Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Macondo

Market Musings 20/2/2012

with 3 comments

It’s been a busy few days as I’ve had to prioritise finishing off two articles for Business & Finance magazine along with some assignments for college. However, with Irish ‘pillar bank’ BKIR reporting numbers today, I thought I should do a quick piece on those, along with the other things that have been competing for my attention of late.


(Disclaimer: I am a shareholder in Bank of Ireland plc) This morning Bank of Ireland reported its full-year results. Going into them I identified five key things to watch out for. Here’s how BKIR did on those measures: (i) Pre-provision profits – The Bank reported underlying profits of €411m in 2011, which came in behind the €0.5bn many of the Irish brokers had projected; (ii) Deposit trends – The Bank did well here, reporting customer deposits of €71bn, up from the €65bn reported at end-2010. Within that, retail customer deposits in Ireland increased by 2% while retail deposits in the UK increased by 25%; (iii) Net Interest Margin – this was an area of disappointment, falling 13bps in 2011 from the 1.46% recorded in 2010, while after adjusting for the costs of the ELG scheme it was just 1.01% in 2011 versus 1.24% the previous year. Management say that the “recovery in our net interest margins has become more difficult”; (iv) Progress on deleveraging – There was nothing really new on this, but BKIR has done a great job to date (contrary to what some of the permabears have been spinning). Having offloaded €8.6bn of non-core loans it is 86% of the way to meeting its divestment target to the end of 2013, while the disposals to date have been done at levels within the PCAR’s base case assumptions. These disposals have helped cut the LDR from 175% at end-2010 to 144% at end-2011; and (v) Impairments – the underlying bad debt charge worsened to €1,939m in 2011 versus €1,859m in 2010. While management sees the impairment charge falling over time, this forecast is clearly dependent on the performance of the economy.


In all, the results are a bit of a mixed bag, and to tell the truth, they are a little bit worse than what I had expected. However, with the shares up nearly 8% at the time of writing the market seems to be taking a different view to me! In terms of the valuation, there are a certain number of “known unknowns”  for Bank of Ireland, but with the shares currently trading at a level (15.1c) that is well below the forecasted trough TNAVs that are in the market (approximately 22-23c) the question for me is are the potential negatives priced in? My gut feeling is that they are, and I note an estimate from Goodbody this morning that if you apply the ‘adverse case’ scenario from the PCAR to their forecasts for Bank of Ireland that you get to a trough TNAV of 13.9c. Trading on less than 1.1x that multiple, I think that Bank of Ireland is worth holding on to at least.


Elsewhere, one stock I need to find the time to write about is C&C. The company may be known for its cider brands (of which the two best known ones are Bulmers in Ireland and Magners in the UK), but it also has quite a few non-cider brands in its portfolio, some of which it merely distributes, but it also owns Tennent’s Lager, the top-selling lager brand in Scotland and Northern Ireland. I have noticed Tennent’s encroaching into a number of the pubs near where I live (Dublin city centre) of late, and utilising the most scientific (!) sampling method available to me I, ahem, “asked Twitter” if this was a phenomenon other people are seeing. There was a wide range of views, but the most interesting thing I picked up was that some feel that Tennent’s, which is pitched at a lower price point than the premium brands, is making inroads with Ireland’s ‘squeezed middle, along with the likes of Diageo’s Tuborg and Gleeson’s Bavaria. It’ll be worth keeping an eye on C&C’s updates throughout the year to see what, if any, the financial impact of this is. Of course, it should not be ignored that some consumers could be trading down from C&C’s premium cider brands to cheaper alternatives too.


(Disclaimer: I am a shareholder in BP plc) Over the weekend I was pleased to see yet another one of BP’s partners in the Macondo well settle legal claims. As part of the settlement, Moex and BP have agreed to dismiss claims against each other. I have written extensively about how the gradual easing of the potential litigation liability has a materially positive impact on the outlook for BP’s valuation.


