Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Total Produce

Market Musings 4/9/2012

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Newsflow has been mercifully light today, which is a help as I’m working on a number of other projects at the moment. In this blog I look at this evening’s Irish Exchequer Returns data, results from Total Produce and a few other bits and pieces that caught my attention since my last update.

 

To kick off with the latest Irish Exchequer Returns data, covering the first 8 months of 2012, these show a big improvement in the reported deficit, which makes for great headlines, but, as I’ve previously cautioned around such releases, tells us little of value about the underlying picture. Total receipts (both current and capital) rose 12% relative to year-earlier levels, while total expenditure (on the same basis) was 14% lower. This produced an Exchequer deficit of €11.4bn versus €20.4bn in the same period last year. However, that deficit figure is meaningless unless you adjust for one-off items and timing issues. On the revenue side, the Exchequer coffers were swelled by €233m from the sale of Bank of Ireland stock last year, while there were no such one-off gains this time round. Recapitalising the listed financial institutions cost €7.6bn in the first 8 months of 2011, but only €1.3bn in the same period this year. So far in 2012 the State has injected €450m into the Insurance Compensation Fund (2011: nil), while Promissory Notes (at least on a reported basis) have cost €25m in the ytd versus €3.1bn last year. Summing these items means that to get the underlying deficit for the first 8 months of 2011 you have to reduce revenues by €0.2bn and lower spending by €10.7bn. This produces a ‘underling’ deficit of €9.5bn in the first 8 months of 2011. The same exercise for the year to date involves lowering total expenditure by €1.8bn, which produces an underlying deficit of €9.6bn between January and August 2012. So, while the headlines suggest the deficit has significantly improved, in reality the underlying fiscal position is in fact little changed. While total revenues have increased (by €2.7bn on a reported basis), this has been eaten up by items such as a €1.6bn increase in interest costs on the national debt, while voted (i.e. day-to-day, nothing to do with bank recaps or interest on the national debt) spending is €0.4bn above year-earlier levels, in contrast to claims that extraordinary levels of fiscal austerity are being imposed on the economy. So, a case of ‘a lot done, more to do’.

 

One potential positive for Ireland Inc, however, is news that at least two European insurance IPOs are planned for later this year – Direct Line and Talanx. Assuming they get off OK it will bode well for the prospects of a sale of the State-owned Irish Life and, in time, (State-owned) IBRC’s 49% shareholding in the old Quinn Insurance business.

 

(Disclaimer: I am a shareholder in Total Produce plc) Total Produce released its interim results this morning. These revealed a 6.7% increase in earnings, while management hiked the dividend by +5% and raised the full-year guided earnings to the “upper end” of the previous 7-8c range.  This is all good stuff, and I suspect the risks for Total Produce lie to the upside as we move towards the end of the financial year. I remain a very happy holder of the stock, and given that it trades on only about 5.5x earnings and has a bulletproof business model, I would consider adding to my position.

 

Staying with the food and beverage sector, UK pub group Greene King said that the Olympics made no difference to its performance. While its overall reported like-for-like sales growth, at 5.1%, is commendable, its comments on the games strengthens my conviction around my recent disposal of shares in one of its peers, Marston’s, after the last of the three clearly identifiable potential catalysts for the sector (Euro 2012, Olympics, Jubilee) had played out.

 

Botswana Diamonds, which I recently profiled, issued an upbeat prospecting update this morning. The shares closed +17.7% in London, so clearly the market liked the look of them. It’s one of the stocks I have on the watchlist at this time.

 

Switching to the support services sector, the venerable Paul Scott profiled UK staffer Staffline. You can read my profile of one of its peers, Harvey Nash, here.

 

Another support services company, albeit a rather different beast, DCC, announced the acquisition of Statoil’s industrial LPG business in Sweden and Norway. This is a sensible bolt-on deal that strengthens DCC’s position in the Scandinavian region.

