Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Tesco

Market Musings 6/9/2012

leave a comment »

The most interesting development I’ve noted this week has been the surge in bond issuance by corporates taking advantage of low yields to refinance at cheaper rates and also push out the weighted average maturity of their debt. No less than 3 of the 20 stocks I currently hold have been at this in recent days – Smurfit Kappa Group, France Telecom (which sold 10.5 year bonds yielding just 2.6%!) and RBS. While reducing interest bills and pushing out the maturity date for corporate debt piles are positive moves for plcs (e.g. a tailwind for earnings and lowered perceived risk), I can’t help but wonder if the recent spike in corporate bond sales points to a bubble in that market. Although, with central banks continuing to significantly influence sentiment towards bonds in general this is a bubble that may not pop for some time to come yet.

 

Switching to specific Irish corporate newsflow, full-year results from CPL Resources – the largest recruitment company in the country with a circa 40% market share – were released this morning. These revealed a resilient performance, with operating profits growing 39% to €10m, while earnings per share rose by a third (helped by a lower number of shares in issue following the recent tender offer). In terms of the outlook, while noting that the market remains “challenging”, management is confident of achieving “further profitable growth in the months ahead”. In all, this is a good set of numbers from CPL. My view on CPL Resources is positive, underpinned by a first-rate senior management team, dominant market share in its home market, a very strong balance sheet (net cash of €28.0m) and a diversified business model (both by geography and by sector).

 

(Disclaimer: I am a shareholder in Tesco plc) We saw some more distribution channel innovation at Tesco, with the roll-out of drive-through grocery pickups. It will be interesting to see if moves like this help to arrest the decline in Tesco’s UK market share.

 

In the energy sector, Providence Resources said its 80% owned Barryroe oil field offshore Cork may contain another 1.2bn barrels, bringing the total potential resource to 2.8bn (it should be noted that this is a P10 estimate).

 

(Disclaimer: I am a shareholder in Ryanair plc) In the transport space, easyJet said that it is to roll out allocated seating across its network from November. This is a significant move and it will be interesting to see if Ryanair, which has experimented with this, follows suit. Speaking of Ryanair, it reported its busiest ever month in August, carrying a record 8.9m passengers, up 9% year-on-year. There has been a lot of media attention given over to Ryanair’s falling load factors (-1ppt to 88%), but I am not especially concerned by that given the impact capacity redeployments (mainly from northern to southern Europe) have presumably had on traffic stats, so I prefer to focus on the positive momentum in total passengers carried. Elsewhere, Aer Lingus reported a fall in ‘mainline’ passengers carried for the second successive month, however, good capacity management kept loads in positive territory.

 

In the blogosphere Lewis looked at an interesting UK quoted manufacturing company, Renold.

Written by Philip O'Sullivan

September 6, 2012 at 10:58 am

Market Musings 24/7/2012

with one comment

Since my last  update the Eurozone’s pressures have again bubbled to the surface, knocking share valuations and pushing down the value of the euro. However, troubles can often lead to opportunities elsewhere, and some of the shares on my buy list are now offering a lower entry price along with a superior potential kicker to earnings from FX than before.

 

The euro fell to a 2 year low against the US dollar and an 11 year low against the Yen. The key Irish stocks who benefit from a stronger USD relative to the euro include: CRH (which I’m a shareholder in), Kerry, United Drug, Glanbia and Kingspan. There are no Irish plcs with a material exposure to Japan. Another consequence of this turmoil is that yields on many ‘safe’ Eurozone countries have fallen into negative territory, which I find difficult to reconcile given how many non-financial corporates, whose balance sheets have seldom been stronger, are offering well covered attractive dividend yields. On this note, I was unsurprised to see that dividend payouts by UK plcs hit a record high in Q2 of this year.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) There was an interesting post on TMF examining “12 shares the market has thrashed this year“. Of the ‘dirty dozen’ I hold TNI, and I concur with the author’s views on it – it’s capitalised at £70m, generated free cashflow of £55m last year (I forecast that it will generate a similar amount this year, putting it on a free cashflow yield of circa 80%!) and as it continues to pay down debt (net debt has fallen from £300m in FY09 to £200m by end-FY11) I see a significant wealth transfer from debt holders to equity holders. While it does have a pension deficit (£230m at end-FY11) this is substantially covered by freehold property with a book value of £177m. It’s a stock I like – on my model it will be debt free by 2015 and generating (I conservatively assume a continued decline in revenues for the newspaper sector i.e. no recovery in advertising and/or circulation revenues) free cash of £35-40m by then – a 50%-60% free cash flow yield based on where the share price is currently at.

 

China has been rocked by another wave of problems around domestically produced baby formula. The sector there has struggled following the 2008 scandal, which has (understandably) directed Chinese consumers towards foreign brands. This is positive news for Ireland, whose share of global infant formula production is approaching 20%. The key beneficiaries from a plc perspective here are Kerry Group and Glanbia.

 

Dragon Oil issued a trading update this morning. Due to sand ingress issues it has trimmed 2012 production growth guidance to 10-15% from the previous 15%, but importantly it has retained its medium term output forecast. The firm is increasing the number of wells it proposes to drill this year to compensate for production delays, which is a positive. While the firm has been expanding into the exploration area, acquiring interests in blocks in Iraq and Tunisia, I can’t help but wonder if Dragon should be using its $1.7bn cash pile to buy up financially constrained smallcaps with proven reserves, many of which are trading on bargain basement prices, rather than engage in more speculative exploration activity.

 

(Disclaimer: I am a shareholder in Tesco plc) I was pleased to see a marked improvement in signage and merchandising in my local Tesco last weekend – on previous visits to the store I found that there was often no correlation between signs and what was actually on the shelves, so perhaps this is an indication that management is delivering on its promise to improve the customer experience in this part of the world. Obviously I’m basing this hunch on a sample of 1 store in a vast network of outlets, but if you’ve noticed similar or divergent trends please feel free to post them in the comments section.

 

Finally, I am pleased this morning to read that Ireland is proposing to reduce its number of parliamentarians and axe over a quarter of the smallest local councils. Even after this move, the country will still be over-represented at a national level – 158 TDs (MPs) and 60 Senators is still far too much for a country of our size (the 2 European countries closest to us in population terms, Norway and Croatia, have unicameral parliaments with 169 and 151 MPs respectively). Hopefully the people will vote to axe the Senate in next year’s referendum to remove this anomaly.

Written by Philip O'Sullivan

July 24, 2012 at 8:40 am

Market Musings 13/7/2012

leave a comment »

Newsflow has been relatively light in recent days but it’s essentially the calm before the storm as we move towards next month’s results season.

 

(Disclaimer: I am a shareholder in Marston’s plc) Since my last update we got some good news out of the UK pub sector. Both Young’s and JD Wetherspoon reported bumper sales during the Jubilee and Euro 2012 period, which presumably bodes well for their sector peers including Marston’s, which I hold. Assuming the London Olympics deliver another lift in sales, we could be looking at upgrades flowing through over the coming months.

 

(Disclaimer: I am a shareholder in Tesco plc) Speaking of UK consumer facing stocks, Shore Capital cut its forecasts for Tesco, citing concerns about its overseas operations. This is a new threat (at least for me) for the group, but I draw comfort from the comments from Shore’s highly rated analyst, Clive Black, about how its core UK business is stabilising.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) There was quite a bit about AIB in the press in recent days. Firstly, the group is reported to have sold a €300m loan portfolio, which is another step in meeting its PLAR requirements, although it should be noted that there is no information in the public domain yet about the discount that these loans were sold at. This morning there was an interview with AIB CEO David Duffy in The Irish Times that’s worth checking out. There’s more chatter in it about the possibility of external investors coming in to the share register from 2014, but I suspect they’ll need more than the ‘high single digit’ returns Duffy mentions to want to get involved – it’s not as if lower risk assets offering superior returns are particularly difficult to find these days. In any event, with AIB capitalised at €29.5bn at the time of writing while its stronger, equivalent sized peer Bank of Ireland is capitalised at just €2.7bn, I think a lot of investors looking at the Irish financials will be wondering why they should opt for AIB when they can buy into a company (i.e. Bank of Ireland) with similar macro exposure and risks (going forward) at a tenth of the price.

 

Switching to macro news, Argentina is the gift that keeps giving when it comes to dysfunctional economic policies. The latest plan by its President is to ban savers from purchasing US dollars. This follows other bizarre developments, such as prosecuting economists who query ‘official’ inflation estimates and restricting capital flows to the point where Mitsubishi and Porsche get paid in peanuts and wine respectively for their sales into Argentina. There’s also the pointless belligerence towards the Falkland Islands (not least given that Argentine military capabilities haven’t really moved on since 1982 while Britain has new Eurofighters, a Type 45 destroyer and a nuclear submarine in the area) and the theft of Repsol’s assets in the country to take into account. Again I find myself wondering aloud why some people here think we should be emulating Argentine policies!

Written by Philip O'Sullivan

July 13, 2012 at 9:17 am

Market Musings 13/6/2012

with 2 comments

Since my last update Spain looks like it may shortly be joined by Cyprus in asking for a bailout, making it two more EU countries that have needed external assistance since Ireland voted yes to the “Stability” Treaty – I hope my country isn’t starting to become a contra-indicator!

 

(Disclaimer: I am a shareholder in Tesco plc) Tesco released its Q1 interim management statement earlier this week. While there was a lot of focus on the performance of individual markets, the bottom line is that Tesco is performing in line with market expectations and the outlook for the full-year remains unchanged. Across the group I was pleased to see an improvement in its Irish sales, which bodes well for the domestic economy here, while the slowdown in Tesco’s Chinese sales growth mirrors the well documented (not least on this blog) pressures in that market. In its key UK market, while conditions remain ‘challenging’, it was comforting to see management describe the performance there as being ‘as expected’. Overall, there’s little within the statement to alter my view on Tesco – it’s clearly going through a rough patch, but trading on less than 9x forward earnings and yielding 5%, and with a relatively strong balance sheet (net debt/EBITDAR was 2.84x at end-FY11) I see limited downside risk to the shares from here. Mind you, some investors have less patience than I, with some giving the CEO a mere 6 months to turn the UK performance around.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc) We saw a positive update from Bank of Ireland earlier this morning, with the group announcing that it has sold another loan portfolio. To date the Bank is 97% of the way through its €10bn programme of divestments, and it is important to note that these sales have been completed within the PCAR base case assumptions. My recent case study on Bank of Ireland is here.

 

Structural steel firm Severfield-Rowen dropped a bit of a clanger earlier this week, warning on profits due to cost over-runs on two projects. It is worth noting that, those two mishaps aside, the group is sticking to guidance of a: “strong order book, anticipated full capacity utilisation and good project mix in both the UK and India”. As Severfield-Rowen is a leading indicator for the commercial real estate sector, this update is somewhat reassuring from a macro perspective.

 

(Disclaimer: I am a shareholder in France Telecom plc)  I was interested to read that France Telecom is preparing to exercise its call option and buy out the other shareholders in video sharing site Dailymotion. Assuming I’m reading the Alexa data correctly, it’s the 99th most visited site in the world, so hopefully FTE will be able to monetise this asset to a level that more than warrants this investment.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) In a further twist to the ongoing INM saga, the company has lost yet another non-executive director, with David Reid-Scott, who only joined the board in December, standing down. INM’s board now has only four directors on it – Denis O’Brien’s associates Paul Connolly and Lucy Gaffney, along with Frank Murray and CEO Vincent Crowley.

 

In other media sector news, UTV is one of three parties linked with possible bids for GMG (Guardian Media Group) Radio. A price of £40-45m has been suggested for the assets, which is ballpark 1x sales. According to the RAJAR figures provided on the GMG website, its two brands, Real and Smooth had 46.4m listening hours in Q1 2012, which is a roughly 4% share of all radio, but of course it’s important to note that the share of commercial radio (BBC doesn’t carry advertising) would be around 10%. This compares with commercial radio shares of circa 8% for UTV and 37% for Global. I’m no expert on competition issues around media ownership in the UK, but I’m guessing that UTV would find it significantly easier to get clearance for a takeover of GMG Radio than Global would. UTV, which has a net debt / EBITDA multiple of only 1.9x (at end-FY11 the net debt and EBITDA figures were £54.7m and £28.3m respectively) would have no difficulty in funding a takeover of GMG Radio.

 

In the energy sector, the wave of M&A activity we’ve seen since the start of 2012 has continued, with Cairn Energy agreeing a $644m takeover of Nautical Petroleum, which is focused on the North Sea. Indeed, that region is a particular area of focus, so whenever I have the time I must put together a comprehensive ‘who’s who’ list of players in that area.

 

(Disclaimer: I am a shareholder in Datalex plc) We saw a lot of news from the airline sector. EasyJet founder Stelios has teamed up with Lonrho to develop an African LCC, FastJet. Elsewhere, Bloomberg ran an interesting article about how traditional airline booking engine providers such as Sabre and Amadeus are seen by some as: “obsolete middlemen who add costs”.  Sentiments like this could open up opportunities for nimble operators such as Irish listed Datalex plc to win over more customers to add to an already impressive client list.

 

Argentina’s banks have lost one-third of their US dollar deposits as savers take flight. This is a further consequence of the crazy economic policies being implemented by President Fernández de Kirchner, which I’ve been writing about for some time. One of the main beneficiaries of this is Uruguay – when I traveled to Montevideo last year I was struck by just how many international banks had operations in that town – and I was not surprised to read of rising concerns in Argentina’s political elite about this. Is it any wonder, given the political backdrop, that Argentine households with at least $100,000 in assets hold 74% of their wealth offshore, according to estimates by the Boston Consulting Group. And to think that some people in Ireland think that we should be emulating Argentina’s economic policies!

 

It’s not just Ireland that has seen these sort of trends – median US household net worth declined by 38% between 2007 and 2010.

 

Staying with macro news, James McKeigue, who writes for Moneyweek, wrote an interesting piece (which mirrors more than a few of the readings I did for the supply chain management module of my MBA) some time ago about how more Western firms are reshoring operations from China. He flagged a similar article in The Atlantic earlier this week.

 

Closer to home, ignoring the 230,000 vacant housing units that are in Ireland, local authorities in County Cork are planning a 5,000 home new town. Given the enormous oversupply of homes in Ireland at this time, you’d wonder how such plans would even make it on to the drawing board, much less be given serious consideration.

 

In the blogosphere, Lewis took a look at Hornby, beloved of model railway enthusiasts everywhere.

Market Musings 22/4/2012

with 4 comments

Given events over the past few days it’s no surprise that this blog is once more focused on the TMT sector.

 

(Disclaimer: I am a shareholder in both Trinity Mirror plc and Independent News & Media plc) On Friday Richard Beddard asked me why I didn’t appear to be particularly concerned about Trinity Mirror’s pension deficit. Regular readers of this blog know that pensions are always a concern for me – I always incorporate the pension deficit or surplus into my valuation models, while as a former shareholder in Uniq (now a part of Greencore) I know all too well what can happen if the pension deficit gets too big. In the case of Trinity Mirror, at the time of writing the company has a market cap of £79m, while it exited 2011 with a pension deficit of £230m and net debt of £200m. So net long-term liabilities of more than 5x its current market cap, which is certainly concerning. This concern is somewhat alleviated by its freehold property assets of £177m, while last year it generated after-tax operating cash flow of £75m. With well-documented cost take-out measures underway and the UK advertising market still tough, I think it’s reasonable to assume that as the cost measures flow through and advertising picks up that Trinity Mirror can hold cash generation reasonably steady for the next 2-3 years. With modest capex requirements for the business and no dividend payout, this should see net debt more or less eliminated by end-2015. While it’s tricky (if not impossible) to predict where the pension deficit will be by then, it only has to improve by £53m (for information, it deteriorated by £70m last year, so moves of this magnitude are not unthinkable) before it’s covered by the property interests. Obviously, a marked deterioration in the UK newspaper sector or adverse market moves that significantly impact the pension deficit pose risks to this thesis, but if I’m right, I should see the value of my TNI shareholding rally strongly from current levels. One thing that TNI observers may wonder about the above analysis is why I’ve left out the current discussions between the publisher and the pensions authorities in the UK about temporarily reducing payments into the scheme – all other things being equal, these cashflows will be used to nuke liabilities (i.e. less money going to fix the pension deficit = more money going to fix the net debt), and given that I treat net debt and pension deficits the same in my investment models it has little impact on my sentiment towards the company.

 

Speaking of media, I came across an interesting survey of advertising expenditure in Ireland, which is quite timely in light of recent developments in the media sector here. While digital is growing at a rapid rate, it is worth noting that ‘old media’ still accounts for the lion’s share of advertising expenditure. I accept fully that there are clear structural shifts underway in terms of where ad spend is migrating to and from, but I remain confident of my central thesis for both INM and TNI that even though the overall ‘pie’ is shrinking, they have the ability to counter this to at least some degree through market share gains as weaker competitors exit the market. INM, as it likes to remind people at every opportunity (!) “is the only profitable newspaper and media firm in the country“, and many of its titles, at both a national and local level, compete with financially challenged rivals. For Trinity Mirror, the firm’s 130 regional titles and  5 national papers appear to be well placed in terms of right-sizing the cost base (this list suggests that it has been more proactive to date at weeding out underperforming titles than its peers) while the well-documented challenges faced by rivals such as Johnston Press could see an acceleration in rival titles exiting the market in 2012/13.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) Following the recent news that two Norwegian kraftliner mills have gone bust, another of Smurfit’s rivals, French containerboard producer Papeterie du Doubs, has gone into liquidation. All of this is supportive for pricing in an industry long known for its problems with overcapacity.

 

(Disclaimer: I am a shareholder in Playtech plc) In the betting space, William Hill’s IMS revealed a solid overall performance, led by its online division, where net revenues rose 33% (relative to a 12% increase in group net revenue). This has bullish read-through for the minority shareholder in the William Hill Online joint venture, Playtech, and it was no surprise to see PTEC’s shares gain 7% on Friday to close at 370p. This is just 10p below my breakeven level on a stock that has repeatedly disappointed me, and if I can get out of it at 380p or better it will be an escape of Harry Houdini proportions!

 

(Disclaimer: I am a shareholder in Ryanair plc) I was interested to read that Flybe has pulled out of Derry Airport in Northern Ireland. This will likely result in (very) modest gains for Ryanair, whose Derry-Liverpool and Derry-Birmingham routes will presumably pick up some traffic from Flybe’s discontinued Derry-Manchester service.

 

In the construction arena, Irish heating and plumbing supplier Harleston bought Heat Merchants and Tubs & Tiles, which came a little bit out of the blue for me given all the chatter linking Saint-Gobain to these assets. The future of the 11-strong chain of Brooks’ builder provider units remains unclear, so hopefully we’ll get some clarity on that this week.

 

(Disclaimer: I am a shareholder in Tesco plc) In the blogosphere, Valuhunter did up (with a little help!) an absolutely fantastic post on Tesco that’s well worth checking out.

 

Finally, if you ever feel like you’ve made a serious blunder in work, just remember that it could be worse – at least you haven’t accidentally fired every single one of your colleagues.

Written by Philip O'Sullivan

April 22, 2012 at 10:37 am

Market Musings 19/4/2012

with one comment

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.

Written by Philip O'Sullivan

April 19, 2012 at 5:22 pm

Market Musings 12/4/2012

with one comment

Both the brokers and the bloggers have provided most of the topics of interest to me in recent days, so let’s focus on them in this update.

 

(Disclaimer: I am a shareholder in Ryanair plc) Davy Stockbrokers downgraded LCC easyJet to ‘neutral’ yesterday on valuation grounds, saying that the stock is high enough. I wonder might this stance prompt some EZJ holders to switch into RYA, given the former’s recent outperformance?

 

Speaking of broker downgrades, NCB cut Kerry Group to ‘accumulate’ on valuation grounds yesterday. You can read their rationale for doing so in detail here – it’s similar to the one that prompted me to recently close out my position in Glanbia (at my €5.30/share valuation and forecasts for FY12 Glanbia would be on 9.3x EV/EBITDA, which to me is far from cheap in absolute terms). Staying with the food sector, Donegal Creameries issued what to me looked like solid enough 2011 numbers this morning. It’s not a stock I follow in detail, but I was interested in management’s comments about the rationalisation of Irish dairy processing capacity, which mirrors my previous scribblings on the issue and has clear implications for Kerry and Glanbia. Another thing that interested me was NCB’s morning note, which said that Donegal’s associate, Monaghan Mushrooms, is the world’s second biggest supplier of mushrooms!

