Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Posts Tagged ‘Trinity Mirror

Market Musings 10/9/2012

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This is a bit of a hotchpotch of what has been catching my eye over the past few days.

 

To kick off with construction, Abbey announced the results of the mandatory offer from Gallagher Holdings. The latter has raised its stake in the housebuilder by 10.7ppt to 72.6%. This is not enough to force a compulsory acquisition of the balance of the shares, so the stock will retain its listing. In the run up to the deadline, I had struggled about what decision to take about my own holding in the company. While the bid from Gallagher represented a nice exit price on a stock I purchased for only €4.60 a share, it was pitched at a disappointingly wide discount to NAV. In the end, I elected to take the cash, on the grounds that I didn’t want to stick around in a stock that has now arguably moved from ‘quite illiquid’ to ‘extremely illiquid’ (!), which makes it unappealing to many institutional investors. However, I may well re-enter the sector in the not too distant future given that the long-term drivers of growth are very much intact (a very old housing stock, net inward migration, severe pressure on housing in the South-East of England).

 

In the food sector, Investec argues that Premier Foods faces ‘death or glory’ by 2014. Elsewhere, NCB issued very different (in tone) reports on Aryzta and its majority-owned associate, Origin Enterprises. On Origin, NCB argues that weather and FX should provide a tailwind to earnings, while on Aryzta, NCB makes a persuasive argument that it may not hit its 400 cent earnings target for 2013.

 

(Disclaimer: I am a shareholder in Harvey Nash plc) In the recruitment space, SThree released an interim management statement that revealed slowing growth. On an annual basis its gross profits rose 6% in Q3 2012 (in constant currency terms) of its financial year (i.e. to end-August), down from +15% in Q1 and +9% in Q2. Drilling down into the numbers we see it has experienced weakness in both the UK & Ireland and ICT, with other areas performing more resiliently. The slowdown in the headline growth rate was, unsurprisingly, explained by “the difficult macro economic backdrop”, but SThree’s resilient overall performance highlights once more the importance at this time of choosing recruitment stocks that offer diversification (both by industry segment and geographic), an attractive dividend and a strong balance sheet. This is what attracted me to recently buy into one of its peers, Harvey Nash. I hope to find the time to research all of the stocks in the sector that fit this bill over the next while.

 

(Disclaimer: I am a shareholder in Bank of Ireland plc and RBS plc) There were a few items of note in the financials space. I saw a very bullish MarketWatch piece on Bank of Ireland, which served as a reminder that while a lot of the domestic commentary is ‘doom and gloom’ oriented, many international observers are bulled up on Ireland Inc (Franklin Templeton’s bold Irish sovereign debt move is a good example of this, as is this favourable coverage from CNBC). In other sector news, RBS is planning to shut down its precious metals trading unit, while it has also ceased commodities research. The FT also reported that it is nearing a Libor settlement with US and UK authorities, which would remove another legacy overhang from the group, which remains on my watch list. Finally, I offloaded my second biggest holding, Standard Life, which has had a great run of late and is no longer (in my view) in ‘cheap’ territory.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) I was pleased to see that new Trinity Mirror CEO Simon Fox has been set very demanding bonus targets based on the share price performance of the group. It is good to see a remuneration committee flex its muscles in this regard, especially in a way that ensures investors’ and management’s interests are very highly aligned.

 

In the blogosphere, John Kingham says: “When I look at BT I see a company and an investment that screams mediocrity“.

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Written by Philip O'Sullivan

September 10, 2012 at 2:40 pm

Johnston Press (JPR.L) – Negative Equity

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As everyone who invested in Irish property over the past decade or so knows, equity is the difference between the value of your total assets and the value of your total liabilities. Another thing that every Irish property owner knows is that while the ‘value’ of your total assets can often be subject to wild swings either to the upside or downside, liabilities are much stickier. And as it is with property, so goes the traditional print media space, where investors have seen accountants significantly write down once extremely valuable newspaper assets, while debt levels have proven immune to such accounting adjustments.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc and Independent News & Media plc) I have previously profiled two newspaper groups with a presence in the UK and Ireland, Trinity Mirror and Independent News & Media, in detail. In both cases, concerns around debt levels and extremely challenging (due to both cyclical – the economy – and structural – the threat of new media) market conditions have been to the fore. While the economy remains a headwind, both have made significant progress in improving their balance sheets. Trinity Mirror is the exemplar in this regard, cutting net debt by a third between FY09 and FY11 (to £201m), without recourse to its shareholders, while over the same period its net assets have risen by 38% to £675m. Over the same period INM has cut its underlying net debt by 26% to €427m (its movement in net assets is not particularly meaningful due to the impact of the deconsolidation of its Australasian business and other disposals).

 

Today I look at one of their peers, Johnston Press (JPR), which has faced similar balance sheet and economic pressures in recent years. The group publishes 13 daily newspapers, ‘more than 230’ weekly newspapers, ‘glossy monthly lifestyle magazines’ and 223 local websites in the UK and Ireland. Its flagship brands are The Scotsman and the Yorkshire Post, while Irish followers of this blog will be familiar with titles such as the Leinster Leader and Kilkenny People.

 

It has faced what can only be described as savage pressure on revenues due to the recession. Between 2007 and 2011 its total advertising revenues declined by 47% to £231m. All categories have been impacted by this, with employment advertising -75%, property -62%, motors -49%, ‘other classified’ -26%, display -24% and Ireland -63% over that period. Revenue from newspaper sales has held up much better, falling only 7% to £96m, while over the same period its very profitable contract printing business has seen revenues fall 23%.

 

In total, the group saw revenues fall £234m over the 4 years to 2011. Half of this was offset through reduced operating expenses, but the remainder hit the bottom line, with operating profits falling over 60% over the period to £65m. The diminished profit outlook has seen JPR book impairments against its intangibles (chiefly, the print assets) totaling £720m since the start of 2006.

 

This brings us back to the housing analogy of the opening paragraph. Due mainly to the impairments noted above, the book value of JPR’s assets has fallen by nearly half – from £1.9bn to just under £1.0bn – since the end of 2007. At the same time, the company’s level of gearing has risen from 98% in FY07 to 126% at the end of last year. It should be noted that net debt, in absolute terms, has been falling (FY07: £671m, FY11: £359m), helped by share sales totaling £207m over the past 4 years. Despite that decline, at the end of last year net debt stood at 4.1x EBITDA, which is an uncomfortably high multiple.

 

Earlier this year the group agreed the amendment and extension of its finance facilities until 30 September 2015. While this facility reduces the near-term risks around the group, it does not come cheap, as shown in this extract from JPR’s H112 results release:

 

The maximum cash margin in the case of the bank facilities is LIBOR plus 5.0% and in the case of the loan notes, a
cash interest coupon of up to 10.3%. In addition to the cash margin, a payment-in-kind (PIK) margin of a maximum
rate of 4.0% will accumulate and is payable at the end of the facility. If the loan facilities are fully repaid prior to
31 December 2014, the rate at which the PIK margin accrued throughout the period of the agreement will be
recalculated at a substantially reduced rate.

 

Looking through JPR’s accounts shows the diminished flexibility imposed on the group by its borrowings. Between 2009 and 2011 it generated some £227m in operating cash flows, but of this 37% went on interest payments and another 58% on repaying borrowings, loan notes and reducing the bank overdraft. This leaves very little for investment, and I was unsurprised to see capex average only £3m per annum over the period, down from an average of £40m per annum over the preceding 3 years. Given the ‘incentive’ to repay (or, as seems more likely, refinance) the facilities before the end of 2014, I would expect to see more of the same over the coming years. Which means no dividends (extremely unlikely in any event given the large stock of debt outstanding), no (meaningful, at least) acquisitions and limited resources (as I see it) for the group to effectively execute its digital-led strategy. On that note, while digital represents the great hope for traditional media, monetising it is proving a challenging task – in FY11 digital advertising contributed only £18.4m of JPR’s revenues, a rise of circa 20% on 2007 levels.