In the blogosphere, Macro and Cheese (!) did up an interesting piece on LTRO and the markets. This is a timely piece, given that markets have been pushing higher in the year to date despite underwhelming fundamentals, including the fact that, of the Eurostoxx 600 companies that have reported Q4 numbers, only 51% have met or exceeded forecasts (versus 69% of S&P 500 stocks). Furthermore, Q4 profit margins for S&P 500 companies declined 27 bps, or 52bps if you exclude Apple. What happens after the ECB’s second LTRO at end-February? My instinct is that we could see a pullback in markets, which is why I’ve been taking some profits recently.


Written by Philip O'Sullivan

February 20, 2012 at 9:48 am

Market Musings 23/7/11

with 4 comments

I’ve been in the UK for the past two days so this blog is really more of a catch-up on what has been catching my attention over that period.


The main news really has been the EU summit. The Irish Times’ Dan O’Brien has a good piece about it here which broadly mirrors my views on the matter. Despite the fact that it does little to address the fundamental causes of peripheral Europe’s problems, it does make life easier for all of them, including Ireland, and it would be disingenuous not to say that. However, this positive development should not induce people to lose track of reality. The estimated savings for Ireland, which total up to €1bn per annum, amount to less than one-tenth of the €10.8bn Exchequer deficit in the first six months of 2011. And don’t forget that our vast Exchequer deficit is being funded by more borrowings, the interest costs on which will erode the savings achieved as a result of the summit over time. One or two misinformed people have argued with me that this development vindicates Enda Kenny and the Irish government’s “negotiating tactics”, but this claim ignores the facts that the European authorities only decided to bolster the peripherals’ economies after a renewed crisis in Greece and soaring Spanish and Italian bond yields raised a clear threat of contagion across the bloc. Our “victory” is nothing more than a by-product of the Greek mess – for months Irish politicians had lobbied for a reduced interest rate only to run into a Gallic brick wall. It was only when Greece blew up again that this reduction happened. To suggest otherwise is naive at best. In terms of a top-down view of the agreement, Bloomberg has a decent summary here.


(Disclaimer: I’m a shareholder in Smurfit Kappa Group plc) This has had a positive effect on equity markets, with the makings of a relief rally firmly in train. I was pleased to see my punt on an “amend and pretend” deal giving comfort to investors, Smurfit Kappa Group, see its share price jump almost 10% in the past two days. I am a little fearful that this gain will be eroded if the US debt talks don’t get revived – but I emphasise the word “little”. I imagine that the GOP, which has no credibility in my eyes when it comes to the deficit, is simply playing politics with this. Time will tell.


I’m surprised by how little attention Cyprus is receiving following the destruction of the island’s largest power station and resulting economic catastrophe. Its economy is also heavily exposed to Greece. What an awful situation its people find themselves in.


In terms of corporate newsflow, I see that Express Scripts has made a $29bn bid to acquire Medco in the United States. I wonder if this will have any impact on Medco’s joint venture with Ireland’s United Drug plc, which is an exciting business targeting the nascent homecare market in the United Kingdom. This is an industry with strong structural growth potential – treating people with long-term conditions at home wherever possible is clearly more cost-effective than putting people into hospital, and with a growing elderly population in the developed world expect to hear lots more about this industry over the coming years.


(Disclaimer: I’m a shareholder in BP plc) I was pleased to see BP’s share price close at the £4.70 mark for the first time since April. Sentiment towards the stock has been helped by government approval of its $7.2bn deal in India and also rumours of a legal settlement with Anadarko over the Macondo well. I have previously blogged about how settlements of this kind can act as a catalyst for the share price so this should come as no surprise to regular readers of this blog.


Finally, this is my last blog before heading off on my honeymoon. I will return in mid-August. Thank you for reading my musings over the past few months and I look forward to sharing more with you (!) after I get back to Ireland.

Written by Philip O'Sullivan

July 23, 2011 at 1:05 pm

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