Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Kentz

Market Musings 19/9/2012

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It’s been a busy couple of days on the newsflow front, with a lot of the Irish smallcap exploration names prominent in this regard. Let’s round up on what has been happening since my last update.


To kick off with the energy sector, Kentz was awarded a $50m shutdown services and operations support contract by Exxon in Sakhalin, far-east Russia.



(Disclaimer: I am a shareholder in PetroNeft plc) Siberian oil producer PetroNeft released a reassuring update this morning, which revealed that output is steady at 2,000 barrels of oil per day, while early results from the Arbuzovskoye well 101, the first of ten planned new production wells on the Arbuzovskoye oil field, are encouraging. We should see a marked pick-up in newsflow from this stock over the coming months as the Arbuzovskoye campaign gathers momentum.


Elsewhere, Petrel Resources announced a “new start” in Iraq, with a new team in place that will “work with national and regional authorities in Iraq to identify projects in which Petrel can be involved”.


Providence Resources provided an update on its Rathlin Basin acreage. While this project is very much at an early stage, the company has identified a number of anomalies that it will now focus on evaluating.


In other resources related news, there was an interesting backward integration move by Samsung, which has invested in a gold mine in exchange for getting a cut of the output. This follows Delta Air Line’s recent purchase of an oil refinery, and may mark a shift by companies to ensure greater security of supply of key inputs and/or margin capture by buying key suppliers.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) There was further M&A activity in the European packaging sector, with Mondi acquiring Duropack’s German and Czech operations for €125m. This is extremely welcome on two counts. Firstly, the European packaging sector has traditionally suffered from overcapacity and volatile pricing, but as I have previously noted, in recent times there has been a wave of consolidation in the industry. This should lead to more rational pricing and supply policies going forward, which will lift profitability across the sector. Secondly, from a Smurfit Kappa Group perspective, the multiples these deals are being done at highlight the value in the stock. As Davy note, using the Mondi-Duropack multiple would imply an equity value of €11.30 a share on SKG, well ahead of the €7.60 it is trading at this morning.


In other Smurfit Kappa news, following a recent similar move the company announced the sale of €250m worth of senior secured floating rate notes due 2020. The proceeds will be used to pre-pay term loans maturing in 2016/17 and while they will not make a significant dent in interest costs (the new notes will pay 3 month Euribor +350bps, versus the 3 month Euribor +362.5-387.5bps the term notes pay) they do push out the average maturity of the group’s debt, thus reducing the risk around the company and giving it enhanced financial flexibility.


In the food sector, Origin Enterprises released its full-year results this morning. These revealed a solid performance by its core agri-services business, with like-for-like operating profits up 7%. Net debt has fallen sharply to €68m compared with €92m a year earlier, which reflects the strong cash flow generation of the business (free cash flow was circa €70m, which implies a FCF yield of 12% or thereabouts). Given this, management has upped the dividend by 36%, which moves dividend cover from last year’s 4x to 3x now. Overall, these are solid results from Origin and shareholders (not least its majority owner Aryzta) will no doubt welcome the significant increase in the dividend.


(Disclaimer: I am a shareholder in Independent News & Media plc) There was some unexpected fall-out from the Irish Daily Star’s (appalling) decision to publish pictures of the Duchess of Cambridge, with 50% owner Richard Desmond saying that he would take “immediate steps to close down the joint venture“. This is easier said than done, given the troubles this would involve with redundancies, property leases, a loss of profits and printing contracts. While there has been speculation that this could be a stroke by Desmond to replace a 50% owned JV with his 100% owned UK Daily Star in the Irish market, I can’t see INM abandoning its sole presence in the national daily tabloid space. So, either this dispute is settled amicably (perhaps with INM agreeing a call option to buy out Desmond?) or not, in which case INM will likely launch a new tabloid (using a different title, as Desmond owns the rights to the Daily Star name) which should be able to more than hold its own against any imported competitor whose relevance to the Irish market could well prove to be uncertain.


In the blogosphere, Lewis looked at Wincanton, with his blog providing enough to persuade me that I don’t need to look at it in more detail!


