Liam's Picks for 2011
Against a very testing economic background I think that the key themes for the irish stocks are recovery in the global economy and cost control or loss containment in Ireland. Many Irish stocks still have pariah status internationally due to being Irish but this hides some interesting opportunities. I suspect that we are likely to see a wave of corporate activity with acquisitions , divestments and takeovers dominating the news. I suspect that there are sufficient number of corporate opportunities to make Ireland one of the surprise positively performing markets in 2011.
Grafton :
The UK merchanting industry continues to consolidate and Grafton is an attractive acquisition opportunity at some stage. In the meantime they along with their peers are seeing like for like sales increases in the UK and rising margins. We are in the land of small numbers in terms of earnings estimates so the real question s if it is possible to get back to normalised margins on recovering sales and how long this will take. The stock has just broken out above the eur3.00 in a sustained way. I think this is a decent opportunity at these levels.
Kerry:
I have been a fan of Kerry for some time. I believe that the management team have got Kerry on very much the right track with the 'Go To' Market strategy which has brought all of their food ingredient technology capability into one facility in Beloit Idaho in the USA.. There is a high level of management confidence that the mid teens earnings momentum is sustainable organically and capable of being supplemented by acquisitions. The management under Stan McCarthy are now focussed on returns in a way the previous management team were not. The earnings story is supplemented by the rising credibility of the management team and the recent investor day in London highlighted the potential for fresh investors who are yet to become converts to this story. The more mundane consumer foods business is doing ok in Ireland and the UK and has interesting acquisition opportunities in both Ireland and the UK. I have seen Greencore mooted as an ideal fit for Kerry. An interesting thought if the Northern Foods deal does not go ahead for them. This is a core holding for me.
Paddy Power
Superb execution of an ostensibly simple business plan reliant on creating , sustaining and rewarding customer loyalty. Online strategy supplemented in the UK by a growing retail rollout. Our research highlights the large brand recognition despite the small market share which indicates significant opportunities to grow into the brand. Ireland retail estate managed very well with flat amounts staked , a small -2% decline in amounts staked and operating profit falling from 11.7m in H1 2009 to 9m in H1 2010 , totalled 16.3m for full year. Australian business a success with acquisition of remaining stake announced before Christmas. The metrics in the rollout of the UK retail estate highlight the cost and returns focus of the management team.
DCC :
With almost 60% of operating profit coming from the energy business and further acquisition opportunities being pursued this is becoming a steadily more easily understood proposition. The recent results highlighted that all of their divisions are performing. The Official earnings guidance for the year has stripped out a eur9m one off weather effect from last year. I think it is safe to assume already that this will be repeated so estimates will be rising. The focus on shareholder returns is consistent. The track record speaks for itself and there are bound to be opportunities to divest over time of some of the divisions such as food and Healthcare which are becoming much less relevant. This would help the rating as the story would be simplified. A core holding in Ireland.
Ryanair :
Ryanair is a company in evolution. It is transitioning from a high volume growth low cost model to a low cost but lower volume growth model with an increasing emphasis on yield capture. They have hedged their oil exposure so it is not such a constraint. The opportunity in the absence of a cheap new fleet deal comes from the sheer numbers of major airports who are now willing to chase Ryanair for terms which allow it to enhance yields without significant additions to its fleet. The prospect of a further special dividend wil continue to appease investors as this company transitions itself from Growth to a more cyclical but profitability driven model. Ryanair is now being priced like a value stock rather than a growth stock and on 10x next years consensus earnings this is not expensive.
Aer Lingus :
Aer Lingus stopped being a low cost Ryanair imitator some time ago. The management have been very credible in their handling of a turnaround in the operating performance of Aer Lingus. This has to be one of the takeover candidates for 2011 though I don't believe that Ryanair will get to be the ultimate owners of this if the government dispose of their stake. The valuation is supported by an asset base which includes its Heathrow slots and its land assets at Dublin Airport.
The RIO Trades….. or trades with higher risk ….
Smurfit :
This is my RIO trade call. It is a simple call on the macro cycle which I believe has turned more positively and that now there is a rising probability that Smurfit Kappa will begin to demonstrate the cash flow required to pay down the debt. The market is in wait and see mode. For a variety of reasons the cash pay down has been always a jam tomorrow event. I think that this year it will come to pass. This is a straightforward cyclical play.
Irish Life :
The regulator has clearly differentiated his views on this one in terms of the PCAR and the time scale given to them to raise the required equity. They don't appear to have the same scale of hidden disasters in their Balance sheet that the other banks notably AIB have and their goal remains to reduce their loan to deposit ratio and find a way to unlock the value of the Life assurance business. This is going to be a volatile year for this one. The regulator has indicated even with the recent PCAR assessment requiring Irish Life to raise eur100m and giving them until June to do it that he considers the risks here to not be so high. The CEO comes from the Life assurance side, at any time they could look to sell the life business to recapitalise the Bank but I believe that the preference here is to try and find a solution to the loan to deposit ratio of the Irish Permanent through a merger if possible then look to unlock the value of the Life assurance entity. On a weak day this is definitely worth taking a position in.
The Oils :
A very interesting sector : Tullow , Cove , Petroneft and Petroceltic all will be making news with drill and deal flow news across the sector. The higher oil price enhance interest. I like Pertoceltic primarily as Tom Hickey has the potential to help shape an investment thesis that appeals to investors. Tom has credibility from his days with Tullow so the market will listen as he gets to grips with his new role as Corporate Development director.
Other takeover candidates : Total Produce , ICG , CPL , INM , Greencore , Origin , C&C
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Liam Boggan
Merrion Stockbrokers
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