Equities Commentary
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R Monday, 15th February 2016 We believe equities could see a short term bounce this week, having held key support levels on both the S&P and Dax. In testimony on Capital Hill last week, Fed Chair Yellen gave confusing signals regarding the economy, saying the Fed would be open to the idea of negative interest rates, but that current financial market volatility was yet to feed into the real economy. The US also sees some important economic data this week in the form of Empire Manufacturing and Manufacturing Production today and tomorrow respectively, and the Minutes from the last Fed meeting on Wednesday. Expectations for rate rises in the US have now been pushed back into 2017. We believe European equities are anticipating a substantial increase in the ECB’s QE programme at the March meeting, at least €80bn per month in asset purchases. Should this not be forthcoming, we expect equities could see further downside. In this environment, the best performing names are those in defensive sectors like Telecoms and Healthcare, and those companies with specific earnings drivers which are not NEWS linked the wider economic growth. David Donnelly | Senior Investment Analyst Equities Commentary Bank of Ireland – Sit tight despite uptick in volatility Closing Price: €0.267 The financial sector has been the worst performing sector in Europe so far in 2016 due to a combination of variables impacting all banks. Firstly, collapsing core yields in Europe are impacting analysts’ Net Interest Margin (NIM) forecasts. Secondly, the spread between core European government bonds (Germany, France) vs. peripheral European government bonds (Ireland, Italy, Spain) have widened, which has negatively impacted peripheral banks. Finally, there are also fears that the recent decline in oil prices will lead to an increase in Non Performing Loans (NPLs) on bank’s balance sheets which could hurt a bank’s capital ratio and limited their abilities to pay dividends. Specific concerns impacting Bank of Ireland include ongoing fears of a BREXIT which continues to weaken the Sterling Pound, which has weakened 10% against the Euro over the past 3 months. This negative translation effect is impacting the size of BOI’s Euro denominated balance sheet. Similarly, uncertainty over the outcome of the Irish election on the 26th February, is also weighing on sentiment. Investor’s may be worried about organic loan volume growth in Ireland too. Last week, there was saw strong demand for BOI’s shares at 25c which should act as support going forward. We expect BOI to announce its medium term dividend policy when it releases Full Year 2015 results next Monday the 22nd February which should support the stock price. We ultimately believe asset quality will continue to improve, impairment charges will decline and the bank will continue to generate capital organically excluding the volatile pension liability. We remain happy to hold positions at current levels, and believe the recent market stress will pass. Stephen Hall, CFA | Investment Analyst Key Metrics 2015e 2016e 2017e Revenue (€’bn) 3.3 3.2 3.3 EPS (€’c) 2.7 2.7 3.1 P/B 0.99x 0.94x 0.88x Div Yield 0.0% 2.9% 5.9% Share Price 1 Mth 3 Mth YTD Return Bank of Ireland -18.7% -19.2% -22.8% ISEQ -15.5% -12.5% -12.4% Source: Bloomberg CANTOR FITZGERALD IRELAND LT D 1 Weekly Trader Monday, 15th February 2016 Verizon – Continues to outperform the S&P Closing Price: $50.11 US telecom giant and core portfolio name Verizon continues to outperform the market, posting gains of 6.68% YTD, while the S&P has declined 8.8%. The shares offer defensive qualities and an attractive dividend yield of 4.64%, against the broader S&P on 2.54%. Verizon remains the market leader in the US for quality, with market leading positions across most metrics. Its recent earnings were a further positive, with the group posting 19.1% growth in EPS, while Operating revenues and customer growth were also ahead of expectations. The dividend remains well covered at 1.74x earnings and 3.54x cash. As the telco space moves to increase mobile content, and while peers have completed multi-billion dollar mergers and acquisitions of various content providers, Verizon has spent significantly less. Its main acquisition was of AOL for $1bn dollars while rolling out its mobile content service Go90. The motivations for the AOL deal include its mobile and advertising platforms, as well as acquiring AOL’s original content programming and media brands such as the Huffington Post. The Go90 video streaming service, includes live broadcasts of college