Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Marston’s

Market Musings 4/9/2012

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Newsflow has been mercifully light today, which is a help as I’m working on a number of other projects at the moment. In this blog I look at this evening’s Irish Exchequer Returns data, results from Total Produce and a few other bits and pieces that caught my attention since my last update.


To kick off with the latest Irish Exchequer Returns data, covering the first 8 months of 2012, these show a big improvement in the reported deficit, which makes for great headlines, but, as I’ve previously cautioned around such releases, tells us little of value about the underlying picture. Total receipts (both current and capital) rose 12% relative to year-earlier levels, while total expenditure (on the same basis) was 14% lower. This produced an Exchequer deficit of €11.4bn versus €20.4bn in the same period last year. However, that deficit figure is meaningless unless you adjust for one-off items and timing issues. On the revenue side, the Exchequer coffers were swelled by €233m from the sale of Bank of Ireland stock last year, while there were no such one-off gains this time round. Recapitalising the listed financial institutions cost €7.6bn in the first 8 months of 2011, but only €1.3bn in the same period this year. So far in 2012 the State has injected €450m into the Insurance Compensation Fund (2011: nil), while Promissory Notes (at least on a reported basis) have cost €25m in the ytd versus €3.1bn last year. Summing these items means that to get the underlying deficit for the first 8 months of 2011 you have to reduce revenues by €0.2bn and lower spending by €10.7bn. This produces a ‘underling’ deficit of €9.5bn in the first 8 months of 2011. The same exercise for the year to date involves lowering total expenditure by €1.8bn, which produces an underlying deficit of €9.6bn between January and August 2012. So, while the headlines suggest the deficit has significantly improved, in reality the underlying fiscal position is in fact little changed. While total revenues have increased (by €2.7bn on a reported basis), this has been eaten up by items such as a €1.6bn increase in interest costs on the national debt, while voted (i.e. day-to-day, nothing to do with bank recaps or interest on the national debt) spending is €0.4bn above year-earlier levels, in contrast to claims that extraordinary levels of fiscal austerity are being imposed on the economy. So, a case of ‘a lot done, more to do’.


One potential positive for Ireland Inc, however, is news that at least two European insurance IPOs are planned for later this year – Direct Line and Talanx. Assuming they get off OK it will bode well for the prospects of a sale of the State-owned Irish Life and, in time, (State-owned) IBRC’s 49% shareholding in the old Quinn Insurance business.


(Disclaimer: I am a shareholder in Total Produce plc) Total Produce released its interim results this morning. These revealed a 6.7% increase in earnings, while management hiked the dividend by +5% and raised the full-year guided earnings to the “upper end” of the previous 7-8c range.  This is all good stuff, and I suspect the risks for Total Produce lie to the upside as we move towards the end of the financial year. I remain a very happy holder of the stock, and given that it trades on only about 5.5x earnings and has a bulletproof business model, I would consider adding to my position.


Staying with the food and beverage sector, UK pub group Greene King said that the Olympics made no difference to its performance. While its overall reported like-for-like sales growth, at 5.1%, is commendable, its comments on the games strengthens my conviction around my recent disposal of shares in one of its peers, Marston’s, after the last of the three clearly identifiable potential catalysts for the sector (Euro 2012, Olympics, Jubilee) had played out.


Botswana Diamonds, which I recently profiled, issued an upbeat prospecting update this morning. The shares closed +17.7% in London, so clearly the market liked the look of them. It’s one of the stocks I have on the watchlist at this time.


Switching to the support services sector, the venerable Paul Scott profiled UK staffer Staffline. You can read my profile of one of its peers, Harvey Nash, here.


Another support services company, albeit a rather different beast, DCC, announced the acquisition of Statoil’s industrial LPG business in Sweden and Norway. This is a sensible bolt-on deal that strengthens DCC’s position in the Scandinavian region.