And finally, if you’ve ever wanted to learn more about money and banking, UCD’s top-rated Professor Karl Whelan has very kindly put up his lecture slides from a course on this very topic.

Market Musings 31/8/2012

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


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


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


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


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


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

Written by Philip O'Sullivan

August 31, 2012 at 8:06 am

Market Musings 19/6/2012

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A big placing and reassuring company updates have given me plenty to contemplate since my last update.


(Disclaimer: I am a shareholder in Irish Continental Group plc) The big news from an Irish corporate perspective since I last blogged was yesterday’s €50m placing in ICG. Irish investment group One51 offloaded its 3m shares at €14.50 apiece, which was a much smaller discount than I would have expected in these difficult markets, but this narrow discount may be explained by ICG picking up 700k of those shares. Not that this necessarily represents a poor deal for ICG – the 700k shares bought back and cancelled at a cost of €10m will save €700k a year in dividend payments, so a 7% annual cash ‘return’ and circa 3% uplift to EPS arising from the lower number of shares in issue looks like a tidy bit of business. It also removes an overhang on the share register, for as regular readers of this blog are aware, I had been expecting One51 to exit this holding for some time. In terms of my reaction to this development, I am closely monitoring the ICG share price with a view to finding a suitable entry level to add to my existing holding.


Turning to the energy sector, Kentz issued a solid trading update this morning just ahead of its analyst jolly / site visit (delete where applicable) to South Africa. The key takeaways are that the group is trading in line with its recently provided guidance, while reassuringly saying that its pipeline gives it visibility on projects out to 2015. At the time of writing the shares are up 7%, which given that there is no change to guidance suggests that there may be at least some short covering going on in Kentz this morning.


(Disclaimer: I am a shareholder in Bank of Ireland plc) Shareholders in Bank of Ireland, as expected, voted overwhelmingly in favour of the transaction with IBRC. This deal should net the group €38.7m in profits.


(Disclaimer: I am a shareholder in France Telecom plc) Following intense speculation of a private equity bid for France Telecom’s UK mobile joint venture, Everything Everywhere, management reaffirmed its support for retaining the brand. However, the media hasn’t yet given up on this story, so we’ll watch this space.


In the blogosphere, I was delighted to see that Paul ‘Paulypilot’ Scott has set up his own blog, which is well worth checking out, while elsewhere Lewis at Expecting Value did a write-up on chocolatier Thornton’s, which is not one for me (my UK consumer facing holdings, Tesco and Marston’s, are far better equipped in my view to get through the ongoing headwinds facing the British economy).

Written by Philip O'Sullivan

June 19, 2012 at 7:52 am

Market Musings 18/5/2012

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We’ve had a Tsunami of company updates since my last blog, so here’s a sector-by-sector wrap of what’s been going on.


C&C posted profits that were in line with guidance. The full-year dividend was raised by a chunky 24%, taking the payout ratio to 30%. On the conference call that followed the results management guided that it will raise this to 40% over time. C&C’s balance sheet is in great shape, with net cash hitting €68m last year. This gives the group considerable scope to launch share buy-backs, pay a special dividend or buy new brands – or in other words, it has a ‘nice problem’ of having to worry about what to do with its excess cash. C&C is a stock I’ve held in the past, but I’d want to do a bit more work on it before seeing if I’ve any room for it in the portfolio.


(Disclaimer: I am a shareholder in Marston’s plc) Elsewhere in the beverage space, Marston’s posted excellent interim results yesterday. Group revenues were +7.6%, underlying PBT +14.7% and the H1 dividend was raised 5%. All divisions (managed houses, tenanted and franchised and brewing) reported a rise in sales and underlying profits. The group is delivering on its ‘F Plan’ (which it defines as food, families, females and forty/fifty somethings) targets, with an 11% rise in meals served. I’m a very happy holder of the stock.


In the energy space, Tullow Oil issued a bullish interim management statement, describing its year-to-date performance as “excellent”. Its year-to-date financials are in-line with expectations, but as ever the main excitement around the stock is based around its exploration activity, which has been yielding encouraging results from Kenya in particular of late.


Staying with the oil sector, my old pals Kentz posted a solid trading update this morning, saying the full-year performance would be “marginally ahead of expectations“. Its pipeline is in good shape, with the order backlog standing at $2.46bn at the end of April, up from $2.40bn at end-December.


(Disclaimer: I am a shareholder in CRH plc) CRH received net proceeds of €564.5m from the sale of its stake in Portuguese cement firm  Secil. As mentioned before, these funds will provide the group with considerably enhanced financial flexibility to expand through M&A over the coming years.


In the retail sector, French Connection was the subject of a lot of attention this week. Richard Beddard did an excellent series of posts on it, summarised here, to which I replied: “Leases and the brand (seems very stale to me) are the big worries I have”.  Those worries didn’t quite go far enough, with the firm posting a profit warning yesterday.


(Disclaimer: I am a shareholder in Independent News & Media plc) We got a lot of news from the media space. UTV Media said that its year to date trading is in line with its expectations. Within the statement it was encouraging to see its Irish radio revenues move into positive territory. Elsewhere, INM said today that “advertising conditions remain challenging and erratic. Visibility remains short and susceptible to influence by macro-economic factors”. It added that net debt currently stands at circa €420m (end-2011: €426.8m). Not a lot to get enthusiastic about, especially on the net debt front, but of course much of the focus on INM is on recent moves in its share register and the intentions of new CEO Vincent Crowley.


In the betting sector, Paddy Power released a very strong trading update, with net revenue growth in the year to date accelerating to 28% from the 17% booked last year. The group is firing on all cylinders and remains the quality play in the betting space.


(Disclaimer: I am a shareholder in Total Produce plc) Irish headquartered food group Glanbia sold its Yoplait franchise back to the brand owner for $18m in cash. Its fellow Irish listed food stock Total Produce reaffirmed its full-year earnings target in a brief update issued earlier today.


(Disclaimer: I am a shareholder in Irish Continental Group plc and Datalex plc) In the transport space, ICG’s IMS revealed a weaker performance from the freight side, while passengers were marginally higher relative to year-earlier levels. This is the seasonally quiet period of the year so there isn’t a lot of read-through from today’s statement. Elsewhere, travel software firm Datalex issued an update this morning in which it said its performance is in line with its forecasts.


In the financial space, IFG posted a solid trading update. Since it agreed to sell its international business the main interest here is its UK and Irish operations. On this front, management says the UK is registering a “robust” performance, while Ireland is “performing well”. The company hints at the possibility of a special dividend post the completion of the sale of the international unit, so I’ll be watching that closely over the coming months.


(Disclaimer: I am an indirect shareholder in Facebook). To finish up with a word on the Facebook IPO, an investment fund I advise went long some Facebook in its IPO today at $40.10. This is very much a short-term trade around its IPO, given that Facebook is trading on 26x historic sales and 107x trailing earnings. Put another way, with a valuation of over $100 per Facebook user, I wouldn’t click the “like” button if someone suggested it as a long-term holding.

Market Musings 4/4/2012

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It’s been a busy couple of days in college, so I’ve been rather neglecting this blog. Let’s round up on what’s been happening.


(Disclaimer: I have an indirect shareholding in DCC plc) DCC demonstrated its commitment to good portfolio management once more through the sale of its enterprise distribution business for €48.1m. While the group has earned well-deserved plaudits over the years for its successful acquisition strategy, it has not been averse to selling assets from time-to-time to maximise returns on capital employed – the sale of its mobility and rehabilitation business for €37m around 18 months ago and the brilliantly timed exiting of its Irish housebuilding jv come immediately to mind in this regard. As an aside, we’ve seen some unusually cold weather in the British Isles in recent days, with snow in parts of Ireland and Scotland. Given that DCC is the leading home heating fuel provider in those areas, I assume the cold snap hasn’t done the business any harm.


(Disclaimer: I am a shareholder in Marston’s plc) I’ve been doing some more work on Marston’s, the UK pub group I hold in my portfolio, to help deepen my understanding of the business. I am indebted to one of the posters on ADVFN for making a report known to me, which shows the 50 top selling beers in the UK off trade. Marston’s ‘Hobgoblin’ is the 8th most popular brand in the Ale category, while Marston’s ‘Pedigree’ is #15 in the same category. While most of the top selling beers are owned by significant global concerns, I was interested to see that there are several independents represented in the top 50. I don’t see Marston’s going on the acquisition trail anytime soon, given the state of its balance sheet, but on paper some of those independents offer a similar profile of integrated beer producer and pub operator to that which Marston’s offers.  Who knows what the future could hold?


In the energy space, Kentz’s share price got thumped today (it’s down nearly 9% at the time of writing). The reason for this is a placing of stock by directors. Originally the firm guided that 12m shares – 10% or so of the shares in issue, would be sold, but in the event the size of the placing was increased due to strong institutional demand to 15m shares. The vendors have undertaken not to sell any more shares for another 6 months. I wonder if the indigestion from this sizable placing could lead to some near-term price weakness.  In the event that it does, I am very likely to call my broker (!) – as regular readers of this blog are aware, Kentz is a stock I sold out of at 403p/share last year and have regretted doing so ever since, and if the price gets down towards the level I sold it at again it will offer outstanding value given the clear progress made in the past 18 months.


(Disclaimer: I am a shareholder in Irish Continental Group plc) Merrion Capital issued its Q2 2012 preview earlier this week. It’s main stock picks for this quarter are: Sandisk, Nuance Communications, Pearson, Anglo American, Deere, Alstom, Anadarko, Unilever, Weir and ICG.


(Disclaimer: I am a shareholder in Ryanair plc) Speaking of transport stocks, I was interested to hear Irish Transport Minister Leo Varadkar lend his voice to calls for 25% State-owned Aer Lingus to pay a dividend. This follows similar calls from Aer Lingus’ 29% shareholder Ryanair, so with a majority of the share register leaning that way, might we see an announcement of a pay-out later in 2012?


Switching to macro news, we received Q1 Exchequer Returns data from the Irish Department of Finance yesterday evening. While a lot of the media headlines hailed the deficit closing to €4.3bn from €7.1bn in the first 3 months of 2011, as ever, the devil is in the detail. The deficit for Q1 2011 included a €3.06bn promissory note payment, while the deficit for this year includes a €250m loan to the insurance compensation fund. Also, the ELG contributed €283m of revenue to the Exchequer in Q1 of this year (Q12011: nil). So, adjusting for these factors, it looks to me like the troubling underlying fiscal position, despite all the talk of austerity, is little changed.


Regular readers of this website will guess correctly that I was unsurprised to see the EU, US and others complain about Argentina’s restrictive trade policies to the WTO.

Written by Philip O'Sullivan

April 4, 2012 at 4:23 pm

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Market Musings 27/03/2012

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It’s good to have a wall of positive newsflow to report for a change – let’s see what’s been cheering me up on the markets since my last update.


(Disclaimer: I am a shareholder in Ryanair plc) In the transport sector, I was pleased to see a strong trading update from easyJet yesterday. The low cost carrier now sees a H1 loss of “between £110 million and £120 million compared with the previous expectation of a pre-tax loss of £140 million to £160 million”. There are two reasons for this improved guidance. Firstly, management sees yields rising 10%, versus the previous expectation of an “upper single digits” increase. This has been helped by a number of competitors having exited the market, a theme I have highlighted before. The second factor is that ex-fuel costs have risen by less than expected (+1.5% versus guidance of +3%), helped by benign weather and good cost management. In terms of the read-through for Ryanair, this is all very positive. Ryanair is similarly well placed to exploit the demise of a number of competitors (Spain, where Spanair ceased trading recently, is Ryanair’s biggest market, while the carrier brought forward the opening of a new base at Budapest to exploit Malev’s closure, for example). On the cost side, there is every reason to assume that Ryanair has benefited from the same positive weather effects. Following Ryanair’s strong Q3 results in January I noticed that a number of brokers had pitched their FY12 estimates above the carrier’s revised net income guidance of €480m. In my model I’ve pitched for net income of €492m. Easyjet’s update appears to vindicate that stance.


This Thursday will see the release of FY 2011 results from IBRC – the former Anglo Irish Bank. I will be attending its results presentation, and will be interested to see if management’s targets for the company have changed since its last update. You can read my views from the H1 2011 results presentation here. If you’ve any questions – within reason (!) – that you’d like me to put to management, please post them in the comments section below.