football, basketball and international soccer, music performances, as well as programs like Comedy Central’s Daily Show, ESPN’s 30 for 30 and live NFL games. In addition to increased data usage, Verizon is looking to add value to advertisers by providing targeted marketing and a more comprehensive picture of consumers. It will look to utilise data from multiple platforms across traditional and digital media to provide a more multi-dimensional view that improves targeting and customer conversion. The shares remain attractive trading on just 12.4x 2016e P/E, a discount to peers on 20.5x. Shane Kelly | Investment Analyst Key Metrics 2016e 2017e 2018e Revenue ($’bn) 131.8 132.5 132.9 EPS ($) 3.9 4.1 4.3 P/E 12.4x 12.2x 12.0x Div Yield 4.6% 4.7% 4.9% Share Price Return 1 Mth 3 Mth YTD Verizon 9.6% 9.5% 6.5% Eurostoxx Tele- -9.6% -19.6% -14.1% coms Source: Bloomberg Smurfit Kappa – Big Re-rating potential Closing Price: €21.20 We think the de-rating in Smurfit Kappa’s valuation over the past 9 months has been too excessive, and we feel there is significant positive re-rating potential in the stock over the short term. Even after rallying 16% off Monday’s lows, Smurfit is only trading at 9.5x FY16e earnings, which is a 20% discount to its 3 year historic average at 11.8x forward earnings. We beleive a conservative re-rating to 10.5x earnings is achievable, offering 11% upside potential in the near term. The market remains broadly bullish on Smurfit, with a consensus 12mth Target Price of €28.60, which offers 35% upside potential if achieved. Smurfit reported an impressive set of Full Year 2015 results last Wednesday, which showed solid organic volume growth of 3%, an ability to pass through corrugated price increased and big increase in its dividend payment. Smurfit is still a very attractive dividend play especially in a very low interest rate yield environment and offers investors a FY16e dividend yield of 3.6%, which is a full 1.4% above the ISEQ average of 2.2%. Smurfit is a highly Free Cash Flow generative company, with a FCF yield for FY16e of 9%. Smurfit is modestly geared, with a Net Debt/ EBITDA of 2.6x even after the two Brazilian acquisitions announced at the beginning of 2016. Management is positive on the earnings growth outlook for 2016, and the market is forecasting EPS growth of 12% in 2016 and 5% in 2017. Stephen Hall, CFA | Investment Analyst Key Metrics 2016e 2017e 2018e Revenue (€’bn) 8.5 8.7 8.8 EPS (€) 2.2 2.3 2.6 P/E 9.4x 8.9x 8.0x Div Yield 3.7% 3.8% 4.3% Share Price Return 1 Mth 3 Mth YTD Smurfit Kappa -14.1% -22.1% -13.9% ISEQ -15.5% -12.5% -12.4% Source: Bloomberg CANTOR FITZGERALD IRELAND LT D 2 Weekly Trader Monday, 15th February 2016 Oil - Gaining exposure to oil RD Shell Closing price: GBp1526 Today marks the beginning of trading for the newly combined Royal Dutch Shell and BG. Since the successful approval of the deal by both sets of shareholders, Shell’s shares have rallied 4.7%, suggesting that the uncertainty regarding the completion of the deal was weighing on sentiment. Our other Core Portfolio Big Oil name, Exxon, is one of the strongest performing names year-to-date, rising 2.1%, while the S&P has declined 8.8%. On a longer term view we see exceptional value in Big Oil names, as ultimately we expect oil prices to rebound over the coming years, and that the current depressed price per barrel is unsustainable. We believe oil prices are currently being weighed on by both over supply, but also diminished demand as a result of concerns regarding a slowdown in global growth. We believe such a reduction in demand is natural at this point in the business cycle, but that demand should steadily rebound in the coming years. Critically however, the net result of such low oil prices is the under spending on oil industry infrastructure. As a result, when oil demand rebounds there will be insufficient infrastructure in place to meet demand, resulting in potentially sharp rallies in the commodity. For investors who would like broader ways to play a future rebound in oil, the iShares Global Energy ETF (IXC US) offers exposure to many of the world’s largest oil companies, and benefits from dividends being distributed from multiple companies, thereby reducing the risk of any one Oil company cutting its dividend. Alternatively, a more direct exposure can be found through ETF Securities OILB ETF (OILB LN), which tracks the price of the Brent Oil benchmark, Europe’s primary oil contract. Alternatively, we have recently launched the Cantor Fitzgerald Oil & Gas Kick Out Note III, which offers a maximum of a 5 year investment term and offers potential returns of 17% per annum.