Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Travis Perkins

Market Musings 27/7/2012

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Blogging has been extremely light as I’m in the final stages of an internship as part of my MBA studies. However, newsflow has been anything but light! So, this blog represents a catch-up on what has caught my eye whenever I’ve been able to find the time to track what’s been happening in the markets this week.


(Disclaimer: I am a shareholder in Allied Irish Banks plc and PTSB plc) There was a lot of news out of the Irish financials this week. AIB released its interim results this morning. Overall, AIB has made good progress on deleveraging and deposits, but more work is needed on margins and costs. To take those in turn, I was encouraged to see that the LDR has improved by 13 percentage points to 125% since the start of the year, helped by €3bn of deposit inflows and non-core loanbook disposals. However, the net interest margin has worsened to 1.24% (pre-ELG) from the 1.36% seen in H12011. Hence, it was no surprise to hear management guide that it will raise mortgage rates in the autumn. As things stand, AIB is currently loss-making before even taking provisions into account, and the group will have to address this through a combination of rate hikes and cost take-out measures. Elsewhere,  PTSB revealed further details on its restructuring plans, but given its limited new lending ability and shrinking presence in the market I can’t see it being anything other than a marginal player for quite some time to come.


In the energy sector Providence Resources released an exciting update in which it revealed that there may be up to 1.6bn barrels of oil at its Barryroe Field, offshore Cork. Obviously it’s early days yet with this discovery, but it’s a stock that merits taking a look at. Once I’ve completed my internship it’s on my list of stocks to look at in more detail. Elsewhere, its Irish peer Tullow Oil released H1 results that contained few surprises given the level of detail provided in its recent trading update.


(Disclaimer: I am a shareholder in Marston’s plc) UK pub group Marston’s released a solid trading update, which revealed a satisfactory performance despite the recent wet weather.


Sticking with food and beverage stocks, Glanbia announced the $60m acquisition of a US beverage firm, which looks a perfect fit for its nutrition operations. This is another example of Glanbia’s successful forward integration strategy, which looks well placed to deliver strong returns over time.


Another Irish firm on the M&A prowl was United Drug, which acquired a German headquartered contract sales outsourcing firm for €35m, which will fit well within its existing Sales, Marketing & Medical division. An EV/Sales multiple of 0.23x is undemanding for a firm like this, so it looks a good deal to me.


(Disclaimer: I am a shareholder in Ryanair plc) Low-cost carrier Easyjet upped its PBT guidance, despite euro weakness, to a range of 280-300m. Prior to that the consensus was £272m. I assume the read-through from this for Ryanair, which reports numbers on Monday, is positive given that the euro weakness is near-term bullish for it (it generates a third of revenues from the UK, while it hedges its fuel and related USD exposures).


In the construction space, UK builders merchant group Travis Perkins’ interim results revealed a slowing performance in Q2. Management doesn’t see growth returning until 2014, so it’s not a sector I see a pressing need to gain exposure to anytime soon.


(Disclaimer: I am a shareholder in France Telecom plc) There was a lot of news in the telecoms sector. Spain’s Telefonica followed the lead of KPN and cut its dividend. France Telecom released its interim results, in which the firm reiterated its full-year cashflow targets, which is somewhat reassuring. France Telecom is a stock I’ve been negative on for some time and which I am looking to exit in the near future due to its inflexible cost base, intense competitive pressures in its home market and my fear that it will cut its dividend.


In the media space UTV announced that it has broadened its partnership with the English Football Association to broadcast rights around the FA Cup, Charity Shield and selected England internationals.


Ireland’s Central Statistics Office released its latest data on Irish house prices, which provide few grounds for optimism. While a lot of the recent media commentary has focused on monthly moves, I prefer to look at prices on an annual basis, given that month-on-month moves can be distorted by the small number of transactions happening in the market at this time. The latest data show that Irish house prices declined by 14.4% year-on-year in June 2012. This is a fall of a greater magnitude than what we saw in June 2011 (-12.9% yoy) and June 2010 (-12.4% yoy). The picture in Dublin is even worse (prices -16.4% yoy in June 2012) which is particularly concerning given that the capital will lead the eventual recovery in Irish house prices (due to much tighter supply and it being the economic heart of the country). Overall, I reaffirm my view from last month, namely that I don’t see any obvious catalyst for a sustained improvement in Irish property prices in the near term.

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 14/12/11

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(Disclaimer: I am a shareholder in CRH plc) There was a good bit of newsflow around CRH and its peers in recent days. In the US, Martin Marietta made a $5bn hostile bid for Vulcan Materials.  If the deal goes through, on paper the combined entity will have 15% of the US aggregates market, compared with 6% for its nearest competitor, CRH. However, in reality I expect forced sales from the combined entity to satisfy regulatory concerns, which will present opportunities for CRH to add to its portfolio of assets in North America at very attractive prices (given the paucity of alternative buyers in the market for heavyside assets). In terms of the implications of the deal for CRH’s valuation, I was interested to read a note from Merrill Lynch which said if the Martin Marietta-Vulcan bid multiple is applied to CRH’s US aggregates unit, the rest of CRH is trading on only 2x EV/EBITDA…”or, looked at alternatively, CRH’s share price should be €25 if we apply this 20x multiple in any sum of the parts calculation”. At the time of writing CRH’s share price is €13.35.


This morning Paddy Power announced that it is entering the North American market after signing a B2B deal with the British Columbia Lottery Corporation. This is an excellent deal that highlights once more Paddy Power’s superior infrastructure – it follows another B2B deal with France’s PMU and showcases Paddy Power’s evolution into a business with both B2B and B2C offerings. As cash-strapped governments the world over relax gambling rules in an effort to find new streams of taxable revenue, this will present a clear structural growth opportunity for Paddy Power to win more deals of this kind.


