Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

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Market Musings 7/7/2012

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(Disclaimer: I am a shareholder in Ryanair plc) Since my last update, two of Aer Lingus’ shareholders came out to say that they will not be supporting Ryanair’s approach for the company. Etihad, which owns just under 3% of the carrier, said “we are not selling“, pledging its support for management, while elsewhere investment fund Matterley, which has a circa €1m stake in Aer Lingus, said Ryanair’s indicated bid level “still undervalues the asset base of the company, before taking account of the valuable slots at Heathrow”, adding “accordingly, the Fund has retained a significant investment”. While these are interesting developments in terms of providing more colour on investors’ intentions, the market is giving us a clear signal on its perception of Ryanair’s chances of success with the shares closing yesterday at €1.07 – some 18% below the price Ryanair says it would be prepared to pay for Aer Lingus.


Staying with Irish plcs, investment fund TVC Holdings issued an update at its AGM yesterday. Management note the wide (29%) discount the shares are trading at relative to its NAV, which I feel is unwarranted given its impressive investment record in recent years. Looking ahead, cash-rich TVC says it believes “there are restructuring opportunities in Ireland and the UK where companies with excessive debt need to raise new equity at attractive terms for new investors”. In terms of opportunities within Ireland, I wonder if TVC will look to leverage its experience in the media sector (it is UTV Media’s largest shareholder with an 18% stake) to help out some of the more geared media players here?


(Disclaimer: I am a shareholder in Datalex plc) Speaking of Irish TMT stocks, I know that I’ve been pushing the bull case for Datalex for a while now, but even I was taken aback by a piece in last weekend’s Sunday Times. The newspaper interviewed United Continental CEO Jeff Smisek, and in the interview he had a go at what he termed the ‘oligopoly GDSs’ such as Amadeus, saying they had “underinvested in their product, as oligopolies always do”. He went on to say: “Our technology is more potent than theirs and we can’t wait for them to catch up”. And who helps United with its online shopping and reservations worldwide? Step forward Ireland’s Datalex.


(Disclaimer: I am a shareholder in RBS plc) There was a lot of news around RBS in recent days. Despite recent setbacks, the bank reaffirmed its target of exiting the APS programme by the end of this year. In theory this will save RBS £500m annually in APS fees, however, the costs of the capital implications of an APS exit are trickier to quantify.  Elsewhere, Bloomberg ran an interesting piece on RBS’ efforts to shrink its non-core loanbook. This is an often overlooked part of the group’s story – since 2008 RBS’ non-core assets have shrunk by 70%, or £238bn, which is an impressive performance given the difficult backdrop. However, offloading the remaining 30% is likely to prove to be more a challenge in the near term given how much of it is concentrated in markets where this is a relative paucity of buyers such as Ireland (Ulster Bank’s share of RBS’ non-core loanbook was £14.4bn at the end of 2011). Overall, I continue to monitor RBS closely but I see no reason, given the present uncertainty around it, to increase my exposure to it just yet.


Ireland’s so-called ‘bad bank’ NAMA said that it no longer expects to make a profit. Given this, shall we say, “tempering of expectations”, can we still be confident of IBRC’s (Anglo Irish Bank & Irish Nationwide) guidance on how much it will ultimately cost the taxpayer?


(Disclaimer: I am a shareholder in BP plc) Bloomberg yesterday reported that BP’s Russian partners are only willing to buy half of its stake in the TNK-BP venture. Given how much trouble BP has had as a 50% shareholder in that venture, I cannot see a scenario where BP is happy to reduce its holding to a minority one. With Gulf of Mexico related payments nearing their end, a successful departure from TNK-BP would equip BP with the financial firepower to consider significant acquisitions elsewhere.


(Disclaimer: I am a shareholder in Abbey and ICG) In the blogosphere, Richard Beddard covered the current focus on income stocks. Given the present uncertainty in the markets, it is unsurprising to see people touting income over the naked pursuit of capital gains at this time.  What I found particularly interesting in his post was the comment about companies’ reluctance to invest. This is a definite concern of mine at present – we’ve seen many cash-rich Irish plcs, including Abbey and ICG, launch share buybacks in recent times – and while this is a ‘low risk’ way of flattering earnings per share, I wonder would shareholders’ interests be better served in the long-run through the money being used to support the expansion of those businesses. In the case of Abbey, distressed landbanks of housing are hardly difficult to find in this market – and Abbey operates across three countries (here, the UK and the Czech Republic). For ICG, might it consider a move for something like the Isle of Man Steam Packet Company, which was taken over by the banks (for which it is presumably a non-core asset!) last year? Or given how many PE deals took place during the boom years in the port infrastructure space, particularly in the UK, might there be some distressed assets there worth picking up?


Staying with the blogosphere, John Kingham wrote a good piece asking: “When is a good time to invest in the stock market?“. His words are worth sharing with any retail investors you know – the tragedy of the market is that often it’s the private investor who is last to buy into the rally and first to sell at the trough.


And finally, also in the blogosphere, the excellent Kelpie Capital presents the bear case for UK housing.

Written by Philip O'Sullivan

July 7, 2012 at 9:14 am

Market Musings 15/5/2012

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Turmoil in Euroland and elsewhere continues to overshadow the markets, which is a pity given that today has brought some encouraging updates from a number of plcs who presumably now wish they’d brought forward or delayed their results date!


Distribution and business support services group DCC issued its FY2012 results earlier today. The results contained few surprises, with  operating profits of €185m coming in towards the higher end of the guided range of €175-190m. Free cash flow, which DCC defines as operating cash flow after net capex, interest and tax, came in at €146.0m, well ahead of the €123.3m out-turn in the previous year. After taking acquisition spend of €168.1m and dividend payments of €63.2m into account, net debt rose from €45m to €128m. Despite this increase DCC’s net debt is still only 0.5x EBITDA, which highlights the financial strength of the group. Across its business units the performance was mixed, as can be seen here:


  • Energy (45% of group profits in FY12) – operating profits fell 38% yoy as a mild winter resulted in abnormally low demand for heating oil (DCC is the biggest distributor of home heating oil in the UK and Ireland). Total heating related volumes declined by circa 15% on a like for like basis compared to the prior year (which had an abnormally cold winter, thus exacerbating the base effects).
  • SerCom (29% of group profits) – operating profits rose 17% due to a combination of organic growth and the contribution from acquisitions.
  • Healthcare (13% of group profits) – underlying operating profits rose 5%, helped by what appears to be strong growth in sales into UK hospitals.
  • Environmental (8% of group profits) – profits rose 25% due to contributions from acquisitions.
  • Food (5% of group profits) – profits fell 7% due to the loss of a chilled distribution contract.


In terms of the outlook, DCC expects growth of 20% in both operating profit and EPS in the current financial year, with the main driver of this being an assumption of ‘normal’ winter weather. Based on the share price at the time of writing (€19.74) this puts the group trading on just under 10.1x forward earnings – which to me appears too cheap for a group with: (i) leading market positions in its key segments; (ii) a very strong balance sheet with ample scope to support earnings-enhancing acquisitions; (iii) a track record of generating consistently high returns; (iv) relatively low risk due to its diversification both by geography and industry into what are mostly defensive areas.


Elsewhere, Irish investment vehicle TVC Holdings also released its full-year results today. The results themselves were good, but updating the valuation to reflect the current situation underlines the value in this stock here. Based on where the shares closed at this evening (85c), this means the group is capitalised at €85.9m. Stripping out TVC’s cash and German bonds (€72.6m) gives a residual enterprise value for the group of €13.3m. For this you get: (i) unquoted equity investments valued at €11.7m; and (ii) an 18% shareholding in UTV Media plc which based on the current share price (£1.32) and exchange rates is worth €28.5m. Put another way, TVC’s NAV per share of €1.14 is significantly above its current market price.  What I would say is that while the ‘quantitative value’ in TVC is quite clear, given the discount it trades at relative to its ‘book value’, this makes no allowance for the ‘qualitative value’ of its excellent management team, which has a phenomenal track record when it comes to picking winners (TVC has previously sold significant stakes in Norkom, Changingworlds and Havok, to name but three successful exits, for many multiples of what it paid for them).


In the UK pub sector, Enterprise Inns released its interim results today. The group, which operates 6,143 pubs, said that average income per pub rose 3.2% in the first 6 months of its financial year, with like-for-like revenues in the substantive estate +1.5%. In terms of the outlook, like many of its quoted peers it sees Euro 2012, The Royal Jubilee and the Olympics as potentially supportive for trading. So, pretty comforting read-through for the wider sector.


From a macro perspective, PIMCO sees China’s growth rate at a 13 year low, Moody’s turned more negative on Italian banks, while as one wag puts it, having founded democracy, Greece likes it so much that it’s going to run its second set of elections in a month. I imagine that central bankers this evening are thinking about launching another bout of quantitative easing to hide these problems for a while!


And finally, did you know that Somali pirates cost the global economy almost $7bn last year?

Written by Philip O'Sullivan

May 15, 2012 at 5:23 pm

Market Musings 4/3/2012

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Big share deals and Ireland Inc have provided the most interest since my last market update. Let’s see what the lessons from these are.


(Disclaimer: I am a shareholder in Ryanair plc) To kick off with the transport sector, Ryanair announced that it bought back 9.5m of its own shares at a cost of €39m. This is particularly interesting in light of comments made on the carrier’s conference call post its Q3 results that it could spend up to €200m on share buybacks. This should help to prop up the share price against the pressure of the recent spike in oil prices. I hope to do a detailed piece on Ryanair over the coming days.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc) To switch from the purchase of a big block of shares to a sale of one, private equity houses Cinven and CVC announced that they sold a 9.7% stake in Smurfit Kappa Group for €158m. The two retain an 8.2% position which is subject to a lock-in agreement until the release of SKG’s Q1 results in May – which I can’t help but wonder if this will be seen as a near-term overhang on the stock – time will tell.


(Disclaimer: I am a shareholder in Irish Continental Group plc) These big share transactions bring to mind a lot of the other stakes in Irish plcs that could change hands this year. The Irish government has signaled a willingness to sell its 25.1% stake in Aer Lingus. One51 has said that it will sell non-core assets, which I assume includes its circa 12% stake in Irish Continental Group. How long will baked goods company Aryzta hold on to its 71.4% shareholding in agri group Origin Enterprises plc for? Given the recent boardroom dispute at UTV Media, what are the intentions of its 18% shareholder and fellow Irish plc TVC Holdings? We could be in for an interesting few months ahead.


Switching to Ireland Inc, the IMF struck a relatively positive note about the country’s prospects. However, the fiscal crisis continues to drag on. Exchequer Returns data for the first two months of the year revealed that the year to date deficit stands at €2.07bn versus €1.95bn in the same period in 2011. The tax take increased from €4.9bn to €6.3bn, but voted expenditure (the part of spending that the government has full discretion over) rose by €474m – this is a disappointing performance. Non-voted expenditure ballooned from €580m to €1.6bn, let by a massive increase in interest costs on the national debt (€848m vs only €61m) and a €250m loan to the insurance compensation fund. The interest costs serve as a reminder of the consequence of this government’s (and its predecessor’s) failure to close the fiscal jaws been revenue and spending. It is astonishing, given the unemployment and emigration crises Ireland is facing, that the government spent 10x on national debt interest costs (€848m) in the first 2 months of 2012 than it did on the Department of Jobs, Enterprise & Innovation (€84.5m).


Finally, in the blogosphere Neonomic did up a good piece on Home Retail Group, which owns Argos and Homebase, that’s worth a read.

Written by Philip O'Sullivan

March 4, 2012 at 10:23 am

Market Musings 24/2/2012

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It’s been a very hectic few days in terms of newsflow. Let’s recap on what’s been happening:


To kick off with the food sector, Kerry Group issued solid FY11 results, with earnings coming in towards the top end of its guided range. Management sees a healthy 7-10% growth in earnings in 2012, but I wouldn’t be surprised if that forecast is augmented by acquisition activity over the coming months.


(Disclaimer: I am a shareholder in RBS plc) The financial sector also featured heavily in recent days. Bloomberg posted a very bullish piece on the outlook for Dublin’s commercial real estate sector, which has positive read-through for the domestic banks here along with RBS and, let’s not forget, NAMA. Speaking of RBS, the bank issued full-year results yesterday that had a few interesting pointers for Ireland Inc. Total impairments at its Ulster Bank unit fell 4% yoy in 2011, although mortgage impairments were nearly 2x 2010 levels last year (£570m vs £294m). In terms of the operating performance, the NIM declined by 7bps to 1.77%, which is not bad, while operating profits were 10% lower at £360m. While I suspect that impairments for the sector have peaked in Ireland, there will definitely be a big change in the mix of impairments in 2012 as residential mortgage books deteriorate further due to the underlying economic fundamentals here.


(Disclaimer: I am a shareholder in CRH plc) Turning to the construction sector, CRH announced a number of management changes at its US operations. This is an important development, as (i) it shows the management cadre’s experience and strength in depth; which (ii) offsets the effect of departures to rivals e.g. Summit Materials. CRH also announced that Nicky Hartery will take over as its next Chairman in May. Elsewhere, as expected Readymix agreed to a takeover by its biggest shareholder, Cemex.


(Disclaimer: I have an indirect shareholding in Dragon Oil) In the energy space, Dragon Oil issued FY11 results that contained few surprises given the detailed guidance provided by management in the run-up to them. Elsewhere, Shell offered $1.6bn or £1.95/share for Cove Energy, which should mean a nice windfall for a lot of Irish private investors. I’ve written before about how I believe one of the themes in the energy space this year will be cash-rich large caps picking up small caps, and Shell’s move for Cove continues a narrative that also features Dragon Oil’s approach for Bowleven and Premier Oil’s acquisition of EnCore.


(Disclaimer: I am a shareholder in Irish Continental Group plc) I was interested to see that HSBC is forecasting significant growth in Irish trade volumes over the coming 10-15 years. Should this come to pass, a key beneficiary of it will be ICG, which is a major player in both LoLo (containers) and RoRo (trucks) freight here.


(Disclaimer: I am a shareholder in France Telecom plc, Independent News & Media plc and Datong plc) Switching to the TMT sector, I was unsurprised to read that France Telecom has cut its dividend. It’s a stock I really need to do some work on to see if there’s merit in keeping it in my portfolio or not. Elsewhere, Datong issued a statement at its AGM yesterday that revealed good progress on cost takeout and optimism on sales growth for the full-year. On the other side of the world, Independent News & Media’s Australasian associate APN posted in-line underlying profits for FY11. There were some boardroom ructions at UTV Media, which I suspect could put the company into play especially given how concentrated the share register is. The firm’s biggest shareholder, TVC Holdings, posted this response to yesterday’s developments.


In the blogosphere, John Kingham did up an interesting piece on Centaur Media, with a focus on its intangible assets. Speaking of intangibles, Lewis did a good article on Communisis that’s well worth a read. He also wrote a piece on Haynes Publishing that’s worth checking out. Wexboy completed (at least for now!) his impressive Great Irish Share Valuation Project.

Market Musings 8/2/2012

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We’ve seen a deluge of corporate newsflow and interesting valuation pointers in the past 72 hours. Let’s run through what’s been happening on a sector-by-sector basis.


(Disclaimer: I am a shareholder in Smurfit Kappa Group) To kick off with the packaging sector, SKG delivered a slew of positive news this morning. In its Q4 results, management revealed that the group generated EBITDA of €245m, which is at the top of the range of estimates heading into the results. The company also announced that it is to reinstate the dividend, while it is also looking to extend its debt maturities. These are all very encouraging steps, and follow on from recent positive newsflow in the sector (both M&A and price increases).


(Disclaimer: I am a shareholder in AIB plc, Bank of Ireland plc, Irish Life & Permanent plc) Irish financial shares have registered very strong performances of late. While it is true that a number of large overseas investors are bulled up on an Irish recovery trade, I cannot see any justification for AIB to be capitalised at circa €50bn – more than double its peak during the Celtic Tiger years. Investors looking to play this ‘recovery trade’ should note that AIB’s locally quoted peers Bank of Ireland (market cap €4.3bn) and IL&P (market cap €2.1bn) are far more modestly valued (at least in relative terms!). Of the three, Bank of Ireland is by far my preferred stock, and for the sake of full disclosure I quintupled my position in it before Christmas at 8c/share. I’m not entirely sure that I’d be chasing it at these levels (14c) now though.


Continuing the recent run of positive newsflow from the Irish flag carrier, Aer Lingus issued strong traffic stats for January. Excluding its Regional operations, it carried 5.8% more passengers last month than it did a year ago.


Cemex indicated that it is willing to increase its possible offer for the minority of Readymix it doesn’t own by 14% to 25c.


Speaking of smallcaps, Bloxham made a few interesting valuation observations on TVCH, which has flashed up (rightly, in my view) on a lot of value investors’ screens. Elsewhere in the TMT sector DMGT issued an IMS that revealed still-challenging advertising conditions in the UK, the effect of which are being mostly offset by cover price increases.


In the healthcare sector United Drug released a positive trading update, in which management said it expected earnings to grow between 4 and 8% this year, which is a very good performance considering the difficult macro conditions and pressures on public budgets.


(Disclaimer: I am a shareholder in BP plc) BP released a good set of Q4 numbers, with profits ($5bn, +14% yoy) beating expectations ($4.88bn). The company hiked the dividend by 14%, which is very welcome. While Macondo is still clouding the outlook for the group somewhat, my gut feeling is that the risks on that front lie to the upside, given how the process has played out to date (relatively benign official reports, many of BP’s partners agreeing to pay some of the damages etc.). As an aside, Steve Baines, who is one of the more astute market watchers on Twitter, noted that the “planned 16% increase in BP capex to $22bn in FY12 shows that the oil service stocks are the place to be”. Which is why I have had Kentz on my watchlist for some time.


In the drink space, MillerCoors acquired the #3 US cider player. This follows C&C’s recent purchase of the #2 US cider player, Hornsby’s. While cider’s share of the US LAD market is tiny (circa 0.5%), in my view C&C’s €20m investment is a very worthwhile punt – a very modest increase in cider’s market share could deliver very impressive returns on investment.


A lot of journalists and politicians these days love to exclaim: Tax the rich! However, in Britain the top 5% of earners already contribute 47% of income tax. The top 1% pay 28%. How much more tax should these people be paying exactly?


The Irish government said that it will be culling the number of town councils here as part of a shake-up of local government. It is simply preposterous that Co. Tipperary has 2 county councils and 7 town councils – an average of 1 council for every 17,500 people!


And finally, in the blogosphere, Lewis posted up the second half of his very detailed analysis of Dairy Crest Group which I’d encourage you to have  a read of.

Market Musings 10/11/11

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Italy may have dominated the front pages since my last update, but we’ve seen quite a good bit of other newsflow as well, particularly on the corporate side.


The latest chapter in the European sovereign debt crisis is being written at this time, with Italian 10 year bond yields having spiked above 7% yesterday. I don’t propose to dwell much on that specific event given the wall of coverage that it has received elsewhere, but given how many questions I’m being asked about the implications of all of this, I thought I should sketch it out. In simple terms, as sovereign bonds come under pressure, this affects European banks’ holdings of government debt. As European banks book losses on their trading positions, this reduces their capital. Which increases the amount of capital that European banks need to raise. But with so much uncertainty out there, private sector involvement in capital raising is likely to be limited. Which means that governments (at least in Europe) have to put in this extra capital. Which puts public finances under more pressure, which puts sovereign bonds under more pressure, which in turn puts banks’ trading books under more pressure… you get the picture. There are signs that the crisis is spreading, with Spanish-German 10 year bond spreads hitting a euro-era record and rumours intensifying around a sovereign downgrade for France.


(Disclaimer: I am a shareholder in Trinity Mirror plc) I was pleased to see a solid trading update from Trinity Mirror this morning. While advertising revenues remain under pressure (hardly surprising given the UK macro picture), circulation revenues are being buoyed by the demise of the News of the World. Net net, management is guiding a “performance marginally ahead of the top end of the current range of market expectations in 2011”.


(Disclaimer: I am a shareholder in Smurfit Kappa Group plc and Playtech plc) Rounding up yesterday’s corporate newsflow, Grafton released a trading update in which it revealed a further moderation in sales in the UK and Ireland, which should come as no surprise given the weak consumer backdrop. This was also a theme of an update from one of Grafton’s peers, SIG, which announced that it sees sales in the UK and Ireland declining next year. Another stock that updated the market yesterday was Smurfit Kappa Group. Going into the results I was nervous about the wide EBITDA consensus range, but in the event EBITDA came in at the high end of this, so my concerns were unwarranted. Smurfit Kappa reaffirmed its year-end net debt target of €2.85bn, which is a good result. I like Smurfit a lot due to the potential upside accruing to shareholders from its ongoing deleveraging, but obviously its share price performance in the near-term will be driven more by macro considerations. Playtech released strong Q3 results in which management expressed confidence on the full year outlook.


With so many people concerned about debt at this time, one stock worth bearing in mind is TVC, which yesterday announced that it is sitting on cash and near-cash assets of €73.0m. It also unveiled a c. 3% increase in NAV in H1 to €1.08/share. In terms of the valuation, at the time of writing TVC’s share price is 75c, which is in-line with net cash per share of 72c. So for a premium of 3c a share (equivalent to €3m) you get an investment portfolio comprising listed and unlisted investments (valued at €36m at end-September) at a discount of around 90%.

Written by Philip O'Sullivan

November 10, 2011 at 11:38 am

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