 

In terms of the valuation, at first glance Johnston Press appears very cheap, trading on less than 2x prospective earnings at its current share price (5.85 pence). However, it is important to note that the group comes with considerable net debt (£332m at the end of July) and a large pension deficit (£102m at the end of June). I ran a DCF valuation on the group using my usual 10% discount rate and applied a -2% terminal growth rate, which produced a negative equity value of -27.5 pence a share. However, it should be noted that this estimate is extremely susceptible to changes in the inputs – for example, every £10m move in the pension deficit moves my equity value by 1.6p. Excluding the pension deficit altogether (I always include it in my DCF calculations) produces a valuation of circa -11p a share. But if Johnston Press really has a negative equity value (in practice, zero, given that a share price can’t go below that!), then why is the share price at 5.85p and not closer to zero? I imagine that investors are betting on an eventual cyclical recovery in advertising, and I can understand why they would be making that bet – as I note above, while advertising revenue has effectively halved from the peak, newspaper sales has fallen by less than a tenth over the same time period, which to me indicates significant operating leverage that could accelerate debt paydown and transform the share price outlook if advertising was to stage a recovery.

 

Overall, my sense is this – if there is life in traditional print media (and I believe there is, hence why I’m long two stocks in the sector), Johnston Press represents a very high risk way of playing that theme. I feel that its hands are tied by its legacy debts, which limits the scope for investment, and there is a danger that equity investors could be significantly diluted (the firm has already agreed to issue warrants totaling 12.5% of its share capital to its lenders). Of course, were the outlook to improve, then the implied equity valuation would recover in tandem with that. However, at this time I see nothing in JPR to justify adding it to my portfolio either instead of or alongside my existing UK print media holding, Trinity Mirror. Both stocks are exposed to the same macro trends, but their balance sheet positions are fundamentally different – at the end of FY11, JPR’s net debt / EBITDA was 4.1x, while for Trinity Mirror it was just 1.6x. My thesis for some time, given the structural long-term decline that is underway in the print media sector, is that the financially strongest will be able to mitigate against a shrinking revenue pie with market share gains as weaker competitors close underperforming titles. Given that stance, I am happy to be a shareholder in the UK’s biggest regional press publisher, and not in the third biggest one.

Written by Philip O'Sullivan

September 9, 2012 at 6:02 pm

Market Musings 9/8/2012

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Blogging has been interrupted this week by coursework and the Olympics, which have seen some amazing performances from Team Ireland. We’ve also seen an amazing performance from Kerry Group, as detailed in this morning’s H1 results.

 

To kick things off, as noted above Kerry released strong interim results this morning. Despite the disruption and costs of its ‘1 Kerry’ business transformation and ‘Kerryconnect’ IT programmes, the group managed to lift trading margins to 8.25% in H12012 versus 8.06% in the same period last year. Ingredients delivered this improvement, with Consumer Foods holding its margin steady despite the consumer headwinds. Kerry now expects earnings to rise 8-12% this year, an improvement from previous guidance of 7-10% growth. Other items of note in the release include an improvement in operating cashflow (€116.7m in H112 versus €104.6m in H111), while the group completed a €20m ingredients acquisition in Malaysia in H1 and since the period end has also agreed to acquire other ingredients businesses in China and Australia, which highlights the growing importance of Asia-Pacific (now 16.5% of total ingredients revenue) to the group. While this is all positive stuff, my main concern around Kerry is its rating – taking the mid-point of its earnings guidance it is trading on circa 17x earnings, which is pretty punchy for a stock carrying €1.3bn in net debt. Kerry is not one for me at that sort of a multiple.

 

In the pharma space Elan Corporation announced a big setback for its Alzheimer’s drug, which will see it take a $117m charge against it. This could have profound consequences for the stock, with some analysts reckoning that Elan could be taken over.

 

(Disclaimer: I am a shareholder in BP plc) The ‘Value Perspective’ team at Schroders posted an interesting piece about BP that shows how a contrarian approach can often reap serious rewards. I have gradually built up my stake in BP over a number of years, and used the Macondo weakness as an opportunity to ‘average down’ on my in costs as part of that. My rationale back then was that the dip in BP’s market cap between its pre-Macondo highs and post-Macondo lows was far in excess than the ‘worst case’ scenarios being sketched about how much the Gulf of Mexico spill would cost the group, coupled with research that showed previous large spills (such as Exxon Valdez) ultimately cost a lot less than what had been feared. Clearly not a ‘risk free’ punt, but it shows that straying from the investor herd can be a very profitable strategy. It’s a similar logic to what led me into Trinity Mirror (see below) at a time when the received wisdom was that ‘all newspapers are doomed’, hence you could pick up its stock for half-nothing.

 

Staying with matters BP-related, DCC made another sensible bolt-on acquisition, acquiring the former’s LPG distribution business in Britain. It perfectly complements DCC’s existing operations in that market, adding 87k tonnes of bulk and cylinder LPG to the existing network of 190k tonnes, giving DCC 25% of the UK LPG distribution market according to analysis by Davy.

 

(Disclaimer: I am a shareholder in CRH plc) CRH confirmed that it is in talks that could lead to it significantly increasing its presence in the Indian cement market. CRH expanding in India makes perfect sense, given that its cement consumption per capita, at 178kg, is the lowest of the BRICS (Brazil: 311kg, Russia: 350kg, China: 1380kg, South Africa: 217kg). I noted some commentary to the effect that CRH has no BRICS experience, but this is absolute nonsense given that the group already has a presence in three of them – China, Russia and India.

 

In the transport sector Aer Lingus released weak traffic stats for July, bringing to an end a run of strong data. It will be interesting to see if this is just a blip or the start of a new trend. Elsewhere African LCC FastJet is making some impressive progress, as this piece shows (I strongly recommend you view the video accompanying it).

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the blogosphere Lewis has turned bullish on Trinity Mirror following last week’s strong interim results. Regular readers of this blog know I’ve been a bull on the stock for months, and it’s nice to see the thesis finally playing out – there’s a lesson there in terms of sticking to your guns in the absence of any ‘new’ information that might challenge a conviction.

 

To finish up, here are two good pieces that grabbed my attention this week – the first challenges the received wisdom about Thatcher’s policies towards Britain’s coal mines, the second explores Ireland’s craft beer revolution.

Written by Philip O'Sullivan

August 9, 2012 at 3:30 pm

Market Musings 4/8/2012

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The past week has been quite hectic, with two weddings and the deadline for completing a 200 page report for the company I’m on an internship with as part of my MBA studies to safely negotiate. Hence, blogging has been a necessary casualty of my lack of free time. So, what has been happening since my last update?

 

(Disclaimer: I am a shareholder in Ryanair plc) Ryanair released its Q1 results. These contained few surprises. The company is sticking to its FY net income guidance of a range of €400-440m which is reasonable in light of the early stage of its financial year. However, with the likes of Easyjet and Aer Lingus recently upping their forecasts, allied to Europe’s biggest LCC’s form for low-balling guidance (it upgraded its guidance twice in its last financial year) and healthy passenger numbers, I suspect the risks to Ryanair’s profits lie to the upside.

 

Elsewhere, as noted above Aer Lingus upgraded its FY earnings outlook in its interim results. Having previously said that 2012 profits “should match” the 2011 out-turn, it now says they will “at least match” last year’s performance. One aspect of the Aer Lingus results release that was particularly encouraging was the long haul performance – compared to the same period last year, in H1 2012 Aer Lingus’ long haul passenger numbers, load factors and yields all increased by 11.0%, 5.0% and 9.0% respectively. This is a magnificent performance given the tough economic backdrop and illustrates the success of Aer Lingus’ moves to leverage Dublin and Shannon, the only airports in Europe offering US pre-clearance, to win transatlantic customers whose journeys originated in other parts of Europe. This means that news of United Airlines terminating its Madrid-Dulles JV with Aer Lingus is not particularly concerning given that Aer Lingus clearly has sufficient demand to justify redeploying the Airbus A330 currently on the JV route to its own branded Ireland – North America routes.

 

(Disclaimer: I am a shareholder in BP plc) In the energy space BP released its interim results. Market reaction was extremely downbeat, but I am (perhaps foolishly?) taking a contrarian view to this and assuming that its run of disappointments means that management will either: (i) come up with shareholder-friendly goodies (a large buyback, chunkier dividends, sensible M&A) to revitalise the share price; or (ii) come under irresistible pressure from investors to unlock the value in the firm through a break-up of the company.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the TMT segment Trinity Mirror erupted this week, with its share price gaining circa 40%, helped by strong interim results. Regular readers of this blog will know that I’ve been an uber-bull on this name for a while, based on my view that it offers a compelling mix of: (i) Very strong cashflows; (ii) Substantial tangible asset backing; (iii) Rapid deleveraging facilitating a re-rating for the equity component of the EV; and (iv) An absurdly low (and unwarranted) valuation. I’m pleased to see that my central thesis is playing out, with the first six months of 2012 bringing a £60.5m reduction in its combined net debt and pension deficit, an amount equal to 75% of what TNI’s market cap stood at on Tuesday. The catapulting of its share price since then indicates that the market may be starting to wake up to this reality. I suspect the TNI story has a lot further to run – if you annualise the H1 earnings the stock is trading on a forward PE multiple of only 2.3x!

 

In the food sector Greencore issued an upbeat trading statement which revealed healthy underlying volume growth allied to management expressing confidence that it can meet full-year earnings expectations.

 

(Disclaimer: I am a shareholder in AIB plc and RBS plc) Switching to financials, I was surprised to read criticism of AIB’s announcement that it is to close a number of branches as part of its efforts to right-size its cost base. As its recent interim results showed, AIB is currently loss-making before you even take provisions into account – which is a clearly unsustainable position. Moreover, the vast majority of transactions these days are done using ATMs, cards and internet banking. Due to all of this, AIB (and indeed its domestic competitors) simply does not need as many branches as it did before.

 

Elsewhere, RBS issued an in-line set of interim results. While LIBOR, IT problems and a daft total nationalisation suggestion by elements within the British government have dominated headlines around the group, it is continuing to make impressive progress in terms of repairing its balance sheet. Investec’s Ian Gordon makes some good points around the numbers (and indeed the outlook for RBS) here. One aspect of the results that I found concerning was Ulster Bank’s impairments. RBS’ Irish unit saw impairments widen to £323m in Q2 2012 from £269m a year earlier, with mortgages to blame for this worsening trend. This has ominous read-through for the other banks operating in the Irish market.

 

(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) In the packaging space Smurfit posted another great set of results, with Q2 EBITDA of €255m coming in right at the top of the range of analyst expectations (€236-255m). Management reaffirmed its full-year EBITDA and net debt targets, but I suspect the risk to both is to the upside given that the two largest European packaging firms, Smurfit and DS Smith, have both recently announced chunky price increases.

 

(Disclaimer: I am a shareholder in Abbey plc) There was more good news for my portfolio from the construction sector, with Abbey’s majority shareholder, Charles Gallagher, making an offer to buy out the minority shareholders in the company. The price being offered isn’t exactly stellar, at 0.86x trailing book value, but it’s one I’m happy to accept given that it represents a 42% return on what I paid for the shares in 2009. If only the rest of my investments worked out so well!

Written by Philip O'Sullivan

August 4, 2012 at 8:21 am

Market Musings 24/7/2012

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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 29/6/2012

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It’s been an incredibly busy 48 hours since my last update. Let’s run through what’s been happening on a sector-by-sector basis.

 

