Good Afternoon ,
In the good old days the day of the Bank of Ireland results would have been a huge day for the Equity market. Today the numbers which are absolutely horrendous actually gave the market a degree of comfort and the stock rallied +1.45%.
The Headlines this afternoon were also as expected with the Minister for Finance announcing that the Sub Holders of AIB Bonds would be making an appropriate contribution to the cost to the State of providing additional capital to AIB while providing them with an additional opportunity to voluntarily exit their investment in AIB in a way that will generate material capital for AIB. If this exercise is not successful, the Government intends to take whatever other action is necessary to ensure appropriate burden sharing by remaining subordinated bondholders. However the government have backed down under pressure from the ECB, the Government’s policy is not to pursue burden sharing with the senior bond holders in AIB, Bank of Ireland, EBS or IL&P.
I went out to the Airport yesterday to meet with the Finance Director of Aer Lingus. It was a good meeting , I think that the management team are under few illusions about the relative scale of their business and that there are a number of factors which they are having to deal with which are legacy issues from previous management strategies. We published research on the stock two days ago. It is a deep value play but the market is very much concerned that the Pension Deficit will ultimately end up being sorted out using the cash balances which are on the balance sheet. Listening to the FD , it is clearly a complex issue with several constituencies to be satisfied but ultimately only one with cash as the Government is unlikely to want to know. The market is already pricing in the worst case scenario in our view so I do think there is upside from here. The prospect of a larger carrier consolidating Aer Lingus to get access to its lower cost base and its Heathrow slots is always a possibility and this is not being priced as an eventuality by the market at this point. I like it though I am not naive about the management challenges. They have an IMS in Early May which I believe the market will take some comfort about current trading though it will continue to worry about the deficit until it is addressed.
I visited United Drug also this week. I had not been out to see them in a while and I was struck by the positive body language of not only Barry McGrane the FD who we met but with the enthusiasm of his assistant who took us through her 10 year history with the company. We walked through their large office complex. There were meeting’s going on, the place was busy , people were smiling. I got the impression that maybe reading the mood of an office campus is an indicator that is really worthwhile. United Drug is a complicated story. It was a story I had previously struggled to get my head around. I thought in the past that the acquisitions previously were all a tad too small and never added up to very much. I can see now that there is a much greater coherence of he strategy and the thesis of a broad outsourced service provider to Large Pharma is very much the key to the story and is coming together as United Drug get sufficient scale. The Irish Business has been struggling as Regulation and pricing pressure impacted but it seems to be past the worst now. The rest of the businesses seem to be ok. United Drug are not expensive trading at under 10x earnings with a balance sheet which can support the targeted high single digit earnings growth with acquisitions. One to watch . Its been a bit of a sleeper and range bound but as it models itself on some of the larger US stocks like McKesson and Amerisource which trade on 16x earnings , it is easier to see how US investors have been increasing their holdings in the stock.
We launched coverage of Cove Energy yesterday with a new analyst. A different type of sector for Merrion and requiring the development of a different expertise. I think there is an interesting opportunity in the Irish E&P sector. It occurs to be that there is portfolio of companies , all of which are now beyond the very early high risk stage of their development . They have all got sufficient cash on the balance sheets to fund activities this year , they have management teams which have a good track record at exploration and in all cases have very interesting partners which once again reduce the risks and adds to the credibility factor. The Shareholder registers of these stocks is already in the main very supportive and So I do believe that there is a play to be made in the sector as there will be plenty of news this year with the main emphasis on re-risking and appraisal with some blue skies stuff rather than all blue skies. Keep an Eye on these stocks... Cove , Petroceltic ,Circle and San Leon. I think that interesting opportunities will present throughout the year here.
Elsewhere I may as well have one more go at re-iterating my faith that Grafton will come good and that the recent sluggish price action provides an opportunity to get long. Buy this one.
Have a good evening .
Liam
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