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) I was pleased to see more capacity take-out in the European containerboard space this morning, with news of the imminent closure of two mills by Norway’s Peterson. As any student of economics knows, reducing supply in the industry will prove supportive of pricing in a segment where Smurfit Kappa Group has a circa one-third share of European kraftliner capacity. All other things being equal, a €10/tonne rise in kraftliner prices lifts Smurfit’s profits by circa €15m (which is pretty chunky considering consensus 2012 PBT is just under €290m)

 

(Disclaimer: I am a shareholder in Datalex plc) In the TMT sector, I was interested to read a post-results note by Goodbody analyst Colm Foley on Datalex plc. He’s opted for 2012 EBITDA and net cash of $6.1m and $15.5m respectively, which is comfortably ahead of my estimates of $5.3m and $13.0m. Of course, as a shareholder I’ve no objections if my estimates are proven to be too conservative! His PT is 70c (mine is 62c), which is well ahead the price at time of writing of 54c.

 

(Disclaimer: I am a shareholder in Tesco plc) In the blogosphere, Calum did up a detailed piece on Halfords that’s worth a look. He also noticed the latest quarterly letter from Kennox AM is out, which mentions a similar investment case for Tesco to the one that prompted me to recently put 6% of my portfolio into the stock. Elsewhere, Mark Carter did a cracking post asking: ‘How safe are blue chips?‘ which to me is an indictment both of index tracking funds and a lazy buy-and-hold strategy.

 

Here’s an interesting fact about how technological advancements are boosting efficiency – If a modern-day Macbook Air had the energy efficiency of 1991 computers, its battery charge would last 2.5 seconds.

Written by Philip O'Sullivan

April 12, 2012 at 2:15 pm

Market Musings 15/2/2012

leave a comment »

As has been the norm of late, while we’ve seen a lot of newsflow around the market, a lot of it is focused on peers of Ireland’s leading plcs. Let’s review what’s been happening on a sector-by-sector basis.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) There has been a lot of news around the Irish financials in recent days. To start off with IL&P, I was interested to read that it has suspended the sale of its UK loanbook along with its subprime business. I find this move more than a little strange given the seemingly buoyant demand for BTL loanbooks in the UK (which is the vast majority of IL&P’s presence in that market) and the fact that IL&P hasn’t written any new business in the UK market since early 2008. The government should be accelerating disposals of non-core assets, not suspending them. Elsewhere, I recently wrote about AIB’s unjustified market valuation. The NPRF has now hired Goodbody Stockbrokers to look into it. Further on in this blog piece I’ve noted some of the consequences of the removal of EU milk quotas in 2015. One potential beneficiary of this, as Bloxham notes, is insurer FBD. Bank of Ireland reports its full-year results on February 20th. Davy have a preview of it here. What I’m looking for in the results are updates on deposits (have recent positive trends been sustained?), de-leveraging (has BKIR continued offloading loans at better-than-expected levels?), margins and the level of provisioning (this will be particularly interesting given recent results from the likes of KBC and Danske Bank).

 

(Disclaimer: I am a shareholder in Marston’s plc and Tesco plc) In the consumer sector, I read an interesting piece on Marston’s strategy in The Daily Express (yes, really!). It’s a strategy that is reaping rewards, given the group’s rising profitability at a time when UK consumer discretionary spending is under pressure. Speaking of the UK consumer, I bought a position in Tesco earlier this week. While time will tell if my purchase was a little premature, I find being able to pay a single-digit PE multiple and a circa 5% dividend yield for a hugely successful global franchise particularly compelling.

 

(Disclaimer: I am a shareholder in Glanbia plc) In the food sector, I was interested to read that Dairygold Co-op is contemplating a €130m investment in growing its milk processing capacity. This follows reports that Glanbia is looking into making a similar investment to exploit the structural growth opportunity arising from the removal of EU milk quotas in 2015. I attended a briefing by a Bord Bia executive recently who outlined that China will be a major buyer of Ireland’s expanded milk production so I’m not surprised by Dairygold CEO Jim Woulfe’s comments in the piece linked above. Speaking of emerging markets, Danone’s 2011 results revealed strong growth by its infant nutrition business in particular, which is no surprise given last year’s buoyant performance by Ireland’s Glanbia and Kerry Group (both of which have a significant presence in that area).

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) I was pleased to see S&P upgrade its credit rating on Smurfit Kappa Group to BB from BB- along with applying a stable outlook to it. While it’s not a major surprise given the progress the group has made in cutting its debt, I am pleased to see that the recent resumption of dividend payments by the group hasn’t dissuaded S&P from this move.

 

Finally, in the blogosphere, John McElligott ran a screen over the Japanese market that identified a few interesting names. Calum has been looking to the United States for inspiration, doing up great articles on Dreamworks Animation and Family Dollar Stores. John did a feature on Flybe which is worth checking out – my view on it is that if the investment case he sketches for Flybe is one you can buy into, then you should be looking at Aer Lingus, which ticks much the same boxes save for having an even stronger balance sheet and superior operating trends.

Written by Philip O'Sullivan

February 15, 2012 at 1:41 pm

Market Musings 12/2/2012

with 3 comments

As the reporting season starts to really get going it’s no surprise that we’ve seen a lot of newsflow right across the market. Let’s run through what’s been happening on a sector-by-sector basis, and what the read-through for companies yet to report their numbers is.

 

(Disclaimer: I am a shareholder in CRH plc) Kicking off with the construction sector, I was interested to read that some of CRH’s major peers on both sides of the Atlantic have posted consensus-beating results. HeidelbergCement reported Q4 EBITDA of €639m, well ahead of consensus of €580m, while in the US Beacon Roofing reported EPS of 41c versus expectations of 29c. Just by way of a reminder, CRH’s geographic split is 50% North America, 35% Europe and 15% emerging markets. Based on recent sector results I suspect the risks to CRH’s full-year results on February 28 lie to the upside.

 

In the food and beverage sector, Diageo revealed that Guinness is recording strong growth in emerging markets, with volumes in Africa increasing by 8% while Asia-Pacific volumes rose 13%. Having had a few pints in a bar in Kuching on the island of Borneo last year, I can indeed confirm that Guinness is making headway in emerging markets! Elsewhere, Greencore announced a very impressive underlying sales performance, recording growth on this measure of 11.2% in the 17 weeks to 27 January. International Flavors & Fragrances, a major competitor of Kerry Group’s Ingredients & Flavours division, reported very strong results that bode well for Kerry’s FY results on February 21. Kerry has previously guided 8-12% growth in earnings for 2011, led by a strong performance by Ingredients & Flavours.

 

(Disclaimer: I am a shareholder in AIB plc, Bank of Ireland plc and Irish Life & Permanent plc) In the financials space, Danske Bank, which owns National Irish Bank, revealed that its Irish impairments and underlying profits both worsened in 2011. In contrast, KBC said that its Irish subsidiary saw impairment charges fall last year. We should get a clearer overview of the domestic situation when Bank of Ireland issues its full-year results on February 20th. Switching to our friends in the UK, there were a number of interesting data points that could suggest upside to the Irish banks’ deleveraging plans. Firstly, Barclays’ UK retail and business impairments fell 35% to £536m in 2011, making for a 44bps charge (2010: 70bps), which could enhance the attraction of any UK loan books in this segment that the Irish banks attempt to offload. Similarly, news that buy-to-let mortgages in the UK are enjoying something of a renaissance is positive news for Irish Life & Permanent in particular, given that IL&P has to sell its £6.4bn UK BTL-heavy loanbook as part of the PLAR requirements. Of course, time will tell how successful the divestments will ultimately be.

 

(Disclaimer: I am an indirect shareholder in Dragon Oil plc) As I alluded to recently, an investment fund that I am involved in has gone long Dragon Oil. A couple of days ago I came across this nice summary of the attractions of the company. Elsewhere, my Russian comrade on the MBA programme, Denis Shikunov, posted up E&Y’s 2011 Global Oil & Gas Transactions Review. I think we’ll be seeing a lot of M&A in this space during 2012, given the astonishingly cheap valuations to be found in the small-cap segment in particular.

 

In the blogosphere, Neonomic posted up an interesting analysis of housebuilder Barratt Developments. It’s a stock a lot of value investing bloggers like, but my preferred play in the sector, due to its bulletproof balance sheet and very inexpensive rating is Abbey. Elsewhere, John Kingham identified an interesting sounding net-net called Molins that’s worth taking a look at. Calum looked at Topps Tiles, which he rightly concludes is a leveraged play on an UK economic recovery. Wexboy posted up part IV of The Great Irish Share Valuation Project. Finally Kelpie Capital posted up a very good piece on Tesco, which is a stock I am strongly minded to purchase.

Market Musings 14/1/2012

with 6 comments

From  a macro perspective, a few things have caught my attention in recent days. The British government published details of the 16 million square metres of property and land it owns across the UK – six times the area of the City of London. With significant excess capacity (550 of the 13,900 properties are vacant – while reading the article it’s clear that many of the ‘occupied’ ones are far from fully utilised) I assume that this will be an area of focus for generating new revenues / saving money for the Exchequer.

 

Now here’s something worth looking at – UK hedge fund Toscafund believes that a Greek exit from the eurozone would result in European social unrest, hyperinflation and a military coup.

 

Switching to equities, the UK retail sector is something that I’ve written extensively about in the past. Following this week’s sharp share price fall by Tesco, a lot of people are asking whether now is the time to pull the trigger and buy into the sector. Here are some perspectives from John Kingham, who asks: Are Marks & Spencer Shares Good Value? and John McElligott, who writes about many of the UK’s biggest listed companies in that space. I should add that I added some UK consumer exposure into my portfolio recently, having acquired a stake in pub group Marston’s, which I’ve written about before here.

 

Staying with UK equities, Calum has written a good piece on the listed housebuilders, that’s worth a read.

 

(Disclaimer: I am a shareholder in RBS plc) RBS has been in the spotlight in recent days. It announced 3,500 redundancies, with 950 jobs going at its Irish operation, Ulster Bank. While obviously these job losses are a tragedy for those involved, they are far from unexpected given the well-documented macro challenges facing the group. With almost indecent haste some brokers, including Seymour Pierce, have been rushing to give the shares a push on the back of the restructuring, and the price motored ahead on the back of this, closing at 24.1p on Friday having finished the previous week at 20.5p. I have a well-below-water legacy position in RBS but I won’t be rushing to add to it (or ‘average down’!) just yet – I would want to see a much brighter macro outlook before I’d consider doing that.

 

(Disclaimer: I am a shareholder in Ryanair plc) Ryanair announced a 25c per passenger charge to cover what it describes as a “new EU eco-looney tax“. Based on its current run-rate of 76m passengers a year this will raise at least €19m per annum. What’s significant about it is that it serves as a reminder that even an extra 25c in revenue per passenger can produce a chunky bit of change for Europe’s largest low cost carrier. I should also point out that Ryanair’s ‘fill the plane’ pricing model and its young fleet of aircraft means that it will always have a lower per passenger charge than its European competitors where green taxes like this are concerned, which underlines its competitive advantage. Staying with airlines, I was interested to read in Friday’s FT that of the 1.2bn people in India, only 55m flew in an airplane last year. Now that’s what I call a growth opportunity!

 

In the energy sector, Dragon Oil announced that it exited 2011 producing 71,751 barrels of oil per day, which is slightly ahead of its 70k target. Elsewhere, I found two pieces of interest in this oil sector note by Edison. The first is the chart on page 3 which rates oil stocks on an EV/BOE basis – this shows that some companies’ oil reserves are being valued at close to nothing (or in some cases less than nothing). The obvious health warning on that chart being that investors need to look at the companies’ ability to bring those reserves into production in a shareholder friendly way before rushing into all of those names. The second thing of note in the report is the question the analysts pose about the potential for consolidation in the sector, which echoes Paul Curtis’ views from two weeks ago.

 

(Disclaimer: I am an indirect shareholder in DCC) In the support services space, NCB published a research note on DCC. While they have trimmed their price target, they are retaining their buy recommendation, which I agree with – DCC is very cheap given its undoubted quality, stable business model and proven track record of creating shareholder value.

Written by Philip O'Sullivan

January 14, 2012 at 4:15 pm

%d bloggers like this: