Market Musings 29/8/2012

It has been another busy day on the results front in Ireland.

 

To start things off, Paddy Power released strong H1 results, with earnings rising 25%. This was despite start-up losses of €6.3m for four new online ventures and some adverse sports results. Net revenue increased in all five divisions (Online, Online Australia, Irish Retail, UK Retail and Telephone) by between 13 and 47%, which is an impressive performance. Also impressive is its branding efforts – in the year to date Paddy Power has increased its Facebook fans by 445% to 251k, Twitter followers by 308% to 133k and YouTube views by 186% to 13m. This gives the group an expanded audience to market its online offering to. As noted above, Paddy Power is investing heavily in improving its offering, particularly on the online side, while it is expanding into new markets. This increased investment is presumably why we aren’t seeing an upgrade to full year earnings guidance today from management despite the strong momentum evident across the group, however, as this investment enhances the longer-term profit outlook for the group investors shouldn’t be particularly concerned about it.

 

Grafton also released its interim results this morning. Reported revenues climbed 5%, but self-help measures on the cost side meant that operating profits increased by just over 19%. In addition, the group’s cash flow generation was impressive – Grafton generated operating cash flow of €55m, well ahead of its €30m in operating profits, as it reduced investment in working capital by €13.5m – a particularly impressive achievement given the increase in revenue. Net debt has reduced by €25m in the year to date to just €201m. There were significant variations in terms of the performance of Grafton’s main operating units. In the UK, revenues and operating profits rose 4% and 12% in constant currency terms, despite a tough market backdrop. In its small Belgian business, which accounts for circa 1.5% of group revenues, profits were flat despite a big increase (albeit off a small base) in sales. In Ireland, conditions remain very challenging – despite many of its competitors having reduced their presence in the market, Grafton’s merchanting revenues were -9% in H1 2012 while retailing revenue fell by 12% in the same period. Cost reduction measures helped to soften the impact on the bottom line. In all, the key message from these results for me is that Grafton is doing all the right things on the cash generation and cost fronts, but the benefits of this are being tempered by difficult end-markets.

 

Switching to food, Glanbia made two announcements this morning. The first being its interim results, which revealed a strong performance on the nutrition side allied to favourable currency effects (reporting earnings were +8.4%, but just +1.3% in constant currency terms). Management has hiked its full year (constant currency) earnings growth outlook from the previous 5-7% range to 8-10%. The second announcement relates to the restructuring of its Dairy Ireland business. Assuming it gets cleared by the various stakeholders, there may be a near-term share price overhang as the Co-op (Glanbia’s biggest shareholder) sells a total of 6% of its stock, while there may be further downward pressure as the Co-op distributes a further 7% of the company to farmers, some of whom may sell their shares. However, in the longer term the market should reward the improved liquidity, free-float and stability of earnings arising from this restructuring of Glanbia’s Irish dairy business.

 

In the financial sector, KBC reduced its 1 year Irish deposit rate by 30bps. This is positive news for banks operating in Ireland as it should help making the task of rebuilding net interest margins across the sector a little easier.

 

(Disclaimer: I am a shareholder in PTSB plc) Speaking of Irish banks’ margins, interim results this morning from PTSB reveal a sharp decline in the NIM since the start of the year. In 2011 PTSB’s net interest margin was 92bps, but this has fallen to 76bps in H1 2012, due mainly to higher deposit costs. Total customer accounts and deposits have increased by €2.2bn in the year to date, with the majority of this due to corporate deposits (the vast majority, if you exclude the customer balances received following the acquisition of Northern Rock’s Irish deposit book), which is a welcome development. PTSB’s LDR fell to 190% at end-June from 227% at end-2011, so still unsustainably high but moving in the right direction at least. Asset quality deteriorated further since the start of the year, with 14.1% of mortgages in arrears of greater than 90 days at the end of June (12.0% at end-2011). The weighted average loan-to-value across PTSB’s mortgage book is 113%, with Irish owner-occupied at 115% and Irish buy-to-let at 137% (UK owner-occupied is 86% while UK BTL is 87%), which points to further pain ahead for the bank. In terms of self-help measures, operating expenses at PTSB were flat year-on-year at €136m, but even a significant reduction in this would be a drop in the ocean compared to the challenges in the loan book. One potential source of optimism is its excess capital – the total capital ratio was 21.5% at the end of June, well above the Central Bank’s minimum target of 10.5%. However, while the excess funds, at €2.2bn, are more than twice the group’s market capitalisation, further impairment charges will eat into this.

