Business Irish

Monday 24 July 2017

Emmet Oliver: Aer Lingus will be bought at a bargain basement price

Ryanair chief Michael O'Leary has parked
his 29.82pc tank on the Aer Lingus runway
where former chief Dermot Mannion had
an unhappy tenure with the low-cost rival
inside his tent. O'Leary has yet to show his
hand post the Eitihad interest, but he may
be more impressed by Manchester City FC
on the pitch than the United Arab
Emirates/Abu Dhabi airline on his patch
Ryanair chief Michael O'Leary has parked his 29.82pc tank on the Aer Lingus runway where former chief Dermot Mannion had an unhappy tenure with the low-cost rival inside his tent. O'Leary has yet to show his hand post the Eitihad interest, but he may be more impressed by Manchester City FC on the pitch than the United Arab Emirates/Abu Dhabi airline on his patch

Such was the surprise at interest in Aer Lingus from Etihad that few reflected on how cheap any buy-in could yet be for the Abu Dhabi-based carrier.

Transport Minister Leo Varadkar is prepared to sell the Government's 25pc stake for €1 a share at best, valuing the entire airline at €530m. Even getting such a price will demand a hefty premium on today's share price, which is nowhere near €1.

It's five years since the airline was floated at €2.20 a share and due to poor management, high oil prices, over expansion and of course the global recession, the shares have plummeted to 73 cent, leaving myriad investors, from Ryanair to Denis O'Brien to the airline's pilots, sitting on severe paper losses.

In crude terms, even if Varadkar gets his wish and achieves a €1 per share sale, almost €600m of shareholder value has been destroyed at the airline over recent years, with the only person blamed apparently, being former chief executive Dermot Mannion.

While the shares have been beaten up for the last five years, the valuations at this stage look unfair and Varadkar is right to insist on at least €1 a share.

The company trades at a huge discount to other airline peers, at just 40pc of its balance sheet value, whereas other carriers typically come in at 80pc of book value.

Clearly detracting from a higher valuation are the pension hole and the awkward presence on the share register of Michael O'Leary.

It must be deeply frustrating for all involved that these factors have left the airline in a bizarre position where the carrier's bank account is virtually the same as its market value. Aer Lingus is a bank account with wings, it seems.

The airline does happen to have 41 Airbus aircraft and 20 valuable landing slot pairs in winter at Heathrow airport, which are apparently being entirely discounted by the market, presumably because they think the pension hole wipes out the value of virtually everything, bar the cash.

That seems to be a very bleak assessment of the airline's prospects, even as talks about the pension get under way. Nevertheless, the price is the price and Varadkar has to live with valuations set by others, not his own corporate advisors.

In fact the Government's insistence -- via the airline's articles of association -- that landing slots at Heathrow must include Irish connectivity mean that not only is there a Ryanair discount baked into the current share price, but there is also an Irish Government discount baked in there too.

While Aer Lingus asserts that the multi-employer pension scheme staff are members of has nothing to do with it, everyone else thinks differently.

Irish brokers estimate that if Aer Lingus has to own up to its portion of the pension liabilities in the scheme, it would wipe out 45 cents per share of value, leaving Aer Lingus farcically cheap.

Throw in an industrial relations dispute or two, and the odd Icelandic volcanic eruption and the raiders from Abu Dhabi could yet get a western European airline for the price of a few battered Airbus A320s.

It's official, ISEQ is no longer the worst performer

From the files of 'shocking, but true'. The Irish stock exchange has not been the biggest destroyer of shareholder value this year in Europe.

Yes, the ISEQ has lost its shareholders money, but for once it has paid off not to be heavily weighted in other bigger exchanges.

The CAC 40 is down 17.4pc this year on the euro crisis and the German DAX is down 15pc for broadly the same reason (the ISEQ is down 9pc).

Curiously, the Dow is flat on the year and the NASDAQ is desperately trying to stay in positive territory.

Meanwhile, so-called emerging markets have, well, not really emerged as stores of value, with most of them underperforming their counterparts in more mature markets.

The world's investment community has finally adopted a permanent view of Irish-listed companies -- it doesn't like them very much, but has stopped the almost remorseless sell-offs witnessed in 2009 and 2010.

Markets are only valuing the assets of Irish-listed companies at three-quarters of their balance-sheet value.

For US companies, they value them at twice their value, for German companies they value them at 124pc of their balance-sheet value.

It would be hard to value Irish companies much lower without the valuations becoming faintly ridiculous.

Not pushing the values down anymore is one thing, upgrading Irish shares is another.

That could take years, and few international investors are going to wait around to see if that eventually happens.

Elderfield zones in on banks' weak spot

Banks regularly betray the real view they have of their assets by where they put them.

Since 2009, certain banks in Ireland have been putting tracker mortgage products into non-core or "quarantined'' divisions.

At one point the banks were hoping NAMA could become just such a quarantine unit, but that plan was scotched.

Incentives have also been offered to move people off trackers and on to higher yielding (from the banks' perspective) standard variable mortgages.

But the banks are stuck with the trackers and Permanent TSB is more stuck than most, with annual costs of €400m to fund the trackers, which are based on ECB base rates plus a margin.

Standard variable mortgages are providing what the banks quaintly call "off-setting'' benefits, until the tracker products slowly, very slowly, work their way out of the system.

The off-setting contribution of standard variables is vital to many lenders, most obviously Permanent TSB.

Hence the decision to pick a fight with 'sheriff' Matthew Elderfield this week over his insistence that standard variable customers have taken enough punishment on rate hikes.

Shorn of the trackers, the present rate environment for variables -- which are hovering between 4pc and 5pc for most lenders -- would be bearable for the Irish banks. But stuck with the trackers, the need to "reprice'' variables has to be sated.

Of course, arbitrary ceilings on mortgage rates will never work long term and are an anathema to anyone thinking of investing in an Irish mortgage lender.

But the tracker addiction of the Irish banks in the tail end of the boom is the real reason they cannot stomach such a ceiling even for a few months.

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