Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Origin Enterprises

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 10/9/2012

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This is a bit of a hotchpotch of what has been catching my eye over the past few days.


To kick off with construction, Abbey announced the results of the mandatory offer from Gallagher Holdings. The latter has raised its stake in the housebuilder by 10.7ppt to 72.6%. This is not enough to force a compulsory acquisition of the balance of the shares, so the stock will retain its listing. In the run up to the deadline, I had struggled about what decision to take about my own holding in the company. While the bid from Gallagher represented a nice exit price on a stock I purchased for only €4.60 a share, it was pitched at a disappointingly wide discount to NAV. In the end, I elected to take the cash, on the grounds that I didn’t want to stick around in a stock that has now arguably moved from ‘quite illiquid’ to ‘extremely illiquid’ (!), which makes it unappealing to many institutional investors. However, I may well re-enter the sector in the not too distant future given that the long-term drivers of growth are very much intact (a very old housing stock, net inward migration, severe pressure on housing in the South-East of England).


In the food sector, Investec argues that Premier Foods faces ‘death or glory’ by 2014. Elsewhere, NCB issued very different (in tone) reports on Aryzta and its majority-owned associate, Origin Enterprises. On Origin, NCB argues that weather and FX should provide a tailwind to earnings, while on Aryzta, NCB makes a persuasive argument that it may not hit its 400 cent earnings target for 2013.


(Disclaimer: I am a shareholder in Harvey Nash plc) In the recruitment space, SThree released an interim management statement that revealed slowing growth. On an annual basis its gross profits rose 6% in Q3 2012 (in constant currency terms) of its financial year (i.e. to end-August), down from +15% in Q1 and +9% in Q2. Drilling down into the numbers we see it has experienced weakness in both the UK & Ireland and ICT, with other areas performing more resiliently. The slowdown in the headline growth rate was, unsurprisingly, explained by “the difficult macro economic backdrop”, but SThree’s resilient overall performance highlights once more the importance at this time of choosing recruitment stocks that offer diversification (both by industry segment and geographic), an attractive dividend and a strong balance sheet. This is what attracted me to recently buy into one of its peers, Harvey Nash. I hope to find the time to research all of the stocks in the sector that fit this bill over the next while.


(Disclaimer: I am a shareholder in Bank of Ireland plc and RBS plc) There were a few items of note in the financials space. I saw a very bullish MarketWatch piece on Bank of Ireland, which served as a reminder that while a lot of the domestic commentary is ‘doom and gloom’ oriented, many international observers are bulled up on Ireland Inc (Franklin Templeton’s bold Irish sovereign debt move is a good example of this, as is this favourable coverage from CNBC). In other sector news, RBS is planning to shut down its precious metals trading unit, while it has also ceased commodities research. The FT also reported that it is nearing a Libor settlement with US and UK authorities, which would remove another legacy overhang from the group, which remains on my watch list. Finally, I offloaded my second biggest holding, Standard Life, which has had a great run of late and is no longer (in my view) in ‘cheap’ territory.


(Disclaimer: I am a shareholder in Trinity Mirror plc) I was pleased to see that new Trinity Mirror CEO Simon Fox has been set very demanding bonus targets based on the share price performance of the group. It is good to see a remuneration committee flex its muscles in this regard, especially in a way that ensures investors’ and management’s interests are very highly aligned.


In the blogosphere, John Kingham says: “When I look at BT I see a company and an investment that screams mediocrity“.

Written by Philip O'Sullivan

September 10, 2012 at 2:40 pm

Market Musings 29/6/2012

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It’s been an incredibly busy 48 hours since my last update. Let’s run through what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) We saw a lot of news out of the Irish financials. Bank of Ireland issued a couple of updates. The first related to the Irish mortgage market, where the group revealed that its share of new lending has increased to 40%, while it did not indicate (emphasis) any change in the pace of arrears relative to its previously stated expectations. Its second update, released yesterday, brought confirmation that Bank of Ireland has completed its €10bn divestment programme within PCAR base case assumptions. This comes as no surprise (the group had previously disclosed that it was 97% of the way through this) but it is an incremental positive and reaffirms my previously expressed view that Bank of Ireland is doing an excellent job at managing the factors it has control over. Bank of Ireland’s main domestic competitor, AIB, released an AGM statement yesterday, the key points of which are: (i) Its non-core business is performing better than expected; (ii) The integration of EBS is going well; and (iii) AIB’s share of the mortgage market is now 35%. On the last point, adding in Bank of Ireland’s share noted above means that 75% of  Irish new mortgages are being issued by AIB and Bank of Ireland – so, essentially a duopoly market. Smallcap IFG’s AGM statement revealed a good start to the year for its core UK and Irish operations, while management said it is going to review its options post the sale of its international unit. Elsewhere, NAMA repaid another €2bn of bonds,  taking its total debt paydown in the past 2 years to circa €3.5bn. At the end of 2011 NAMA had €29.1bn of debt securities in issue, along with another €1.6bn of a subordinated equity instrument. Overnight we heard news of a ‘breakthrough‘ agreement on Ireland’s debt burden which may have significant effects on the banks here. However, I would echo the caution expressed by Constantin Gurdgiev here, namely “we cannot tell how positive it is yet”.


