Morning Wrap
Today ’s Newsflow Equity Research 01 Jul 2016 Upcoming Events Select headline to navigate to article
Cairn Homes Positioned to benefit from Irish homebuilding Company Events upswing 05-Jul IAG; June 2016 - Traffic Stats Persimmon; Q2 2016 Trading Update GVC Holdings Publishes notification of transfer to premium 06-Jul Norwegian Air Shuttle; June 2016 - Traffic Stats listing Topps Tiles; Q3 2016 IMS 07-Jul Air Berlin; June 2016 - Traffic Stats Commercial property Office market strength continues Associated British Foods; Q3 2016 results CPL Resources; Q2 2016 results Hibernia REIT Acquisition of 3 blocks in single estate for Marks & Spencer; Q1 2017 results €51.0m Kerry Group Robust performance from McCormick in Q2 Breedon Aggregates Hope Materials deal on track to complete in August Independent News & Media Trinity Mirror update is more evidence of print weakness
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Goodbody Stockbrokers (trading as Goodbody) is regulated by the Central Bank of Ireland. For the attention of US clients of Goodbody Securities Inc, this third-party research report has been produced by our affiliate Goodbody Stockbrokers. Please see the end of this report for analyst certifications and other important disclosures. Goodbody Morning Wrap
Cairn Homes Positioned to benefit from Irish homebuilding upswing
We have updated our model to reflect acquisitions over the past few months and the FY15 Recommendation: Buy results. We are anticipating Cairn sells c.100 homes in 2016, ramping up to c.350 in 2017, Closing Price: €0.96 c.790 in 2018 and hitting its target run rate of 1,000+ in 2019. A new housing plan is Eamonn Hughes earmarked for July by the new government and is likely to include a range of measures to +353-1-641 9442 encourage residential delivery (infrastructure spend, possibly lower VAT rates etc). Cairn [email protected] controls c.20% of undeveloped land in Dublin and its strong balance sheet and team with extensive operational experience leaves it ideally placed in the cyclical upswing.
Cairn is targeting operating margins of c.20% when production ramps up. We conservatively model house price inflation below our house view and rising cost growth, resulting in margins of c.17.6-19.3% over 2018-20. We are forecasting that NAV grows by c.20% by 2020, but Cairn is strongly cash generative, with net cash accounting for 45% of NAV by 2020, from net debt last year.
Whilst falling heavily in recent days on Brexit concerns (-c.30%), UK housebuilders in prior house completion growth cycles traded on 1.6-1.7x P/NAV. Applying these multiples to our NAV in the year of Cairn’s trend 1,000+ run rate and discounting back drives a €1.33 valuation. We also look at ROCEs by decade end to drive multiples, recycle some cash and value the residual at 1x (all discounted back), deriving a €1.29 valuation. We update our PT to the €1.31 mid-point. Buy.
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GVC Holdings Publishes notification of transfer to premium listing
GVC Holdings has this morning released its notification to transfer to a premium listing. The Recommendation: Buy company has requested that the UKLA approve the transfer with effect from 8.00am on the Closing Price: £5.63 1st of August. Moving to a premium listing should mean GVC will become eligible for FTSE Gavin Kelleher index inclusion in September. In today's announcement they also flag that GVC has extended +353-1-641 0423 the Cerberus debt facility from September 2017 to April 2018. The extension does not alter [email protected] the Board's intention or timetable for refinancing on improved terms. They still intend to refinance this facility before the existing maturity. We expect to hear something on this at the end of this year or early next year.
This morning’s announcement was expected and is broadly in line with management’s guidance on a timetable for a premium listing (however it is probably happening a little quicker than we would have expected which is a positive). We see a premium listing and inclusion in the FTSE as positive from both a technical and quality perspective and a premium listing is one of a number of positive catalysts we identified in our June 3rd note. We continue to like the GVC story and we re-iterate our positive call on the stock.
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Commercial property Office market strength continues
In its latest bi-monthly report on the commercial property market, agents CBRE states that Dermot O’Leary +353-1-641 9167 activity in the Dublin office market has continued to be strong, with a healthy volume of [email protected] transactional activity being recorded in Q2. While no numbers are mentioned, it also notes that there are currently “several sizeable transactions currently in negotiations” and will fall into the numbers over the coming months.
In relation to rents, the report notes that while €60 per square foot is now being quoted for a number of buildings in the CBD, there is no firm evidence as yet of this level being achieved. As such, CBRE has left its CBD Grade A rent estimate unchanged at €57.50 per sq ft. It does expect to see further upward pressure in the Autumn. In our estimates for the Irish REITs, we assume an end-year rent figure of €65 per sq ft both this year and next, although there may be some upside risk to this estimate. The reason for this is the ongoing delay in new supply coming on stream. In this regard, CBRE notes that several schemes whose original completion date was 2018 will not now be completed until “2019 or beyond”.