Market Musings 3/9/2012

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(Disclaimer: I am a shareholder in Abbey plc) While the macro outlook is challenging, it is interesting to see that two UK focused housebuilders have been the subject of takeover approaches from management in recent weeks. An investment vehicle controlled by Abbey’s Executive Chairman now owns nearly 62% of the company’s shares, with its offer remaining open for acceptances until 1pm (Dublin time) on 7 September 2012. Elsewhere, the Chairman of Redrow has also made a preliminary approach to buy out the firm using a consortium comprising his own investment vehicle and two funds. When management teams, who presumably (!) have access to better information than the likes of you and me, are making such moves, this suggests to me that there is decent value still to be had in the sector.


Staying with UK stocks, I sold out of Marston’s this morning. My reasons for doing so were twofold. Firstly, the three catalysts that had been identified for the stock (The Queen’s Jubilee, Euro 2012 and The Olympics) are all over and I am guessing that the regular newsflow from the many quoted UK pub groups means that the impact of these have all been priced in. Secondly, the shares have increased by over 25% (in euro terms) since I added it to the portfolio earlier this year. You can read about why I was originally attracted to Marston’s here. In terms of where the proceeds are being recycled into (Harvey Nash plc), I will upload a blog later today outlining my rationale for the inclusion of ‘an old friend’ back in the portfolio.


In other food & beverage sector news, tropical produce importer Fyffes today raised its full-year adjusted EBITA guidance to a range of €28-33m versus the previous €25-30m. This improved outlook is based on decent organic growth and FX effects in H1 2012. Extrapolating from the adjusted EBITA of €23.3m Fyffes achieved in the first half of the year and adjusted diluted EPS of 6.48c in the same period, this points to full-year earnings of at least 8.5c, putting the stock on less than 6x earnings, so clearly cheap. Its sister company, Total Produce, which I hold, reports its interim results tomorrow.


(Disclaimer: I am a shareholder in Smurfit Kappa plc) There was a bit of news out of Smurfit Kappa Group since my last update. This morning it announced the launch of a senior secured notes offering, which will raise €200m and $250m, maturing in 2018. The proceeds will be used to repay all of the existing 7.75% senior subordinated notes due in 2015. Given the relatively low rates on offer for similar rated debt at this time, this should, I estimate, shave at least €7m from SKG’s annual interest bill, as well as extending the weighted average maturity of its debt, which reduces the perceived riskiness around the group. In all, a win-win move for Smurfit Kappa. Elsewhere, the group is to invest €28m in a new bag-in-box facility in Spain, which  is a further sign of how Smurfit Kappa’s improved financial position is giving it enhanced flexibility on both the M&A and capex fronts.


(Disclaimer: I am a shareholder in Independent News & Media plc) It was confirmed that total Irish newspaper advertising declined 10% in the first 6 months of 2012. Annualising it, and putting in a little bit of a kicker for Christmas related spending, means that it’s still a circa €180m market, so not to be sniffed at despite the confident predictions of certain ‘new media’ devotees who assure me that ‘old media’ is completely toast. While I don’t for one moment dispute that old media is in long-term structural decline, my central thesis on the sector remains that it will not disappear for many years to come, with larger newspaper groups (such as INM) being able to mitigate against the effects of a shrinking market by gaining share as weaker competitors exit the industry. Of course, the extent to which equity investors can benefit from this depends on how successfully INM can prevail over its liabilities, and in this regard I was pleased to read reports of a third bidder entering the fray for INM’s South African unit. The more the merrier, clearly, as this should mean a satisfactory sale price for the business.


In the blogosphere, I was pleased to see the launch of two new blogs by Paul Curtis and Mark Murnane. I’ll be updating the blogroll later today – if there are any other investment and/or economics sites you think I should be following, please suggest them in the comments section below.

Written by Philip O'Sullivan

September 3, 2012 at 10:02 am

Market Musings 27/7/2012

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Blogging has been extremely light as I’m in the final stages of an internship as part of my MBA studies. However, newsflow has been anything but light! So, this blog represents a catch-up on what has caught my eye whenever I’ve been able to find the time to track what’s been happening in the markets this week.