In the oil space, Tullow Oil saw its shares climb 6.6% yesterday following news of a chunky (>20m net pay) oil find in Kenya. After its amazing success in Ghana and Uganda, might lightning strike a third time for this emerging oil giant? Elsewhere in the oil sector, services group Kentz saw its shares rise nearly 7% yesterday on the back of strong results. I was impressed to see Kentz’s backlog increase by 50% in 2011 to US$2,401m, from the US$1,603m seen at the end of 2010. So, like many of its clients, it appears that Kentz has plenty of fuel in the tank.


In the agri sector, Continental Farmers Group reported its full-year results. Their broker, Davy, says CFG’s in-line results were “an excellent achievement“, given the slump in potato prices in Ukraine. While I am attracted to CFG due to the long-term fundamentals around farming, I would want to see a sustained improvement in its cash generation before I’d look to invest in the company.

Written by Philip O'Sullivan

March 27, 2012 at 8:20 am

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.

Market Musings 22/1/2012

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


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


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


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


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


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


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


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


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


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


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


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

Lessons Learned

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While blogging earlier this week I noticed that I was approaching my 100th post on this site. I thought that this would be a good time to ‘take stock’ of the lessons learned since I started to publish my musings back in March.


There have been a number of consistent themes on the blog throughout the year. From a macro perspective I’ve been very bearish (and remain so) on all of the world’s leading economies. While this was hardly an earth-shattering stance to take, I have been surprised by just how weak the response of policymakers in both the US and Europe has been. The only other macro-surprise that I’ve encountered is the way the Chinese economy hasn’t slowed down as much as I had anticipated, but given how unreliable official Chinese “data” is (apparently if you sum all of the reported provincial GDPs in China and compare the result with reported national GDP the difference is bigger than the size of the Swiss economy!) you can never be sure what the truth is.


From a stocks’ perspective, my preference all year has been for defensives over cyclicals, which is no surprise given my macro call. I haven’t rigidly stuck to that call, however, having made a couple of opportunistic cyclical trades in the past few months (although, to be fair, I had significant defensive exposure within the portfolio to begin with). I’ve also seen two of the companies in my portfolio, Uniq and Chaucer, taken over. I also did a lot of travelling during the year which constrained my ability to monitor the markets and trade more often. Excluding takeovers, here are the trades I’ve made since launching the blog:


