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

　

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