(Disclaimer: I am a shareholder in Allied Irish Banks plc and PTSB plc) There was a lot of news out of the Irish financials this week. AIB released its interim results this morning. Overall, AIB has made good progress on deleveraging and deposits, but more work is needed on margins and costs. To take those in turn, I was encouraged to see that the LDR has improved by 13 percentage points to 125% since the start of the year, helped by €3bn of deposit inflows and non-core loanbook disposals. However, the net interest margin has worsened to 1.24% (pre-ELG) from the 1.36% seen in H12011. Hence, it was no surprise to hear management guide that it will raise mortgage rates in the autumn. As things stand, AIB is currently loss-making before even taking provisions into account, and the group will have to address this through a combination of rate hikes and cost take-out measures. Elsewhere,  PTSB revealed further details on its restructuring plans, but given its limited new lending ability and shrinking presence in the market I can’t see it being anything other than a marginal player for quite some time to come.


In the energy sector Providence Resources released an exciting update in which it revealed that there may be up to 1.6bn barrels of oil at its Barryroe Field, offshore Cork. Obviously it’s early days yet with this discovery, but it’s a stock that merits taking a look at. Once I’ve completed my internship it’s on my list of stocks to look at in more detail. Elsewhere, its Irish peer Tullow Oil released H1 results that contained few surprises given the level of detail provided in its recent trading update.


(Disclaimer: I am a shareholder in Marston’s plc) UK pub group Marston’s released a solid trading update, which revealed a satisfactory performance despite the recent wet weather.


Sticking with food and beverage stocks, Glanbia announced the $60m acquisition of a US beverage firm, which looks a perfect fit for its nutrition operations. This is another example of Glanbia’s successful forward integration strategy, which looks well placed to deliver strong returns over time.


Another Irish firm on the M&A prowl was United Drug, which acquired a German headquartered contract sales outsourcing firm for €35m, which will fit well within its existing Sales, Marketing & Medical division. An EV/Sales multiple of 0.23x is undemanding for a firm like this, so it looks a good deal to me.


(Disclaimer: I am a shareholder in Ryanair plc) Low-cost carrier Easyjet upped its PBT guidance, despite euro weakness, to a range of 280-300m. Prior to that the consensus was £272m. I assume the read-through from this for Ryanair, which reports numbers on Monday, is positive given that the euro weakness is near-term bullish for it (it generates a third of revenues from the UK, while it hedges its fuel and related USD exposures).


In the construction space, UK builders merchant group Travis Perkins’ interim results revealed a slowing performance in Q2. Management doesn’t see growth returning until 2014, so it’s not a sector I see a pressing need to gain exposure to anytime soon.


(Disclaimer: I am a shareholder in France Telecom plc) There was a lot of news in the telecoms sector. Spain’s Telefonica followed the lead of KPN and cut its dividend. France Telecom released its interim results, in which the firm reiterated its full-year cashflow targets, which is somewhat reassuring. France Telecom is a stock I’ve been negative on for some time and which I am looking to exit in the near future due to its inflexible cost base, intense competitive pressures in its home market and my fear that it will cut its dividend.


In the media space UTV announced that it has broadened its partnership with the English Football Association to broadcast rights around the FA Cup, Charity Shield and selected England internationals.


Ireland’s Central Statistics Office released its latest data on Irish house prices, which provide few grounds for optimism. While a lot of the recent media commentary has focused on monthly moves, I prefer to look at prices on an annual basis, given that month-on-month moves can be distorted by the small number of transactions happening in the market at this time. The latest data show that Irish house prices declined by 14.4% year-on-year in June 2012. This is a fall of a greater magnitude than what we saw in June 2011 (-12.9% yoy) and June 2010 (-12.4% yoy). The picture in Dublin is even worse (prices -16.4% yoy in June 2012) which is particularly concerning given that the capital will lead the eventual recovery in Irish house prices (due to much tighter supply and it being the economic heart of the country). Overall, I reaffirm my view from last month, namely that I don’t see any obvious catalyst for a sustained improvement in Irish property prices in the near term.

Market Musings 21/7/2012

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Since my last update the latest corporate developments have been mostly about Irish companies looking to either move in or move out of other countries. Let’s examine what’s been going on.


(Disclaimer: I am a shareholder in Independent News & Media plc) INM confirmed that it has received “informal and unsolicited expressions of interest” for its South African business. With the group’s main lender having reportedly categorised INM as one of its “most challenged corporate relationships“, divestments to strengthen its balance sheet appear to be a must. At the end of 2011 INM had net debt of €427m. If INM were to offload South Africa and its APN stake for €350m (based on media reports on South Africa could fetch and the current market value of APN), this would cut net debt to circa €75m. Add in the €125m current market cap INM is on and it would have an enterprise value of €200m against which the firm would have All-Ireland assets which produced sales and operating profits of €363m and €46m respectively in 2011, which was clearly a tough year for the media sector here. While you would have to adjust the above profits for INM’s group overhead costs, it seems to me that the market is applying a very low multiple to its Island of Ireland division. Divesting its overseas units should draw attention to this and potentially lead to a dramatic re-rating for INM.


DCC issued a solid trading update on Friday, which revealed that its Q1 performance was “ahead of budget”. However, management is sticking to its previous full-year earnings guidance, which is reasonable given how heavily skewed its profits are towards the second half of its financial year. To me there was little in the release to change the narrative around the company – DCC’s proposition to investors is a strong balance sheet and a good mix of assets, yielding consistently high returns, trading on an undemanding multiple.


(Disclaimer: I am a shareholder in CRH plc) Press reports suggest that CRH may be considering a €1bn+ deal in India. The cement assets in question have a combined capacity of 9.8m tonnes and they would more than treble CRH’s presence in the market if acquired. We’ll have to wait and see if there’s more to this story.


(Disclaimer: I am a shareholder in Marston’s plc) TMF’s Tony Luckett wrote an interesting piece on the UK pub sector – only the strong will survive. In it he cites research from CAMRA,  suggesting that the pace of pub closures in the UK may be leveling off. This is an encouraging claim, and it’s something that I’ll keep an eye on to see if the trend continues to improve.


(Disclaimer: I am a shareholder in AIB, PTSB and RBS) The Irish banking sector was in focus in recent days. PTSB gave a non-update on its restructuring plans, which contained nothing that wasn’t already in the public domain. My view on PTSB remains that, unless it can heroically engineer a large-scale recapitalisation to pave the way for a step-up in its lending capacity, it is very likely to remain a marginal player in the Irish banking market. I struggle to see why it wasn’t shunted into AIB. Today’s press asks if RBS’ Ulster Bank is gearing up to leave Ireland – I would think this extremely unlikely given the difficulties that would be involved, particularly in terms of time and costs – the problems of moral hazard, deposit flight, extricating the bank out of lengthy contracts, redundancies and so on would make this a very messy process (think of the hassle Lloyds has had with BOSI). I suspect that while Ireland is going to be down the pecking order in terms of capital allocation from RBS’ head office over the coming years, the much lower competition relative to before in the banking sector here means that margins on new lending should be quite attractive whenever the domestic economy and the financial system are restored to vigour. As the third biggest bank in Ireland, RBS should find itself well placed to exploit this future opportunity.


In the insurance sector FBD Holdings appointed UK firm Shore Capital as its new joint broker following the sad demise of Bloxham. This is a curious move given that FBD’s core operations are all in Ireland – might FBD be considering a push into Britain?


And finally – I was interested to read that 48 tonnes of silver bullion were recovered from a shipwreck off the west coast of Ireland.

Written by Philip O'Sullivan

July 21, 2012 at 1:37 pm

Market Musings 13/7/2012

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Newsflow has been relatively light in recent days but it’s essentially the calm before the storm as we move towards next month’s results season.


(Disclaimer: I am a shareholder in Marston’s plc) Since my last update we got some good news out of the UK pub sector. Both Young’s and JD Wetherspoon reported bumper sales during the Jubilee and Euro 2012 period, which presumably bodes well for their sector peers including Marston’s, which I hold. Assuming the London Olympics deliver another lift in sales, we could be looking at upgrades flowing through over the coming months.


(Disclaimer: I am a shareholder in Tesco plc) Speaking of UK consumer facing stocks, Shore Capital cut its forecasts for Tesco, citing concerns about its overseas operations. This is a new threat (at least for me) for the group, but I draw comfort from the comments from Shore’s highly rated analyst, Clive Black, about how its core UK business is stabilising.


(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) There was quite a bit about AIB in the press in recent days. Firstly, the group is reported to have sold a €300m loan portfolio, which is another step in meeting its PLAR requirements, although it should be noted that there is no information in the public domain yet about the discount that these loans were sold at. This morning there was an interview with AIB CEO David Duffy in The Irish Times that’s worth checking out. There’s more chatter in it about the possibility of external investors coming in to the share register from 2014, but I suspect they’ll need more than the ‘high single digit’ returns Duffy mentions to want to get involved – it’s not as if lower risk assets offering superior returns are particularly difficult to find these days. In any event, with AIB capitalised at €29.5bn at the time of writing while its stronger, equivalent sized peer Bank of Ireland is capitalised at just €2.7bn, I think a lot of investors looking at the Irish financials will be wondering why they should opt for AIB when they can buy into a company (i.e. Bank of Ireland) with similar macro exposure and risks (going forward) at a tenth of the price.


Switching to macro news, Argentina is the gift that keeps giving when it comes to dysfunctional economic policies. The latest plan by its President is to ban savers from purchasing US dollars. This follows other bizarre developments, such as prosecuting economists who query ‘official’ inflation estimates and restricting capital flows to the point where Mitsubishi and Porsche get paid in peanuts and wine respectively for their sales into Argentina. There’s also the pointless belligerence towards the Falkland Islands (not least given that Argentine military capabilities haven’t really moved on since 1982 while Britain has new Eurofighters, a Type 45 destroyer and a nuclear submarine in the area) and the theft of Repsol’s assets in the country to take into account. Again I find myself wondering aloud why some people here think we should be emulating Argentine policies!

Written by Philip O'Sullivan

July 13, 2012 at 9:17 am

Market Musings 20/5/2012

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After the huge volume of company updates we saw on Friday I’m hoping that this week will be a little quieter on the newsflow front. In this update I’m focusing on what to expect from this week’s main scheduled updates from across the universe of stocks I follow, along with one or two other nuggets of information that I found interesting.


(Disclaimer: I am a shareholder in Ryanair plc) Given that I have about 17% of my portfolio invested in Ryanair, tomorrow’s FY12 results from Europe’s biggest low cost carrier will be of particular interest to me. RYA guided in late January that it now expects to deliver net income of €480m, having previously upped its guidance by 10% to €440m back in November. With consensus standing at €494m (in my own model, for what it’s worth, I have €491.9m), it seems that the market expects an earnings beat from Ryanair. Of course, nobody trades the history, so all eyes will be on guidance for how RYA has performed since the start of its FY13 financial year, particularly on the yield side, along with any clues on special dividends (unlike most followers of the company I currently forecast two €500m payouts – in both FY13 and FY14 – but given the €106m it has spent on buying back its own shares recently, I’m starting to wonder if I should revise that to one special dividend and further share buybacks). I wouldn’t expect too much ‘new news’ on the cost side given that RYA has hedged 82% of its fuel needs for FY13 already.


(Disclaimer: I am a shareholder in Irish Life & Permanent plc) Another company updating the market this week is Irish Life & Permanent, which holds its AGM on Tuesday. I’m assuming that it will repeat the practice of previous years and release an interim management statement at 7am that morning. Following the announced sale of its insurance unit to the State, and news that the State is positively disposed to its restructuring plans, I assume that interest will be centred on: (i) the provision of more information on how the post-restructuring ptsb banking unit will operate; (ii) arrears and impairment trends in the loanbooks; and (iii) any hint of a possible re-start of the sale process around the UK buy-to-let mortgage book.


Food manufacturing group Greencore will release its H1 results on Tuesday. The main attention here will be on the integration of Uniq, current trends in the UK convenience food space and how well its (still relatively small) US business is performing. Trading on a PE of circa 6x and yielding around 6%, Greencore looks cheap but I dislike its chunky net debt.