  • Harvey Nash (Support Services/Recruitment). Sold on 24/3/11 for 71p/share. Price now = 58p. I exited this holding due my nervousness around the UK economy. I like the company, and management, but given my macro view this isn’t one I’d be looking to buy back into anytime soon.
  • Ryanair (Transport / Airlines). Bought on 28/3/11 for €3.25/share. Price now = €3.67. I doubled my holding in Europe’s low-cost carrier because I liked the valuation and the potential for another special dividend. Strong recent results and increasing chatter around a special dividend makes this one I’m a very happy holder of. The main reason why I won’t buy more here is that I have a chunky (c. 20% of my portfolio) exposure to it.
  • Kentz (Energy / Oil Services). Sold on 29/3/11 for £4.03/share. Price now = £4.765. I sold out of Kentz having slightly more than doubled my money on the stock. Clearly the timing could have been better, alas! Kentz is a stock I do like due to its strong balance sheet, track record and excellent management team. I’m sure that I’ll buy it again in the future.
  • Trinity Mirror (Media / Newspapers). Bought on 30/3/11 for £0.47/share. Price now = £0.515. I tripled my holding in this company after its shares had tanked. I like this one a lot – strong asset backing, a very inexpensive rating and decent potential for upside for equity holders from its ongoing deleveraging.
  • AstraZeneca (Healthcare / Pharmaceuticals). Sold on 13/4/11 for £30.095/share. Price now = £29.095. I had made about 10% out of this one (>15% if you add in dividends) and was talked into selling it by a pharma analyst. One that I’d need to do a lot of work on before buying back into.
  • Standard Life (Financials / Insurance). Bought on 20/4/11 for £2.102/share. Price now = £2.057. Doubled my holding in this one after being attracted by the chunky dividend and also a desire to maintain my insurance sector exposure after Chaucer headed for the stock market exit.
  • Smurfit Kappa Group (Industrials / Paper & Packaging). Bought on 19/7/11 for €6.84/share. Price now = €4.80. The dramatic events in the Euro-area have thumped this company’s share price. I believe the shares were fundamentally undervalued at €6.84 when I nearly doubled my holding. At the current level they are even more so.
  • PetroNeft (Energy / Oil Exploration & Production). Bought on 28/9/11 for £0.215/share. Price now = £0.245. Doubled my holding in this Siberian oil producer after market sentiment towards it was dented by poor production figures. Further discoveries of oil during the year underline the deep value in this company, but it is going to have to prevail over its operational issues before it gets the rating it deserves.
Overall, my trading record hasn’t been too bad, but of course had I liquidated my portfolio earlier in the year and bought back in more recently I’d be far happier! At the moment I’ve 20 positions across the UK, Irish and French markets, which is probably as many different holdings as I can manage given the other demands on my time. This is why, as you’ve probably noticed, all of my buys have been top-ups of existing holdings.
I have a bit of cash in my trading account at present, but I’m reluctant to invest more at this time due to a combination of an uncertain backdrop and also the way that I’m toying with around 5 different buy ideas. What the latter tells me is that I don’t have enough conviction to pull the trigger on anything just yet, while in any event having cash gives me the flexibility to respond appropriately if any compelling opportunities present themselves, which is clearly no bad thing. When I was younger I tended to be impulsive and invest whenever I had the funds to do so. Perhaps my current conservatism is a sign that I’m getting old!
On a final note, one of the main benefits for me of operating this blog is that it has given me an opportunity to interact with some of the top investment bloggers. Since going live with the first (to my knowledge) Irish-orientated blog I’ve been joined by two outstanding peers – John McElligott and Wexboy – whose views I highly recommend. In terms of blogs based in other countries, I really value the insights of Expecting ValueKelpie CapitalMakro TraderMark CarterSharecropperUK Value InvestorValuhunterUK and the incomparable Zero Hedge. Hopefully by the time I approach my 200th post this list will be considerably longer.

Written by Philip O'Sullivan

November 12, 2011 at 4:32 pm

Market Musings 28/03/11

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(Disclaimer: I am a shareholder in Kentz plc and AstraZeneca plc)


Engineer Kentz reported its FY10 numbers this morning. Sales came in at $1057.4m, PBT $67.5m, backing out the finance lease obligations gives net cash of $205.5m and the full-year dividend was 10c. For reference, Bloomberg consensus was for sales of $1035.3m, PBT of $63.27m, net cash of $182m and a full-year dividend of 8.2c. So, it all looks a little ahead of what the market was expecting for 2010.


The group’s order backlog at the end of 2010 increased by 7.0% to $1,602.6m. On this, the group has decent visibility of projects (no great surprise given the nature of its work) with c.$932.2m of the backlog relating to work due in 2011 and the remaining $670.4m in 2012 and beyond. Management say: “Our current future prospects for Kentz from across our current and some new areas of operation exceed $3.7 billion”.


The company also comments on the recent unrest in MENA, saying that in the ytd this is had “no material impact”. On the outlook, the CEO says: “Our current trading is in line with expectations”, while the Chairman says: “I am pleased to report that the outlook for the coming year is very promising; we have exciting project opportunities in prospect and the management team in place to realise the full potential of our Company”.


Elsewhere, Readymix announced that takeover “discussions with all third parties have been terminated”, adding that “trading remains difficult in the construction industry throughout Ireland”. Tullow Oil disclosed that its Teak-2 exploration well off Ghana found 27 meters of oil and gas reservoirs.


While not of particular Irish interest, I note that AstraZeneca has reached a deal with the UK & US tax authorities on transfer pricing arrangements which has prompted it to up its 2011 core EPS target range from $6.45-6.75 to $6.90-7.20


Today’s “You don’t say?” gong goes to Goldman Sachs, which says that Irish government bonds will “continue to exhibit high volatility“.

Written by Philip O'Sullivan

March 28, 2011 at 6:27 am

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