Monday, 5th February 2018 Key Themes This Week Major Markets Last Week Our thoughts on the recent sell off We had been guiding investors that the equity market returns we had seen Value Change % Move in January were quite extraordinary and that we needed some form of - Dow 25521 -4.12% correction in the near term as part of a healthy shakeout. Last week this 1095.75 took place and it appears to be continuing this morning with European S&P 2762 -110.74 -3.85% equities down 0.5 - 1%. The Dow had its worse day in two years on Friday and Asia fell overnight by approx. 2%. In the short term ,some profit taking Nasdaq 7241 -264.83 -3.53% was always going to happen considering the S&P was up 6% in under a month. Underlying economic growth and earnings remain quite strong, so UK Index 7358 -313.43 -4.09% from a fundamental perspective the story is still solid. However with the recent rapid tick up in yields, investors have been somewhat spooked. The DAX 12698 -626.54 -4.70% US 10 year is now 2.84%, driven by hawkish Fed minutes and a general ISEQ 6800 -259.31 -3.67% uptick in inflation expectations on behalf of household and consumers. Likewise in Europe, the German 10 year yield has moved from 0.3% to 0.73%. Nikkei 22,682 -947.26 -4.01% With the 3% level in sight and most surveys stating that investors view that H.Seng 32,245 -721.67 -2.19% level as where it gets troublesome for equities, there is a risk that the recent STOXX600 384 -16.07 -4.02% bearish sentiment we have seen takes a more permanent hold. Not only has the equity risk premium (what investors get paid for holding equity over Brent Oil 68.22 -1.24 -1.79% bonds) declined but jobs data on Friday in the US showed that wage inflation is now 2.9%, the highest rate since May 2009. This will increase Crude Oil 65.27 -0.29 -0.44% fears about margins and may put pressure on earnings expectations as we Gold 1336 -4.07 -0.30% move further into 2018. Where this goes from here is key. There have been several examples of companies using cash generated from recent tax reform to give their employees once of bonuses and pay rises. But this Silver 16.7944 -0.37 -2.17% trend has been sparse enough so far. Unless this takes hold across the Copper 320.25 0.85 0.27% board we are unlikely to see a significant move up in wage inflation, despite a pretty tight labour market at full employment. Without wage inflation it is CRB Index 443.46 3.51 0.80% unlikely to see a major consumption shift which would drive core inflation higher. Euro/USD 1.2466 0.01 0.67% Euro/GBP 0.8830 0.00 0.37% The market currently expects 2.5 hikes from the Fed this year and the Fed is guiding for 3. Likewise in Europe, Mr Draghi is blue in the face from GBP/USD 1.4118 0.00 0.31% emphasising the timeline for tightening. Bond buying to finish in September, perhaps being wound down over a 3 month period. No rate rises until 2019 Value Change at the earliest. With significant slack in the European labour market we see German 10 Year 0.737 0.04 little chance of a spike in wage inflation. Core inflation should remain muted, decreasing the possibility of Mr Draghi moving early. It must also be noted UK 10 Year 1.571 0.12 that the recent moves may mean yields are more attractive for longer-term US 10 Year 2.8489 0.16 investors who are looking to match off liabilities. If they start buying again that should help restrain yields in the near-term. Irish 10 Year 1.151 0.03 The market is definitively moving into a period of rising rates. But the critical factor for us is not the direction. It is the trajectory and speed at which is Spain 10 Year 1.436 0.02 moves. If rates continue to move like they have so far this year, it is highly Italy 10 Year 2.014 -0.01 like equity markets will experience an entrenched sell-off in the near term. But, if as we expect, the recent yield movements retrace, growth and earnings dynamics remain strong enough to sustain decent equity returns BoE 0.5 0.00 into 2018. Markets may remain staid this week however as investors watch ECB 0.00 0.00 where yields go from here. Fed 1.50 0.00 This week: Ryanair, PayPal, Facebook, Apple & Amazon All data sourced from Bloomberg CANTOR FITZGERALD IRELAND LT D 1 th Weekly Trader Monday, 5 February 2018 Ryanair – Cautious guidance drives price action Closing Price: €16.135 Will Heffernan | Investment Analyst Key Metrics 2018e 2019e 2020e Revenue (€’bn) 7.02 7.612 8.36 EPS (€) 