Liams Last Post : Elan ammend their trial, Irish Banks shareholders endure their own trial...

Liams Last Post Tuesday 15/12/09

 

Good Afternoon ,

 

The year is really now starting to Drag. Newsflow is incredibly light , the big news today was the news of the 'Modification to the Elan clinical trial being run with Transition Therapeutics. 9 deaths on the trial , none of course directly linked to the trial but 9 nonetheless , so the trial is modified to stop the two highest dose groups within the trial. Not good news... and a blow for the drug which was supposed to have a potentially benign safety profile.   We had ascribed a 10% chance of success for this drug providing a per share value of c.50c in our Elan SOTP of $7.33/share... obviously this will be 'Ammended' too now.

The FBD news of their increasing estimate of the cost of the flood claims impacted the stock yesterday , the investment case remains very valid despite the increased one off cost of claims so the market reacted somewhat more positively and thstock continued to claw back the losses of yesterday. Elan managed a rather stoic performance with the stock pnly down -2%

 

The long suffering holders of the irish financials today continued to watch their stocks move lower. AIB -7.5% , having recovered from its low of over -10% at one stage and Irish Life which also fell -4.5% drifted on no news.  Bank of Ireland only down -2.3% was an absolutely heroic performance.

 

Fyffes holders await the final signature on the EU banana regime duty change. Potentially very earnings accretive unless the lower duty is competed away. Given the sector track record , I see no reason to assume that the lower duty wont be competed away immediately but it might provide a filip to sentiment even for a short while..

 

Markets today .... little ado about nothing , opened , dropped , recovered touched positive territory in Europe and closed basically flat on yesterday.  London eased into the close to finish down -0.5% and the USA after a decline inthe US EMpire State manufacturing index is down -.17% aat 5pm

 

Have a good evening.

 

Liam

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

Tel.: 353-1-2404171

Mob:353-87-2313505

www.merrion-capital.com

Disclaimer www.merrion-capital.com/disclaimer.html

Merrion Stockbrokers Limited (registration no. 307878) is a limited liability company whose registered office is at Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland.

 

Liams Last Post : Quiet , Dubai relief and DCC deal the highlights

Good Afternoon ,

 

I was away for a couple of Days in Frankfurt. Always good to get out of Dublin these days and to find a world where there is a more optimistic view of the world in 2010 , a world where  everyone is not under the cosh of NAMA and a government that is faced with taking very tough decisions just to keep the show on the road.  THe perception from the Germans I spoke to towards Ireland was favourable and there was indeed a recognition as reflected nthe coverage of the likes of the FT that the Irish government has taken significant steps to address the economiy and the position we find ourselves in... 

 

Kingspan fell -3.3% despite the Friday bolt-on deal. The Deal highlights how Kingspans rapid reduction in net debt balances combined with a stabilisation in its sales run-rate allows management to restart considering acquisition opportunities we estimate that Kingspan has the capacity to invest 200m in acquisitions over the next two years.

 

The DCC deal was decent size and is earnings accretive by just over 1% this year and mearly 4% next year. I have to say that DCC under this management team seem just determined to deliver deal after deal in their chosen space. The de-emphasis of the Food and Healthcare businesses is evident to all and sundry now so one has to think that at some stage that these are likely to be disposed of. this acquisition of Brogans Holdings Ltd, a 447m litre oil distribution and fuel card business in Scotland and the north of England for cash consideration of 47.2m. Brogans operates 87 road tankers out of 15 locations and generated operating profits of 7.9m in the year to May 2009 (operating margin of 2.4%). The acquisition adds c.10% to DCC's existing volumes of c.4.5bn litres and increases its market share in the UK oil distribution market from 13% to 14%. The pre-synergy multiple of just under 6x historic operating profit looks attractive

 

The CEO of ICG last week sold 7.1% of his 16% stake in the company, which appears to have been purchased by Rokeby Investments Ltd, an investment company controlled by him , This news caused a stir on friday when it broke...but it sems like just moving stock around for tax purposes...

 

Overall Volumes thin now , THis year definitely over as far as the markets are concerned.  The Dubai bail out by Abu Dhabi was a surprise which took the pressure off markets to everyones relief.

 

Most markets range bound though and closed the day net up between 0.5% and 1% across he major markets.  Ireland was broadly flat on the day. The banks down , CRH up but Kingspan and Grafton still struggling .

 

  

Have a good evening

 

Liam

 

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Merrion Stockbrokers Limited (registration no. 307878)
is a limited liability company whose registered office is at
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Liams Last Post : Irish Financials as 'event driven value opportunities'... maybe getting there ...

Good Afternoon ,

 

A Messy miserable day for markets not helped by US economic data , a rather tepid reception to Ben Bernankes pronouncements last night which hardly took the market by surprise and the news of property Losses in Dubai and to crown it all the Downgrade of the credit rating of Greece.

  

Today Merrion have published a note on the Banks, updating our NAMA discount assumptions and the amounts required to bring the banks to an 8% equity Tier 1 ratio.  For AIB we are now forecasting a 35% NAMA discount and 27% for Bank of Ireland. It would appear that as we get closer to the NAMA event taking place that discretion and caution is guiding the behaviour of all the advisors involved and everyone is looking to protect themselves in terms of the valuations they are prepare to sign off on. So the earlier fears of NAMA simply overpaying are dissipating somewhat.  Clearly the Higher the discount , the higher the equity required to recapitalise the banks. The problem for the market has been to look at the scale of the recapitalisation required relative to the current market capitalisation and then shy away from the banks... in some cases the screeching of tyres as the potential investor has roared off into the distance has been obvious...

 

But I personally believe that times are getting very interesting now for anyone who is prepared to look for elusive 'EVENT DRIVE VALUE OPPORTUNITIES' and Bank of Ireland is potentially a very interesting story...

 

If you take the starting point that the support by the government in the form of preference shares is sufficient to meet regulatory capital requirements , then the only reason that the Bank would look to recapitalise with common equity is to free itself from government influence and to make itself more attractive to equity investors. 

 

We are approaching D-Day for NAMA which will provide certainty, the EU re-structuring is hardly likely to be that onerous for the banks especially when the experience of RBS is taken into account. So the obvious solution to the re-capitalisation of Bank of ireland would be for the Government to agree to under write an equity issue which would repay the Preference shares and protect the pre emption rights of existing shareholders. A similar scheme was already done with Lloyds earlier this year. 

 

I believe that investors are clever sophisticated people who like being presented with simple propositions and the Irish banks have had more variables than any sensible person would look at but over time the options are coalescing and there is a rising degree of certainty which can be priced by the market...

 

If the Government , once they get over the budget tomorrow and NAMA after that , see the light and I presume they will , then a mechanism whereby they underwrite the issue that pays them back could be a huge success... there is nothing like an issue which is already underwritten to create investor interest. The key here is the extent of the discount to the price that the issue takes place at.  It is our view that Bank of Ireland can earn 13%  post recapitalisation to 8% equity Tier 1 on a pre provision normalised profit level which is 36% lower than previous peak profits. This is attractive. 

 

AIB needs a massive injection of cash which we think is most probably in two tranches and requires more imagination....than looking at Bank of Ireland. 

 

I commend Sebastians note to you... definitely worth some quiet contemplation, especially if you are charged with looking for value and performance ....

 

The Easier play is of course Irish Life...but I think I have done this one to death recently... And there is FBD...roaringly cheap and not requiring any re-capitalisation... 

 

Plenty of value in the Irish financials.... and the smoke is clearing....Get your boots on... might not be time to wade in yet... but I sense an opportunity coming... 

 

 

Tomorrow we look forward to being fleeced in the budget... Can hardly wait ...

 

Have a good evening ,

 

Liam

 

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

Tel.: 353-1-2404171

Mob:353-87-2313505

www.merrion-capital.com

Disclaimer www.merrion-capital.com/disclaimer.html

Merrion Stockbrokers Limited (registration no. 307878) is a limited liability company whose registered office is at Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland.

 

 

 

 

Liams Last Post : Ryanair the debate of the day...Cyclicality upon us...

Good Afternoon ,

 

Market Strength from Friday did not carry over into Mondays trade and though there was little news , there was plenty of noteworthy stuff going on in Ireland with Merrion publishing a note on Ryanair , re-iterating our cautious view and the Hold recommendation , Another broker in Dublin , on the other hand also published a note on Ryanair today returning the stock to its conviction list for 2010. The other note followed the initiation by a UK broker last week with quite bullish assumptions. As one person said to me that their blues skies scenario is the central case.

 

I have to say I believe the John Mattimoe position and I agree with his view that Ryanair is transitioning to a cyclical company and that the issue is how much the market de-rates the multiple paid for a cyclical earnings

 

. I know that there is a battle of perceptions being waged in the share price which has been a relative basket case in terms of performance.  I think there is general agreement that the business is in transition....and that the only real difference is in emphasis with the DAVY note focussing on the cashflow generation potential of the business whereas the Merrion note looks at the valuation rating and the Merrion Note has some detailed modelling of the continued growth strategy scenario or the constrained growth scenario. The constrained growth scenario shows profit per passenger rising faster to our assumption of Eur11.02 in both scenarios by 2018.  Our conclusion is that this is a long way out and that Ryanair will be the dominant player in the low fares sector with the sector maturing too as it grows to 30% of the total market. In short our view is that the cyclical nature of their earnings at these levels of market penetration will be attributes a lower earnings multiple.

 

I am sticking with Johns view and it is interesting as Ryanair has done nothing except execute its strategy flawlessly but the market cannot really decide how to call what happens next. My gut feeling is that the bulls will be disappointed over time but that the stock will remain resilient while there is no obvious really bearish case.

 

 Stock like Glue stuck within a very narrow range today...down -0.08%

 

Quiet day... most markets recovered in the afternoon , the USA futures were showing negative at the opening but the market opened up and has held itself in positive territory....Ben Bernanke speech will set the tone for the evening.

 

 

Have a good evening.

 

Liam

 

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

Tel.: 353-1-2404171

Mob:353-87-2313505

www.merrion-capital.com

Disclaimer www.merrion-capital.com/disclaimer.html

Merrion Stockbrokers Limited (registration no. 307878) is a limited liability company whose registered office is at Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland.

 

 

 

 

Liams Last Post : Liamo's 10 Key Picks for 2010... Steal a march... and get re-postiioning now...

Good Afternoon ,

 

Rather than commentating on what has happened today I thought I would send you my thoughts such as they are right now looking ahead to 2010.  I have included current prices so you can hold me accountable… I reserve the right to change my mind over time about this list over time depending on market developments.

 

This is my own collection of ideas arising out of conversations I have been having with colleagues in both sales and research and observing the past few weeks of company statements and results. There has been much debate about the prospects for Ireland next year...and while I believe I am not being Naiive about the challenges facing Ireland , I am fully aware of the abysmal state of the economy and how tough life is and is getting for everyone as the rich go bust and are increasingly appearing in the courts as banks aggressively chase personal guarantees and the middle/high income earners face large tax hikes , and the public service unrest all reflect the reality of the new Ireland…however….Looking at Irish consumer sentiment improving as released yesterday, unemployment remaining stable for 3 months at 12.5% and the fact that the consensus is now for 2009 to be the bottom for earnings for a large number of the Irish stocks with some earnings estimates now being raised for both the 2009 and 2010 outlook, it is worth humbly suggesting that Ireland Inc is at an inflection point in perception....and Irish stocks which remain out of favour could come in for some serious attention early in the new year...

 

Gazing ahead to 2010 …I have narrowed down my favourites to 10 ( There were other candidates) … where there is Secular growth , Growth with Defensive qualities and event driven re-structuring plays…. So steal a march and get cracking now in terms of re-positioning your portfolio now... 

 

Needless to say , feel free to disagree and I would love to hear better suggestions…

 

I hope this provides some food for thought….

 

Have a good evening ,

 

Liam

 

 

 

LIAMO'S  IRELAND IDEAS for 2010

 

********** Secular Growth Stories ***********************

 

Paddy Power (25.5)  UK and  Australia online and market share play with potential for other European deals such as the French PMU deal and always the prospect that at some stage that the US market may open up to it , while having robust performance from Ireland through downturn. Not cheap but genuine momentum. I love it…

 

Norkom  : (1.27) Company confident in its future growth prospects, in the US, Continental Europe, Middle East and Asia-Pacific and progress on its strategy to broaden its potential market base by partnering to broaden customer base. Trading on 10.3x 2010 EPS.  EV/EBITDA basis  8.0x calendarised 2010 forecasts are undemanding multiples for a company expected to delivery earnings growth above 20% into the medium term.

