Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Merrion Pharmaceuticals

Market Musings 28/5/2012

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Since my last blog post it’s been a case of the good (Irish plc updates), the bad (financial irregularities) and the ugly (Eurovision).


Origin Enterprises posted a solid Q3 trading update this morning. Underlying revenue is ahead by 7% in the year to date, led by a strong agronomy performance. Its main associates, Valeo Foods and Welcon performed solidly. In terms of the outlook, management says it is: “comfortable with consensus market estimates for an adjusted fully diluted earnings per share of circa 44.5 cent”. I suspect that the risks to that lie to the upside, given that all businesses were at least performing to expectations heading into Q4 (the second half of Origin’s financial year accounts for 85% of FY profits, so management may be playing it somewhat cautious). I like Origin – a lot. Management has done a great job in reshaping the business, merging non-core units with peers to create strong associate businesses that can be sold off in order to realise value in the future while investing capital to support its main farm-related operations, which tap into the structural themes of EU quota removal and rising food demand from emerging markets. One further attraction of its business model is that it is extremely cash generative, and likely to move into a net cash position possibly as early as end-2013 on my estimates (barring any large acquisitions), so if balance sheet safety is your thing, Origin is worth taking a look at.


Elsewhere in the food space Calum wrote an interesting blog about Hilton Food Group. On learning that it has 90% exposure to only two customers I became immediately nervous about it, due to the risk that margins could be squeezed ever-tighter by its key accounts.


Diageo bought Brazil’s leading premium spirits brand. While Diageo is not a stock I closely follow, I have noticed that it has been buying up more and more spirits brands, particularly those in emerging markets. Its focus on high-growth markets makes me wonder what Diageo’s longer-term intentions for its Irish beer brands – Guinness, Harp, Kilkenny and Smithwick’s – are. Were any of them to become available at some point in the future, I suspect the cash-rich C&C would be keen to acquire them, not least given the success it has had in cross-selling its cider brands since adding Tennent’s Lager to its portfolio.


(Disclaimer: I am a shareholder in Allied Irish Banks plc) The Financial Times reported that AIB is looking to sell €675m of loans which are primarily secured against Irish commercial real estate. Assuming the report is accurate, the pricing of this will be interesting as a gauge of what people are willing to pay for Irish loan assets at this time. I am in the process of building a model on AIB and I hope to share some detailed views on it with you in due course.


First Derivatives released strong results, with revenue and EBITDA rising 25% and 22% respectively in the year to end-February 2012. The statement contained a number of key positives, including news that its client base has now grown to “91 different investment banks, exchanges, brokers and hedge funds”; the revelation that the firm’s property assets (book value £15.5m) have been independently valued as having a market value of £18.9m; and the firm reported growth not just across all of its business segments (software and consulting) but also all of its key geographies (UK, rest of Europe, America and Australasia). In all, this reads like a company that’s doing all the right things.


The Central Bank of Ireland directed Bloxham Stockbrokers to cease all regulated activities. This is yet another setback for the image of Ireland Inc after a wave of financial scandals in recent years.


Merrion Pharmaceuticals said that its CEO is to step down.


Serial wasters of taxpayers’ money, Cork City Council, spent €259,000 commissioning a map that it has no plans to exhibit. Funny the way ‘austerity’ hasn’t seen a halt to white elephants like that.


Written by Philip O'Sullivan

May 28, 2012 at 5:18 pm

Market Musings 2/4/2012

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


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


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


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


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


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


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


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

Written by Philip O'Sullivan

April 2, 2012 at 8:10 am

Market Musings 2/2/2012

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We’ve seen a lot of company announcements, macro developments and a blockbuster IPO announcement since my last update.


(Disclaimer: I am a shareholder in Ryanair plc) To kick off, one of the bull points about Ryanair I noted the last time I mentioned the company was easing competitive pressures, due to the demise of Spanair and, as seems likely, the imminent downfall of Malev. Bloxham’s Joe Gill notes that in addition to Spanair three other European airlines have gone bust in the year to date – Cirrus, Air Alps and Czech Connect. The longer oil stays at these levels the less competition Ryanair will have to face over European skies.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Following the recent DS Smith – SCA deal, there has been more consolidation in the European packaging space. Subject to regulatory approval, Billerud is to pay €130m (7.2x EV/EBITDA) for UPM’s packaging assets. I read a broker note that said taking account of the synergies would put the multiple to 6.0x EV/EBITDA, which is about a 1/3rd premium to the EV/EBITDA multiple that Ireland’s Smurfit Kappa trades on. Leaving aside the valuation (and I think SKG is very cheap), these deals will help to lessen competitive pressure in the industry (and, one assumes, help pricing), so I view this as a win-win for Smurfit.


There was a lot of excitement around the Facebook IPO. Despite being an avid Facebook user, I have serious misgivings about this float. Facebook has 800m active users, so an implied valuation of $90bn values each of these at $112.50. I wouldn’t pay that much for a client base that mainly posts up pictures of crazy nights out and plays Farmville. Forbes has a good piece on the IPO here. And here’s an interesting piece on the merits of Facebook’s advertising service.


Irlandia Investments, the investment vehicle of the Ryan family (of Ryanair fame) appears to be giving Merrion Pharmaceuticals a dig-out.


I’ve previously written about Ireland’s glut of airports. Hence, I am not surprised to read that Galway Airport may cease trading over the coming days. Assuming it does close down, this will have a marginal benefit (the airport only handled 160,000 passengers in 2010) on Ireland West Airport Knock (83km away, according to Google Maps) and Shannon Airport (79km away).


(Disclaimer: I am a shareholder in Irish Continental Group plc) Staying with the transport space, part-taxpayer funded Fastnet Line confirmed that it is to close down. The company, which operated a loss-making ferry service between Cork and Swansea, had transported 153,000 passengers since its launch in 2010, many of whom would presumably have traveled on the private, unsubsidised and profitable Irish Continental Group’s service between Pembroke and Rosslare had Fastnet not been in operation. So, while Fastnet’s demise is obviously a blow to its workers, a lot of this business will undoubtedly transfer to another Irish company at no further cost to the taxpayer.


Speaking of taxpayers, this evening saw the release of the first set of Exchequer Returns for 2012. Some media outlets are shrieking excitedly about the 17% yoy increase in headline revenue, but this is flattered by a number of factors, such as the late payment of €261m of corporation taxes, expected in December, the effect of the USC on income tax receipts and also the relatively easy comparatives for VAT (retail sales were badly affected 12 months ago by adverse weather conditions). On the expenditure side, there are also a number of one-off items such as a €210m loan to the insurance compensation fund. In all, I wouldn’t read too much into what is just one month’s data.


In the blogosphere, John Kingham took quite a detailed look at Psion that’s worth a look (I don’t know enough about the technology to even begin to consider the merits of investing in it!). Elsewhere, Lewis did up a great piece on Dairy Crest that I’d also recommend you have a read of.


Finally, WordPress tells me that my blog (via several social media platforms) now has 1,000 followers. I’d like to thank you all for your ongoing support and, as ever, please feel free to email and tweet me suggestions on investment related subjects you’d like me to cover on this site.

Market Musings 22/10/11

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Blogging has been abnormally light this past week due to a confluence of factors, chiefly the fact that on Monday I’ve both 3,000 words due for Business & Finance magazine and an exam worth 70% of the marks in that module in Smurfit!


David Einhorn at Greenlight Capital announced that he was going short Green Mountain Coffee. His investment rationale can be viewed here.  While I don’t know anything about Green Mountain or whether Einhorn is justified in taking this position, there’s no denying that private investors can learn a lot about the type of “due diligence” hedgies do by reading Einhorn’s presentation.


We got a reminder of Irish headquartered bookmaker Paddy Power’s gift for generating lots of free publicity earlier this week. This is a marketing tactic that Paddy Power rolls out all the time – management takes a view that if the person, team or event they pay out early on wins, they would have had to pay out anyway. If they call it wrong, they take the cost of it out of the marketing budget. In any event, stunts like this result in the company’s name getting a lot of mentions in the media (perversely, they get even more publicity when they call things wrong, such as when they paid out early on Arsenal to win the 2002/03 Premier League title!), which can only be a good thing, especially given that the press coverage is for “punter friendly” actions such as this. This should also be a particularly helpful move given that Paddy Power’s operations now extend across rugby loving nations such as Ireland, the UK and Australia (where, and I’m always surprised by how many Irish people don’t know this, Paddy Power is the largest “corporate” – i.e. private – bookmaker). Of course, it isn’t the first stunt Paddy Power that has pulled at a Rugby World Cup.


Dublin was visited by the Troika earlier this week, who had this to say. Overall it would appear that we’re ticking all the boxes, but reading between the lines I see a hint of larger-than-currently-guided fiscal consolidation in the upcoming budget, specifically the part that reads: “The forthcoming 2012 budget will make progress along that path by targeting a deficit of no more than 8.6% of GDP” (emphasis mine). Bear in mind that the economic outlook has clearly deteriorated since Minister Noonan first guided €3.6bn in measures in the next budget – so don’t be surprised when he ups this target.


Speaking of the Irish economy, we got two reminders of how it is not out of the woods by any means in this morning’s press. Builder Manor Park has gone into receivership, less than 4 years after DCC sold its 49% stake for €181m – the old adage of “timing is everything” comes to mind! Elsewhere, a provisional liquidator has been appointed to Zapa Technology.


In terms of Irish corporate newsflow, Dragon Oil issued a very solid interim management statement in which it guided output growth in excess of 25% in the current year. Merrion Pharmaceuticals said it will not meet 2011 revenue targets, while it has also hired advisors and may sell all or part of the company. Following on from the announcement made earlier this week, United Drug disclosed that it will receive £8.2m for its stake in the Medco jv in the UK.


The US Air Force has started testing its new F-35B joint strike fighter.


In terms of what some of the people I follow are writing, my old pal Joe Gill had some interesting things to say about social networking. Speaking of pals, Makro Trader had some interesting observations on the Swedish housing market – have the authorities there learned enough lessons from the early 1990s crash? Elsewhere John McElligott provided an update on his thoughts on the UK retailers. Regular readers of this blog know my attitude towards that sector – as I’ve said before, “rioters are the only ones frequenting the High Street“. Ian Parsley, who is one of the best commentators on politics and economics in Northern Ireland, echoed my recent sentiments about the UK’s soaring inflation by saying:


If you print money, the value of money in your pocket decreases and the amount of it you need to buy stuff increases. Why the surprise re: inflation?

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