(Disclaimer: I am a shareholder in RBS plc) Switching to financials in other jurisdictions, the LIBOR investigation has had a significant impact on sector valuations in the UK. Also, the “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger” quote on page 19 of the FSA’s report should have a significant impact on what people put in work emails in future! From my perspective, my UK bank sector exposure is limited to a small position in RBS, which had already become smaller on the back of its IT problems. Yesterday’s 11.5% slump threatens to push the share price below £2 for the first time since the 1-for-10 reverse share consolidation. I’m still positive on the stock on a longer-term perspective, and am monitoring its current difficulties closely with a view to gauging if the risk/reward justifies topping up my position – although clearly this is not something I envisage happening in the immediate future.


(Disclaimer: I am a shareholder in PetroNeft plc) This morning’s 2011 results from PetroNeft give me few grounds for optimism. While management say that “production levels have been stabilised”, at 2,200bopd presently output is still below the 2,300bopd reported in early April and the 3,000bopd achieved at the end of 2011. I also note management’s comments that: “we have initiated discussions with a range of strategic investors about possible farm-outs, long term off-take agreements and potential equity or asset investments which in the long term would strengthen the Group’s financial position”. This ties in with the revelation that Macquarie wishes to reduce its $30m available loan facility to PetroNeft by $7.5m, “however they are giving the Group time to work this out “. Overall my sense is that a solution to the challenges PTR faces will likely prove to be unfriendly to existing shareholders, but assuming I’m right perhaps this is already reflected in the price as I note that the shares have opened higher this morning.


In the food sector, Greencore made what it described as a ‘platform acquisition’ in the US, buying Schau for £11m, or around 0.5x annual revenues. It also revealed a new $50m contract, which assuming a 6% margin should lead to around $3m in extra operating profits on a full-year basis. Overall, Greencore’s US business continues to make progress, but it is still a marginal player in a huge market – I wonder would the capital the group has tied up here be better deployed in strengthening its strong position in the UK instead of trying to build a sizeable operation in the States. In other Irish food company news, Origin Enterprises released a fascinating presentation about its agronomy operations. I’m very bullish on the long-term outlook for this business, which is underpinned by rising food consumption across the world, the lifting of EU quotas and food security issues.


In the support services sector, CPL Resources released an upbeat trading statement, featuring the word “strong” no less than three times, which bodes well for Ireland Inc.


(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector,  News International raised the cover price of The Sun newspaper, which could (emphasis) pave the way for Trinity Mirror to follow suit with its Daily Mirror title.


In the blogosphere Lewis took a look at Plastics Capital, which is not a name I’m too familiar with and based on his blog not one I wish to become more acquainted with anytime soon! Speaking of blogs, FT Alphaville posted up UCD Professor Karl Whelan’s Target2 presentation. I was particularly struck by slide 20 – Eurozone countries’ net balances with the Eurosystem.


Finally, John Kingham looks at how his top tips for 2012 have performed in the year to date – I will outline how mine have done over the weekend.

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 8/3/2012

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


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


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


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


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


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


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

Written by Philip O'Sullivan

March 8, 2012 at 10:54 am

Market Musings 4/3/2012

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Big share deals and Ireland Inc have provided the most interest since my last market update. Let’s see what the lessons from these are.


(Disclaimer: I am a shareholder in Ryanair plc) To kick off with the transport sector, Ryanair announced that it bought back 9.5m of its own shares at a cost of €39m. This is particularly interesting in light of comments made on the carrier’s conference call post its Q3 results that it could spend up to €200m on share buybacks. This should help to prop up the share price against the pressure of the recent spike in oil prices. I hope to do a detailed piece on Ryanair over the coming days.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) To switch from the purchase of a big block of shares to a sale of one, private equity houses Cinven and CVC announced that they sold a 9.7% stake in Smurfit Kappa Group for €158m. The two retain an 8.2% position which is subject to a lock-in agreement until the release of SKG’s Q1 results in May – which I can’t help but wonder if this will be seen as a near-term overhang on the stock – time will tell.