 

DCC : (18.97)   Strong balance sheet platform to acquire oil distribution assets in UK . Medium term opportunity in wider European market. The energy business will continue to grow and grow and DCC is likely to become rated as a highly profitably energy distribution business than a poorly understood conglomerate.

 

********** Re-Structuring Plays *******************

 

Irish Life : (3.30)  Re-structuring play to unlock the value of the Life company and solve the capitalisation and funding issues at the Bank. There were negative details contained within the IMS re Commercial property exposure which were clearly disappointing and the market reacted very badly to the news. The negative in the IMS is that Recapitalisation requirements to get to 8% Equity Tier 1 has increased to c. €1B and it is significant compared to the current market Cap of the company but our end 2010 embedded value forecast for the life business is €1.5B or c. €5.40/share.  The general insurance associate holding at book value adds an incremental 50c/share.  Assuming that confidence in the embedded value returns (i.e. the downward revisions/surprises stop) and the valuation pulls to 1x (compared to an historic range above 1.4x reflecting the strong franchise and growth potential and an estimated 0.65x currently) and the general insurance associate is valued at book , we derive a  fair value per share estimate of Eur10.46.

   

 

********** Cyclical recovery ************************

 

CRH  (17.69) Likely meaningful improvement in earnings next year despite further overall top line weakness. Cost savings will be an important dynamic allowing CRH strong leverage to a recovery. CRH's ROCE has compressed much more significantly this time compared to previous downturns. An EV/Capital Employed valuation of just under 1x remains very attractive for a company with the potential to re-establish an attractive level of ROCE in a recovery and to invest further capital in acquisitions

 

Grafton  : (3.15) UK economy play and play on RMI and DIY , massive costs taken out , big leverage to recovery. Grafton in their recent IMS confirmed that the trends which they had noted earlier of a stabilisation of business have continued. The company have indicated comfort with trading at their UK merchanting business and while consensus expectations are for the company to scrape into a loss at the EPS level , we are at the top of the range of forecasts looking for 16c eps for next year , top of the range at the moment but given the previous peak earnings was 83.5c , there is a long way to go to if the UK economy particularly continues to pickup.  

 

Smurfit : (5.70)  SKG's mid-cycle earnings capacity is greater than previously estimated. SKG can reach mid-cycle EBITDA earlier than anticipated due to the impressive pace of recent supply-driven price increases. Consequently, an EV valuation of 6x mid-cycle EBITDA is now appropriate, equivalent to €8.25 per share.

 

 

************  Defensive Growth / Value ************************

 

Total Produce  : (34.5c)Defensive cash generative fruit distributor on 5.5x earnings , Lowly values P/E of 5.5x,  and a high FCF yield of 18% and  yielding 5.4%.

I would like to bid for this company myself….

 

Kerry :  (20.25) Consensus growth expectations could rise sharply , The Kerry management remain focused on maximizing cross selling and product development maximization through the implementation of their 'Go to Market' strategy which provides the opportunity for the company to outperform its official topline growth targets of 2-4%, particularly as the strategy is rolled out through Asia-Pacific and EMEA. The 'Go To Market' strategy essentially brings the company's capabilities assembled through its numerous acquisitions under one roof  in the USA and allows them to leverage off the assembled expertise they have acquired. This combined with margin accretion through further cost rationalization and the SAP driven savings, suggests that potential earnings growth over the medium term could be significant and ahead of current consensus. Kerry trades on a discount in terms of P/E to the other ingredients manufacturers but on a similar EV/Ebitda multiple but if earnings growth accelerates then this could trigger strong performance.

 C&C  : (2.85)  Deal driven management team going to drive momentum . The stock is now trading at 11.4c our calendarised 2010 EPS forecast, a 20% discount to the brewing sector. The valuation is underpinned by the free cash flow yield of 8.7% in 2010.  The Gaymers deal reduces reliance on the RoI and GB sales will  be balanced between the off and on trade. Cider portfolio diversification across multiple brands across a range of price points should allow C&C achieve improved traction and market share with customers, both on and off trade. Focussed deal driven management team going to continue to drive this hard.

 

 

 

 

 

Liam

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

Tel.: 353-1-2404171

Mob:353-87-2313505

www.merrion-capital.com

Disclaimer www.merrion-capital.com/disclaimer.html

Merrion Stockbrokers Limited (registration no. 307878) is a limited liability company whose registered office is at Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland.