Morning Wrap
Today ’s Newsflow Equity Research 21 Oct 2015 Upcoming Events Select headline to navigate to article
Economic View Mortgage credit standards tightened in Q3 Company Events 21-Oct Home Retail Group; Q2 2016 Results 22-Oct Ladbrokes; Q3 2015 Results US Building Materials ABI back into positive territory in Norwegian Air Shuttle; Q3 2015 Results September Travis Perkins; Q3 2015 IMS 23-Oct William Hill; Q3 2015 Results 27-Oct Carpetright; Q2 2016 Results Geberit; Q3 2015 Results Kerry Group Strong FY15 from Chr. Hansen 28-Oct C & C Group; Q2 2016 Results St Gobain; Q3 2015 Results
Origin Enterprises Yara positive update
Fyffes Announce expansion of farming capacity
Paper & Packaging PCA notes lower containerboard Economic Events export prices, guidance for Q4 below expectations Ireland
Economic View New Governor maintains CB independence United Kingdom 22-Oct Retail Sales Ex Auto Fuel YoY
United States Kenmare Resources Weak outlook from Base Resources 23-Oct US Manufacturing PMI
Europe Commercial Property NAMA reports H115 net income of 22-Oct ECB Main Refinancing Rate €473.5m, exceeds FY14 23-Oct Eurozone Services PMI Euro Area Second Quarter Government Debt Eurozone Manufacturing PMI Eurozone Composite PMI Mincon Group Mining remains a headwind for Atlas Copco in Q3
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Economic View Mortgage credit standards tightened in Q3
There have been numerous signs that the macro-prudential rules introduced by the Central Dermot O’Leary +353-1-641 9167 Bank continue to impact on the property market. The latest bank lending survey from the [email protected] Central Bank, released yesterday, provided another.
Although there was no change in demand for mortgages reported in Q3 by the banks, credit standards tightened modestly. This is the second quarter this year that credit standards have tightened. On the demand side, the unchanged position followed a modest reduction in Q2, while this followed a substantial increase in demand in the prior two-year period. Housing market prospects, consumer confidence and the general level of interest are also contributing positively to demand, but the regulatory regime is affecting negatively. The effect of the macro-prudential rules is also seen on the supply side, with LTV sizes and other loan size limits tightened.
We always suspected that the introduction of these rules would result in a slowdown in the residential market in the short-term. In the medium-term, however, we remain of the view that the shortage of supply relative to demand should result in a reacceleration in price inflation.
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US Building Materials ABI back into positive territory in September
The Architecture Billings Index (ABI: a 9-12 month leading indicator for the US non- Robert Eason +353-1-641 9271 residential sector) returned to positive territory in September with a reading of 53.7 versus [email protected] 49.1 in August. It has now been above the critical 50 level for six of the nine months of the year. The more forward indicators of project inquiries and design contracts also remained David O’Brien +353-1-641 9230 positive at 61.0 and 53.2, respectively (versus 61.8 and 55.3 previously). david.a.o’[email protected]
Sarah Reilly Since Wolseley reported a slowdown in the industrial segment of its US business +353-1-641 6080 there has been some concern about the wider non-residential market. The strength [email protected] of the ABI in September is therefore encouraging.
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Kerry Group Strong FY15 from Chr. Hansen
Chr. Hansen reported a strong outcome to FY15, with organic growth of 10% for the year, Recommendation: Hold including 11% for its Q4. The company earns high margins at 27% on its Cultures & Closing Price: €69.32 Enzymes businesses, despite an increased spend on R&D. Hansen anticipates continued Liam Igoe organic growth of 8-10% next year. +353-1-641 9450
[email protected] The results set a positive backdrop for Kerry’s functional ingredients business. Kerry will provide a Q3 update on November 3rd. We are forecasting lfl growth of
3.5% in continuing volumes in the period.
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Origin Enterprises Yara positive update
The Scandinavian fertiliser manufacturer, Yara, reported a 15% increase in its Q3 EBITDA Recommendation: Buy and noted a 5% fall in its European fertiliser deliveries during the period. The company Closing Price: €6.53 states that the global farm outlook for fertiliser application remains supportive, especially for Liam Igoe European countries benefiting from lower exchange rates. +353-1-641 9450
[email protected] While Origin’s European customers may also benefit from a competitive standpoint due to a weaker currency, this does not apply to Origin’s UK customers, where a strong sterling continues to negatively impact on farm incomes.
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Fyffes Announce expansion of farming capacity
Yesterday afternoon, Fyffes announced a $30m investment in additional capacity in its melon Recommendation: Buy business as well as the expected acquisition of a Costa Rican banana farm for $15m. The Closing Price: €1.52 former includes the leasing of c. 2,500 ha, the purchase of 100 ha, 4 packing stations and Patrick Higgins other equipment for $18m and a further $12m investment in working capital. +353-1-641 0403
[email protected] The Costa Rican purchase was flagged in the Group’s FY14 results in March (and consequently is in our numbers), whereby Fyffes provided a vendor loan to a supplier of c.
$7m (which was accounted for under working capital movements) with the intention to acquire the assets in FY15 for $15m (with the $7m loan paid back through fruit agreements). Fyffes has been operating the asset under lease since FY14.
Finally, Fyffes has closed its Irish defined benefit scheme to future accrual and liability. This will result in a once-off payment of €20m (€10.5m higher than the balance sheet valuation) and will increase operating profits by c. €1m on a full year basis. In addition, €4.5m is payable under the merchant navy ratings pensions scheme (provisioned for on the balance sheet).
Overall, the various transactions/payments will see our net debt figure move to c. €58m (vs net cash of €10m forecasted previously), or 1x net debt/EBITDA. With capacity in melon farms close to full utilisation (17m cases), yesterday’s announcement will expand capacity by c. 25% (4m cases) and provides Fyffes with room to grow in the medium term. The expansion illustrates the strength of the division’s performance, with market share in US winter melons growing from 23% when it was acquired in 2008 to 35% this year. Home…
Paper & Packaging PCA notes lower containerboard export prices, guidance for Q4 below expectations
Packaging Corp of America has reported Q315 eps of $1.26 compared to consensus of $1.28. David O’Brien +353-1-641 9230 Corrugated volumes increased by 1.3% yoy during Q3 compared to +2.1% in Q2 and +4.4% david.a.o’[email protected] in Q1. While not being specific on which region, management notes that containerboard export prices are lower. Guidance of $1.03 for Q4, which includes a headwind of $0.10 for Robert Eason +353-1-641 9271 maintenance, compares to consensus of $1.17. [email protected]
These results appear pretty lacklustre from Packaging Corp with some softness coming from the print paper business. Corrugated volume growth in the US is solid but unspectacular. We await further commentary from management on containerboard export prices. Given that kraftliner imports to Europe are making little or no profit, we believe the scope for pricing downside to Europe is relatively limited or deliveries will reduce materially.
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Economic View New Governor maintains CB independence
Yesterday’s announcement that Philip Lane will become the next Governor of the Central Dermot O’Leary +353-1-641 9167 Bank is only a surprise due to the intense speculation that it would be awarded to his nearest [email protected] challenger for the role over recent weeks.
In terms of credentials on international finance, Professor Lane has few peers, having achieved his PhD in Harvard, written extensively in peer-reviewed journals and taught alongside the outgoing Governor in Trinity College for years. He will be an important intellectual asset at the ECB Governing Council.
Perceived lack of independence has been a criticism levelled at the Central Bank in the past, given that Governors have tended to come from within the ranks of the civil service. Governor Honohan was the first to break that trend, while the appointment of Philip Lane will ensure that independence is maintained.
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Kenmare Resources Weak outlook from Base Resources
While Q3 production volumes from Base Resources this morning all showed healthy QoQ Recommendation: Hold increases (ilmenite +2.3%, rutile +7.3%), it is the comments on the current market outlook Closing Price: £0.02 that draws attention. As expected, Zircon demand remained relatively stable through Gerry Hennigan September, but pricing for ilmenite and rutile came under further pressure towards the end +353-1-641 9274 of the quarter as “competition for sales increased”. Reflecting the latter, the statement adds [email protected] that “many ilmenite producers continue to experience significant financial pressure as market prices remain at unsustainable levels”. The statement adds that management at Base do not expect any significant improvement in conditions over the course of Q4.
While the above will not come as a surprise, the ability of mineral sands producers to deleverage in the current environment will clearly be difficult. We are forecasting a broadly ‘flat’ net debt progression for Kenmare in 2015, exiting the year on $317.8m on cost cutting initiatives. Based on the comments above, that may be a challenge.
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Commercial Property NAMA reports H115 net income of €473.5m, exceeds FY14
NAMA reported Q2 results yesterday, recording a net profit of €344.1m for the quarter, Eamonn Hughes +353-1-641 9442 bringing the H1 outturn to €473.5m, c. €15m ahead of last year’s full year outturn and [email protected] flagged on October 1st in NAMA’s upgraded lifetime profit estimate from €1.0bn to €1.75bn. Net interest income in Q2 was €99m, down from €105.3m in Q1 as the loan book continues Colm Foley +353-1-641 6042 to shrink (-10% over the quarter). Other income was €288m in H1 (€28.5m in Q1), [email protected] incorporating a net profit €259m on disposal of loan and property assets, largely reflecting Sarah Dunne surplus income from debtors who have fully repaid all NAMA debt. In addition, NAMA +353-1-641 0482 recognised a €24.8m impairment write-back in H1, small in the context of its loan book, but [email protected] its first since inception. Cash proceeds from disposals was €1.96bn in Q2, with a total of €2.1bn of cash generated in the quarter (€1.4bn in Q1), with €1.75bn of senior bond redemptions (€1.0bn in Q1).
Our current forecasts drive an end 2018 NAV of €2.6bn, a €1bn surplus to NAMA’s subordinated bonds (€1.6bn). However, we previously flagged that a more realistic surplus was closer to €2bn given our model excluded any further improved collateral values, any profit on the Dundrum Shopping Centre sale and a further €300m of impairments, all of which are looking increasingly conservative. Publication of the H1 results, the closing of the Dundrum SC sale and NAMA’s updated guidance 3 weeks ago all point to growing confidence on a €2bn+ lifetime surplus estimate. Indeed, with NAMA’s Dublin Dockland’s SDZ assets still growing in value, the profit estimate risk bias remains positive. We are publishing a note with more detail separately.
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Mincon Group Mining remains a headwind for Atlas Copco in Q3
Atlas Copco, a broad based peer of Mincon, saw its share price up over 3% yesterday Recommendation: Hold following the release of Q3 results midday. While industrial demand was described as stable Closing Price: €0.68 (9% QoQ increase in revenue, ‘flat’ on a constant currency basis), demand within mining and Gerry Hennigan the oil & gas-related segments, the former of relevance to Mincon, was described as weak. +353-1-641 9274 The quarterly performance in mining was reflected in a 5% QoQ decline in orders and was [email protected] “negatively affected by cancellations of about SEK 300m, primarily related to large surface drilling rigs in Australia”. Compared to the previous year, the order intake increased in
Europe, but decreased in most other major mining markets.
In the context of ongoing weakness in the mining sector, the commentary from Atlas Copco yesterday should not come as a surprise. Acquisitions for Mincon are forecast to result in a 19% YoY increase in 2015 sales, but pricing pressure is forecast to result in a drop in operating margins from 19% to 12.6%, with YoY operating profit in our model falling as a result from €10.4m to €8.2m.
