his views, make yourself a coffee and watch this video.


Sadly, this was also a day in which we saw the worst in politics, with Irish Minister of State Willie Penrose resigning over the closure of a barracks in his hometown. His move is a deeply cynical one, and reflective of a narrow-minded, parochial and short-termist mindset that has played a key role in getting Ireland into the trouble it’s in. The Exchequer deficit for the first 10 months of 2011 was €22bn. We simply can’t afford to base troops in Mullingar to defend County Westmeath from non-existent threats.


Finally, to end on an uplifting note. Those of you who are into sport will no doubt have heard of Munster’s incredible last-ditch victory over the weekend. The commentary on this video really captures the “who dares wins” nature of the win, while Gerry Thornley in the Irish Times, as ever, sketches a perfect picture of how the entire game played out.

Written by Philip O'Sullivan

November 15, 2011 at 7:58 pm

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