By my reckoning top 25 Irish equities, representing 95% of the index are trading on a P/B of 1.23, More meaningfully the median P/B of the Irish index is 1.5x. While this sounds high, one should rememeber that ELAN plc representing approximately 10% of the index trades on 29xBV. If one removes ELAN plc from tthe index calculation given its lack of profitability, then the Irish equity market is trading at a P/B of 1.13 and a Graham & Dodd PE of 14x.
Many of the major shares trading on the Dublin market have been largely unaffected by the turmoil in Ireland or in the Eurozone. For instance in the past 5 years, the share prices and total returns from Paddy Power, Dragon Oil and Glanbia have managed a total return in excess of 100%. Kerry Group, Aryzta (formerly IAWS) and Irish Continental Group have managed total return in excess of 60% in the same time frame.
At the other end of the league table, Anglo Irish Bank has fallen 100%, whilst Readymix, Independent News and Media, Bank of Ireland, Allied Irish Banks and Irish Life & Pemanent have fallen by more than 90%. This is not a surprise given the damage to the franchise, book value and earnings within the Irish financials sector. So where are the opportunites in Irish equities at present?
In previous posts I have spoken about CRH and Grafton plc. With regard to CRH, I do not believe for one minute that the franchise has been damaged in any way. This is a cyclical business that is now trading below book value, and this is undeserved in my opinion. The median ROE for CRH over the past 14 years is 12.5% and the median ROA is 5.5%. This business will once again trade at a premium to book value, but I have no idea when. Now the short term outlook is not highly promising, so I would use weakness below €12 to add to my position. To my mind the stock is trading in a range from sub €11-€16. Agressive traders will play this range. I am content to accumulate at the lower end of the range.
Grafton is particularly good value in terms of earnings, sales and book value multiples. My key worry is that I dont see an easy path for Irish margins to recover to the lofty levels that they once enjoyed. For that reason I have preferred to wait for lower levels before commiting any capital. Having visited Grafton plc and been an institutional shareholder in the past, I have to say that they run a very lean ship. On that basis, I am not sure how much fat there remains to be removed from the business to support margin progression. The top line needs to come back – not there yet.
I was surprised to see just how poorly Icon PLC has done recently. It has been quiet a while since I looked at the company. The company is one of several leaders in outsourced pharmaceuticalclinical research. Many Irish people are unaware of the business, but has been a tremendous success story with a truly global operation that is run out of the HQ in South County Dublin. The market is worried about margin progression, particularly in light of the recent deal signed with Pfizer. No debt, trading on an EV/Sales of 0.5 approximately, with a 10% cashflow yield. Over the past decade average ROE’s have been 13%. With almost 30% of the market capitalisation as cash, I think that this stock requires further investigation by me. CEO has recently retired and been replaced by the last CFO.
Cider manufacturer, C&C is becoming interesting in valuation terms once more. THe washout of a summer in Ireland and the UK will more than likely have eaten into short term margins. Total Produce trades below book value and on a Graham & Dodd PE multiple of 9. Again it is an area that needs some exploration. An interesting special situation could well be Aer Lingus. There is cash on the balance sheet, but this is offset by a very very large pension deficit. However against this backdrop, the carriers slots at Heathrow airport could well be worth more than the rest of the assets net pension liabillities. There is always Ryanair lurking. Aer Lingus is presently valued at 0.4x book value. Highly risky, but intriguing nonetheless.
Of the shares that have enjoyed stellar performance in the past 5 years, I have to say that there is little to attract me there presently. There is no doubt that Paddy Power, Aryzta and Kerry Group are class operators in their chosen arenas. They are lead by superb management teams, have excellent balance sheets and long term track records of value creation. I find present valuations of all daunting to be honest. I would not be investing in any right here and now. In fact, for those readers that follow technical analysis, the long term uptrend on both Kerry Group and Aryzta has broken down in the past few weeks and there are weekly MACD reversals and monthly negative divergences.
The Irish stock exchange is a small index, yet there are some fascinating companies and very interesting investment and speculative prospects.
Other than what I am already invested in I will do some research on Icon, Total Produce and Aer Lingus Allied to that, I am going to revisit the UK retail sceene. The profit warning from Mothercare recently has underlined just how poor the UK retail outlook is currently. I feel that many of the companies have a similar issue – the UK consumer is overshopped and retail density is too high. I would be impressed to see any CEO tackling this issue by agressively shrinking the retail estate. I will revisit Home Retail and have a peak at Mothercare given that it seems that the CEO was ousted by the Chairman. I feel that for many of the UK retail scene, if any managment team was driven on tackling the sheer amount of store duplicaton and store underperformance then considerable upside is a distinct possibility. Finally, I was asked by an acquinatnce to have a look at a small Greman elctronics company, KONTRON. The stock is trading below book value and on a pretty low sales multiple. I am usually wary of technology companies in that I am often lost at the terminology. However Kontron is worthy of some attention given the clean balance sheet, attractive valuation and swing back to profitability from a loss in 2010.
The more time that I devote to searching for investible ideas the more I am finding. I remain of the view that the overall secular bear market that began in 2000 is not yet complete. However given high recent stock correlations, I think that over the next two years that stocks offering value and balance sheet strength will begin to shine and detach from the overall bear market.