Market Musings 16/7/2012

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Since my last update there have been quite a few developments around the banking sector. The Irish banks’ reliance on monetary authorities for funding rose marginally in June, but it remains 32% below peak (€187bn in February 2011) levels. Elsewhere, UBS put together an interesting table showing credit and deposit trends across Europe – the deleveraging process for households in Ireland is especially acute relative to other EU member states, while the deposit trends are disappointing, especially given the competitive rates the banks are offering to savers. On that note, with deposit rates looking set to continue to fall as the Irish banks work towards rebuilding their net interest margins, I wonder if this might lead to more deposits moving out of the country over time. Time will tell.

 

(Disclaimer: I am a shareholder in Bank of Ireland, AIB and Permanent TSB) Speaking of Irish banks, I had a look at the liquidity of their shares after noticing a few comments about abnormal price moves. Bank of Ireland has a free float of 85%, compared to the circa 0.2% of AIB and PTSB that is outside of State ownership, so it was no surprise to see that the average daily volume of shares traded in Dublin in Bank of Ireland (33m) is 44 times that of AIB (750k) and 98x PTSB (337k). Considering that, based on where PTSB’s share price closed on Friday (2.5c) the average daily volume traded in that stock is worth less than €10,000 you would want to be careful not to read too much into any daily movements in its share price. The same applies for AIB, where on the same criteria less than €50k worth of stock is traded each day in Dublin.

 

(Disclaimer: I am a shareholder in RBS plc) Elsewhere in the financial space RBS’ planned IPO of Direct Line was the subject of significant media coverage in recent days. Press reports over the weekend suggested that leading private equity firms are circling around RBS’s insurance operation, which generated operating profits of £454m on revenues of £4,072m last year. I think a trade or private equity sale of this business, which is valued at £3-4bn, would be in shareholders’ best interest – particularly given that, with 11 investment banks lined up to advise RBS on an IPO, the fees involved would be substantial if it goes down the listing route.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Switching to media, TCH announced that it is considering restructuring its debt. The group operates national and local newspapers along with several local radio stations and its quoted competitors include Independent News & Media, UTV Media and Johnston Press. Should any restructuring move lead to closures of underperforming assets there will presumably be opportunities for those three, along with TCH’s unquoted peers, to gain market share.

 

(Disclaimer: I am a shareholder in BP plc)  In the energy space, I am concerned by a report that an Argentinian province is threatening to revoke a licence held by BP’s joint venture, Pan American Energy. The asset in question is Argentina’s largest oil field, while the recent nationalisation of Repsol’s business in that country shows that Argentine politicians are not above taking actions that will ultimately prove ruinous to FDI inflows.

 

Investors Chronicle’s John Ficenec wrote a good piece on the recruitment sector. I’ve been tempted by some of the cheap valuations in the sector of late but am torn by the macroeconomic headwinds. Of course, if there’s any hint of these abating the sector should significantly re-rate, but timing that entry point is easier said than done!

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector I note a report saying Total Produce has made a bolt-on acquisition in France. There’s no official word from the company, but assuming the report is accurate I’m guessing the business should add 1% to TOT’s topline with a slightly lower effect (due to: (i) finance costs; (ii) France having a 33.3% corporate tax rate, versus TOT’s current 19.3% effective rate; and (iii) synergy benefits will presumably be lower than they would be in areas where TOT has a more substantial presence) on earnings.

 

Finally, with the US Presidential election only a few months away, I was interested by the results I got on this questionnaire that matches your political views to those of the candidates – supposedly I’m 93% in-tune with Gary Johnson and 88% with Ron Paul! Why don’t you take the questionnaire and see where you stand.

Written by Philip O'Sullivan

July 16, 2012 at 7:50 am

Market Musings 18/5/2012

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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 14/5/2012

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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

Market Musings 4/5/2012

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Happily most of the newsflow I’ve seen since my last update has involved encouraging Q1 updates, so let’s run through what’s been happening in the markets.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group) I was delighted to see a blow-out set of Q1 numbers from SKG this morning.  EBITDA of €246m was well above analysts’ forecast range of €181-233m. Other points of note include an increase in the cost take-out goal (from €150m to over €200m), while management now expects to match 2011’s EBITDA outcome this year, which is ahead of what most analysts had expected given the poor state of many of its end markets. This is the latest in a series of encouraging announcements from the company, and I’m a very happy investor in the stock. The only potential negative I see at this time is the troublesome rise of economic nationalism in some Latin American markets. That region contributed 23% of SKG’s EBITDA in the first quarter of 2012, and I am somewhat concerned about its assets in Venezuela (where the government stole some of SKG’s property last year) and Argentina, where the president has been actively implementing insane economic policies of late. However, against that I note that most of SKG’s Latin American assets are located in more stable countries such as Mexico, Chile and Colombia.

 

(Disclaimer: I am a shareholder in RBS plc) Another firm to issue a Q1 update today was RBS. I will refrain from passing judgement on the overall group performance, as I’m in the process of building a model on the company as a precursor to a detailed case study, but from an Ireland Inc perspective I was interested to see what it had to say about Ulster Bank in particular. In the event, RBS says Ulster Bank “still faces exceedingly difficult market conditions”, with impairments continuing to rise in the residential mortgage book. The unit’s total impairments in Q1 2012 were £654m, compared to £570m in Q4 2011 (and £1294m in Q1 2011). Ulster Bank’s Q1 pre-impairment profit was -12.5% yoy. Overall, to me this reads like a ghastly performance by RBS’ Irish operation.

 

Staying with Irish financials, I was interested to read that financier Edmund Truell is raising up to £200m this month to put towards “deals in the European financial services or business administration sectors“. Interestingly, Truell is already the biggest shareholder (via the Fiordland investment vehicle) in Irish listed IFG, which is the biggest administrator of bespoke SIPPs in the UK market. His next moves will be interesting to watch.

 

Aer Lingus issued a strong Q1 interim management statement. Within it management upgraded full-year guidance from the “Our expectation for 2012 is that the Group will remain significantly profitable albeit below 2011 levels” provided at the time of the full-year results in February to the new guidance of “If current trends continue, Aer Lingus’ operating profit for 2012 should match that achieved in 2011“. Aer Lingus has done an excellent job of managing yields and capacity against the headwinds of a high oil price and very difficult economic conditions in its home market.

 

(Disclaimer: I am a shareholder in Ryanair plc) Elsewhere in the airline sector, one of the key themes I’ve been pushing in recent months has been the demise of and/or capacity reductions by numerous European carriers and the benefits that this translates into for Ireland’s relatively more efficient carriers.  Denmark’s Cimber Sterling, which carried 2m passengers in 2010, went bust this week. It operated out of Copenhagen, Aalborg and  Billund. Ryanair has a presence in Billund. Another carrier that has been slashing capacity is BMI Baby. It is pulling out of Ireland West-Knock, where its passengers will presumably switch to Ryanair and Flybe, and also out of Belfast, where its passengers will presumably switch to Aer Lingus, Easyjet, Thomas Cook and Flybe. Reduced competition is facilitating fare increases for Ryanair and Aer Lingus at this time.

 

(Disclaimer: I am a shareholder in France Telecom plc) Switching to the TMT sector, France Telecom issued its Q1 results. I was pleased to see the group reaffirm guidance of operating cashflows in 2012 of close to €8bn, but was less pleased to see the group pull back from its guidance for 2013-15. The stock trades at a discount to my estimated valuation on the company, but I am loath to raise my exposure to it, due to the deteriorating outlook noted above and the risk of elevated political interference (over and above Sarkozy’s meddling) going forward, assuming that France swings to the left in the second round of the upcoming presidential elections.

 

(Disclaimer: I am a shareholder in Total Produce plc) Total Produce made a small acquisition, buying a 50% stake in Flancare (Clonmel) Distribution Limited. As the target was in liquidation, I assume the consideration is very modest, but nonetheless take heart from the inference in the statement that these are very well-invested assets.

Written by Philip O'Sullivan

May 4, 2012 at 9:35 am

Market Musings 10/4/2012

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It’s been a real mixed bag of newsflow since my last update! Let’s jump from one story to another.

 

(Disclaimer: I am a shareholder in Datalex plc) I was interested to learn more details about the deal that Westjet, the 10th biggest airline in North America, has cut with Irish travel software provider Datalex. The Canadian carrier says it will use Datalex’s TDP (travel distribution platform) “as our core e-commerce platform in support of all current and many new innovative shopping and reward features that we plan to roll out in the coming months”. What I found interesting about the deal was that Datalex will replace Sabre as Westjet’s partner in this regard, which given Sabre’s scale (its revenues of circa $3bn are roughly 100x higher than Datalex’s annual revenues) is surely a vindication of the quality of Datalex’s offering.

 

(Disclaimer: I am a shareholder in Total Produce plc) Switching to the food sector, South Africa’s Capespan, in which Total Produce is the 2nd biggest shareholder with a circa 25% holding, reported improved FY11 results. Recent newsflow around Capespan’s third largest holder, Bidvest, could provide an opportunity for Total Produce to lift its shareholding.

 

Moneyweek had an interesting article about the 20 ‘best’ stocks on the FTSE.

 

Speaking of footsie stocks, in the blogosphere, Kelpie Capital did a detailed piece on Weir Group that’s well worth a read.

 

Turning to macro news, Goodbody’s Dermot O’Leary wrote an interesting piece in his morning wrap on the UK’s two-speed housing market, which you can read at the bottom of page five here. This underlines the importance of looking beyond headlines – while the RICS index suggests ‘UK house price expectations are at a 21 month high‘, but with 11 out of 12 regions expected to record negative price returns over the next 3 months (Northern Ireland has the weakest house price outlook), as ever, the devil is in the detail.

 

Elsewhere, I wrote a piece some weeks ago about my recent experiences in China. One of my Twitter “followers”, Derek Madden, brought to my attention an interesting piece by economist Joseph Salerno on China’s current inflationary pressures, which you can read here.

 

To descend into the bear pit that is international relations, I read a great blog by my old friend Ian Parsley about the tensions around the Falkland Islands earlier today. Having visited Argentina last year and seen at first hand the severe poverty many of its people live in, I would concur with his assertion that: “The whole Argentine approach is self-defeating”.

Written by Philip O'Sullivan

April 10, 2012 at 2:31 pm

Market Musings 2/4/2012

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Just when I thought the volume of newsflow would ease off as we reached the end of the results season, we get another slew of trading updates, placings and news of commercial opportunities!

 

(Disclaimer: I am a shareholder in Irish Life & Permanent plc) IL&P’s results this morning contained few surprises given prior guidance provided by management on impairments and arrears. The loan-to-deposit ratio improved to 227% last year from 249% in 2010, and this is of course miles offside the Central Bank’s target of 122.5% by the end of 2013 (I should note that €500m of deposits from Northern Rock moved into ptsb after the year-end). The net interest margin rose 10bps yoy to 0.96%, helped by rising variable mortgage rates and a greater reliance on low-cost ECB funding. We’ll know by the end of this month what the State’s intentions for the future of the banking unit is. Until we get some clarity on that, I remain inclined to steer clear of the stock (my current position is a residual legacy holding that scarcely seems worth the effort of selling!)

 

(Disclaimer: I am a shareholder in Datalex plc) Friday’s results from Datalex were rather lost in a deluge of news from the financials sector along with Ryanair’s chunky share buyback. Going into them I had forecast revenue, EBITDA and cash of $28.6m, $4.6m and $12.9m respectively. In the event these came in at $28.0m, $4.3m and $12.5m, so a little bit behind me but bang in line with what brokers Davy (revenue of $28.0m, EBITDA of $4.3m) and Goodbody (revenue of $28.5m, EBITDA of $4.3m) had forecast. In terms of my model, not a lot has changed. I now expect revenues of $29.3m and EBITDA of $5.3m in 2012, which is perhaps too conservative given that the company will have at least eight new paying clients this year. Against that I’m a little nervous of how the tough economic backdrop could be impacting demand for a number of its existing clients. Here I would point to the $0.4m provision Datalex booked in its 2011 accounts against its receivable from Spanair, which ceased trading in January. In any event, the model now spits out a valuation of 62c/share (versus the previous 64c / share), which is 24% above where the shares closed at on Friday (50c). Datalex is certainly cheap, at 6.4x 2012 EV/EBITDA (on my estimates) and with the balance sheet bolstered by gross cash of $12.5m (just over a quarter of the market cap) it’s not a stock I’d lose any sleep over. I’m happy to stay long, and would probably top up my position if I realise some gains elsewhere in the portfolio (I’ve as much total market exposure as I’m comfortable with for now).

 

(Disclaimer: I am a shareholder in Playtech plc) Elsewhere in the TMT sector, I note that Playtech is one of three firms shortlisted to provide an online betting platform for Greece’s OPAP, which is Europe’s biggest betting firm. While we’ll wait and see what the outcome of this process is, it’s encouraging to have seen a consistent stream of good news from Playtech of late.

 

(Disclaimer: I am a shareholder in France Telecom plc) In the final bit of TMT related news, I was interested to read that France Telecom’s new low-cost competitor in the French mobile space, Free, appears to be having serious teething problems. This is presumably deleterious to Free’s customer acquisition strategy, and by extension bullish for the likes of France Telecom and Vivendi. I wrote a recent detailed piece on France Telecom here.

 

In the healthcare space, Merrion Pharma released results on Friday afternoon. With revenues, EPS and net cash all declining, the results looked just like you’d expect results put out just before the weekend kicks off to look!

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, I picked up a story from the South African media that said the third biggest shareholder in Capespan, Bidvest, has given up on plans to boost its stake in the firm. The article speculated that either of the two biggest shareholders, Zedar and Total Produce, may buy out Bidvest. Given the strategic importance of Capespan to Total Produce, I would welcome an increase in TOT’s stake in the firm.

 

(Disclaimer: I am a shareholder in PetroNeft) Switching to the energy sector, PetroNeft issued a reassuring update this morning. Following a recent run of disappointments, it was good to see a 36% increase in its reserves while output was steady at 2,300 bopd. So, no surprise to see the shares open strongly this morning. Elsewhere, Providence announced that it is raising $100m to help commercialise its recent oil find offshore Cork and pay down convertible debt.

Written by Philip O'Sullivan

April 2, 2012 at 8:10 am

Market Musings 19/3/2012

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Now that I’ve returned from my travels, this is the first of what’s likely to be three catch-up blogs. In this one I’m going to review the main developments over the past week across the universe of stocks I follow, in the second one I’ll examine the key ‘Chinese takeaways’ from my trip and in the third I hope to catch up on what my peers in the Blogosophere and the media have been saying recently.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector, Trinity Mirror issued FY2011 results. Going into them I had forecast revenues of £731.0m, EBIT of £99.6m and net debt of £195.8m. In the event, these came in at £746.6m, £92.4m (the main variance here was that exceptional items were c. £5m worse than expected) and £200.7m respectively. One thing that did catch me offside was the pension deficit – this widened to £230m from £161m in FY2010. This is a very material move – the deterioration is the equivalent of 27 pence per share, which compares with Trinity Mirror’s current share price (at the time of writing) of 36.5p. Updating my DCF based valuation model produces an equity value of just 13p per share, which represents 63% downside from current levels. However, this valuation is extremely sensitive to movements in the pension deficit – a 10% move in the pension deficit moves the price target by 9p. I would also note: (i) the strong asset backing (freehold property had a book value of 72p/share in 2010); (ii) the further self-help moves the group could implement on the cost side; and (iii) the reasonably strong cash flows (operating cashflow was £76m last year), which give me confidence that the group can nuke its net debt over the coming 3-4 years. Overall, for me Trinity Mirror is downgraded to a hold.

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector, Aryzta posted its H1 results. There wasn’t a whole lot in it for me, with management saying: “our EPS guidance of 338 cent for FY12 and 400+ cent for FY13 remains unchanged”. Elsewhere, Total Produce announced this morning that it is to be included in the ISEQ 20 indices, which may prompt some modest index buying.

 

(Disclaimer: I am a shareholder in Playtech plc) In the technology sector, there were reports that Playtech and William Hill are to open talks on their WHO joint venture shortly. From my perspective, the best option for both parties is for William Hill to buy Playtech out (given the difficult working relationship, William Hill’s online needs, Playtech’s balance sheet being significantly strengthened at a time when it’s looking to do deals etc.), a theme explored by IC here. Playtech also issued FY2011 results, which revealed a strong performance (revenues +46%, gross income +41%), while net cash was a healthy €137.3m. Management also signaled that the group has made a strong start to 2012, and that the company has made progress towards achieving a full listing. Playtech’s share price has surged in the past week, tipping 350p and bringing it closer to my breakeven level (~380p). I remain an ‘unhappy holder’ of Playtech but will be ‘less unhappy’ if I can get out of the position flat or slightly up.

 

In the energy space, Tullow’s FY2011 results contained few surprises, save for a big ramp up in the dividend (from 6p to 12p). That said, the implied yield is only ~1%, so hardly anything to get excited about.

 

In the recruitment sector, CPL Resources acquired a Swedish firm, ERHAB. While no details of the consideration paid were released, I would expect it to have been very modest – high six figure / low seven figure territory – given CPL’s past form and its understanding that when you buy a recruitment firm you buy a business whose assets walk out the door at 5pm every evening. Hence, this is likely to be about buying a small number of individuals and then investing in building a strong team around them to increase ERHAB’s share of the market. It’s a model that has worked well for CPL both at home (CPL is the largest recruitment firm in Ireland, and has successfully evolved from being a niche IT recruitment specialist – e.g. CPL = ‘Computer Placement Limited’ – into a diversified operator) and abroad (CPL generated 33% of its permanent fees outside of Ireland in FY2011).

 

Finally, Siteserv has agreed to be sold to a vehicle owned by businessman Mr. Denis O’Brien. Under the terms of the proposed deal, shareholders will receive approximately 3.92c / share. I find this a little surprising given that the scale of Siteserv’s debts might have been expected to result in no consideration going to equity holders. However, IBRC (the former Anglo Irish Bank) seems happy with this arrangement. Overall, it seems the ISEQ is going to lose yet another company.

Written by Philip O'Sullivan

March 19, 2012 at 11:48 am

Market Musings 6/3/2012

with one comment

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.

Written by Philip O'Sullivan

March 6, 2012 at 10:36 am

Market Musings 18/2/2012

with 2 comments

As has been the norm so far this month we’ve seen a lot of newsflow in recent days from right across the market. Let’s cover what’s been happening on a sector-by-sector basis.

 

(Disclaimer: I am a shareholder in France Telecom plc) In the telecoms space, I was interested to read that Deutsche Telekom is considering exiting its Everything Everywhere jv with France Telecom in the UK. It will be interesting to see how the latter responds, given that France Telecom has been exiting operations in Europe of late, selling its Austrian and Swiss businesses. Bernstein reckons that it is likely to IPO Everything Everywhere, which would be my preferred choice – France Telecom needs to slash its vast net debt (€30.3bn at the end of H1 2011) and this, along with the proceeds of the recent disposals, could put a chunky dent into it. With the French state, France Telecom’s biggest shareholder, losing its AAA rating from S&P earlier this year and Moody’s threatening to follow suit, I think heavily indebted corporates in that market are going to come under increasing pressure unless they can get their balance sheets in order. Against that I note that FTE is considering spending $2bn to buy out its Egyptian partner in that market, but the costs of that potential deal are significantly outweighed by the disposal proceeds outlined above.

