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Kerry Group Continued improvement in Q4 Company Events 16-Feb Kerry Group; FY20 Results Playtech Announces strategic agreement further outlining 18-Feb Air France-KLM; FY20 Results its US optionality Barclays; FY20 Results 19-Feb IRES REIT; FY20 Results Irish Banks BPFI study highlights Irish mortgage RWA Kingspan; FY20 Results density outlier status NatWest Group; FY20 Results SEGRO; FY20 Results Irish Banks Minister unsurprisingly guides ongoing support 23-Feb HeidelbergCement; FY20 Results HSBC; FY20 Results for businesses Irish Economic View Big pharma contributes to record exports in 2020
Economic Events Ireland
United Kingdom
United States
Europe
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Kerry Group Continued improvement in Q4
Kerry has reported a robust FY20 performance, following a solid Q4 outcome, helping to Recommendation: Buy achieve an EPS outcome of 345.4c which is broadly in-line with forecast. This represents a Closing Price: €106.10 9.4% decline on a constant currency basis, compared to guidance of 8-11%. The Taste & Nutrition (T&N) division returned to volume growth in Q4 (+0.7%) with FY volumes declining Jason Molins +353-1-641 9141 3%. T&N margins were 10bps ahead of forecast at 14.2% (-110bps yoy). The Consumer [email protected] Foods division underlying FY volumes (ex. ready meal contract loss) were up 2.2% which implies a strong Q4 performance of +8.8%. Margins were broadly in-line with forecast at
7.8% (+20bps yoy). The Group also announced that it is conducting a strategic review of its dairy-related businesses in Ireland and the UK.
Key takeaway from today’s update are as follows: i) Kerry’s Taste & Nutrition division delivered FY20 organic volume decline of 3% (GBY -3%), implying a Q4 outcome of +0.7% (GBY 0.7%). While foodservice volumes fell 19% in the year, performance continued to recover in Q4, falling 8%% in the quarter (vs. -15% in Q3). By region, Americas fell 2.5%, Europe -5% , APMEA -1.9% Margins were down 110bps to 14.2% reflecting operating deleverage and net COVID-related costs. ii) The Consumer Foods division reported underlying organic volume growth of 2.2% (-2.6% inc. the ready meal contract loss) which compares to GBY forecast for +0.4% and implies a strong Q4 performance of +8.8%. The division saw a strong performance across the portfolio, while its frozen meals business also benefitted from increased retailer stocking in Q4. Margins grew 20bps to 7.8% as efficiencies were partially offset by COVID-19 impacts and pricing; and iii) Net debt came in at €1.95bn (GBY €1.9bn), resulting in pro-forma net debt:EBITDA of 1.9x. Kerry has completed €280m of M&A deals during the year and we note yesterday’s announcement to acquire Biosearch Life for c.€127m.
In terms of outlook, T&N growth prospects remains strong in the retail channel, while foodservice is expected to see a continued recovery. Overall T&N volumes are expected to be flat to positive volume growth in Q1, with a strong recovery and good growth in the FY21. Consumer foods is expected to deliver good growth underpinned by innovation.
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Playtech Announces strategic agreement further outlining its US optionality
Playtech has this morning announced that it has signed strategic agreements with various Recommendation: Buy subsidiaries of Greenwood Racing Inc in the US. The agreement includes the licensing of Closing Price: £4.85 Playtech product to Greenwood companies in Michigan, Indiana, New Jersey and Pennsylvania. The first launch as part of this agreement will commence with the launch of Gavin Kelleher +353-1-641 0423 online casino in Michigan on Playtech’s IMS and Player Account Management system. This [email protected] follows on from Playtech announcing in January that it had received Michigan approval in December last year.
At present Greenwood companies own and operate Parx Casino, which is the largest land based casino in Pennsylvania, and it operates online sports betting and online casino in the state as well. In 2020, it generated $61m in iGaming revenue in Pennsylvania and $16m of online sports betting revenue. It had an 11% share of the Pennsylvanian iGaming market and an 8% online sports share during 2020. In New Jersey, it operates on the Ocean Casino licence, which had a low single digit share in 2020. It operates retail sports betting in Michigan but will launch online casino with the signing of this deal with Playtech.
While we do not expect to change our forecasts on the back of this announcement it is news flow that should be well received as it offers further evidence of Playtech increasing its US optionality. The group has already launched iGaming products in New Jersey for Bet365 and Entain during 2020. This deal is another very positive step as it is a multi-state and multi product deal, and the supply of the IMS shows how Playtech will be a key partner for Greenwood companies going forward. We suspect there is potential to expand this agreement into other US states, outside of the 4 covered in this agreement, over time. It also suggests that there could be significant demand for the IMS in the US market.