It is too early to tell the specific impact on the Dublin office market of the UK’s decision to leave the EU, but there has been some evidence of an impending migration of firms and people that could be of benefit over the coming years.
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Hibernia REIT Acquisition of 3 blocks in single estate for €51.0m
Hibernia REIT has announced the acquisition of Blocks 1, 2 & 5 Clanwilliam Court, Dublin 2 Recommendation: Buy for €51.0m. The acquisition of the office buildings, comprising 93,700 sq ft, equates to €544 Closing Price: €1.27 sq ft and follows the purchase of Marine House in March, in the same estate, for €26.5m (or Eamonn Hughes €640 sq ft). +353-1-641 9442
[email protected] Blocks 1, 2 & 5 are 76% let, generating income of €2.9m from rent of €34 sq ft, equating to a net initial yield of 5%. Hibernia notes recent lettings in the buildings in excess of €40 sq ft, so if fully let and post-settlement of an outstanding rent review, the buildings could yield closer to 7.5%. The weighted average period to break/expire is 5 years and all leases are due to expire by the end of 2021. The 5% net initial yield on the current acquisition compares to the 4.3% level on the original Marine House acquisition. Hibernia now owns four contiguous blocks (134,000 sq ft) of the seven blocks that comprise the estate (six office blocks, one residential).
The acquisition provides a decent initial yield with good asset management opportunities to increase income further. In addition, given its very central location and the synchronized lease expiry on the blocks, Hibernia also has refurbishment/ redevelopment potential at a later date. Previously, Hibernia had c.€265m of investment capacity, a figure set to reduce to c.€210-215m post the acquisition. Hibernia trades on 1x its last reported NAV, but is set to grow NAV by an average 10% p.a. over the next two years, helped by an attractive near term development pipeline (a beneficiary of Brexit?). We reiterate our Buy call and €1.56 PT.
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Kerry Group Robust performance from McCormick in Q2
McCormick’s reported Q2 results yesterday afternoon, with constant currency sales growth of Recommendation: Buy 6%. The Group’s Industrial division (which is a peer of Kerry’s Taste & nutrition division) Closing Price: €79.14 grew constant currency sales by 3% (vs +5% in Q116) in the quarter driven by both Liam Igoe volumes and price/mix. By region, the Americas region grew c.c. sales by 2% with growth in +353-1-641 9450 branded foodservice products and snack seasonings. In EMEA, c.c. sales grew 1% driven by [email protected] pricing partly offset by lower volumes. This is compares with +11% in Q1 as distribution gains from last year are lapped.
Overall the key growth drivers for the division are unchanged and on the conference call management highlighted that ‘health and wellness’ drove about 40% of its innovation pipeline. In terms of outlook, management reaffirmed its range of expected growth rates in sales and adjusted EPS and indicated its greater confidence in achieving the higher end of those ranges.
Both Kerry and McCormick’s are benefitting from the significant change in consumer preferences and accelerated level of new product development by consumer packaged food companies. McCormick’s H1 growth rate of c.4% in H1 is broadly in-line with our H1 lfl sales growth forecast (due August 4th) for Kerry’s Taste & Nutrition division of 3.7%. However, despite the similar growth prospects McCormick trades on a FY17 PE multiple of 25x vs. Kerry on 21x.
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Breedon Aggregates Hope Materials deal on track to complete in August
Yesterday, the Competition and Markets Authority (“CMA”) announced that subject to Recommendation: Buy consultation with interested parties, it was minded to accept the proposed undertakings by Closing Price: £0.62 Breedon Aggregates in relation to the acquisition of Hope Construction Materials. The Jason Molins undertakings include the sale of 27 ready-mix concrete sites, with the majority being sold to +353-1-641 9141 CRH. In a separate statement, Breedon Aggregates noted that it is confident of completing [email protected] the acquisition in early August.
Overall, this news is encouraging both in respect of the positive ruling from the CMA and also the ability for Breedon Aggregates to find a buyer for the assets in the context of the UK market which is facing some uncertainties post the Brexit vote.
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Independent News & Media Trinity Mirror update is more evidence of print weakness
Trinity Mirror, a UK listed print led media peer of INM, has issued a H116 post close trading Recommendation: Hold update this morning. The group’s previous trading update on May 5th showed like-for-like Closing Price: €0.14 group revenue of -8.6% yoy in the first four months of the year and this trend has continued Gavin Kelleher into Q2 with H1 lfl revenue of -8%. The majority of the weakness is being driven by a sharp +353-1-641 0423 decline in publishing print advertising revenue of -17% in H1. The decline in circulation [email protected] revenue has not been quite as severe, -5% in H1. Trinity Mirror’s digital revenue grew 14% yoy in the period.
The update form Trinity Mirror is yet another indication of the challenges facing the print media vertical whose decline has clearly accelerated in 2016. At its AGM last month INM cited print advertising weakness in 2016 thus far. Management’s ongoing efforts to offset this through digital growth and shrewd cost cutting has proven successful thus far but will become more difficult in the wake of sharper declines in print media (c.95% of group revenue). However, we acknowledge that the current valuation (c.10% FY16 free cash flow yield) reflects a lot of these risks.
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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 2016f 2017f CRH 26.00 21,207 1.0 -4.6 -4.5 -2.6 -0.1 0.1 0.6 8.0 16.4 12.9 Ryanair 11.32 15,497 2.8 -17.3 -19.7 -24.6 1.8 -13.1 -15.5 -16.4 14.2 10.0 AIB Group 5.50 15,023 0.0 -12.7 -19.8 -17.4 -1.0 -8.3 -15.5 -8.4 12.1 16.7 Kerry Group 79.86 14,039 0.9 -0.1 -1.5 4.7 -0.1 4.9 3.7 16.1 24.2 21.3 HeidelbergCement 67.47 13,387 -1.3 -10.9 -12.3 -10.8 -2.3 -6.5 -7.6 -1.1 13.0 11.8 Wolseley 38.70 10,064 1.4 0.6 -4.5 4.8 -0.8 -2.6 -7.4 3.1 15.3 13.5 IAG 3.70 7,521 3.0 -29.9 -30.9 -39.4 1.9 -26.4 -27.2 -32.8 3.8 3.0 Mondi 13.95 6,774 4.0 2.3 3.6 4.6 3.0 7.5 9.2 16.0 12.0 11.5 Paddy Power Betfair 78.95 6,608 -0.7 -9.3 -13.9 -13.1 -2.9 -12.1 -16.5 -14.5 25.6 21.0 DCC 65.85 5,810 2.8 0.5 4.7 16.3 0.5 -2.6 1.5 14.4 26.2 24.0
Indices ISEQ performance
% Price 1 Day 1 Week 1 Mth Ytd ISEQ 5,642.49 0.97 -11.44 -13.11 -16.92 6,800 FTSE 100 6,504.33 2.27 2.62 4.39 4.20 6,600 6,400 DAX 30 9,680.09 0.71 -5.62 -5.68 -9.89 6,200 CAC 40 4,237.48 1.00 -5.11 -5.95 -8.62 6,000
FTSE Eurofirst 300 1,303.27 0.96 -4.16 -4.42 -9.34 5,800
Nasdaq 4,842.67 1.33 -1.37 -2.13 -3.29 5,600 S&P 500 2,098.86 1.36 -0.68 0.09 2.69 5,400 Dow Jones 17,929.99 1.33 -0.45 0.80 2.90 5,200 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Nikkei 225 15,575.92 0.06 -4.08 -9.63 -18.17
Exchange Rates
Current Px 1 day Px 1 Week Px Dec15 Avg Ytd
Stg/€ 0.831 0.821 0.767 0.737 0.779 STOXX 600 performance US$/€ 1.111 1.110 1.135 1.086 1.116 CHF/€ 1.082 1.088 1.086 1.087 1.096 420
JPY/€ 113.972 113.967 119.986 130.676 124.439 400
Bonds 380
Yield 1 Day Yld 1 Wk Yld 1 Mth Yld 3 Mth 360
US 2 Yr 0.58 -0.06 0.58 -0.30 -0.14 340 US 10 Yr 1.47 -0.04 -0.27 -0.37 -0.30 320
UK 2 Yr 0.10 -0.10 -0.42 -0.32 -0.35 300 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 UK 10 Yr 0.87 -0.08 -0.50 -0.56 -0.55
BD 2 Yr -0.67 -0.01 -0.11 -0.67 -0.18
BD 10 Yr -0.14 -0.01 -0.23 -0.14 -0.29
Irish 10 Yr 0.52 -0.08 -0.24 -0.25 -0.20
Commodities FTSE 250 performance
% Current 1 day 5 day 1 Mth 1 Yr 18,000 Brent (ICE $/bbl) 49.68 -1.84 2.62 -0.02 -21.87 17,500 Gasoline (NYM $/Gal) 1.50 -1.54 -1.55 -6.95 -26.74 17,000 Heat Oil (NYM $/Gal) 1.49 -3.73 1.38 -0.56 -21.23 16,500 Nat.Gas 2.92 2.13 9.84 27.80 3.25 Gold $/oz 1,320.75 -0.06 0.40 8.96 12.79 16,000 Silver $/ozt 18.36 0.82 1.77 14.32 16.94 15,500
Copper U$/MT 4,827.00 0.98 3.52 2.70 -15.63 15,000
Wheat $/BU 4.46 0.22 -4.19 -4.09 -27.65 14,500 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16
Source : FactSet
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