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Market Data Top 10 Covered Companies
Company Price Mkt Cap Absolute Relative to European Sector P/E (LC) (LCM) 1 Day 1 Week 1 Mth Ytd 1 Day 1 Week 1 Mth Ytd 2015f 2016f AIB Group 0.08 39,263 -2.6 -3.8 -3.8 -5.1 -2.2 -5.0 -5.9 -10.3 24.3 27.3 CRH 23.51 19,176 -0.6 -1.5 -8.7 18.1 -0.2 -2.6 -10.7 11.6 21.0 12.9 Ryanair 13.40 18,544 -0.4 4.5 -1.1 36.6 0.0 3.3 -3.3 29.0 13.1 15.0 IAG 5.92 12,034 -1.9 2.7 -1.4 21.8 -1.5 1.5 -3.6 15.0 11.4 8.0 Wolseley 37.54 9,762 0.4 1.5 -9.2 1.8 0.4 2.2 -11.7 1.8 15.6 14.3 Kerry Group 69.32 12,186 0.8 3.5 5.4 21.5 1.2 2.3 3.1 14.7 23.1 21.2 Bank of Ireland 0.36 11,691 1.1 6.2 5.2 15.3 1.6 4.9 3.0 8.9 11.3 11.8 Mondi 14.60 7,089 0.6 1.4 5.8 39.0 1.1 0.2 3.5 31.3 14.2 12.9 easyJet 17.31 6,820 -0.9 0.5 -0.7 3.6 -0.9 1.1 -3.4 3.5 12.4 11.7 Travis Perkins 19.36 4,782 0.4 -1.5 -4.7 4.3 0.4 -0.8 -7.3 4.2 15.4 13.1
Indices ISEQ performance
% Price 1 Day 1 Week 1 Mth Ytd 7,000 ISEQ 6,298.77 0.18 2.40 -2.60 20.56 6,500 FTSE 100 6,345.13 -0.11 0.04 3.95 -3.37
DAX 30 10,147.68 -0.16 1.14 2.33 3.49 6,000 CAC 40 4,673.81 -0.64 0.66 3.04 9.39 FTSE Eurofirst 300 1,431.95 -0.45 1.04 2.46 4.63 5,500 Nasdaq 4,880.97 -0.50 1.76 1.11 3.06 5,000 S&P 500 2,030.77 -0.14 1.35 3.71 -1.37 Dow Jones 17,217.11 -0.08 0.79 5.08 -3.40 4,500 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Nikkei 225 18,207.15 0.42 -0.15 0.76 4.33
Exchange Rates
Current Px 1 day Px 1 Week Px Dec14 Avg Ytd
Stg/€ 0.734 0.731 0.747 0.776 0.729 STOXX 600 performance US$/€ 1.134 1.131 1.137 1.210 1.116 CHF/€ 1.082 1.083 1.092 1.202 1.065 420 410 JPY/€ 136.014 135.126 136.328 145.079 134.844 400 390 Bonds 380 370 Yield 1 Day Yld 1 Wk Yld 1 Mth Yld 3 Mth 360 US 2 Yr 0.63 0.04 0.63 -0.05 -0.08 350 340 US 10 Yr 2.07 0.05 0.02 -0.07 -0.31 330 320 UK 2 Yr 0.56 0.01 - -0.04 -0.23 310 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 UK 10 Yr 1.75 0.03 0.02 0.02 -0.34
BD 2 Yr -0.25 0.02 0.01 -0.25 -0.03
BD 10 Yr 0.62 0.06 0.04 0.62 -0.09
Irish 10 Yr 1.22 0.06 0.04 -0.04 -0.14
Commodities FTSE 250 performance
% Current 1 day 5 day 1 Mth 1 Yr 18,500 Brent (ICE $/bbl) 48.71 0.21 - 2.61 -42.96 18,000 Gasoline (NYM $/Gal) 1.25 - -4.27 -7.73 -43.12 17,500
Heat Oil (NYM $/Gal) 1.45 - -2.50 -2.79 -41.70 17,000
Nat.Gas 2.48 1.39 0.94 -4.95 -32.53 16,500
Gold $/oz 1,177.75 0.20 -0.55 3.18 -5.36 16,000
Silver $/ozt 15.86 - -1.98 3.93 -8.75 15,500
Copper U$/MT 5,189.00 -0.97 -2.90 -3.15 -21.56 15,000
Wheat $/BU 4.86 - -3.33 -0.21 -5.40 14,500 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15
Source : FactSet
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