(Disclaimer: I am a shareholder in Irish Continental Group plc) These big share transactions bring to mind a lot of the other stakes in Irish plcs that could change hands this year. The Irish government has signaled a willingness to sell its 25.1% stake in Aer Lingus. One51 has said that it will sell non-core assets, which I assume includes its circa 12% stake in Irish Continental Group. How long will baked goods company Aryzta hold on to its 71.4% shareholding in agri group Origin Enterprises plc for? Given the recent boardroom dispute at UTV Media, what are the intentions of its 18% shareholder and fellow Irish plc TVC Holdings? We could be in for an interesting few months ahead.


Switching to Ireland Inc, the IMF struck a relatively positive note about the country’s prospects. However, the fiscal crisis continues to drag on. Exchequer Returns data for the first two months of the year revealed that the year to date deficit stands at €2.07bn versus €1.95bn in the same period in 2011. The tax take increased from €4.9bn to €6.3bn, but voted expenditure (the part of spending that the government has full discretion over) rose by €474m – this is a disappointing performance. Non-voted expenditure ballooned from €580m to €1.6bn, let by a massive increase in interest costs on the national debt (€848m vs only €61m) and a €250m loan to the insurance compensation fund. The interest costs serve as a reminder of the consequence of this government’s (and its predecessor’s) failure to close the fiscal jaws been revenue and spending. It is astonishing, given the unemployment and emigration crises Ireland is facing, that the government spent 10x on national debt interest costs (€848m) in the first 2 months of 2012 than it did on the Department of Jobs, Enterprise & Innovation (€84.5m).


Finally, in the blogosphere Neonomic did up a good piece on Home Retail Group, which owns Argos and Homebase, that’s worth a read.

Written by Philip O'Sullivan

March 4, 2012 at 10:23 am

Twelve for 2012 – Part 1

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In a recent email exchange with some of the leading share bloggers in the UK and Ireland I proposed that we each sit down and draft our thoughts for how the markets will behave in 2012, and what stocks we’d like to own to play some of those themes. Given resource limitations (I don’t know of any blogger who has a team of analysts working for them!), there will, I’m sure, be quite a bit of selection bias in the names we highlight – generally speaking, people invest in what they know! I illustrate that perfectly by choosing 5 Irish listed names in my core picks, although all of them are firms with a distinct international dimension (none of them could be described as plays on the Irish domestic economy). But despite the selection bias I do think that this is a worthwhile exercise, and one that will no doubt contribute to idea generation. As ever, readers are strongly advised to do their own research and consult a professional financial adviser if they want to invest their own money.


2012: The Macro Call


Looking ahead to next year, I see no grounds to assume that the macro situation will be materially different to that which we saw in 2011. Sclerotic growth across the leading Western economies, limited credit availability, rising unemployment, political uncertainty and austerity are all likely to be key themes over the coming 12 months. Added to the mix is likely to be a pronounced deterioration in the Chinese economy. I am gravely concerned at the rise in economic nationalism and see further policy incoherence at a European level as countries pull in different directions. However, my sense is that the euro will survive, given that its failure would lead to a deep and prolonged depression on a scale not seen for close to a century. That said, its survival will come at the expense of a weaker euro as monetary policy here is loosened to ensure its survival (given the lack of political consensus on how to fix the issue, I don’t see a solution that doesn’t involve some form of quantitative easing).


For me there are five key tactics to mitigate against this pressure:


  1. Choose firms with strong balance sheets
  2. Choose defensives over cyclicals
  3. Choose firms with significant exposure to markets outside of the Eurozone
  4. Hedge against inflationary pressures / political risk
  5. Choose firms with attractive and well-covered dividends.


This screen leads me to highlight 6 ‘core’ conviction investments as being particularly interesting at this time. I’ve also looked at 6 more speculative plays for people with an appetite for risk. In today’s blog I outline my six conviction picks for 2012. In the next one, I will outline my six speculative plays – PetroNeft, Marston’s, Bank of Ireland, Petroceltic, Ladbrokes and Aer Lingus. Some of my readers suggested a number of other names that didn’t make the cut for a variety of reasons (French Connection, LoQ, Software Radio Technology, Sportingbet, Orosur Mining, Soco International, C&C, St. Ives, De La Rue, M&S, Tullett Prebon, Antofagasta, Morgan Sindall, ICON, CRH, élan, Ocado), which I hope to tackle in other blogs over the coming year.


