Investor/An insider's guide to the market: Confirmation that the euro-zone economy is in great shape came earlier this week with the release of fourth-quarter data for the German economy. German GDP expanded by 0.9 per cent quarter on quarter, which was well ahead of the market expectation for quarterly growth of 0.6 per cent. For 2007 as a whole, German growth now stands at 2.7 per cent, with extremely strong export growth the key driver.
German exporters continued to gain global market share in 2006, due to improving competitiveness relative to some of its European counterparts.
Several years of below-average wage increases, combined with corporate restructuring and cost cutting lies behind this sustained improvement in competitiveness.
The other side of virtually no real growth in wages for several years has been very sluggish German consumer spending. However, during 2006, the German consumer finally began to spend a little extra and this was a significant factor in adding to the sustainability of German growth. With total numbers in employment rising and unions flexing their muscles, income growth is likely to accelerate in 2007.
While this may have some inflationary consequences, stronger income growth should lead to a gradual acceleration in consumption growth in 2007.
Economic prospects for the euro zone as a whole look quite good for 2007 as French and Spanish economic growth also remained firm in the final quarter of last year. Confirmation of such robust European-wide economic growth points to an European Central Bank (ECB) repo rate of 4 per cent by the summer.
This benign economic backdrop has been feeding through to European corporate earnings, which continue to grow steadily. For 2007, corporate profits are expected to grow at an annual rate of approximately 8 per cent.
The fourth-quarter corporate profit results in the US last year showed that US companies were continuing to perform strongly right up to the end of 2006.
However, most US companies signalled that they expected a significant slowdown in the rate of growth in profits during 2007. Therefore, the relative profit performance of European companies is expected to improve this year.
In the Irish market, DCC became the latest company to adopt a policy of unlocking the value of its property assets. One company that has successfully unlocked significant value is Fyffes through a demerger into three separate quoted entities, one of which is a property company, Blackrock International.
Ironically, Fyffes is the company that was involved in an acrimonious and high-profile insider dealing court case against DCC.
DCC recently confirmed the sale of a 1.5-acre site in Sandyford for €40 million, but more significantly, the company noted its strategy of "optimising shareholder value from certain property assets, including its 49 per cent shareholding in Manor Park Housebuilders Limited".
If a sale of Manor Park was successfully completed, it would have a material impact on DCC's balance sheet. Brokers estimate that the DCC stake in Manor Park is worth approximately €300 million.
Allowing for tax and associated expenses, the sale of the stake would leave the group in a net cash position, giving it additional scope for acquisition activity, stock buybacks and/or the payout of special dividends to shareholders.
DCC's shares have enjoyed a very strong run over the past month and have now risen by over 40 per cent in the past six months. This has pushed up its stock market rating and it now trades on a prospective price earnings ratio of over 15.
Housebuilders generally trade on below market average p/e ratio. On the Irish market, Abbey trades on a p/e of 9 and McInerney's p/e is 11. In the event of a disposal, DCC would have full ownership of all of its major operating units. Without the more lowly rated housebuilder, DCC's shares would command a somewhat higher stock market rating.
The performance of the shares in recent days probably already partially anticipates this. However, Investor believes that there is still a further upside to the share price.
In the current Irish property market, DCC may realise a higher price for the sale of its property assets, including Manor Park, than currently estimated. Just as important is how the company applies any funds raised. On the basis of DCC's long track record of producing consistently good returns to its shareholders, Investor is confident that any funds released will be applied in a way that enhances shareholder value.
