Business

Sunday 24 September 2017

Wilbur says 'thanks but no thanks' to punt on AIB

NO AIB STOCK: Wilbur Ross said he only invests in struggling businesses
NO AIB STOCK: Wilbur Ross said he only invests in struggling businesses
Richard Curran

Richard Curran

American billionaire Wilbur Ross has said thanks but no thanks to the prospect of investing in AIB. The famous Wall Street investor trebled his money at Bank of Ireland, making a €477m profit in just three years when he later sold out of the stock.

AIB might want to take it as a back-handed compliment though. Ross said he only invests in struggling businesses. His investment mandate is to invest in companies that need help reviving themselves and not in banks that are already healthy.

It must have been a pretty quick turnaround for AIB because a year ago Ross told a conference that AIB needs to be "rehabilitated."

Ross picked the perfect time to sell out of BoI, given that the share price has done little since then. At around 35c, Bank of Ireland shares are nearly four times their 9c level in 2011 when Ross and other investors bought in. But very few investors had the money or the courage to follow them at that price. Many waited until it was north of 25c. Much of the big profit has already been cashed in, so the share price has been quite static.

AIB will not be a 200pc profit return in just three years. That boat has sailed. AIB will expect to attract long-term institutional investors rather than those looking for a higher risk, higher return. The bank has been valued at €11.7bn by the NTMA. That values the 0.2pc shareholding held by private investors, and not the State, at just €23.4m or 2c per share. The stock continues to trade at 8c in some kind of market lunacy.

What would Ross make of that investment approach?

 

UTV is fighting an uphill battle down South

UTV Media is off to a shaky start with its big TV investment south of the border. UTV Ireland is already shifting around the programme schedule just four months after going on air.

During the week, the group warned that losses for this year at the station would be £8.5m (€11.7m) or close to three times its original estimate.

Doing a few calculations based on its guidance figures for TV revenues, UTV Ireland looks like taking in around £10m to £11m in revenue in 2015. Producing a loss of £8.5m suggests it will cost around £18.5m to £19.5m to run. That is a sizeable cost given the overall size of the group.

That cost is unlikely to reduce in the near future. So UTV Ireland would have to practically double its 2015 revenues next year before breaking even. UTV Media is facing pressure on a number of fronts. Revenues at its Belfast operations are feeling the heat of David Cameron's Northern Ireland austerity programme which looks set to continue. Public sector advertising has been affected.

Down South, turnover at the company's Irish radio division fell from £5.1m to £4.6m in the first three months of this year. UTV Media has eight radio stations in the Republic, including popular Dublin channel FM104. Elsewhere it is holding up well.

One of its real strengths is that it also has some very successful British radio stations, including Talksport, which last year accounted for over a quarter of the group's entire revenues. Talksport has 3.4 million listeners and pulled in £29.7m in revenues in 2014.

Its British radio division makes roughly the same operating profit as its UTV television station and its Republic of Ireland radio stations combined.

The commercial logic of developing a television channel in the southern market is very strong. It just looks like it will be harder, more expensive and take longer than originally thought.

UTV Media's share price fell 8pc on Thursday's announcement about UTV Ireland. The Dublin channel cost around £3m in start-up costs in 2014. Even if it could halve its losses next year, UTV Ireland would have cost the group £15.7m (€21m) in its first two years of operation.

That is quite a chunk of change.

 

Property REITs are in it for the long haul

They say that half of business success is being in the right place at the right time. But surely, it is about having money when nobody else does, in the right place at the right time?

Stephen Vernon of Green Property proves that in spades. His Green Reit was the first to market at a time when even six months made quite a difference in the commercial property market recovery.

Its IPO was two years ago, and it has invested €774m. Occupancy at its properties is 96pc and its loan-to-value ratio is just 10pc.

The stock has climbed from a float price of 100c to 159c and is already paying out dividends. That is quite a performance.

A report from Davy stockbrokers last week estimated Green Reit's remaining financial firepower for further investment at about €400m. Vernon is not one to get carried away. He won't spend just because he can, especially as the commercial property market recovery matures.

Not long after the Green Reit IPO came Hibernia. It has moved incredibly quickly having invested €550m in 15 acquisitions. Aside from one residential play, it has put a lot of eggs in the IFSC basket with 80pc of its assets in or adjacent to it. Hibernia's LTV is just 4.4pc. Its net asset value per share is 105c and it is trading at 126c.

These guys have had a great run too, but have all the big gains already gone out of property? High-risk high-return quick bucks possibly have. But Reits are supposed to deliver a steadier, longer term return through dividends and solid but not spectacular share price growth.

The biggest mistake they can make, and it only comes well into maturity, is borrow too much money as they try to keep on delivering more deals to lift the share price.

Green and Hibernia are a very long way from that scenario now and are relatively under-borrowed because they are still so new. Equivalent older property companies abroad are much more heavily borrowed.

Based on price to earnings multiple, Green and Hibernia are not expensive. Green is on a P/E of 8.8 times this year's earnings. Hibernia is on 9.4 times. British Land is on 25.7 times and Land Securities Group is on 28.8!

Green looks a little more predictable in a good way. Hibernia may have a longer path to value creation, is how Davy described it.

Hibernia announced that it was buying out its investment manager company in a move that should make things simpler and more transparent into the future.

Perhaps they should have set it up this way in the first place

Nevertheless, clarity and transparency are the order of the day with Reits. They have very high disclosure levels and publish very detailed information for investors.

Both Green and Hibernia are a long way from the old days of pre-crisis property companies. This often involved a developer, a big personality, some contacts, rampant ambition, very limited self-restraint and a network of 200 different companies which meant nobody knew how much money he was making or losing.

Adios to all that.

rcurran@independent.ie

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