(Disclaimer: I am a shareholder in Marston’s plc). With all the market noise on Friday, I didn’t get a chance to properly review the presentations that accompanied some of the results statements that came out that day until yesterday. One that really stood out for me was pub group Marston’s – happily, for all the right reasons. In the group’s interim results presentation management outlined a number of key positives, including: (i) slide 8 illustrates the positive trends in operating margins, which have risen 90bps in 4 years despite the economic headwinds, which underlines the successful execution of the firm’s growth strategy; (ii) slide 37 shows that the firm is comfortably within all of its debt covenants; (iii) slide 19 illustrates just how well the firm’s investment policy is paying off, with targeted ROI from new-builds of 16.5%; (iv) slide 25 shows how the learning effects from this strategy is paying off, with returns on more recently completed establishments standing at 18.5%; and (v) slide 38 shows that the firm has no significant near-term debt maturities, which gives it welcome breathing space. In all, I found Marston’s presentation to be very comforting and remain a happy holder.


The government announced that the keel has been laid for the first of the Irish Naval Service’s two new offshore patrol vessels. At 90m long these will be the largest ever vessels operated by the INS, and they are due to be delivered in 2014 and 2015 to replace two of the three Emer class vessels (commissioned in 1978, 1979 and 1980 respectively). In Department of Defence briefing notes prepared for the Minister after he took up his post early last year these were the only significant planned procurement items alluded to, which reflects the present financial constraints. However, by 2015, after the delivery of the OPVs, of the INS’ eight strong flotilla three will have been in service for over 30 years, so this is an area that will have to be revisited by the Minister before long.

Written by Philip O'Sullivan

May 20, 2012 at 12:40 pm

Market Musings 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 24/4/2012

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The main interest this morning is Bank of Ireland’s IMS (more of which anon), but we’ve also seen some interesting developments in other sectors that merit some attention.


(Disclaimer: I am a shareholder in Independent News & Media plc) Macquarie says Gavin O’Reilly’s departure from INM could be a precursor to a sale of its stake in APN. Such a move would, in my view, make a lot of sense – assuming INM can secure an exit price far in excess of its current market value. Last night INM’s shareholding in APN News & Media was valued at €126m, compared to INM’s market cap of €140m. INM’s recent results statement revealed that “as at 31/12/2011 INM carried its investment in APN on its Balance Sheet at an amount of €255.1m or A$1.68 per APN share held”. I appreciate that this is a very crude analysis, but if you were to split the difference between the market value and book value of the APN (i.e. €190.6m, putting APN on the sort of valuation it traded at last summer – which is not unthinkable given that such a sale would put a big chunk of Australasian media assets potentially in play) and INM received these proceeds (let’s ignore any tax implications for the sake of keeping things simple – in any event, presumably, a disposal would be done in a tax efficient manner), it would have the effect of reducing INM’s end-2011 net debt of €426.8m by 45%. In terms of the cashflow effects, INM’s only cashflow from APN is the dividend it receives from the group (€15.8m in 2011), which would cease in the event of a disposal. So, for arguments sake, based off the 2011 results this would put INM on trailing net debt of €236m and EBITDA of €86m (i.e. the €102.2m reported EBITDA less the APN dividend) – a very manageable net debt/EBITDA ratio of 2.7x, not least given how advertising markets are some way off a recovery in its home market. This is also a far superior situation to the net debt / EBITDA ratio of 4.2x INM reported in 2011 – and I think it’s safe to say that measures to dramatically improve INM’s balance sheet such as the above would see a marked improvement in the group’s share price.


(Disclaimer: I am a shareholder in Bank of Ireland plc) We had an IMS from Bank of Ireland this morning. As regular blog readers are aware, my focus where the Irish financials are concerned is fixed on deposit trends, net interest margins, progress on deleveraging and impairment guidance. Two months ago BKIR’s FY2011 results revealed a bit of a mixed bag (in my view) on this front. Today’s statement revealed: (i) End-Q112 deposits of €70bn are more or less in line with the €71bn at end-2011, while the LDR has improved to 142% from 144% at end-2011; (ii) net interest margins are expected to improve in H212 due to lower ELG participation, repricing of the loan book and reduced deposit pricing; (iii) the group continues to make good progress on deleveraging, and has completed / contracted divestments to date of €9.5bn, 95% of its PCAR target, at an average discount of 7.6% (by end 2011 the figures were €8.6bn sold at an average discount of 7.1%). The updated divestment figure remains within the PCAR base case assumptions. Bank of Ireland says: “redemptions and repayments in our other portfolios remain in line with our expectations”; (iv) On impairments, BKIR says: “we maintain our expectation that impairment charges will reduce from the elevated levels experienced in 2011”. The Bank notes that “domestic economic indicators remain weak, unemployment remains elevated, and residential property prices do not appear, as yet, to have fully stabilised”, while Eurozone concerns have heightened – this is no surprise given what we know from recent economic data releases and so on, and I suspect this has been priced in given recent declines in the BKIR share price from its 2012 peak. Overall, I view Bank of Ireland’s IMS as ‘solid’ – in terms of the factors it has control over it is meeting its goals, and while the macro picture remains challenging, it is well placed to capitalise once that situation improves. I remain a happy holder, and would certainly consider adding to my position over time.


