Investor/An insider's guide to the market: Company results have been coming thick and fast this week, especially in the Irish market. In the financial sector, Irish Life and Permanent (IL&P) reported a strong set of results earlier this week. Pretax profits in 2004 rose by 10 per cent to €400 million, helped by an unexpectedly strong contribution from the group's general insurance associate, Allianz. Profits from Allianz rose from €45 million in 2003 to €62 million in 2004 reflecting an improvement in underwriting conditions.
IL&P's banking business reported pretax profits of €122 million and chief executive David Went stated that the bank was targeting a large increase in current account holders in 2005. New procedures on current account switching now makes it much easier for customers to switch their accounts from one bank to another. IL&P's no-charge current account is therefore a key plank in the company's strategy to gain market share.
The overall banking business had a strong year with new lending up 33 per cent and costs remained under control.
The life business is still larger in the group context and it generated pretax profits €215 million in 2004, which was up from €190 million in 2003. Overall, these were a solid set of results with the banking and life operations performing in line with market expectations while the contribution from Allianz surprised on the upside.
For shareholders, earnings per share (EPS) rose to 120 cent, out of which the company paid a dividend of 55 cent per share, representing a 10 per cent increase on the 2003 dividend.
On the day of the results announcement, the share price declined by 15 cent, although the price had risen by approximately 6 per cent over the month prior to the results announcement. For the year to date, the share price has risen by about 8 per cent, which is in line with the Iseq Overall index (excluding Elan).
Over the long term, the shares have delivered reasonable returns to investors, although the returns have been somewhat disappointing in the context of the booming Irish economy.
Amongst the larger Irish-quoted companies, IL&P is unique in that virtually all of its profits are generated in Ireland. This is a well-articulated strategy of the senior management and, in view of the prolonged boom in the Irish economy, it has paid dividends.
IL&P's core mortgage and life business have had the luxury of operating in markets that have been growing rapidly for several years. However, profits growth has lagged behind volume growth due to intense competitive pressures in the financial sector.
Irish Life is also unique in that its primary focus is on selling financial products to individuals. Its corporate business is mainly confined to providing investment management services to large pension funds.
The medium-term prospects continue to look favourable. The residential housing market is very strong and the number of new housing units built in 2005 could match the record number built in 2004.
The growing population also provides a favourable backdrop to the demand for protection and long-term investment products sold by the company's life arm.
At the current share price, the shares are trading on a price/earnings ratio of 12.5 and offer a dividend yield of 4 per cent. This rating is more or less in line with international peers and, therefore, the shares are unlikely to rise significantly in the short term.
However, over the medium term, Investor takes the view that the company will deliver above-average growth in profits and dividends compared with international peers.
Several of the markets mid-capitalisation industrial stocks also reported results during the week, including Irish Continental Group (ICG).
ICG is very dependent on the Irish economy but it experienced very difficult trading conditions in 2004. Its freight business was strong but weak tourist volumes, delays in commissioning its terminal extension, industrial action and higher fuel costs led to a decline in profits in 2004.
EPS declined by 7 per cent, although ICG's strong cash flow generation enabled it to increase the dividend by 15 per cent.
The business conditions facing ICG seem set to remain very challenging for the foreseeable future. Competition from low-cost airlines and upward pressure on costs due to high oil prices will continue to bear down on profitability. Furthermore, the management imperative of reducing the cost base creates the potential for further labour unrest.
Given the difficult operating environment, Investor's view is that the shares are unattractive at current levels. On the plus side, ICG has a strong balance sheet and is generating sufficient cash to pay down debt and/or to repurchase some of its own shares in the market. This will limit any potential downside in the share price.
With the results announcement season coming to a close, the picture emerging is one of solid progress by most companies, which will underpin share prices at current levels. However, results have not been so good as to justify further significant strength and, therefore, the Irish market could well mark time in coming months.
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