Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

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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 7/6/2012

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Markets have been extremely volatile in recent days due to a combination of ratings agency downgrades, dodgy economic signs and a view by some investors (this one included) that the worse things get from a macro perspective, the more likely it will be that Central Banks introduce further quantitative easing.

 

This brings to mind something that I have been meaning to mention for a while – I often get queries from people about “what my X month price target for XYZ stock is”. The simple truth is that nobody, except perhaps a market maker in the most illiquid of stocks, has a clue about what price a stock will be trading at tomorrow, let alone in a few months. In a world where we cannot rely on meteorologists to call tomorrow’s weather with 100% accuracy, it would be ill-advised to have that degree of confidence in someone who pontificates on the equity markets! For the record, whenever I express a ‘price target’ for a company, this is my estimate of the underlying equity value of the company, as opposed to a target I see it hitting in any specific timeframe. This is especially true in the current environment, where markets oscillate violently between ‘risk-on’ and ‘risk-off’. All I can do is stick to my central thesis for this year, which I wrote back in December, and which I see no reason to change, given how my thesis, shown below, has played out so far:

 

Looking ahead to [2012], I see no grounds to assume that the macro situation will be materially different to that which we saw in 2011. Sclerotic growth across the leading Western economies, limited credit availability, rising unemployment, political uncertainty and austerity are all likely to be key themes over the coming 12 months. Added to the mix is likely to be a pronounced deterioration in the Chinese economy. I am gravely concerned at the rise in economic nationalism and see further policy incoherence at a European level as countries pull in different directions. However, my sense is that the euro will survive, given that its failure would lead to a deep and prolonged depression on a scale not seen for close to a century. That said, its survival will come at the expense of a weaker euro as monetary policy here is loosened to ensure its survival (given the lack of political consensus on how to fix the issue, I don’t see a solution that doesn’t involve some form of quantitative easing).

 

For me there are five key tactics to mitigate against this pressure:

 

  1. Choose firms with strong balance sheets
  2. Choose defensives over cyclicals
  3. Choose firms with significant exposure to markets outside of the Eurozone
  4. Hedge against inflationary pressures / political risk
  5. Choose firms with attractive and well-covered dividends.

 

Moving on to corporate news, Dragon Oil, which I traded in-and-out of earlier this year, announced a $200m share buyback. Opinions vary on this move. Steve Markus, who I have great respect for, and who is a must-follow on Twitter, said he: “would rather have the cash!” I wonder if more shareholder value would have been delivered had Dragon cast an eye at some of the financially constrained smallcaps (particularly some of the ones you can find on AIM) that are trading at bargain basement prices. Another Irish listed oil stock, Tullow Oil, reported a chunky (31m of net pay) oil find offshore Côte d’Ivoire.

 

(Disclaimer: I am a shareholder in Ryanair plc) We had a lot of news from the airline sector. Aer Lingus released its latest traffic statistics this morning. These were unambiguously good numbers, with load factors +2.9ppt and flown passengers +2.4ppt. I was particularly impressed by the 12.7% rise in long-haul (transatlantic) passengers, a factor of the 10.5% increase in RPKs. Another Irish airline reporting a rise in passenger numbers was Ryanair, which revealed a 5% yoy increase to 7.51m in May, bringing Ryanair’s total number of passengers carried over the past 12 months to 76.6m.

 

In other airline sector news, it was reported today that Kerry Airport’s revenues fell 40% last year. Credit is due to local management, who, demonstrating the county’s well-earned (I may be showing my Cork bias here!) reputation for parsimony cut administration costs by an admirable 35% in response.  Some months ago I wrote of the need for airports in the south and west of Ireland to consolidate, and even after the government’s decision to cease funding for Galway and Sligo Airports I wonder if they’ll be the last to see their government support pulled. Indeed, in this regard I was interested to also read today that Spain is to at least partially close 30 of its 47 State run airports.

 

In the construction space, Grafton put Irish DIY chain Atlantic Homecare into examinership. This is a smart move by management as it should allow it to close underperforming stores and save on the rent bill.

