Merrion model pays handsome dividends

PUNTERS who opted for the “10 Stock Model Portfolio” of Merrion Stockbrokers did extremely well in 2003.

Figures released yesterday show the shares gained 45.7% against the 23.2% notched up by the ISEQ.

In effect it meant that €100,000 invested generated a return of €45,727.

The return does not include brokers commissions or stamp duties and is based solely on the share price performances. Dividends are excluded also from the performance calculation.

Of the 10 stocks in the model portfolio, eight delivered positive returns for the year as follows: Kingspan 157.7%; Anglo Irish Bank 85.8%; Grafton 60.2%; CRH 38.3%; Jurys Doyle 36.1%; Kerry 32.2%; IAWS 29.2%; and IN&M 23.2% since being added to the list. The much hyped Ryanair dipped 0.5% while Allied Irish Banks has fallen 1.9% since their introduction to the portfolio.

Rory Gillen, head of research, Merrion, said “AIB has been a dull performer in 2003, but with the likelihood of a pick-up in earnings growth in 2004 increasing, we are confident of a better share price performance from here on”.

In Ryanair's case Mr Gillen said the over-emphasis on the Charleroi investigation by the EU was over done, but nevertheless it did impact on the share's performance in 2003.

“However, our view remains that the group will not be materially impacted by the Charleroi outcome and the current rating represents an attractive entry point for a company we believe will be significantly bigger on a 3-5 year view.”

As the New Year kicks off Merrion has dropped Jurys Doyle from its share picks and replaced it with Fyffes.

Dollar weakness and the positive impact it will have on profits in the fruit importers is the key reason for the shift, and less to do with any radical shift is group strategy in the year ahead.

Relatively speaking the shares remain cheap, said Gillen. By contrast Jurys Doyle share price is fully rated according to the broker and is already factoring in “good recovery through to mid-2005”.

On aggregate the current ten stocks in the model portfolio are expected to deliver underlying earnings growth of 15.5% over the next year and trade on a prospective p/e of 12.1.

Given its track record Gillen’s claim that the portfolio continues to offer excellent value, particularly against the Euro 10-year bond yields of 4.3% is difficult to argue with from an investor perspective.

Since the start of last year the portfolio line-up has been shaken up from time to time. Just as Fyffes has displaced Jurys Doyle, Irish Life & Permanent, DCC, ICON and Bank of Ireland were removed.

Given that AIB and Ryanair have not delivered so far in the context of the Merrion portfolio it has detailed its arguments in its end of year review for their inclusion.

On Ryanair, Merrion argue even if the findings on Charleroi go against the airline it will force the EU to set out a “blueprint” on how state-owned airports deal in future with airlines. If that happens, Ryanair can then reformulate its deal with the airport authority without doing any material damage to its cost base or growth, argue Merrion.

The brokers have not ruled out an initial negative reaction to the ruling when it comes, but believes it will be short-lived once the markets have time to fully digest its implications.

Once the flexibility issue on deals becomes clear Merrion is convinced the shares will rebound.In the case of AIB, Merrion is emphatic. It says the strength of its retail franchise in Ireland, its British small business operations and the contribution from M&T, leave the bank in a strong position going forward.

Its longer-term prospects in Poland is another comfort factor, while the recuperation of some of the Allfirst fraud loss in the US would enhance its balance sheet in years ahead.Merrion’s portfolio was down a full 18% last year reflecting the final blow-out of the bear market that started back in 2000.

In that year it achieved a 30.2% return against 15.7% for the ISEQ and, in 2001, it was up just 4.7% against a decline of 0.3% in the ISEQ.

Merrion is unusual in putting its investment advice to the test in this manner and Gillen is confident that, with a recovery underway across most stock markets, 2004 will show further out-performance by the selected shares.

How well they do could ultimately be determined by the US. If the economy turns sour in the second half, stock markets could reach sharply undermining stock performances across the board.