The Celtic Contrarian

Published in Investing on 24 August 2010

Opportunities in a market that's lost 75% of its value since 2007.

You don't hear the term 'Celtic Tiger' much these days and, when you do, it has rather an ironic ring.

'Ireland's Economic Miracle', the period of rapid economic growth between 1995-2007, which put it in the same league as the 'Tiger' economies of Asia, came to an abrupt halt with the bursting of the country's property bubble and a collapse in consumer spending.

Ireland was the first euro zone country to officially enter a recession, but GDP growth finally turned positive again this year.

Two economies

Helped by an attractive corporate tax regime and the presence on its soil of international companies, Ireland's exports account for more than half of its GDP. That's ahead of even uber-exporter Germany.

At the same time, the domestic economy labours under draconian austerity measures, putting it in the same boat as the likes of Greece, Italy, Spain and Portugal, where I looked at the investment possibilities for incorrigible contrarians in an article last week.

Lloyds Banking Group (LSE: LLOY) is the latest financial house to give Ireland's domestic economy a vote of no confidence.

Lloyds inherited its Irish operations when it took over HBOS, whose aggressive lending model had helped inflate the Celtic Tiger's property bubble. Earlier this year, Lloyds announced the closure of 44 Halifax branches in Ireland, and last week said it was also going to discontinue its business banking operation.

Problem loans represent over 40% of Lloyds's €30bn loan book in Ireland, and the group concluded that there was 'little opportunity for scalable growth in the future.'

Let's have a look at three ways in which contrarian investors might consider playing Ireland.

Gartmore Irish Growth Fund

In the absence of an Ireland-focused exchange traded fund (ETF) accessible to UK investors, the Gartmore Irish Growth Fund (LSE: GIR), an investment trust, offers broad exposure to both the export and domestic economies of Ireland.

The fund listed in 1995, just as the Celtic Tiger began to roar, and has been managed since its inception by Gervais Williams. It has a good long-term performance record, having provided shareholders with a return in excess of 200% over the past 10 years.

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In the year ended 31 March, its net asset value (NAV) increased 77%, with the share price up 96% as the discount to NAV narrowed from 21% to 13%. Obviously, March 2009 would have been a great time to invest!

However, the current share price of 617p is 17% down from its bull-run high last year and the discount to NAV of 14% remains wider than its long-term average. So, a fair bit to play for if the Irish market picks up again going forward.

TVC Holdings

One of the Gartmore fund's holdings, at 2% of its portfolio, is AIM-listed TVC Holdings (LSE: TVCH), an investment company in its own right.

TVC offers a more aggressive play on Ireland, with 60% of its portfolio in just two listed companies, 12% in a handful of unlisted companies, and 28% in cash and government bonds.

The largest holding, Norkom (LSE: NORK), is a provider of innovative financial crime and compliance solutions to an international market; second-largest holding UTV Media (LSE: UTV), has radio assets in the UK and Ireland, and the ITV franchise for Northern Ireland; and the unlisted companies include an Irish hotels chain, Maldron Hotels.

Like the Gartmore fund, TVC saw a big leap in its share price in the year ended 31 March, but is now off its bull-run high.

Individual companies

There are plenty of Irish banks and construction-related companies, accessible to UK investors, as Padraig O'Hannelly wrote about back in February.

Many of the companies in the latter sector do considerable business outside of Ireland. Kingspan (LSE: KGP), for example, which reported encouraging interim results on Monday, generated less than 10% of its first-half revenue from Ireland.

Debt is a big issue with a number of companies in the sector, although not all are on the scale of infrastructure support services group Siteserv (LSE: SSV), a £7m micro cap company with net debt of €145m at the last reckoning.

For small cap investors who want to take a contrarian bet on Ireland, I haven't managed to find a company with the same kind of domestic focus and attractive fundamentals as Globo (LSE: GBO) in Greece, which I highlighted last week.

The Gartmore and TVC offerings look more attractive than the available individual companies to me at the moment -- but if you think I've missed a small cap Irish jewel, tell me about it in the comments box below.

More from G A Chester:

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Dozey1 24 Aug 2010 , 2:51pm

The biggest jewel I have found is Tullow (TLW) but perhaps the boat left long ago!

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