Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Origin Enterprises

Market Musings 19/9/11

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The demands of the MBA and my work for Business & Finance (I’ve two articles due this week!) have meant that I haven’t been following newsflow as closely I would have liked to, but despite that what I’ve missed out on in terms of quantity has been more than compensated for by the quality of what I have seen!


Firstly, this is something to watch out for regarding the food sector. I note that, ceteris paribus, base effects for food inflation will become much more benign in Q4 of this year. Obviously in absolute terms agri-commodity prices are at elevated levels, but a leveling off in the inflation rate could see a more positive tone from some food companies between now and year-end. Speaking of food companies, Irish investors should keep an eye out for full-year results from Origin Enterprises on Thursday. Given the positive market backdrop for its core agri-services unit, I expect an upbeat tone to results, while investors will also be looking for an update on how the re-organisation of its food unit is going along with news on how the integration of its recently acquired agronomy and fertiliser units is progressing.


I’ve warned about this before – The Daily Telegraph writes that China faces its own subprime credit bubble crisis. Another person who shares my concerns around China is Hugh Hendry. I previously posted this video that sets out some of Hendry’s concerns, and I was unsurprised to read of how well his fund is doing this year on the back of his bearish conviction on China.


I was rather exasperated to read some online criticism of the Irish government’s decision to award a roadbuilding contract to a foreign concern. The criticism started and finished with the nationality of the business that secured the contract, which led me to wonder aloud: Do the people who criticise the Irish government for awarding contracts to foreign companies also complain when Irish firms win foreign contracts? There are two aspects to this really. Firstly, the Irish government has a moral obligation to taxpayers to deliver value-for-money on contracts, so there’s no sense in passing on a cheaper alternative solely to give a dig-out to a domestic firm. As an aside, several people made the point to me that successive governments’ procurement record hasn’t been particularly encouraging (PPARS, e-voting etc.), so obviously there’s scope for improving the entire tendering process for State contracts. Secondly, many Irish firms have proven successful at winning contracts from foreign governments, particularly on the IT side, while elsewhere did you know that CRH is the largest asphalt provider in North America? Adopting a “Little Irelander” procurement policy could endanger some of the international work won by our own companies. So, let’s not cut off our nose to spite our face.


UBS provided an update on its rogue trader problems. I wrote about this on Saturday morning, and following on from my comments about the failings of its internal auditors I got an interesting comment from a regular reader of this blog. He makes the valid point that:


“Having worked for a large financial institution as an internal auditor, I can tell you internal auditors often spot things like this and are put under tremendous pressure, up to the point of threatening dismissal, to forget about these issues and move along.” 


While of course there’s no suggestion that such a thing happened in UBS in this instance, you’d wonder how often has a scenario such as the one my correspondent has sketched out happened in other institutions.


The Financial Times argues that IAG (British Airways & Iberia) is unlikely to bid for Aer Lingus. If IAG are out of the picture, I can’t see the Irish government finding an acceptable (from its perspective) bidder for its 25% stake anytime soon.


Some MBA pointers that I found interesting. Firstly, applications for full-time MBAs have fallen for a third successive year, which is no surprise given economic conditions. Secondly, my beloved Smurfit Business School was featured in today’s Financial Times.


My old friend (or should that be young friend?!!) Sam Bowman had a brilliant op-ed in today’s City AM newspaper. He is a must follow on Twitter.


Another brilliant read is this blogpost on 5 cheap UK stocks by Expecting Value.

Market Musings 13/9/11

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Since my last update, my attention has mainly been caught by some really excellent original research from some of the other bloggers covering UK and Irish equities, M&A activity and further signs of the ongoing stress around peripheral Europe.


One story I missed over the weekend with all the travelling was this report that Origin Enterprises has been on the receiving end of an approach from a private equity player. The suggested price, £400m, looks implausibly low given that this places the group on a PE ratio of only about 8x. The group, which is rapidly deleveraging, is worth a lot more than that given that it is well placed to benefit from the structural growth opportunity in farming due to its strong positions in the areas of agronomy and farm inputs. It should be noted that Origin is 71% owned by Aryzta.


While I’m dubious about the Origin story, one genuine M&A story is the news that Kerry Group has expanded its ingredients operations in the EMEA region with the purchase of SuCrest. This is the type of tasty bolt-on that Kerry is particularly good at doing, and serves as a useful reminder of its considerable scope to expand through acquisition.


IFG shares crashed 26% to €1.20 today after announcing that takeover talks with Bregal Capital have ended. This puts IFG on an PE ratio of circa 6x, which is simply too low for a company with annuity-style revenues and a very strong balance sheet. Of course, the obvious question is what the catalyst to drive the shares from here is going to be, but for patient, longer-term investors, you are unlikely to go wrong with this stock.


There were more signs of stress in peripheral Europe, which make the political response to date look even more ridiculous. Last night Bloomberg reported that the Greek default risk had soared to 98%, while the Greek 1 year bond yield stood at over 117%. Italy, meanwhile, looks like it is trying to sell off the family silver to China. France’s banks have been battered by concerns over their exposure to Europe’s weaker regions. This chart shows how the market is seemingly adopting a “one size fits all” approach to SocGen and BNP – I recall seeing similar identical trading patterns in the Irish banks once upon a time.


Bizarrely, despite the debt worries, many investors continue to favour government bonds over equities at a time when corporate balance sheets have never been stronger!


(Disclaimer: I am a shareholder in Trinity Mirror plc) The wonderful Expecting Value blog had a great piece on regional newspaper group Johnston Press yesterday. Regular readers of this blog will know that my current preference in the UK media sector is Trinity Mirror. Comparing the two, I prefer Trinity Mirror due to its much stronger balance sheet (net debt + pension deficit at the H1 stage for TNI was £336m vs. £430m for JPR), better profitability (consensus EBIT figures for TNI and JPR for the current financial year stand at £97m and £73.8m respectively), and better brands (a mixture of national and regional versus regional).


(Disclaimer: I am a shareholder in Abbey plc) Another great blog is my only domestic peer (that I’m aware of) John McElligott’s “Value Stock Inquisition“. Yesterday he wrote a good piece on the UK listed housebuilders, concluding that while the sector is not yet right to buy into, Abbey looks the most attractive. He’s in good company with this view, see here for my previous musings on the stock.


Last, but certainly not least, UK Value Investor has a good analysis of BHP Billiton today that’s worth a read. I bought it for sub-£10 a share a few years ago and sold out at £17, so while I feel a bit foolish for missing its continued ascent since then, my bearish views on China mean that it’s not one I’m likely to buy into up here. Perhaps if it goes below £10 again it might look interesting to me.

Written by Philip O'Sullivan

September 13, 2011 at 5:47 pm

Market Musings 26/6/11

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Overall it’s been a quiet couple of days since my last recap of what’s going on in the business world, but I’ve still managed to pick up a couple of interesting nuggets of information.


The Dublin Airport Authority (DAA) released its 2010 annual report which revealed that net debt was €765 million at the end of last year versus €616 million at the end of 2009, while the pension deficit currently stands at €20m. By its own admission, the DAA’s “credit rating was reduced twice by S&P during the course of the year under review from a level of A-/Negative Outlook at the beginning of 2010 to BBB/CreditWatch Negative”. That is the lowest “investment grade” rating that an entity can have under S&P’s ratings system.


Stockbrokers NCB had an interesting footnote to the impending listing of Continental Farmers Group, a stock I’ve mentioned before. According to NCB’s number crunching, Origin Enterprises’ stake  is worth just €9.3m based on the IPO price, which is less than half what it paid to acquire it. CFG lists on both the AIM and ESM markets on Tuesday.


The team in Fisher Investments have put together a really useful primer on the IEA’s release of 60m barrels of oil over 30 days that’s well worth a read. Those of you who are on Twitter would do well to follow them – they are always putting out useful briefing notes. Speaking of useful briefing notes, I had the pleasure of attending (and for the sake of full disclosure, I also helped organise) a great presentation by Cormac Lucey on the causes of Ireland’s economic misery. Cormac puts forward a very cogent argument, and I would encourage you to download his slides. Finally, another brilliant presentation that I encountered in recent days was IceCap Asset Management’s latest offering, “Hitting the Fan“.


(Disclaimer: I am a shareholder in Glanbia plc) From an Irish corporate perspective, I see that Merrion Stockbrokers are bullish on Glanbia. You can read my latest views on the company here.


This is an interesting article – 10 brands that will disappear in 2012.


Lastly, I got a good reaction both on Twitter and by email to yesterday’s article on this blog about the Irish stocks that I would consider buying when markets settle down. If you’ve any thoughts on them, or indeed alternative suggestions, then why not leave a comment on it?

Written by Philip O'Sullivan

June 26, 2011 at 3:52 pm

Market Musings 20/6/11

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It’s been a busy few days as I’ve been juggling getting my latest articles for Business & Finance magazine finished along with the various other demands on my time. It’s also been a busy few days in terms of newsflow. The main focus has been on the Greek tragedy, and the ham-fisted approach from the European authorities to this.


In recent days, the European Commission and the ECB have gone out of their way to try to ensure that a restructuring of Greece’s debts doesn’t trigger a credit event. The fact is, as commentators including Paul Sommerville have noted, that this will make sovereign CDS protection worthless, which will lead to major risk aversion around peripheral European debt. Which includes our own – not that Irish sovereign debt is a particularly attractive asset class at this time, mind! From a top-down perspective, the muddled response from the European authorities to this problem isn’t helping either, especially with the received wisdom being that they are looking for yet another patch-up instead of a proper lasting resolution. As Pimco’s Bill Gross remarked, the  “Greek can [is] likely to be kicked down the road, but it’s broke and investors know it“. As a sign of investor skepticism about the handling of the situation there, Greece’s 2 year yields topped 30% on June 16.


In the UK, we had a update on trading from Sainsbury. CEO Justin King said that the consumer environment is the toughest he’s seen in 30 years in the business. Not that this is a surprise given the pressures UK shoppers are under pressure these days (the average household had £167 a week of discretionary income in April 2011, 7.1% lower than a year earlier). Interestingly, the appropriately named King disclosed a few data points on the impact of the Royal Wedding – Sainbury sold 300 miles of bunting, 159,000 flags and 49,000 mugs to people celebrating the happy occasion, while also disclosing that they “sold the most champagne we have ever sold outside of Christmas”. The pressure is on for Prince Harry to give consumers another lift next year!


Closer to home, we had the review of the Croke Park agreement’s “progress” since its implementation. I didn’t go through it in a lot of detail because I can see that it simply will not endure given the fiscal situation the country is in. There was a big splash in the media about how it has supposedly saved the Exchequer €600m so far, but let’s not delude ourselves. The savings from the Croke Park deal are less than the interest costs on borrowing €20bn each year to pay for bloated public expenditure.


Elsewhere, we learned that the government is (rightly) looking for burden sharing with bondholders in Anglo and Irish Nationwide. Given the cool response so far to this, I would judge the chances of success with securing approval from our “friends in Brussels” at less than 50-50, but perhaps it can be used as leverage to get a better deal on the bailout rate and so on. Our dealings with Europe might have been easier if it wasn’t for the delinquent behaviour of members of the Cowen administration. The Irish Examiner reported on June 17 that “Ministers in the last Government missed almost two thirds of Ecofin/European council finance meetings from 2007 to 2011”. Returning to the bond issue, some so-called commentators said that Noonan’s announcement was a “shocker”, but to me this served more to illustrate their poor grasp of the market than the reality of the situation. The wide discount to par that the bonds were trading at meant that the market was anticipating something along those lines.


