Good Afternoon
In a repeat of yesterdays trends equity markets had another down day led by Materials and consumer discretionary and IT related stocks with Industrials following closely behind. Materials stocks gave up another -22.6% today. This sector was the absolute darling of the markets for the last few weeks and I was on the worn side arguing that there had been no earnings upgrades to support the magnitude of the sector rally. Interesting that the sector has given up so much round so quickly.CRH which had pushed above the eur17 level for he first time in a year is now back at eur16.00 and briefly tested below this.
Grafton remains strong however supported by the increasingly obvious sector momentum as evidenced by the Travis Perkins results yesterday. This is all supportive of our Bullish stance as a house. Interestingly there has been a noticeable increase in Grafton liquidity over the past few days and I just hope this is a sign of things to come. I am committed to Grafton as one of the Best ideas in the Irish Market.
Commodities which had been strong continued to surrender gains and there was a flight into Swiss Francs as a Safe haven.
Today Merrion took a bold step in terms of the re-building of the research proposition and initiated coverage of two stocks DCC and Rubis. Both are in the Energy distribution sector. The Recommendations are a BUY on DCC with a price Target of eur28 and a Hold on Rubis the French company with a price target of Eur856.
Frankly I had never heard of Rubis until recently and despite its smaller size this French company has been more aggressive in the scale of the acquisitions it has been making as it grows its energy distribution and storage business in emerging markets. Rubis largest deal has been the eur220m acquisition of the Chevron Caribean business which compares to the much smaller and slower acquisition pace of DCC
Market reaction to the initiation has been favourable. I would have to say that but nonetheless it is true that many European Institutions do hold both stocks and compare the two companies whereas DCC has traditionally only been looked at by Domestic analysts and seen as a conglomerate and Rubis has a French analyst audience so there is much to be gained from a compare and contrast approach.
Looks to me that there is a very easy BY case for DCC on the back of their consistent track record of delivery of earnings and there is scope for them to get more aggressive in the scale of acquisitions (HO HO PUN intended) . Many Portfolio managers have been sceptical of DCC and their apparent inaction re transforming the shape of their business through disposals. At this point however it makes sense for DCC to take a radical approach as the energy business is the clear focus and we have analysed that a disposal and re-deployment of the proceeds of the Food and Healthcare businesses would add up to 400bp Return on Capital Employed.
I commend the research reports to you and will be arranging for Gerard to meet and discuss these companies over the next few days.
ICON had results which look weak and the market swiftly gave it a bloody nose as the stock fell -9%.
Bank of Ireland announced the disposal of bank of Ireland Security Services and the stock gained 3% to 34c as the Bank is forced to dispose of business after business as part of its re-structuring.
The most interesting news late thjs afternoon is the announcement that Anglo has disposed of its deposit book to AIB and Nationwide has disposed of its deposit book to Irish Life. Irish Life needs this transfusion of deposits very quickly so this is welcome news. Bad news all round now for the Bond holders though where the impediment to getting them getting burned was always that the Deposits ranked pari passu with the Senior Bonds.
The market had a go at the smaller oil companies over the past couple of days too and they had some recent gains which they gave up. The stocks ar showing decent resistance at these current levels though.
Aer Lingus announced it is making an exceptional provision of €32.5million in its financial statements following negotiations with the Irish
Revenue Commissioners. This amount relates to PAYE, PRSI, interest, penalties and related costs arising from payments to 715 staff under
a restructuring programme negotiated in 2008 at the Labour Relations Commission and implemented in 2009. The nub of this is that a large number of staff were made redundant and then subsequently re-hired and the tax benefits of the redundancy were disputed by the Revenue authorities Aer Lingus accepts that it gave assurances to staff at the time that any terminations of employment should qualify as legitimate redundancies and that staff members made their decision on the basis that any tax liability in relation to the programme would be limited. On this basis, Aer Lingus believes that it is inappropriate to seek to recover any amounts from staff.. Oh well. I suppose they acted in good faith at the time and on the basis of advice which has subsequently been overturned. It is a blow to investors though that the ongoing costs of the re-structuring and the balance sheet NAV continues to be impacted by the residual effects of the re-structuring.
Ryanair fell as the oil price impact continues hang over the sector and simply High Fuel costs are bad for economic growth , propensity to travel with higher fars and lower profits. The danger of a prolonged period of Higher oil prices has considerably increased and so the fact that Ryanair is hedged forward is sen as irrelevant from the markets perspective,.
Have a good evening.
Liam
___________________________________________
Liam Boggan
Merrion Stockbrokers
Tel.: 353-1-2404171
Mob:353-87-2313505
www.merrion-capital.com
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