(Disclaimer: I am a shareholder in Marston’s plc) I was pleased to see a solid trading update from UK pub group Greene King, which presumably bodes well for Marston’s. Speaking of pub groups: According to the British Beer and Pub Association, there are 51,158 pubs in the UK. Of the listed pub groups, Enterprise Inns has c. 6,250 pubs (12.2%)Punch 5,000 (9.8%)Marston’s 2,150 (4.2%), Greene King 2,000 (3.9%), Mitchells & Butlers 1,600 (3.1%)Spirit 803 (1.6%)Wetherspoon 800 (1.6%), Fuller’s 360 (0.7%) and Young’s 241 (0.5%). I see the market share of these large players steadily increasing over time as smaller operators exit the market.


Speaking of UK plcs, here’s some cheer for income investors – FTSE dividends jump to a record level.


In the food sector, I was interested to read that Nestlé is paying a hefty 5x revenues for Pfizer’s infant nutrition unit. There is bullish read-through for Ireland’s Glanbia and Kerry from that transaction – Ingredients account for 69% & 77% of Kerry Group’s sales & trading profits respectively, while for Glanbia it’s 49% & 67% of underlying sales & EBIT. Clearly, infant nutrition is only a portion of Kerry & Glanbia’s ingredients operations, but this is still supportive from a valuation angle.


To finish up with some macro news, Eurostat provided us with the 2011 fiscal details on EU member states. Ireland, despite all the talk of austerity, was bottom of the list, running up a frightening deficit of 13.1% of GDP last year. The underlying (ex bank recaps) deficit was 9.4%. Greece was the next worst on 9.1%. So, to emphasise, even after stripping out the cost of bank recaps Ireland had the worst deficit in the EU last year. Yet listening to some politicians and pundits here one would be forgiven for thinking that we’re experiencing severe austerity measures relative to what other EU citizens are putting up with.

Written by Philip O'Sullivan

April 24, 2012 at 6:29 am

Market Musings 4/4/2012

with one comment

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

Posted in Market Musings

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Marston’s (MARS.L) – The Pub Grub Hub

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(This is the thirteenth installment in my series of case studies on the shares that make up my portfolio. To see the other twelve articles, on Ryanair, PetroNeftIrish Continental GroupIndependent News & MediaTotal ProduceAbbeyGlanbiaIrish Life & PermanentDatalexTrinity Mirror and Datong, click on the company names)


Marston’s describes itself as “a leading independent brewing and pub retailing business operating a vertically integrated business model”. It has three business areas – (i) Marston’s Inns & Taverns, where it directly manages around 500 pubs; (ii) Marston’s Pub Company, which comprises around 1,650 tenanted and leased pubs; and (iii) Marston’s Beer Company, which comprises five breweries producing a range of premium cask and bottled beers, of which Hobgoblin and Wychwood are the best known.


Its strategy is to: (i) grow its estate of pubs through greenfield developments (the company aims to open 25 pub-restaurants in the current year), (ii) increase sales in its existing estate through a combination of its enhanced franchise model and what management calls ‘The F Plan’ – a focus on “food, families, females and forty/fifty somethings”. The F Plan is a response to changing consumer tastes in recent years (a general switch to the off-trade, the impact of the smoking ban etc.) and makes sound business sense – as  evidenced by the rising average profit per pub in its Inns & Taverns division between FY08 and FY11 – £117k, £120k, £132k and £145k respectively. It would seem that attracting in more people who want to have a meal in a pub is more profitable than simply focusing on those for whom ‘eating is cheating’! In the firm’s latest trading update management revealed like-for-like food sales growth of 3.9% and like-for-like ‘wet sales’ growth of 3.4%. (iii) ‘Localness and Premium Brands in Brewing’ – revenue in its Beer division has gone from £84.1m in FY07 to £106.5m in FY11; and (iv) Cutting the net debt / EBITDA ratio – this has improved from 7.1x in FY09 to 5.7x in FY11, and I forecast that it will have improved further to 5.4x in FY12. This is certainly high, but the group has strong asset backing, with PPE of £2bn versus net debt of £1.1bn or so.