I was interested to learn that Ireland’s government is planning to tighten the country’s media M&A rules. This has clear implications for the two listed Irish media stocks, Independent News & Media and UTV Media. Shares in INM, which I am a shareholder in, slumped 7.5% on the back of that story.


Today brought news of another bolt-on deal by Origin Enterprises, this time it’s snapping up Carr’s Milling’s fertiliser business, which is a great fit for its operations in that area. Origin has made tremendous progress since its partial de-merger from Aryzta, and it’s a good way to play the structural agri-commodity growth story. It’s one I’ve kicked myself for not buying in the past, and if the price comes back from here it is one I’d definitely consider investing in.


I’m amazed by how little coverage the gradual implosion of the Chinese economy is getting here. In today’s latest bear point, I see that house prices have fallen in a third of cities surveyed, according to an official report. And we all know how dubious Chinese State data is, so the reality is presumably even worse.


And finally, Lloyds is reviewing insurance payouts that help secure the release of boats and crew held by pirates.

Written by Philip O'Sullivan

June 20, 2011 at 10:19 pm

Market Musings 13/6/11

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Haven’t been blogging for the past few days as my stag weekend successfully competed for my attention against the financial markets! While it was in London, I did my bit for Ireland Inc by flying Ryanair and staying in a hotel that is now under the control of NAMA.


As regular blog readers will know, I’ve been extremely cautious around equity markets for some time, and this caution has proved warranted. All of the ingredients remain in place for continued weak performance over the coming months, with concerns about the strength of the US economic recovery (not helped by weak jobs data), further evidence of a slowdown in China (note the decline in new loans in this article) and the ongoing European debt crisis showing no signs of going away. This is a good primer on the challenges the market faces.


In the US, I note that Fitch is threatening to downgrade its AAA rating if the country’s debt ceiling isn’t raised. I’ve previously noted that the Federal Government is running an unsustainable deficit of 10% of GDP, and again I ask how borrowing more is going to solve America’s debt problems. I suspect we’ll be hearing a lot more rhetoric like this before the year is out – not that America isn’t justified in complaining about its European allies. The Financial Times reported over the weekend that the US share of total NATO defence spending has climbed from 50% in 2001 to 75% today, with EU member states having slashed defence spending by $45bn in the past two years – that’s equivalent to Germany’s total annual spend. Elsewhere, expectations that QE3 will be launched by the Fed continue to rise, as evidenced by this chart.


The received wisdom about Spain being “different” to the rest of peripheral Europe continues despite alarming reports such as this.


The social networking bubble continues to baffle me, and I would concur with the views of Forrester’s Mulpuru about the valuation being applied to Groupon.


From an Irish corporate perspective, I note that shares in PetroNeft continue to drift after its disappointing operations update, following which Goodbody cut its NAV valuation (from 81.9p to 77.5p) and 2011 production (3.9k to 3.4k/day) forecasts.  I’ve been a shareholder in this stock for some time, and while I think it’s very cheap when measured on an EV/BOE basis, I can see from the share price that I’m not alone in being disappointed by poor production levels. Hopefully we’ll see improving output trends later on in the year.


Staying with corporate Ireland, I was pleased to see that the Irish Stock Exchange is to see its first new listing since – I believe – Merrion Pharma joined the market in December 2007. Continental Farmers Group counts Origin Enterprises plc as its largest shareholder and the board contains heavy hitters such as Peter Priestley and former UK Foreign Secretary Malcolm Rifkind. Given the structural drivers around the agri sector and with Origin’s agronomy expertise underpinning its assets, it looks like an interesting addition to the ESM. One to definitely keep an eye on.


I’m afraid to click on any links to stories relating to the Irish banks at the best of times, but this one is an important read.


And for the final corporate Ireland update, I note positive noises from Kingfisher and Michelmersh about Poland and the UK respectively, which bode well for CRH’s operations in those markets (Disclaimer: I’m a shareholder in CRH).


Finally, this is surreal – a James Bond parody featuring Tessa Jowell, Wikipedia’s Jimmy Wales & Ocado’s Jason Gissing

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