 

In the construction sector, I was interested to read that the company that bought out Wolseley’s assets in the Irish market has been placed into examinership. While time will tell what the outcome of that process is, any closures would likely benefit Grafton, which has 67 merchanting outlets and 49 DIY retailing outlets in Ireland. Elsewhere in the sector Valuhunter did up a stonking blog on housebuilder Bellway in which he makes a very interesting observation – the UK benefits cap may lead to some internal migration as people move from the more expensive south-east of England to other regions. I am perplexed to read hand-wringing articles on the benefits cap such as this one – surely it is unreasonable to expect taxpayers to pay for people to live in the most expensive areas?

 

(Disclaimer: I am a shareholder in Total Produce plc) Switching to food companies, I was interested to read Indian media reports (this doesn’t appear to have been picked up by either the Irish media or any of the domestic brokers here yet) that Tata has ‘dissolved’ its joint venture with Total Produce. This is disappointing, as there’s no denying that the jv offered the greatest organic growth potential of all of Total Produce’s units. However, we have to frame that disappointment in the context that it was only a very small part of Total Produce’s business – I estimate only 1 or 2% of turnover.

 

(Disclaimer: I am a shareholder in PetroNeft and an indirect shareholder in Dragon Oil) In the energy sector, PetroNeft issued a ghastly trading update, in which it said production has slipped to 2.3kbopd versus 3kbopd at end-2011. This is eerily reminiscent of the technical problems that dogged the stock throughout 2011, and hence it was no surprise to see the share price close down nearly 40% yesterday. Sentiment will not be helped by an RNS posted after the market close by JP Morgan, which said that it has followed up its recent share sale by offloading a further 5m shares. JP Morgan has 6.8% of PetroNeft’s shares remaining, and were it to run its stake down to zero that would mean the market will have to digest about 8x the ADV. I can’t see a queue of buyers for that at the moment. Elsewhere, Dragon Oil said that it is considering making a bid for Bowleven. Contrarian Investor UK welcomes the return of M&A within the sector.

 

In the recruitment space, Harvey Nash issued a strong trading update. It’s one that I sold out of early last year – in hindsight, with very good timing – but I have been keeping an eye on it because I like its conservatism, diversification and excellent management team. While there is no denying that it’s cheap – it trades on a single digit PE and yields around 4.5%I suspect there will come a better time to buy Harvey Nash later this year – EPS momentum is set to fall off a cliff from the +16% in the 12 months to end-January 2012 to +4% in the current financial year, before accelerating once again to +34% in the 12 months to end-January 2014.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc, Bank of Ireland plc and Irish Life & Permanent plc) I was interested to read that IBRC, the bad bank formerly known as Anglo Irish Bank, is “anxious” to take on the tracker mortgages that are causing so much hurt for AIB and IL&P. Bank of Ireland reports results on Monday that will hopefully give a lot of clues about the dynamics within the Irish market at this time. The key things to watch out for in BKIR’s results are pre-provision profits (most analysts expect €500m), deposit trends, net interest margins, progress on deleveraging and impairment guidance.

 

(Disclaimer: I am a shareholder in Independent News & Media) I recently did up a case study on Independent News & Media, in which I mentioned the problem of imploding newspaper circulations. I was interested to read that INM has just de-registered 12 of its regional titles from the industry’s official circulation auditor, ABC. I’m sure that there’s no correlation between the two!

 

(Disclaimer: I am a shareholder in Datong plc) I was interested to read a piece in Growth Company about a stock I hadn’t come across before – PSG Solutions. PSG is clearly a microcap, with a market cap of only £26m, but I was interested to learn that it has a unit called Audiotel that specialises in technical surveillance countermeasures. I wonder if it would be a good fit with Datong, whose surveillance capabilities are well documented. Partnering the two could give it a nice breadth of offerings to security agencies. If anyone has a view on this, why not post a comment below.

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