We saw a couple of updates from firms exposed to the UK housing market this week. Carpetright’s H1 results looked reasonably OK (all things considered, given the difficult UK consumer backdrop) to me. There were no major surprises in the statement, with like-for-like revenues -2.4% while the dividend was suspended (as previously flagged). Elsewhere, Travis Perkins released a very solid trading update, in which management said the group is on track to meet profit and net debt targets for the full-year.


(Disclaimer: I am a shareholder in Datalex plc) Following the recent positive news of a resolution of its litigation with Flight Centre, Datalex was upgraded to ‘Outperform’ at Davy. The company issued a stock exchange release which said it would book a $2m exceptional item regarding this settlement. I was pleased to see the firm also state in the release that its EBITDA and net cash guidance for FY11 remains unchanged.


(Disclaimer: I am a shareholder in Ryanair plc) Staying in the broader travel sector, this is more bad news for tour operators – Ryanair is to open a new base at Palma.


Stockbroker Brewin Dolphin published a list of 15 stocks for own for the next 4 years (i.e. 15 for 2015).


Speaking of stockbroker recommendations, Dolmen upped its price target on Cove Energy to 200p/share. That’s 100% upside from where the stock was trading earlier today!


(Disclaimer: I am a shareholder in Irish Continental Group plc) And speaking of broker notes that caught my eye, I saw an excellent 30 page note from Merrion’s Gerard Moore today on ICG – “Cash Machine”. For income investors, this part is particularly interesting:


“Even in a stressed scenario we estimate ICG could comfortably pay a dividend of €1 (Yield 7%) and in our core scenario ICG could increase the dividend to €1.23 in FY 12 (Yield 9%) and €1.98 in FY 13 (Yield 14%), while remaining debt free“.


Switching to macro news, economist and Bloomberg Brief contributor Michael McDonough has been doing a great job in charting the decline in the Chinese housing market. This chart captures the trend in house prices there. And as we’ve seen in Ireland, such moves bode ill for China’s financial institutions and the wider economy.


Greece’s January – November budget deficit? €20.52bn. Ireland’s budget deficit for the same period? €21.37bn

Market Musings 24/11/11

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I was thinking that I should have something special for this entry, which is my 100th blog post, but in the event the Eurozone has provided all the fireworks.


If you want proof of how the Eurozone crisis has spread from the periphery to the so-called “safe” core, look at yesterday’s German bund auction, described by Monument’s Ostwald as “a complete and utter disaster. If Germany can’t find buyers for its 10 year issuance, what hope has the rest of the currency union? I don’t know about the rest of you, but I prefer being invested in financially strong blue-chips with strong franchises and also commodities over Euro government debt. Staying with the now-troubled “core”, Fitch warned yesterday that its AAA rating on France could be at risk. Elsewhere in the Eurozone, Greece’s Central Bank warns that the country is on its last chance to stay in the single currency. On the plus side, when the Greeks bring back the drachma at least we can all enjoy cheap holidays over there!


Speaking of commodities – a lot of people have been saying to me that they think gold is in bubble territory. For a contrarian view, this tweet from Goldcore is interesting: “Lack of coverage of gold in [the] media is symptomatic of bull market in its infancy as animal spirits & public participation remain negligible“.


My bearish view on consumer facing stocks in the UK means that high quality companies such as Grafton, Wolseley (which I’ve traded before), SIG and Travis Perkins that would ordinarily be contenders for inclusion in my fund aren’t getting a look-in these days. However, one report I recently came across highlights the long-term structural driver for builders’ merchants, namely, that 55% of UK housing was built before 1970 (see Table 2.4 on page 54). Once I’m satisfied that we’re at the low point in the cycle, I will look to buy some exposure to this sector.


Some other interesting data points – the FT had an interesting report on UK university endowments, which showed that Cambridge has built up a £4.0bn fund, Oxford a £3.3bn one, while the remaining 163 other UK universities ‘only’ have £2.0bn. I assume, given the propensity for short-termism in Ireland’s public sector and political establishment, that none of our universities have established the type of meaningful reserves that would propel them into the top tier internationally. Yet the talking heads here persist with the myth that Ireland has a ‘world-class’ education system, despite, for example, our failure to produce a single Nobel Prize winner in any scientific field since Ernest Walton in 1951. Or the fact that no Irish university ranks in the top 200 globally, as per the Academic Ranking of World Universities 2011.


And another data point – I also read in the FT that UK households now dump ‘only’ 7.2m tonnes of food waste annually, 13% below 2006/07 levels, as hard-pressed families embrace thrift.


(Disclaimer: I am a shareholder in Playtech plc) Turning to corporate newsflow, Playtech continues to be a source of extreme annoyance for me. Yesterday it announced a £100m placing, plans for more M&A/jv activity and a new dividend policy. Ivor Jones at Numis makes some good comments about it here which sums up my views about all of this. I also note that the CEO of William Hill, one of Playtech’s largest customers (if not the largest) has been blogging about his sense of annoyance towards Playtech’s CEO. My patience with this company is close to exhaustion.


(Disclaimer: I am a shareholder in PetroNeft plc) I was pleased to see Peel Hunt initiate coverage on PetroNeft with a “Buy” recommendation and 54p price target (150% upside to this morning’s price!). However, near term performance from the Siberian oil producer, as I’ve noted before, will hinge on the results from its hydraulic fracturing programme at the Lineynoye oil field.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) I am intrigued by news that Smurfit has invested in a packaging plant in Russia. Details remain sketchy but I assume that this investment – if confirmed – will not materially alter its debt-reduction plans.

Written by Philip O'Sullivan

November 24, 2011 at 10:18 am

Market Musings 9/10/11

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


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


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


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


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


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

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