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Irish Banks BPFI study highlights Irish mortgage RWA density outlier status
The BPFI has published an extensive study of 12m data points from 613k mortgages across Eamonn Hughes €83bn of value at the five retail banks showing that Irish banks hold 3x more capital on the +353-1-641 9442 mortgage book compared with European peers. It estimates that this equates to an extra [email protected] capital requirement of c.€2.5bn across the Irish financial system due to an average 37.1% Barry Egan RWA density on Irish mortgages in the analysed pool vs an average 13.3% across the EU. +353-1-641 6059 [email protected] There were a few findings of interest to us from the note. Firstly, the average RWA density in the BTL book was 64.8% compared with 33.3% for the PDH (principal dwelling), but the
average LTVs were similar at 49.1% and 45.1%. Secondly, the RWA density on Never
Impaired mortgages is 29.0%, with a density of 83.0% on the Now/Past Impaired book. Both have similar LTVs of 45.0% and 45.6% respectively. As such, this is saying that the Never Impaired mortgages RWA density is still 2.2x the average in Europe (which actually includes impaired, so the gap is probably a little wider again). The “bad book” pool is down from 33% of the mortgage pool in 2014 to just 15% now but over this period, but RWA densities have risen, partly due to the TRIM exercise. Indeed, the BPFI report shows a major improvement in the quality of the overall loan book in recent years, but it is having no impact on lowering capital requirements for the retail banks. This is expressed mainly in the fact that post-2017 mortgages have an RWA density of 31.3% (39.3% pre 2017) post the macro-prudential rules, but average LTIs and LTVs are at the lower end of the scale versus peers. For instance, it notes banks in Austria and Belgium are lending at >6x LTI vs Ireland on 3.2x but RWA density is 10/11% in Austria/Belgium vs 31% on post-2017 lending in Ireland. This 31% risk weighting is very close to the standardised risk weight of 35% (so much for IRB models!!). Finally, the analysis shows a strong correlation in Europe between RWA density and LGD, except in the case of Ireland. The report suggests that this is from the use of Downside LGD which is significantly more aggressive in Ireland due to the much larger drop in property prices during the last crisis. Also, the report finds that the low level of recovery of security for mortgages in Ireland is also a factor (average 11% recovery rate at end of enforcement through the judicial process vs 46% EU average).
We undertook a similar exercise in early 2019 on mortgage RWA density and came to the exact same conclusion. Our Changing the Conversation analysis estimated that Irish mortgage RWAs were 3.2x the EU average, a very similar finding to the BPFI work this morning. However, to be fair, the BPFI report analyses data on over 600k mortgages, so is a hugely detailed and convincing piece of work. The frustration for the Irish banks will be that even as credit quality improves, Irish
mortgages will continue to attract much higher RWAs than peers unless a greater This document is intended for the sole use of Goodbody Investment Banking and its affiliates weight is attached to the improvements in underwriting quality under the macro- prudential framework. This will keep Irish mortgage rates elevated given Irish banks need to hold more capital than peers to support their mortgage books, with Irish mortgage rates currently are over 2x EU levels (2.76% vs 1.29%). Our own analysis suggests that Irish mortgage risk weights are probably c.30% too high, suffering from inclusion of the prior GFC downturn data, unlikely to be repeated since the introduction of the macro-prudential rules. Another way of thinking about this is the BPFI estimate of the “extra” capital requirement of €2.5bn tied up across the financial system because of the higher RWA density vs Europe. Allocating this out across the banks simplistically based on mortgage market shares (forget about underwriting/LTVs/LTIs etc), then this equates to c.150bps of CET1 capital at AIB, 130bps at BOI, but 430bps at PTSB. As such, underlying ROEs would be much better if this was the case (core ROEs would be c.10% better at AIB and BOI if this was the case, much higher at PTSB).
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Irish Banks Minister unsurprisingly guides ongoing support for businesses
In no surprise really, the Minister for Finance has acknowledged that the government’s Eamonn Hughes pandemic support for businesses is likely to be needed for the first half of the year. Mr +353-1-641 9442 Donohoe was speaking after a briefing of the Eurogroup of Finance Ministers by the WHO on [email protected] the outlook for the pandemic, with the Minister suggesting that economic supports would Barry Egan remain “as long as they are needed”, adding “there is an inherent risk in withdrawing +353-1-641 6059 support too early”. This clearly cements expectations that the current supports will be [email protected] extended beyond end Q1, with the Minister noting there will be no “cliff edge”.
Elsewhere in the SME sector, we note the Irish Independent story that PTSB is forming a
partnership with invoice discounter Bibby Financial Services. The referral agreement with involve Bibby offering invoice finance services to PTSB customers. The move is another part of PTSB’s wider strategic efforts to deepen its penetration of the SME market.
SMEs will welcome the expression of interest in continued support for businesses, though recognition of these needs will already have been factored into investor’s expectations, and our own.
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Irish Economic View Big pharma contributes to record exports in 2020
Strong growth in pharmaceutical exports propelled Ireland’s trade surplus to a record high of Dermot O’Leary €75bn last year, largely contributing to Irish GDP growing at the fastest pace in the +353-1-641 9167 [email protected] developed world. According to data published by the CSO yesterday, Ireland recorded a trade surplus of €75bn in 2020, up from €62bn in 2019. Within this, exports grew by 5% to €161bn, while imports declined by 6% to €85bn.
The data published yesterday relate only to goods. Exports of goods from Ireland are dominated by the large pharmaceutical sector, accounting for two thirds of the total in 2020. Delving deeper, 59% of these exports were “medical and pharmaceutical products”. Exports of this category boomed by 25% last year due to the fight against the pandemic. As such, Ireland benefited from being an important base for some of the so-called “winners” from the crisis. The other area of growth globally was, of course, ICT, where Ireland has also excelled over recent decades. We are likely to see the impact of the growth in that sector in the National Accounts data to be published next week.
While GDP is a flawed gauge of economic progress in Ireland due to distortions caused by the large multi-national presence in the country, it does tell us something about the rising importance of foreign trade and investment for the country. This has real effects in the form of jobs, incomes, innovation and tax revenue.
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