Market Musings 25/6/2012

Ever since I started this blog one of the key themes has been the slowdown in the Chinese economy. A couple of interesting articles that suggest this is really starting to play out came my way over the weekend, which I highlight here:

 

1. This is  an excellent TLS review of Jonathan Fenby’s latest book on China which outlines a lot of the key challenges facing the country
2. The New York Times asks if China is manipulating statistics to camouflage the scale of the slowdown
3. Chinese shipyards are seeing orders dry up…
4. …while the textile industry is seeing a slump in the rate of export growth
5. Rising coal stockpiles also point to slowing economic activity…
6. …along with modest growth in oil demand

 

You can read my thoughts following my recent visit to China here.

 

Bookmaker Paddy Power, which has a well-deserved reputation as a marketing genius, has presumably garnered a lot of goodwill in England with a €1,000,000 refund to punters after the team’s penalty loss to Italy last night.

 

The land-grab for emerging markets’ alcohol brands continues, with AB Inbev reportedly in talks to buy out the 50% of Corona beer maker Grupo Modelo that it doesn’t already own. Along with AB Inbev, Diageo, Heineken and Molson Coors have all been active in terms of buying high-growth brands in the developing world in recent times, which could lead to opportunities for smaller producers in this part of the world (I’m mainly thinking C&C here) to pick up more mature brands which would fit well within their portfolios.

 

(Disclaimer: I am a shareholder in Datalex plc) This morning it was announced that Datalex CEO Cormac Whelan is stepping down. He is to be replaced, at least temporarily, by Senior VP of Sales, Aidan Brogan, who has been with the company since 1994. Whelan leaves behind a strong legacy at Datalex, having successfully transitioned the business model into a transaction-based one and signed up plenty of blue-chip clients for the firm. Importantly, today’s statement also reveals that: “The business is performing in line with guidance to date in 2012, and the board looks forward to the remainder of the year with confidence”.

 

David Holding wrote an interesting article on TMF – “6 Baked Bean and Shotgun Shares” that’s worth checking out. Of the six, the only one I hold is BP, but I am intrigued by Camellia (which I had never heard of before) – assuming he has his numbers right (I’ve no reason to suspect otherwise) and there’s nothing peculiar lurking within the accounts, it’s one that seems worthy of conducting further analysis on.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the blogosphere, Paul Scott posted an excellent overview of newspaper group Trinity Mirror which hit all the key points.

Market Musings 18/5/2012

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 19/4/2012

What an eventful 48 hours it’s been since my last update!

 

(Disclaimer: I am a shareholder in Independent News & Media plc and Trinity Mirror plc) The media sector has produced much excitement, with boardroom ructions and rumours of stakebuilding to the fore. This morning two large prints in INM – one for 10m shares, the other for 3m, were recorded. Combined this is equivalent to 2.4% of the company. RTE hints that the buyer is not connected to the three billionaires (Tony O’Reilly & family, Dermot Desmond and Denis O’Brien) on the INM register, which adds a further touch of intrigue to the stock. This evening it was confirmed that Gavin O’Reilly has stepped down as INM CEO, to be replaced by Vincent Crowley. I welcome Crowley’s appointment – I met him quite a few times when I covered INM as a sell-side analyst some years ago and was very impressed by him. He has a good reputation for tight cost management (earned at a time when the Irish economy was thriving and few executives here were as focused on cost take-out as he was back then) and any strong action by him on this front could see a decent re-rating for the stock, which is capitalised at only €134m. I take encouragement from INM’s statement this evening that Crowley “has the unanimous support of the Board”, which hopefully will put to rest the ugly (and very public) feuding that has made the underlying performance of the group something of a side-show for too long. In an ideal world this change will pave the way for the group to focus 100% on the main task at hand, i.e. maximising cash generation to fix the balance sheet and enhance shareholder value. Elsewhere in the media sector, in the UK DMGT’s trading update revealed weakening trends in the past three months, which doesn’t bode well for the likes of Trinity Mirror and Johnston Press.

 

(Disclaimer: I am a shareholder in Tesco plc) Tesco released its results and a strategy update. The results were in line, and management sees the 2012/13 performance (yes, I know it’s early days) meeting forecasts. On the strategy front, there was nothing new that I saw given the extensive media previews / leaks (delete where applicable) in the run up to the official announcement. Obviously time will tell if the strategic objectives are met, but I’m willing to give Tesco the benefit of the doubt given its proven track record, strong brand (I know some people dispute this, but I doubt they’d slap Tesco as a prefix to all sorts of new ventures if the brand wasn’t that good) and solid market positions in many of its key geographies. Many analysts seem to concur. Valuhunter did up a good piece on Tesco here that’s worth a look.

 

This is absolutely brilliant – check out Paddy Power’s comic-book style annual report.

 

For those of you who follow the oil sector, Dragon Oil’s CEO made some interesting comments about its future strategy in this video interview.

 

(Disclaimer: I am a shareholder in Abbey plc) Following on from recent upbeat comments from Telford Homes, Persimmon issued an IMS laden with news of rising orders, margins and cashflow. This all gives me further comfort on my position in Abbey.

 

On the macro front, I was interested to read that authorities zoned enough land for residential to accommodate double the population of Ireland. I’d love to find the genius who thought it would be a good idea to have local councils give an input into this process.

 

Speaking of housing, Chinese house prices fell in 46 of the 70 biggest cities month-on-month in March (in 37 out of the 70 on a year-on-year basis). I have repeatedly identified this area as a serious problem for China, most recently here.

 

And finally, here’s the IMF’s ultimate guide to which countries are the most vulnerable in terms of debt/leverage. No surprise to see Ireland is covered in red ink.

Market Musings 6/3/2012

It’s pretty much been all about results since my last update. Let’s run through what’s been happening on a sector-by-sector basis.

 

To start with the financial sector, insurer FBD posted very good 2011 numbers, with operating EPS coming in at 170c versus guidance of 155-165c. The firm saw a 15% uplift in NAV to 630c last year, while it also hiked the dividend by 9.5%. A lot of credit has to go to John McElligott, who correctly identified the opportunity in FBD quite some time ago.

 

Elsewhere, in the leisure space, Paddy Power, as usual (!), posted outstanding 2011 numbers yesterday. EPS came in at 212.3c (+26%) versus consensus of 202.5c. Management raised the FY dividend by 33%, while net cash of €136m illustrates perfectly the group’s strength and flexibility to respond to new opportunities.

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, Total Produce released solid 2011 results this morning, with EPS and DPS both up 6% last year. The group did an excellent job in managing pressures such as the German E. coli scare and fragile economic conditions, with total group adjusted EBITA margins only declining 6bps to 1.78% on revenues that were 2.8% lower. Net debt rose to €75.5m from €48.5m at end-2010 mainly due to acquisition spend (including deferred consideration) of €22m, although I was disappointed to see a working capital outflow of €7.8m, which more or less unwound the €7.0m inflow in the previous year. Having updated my model, I was surprised to see a valuation of 59c / share produced by my blended method (P/B, SOTP and DCF) – this is unchanged on my previous valuation of the company, despite the progress made over the past year, and the main reason for this was a €7m deterioration in the reported net pension deficit (while I note management’s comments that this position has improved of late, I prefer to use reported figures in my calculations for consistency). However, as a valuation of 59c/share offers 27% upside from last night’s close, I still think Total Produce is excellent value here.

 

There was a good bit of news out of UTV Media. The company extended its network affiliate agreement with ITV out to 2024, which won’t really come as a surprise to anyone, while it also acquired social media marketing specialist Simply Zesty to help bulk up its New Media division. While these are incremental positives, the main market interest in the group at this time is centered on its recent boardroom bust-up.

 

(Disclaimer: I am a shareholder in Ryanair plc) In the airline sector, we had traffic stats from both listed Irish carriers. Ryanair’s February traffic was -2% yoy (4.5m passengers), versus -6% in January, -5% in December and -8% in November. Elsewhere, Aer Lingus continued its run of strong traffic stats, revealing a 7.5% rise in passengers carried, while loads were +1ppt at 67.3%, in February.

 

In terms of macro news, China downgraded its annual growth target from the long-standing 8% to 7.5%. This came as no surprise to me given my previous comments about the more muted outlook for the Chinese economy. I’m travelling there with my MBA classmates on Saturday, and look forward to sharing my insights upon my return to Ireland.

Market Musings 31/12/2011

Having been on holidays down the country for much of the past week and having prioritised what little writing time I had on my 2012 outlook (part I and part II), this blog represents a ‘catch up’ on what’s been happening since my last wrap on December 20th. While this is traditionally a quiet time on the markets there have been incidents in the past where companies have tried to sneak out a profit warning just before Christmas or New Year’s Eve, but thankfully we didn’t see a repeat performance by any Irish plc this year!

 

To kick off with some macro news – in the UK, despite media reports of bumper Christmas sales in some areas, I note that consumer confidence indicators suggest that this optimism may be a little premature. It should be noted that base effects may impact on headline sales figures also, given last year’s weather-related disruption.

 

In the Eurozone, outgoing ECB board member Lorenzo Bini Smaghi said that QE could become an appropriate tool for the central bank to use if conditions worsen. I have previously stated my belief that the ECB will eventually resort to QE, so I’m not surprised by these comments.

 

This is an unbelievable statistic – Japan will raise more cash from debt issuance than taxes for a fourth year in a row. Given Japan’s demographics, I would be very reluctant to even consider investing in all but the most short-term Japanese government debt.

 

(Disclaimer: I am a shareholder in Playtech) The betting sector was in focus in recent days, following reports that the US is easing its hardline stance on internet gambling. We’ve seen reports like this before, so I’m inclined to be a little cautious around them. However, in the event of an easing of restrictions, this would have clear benefits for the likes of 888, Playtech, Bwin.party Digital Entertainment and Ireland’s Paddy Power (which has already inked B2B partnerships in France and Canada).

 

NCB published a great note on Greencore, noting that while it offers an attractive dividend yield, three key risks (cashflow, pension deficit, concentrated customer base) remain. As an aside, speaking of attractive dividend yields, just a point that keeps coming to mind whenever I dip into investment bulletin boards – it’s amazing how many “income investors” don’t understand that cash flow dividend cover is more important than the dividend yield when evaluating stocks from that perspective. I learned this the hard way as an undergraduate when I invested in Waterford Wedgwood, which was ‘yielding’ around 20% on paper. Within a short period of time the dividend was suspended and I ultimately lost most of my ‘investment’.  Had I been a few years younger it would truly have been a ‘schoolboy error’!

 

(Disclaimer: I am a shareholder in Total Produce plc) Elsewhere, Total Produce did a bit of housekeeping among its portfolio of investments, swapping its stake in its international jv with Capespan for a bigger shareholding in the South African firm and €8.5m in cash.

 

(Disclaimer: I am a shareholder in CRH plc) I note that CRH has made yet another bolt-on acquisition, this time in the US, which is the latest example of the firm putting its industry-leading balance sheet to work. I note also the slide in the value of the euro against the dollar to a 15 month low – this is positive for CRH, which reports in euro and generates 45% of its EBITDA from its Americas division.

 

(Disclaimer: I am a shareholder in AIB, Bank of Ireland and Irish Life & Permanent) I was pleased to learn that Ireland has lifted its ban on short-selling financial shares. This is a long-overdue move, although the ban did illustrate, as I have shown before, the futility of such restrictions. This may focus some attention on the anomalous valuation of Ireland’s two largest quoted banks – Bank of Ireland (market cap €2.5bn) and its weaker rival AIB (market cap €35.4bn).

 

Finally, I wish all of my readers a happy, healthy and prosperous 2012!

Market Musings 16/11/11

It never rains but it pours. After yesterday’s paucity of corporate newsflow we got a deluge of it today, along with a few interesting macro pointers. Let’s run through what’s been going on.

 

(Disclaimer: I am a shareholder in Glanbia plc). Glanbia released a strong trading update earlier today, with management guiding “circa 20% growth in adjusted earnings per share for the full year, on a constant currency basis”, which is at the high end of the previously guided 18-20% range. Within the statement management note weaker dairy prices, a theme I flagged last month, but this is being offset by stronger whey and US cheese prices. Overall, a very encouraging update from the company.

 

Elsewhere, Paddy Power also released a strong interim management statement, with its online division the key area of outperformance. Management is guiding  FY11 underlying diluted EPS growth in 2011 of 15%-20%, which compares to Bloomberg consensus (before today) of +13% yoy. The group also announced the acquisition of a Bulgarian games developer. Paddy Power’s net cash was a strong €96m as at November 14th, which, as management note, gives it “significant financial flexibility”. Following on from my recent remarks about the Irish retail betting market, it is instructive to note that Paddy Power’s like-for-like amounts staked and gross win were down 6% and 11% respectively in the July 1 – November 14 period, relative to year earlier levels. I wonder how many more of its peers will be exiting the market over the coming year.

 

Also on the ISEQ today we got full-year results from United Drug in which the company disclosed sales and operating profit growth of 1% and 4% respectively. Management has proposed a 3% higher dividend. Overall, this is a solid out-turn given the macro headwinds from United Drug, and reflects the good work being done by CEO Liam Fitzgerald and CFO Barry McGrane, along with their colleagues.

 

Switching to macro matters, today’s Goldman Sachs morning note had an interesting data pointer. Spanish house prices are only down 17% since the peak in 2008, according to government statistics. This seems highly dubious, given the realities of Spain’s property market, which I’ve blogged about before here and here. Unsurprisingly, I see no reason to own any bank with material exposure to Spain.

 

Staying with matters macro related, structural steel firm Severfield-Rowen is a leading indicator for the construction industry in the UK. Earlier today it said that the “UK market will be tough for the next few years”, which is something to bear in mind if you’re contemplating buying any stocks with an exposure to this market.

Market Musings 4/11/11

It has been an extraordinary 48 hours since my last update. Greece’s government flip-flopped on the referendum issue which has given some relief to markets, at the expense of underlining again just how incompetent the Eurozone’s political leadership is. We’ve seen a huge amount of corporate newsflow and further updates on the Irish government’s fiscal strategy.

 

UK retailers have attracted my attention quite a bit since the start of the year. Regular readers will know how bearish I am on the sector, so while this isn’t an area I’d look to invest in, Lewis at Expecting Value did a good piece on some of the listed REITs that are one way to get exposure to the UK consumer. Elsewhere, Bloomberg published an interesting article about how more companies are hiring lease-breaking specialists, which bodes ill for the UK REIT sector in general.

 

(Disclaimer: I am a shareholder in RBS plc) Speaking of the UK, RBS released results this morning that were behind expectations, but despite this analysts seem to be taking a glass half-full approach to the stock. I’ve a legacy position in RBS that is horribly underwater, and I have to admit that I have been toying with the idea of doubling/trebling/quadrupling (!) up on my holding in an effort to claw back losses. However, my fears about RBS’ potential losses on European sovereign debt have made me hesitant up to now. It might be one to play once the Euro-madness abates. I’ll wait and see.

 

Closer to home, the Irish government published its Exchequer Returns data for the first 10 months of the year. The deficit came in at €22.2bn (roughly 15% of GDP) versus €14.4bn in the same period last year. Total Irish government voted spending was only -0.5% in the first 10 months of 2011 versus the same period in 2010. So much for “austerity”. Even more ominously, Ireland’s Exchequer deficit for the first 10 months of 2011 is equal to 83% of the entire tax take during that period. Leading on from this, the Irish government is raising its fiscal consolidation target to €3.8bn from the previous €3.6bn. This should come as no surprise to my readers, given that I sketched the reasons why this was certain to happen here.

 

The airline sector has thrown up a lot of interesting pointers in the past few days. Aer Lingus says it expects to report full year 2011 operating profit “at the upper end of the range of current market expectations“, which continues the more positive narrative I’ve remarked on before. Elsewhere, IAG (British Airways + Iberia) has announced that it is to buy BMI. This raises an interesting question as IAG currently has 44% of Heathrow slots while BMI has 8.5%. Should competition authorities compel IAG/BMI to shed some of these, I wonder if Aer Lingus would consider putting some of its vast cash pile to work and buy some slot pairs? As things stand Aer Lingus has the 4th highest number of slots (roughly 4%) at Heathrow, behind IAG, BMI and Virgin Atlantic.