(Disclaimer: I am a shareholder in Allied Irish Banks plc and Bank of Ireland plc) We saw a lot of news out of the Irish financials. Bank of Ireland issued a couple of updates. The first related to the Irish mortgage market, where the group revealed that its share of new lending has increased to 40%, while it did not indicate (emphasis) any change in the pace of arrears relative to its previously stated expectations. Its second update, released yesterday, brought confirmation that Bank of Ireland has completed its €10bn divestment programme within PCAR base case assumptions. This comes as no surprise (the group had previously disclosed that it was 97% of the way through this) but it is an incremental positive and reaffirms my previously expressed view that Bank of Ireland is doing an excellent job at managing the factors it has control over. Bank of Ireland’s main domestic competitor, AIB, released an AGM statement yesterday, the key points of which are: (i) Its non-core business is performing better than expected; (ii) The integration of EBS is going well; and (iii) AIB’s share of the mortgage market is now 35%. On the last point, adding in Bank of Ireland’s share noted above means that 75% of  Irish new mortgages are being issued by AIB and Bank of Ireland – so, essentially a duopoly market. Smallcap IFG’s AGM statement revealed a good start to the year for its core UK and Irish operations, while management said it is going to review its options post the sale of its international unit. Elsewhere, NAMA repaid another €2bn of bonds,  taking its total debt paydown in the past 2 years to circa €3.5bn. At the end of 2011 NAMA had €29.1bn of debt securities in issue, along with another €1.6bn of a subordinated equity instrument. Overnight we heard news of a ‘breakthrough‘ agreement on Ireland’s debt burden which may have significant effects on the banks here. However, I would echo the caution expressed by Constantin Gurdgiev here, namely “we cannot tell how positive it is yet”.

 

(Disclaimer: I am a shareholder in RBS plc) Switching to financials in other jurisdictions, the LIBOR investigation has had a significant impact on sector valuations in the UK. Also, the “Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger” quote on page 19 of the FSA’s report should have a significant impact on what people put in work emails in future! From my perspective, my UK bank sector exposure is limited to a small position in RBS, which had already become smaller on the back of its IT problems. Yesterday’s 11.5% slump threatens to push the share price below £2 for the first time since the 1-for-10 reverse share consolidation. I’m still positive on the stock on a longer-term perspective, and am monitoring its current difficulties closely with a view to gauging if the risk/reward justifies topping up my position – although clearly this is not something I envisage happening in the immediate future.

 

(Disclaimer: I am a shareholder in PetroNeft plc) This morning’s 2011 results from PetroNeft give me few grounds for optimism. While management say that “production levels have been stabilised”, at 2,200bopd presently output is still below the 2,300bopd reported in early April and the 3,000bopd achieved at the end of 2011. I also note management’s comments that: “we have initiated discussions with a range of strategic investors about possible farm-outs, long term off-take agreements and potential equity or asset investments which in the long term would strengthen the Group’s financial position”. This ties in with the revelation that Macquarie wishes to reduce its $30m available loan facility to PetroNeft by $7.5m, “however they are giving the Group time to work this out “. Overall my sense is that a solution to the challenges PTR faces will likely prove to be unfriendly to existing shareholders, but assuming I’m right perhaps this is already reflected in the price as I note that the shares have opened higher this morning.

 

In the food sector, Greencore made what it described as a ‘platform acquisition’ in the US, buying Schau for £11m, or around 0.5x annual revenues. It also revealed a new $50m contract, which assuming a 6% margin should lead to around $3m in extra operating profits on a full-year basis. Overall, Greencore’s US business continues to make progress, but it is still a marginal player in a huge market – I wonder would the capital the group has tied up here be better deployed in strengthening its strong position in the UK instead of trying to build a sizeable operation in the States. In other Irish food company news, Origin Enterprises released a fascinating presentation about its agronomy operations. I’m very bullish on the long-term outlook for this business, which is underpinned by rising food consumption across the world, the lifting of EU quotas and food security issues.

 

In the support services sector, CPL Resources released an upbeat trading statement, featuring the word “strong” no less than three times, which bodes well for Ireland Inc.

 

(Disclaimer: I am a shareholder in Trinity Mirror plc) In the media sector,  News International raised the cover price of The Sun newspaper, which could (emphasis) pave the way for Trinity Mirror to follow suit with its Daily Mirror title.

 

In the blogosphere Lewis took a look at Plastics Capital, which is not a name I’m too familiar with and based on his blog not one I wish to become more acquainted with anytime soon! Speaking of blogs, FT Alphaville posted up UCD Professor Karl Whelan’s Target2 presentation. I was particularly struck by slide 20 – Eurozone countries’ net balances with the Eurosystem.

 

Finally, John Kingham looks at how his top tips for 2012 have performed in the year to date – I will outline how mine have done over the weekend.

Market Musings 25/6/2012

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Written by Philip O'Sullivan

June 25, 2012 at 7:59 am

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