 

(Disclaimer: I am a shareholder in France Telecom plc and Independent News & Media plc) In the TMT sector, France Telecom’s unions were unsuccessful in their moves to force a dividend cut. However, I fear that this may prove to be round one in this battle, given the potential for increased political interference in the company, a concern I’ve previously noted.  In other TMT sector news, it was confirmed that Dermot Desmond has increased his stake in Independent News & Media ahead of tomorrow’s AGM. With yet another INM non-exec confirming their resignation, it will be interesting to see what new faces are co-opted to fill the gaps on the board after a wave of recent departures.

Written by Philip O'Sullivan

June 7, 2012 at 7:38 pm

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 9/5/2012

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Since my last update markets have been rocky on the back of election results in France and Greece in particular. Notwithstanding this present volatility, however, I don’t see this as a game-changer, given that Hollande was the front-runner for the French presidency for quite some time before the election, while Greece has for so long been anything but well-behaved that the election of a large number of cranks to its parliament is unlikely to result in any deviation from the Hellenic Republic’s recent record when it comes to compliance with sound economic policies. What the pullback in the market means for me, if anything, is that some of the stocks I was looking to buy are now more attractively priced, but more on this anon.

 

(Disclaimer: I am a shareholder in CRH plc) We got an interim management statement this morning from CRH. I, and indeed all of the brokers whose preview notes I saw ahead of this announcement, had expected the company to guide that H1 EBITDA would increase compared to year-earlier levels on the back of improving trends in North America and the benefits of cost take-out programmes. In the event, the company is guiding “overall EBITDA in the less significant first half of the year to be close to last year’s level”. While the firm is sticking with its “overall like-for-like sales growth in 2012 and a year of progress for CRH” full-year guidance, I think this is a disappointing statement in light of more upbeat releases from peers in recent times. Other points of note within the statement include: (i) Regional performance as expected, with “a firmer tone in construction markets in the United States” and a weaker economic backdrop in Europe; and (ii) Development spend appears somewhat underwhelming – CRH said it spent €230m on 13 acquisitions and investments in the year to date. This compares with the €186m spent in H12011. Given CRH’s strong balance sheet, I would have hoped that the company would have stepped up its development spend more significantly by now. Overall, I see little in this statement to get enthusiastic about.

 

Elsewhere, United Drug issued its H1 numbers this morning. Going into it I had expected the group to have faced headwinds due to the impact of healthcare cutbacks, in the event the group unveiled a robust performance, achieving both topline growth and an impressive (8%) increase in earnings per share. Management is sticking to its full-year guidance of 4-8% growth in EPS, but given the H1 performance I suspect the risks to United Drug’s numbers lie to the upside.

 

Tullow Oil saw its share price close up over 3% yesterday on the back of a chunky oil discovery in Kenya. The company’s strike rate when it comes to finding new resources is to my knowledge unparalleled in the industry, and  is a testament to the outstanding team built around exploration director Angus McCoss.

 

(Disclaimer: I am a shareholder in BP plc) Speaking of oil stocks, I followed through on my recent commitment to add to my sterling denominated assets and I doubled my position in BP at 420p yesterday. While I appreciate that the oil price is under pressure at this time, for me I think there is a hell of a lot of downside risk priced into BP at these levels (just under 6x PE), while the prospective dividend yield of 5.4% is particularly attractive relative to the poor returns presently available from traditional ‘income assets’.

 

One of my Twitter ‘followers’ asked me if I was concerned about the FX risk after I loaded up on BP shares yesterday. I replied that I was bearish on the euro both in the short-term (due to the market’s nervousness around France, Greece and Ireland) and the long-term (due to growing policy incoherence at the EU level as more and more of the architects of the present strategy are being rejected at the ballot box). For this reason I’ve been buying exposure to sterling both through equities and by moving cash from euro into sterling.

 

(Disclaimer: I am a shareholder in RBS plc) Following its recent Q1 results, RBS CEO Stephen Hester gave an interview that contained a few interesting nuggets. I have to say I’m really getting a sense that the bank has turned the corner, as illustrated by some of Hester’s comments in that clip.

 

(Disclaimer: I am a shareholder in France Telecom plc) In the telco space, Mexican billionaire Carlos Slim’s America Movil bid to raise its stake in Holland’s KPN. With Hutchison Whampoa reportedly prowling round Ireland’s eircom, not long after it bought Orange Austria from France Telecom, who also sold Orange Suisse to private equity firm Apax, this pick-up in M&A activity is presumably bullish for sector valuations. France Telecom is trading at a small discount to my valuation on the company, and I am monitoring the share price closely with a view to exiting the position. Hopefully these developments mean that I can escape from it sooner rather than later!

 

In the macro space, the Adam Smith Institute, which is one of my favourite think tanks, happened upon this great chart which illustrates that Ireland is not the only country in Europe where many politicians and media commentators talk of ‘austerity’, while in reality government spending is in fact little changed compared to the past couple of years.

Written by Philip O'Sullivan

May 9, 2012 at 7:36 am

Market Musings 8/4/2012

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This blog has been quiet in recent days after my wife quite rightly insisted that we take advantage of the unusually good weather here in Ireland and head to the seaside for a short break. In addition to sunburn, one of the other things I got from the break was that the lack of internet connectivity where we were meant that I could spend a bit of time thinking about investing tactics, more of which anon.

 

Before we get down to that, let’s catch up on what has grabbed my attention in recent days. Steve Baines, who is a must-follow on Twitter if you don’t already follow him, highlighted that a shortage of rigs is delaying planned drilling activity in East Africa. This may well be affecting one or more of the Irish businesses with a presence in the region, such as Tullow Oil, Cove Energy and Aminex. Speaking of the energy sector, one theme I’ve droned on about on this blog for some time is the step up in M&A activity within the space. Proactive Investors put together an interesting piece on how the North Sea is a hotbed of activity in this regard. On that note, I have been meaning to do quite a bit of work on Xcite Energy in particular, which is a favourite of some members of the wider ‘Twitterati and blogging community’. If any of you think there’s a more intriguing North Sea prospect that I should take a look at first, please post about it in the comments section below.

 

I was interested to see that Bank of America-Merrill Lynch has upgraded cider maker C&C to ‘buy’, citing long-term growth potential in new markets, including the USA, and its valuation as key attractions. Mind you, brokers like to upgrade C&C before the summer – if the weather’s hot C&C makes out like a bandit and the broker looks like a genius, and if the weather’s bad, the broker has a ready made excuse if the shares don’t perform. However, I’m sure this has nothing to do with the timing of the BoA-ML upgrade.

 

In terms of investing tactics, in between burning things on the barbecue and gorging on Easter Eggs I found time to reflect on my trading history, and the lessons I’ve gleaned from it, this weekend. I decided mainly to focus on the losses, because many of my ‘wins’ have come from times when the markets have been rising and it’s dangerous to try to discern the extent to which I ‘won’ because of where I specifically chose to place my chips and the contribution made by rising markets more generally. Also, focusing one’s attention on investment successes opens the door to hubris and all the potential pitfalls that brings. My reflections gave rise to several key learnings, namely:

 

Do your homework – In terms of destruction of value, the greatest concentration of losses in my portfolio stems from the Irish financials. I can only say that these losses are simply down to Neanderthal stupidity on my behalf. During the Celtic Tiger years, I watched as my bank shares soared in line with the economy. When the wheels came off it, I found myself severely lacking in terms of my understanding of just how exactly banks operate. However, despite this major gap in my knowledge set, I lazily decided to outsource this to others, and elected to take heed of bullish commentary about the prospects of a ‘soft landing’ for the Irish economy and also the banks’ capacity to absorb losses. Had I known then what I know now, I would have understood that even (in hindsight) conservative assumptions on losses on their domestic loanbooks would have seen the Irish banks’ capital base massively eroded, and this would have signaled loud and clear that I had to get out of them ASAP. As I say, I can blame nobody other than myself for this. Since then I have sought to build my own detailed models on companies to understand fully their financials. This exercise is in part manifested in the ‘Case Studies’ section of this website. This has imposed considerable discipline on my investing style, and prevented some of the kneejerk trades that I might otherwise have made.

 

Invest in what you know – A few weeks ago a dear American friend invited me to meet her parents, who were holidaying in Ireland. On learning that I had worked as a stockbroker before, her father discussed some of the shares in his portfolio with me. While I was unfamiliar with the ones he mentioned – I focus my attention on UK and Irish equities primarily – what impressed me was his deep understanding of the companies he is a shareholder in. This was mainly driven by the fact that many of the shares he owns are ones in companies located near to where he lives. As he outlined the range of products a manufacturing company he holds makes, I was reminded of two of Warren Buffett’s quotes – the first being to “never invest in a business you cannot understand“, the second (and I’m deliberately chopping off the end of it) being: “I never buy anything unless I can fill out on a piece of paper my reasons”. While my past experience of covering a range of industries from luxury goods (Waterford Wedgwood) to recruitment (CPL Resources), media (INM, UTV) and transport (ICG) to name but four of the sectors I covered while working as an equity research analyst means that I’ve been lucky enough to have gained exposure to plenty of industries, this advice certainly holds true for me also. I generally steer clear of pharma and biotech stocks (what I know about the science underpinning many of their products could probably fit on the back of a postage stamp!), while my near-Luddite status when it comes to technology means that I seldom venture into that sector. And how have I learned this? Mainly by losing money in stocks (that I still hold) such as Datalex and Datong.

 

Don’t overestimate yourself – This goes back to the hubris issue I mentioned above. While some financial and economic commentators I’ve encountered both on- and off-line like to pretend they know it all, the reality is that if they did, they wouldn’t be spending their time pontificating on blogs. Certainly if I was as good an investor as I’d like to be, I would be living off my profits in the Cayman Islands!

 

Sometimes bad things happen to good people – In addition to trades that are mistimed, misjudged and misguided, there will always be some trades that blow up for factors one couldn’t be reasonably expected to foresee. My heavy losses to date on PetroNeft have been due (chiefly) to technical issues with oil extraction in Western Siberia. And my BP shares nosedived after Macondo – another event I couldn’t have forecast. Such is life. In ‘The Prince’ Machiavelli advised that: “If an injury has to be done to a man it should be so severe that his vengeance need not be feared“. Investors should modify that line and ensure that they’re never so financially exposed to a company that if something goes horribly wrong that it will do them severe damage.

 

Anyways, the above are just some of the things I reflected on while I was in County Wicklow over the weekend. They are not, of course, meant to be an exhaustive toolkit for investors, but certainly some of the reflections will be incorporated into my trading tactics over the coming months. If you’ve any similar pointers that you’ve picked up over the years, I’d love to hear them.

Written by Philip O'Sullivan

April 8, 2012 at 6:17 pm

Posted in Market Musings

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Market Musings 27/03/2012

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It’s good to have a wall of positive newsflow to report for a change – let’s see what’s been cheering me up on the markets since my last update.

 

(Disclaimer: I am a shareholder in Ryanair plc) In the transport sector, I was pleased to see a strong trading update from easyJet yesterday. The low cost carrier now sees a H1 loss of “between £110 million and £120 million compared with the previous expectation of a pre-tax loss of £140 million to £160 million”. There are two reasons for this improved guidance. Firstly, management sees yields rising 10%, versus the previous expectation of an “upper single digits” increase. This has been helped by a number of competitors having exited the market, a theme I have highlighted before. The second factor is that ex-fuel costs have risen by less than expected (+1.5% versus guidance of +3%), helped by benign weather and good cost management. In terms of the read-through for Ryanair, this is all very positive. Ryanair is similarly well placed to exploit the demise of a number of competitors (Spain, where Spanair ceased trading recently, is Ryanair’s biggest market, while the carrier brought forward the opening of a new base at Budapest to exploit Malev’s closure, for example). On the cost side, there is every reason to assume that Ryanair has benefited from the same positive weather effects. Following Ryanair’s strong Q3 results in January I noticed that a number of brokers had pitched their FY12 estimates above the carrier’s revised net income guidance of €480m. In my model I’ve pitched for net income of €492m. Easyjet’s update appears to vindicate that stance.

