Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Rolls-Royce

Market Musings 15/9/2012

with 2 comments

It’s been an eventful few days since my last ‘general’ round-up on what’s been happening in the markets, with the Federal Reserve further opening the monetary sluices and continued positive developments around Ireland Inc (a well received sale of bills, positive noises from the IMF, soaring bond prices etc.)

 

For me, the central message to take from these markets at this time is that the monetary authorities on both sides of the Atlantic stand ready to do ‘whatever it takes‘ on the policy front. This is unambiguously bullish for a number of asset classes, in particular equities (in general) and commodities (including gold, which I’ve been a bull on for some time), however, it also has other consequences that are worth bearing in mind. While the growth outlook is concern enough in itself, the main overall threat in the system (in my view) remains on the prices front, as an enthralling battle takes place between the forces of inflation (central banks’ printing presses) and deflation (private sector deleveraging). Which force is likely to prevail? The old rule of “Don’t bet against the Fed” comes to mind. This to my mind puts the onus on investors to position themselves accordingly. We have seen from the share price reactions to Helicopter Ben’s latest move how they should do this, with mining stocks (e.g. commodity plays) surging, financials pushing higher (anything that pushes up asset prices a positive, while the funding outlook is improved) and a lift in those highly leveraged stocks operating well within covenants and who may take the opportunity to refinance at even lower rates as yields are pushed down elsewhere by central bank intervention (a good example being Smurfit Kappa Group, which I hold, whose balance sheet is to my mind still very much misunderstood by the market, and which rose 13% on 11 times average daily volume in Dublin yesterday as more investors wake up to to the story). Of course, it is also worth bearing in mind that higher commodity prices are likely to hurt a lot of stocks that are price takers on the input side and who will struggle, due to the tough economic backdrop, to pass on higher input prices to consumers.

 

In terms of my own response to all of this, I have been stepping up my exposure to financials, trebling my stake in Bank of Ireland and significantly increasing my exposure to RBS (which is now my third-largest portfolio position). The recent surge in the value of Irish government bonds prompted my Bank of Ireland move, given that BKIR held €5,945m worth of them at the end of June (up to €1.5bn of which were acquired following the LTRO earlier this year). As the notes to BKIR’s interim results show (see page 99), the vast majority of these are in the books on a ‘Level 1’ fair value basis, i.e. “valued using quoted market prices in active markets”. Given the recent lift in Irish bond prices, this should have a positive impact on Bank of Ireland’s NAV, given that “any change in fair value is treated as a movement in the [available for sale] reserve in Stockholder’s equity”. Elsewhere, in the case of RBS, the IPO of its Direct Line business and recent moves towards agreeing financial settlements for Libor and IT issues indicate that the narrative around the group may be about to radically shift, as I noted in a recent blog post.

 

(Disclaimer: I am a shareholder in Datalex plc) In other news, travel software company Datalex confirmed that interim CEO Aidan Brogan is to get the job on a permanent basis. This is a sensible decision. Aidan has been with the firm for almost 20 years, and his strong background in sales is likely to help Datalex build on its growing list of clients.

 

Elsewhere in the TMT space, Johnston Press has reportedly delayed its relaunch programme. You can read my recent piece on the firm here.

 

(Disclaimer: I am a shareholder in France Telecom plc) And in other TMT news, the team in aviate came up with an interesting angle on Apple’s latest toy, namely that “in the European launch only Deutsche Telkom and France Telecom were given the hallowed LTE version of the iPhone 5“. I must confess that what I know about ‘fashionable’ mobile phones could fit on the back of a postage stamp, so hopefully one of my kind readers will let me know if this is a significant advantage over other carriers or not!

 

In the energy sector, consolidation has been a big theme this year, as cash-rich majors have snapped up financially constrained small cap names with proven resources. This clip suggests that the trend has further to run (and indeed, assuming the latest QE moves push up oil prices, this will provide the large caps with even more cash to play around with).