Six Conviction Picks for 2012


Origin Enterprises (Current Price €3.05, Market Cap €406m)


Origin has successfully repositioned its business model over the past few years, merging its fishmeal and food operations (both of which are now treated as associates) and focusing on its core agri-services business. Its recent trading update revealed a positive start to the FY12 financial year (to end-July). Origin will also benefit from a full-year contribution from the businesses acquired last year (UAP and Rigby Taylor) and the integration benefits they provide. The firm has significant firepower to expand its businesses over the coming year, helped by a strong balance sheet, while it also has the option to raise extra capital through selling off one or more of its JVs. Trading on less than 6.5x forward earnings and with a net debt / EBITDA of less than 1x, this stock is overdue a re-rating.


Balance sheet strength: High, with net debt of less than 1x EBITDA.

Defensive/Cyclical: Defensive.

Non-EZ exposure: Just under 60% of Origin’s FY11 revenue came from the UK. Most of the 17.5% Origin says came from the “rest of the world” (i.e. outside of the UK and Ireland) comes from Norway, Poland and the Ukraine.

Dividend yield and cover: Origin yields 3.6% covered just over 4x.


DCC (Current Price €18.53, Market Cap €1.6bn)


(Disclaimer: I have an indirect shareholding in DCC). “Consistency” is a word that comes to mind whenever I think of DCC. The company has delivered growth in EPS every year since its IPO in 1994. In this financial year (to end-March 2012) that record looks like it will draw to an end, with unusually mild weather putting pressure on earnings in its core energy division (60% of group profits).  The shares have struggled in recent times after management lowered guidance due to this weather effect, but as I’ve previously argued, this looks overdone. Profits in its four other divisions (IT, Food, Healthcare and Environmental) are all rising. The company has a consistent record of generating high ROCE (19.9% in 2010, 18.4% in 2009), helped by a solid track record of making astute investments across its business areas. While this financial year looks like a ‘blip’ due to abnormal weather, the next financial year should see a strong rebound in earnings, assuming a more ‘normal’ winter and the benefits from this year’s acquisitions.


Balance sheet strength: Very high. Net debt / EBITDA for the current year is likely to come in around 0.6x.

Defensive/Cyclical: The vast majority of DCC’s businesses are defensive.

Non-EZ exposure: 72% of DCC’s revenue comes from the UK, of the balance, while most of this is euro DCC has a presence in several non-EZ countries such as Sweden and Denmark, while it also has a small US business.

Dividend yield and cover: The shares currently yield 4.0% and are covered 2.7x.


Total Produce (Current Price €0.38, Market Cap €127m)


(Disclaimer: I am a shareholder in Total Produce plc) It’s hard to imagine a more defensive business than the one that distributes fruit and vegetables. Total Produce moves 250m cartons of the stuff around Europe each year, making it the largest player in the sector. Its strategy is simple – it aims to consolidate a highly fragmented industry (despite being the biggest player, it commands only about a 5% market share) and squeeze out higher margins through achieving synergies in a mature market. Trading on just over 5x next year’s earnings and yielding around 5%, its valuation is an anomaly. I see scope for a considerable step-up in M&A activity over the coming year that could lead to earnings upgrades, while further share buybacks (which would also be EPS enhancing) cannot be ruled out.


Balance sheet strength: I estimate that Total Produce will exit 2011 with net debt of around €70m, or 1.2x EBITDA.

Defensive/Cyclical: Very defensive

Non-EZ exposure: Roughly 50% of its H1 revenue was to the UK and “Scandinavia”, which in TOT’s case is mainly Sweden.

Dividend yield and cover: Currently yielding 5%, the dividend is 4x covered.


Irish Continental Group (Current Price €14.71, Market Cap €366m)


(Disclaimer: I am a shareholder in Irish Continental Group plc) It’s relatively plain sailing for marine transport operator ICG. While market conditions remain tough, competitors are exiting the market, which is helping ICG to gain market share. In the first 9 months of 2011 revenues in the Ferry division were flat, while Container & Terminal revenues were up just under 10%. A higher oil price hasn’t helped the bottom line, but the firm should still do about €50m of EBITDA this year (it did €40m in the first 9 months of 2011). I estimate that it’ll finish the year with net debt of only €5m or so, which highlights its balance sheet strength. At the rate at which it’s throwing off cash, I wouldn’t be surprised to see talk of a special dividend (or a rise in what’s already the 2nd highest yield on the ISEQ at 6.8%) over the next year or two.


Balance sheet strength: ICG is virtually debt free

Defensive/Cyclical: Like Ryanair, I would argue that it’s at the defensive end of what is a cyclical industry.

Non-EZ exposure: 23% of its 2010 revenue came from the UK

Dividend yield and cover: 6.8% yield covered about 1.7x by free cashflow. This cover will rise sharply once volumes pick up.


Ryanair (Current Price €3.75, Market Cap €5.5bn)


(Disclaimer: I am a shareholder in Ryanair) With consumers watching every penny, this is music to the ears of cut price airlines like Ryanair. Last month the carrier raised its full-year earnings guidance by 10% as passenger numbers and yields (helped by a better mix of airports) continue to rise. The big catalyst for 2012 is likely to be  a special dividend worth as much as €500m. That’s equivalent to circa 9% of RYA’s current market cap.


Balance sheet strength: Very strong. Depending on the timing of the special dividend, the company could be in a net cash position as early as the middle of the 2012 calendar year.

Defensive/Cyclical: Probably the most defensive stock in a cyclical industry!

Non-EZ exposure:33% of Ryanair’s FY11 revenues were non-euro (primarily sterling)

Dividend yield and cover: Special dividend equivalent to a 9% yield likely in the next financial year.


Gold (Current Price $1,608/ounce)


With central banks busily debasing currencies across the West, a strategy that will only result in more inflation, that would normally be reason enough to hold gold, given its proven qualities as a hedge against rising prices. In these testing times another reason to hold it is as an ‘insurance’ against the really ugly political and economic risks we face – including the possibility of an all-out collapse of the euro. And if that happens – what would you rather own? Something that has been a store of value for thousands of years, or a new Irish currency? This video provides an excellent overview of the merits of owning gold as part of a diversified investment strategy.


* All share prices and market cap details taken from the Irish Stock Exchange website. Gold price from here.

Written by Philip O'Sullivan

December 23, 2011 at 10:58 am

Market Musings 21/11/11

with 7 comments

Origin Enterprises issued a solid trading update earlier this morning. Management said the “performance [is] in line with the group’s expectations in the seasonally quiet first quarter of the 2012 financial year”, adding that it “remains comfortable with consensus market estimates for the full year”, helped by the positive outlook for primary food producers. Of course, much hinges on the performance in the second half of Origin’s financial year, which accounts for 85% of the full-year profitability of the group, but given indications of a further loosening of monetary policies in many of the world’s leading economies, I think the outlook for soft commodities will remain positive, which will translate into clear benefits for Origin, which supplies many key inputs into the farming sector. Given this macro backdrop, and the excellent job management has done in repositioning the group through securing strategic alliances for its food and fishmeal operations and concentrating on its core agri-services and agri-inputs operations, Origin Enterprises is a stock I like.


(Disclaimer: I am a shareholder in Total Produce plc) Staying with the food sector, I uncovered this piece of information regarding Total Produce – in its recent H1 results the group referred to having increased its shareholding in the leading South African fresh produce company, Capespan, without stating by how much it has increased its shareholding. I note that some six weeks or so after this announcement Capespan disclosed that Total Produce has in fact nearly doubled its shareholding in the company to 20%. This helps cement Total Produce’s partnership with its leading provider of citrus, deciduous and stonefruit categories to the European market.


A troubling indicator of the health of Ireland’s retail sector – on Saturday morning I went into the Argos store in the Stephen’s Green shopping centre in central Dublin. Despite Christmas being just over a month away, it had no cashiers on duty at 11.15am, with customer service staff taking payments. If a mass-market chain like Argos needs no cashiers at that hour on a Saturday morning during what is meant to be a seasonally busy time, you’d wonder about how grim things must be for a lot of retailers at this time. Which makes plans to raise the VAT rate by 2% all the more ridiculous. The government should instead be taking a chainsaw to public spending, much of which, as multiple reports from the Comptroller and Auditor General show, disappears into a black hole.


Staying with troubling indicators – how’s this for a statistic around the UK housing sector: The average age of a first time home buyer in England is now nearly 43.


If you’ve any plans to travel to Moscow, you should check this place out.


Finally, on a lighter note, one of my readers flagged this tweet by Martin Geddes:


With the Euro, Germany thought it was getting everyone to adopt the Deutschmark. What has happened instead is that Germany got the Lira.

Written by Philip O'Sullivan

November 21, 2011 at 9:43 am

Market Musings 11/11/11

with 3 comments

Markets are going better on optimism around regime change in Greece and Italy, but I suspect this positive sentiment is a little premature given how often we’ve been let down by Europe’s political class. We’ve also seen some political pressure applied to the Irish financial sector, which is a case of “Robbing Peter to pay Pól”. Finally, the Irish blogging sector has a great new entrant, more of which anon.


(Disclaimer: I am a shareholder in AIB plc) 99.9% State-owned AIB announced that it has u-turned on its previous decision not to pass on the recent ECB rate cut after being leaned on by the government. The bank’s previous stance had been categorised as Scrooge-like behaviour, but in reality, as economist Ronan Lyons says, it represents “a win for mostly pre-2004 borrowers at the expense of taxpayers“. By holding back AIB’s ability to return to profitability and rebuild its capital, this exposes taxpayers to the risk of having to inject even more money into the bank down the road.


(Disclaimer: I am a shareholder in Bank of Ireland plc) Elsewhere, Bank of Ireland released a solid trading statement earlier today. One broker note I saw states: “it reads like it’s steadying the ship”, which I think is a reasonable summation. I was pleased with the improvement in the LDR (from 164% in June to 153% at end-October) and the stabilising NIM. Of course, the big unknowns are what happens if the eurozone crisis deepens and/or the Irish government gets even more ‘hands on’ with the financial sector, so let’s not count our chickens just yet!


Staying with corporate newsflow, Carr’s Milling released full-year results earlier today that confirmed a buoyant agri-sector in the UK, which has positive read-through for Irish listed Origin Enterprises.


(Disclaimer: I am a shareholder in Total Produce) Finally, I was delighted to learn earlier today that there are now three Irish blogs focused on equities. In addition to mine and John McElligott’s ‘Value Stock Inquisition‘, you can now follow Wexboy’s value investing blog. He has a great post on Total Produce, which I’m a big fan of, that’s really worth a read. Be sure to bookmark his site.

Written by Philip O'Sullivan

November 11, 2011 at 6:40 pm

Market Musings 23/9/11

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College deadlines and Arthur’s Day both conspired to prevent me from updating this blog yesterday, which is a pity given the volume of interesting snippets that I’ve come across since Wednesday.


I was amused to see this philosophical take on the recent UK riots by the CEO of JD Sports:


As the riots showed, there is a strong demand for our products on the High Street

Long-term trends in alcohol consumption is something that has interested me in the past. We’ve seen traditional beers lose market share to spirits, cider and wine for many years now, which has clear implications for the likes of Guinness owner Diageo and Bulmers/Magners owner C&C. This chart from Mike McDonough shows that growth in wine spend in the US has outstripped beer over the past decade.


This is an interesting article – BT’s copper wiring is worth more than the group’s enterprise value.


Staying with the US, this is a very effective table explaining the US fiscal position in household budget terms. Elsewhere in the States, I note that unemployment among the over-55s stands at levels not seen for six decades.


Following on from my last blog, one of my readers sent me this link to some interesting pointers on “Full Tilt Ponzi“.


Turning to corporate newsflow, we saw some very strong results from Origin Enterprises yesterday. Earnings growth of 16% was well ahead of consensus of circa 10%. Origin’s outlook statement was more qualitative than quantitative, as you’d expect given its FY12 has only just started. However, it is clear that things are looking up for this company, which is perfectly placed to benefit from the positive conditions in the agri sector.


I note that Easyjet increased its full-year PBT guidance from £200-230m to £240-250m yesterday. The company also declared a £150m special dividend. From an Irish perspective there is obvious positive read-through for Ryanair’s quarterly results in November.


Speaking of upgrades, Goodbody Stockbrokers raised its forecast for Irish 2011 GDP growth from 0.5% to 1.3%, with the GNP forecast moving from -1.0% to 0%. This revision is solely down to net exports, with domestic demand remaining weak.


DCC announced a great deal in the energy space this morning, which will go a long way towards meeting its ambitions of securing 20% of the UK fuel market. Assuming that today’s acquisition and the previously announced Pace deal both secure regulatory approval, these will take the volume of fuel that DCC distributes each year to over 9bn litres. DCC has a consistent track record of delivering high returns from its energy business, and it is one of my preferred stocks at the moment.

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