| Strong market performance is the icing on the cake for Merrion |
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By: Liam Boggan, Liam Boggan
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| One year on from Merrion’s acquisition by Icelandic bank Landsbanki, Liam Boggan examines the changes that have been undertaken at the broker, the impact of its new parent, and overall market performance. |
Merrion Stockbrokers has, like all of the brokers in Ireland, enjoyed the benefits of a supportive environment in the past year and looking ahead to next year, we are setting our sights on positioning Merrion to meet the demands of an ever-increasing competitive environment.
It is a year now since I joined Merrion Stockbrokers as head of research and I am heartened that the growth opportunity that I saw at the time is starting to come to fruition. It is also a year now since the acquisition of Merrion by Landsbanki was announced. Merrion now finds itself part of an organisation which includes the continental European broker Kepler Equities and the UK based Teather and Greenwood. The combined equity business has a fine distribution platform with a sales force of one hundred and two salespeople who are located close to their clients in nine offices across Europe and a sales office in New York. We have forty sales traders, eighty five analysts and a combined client base of eight hundred institutional investors.
This year there have been some initial steps taken to bring some cohesion to the totality of the group, though each entity will remain separately managed. We have launched a common look and feel for the group research product and have agreed a common recommendation structure as well as common accounting definitions. On top of this we have created an as yet internal database of approximately five hundred companies. This number is expected to rise to eight hundred over time.
From a Merrion perspective, we should be able to benefit significantly in terms of adding a real and genuine pan European context to our research product which is best known for its concentration on a very structured bottom up approach. The fact that the research and sales are carried out multi- locally across the group and that the three organisations now share a vision of what they are trying to achieve will, I believe, enable Merrion in particular to increase the value that we add to our clients.
This year has been stunning with regard to the performance of markets across the world despite the high levels of volatility and geo political uncertainty that were particularly pervasive during the first half of the year. In Ireland, the stocks which in the year to date have performed very well are notably the smaller stocks , particularly those with exposure to the continuing strength of the Irish economy such as Veris (formerly Irish Estates), CPL and Newcourt.
The stock which captured most of the imagination this year was C&C, a stock which Merrion has been closely associated with as one of our highest conviction BUY recommendations this year. C&C has rallied 113 per cent year to date at time of writing and we remain very bullish about the fundamental prospects looking into next year, although there is likely to be a dearth of newsflow on the stock until the new year.
A cornerstone of the Merrion philosophy is the accountability of our research product and the performance of the stocks that make up our key buy list. To this end Merrion continue to run our flagship ‘Merrion 10 Stock Model Fund’ and the performance of the stocks within the fund in the year to date has reflected the strong performance of the leading stocks in the market. Apart from C&C , the top performing stocks which we have included within the Model fund are IAWS and Kingspan, followed by the likes of DCC, Grafton and Paddy Power. The performance of the fund and the performance of the individual constituent stocks is published everyday on the merrion-capital.com website.
Looking ahead to next year, the economic prospects remain bright, though there are fears about the level of exposure that the economy here has to the construction sector. The outlook for residential construction has become one of the crucial pieces of the jigsaw in determining the outlook for the overall economy and by implication the prospects for the financial and the construction stocks in particular. AIB senior management have however, come out with quite bullish statements suggesting that the outlook for 2007 is for the rate of housing units completions to be about 85,000 units next year. This is significantly higher than the view which had become almost consensus about a slowdown towards 60,000 units or below.
Bank of Ireland in their results presentation was also supportive view about the prospects for continued strong performance by the Irish economy. In particular they pointed to the absence of any signs of stress in personal lending or credit card balances. Also their comments re the SSIA experience to date suggests that the behaviour of the typical SSIA account holder is to continue to save rather than having a giant splurge of spending. On the housing front, Bank of Ireland did mention that although first time buyer affordability ratios are now stretched , this is not an impediment to them growing their loan book. While this issue is unlikely to go away anytime soon, it does appear that there is room for the economic story to continue with strong growth for certainly one more year.
Merrion continues to be bullish about the prospects for a continuation of the strong earnings growth trend in Ireland in 2007. The last quarterly review of the ‘Merrion 10 Stock Model Fund’ showed the earnings growth prospects for the portfolio of constituent stocks is 16.6 per cent for 2007, and since then we have had earnings upgrades from some of the stocks such as DCC , Bank of Ireland and Ryanair and C&C. The continued upward market momentum means that at least some of this upside is now discounted in current valuations.
Looking ahead to 2007, the quest is on to find the stocks to follow the success of Kingspan, Paddy Power and C&C to name but a few, which have helped to keep Ireland on the map as an attractive place for both domestic and international investors to come to trawl for growth and value. Merrion Stockbrokers also looks forward to the challenge of identifying the winners and the losers for next year and trying to continue to grow and build the Merrion business into the future.
Obviously without the continued support of our clients we would be nothing and so we would like to thank all of our clients for their support in 2006. |
Liam Boggan is head of equity research at Merrion Stockbrokers.
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