Liams Last Post : still pushing Grafton , the switch out of CRH and into the Oils and would rather wait for Greencore whilst eating my cheese !!

Good Afternoon ,

 

In the past the Last Post has chronicled the demise of the market and readers could live through the experience of being a broker in the most unpopular market on the planet.  I have to admit that one of the reasons for the lower output on the last couple of weeks has been a considerable number of client meetings and a pick up in travel particularly to the UK. I am nearly sick of telling people that the perception of Ireland has shifted, though the follow on liquidity and money flow driven rally is still to come !

 

The simple matter is that while Ireland inc continues to go through paroxysms of doom and despair and journalists and politicians continue to berate the banks and the bankers and the poor unfortunate taxpayers are getting screwed the rest of the worked has moved on and indeed the non financial quoted PLC and international traded sectors of Ireland have moved on to better and a more interesting space. I was fascinated that Michael Lewis already famous article on Ireland which appeared in Vanity Fair is almost historical in the way it is written thought he story is not over by a long shot.

 

I am going to just highlight the Grafton story ( AGAIN….) which we have been pushing and pushing. It struck me on the road last week that once Gavin Slark materialises at Grafton that the perception of Grafton is going to change markedly , from an former Irish Growth company which was expanding rapidly in the UK to a UK PLC which has interesting upside surprise as Ireland recovers. The Valuation argument is rehearsed in our research reports and is compelling as is the assumptions we have made which are deliberately very conservative and still supportive of decent upside.   

 

CRH is looking like it is topping out and losing momentum here. The Obama administration new budget proposed big numbers in terms of commitment to infrastructure and Highway repairs and new highways but the all important piece of the jigsaw as in how they get paid for was not addressed so no positive momentum here. The Martin Marietta numbers which followed Vulcan contained commentary which was un remarkable too and the states which seemed to be doing better were vertainly not the same states where CRH is exposed. One eminent portfolio manager who has been a sceptic of CRH for some time put it tom me at the weekend that the obsession of CRH management teams to not pay up has led to them making significant investments in states where ultimately the growth rates have been low rather than paying up for higher growth rate exposure. Even if you don't agree with that thesis the simple fact is that CRH is unlikely t surprise on the upside in March. CRH has been pushed and pushed in sector pieces by some large Bulge bracket brokers and it certainly shows up on screens of underperformers particularly with US exposure. Even the bears of CRH have been aware that last year CRH performed ahead of its results before giving it all away. As similar story may occur this time and the valuations suggests not much support after the rally.  My suggestiontake some money off the table in CRH. There was not a single portfolio manager I spoke to pre christmas or since who thought it would rally the way it has and to a man everyone we met agreed with our analysis of its prospects and indeed went further to ask David Holohan at what point he would switch the 'Hold' recommendation to a Reduce. I admit I hate Hold recommendations with a passion but in this case we did think it might rally but was not a buy. Now it has rallied and is expensive and still not a buy !!  What to do ? Easy switch or short CRH in to Grafton or St.Gobain or if you are looking for an alternative try Holcim  or Lafarge which have been hit on worried about cement and also form the shift of perception into Developed markets and away from emerging markets exposure.

 

I continue to like the small oils… and met Petroceltic yesterday. A very strong management team a cashed up balance sheet and some interesting developments likely over the next few months may give this one a push. Cove is a higher risk profile stock then Circle oil probably a bit lower on the spectrum with Petroneft somewhere in the middle . I am an advocate of a strategy of allocating a percentage of any portfolio to a selection of these stocks depending on your individual risk profile.

 

Greencore said that they were still considering their options re Northern foods. We think it will be difficult for Greencore to convince the market of the merits behind Northern Food takeover. Assuming Greencore matched Boparan's price of 73p and achieved 50% of its planned synergies, the Year 3 EPS accretion would be 16% but the taxed ROCE would be just 7.9%. Even if 100% of synergies are achieved, the Year 3 taxed ROCE would be 9.7%, hardly mouth watering. However management might just be tempted to go for it. If another private investor paid a 20% premium to take Greencore private, he would be paying a Year 3 EV/EBITA of 8.7x and earn a Year 3 taxed ROCE of 9.1%. Greencore's average net debt/EBITDA would rise up to 5.6x and the FCF interest cover would be 1.6x. Conclusion: Hold off on Greencore until Boparan has done the deal and the merger risk is gone. Then Greencore itself comes back into play either as a target (Private equity, Private industrial, Other food company) or a new merger candidate.

 

And finally while I acknowledge that the relationship is not as straightforward as it might appear, Glanbia share price is heavily correlated to the price of Block Cheddar in the USA. The Block cheddar price has recently gone up like a rocket in an almost vertical line and there is now close to 20% performance gap which Glanbia could potentially close. The probability of a disposal of the Dairy business seems to have diminished and in this inflationary environment for all commodities , the market thinks this is a good thing so again another reason to like Glanbia at this point.  

 

 

Have a good evening

 

Liam  

___________________________________________

Liam Boggan

　

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