 

This Thursday will see the release of FY 2011 results from IBRC – the former Anglo Irish Bank. I will be attending its results presentation, and will be interested to see if management’s targets for the company have changed since its last update. You can read my views from the H1 2011 results presentation here. If you’ve any questions – within reason (!) – that you’d like me to put to management, please post them in the comments section below.

 

In the oil space, Tullow Oil saw its shares climb 6.6% yesterday following news of a chunky (>20m net pay) oil find in Kenya. After its amazing success in Ghana and Uganda, might lightning strike a third time for this emerging oil giant? Elsewhere in the oil sector, services group Kentz saw its shares rise nearly 7% yesterday on the back of strong results. I was impressed to see Kentz’s backlog increase by 50% in 2011 to US$2,401m, from the US$1,603m seen at the end of 2010. So, like many of its clients, it appears that Kentz has plenty of fuel in the tank.

 

In the agri sector, Continental Farmers Group reported its full-year results. Their broker, Davy, says CFG’s in-line results were “an excellent achievement“, given the slump in potato prices in Ukraine. While I am attracted to CFG due to the long-term fundamentals around farming, I would want to see a sustained improvement in its cash generation before I’d look to invest in the company.

Written by Philip O'Sullivan

March 27, 2012 at 8:20 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 5/2/2012

with 2 comments

It’s the calm before the storm as we’ve a seriously busy week ahead in terms of scheduled corporate news in both the UK and Ireland. Let’s recap on what’s been happening while I have a spare moment!

 

(Disclaimer: I am a shareholder in Ryanair plc) As had been widely expected, Hungary’s Malev ceased operations early on Friday. Ryanair illustrated perfectly the flexibility in its business model by bringing forward the opening of a new base at Budapest to exploit the new gap in the market. In other news, Ryanair also issued an open letter to Aer Lingus warning that it would resist any attempts by AERL to top up the IASS pension fund over and above previously disclosed levels. In a final piece of Ryanair related newsflow, the airline announced that the number of passengers it carried in January was -6% yoy, which is broadly in line with expectations. The fact that load factors were flat yoy at 71% to me illustrates that good sense underpinning Ryanair’s decision to ground 80 aircraft (nearly 30% of its fleet) over the winter.

 

In the energy sector, there was good news for Tullow, which finally inked a PSA with the Ugandan government. Dragon Oil was also the subject of scrutiny by some of the Dublin brokers, with Davy raising its NAV estimate by 7% to 678p, while Goodbody recently upped its total risked NAV derived price target on the Turkmenistan based oil producer to £8.15. Its share price closed at £5.16 on Friday, and for the sake of full disclosure it’s a stock that an investment fund I advise is contemplating adding to its portfolio.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) I was interested to read that Dermot Desmond has increased his stake in INM to 5.75%. I have a small position in INM and wonder if this is shaping up to be a special situation deserving of more in-depth analysis to see if it’s worth buying more shares in the company. Finding the time to do such an analysis is of course easier said than done!

 

Elsewhere in the TMT space, I was disappointed to read that the amount of VC funding raised by Irish technology companies fell by 11.5% last year.

 

In the blogosphere, Wexboy did up an interesting piece on Tanzanite miner Richland Resources. Richard Beddard wrote a thought-provoking article on N Brown (regular readers will know that my preference for some time has been to avoid UK consumer facing stocks, with only Marston’s proving to be the exception to the rule for over a year now). John Kingham wrote a detailed piece on Smith & Nephew that served to remind me of how little attention I give to the pharma sector! Contrarian UK made a very welcome return to blogging by doing a detailed write-up on message board favourite Xcite Energy.

 

Finally, looking ahead, the main scheduled Irish corporate news this week are FY results from Elan & Smurfit Kappa Group (both on Wednesday) along with AGMs for United Drug (Tuesday) and Greencore (Thursday), which will no doubt provide plenty of food for thought.

Written by Philip O'Sullivan

February 5, 2012 at 7:21 pm

Market Musings 7/11/11

with 2 comments

The past couple of days have been rather busy due to college and work commitments, which from this blog’s perspective is a pity in that I wasn’t able to provide the sort of timely analysis that I normally try to do. We’ve seen a lot of troubling economic developments around the world, but against that we’re also seeing some positive signs from corporates and from the Sage of Omaha. Let’s drill down into what’s been happening.

 

(Disclaimer: I am a shareholder in Ryanair plc) Ryanair reported a very good set of numbers earlier today. Encouragingly, the group raised its full-year net income forecast by 10% to €440m. The market gave all of this the thumbs up, with the shares finishing up 5.1% in Dublin this evening. You can see an interview with Ryanair CEO Michael O’Leary here. Overall, it is a testament to the resilience of Ryanair’s business model that it is able to churn out a performance like this in such an extraordinarily challenging market. Elsewhere in the airline sector, Aer Lingus released decent traffic stats this morning, with good capacity management seeing load factors rise 2.1ppt in October.

 

Greencore’s share price jumped nearly 10% just before the close on Friday, leading me to wonder aloud if the weekend papers were going to contain any major news on the stock. In the event, the Sunday Times said that the fund behind the recent approach for the company looks to be US private equity firm Clayton Dubilier & Rice, which counts former Tesco supremo Sir Terry Leahy among its team. One to keep an eye on.

 

(Disclaimer: I am a shareholder in Total Produce) Staying with the food space, John McElligott posted a great blog earlier today on the UK retailers and also Irish headquartered fruit and vegetable distributor Total Produce. I’m a big fan of TOT for some of the reasons John touches on – a very defensive business model, high cash generation, a strong balance sheet and enormous scope for the group to expand through acquisition in the extremely fragmented European produce distribution space (where TOT is the biggest player despite having only 5% market share!).

 

An interesting development – Warren Buffett invested $23.9 billion in the third quarter, the most in at least 15 years.

 

To return to a regular theme on this blog – if you want to know how grim things are getting in China, read this.

 

Europe’s woes continue to rumble on. Earlier today Morgan Stanley downgraded European equities to underweight, citing deteriorating growth, falling corporate margins, poor policy responses and leading indicators. The only Irish stocks in Morgan Stanley’s European model portfolio are Tullow Oil (rated overweight by MS) and Ryanair (underweight). Italy has come under extreme pressure today, with political instability not helping matters. Summing up the gravity of the situation, Nordea in a note released earlier today warned that:

 

The printing press at the ECB increasingly seems to be the only weapon left to save the Euro area from meeting its Waterloo in Rome.



And finally, on a lighter note, Twitter has provided some good chuckles in recent days, such as:

 

From @Makrotrader in Sweden: “I really really like Tzatziki. But I will boycott that as well. It is over. No more Greece. Good thing they don´t have good wines

 

and from @drmarkperry in Ireland: “I wouldn’t buy stock in Groupon with an 80% group discount coupon

Market Musings 24/8/11

with 6 comments

In my last blog I wrote about how this was going to be a busy week for corporate newsflow, so it’s no surprise that I focus mainly on this today, however, I also have some interesting (to me anyway!) nuggets on State transport policy, QE3 and gold to share with you.

 

(Disclaimer: I’m a shareholder in Glanbia plc) I was delighted to see Glanbia report “excellent” results earlier today. So was the market, with the shares up over 5% at one stage. The company has raised its full-year guidance to 18-20% growth (constant FX) in adjusted EPS from the previous 11-13%. Regular readers will know that it’s one I have been positive on for a while. The conference call threw up some interesting pieces of information. Six of the top ten sports nutrition supplements listed on the leading US website are made by the group, while  in the premix ingredients space Glanbia is no. 3 globally after DSM and US private company Fortitech. Both of those achievements are a vindication of the strategy the group has embarked upon for some years now to diversify away from its commodity business roots. In terms of M&A activity, Glanbia says that it is looking to buy ingredients companies in Asia and customer facing nutritional companies in the US and Europe. All of which sounds good to me!

 

We also got results from FBD this morning which reveal a solid operating performance and news of a JV with Farmers Business Developments for its hotels and leisure business. This JV is a positive development, which will take investor attention away from the non-operating business and allow it to focus more on its excellent insurance unit.

 

The third Irish company to report today was Tullow Oil. The market reaction was positive, but I do note the downward revisions to production (90 – 94 kbopd to 82 – 84 kbopd). Obviously the main value in Tullow is in its exploration and future production upside, but I would prefer to see production picking up to help with the funding of its ambitious plans to develop its new resources.

 

(Disclaimer: I’m a shareholder in Uniq plc) Greencore announced a 91% take-up by shareholders of its rights issue to fund the takeover of Uniq. This is a positive development for the company, and the high take-up was particularly welcome given the recent market turmoil. The challenge now for Greencore’s management team is to integrate the businesses, take costs out and do all it can to prevent the multiples from squeezing margins lower. All of which is easier said than done! This is a stock I have traded successfully in the past and one that remains on the watchlist. I’ll wait and see how the integration and cost take-out goes over the next while.

 

(Disclaimer: I’m a shareholder in Ryanair plc). Ryanair announced the ending of its flights from Dublin to both Kerry and Cork yesterday, which the Irish Examiner’s Niamh Hennessy has a good overview of here. This prompted a lot of debate on various social media websites, and I offer these perspectives to people wondering about the decision:

 

  1. Ryanair has been redeploying aircraft across its network to more profitable routes for years. While there was talk that Cork-Dublin was a “very profitable” route for the carrier, I don’t buy that given the competitive prices (relative to rail etc.) Ryanair charged. Also, on the cost side, Ireland’s main airports are among the most expensive in Europe in terms of landing charges.
  2. Landing charges, a small population and/or a weak domestic economy mean that most of Ireland’s airports hold little attraction for carriers outside of the two domestic airlines, Aer Lingus and Ryanair (I count Aer Arann within AERL, given the importance to it of its relationship with its bigger peer). You can see what I mean by looking at how few carriers outside of AERL and RYA operate year-round scheduled services at Cork, Kerry, Shannon and Ireland West-Knock, which are the main airports outside of Dublin.
  3. Investment in road and rail infrastructure during the Tiger years meant that the Cork-Dublin route did not save a whole lot of time relative to other modes of transport, which limited pricing power on the route.
  4. Some people felt that Kerry Airport should have been an attractive market for Ryanair. This doesn’t stand up to scrutiny, considering that (i) The airport only attracted 424k passengers in the 14 months to the end of 2010; and (ii) If flights from Kerry to Ireland’s major population centre require a taxpayer funded PSO subsidy, there just isn’t the demand for the route.
  5. If Ireland didn’t have so many airports, economies of scale could allow for reduced landing charges at the ones kept open, which would stimulate more interest from carriers. It makes no sense that 4 of the 6 counties in Munster (population 1.2m) have airports. Similarly, it makes no sense that every single county on the west coast of Ireland (save for Leitrim, which only has a 2.5km long coastline) has an airport. Basic economics suggests that airports in the south and west of Ireland will be consolidating over the medium term.
  6. Before I am accused of being a Jackeen with no understanding of the needs of rural Ireland, I should mention that I’m a Cork-born Munster Rugby fanatic.

 

Moneyweek has a beginners guide to investing in gold, which some of you might find of use. Staying with precious metals, here’s two interesting charts – Dow to silver and Dow to gold ratio charts.

 

Fisher Investments provide some useful insights into QE3 here which it posted ahead of the start of the Fed’s Jackson Hole meeting.

 

Finally, a lesson for Ireland. One of our biggest listed companies, Smurfit Kappa Group, has seen Moody’s upgrade its outlook on its debt to “positive” since my last blog. Progress in terms of addressing its debt position was the main driver behind this improved stance, and there’s a lesson there for Irish policymakers, not least given that the State is rated as “junk”. We could solve a lot our financing woes at a stroke by living within our means, rather than continuing to bequeath an obscene national debt mountain onto future generations.

Written by Philip O'Sullivan

August 24, 2011 at 11:11 am

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