1.195 1.265 1.399 Price/ Earnings 13.02 12.3x 11.12x Div Yield 0.46% 0.47% 0.33% Share Price Return 1 Mth 3 Mth YTD RYA ID 2.0% -9.5% 3.49% Source: All data & charts from Bloomberg & CFI Ryanair released Q3 results this morning. Management announced a €750m buyback that will start in February and is expected to com- plete in September. The rest of the results were generally in line with expectations. Q3 revenue was €1.4bn vs consensus of €1.389bn, an increase of 4.4% YoY. This was driven by increased passenger numbers (+6% YoY) and a 12% uptick in ancillary revenue. This indicates that the additional uplift we were expecting from My Ryanair and Ryanair Rooms is coming through. Q3 net income came in at €106m vs estimates of €101m. Management maintained FY18 guidance for net income to remain in the range €1.4bn to €1.45bn. Costs are expected to tick-up in FY19, driven by €300m in fuel increases and a further €100m in staff costs. The company still expects unit costs to be down by 2% in FY18, a testament to the resilience of the Ryanair model. Management has guided for 130m passen- gers carried in FY18 (up from 129m) and for this to increase by 6% in FY19. Disappointingly, it expects fares to remain under pressure, unlike its peers (who had guided for increasing fares this year). Regarding FY19 fares, management stated “while we have practically no visibility on FY 19 fares, and our budget is not yet finalised, we do not share the optimism of competitors and market commentators for summer 2018 fare rises”. On a brighter note, management did say that this decline could be offset by continuing growth in ancillary revenue. But overall this cau- tious guidance is likely to weigh on the stock in the immediate term. Regarding fuel cost increases, it is now 70% hedged for FY19 at approx. $55 a barrel. FX hedged remains high as well with 90% hedging at an average EURUSD rate of $1.25 in FY19 (up from $1.12 in FY18). Management was keen to emphasise the increased cost advantages from 2019 onwards due to the new generation of aircraft coming on broad will add 4% more seats and will be 16% more fuel efficient than any other model Ryanair currently has in its fleet. This should add further to the cost per seat advantage Ryanair maintains over its rivals. These numbers are unlikely to result in earnings upgrades for the stock. While it should be noted that management has a history of conservatively guiding, the expectations on fare prices is at odds with the rest of the peers and somewhat disappointing. However, the €750m buyback announcement is definitely welcome and indicative of management’s continuing confidence in the model. The market may view these results and guidance as somewhat underwhelming. But it highlights that the Ryanair model is still intact from a longer term perspective. It must also be noted that some of the caution in the guidance may be due to management allowing for unforeseen roadblocks in the remaining staff negotiations and potential disruption later in the year. The market expectation is for tightening capacity in Europe and supply demand/dynamics being supportive for airlines. If this scenario bears fruit, Ryanair will re-rate higher. Ryanair and the overall sector had performed well year to date. The stock is down 3% in early trading, driven by these results and general weakness in European equity markets. There has been no positive reaction to the buyback announcement, which is a surprise. We maintain our Outperform. CANTOR FITZGERALD IRELAND LT D 2 th Weekly Trader Monday, 5 February 2018 Apple - Declining iPhone sales offset by average handset price gains Closing Price: $160.50 Will Heffernan | Investment Analyst Key Metrics 2018e 2019e 2020e Revenue ($’bn) 265 274.7 280.37 EPS ($) 11.5 13.03 14.07 Price/Earnings 13.9x 12.3x 11.4x Div Yield 1.67% 1.86% 2.17% Share Price Return 1 Mth 3 Mth YTD AAPL ID -8.29% -6.69% -5.16% Source: All data & charts from Bloomberg & CFI Apple released Q1 results last week that contained some positives and negatives but were received favourably overall by the market. We had been highlighting the increasing worries in advance of these results that iPhone X sales may come in below estimates. This came to pass with total units sold at 77.3m vs estimates of 80.2m. Despite this miss, investors’ concerns were assuaged by the fact that the Average Selling Price (ASP) rose from $767 to $796 (+12% YoY).