On building a model for the company, two things stood out – its operational excellence and its cash flow. I’ll focus on both of these in my analysis, before concluding with some valuation thoughts.


In terms of its operational qualities, Marston’s is an outstanding performer. As illustrated above, it has managed to lift average profitability across its estate at a time when the consumer has been under siege from a dismal economic backdrop. Its headline performance has been assisted by a clear willingness to divest under-performing assets. The group sold 25 pubs in the last financial year and over the previous 4 years it has raised just under £80m from the sale of assets. Marston’s is also adding pubs to its estate in other areas. The group opened 55 new pubs between FY05 and FY11, which are delivering an average return on investment of circa 17% and achieving average weekly takings of circa £23k. Post 2009 its new builds have been delivering average weekly turnover of £27k and pro-forma annual EBITDA of £400k, well ahead of management targets of £20k and £300k respectively. And I emphasise, this is in spite of very tough economic conditions. In its recent trading update, the group reported low-single digit growth across all business areas, and management expressed hope for good trading around events such as the Queen’s Diamond Jubilee and Euro 2012.


Cash flow is something that does concern me about Marston’s. At the end of FY11 Marston’s had net debt of £1.1bn, unchanged from the end-FY09 level, despite having generated £371m of operating cashflow over the period. Looking at the statements shows where this ended up – £170m in net capex, £66m in dividend payments and £144m going on interest payments.


Whatever about the interest payments (mandatory), and the capex (justified by high ROI), the dividend stands out as a particular anomaly to me. Based on where the shares are currently trading at (99.75p) Marston’s yields 5.8%. I wonder if shareholders would be better off if the company axed the dividend and pumped the money saved into either new build pubs, given their ROI of 17%, or on paying down debt – net finance costs / average net debt over the past 3 years have been a stable 6.9%  per annum. If the latter, it would accelerate management’s goal of reducing the net debt / EBITDA ratio (I do find it interesting that the stated goal is to reduce the ratio as opposed to reduce the debt) and de-risk the company somewhat. If the former, I think it would greatly enhance shareholder value over time.


In terms of the valuation, I have opted for conservative revenue growth and margin estimates over the coming years, partly because of the troubled macro outlook and partly because I wonder if the group’s cash flows (after dividends and interest have been paid) may limit growth. I have come up with a blended valuation of 92.5p / share for the company, based on the average of a DCF model (68p/share), my end-2012 forecast NAV/share (£1.52) and a Dividend Discount Model (58p/share). I assume zero growth in dividends from here, which is conservative, but I don’t see any justification for raising the dividend given the factors noted above. At a price of 92.5p / share Marston’s trades on the following FY12 multiples (based off my forecasts) – 7.9x EV/EBITDA and 7.2x PE, while it would have a 6.3% dividend yield.


This valuation stands 7.2% below where the shares are presently at, however, I don’t think I’ll be rushing to the exit. This is due to four reasons – firstly, the dividend yield is one of the highest ones within my portfolio, and there’s no harm having some decent income generating stocks in it; secondly, there is some potential for positive surprises from factors such as Euro 2012 and a decent summer; thirdly, when the UK economy starts to pick up, Marston’s should outperform (from an operating perspective) as much on the upside as it has done on the downside; and fourthly, I think the downside risk is limited given the conservative assumptions built into my forecasts. But would I buy more? It’s a bit like consuming the ‘wet’ products Marston’s sells – there’s nothing wrong with having a few, but I wouldn’t want to have too many of them – given both the high level of debt and the valuation.

Written by Philip O'Sullivan

March 23, 2012 at 3:57 pm

Posted in Sector Focus

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