 

In the betting space, Boylesports has bought William Hill’s retail estate in Ireland. While this is only a small number of shops, it is likely to be an incremental positive for Paddy Power, as the fewer people there are making odds, the less competition. I’d an interesting discussion about this on Twitter with a number of my “followers”, and it was interesting to have the Boylesports PR person join the debate, which goes to show that they are very clued in to social media, so well done to Nicola McGeady for her attentiveness!

 

The ECB’s 25bps rate cut is a small positive for Ireland. I’ve previously done up some back of the envelope calculations on how positive this is, if any of my readers have better data please send it on.

 

(Disclaimer: I am a shareholder in Datong plc). One of the smallest positions in my investment fund is Leeds based spy gadget maker Datong plc. When I first invested in them I did rather take it for granted that the equipment they produce would be used against ‘Johnny Taleban’ et al. However, I was intrigued to read that London’s Metropolitan Police uses some of its kit to, ahem, “eavesdrop” on people in the UK. Not that this story has done Datong any harm, given that its share price has shot up following this news. No such thing as bad publicity I guess!

Market Musings 22/10/11

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?

Market Musings 9/10/11

Since my last update on Friday the main newsflow has been centred on further signs of strain in continental Europe around the sovereigns and the banks.

 

In terms of the Eurozone’s difficulties, Fitch decided to sneak out a downgrade of Italy’s credit rating on Friday evening, presumably hoping that its Italian offices wouldn’t be attacked by rioters, as opposed to what happened to Moody’s in Milan recently. Today brought news that Merkel and Sarkozy are willing to do “everything necessary” to keep the single currency block intact and recapitalise the banks. This stance is, of course, regardless of the cost to the taxpayer. Speaking of costs to the taxpayer, Belgium’s government has reportedly decided to nationalise Dexia’s consumer bank in that country and guarantee €72bn of Dexia’s loans and bonds. This move, if confirmed, will surely unsettle investor confidence in Belgium – at the end of 2010 the country’s reported national debt of €341bn was equal to 97% of the country’s GDP, so the Dexia guarantees alone should trouble anyone with a long position in Belgian sovereign debt if press reports prove to be on the money (at the time of writing there was some conflict in the reports I was seeing out of Belgium). In any event, today’s developments are also a reminder of how woeful the European banking stress tests were, given that Dexia passed the last round of tests only three months ago with flying colours.

 

Dublin played host to the Global Irish Economic Forum over the weekend, which provided plenty of positive headlines around our economy (for a change!). While I wouldn’t be quite so bullish as Taoiseach Enda Kenny was about our country’s medium term economic prospects, there’s no denying that he communicated a strong enterprise-friendly narrative around Ireland to a global audience. The event brought some seriously heavy hitters from a wide range of industries to the capital, who hopefully got some opportunities to properly network with our indigenous entrepreneurs – recall how a pub crawl reportedly helped swing the recent Twitter investment our way!

 

Looking ahead to this week, there’s little by way of scheduled corporate newsflow in Ireland. In the UK, the recruitment sector will be in focus due to Q3 trading updates from Michael Page International and Robert Walters. Investors interested in the UK construction sector should also watch for builders’ merchant group Travis Perkins‘ IMS (Irish investors should note that Travis is a peer of Grafton Group). Speaking of stocks that provide read-across to Irish listed companies, Ladbrokes is also due to issue an update. Paddy Power shareholders should take note of their comments, given that the two compete across a range of platforms (shop, internet, phone) in the UK and Ireland.

 

And finally, one of my followers on Twitter asked me to clarify what is the difference between a “Buy” recommendation and an “Add” recommendation from stockbrokers. An official definition from one Irish broker can be found here, but I prefer this alternative definition from an analyst friend:

 

“‘Buy’ means love the company, love the price. ‘Add’ means love the company, hate the price. ‘Reduce’ means hate the company, love the price. ‘Sell’ means hate the company, hate the price.”