 

In the blogosphere, Lewis profiled Impellam. Elsewhere, John took a good look at Rolls-Royce.

Written by Philip O'Sullivan

September 15, 2012 at 12:01 pm

Market Musings 14/5/2012

with 4 comments

The past few days have been relatively quiet in terms of newsflow, but as this is due to change starting tomorrow with a significant number of results and trading updates expected before the end of next week from Irish plcs I thought I should do a quick blog on what’s been grabbing my attention of late.

 

(Disclaimer: I am a shareholder in Total Produce plc) To begin with the food sector, The Irish Times carried an interesting report from the Fyffes AGM at which management admitted that  it considers a re-merger with Total Produce “from time to time”, but has no current plans to execute one. A merger would have some positives – economies of scale, more institutional interest in a combined entity with a higher market cap etc. – but for me it would add a chunk of volatility into the Total Produce investment case that I would prefer to do without. I believe that Total Produce should stick to its stated task of consolidating Europe’s fragmented produce sector – leading Irish companies such as DCC and United Drug have demonstrated in their market segments that focused distribution firms can deliver consistently high returns over time. Why risk that narrative by adding a more volatile component?

 

I was pleased to see that the Irish Stock Exchange will next month be joined by a new entrant – Fastnet Oil & Gas is backed by Raglan Capital and some of the directors of Cove Energy, which was recently sold to Shell for £1.2bn. I suspect that this will attract a lot of private investor interest given the way Cove shareholders made out like bandits. I look forward to tracking its progress.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc). Today it was confirmed that AIB is to issue another 3.6bn shares to the Irish State in lieu of a €280m cash dividend on the NPRFC’s preference shares. This means that AIB will have 517bn (yes, billion, with a “b”!) shares in issue following this transaction. Given tonight’s closing price (7c), AIB is presently capitalised at €36bn, roughly twice its peak during the Celtic Tiger, when the bank also had significant operations in both the United States and Poland. This valuation is quite obviously ridiculous, especially when benchmarked against its closest domestic peer Bank of Ireland, capitalised at only €2.7bn. My only remaining shares in AIB are some legacy ‘staff shares’ that are horribly underwater and which I view as having value solely as a tax loss to offset against capital gains elsewhere in the portfolio at some future point.

 

In the construction space Irish builders merchant and timber distributors Brooks has been bought out of insolvency by Welsh timber firm Premier Forest Products. From a plc perspective, given that Brooks will operate from only 6 outlets post the transaction and the fact that the acquirer is a timber specialist, I assume that this is unlikely to form a base for Premier to build a substantial operation that would have a significant competitive impact on either Saint-Gobain or Grafton in this market.

 

Speaking of builders merchant groups, Travis Perkins released an IMS earlier today in which it stated that: “at a group level the outlook for the year remains unchanged and we remain confident of meeting consensus expectations”. In the first four months of the year Travis Perkins achieved like-for-like group in its UK general merchanting operations of +2.6% (specialist merchanting was +1.9%), which compares with the +1.7% achieved in the same period in that market by Grafton.

 

Fidelity investment director and columnist with the Daily Telegraph Tom Stevenson posted a great video on China, which mirrors many of my findings from my recent trip there.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) As ever the blogosphere has thrown up some interesting nuggets. John Kingham asks if Rolls-Royce shares are as attractive as the company, while Lewis did a great write-up on UK housebuilder Barratt Developments. Elsewhere, Paul Scott provided a very comprehensive review of Trinity Mirror’s AGM, which included some encouraging signals on the dividend (if income is your thing), but as ever my own bias towards strong balance sheets means I’d prefer to see it move towards a zero net debt position before reactivating distributions to shareholders. I am very tempted to increase my position in TNI following its recent good news around its net debt and pension deficit.

Written by Philip O'Sullivan

May 14, 2012 at 6:47 pm

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