Irish Equity Morning Note
Transcription
Irish Equity Morning Note
Irish Equity Morning Note March 7, 2011 Equity Desk: +353 1 670 2233 Equity Research: +353 1 611 5611 Today’s News ¾Economic Update Ireland gets a new government ¾Paddy Power (€29.40) – HOLD FY Results in line with expectation ¾FBD Holdings (€7.79) – BUY FY results due tomorrow ¾Irish Continental (€17.74) – BUY Minimal 2010 debt of €8m, 100 cent dividend expected, fuel a focus ¾Aer Lingus (€0.87) Aer Lingus passenger stats and Irish airport tax ¾DCC (€23.52) – BUY DCC to acquire Total Butler? Global Update Last Friday’s US employment report for February showed a strong increase of 192,000 in the non-farm payroll……..Allowing for positive demographics, the non-farm payroll needs to be growing above the 150,000 per month mark to achieve a slow improvement in the unemployment rate, confirming the economy’s capacity for self sustaining recovery…..most indicators now support the view that the US labour market has arrived at this point…….The US unemployment rate ticked down again in February to 8.9% from 9.0% in January. The peak was at 10.1% in October 2009 and a clear downward trend has recently become established. When the Fed made its first official interest rate hike in the previous cycle in June 2004, the unemployment rate had fallen from a peak at 6.3% in June 2003 to 5.6% and had established a clear downtrend. However, in June 2004 the core US inflation rate was trending up again whereas it is still trending lower at present, and the level of the unemployment rate was a lot lower than currently…… Disclosures begin on page 8 Produced by NCB Stockbrokers Limited, a member of ESN Distributed by the members of ESN (see last page of this report) Market S&P 500 INDEX NASDAQ COMPOSITE INDEX FTSEUROFIRST 300 INDEX FTSE 100 INDEX NIKKEI 225 SHANGHAI A SHARES IRISH OVERALL INDEX Latest 1321.2 2784.7 1148.5 5990.4 10505.0 3333.7 2920.2 1d% -0.7 -0.5 -0.6 -0.2 -1.8 1.9 -0.3 6m% 21.0 26.1 8.2 10.8 13.9 11.8 4.9 Forex Euro/$ Euro/Stg Euro/Yen $/Yen Latest 1.3979 0.8600 114.99 82.26 1d% 0.0 0.0 0.1 0.1 6m% 9.8 -4.0 -7.5 1.8 Bond Yields US 10yr German 10yr UK 10yr Japanese 10yr Irish 10yr Spain 10yr Irish/German 10yr Spread Spain/German 10yr Spread Latest 3.48 3.27 3.63 1.27 9.38 5.39 6.11 2.12 1d bp -0.9 0.0 0.0 -1.9 -2.4 -1.6 -2.4 -1.6 6m bp 88.6 101.8 101.8 11.3 362.7 136.3 260.9 34.5 Corporate Bond Yields Moody's AAA Indices Moody's BAA Indices Latest 5.21 6.13 1d% 1.0 1.2 6m% 15.8 7.7 US Corporate Bond Spreads (over US 10yr Treasury) Moody's AAA Indices Moody's BAA Indices Latest 1d% 6m% 1.73 2.65 5.0 4.1 -34.9 -31.1 Official CB Interest Rates ECB Rate UK Base Rate US Fed Funds JPY Rate Latest 1.000 0.500 0.250 0.100 1d% 0.0 0.0 0.0 0.0 6m% 0.0 0.0 0.0 0.0 Money Market Rates Euribor EUR 3M Libor GBP 3M Libor USD 3M Latest 1.162 0.805 0.310 1d% 5.8 0.3 0.0 6m% 31.6 10.9 5.7 Money Market Spreads (over Official CB Rates) Euribor EUR 3M Spread Libor GBP 3M Spread Libor USD 3M Spread Latest 1d% 6m% 0.162 0.305 0.060 -39.5 -0.8 0.0 -238.5 34.9 39.0 Commodities WTI Crude Future Gold CRB US Spot Foodstuff CRB US Spot Metals Baltic Dry Index Latest 106.4 1436 498 1084 1346 1d% 2.0 0.6 0.5 -0.6 2.2 6m% 31.7 14.3 25.0 30.2 -53.2 Upcoming Events….. 08 Mar FBD Holdings: FY Results 09 Mar Tullow Oil: IMS 10 Mar DS Smith: IMS 14 Mar ARYZTA: H1 Results 10 May CRH: AGM/IMS 10 May Kerry: AGM/IMS All ESN research is available on Bloomberg: “ESNR” <go> NCB Stockbrokers Ltd is regulated by the Central Bank of Ireland. NCB Stockbrokers Ltd is a member of the Irish Stock Exchange and the London Stock Exchange. Morning News & Views Economic Update Ireland/Economy • Ireland gets a new government • Fine Gael and Labour have agreed a Programme for Government, with the new Government expected to be appointed on Wednesday. Fine Gael have retained the traditional role of Finance Minister with Michael Noonan the most likely candidate to fulfil the position. The new Government is targeting a reduction in the deficit to 3% by 2015. The new partners have committed to maintaining the current rates of income tax together with bands and credits and go onto say that they will not increase the top marginal rates of taxes on income. There is to be a reduction in public service numbers of between 18,000 and 21,000 by 2014, compared to the total number at the end of 2010. The number if to be further reduced by a further 4,000 by 2015. The new partners have said that they will target up to €2 billion in sales of non-strategic state assets drawing from the recommendations of the McCarthy Review Group on State Assets when available. • The new Government will seek a reduced interest rate on the bailout loan agreement. With regard to the senior bond issue the Programme for Government goes onto say “The Government accepts that enabling provisions in legislation may be necessary to extend the scope of bank liability restructuring to include unsecured, unguaranteed senior Bonds”. This is consistent with our view as outlined in the piece “Are Anglo senior unsecured bonds safe?” A friendly tender would allow politicians to go back to the electorate with a saving in hand and the new government would not have invoked the wrath of the ECB/EU. The stick for a prospective holder is the threat that legislation can be enacted to make a coercive tender more likely. To date, however, that legislation has not been brought forward. The risk reward for holding senior unsecured debt in the non‐viable banks is looking increasingly more attractive. The new Governments language can be seen as that stick. Brian Devine +353 1 611 5847 [email protected] NCB Stockbrokers Ltd is regulated by the Central Bank of Ireland. NCB Stockbrokers Ltd is a member of the Irish Stock Exchange and the London Stock Exchange Morning News & Views Paddy Power Key financials (EUR) Sales (m) EBITDA (m) EBITDA margin EBIT (m) EBIT m argin Net Profit (adj.)(m) ROCE Net debt/ (cash) (m ) Net Debt/Eq uity Debt/EBITDA Int . cover(EBITDA/Fi n. int EV/Sales EV/EBITDA EV/EBITDA (ad j.) EV/EBIT P/E (adj.) P/BV OpFCF yield Dividend yield EPS (adj. ) BVPS DPS €29.40 12/09 2,751 85 3.1% 67 2.4% 57 12/10e 3,746 125 3.3% 104 2.8% 80 12/11e 4,229 125 3.0% 101 2.4% 84 58.5% (73) -0.4 -0.9 (170.3) 0.4 12.7 12.7 16.2 20.3 7.3 7.5% 1.9% 1.22 96.4% (130) -0.6 -1.0 (880.1) 0.4 10.8 10.8 12.9 18.4 7.4 9.2% 2.2% 1.67 57.4% (97) -0.4 -0.8 (81.7) 0.3 9.9 9.9 12.2 16.9 5.9 9.1% 2.5% 1.74 3.39 0.56 4.15 0.64 4.96 0.73 HOLD Ireland/Gaming • FY Results in line with expectation • The Facts: Paddy Power released full-year 2010 results. Operating profits increased to €104m (+56% y-o-y) with the adjusted EPS rising 40% to 169c (both broadly in line with our forecast and at the high end of management guidance). The full-year dividend per share rose 28% to 75c (implies 44% payout ratio) while cash balances increased to €159m (2009: €75m). • Our Analysis: On a divisional basis, the online business (excl Australia) continues to perform strongly with FY 2010 operating profits rising to €57.5m (+20% y-o-y). Amounts staked increased 29% (y-o-y) to €1.1bn while the sportsbook gross win margin expanded by 170bps to 8.6% (2009: 6.9%). The overall gross win increased by 61% (y-o-y) to €91m. • Operating profits in the Australian division rose to €19.5m (2009: €4.6m) principally driven by a large increase in customer activity (online: +46%) together with favorable sports results. The gross win percentage increased to 7.9% (2009: 7.1%) with the group confident of achieving this margin level going forward (assuming normal results and mix). • The performance of the Irish Retail division is feeling the affects of the tough economic conditions, with the total amount staked in 2010 declining 4% (y-o-y) to €908m (down 7% on a like-for-like basis excluding new shop openings). Nevertheless, an improved gross win margin (+90bps y-o-y to 12.1%) helped to drive operating profit growth of 8% to €17.6m. • Operating profits in the UK retail business rose to €7.4m (2009: €1.3m) with the division benefitting from increased shop maturity, but also increased profitability per shop as a result of the introduction of the new “Storm” FOTB (machine gross wins rose 66% to €24m) together with a normlaisation of sporting results. • Conclusion & Action: On outlook, turnover and sporting results in the current year have started strong, despite the adverse weather conditions experienced in Australia. Sportsbook amount staked are up 16% (y-o-y) and total gross win is up 38% (y-o-y) in the first two months. According to Bloomberg reports, Paddy Power is comfortable with median consensus estimates for a 2011 EPS of 178c (+5% y-o-y), giving us the scope to increase our numbers (NCB current forecast: 2011 EPS of 174c). We expect the group’s strong online presence, coupled with its fast-growing Australian operations to compensate for a weak domestic performance over the coming year. The stock is currently trading on 15x our 2012 earnings (197c). A presentation will take place at 9am – Ireland: + 01 242 1074, UK: 0208 974 7900, Pass code 947 225. Ciaran Callaghan +353 1 611 5876 [email protected] NCB Stockbrokers Ltd is regulated by the Central Bank of Ireland. NCB Stockbrokers Ltd is a member of the Irish Stock Exchange and the London Stock Exchange Morning News & Views FBD Holdings €7.79 Key financials (EUR) Lif e Gross premiu ms (m ) Non-L ife Gross prem .(m) To tal Net Revenues (m) Lif e Ins.Tech.Result (m) Non-L ife Ins. Tech.Result EBIT (m) 12/09 0 357 342 0 15 -35 12/10e 0 364 349 0 41 35 12/11e 0 389 375 0 67 51 Net Profit (adj.) (m) Sh arehol ders Equity (m) ANAV (m) ROE (adj.) (%) Comb ined ratio (%) P/E (adj.) P/BV P/ANAV P/EbV Dividend Yield EPS (adj. ) BVPS ANAVPS Eb VPS 25 192 6 -14.5 104.1 9.3 1.2 1.2 nm 3.9% 0.74 5.74 5.74 0.00 32 209 6 15.5 100.7 6.4 1.0 1.0 6.2 5.0% 0.97 6.28 6.28 1.00 46 235 7 20.0 96.6 5.7 1.1 1.1 3.9 7.0% 1.37 7.05 7.05 2.00 0.30 0.39 0.55 DPS BUY Ireland/Financials • FY results due tomorrow • The Facts: FBD is set to release full-year 2010 results tomorrow (8 March). We forecast an increase in the operating EPS of 30% (y-o-y) to 97c, which is below management guidance of 105 to 110c. However the latter was issued in mid November, prior to the outbreak of extreme weather conditions suffered in the run up to year-end. Consequently we prudently decided to leave our estimates unchanged, albeit note that reinsurance protection will help to mitigate potential claims (limits freeze related losses to €5m over a seven day period). • Our Analysis: Further evidence of a hardening in premium rates is anticipated at the full-year stage (particularly in home and business). However, we expect motor pricing to continue to lag other product lines, largely as a result of intense competition. We still forecast total premiums to increase by 6% in 2010, offset to some extent by a fall in volumes and cover. Overall, we expect gross written premiums to rise by 2% (y-o-y) to €364m. • On the loss ratio, the H1 underlying performance showed marked improvement (especially in the frequency of claims), with this positive trend expected to continue in H2. We forecast a FY loss ratio of 81% (or 77% excluding January’s €12m of exceptional weather losses). After incorporating costs of €60m, the combined ratio is set to rise to 101% (2009: 104%), with an overall underwriting loss of €2m forecasted (2009: €13m). • Elsewhere, we expect the non-underwriting result to fall to €4.2m (2009: €6.5m), masking a solid performance in the financial business. While operating conditions in the property and leisure business persist to be challenging, FBD’s focus on cost reduction should ensure that the divisions remain profitable and cash generative. On impairments, some further modest writedowns are likely following updated valuations, however the Irish FBD hotel chain was already written down by 45% below its peak 2007 valuation at H1 (developer loans – 55%). • Conclusion & Action: Trading on just 5.7x our 2011 recovery earnings (EPS 137c) with a prospective 2011 dividend yield of 7%, we remain positive on the stock and reiterate our BUY recommendation. Ciaran Callaghan +353 1 611 5876 [email protected] NCB Stockbrokers Ltd is regulated by the Central Bank of Ireland. NCB Stockbrokers Ltd is a member of the Irish Stock Exchange and the London Stock Exchange Morning News & Views Irish Continental €17.74 Key financials (EUR) Sales (m) EBITDA (m) EBITDA margin EBIT (m) EBIT m argin Net Profit (adj.)(m) 12/09 261 51 19.5% 27 10.2% 25 12/10e 264 54 20.6% 31 11.9% 29 12/11e 270 56 20.9% 35 13.1% 34 ROCE Net debt/ (cash) (m ) Net Debt/Eq uity Debt/EBITDA Int . cover(EBITDA/Fi n. int EV/Sales EV/EBITDA EV/EBITDA (ad j.) EV/EBIT P/E (adj.) P/BV OpFCF yield Dividend yield EPS (adj. ) 13.1% 22 0.1 0.4 31.8 1.5 7.5 7.5 14.3 13.5 2.4 15.9% 5.6% 1.08 17.6% 8 0.0 0.1 30.2 1.5 7.3 7.3 12.6 13.2 2.3 10.5% 5.6% 1.17 21.3% (15) -0.1 -0.3 80.4 1.6 7.6 7.6 12.2 12.3 2.5 12.0% 5.6% 1.45 6.19 1.00 6.69 1.00 7.04 1.00 BVPS DPS BUY Ireland/Transport • Minimal 2010 debt of €8m, 100 cent dividend expected, fuel a focus • The Facts: ICG reports 2010 results on 14 March. We forecast total revenues of €263m, EBITDA of €54.4m. EPS of 146.8 cent is forecast, including an €8m gain arising on the sale of the Pride of Bilbao. Excluding this gain, we forecast adjusted EPS of 117.2 cent and a dividend of 100 cent. • Our Analysis: ICG issued an IMS on 18 November to the end of October. Passengers carried were up 8.9%, car numbers were down 1.0% and ro-ro freight volumes were 10.4% lower than in 2009. Container freight volumes were 4.1% higher and units handled at the Group’s 2 port terminals rose 1.6%. • In the remainder of the year we expect trading to have followed similar patterns. Passenger car carryings will have benefited in December 2010 from the severe weather disruption caused to the airline sector, while the decline in ro-ro freight should have continued to moderate as comparables become easier. In the container business, the Group intentionally shed some lower-yielding volumes in H2 2010. • Cash generation will have continued to be strong and we forecast end-2010 net debt of €8m after free cash generation of €35m for the year. The gain on the sale of the Pride of Bilbao in 2010 highlights the Group’s relatively conservative depreciation policies. • We forecast a dividend of 100 cent per share in respect of 2010, representing a yield of 5.6%. This is covered 1.5x by 2010 EPS (including the Bilbao gain) and 1.4x by the Group’s free cash generation. With modest capex needs over the medium term the security of this dividend is a particular. • The outlook for the economy and for fuel will be important. The Irish economy has seen strong exports in the past year, while the multinational segment of the economy is trading well in response to economic recovery globally. Related imports have also been strong. Freight flows related to domestic consumption are likely to have remained sluggish. This trend is likely to continue. • Fuel is expected to remain unhedged, with the total fuel bill rising from €32m in 2009 to circa €41m in 2010. This is a material cost increase but fuel surcharges in freight and higher passenger yields (we estimate 8-10%) will have sustained profit recovery in the face of this increased bill. The fuel cost outlook will have deteriorated in recent weeks and could rise by circa €10m year on year but need to ultimately be passed on. • Capacity on the long sea routes on the Irish Sea was cut by DFDS (3 ships) at the end of January, with Seatruck adding a single vessel. Stena Line also ceased its Larne-Fleetwood service. Although not directly competing with ICG, these should be positive for yields, while leaving ample scope for medium-term growth. • Conclusion & Action: With a near 5.6% dividend yield, minimal gearing, strong competitive position and an 11% free cash flow yield (€47m in 2011) we maintain our buy stance. John Sheehan +353 1 611 5912 [email protected] NCB Stockbrokers Ltd is regulated by the Central Bank of Ireland. NCB Stockbrokers Ltd is a member of the Irish Stock Exchange and the London Stock Exchange Morning News & Views Aer Lingus €0.87 DCC Key financials (EUR) Sales (m) EBITDA (m) EBITDA margin EBIT (m) EBIT m argin Net Profit (adj.)(m) ROCE Net debt/ (cash) (m ) Net Debt/Eq uity Debt/EBITDA Int . cover(EBITDA/Fi n. int EV/Sales EV/EBITDA EV/EBITDA (ad j.) EV/EBIT P/E (adj.) P/BV OpFCF yield Dividend yield EPS (adj. ) BVPS DPS €23.52 03/10 6,725 240 3.6% 187 2.8% 147 14.6% 54 0.1 0.2 22.0 0.2 6.8 6.8 8.7 10.8 2.0 16.7% 2.9% 1.78 9.51 0.67 03/11e 8,275 283 3.4% 218 2.6% 170 16.0% 26 0.0 0.1 20.2 0.2 7.0 7.0 9.0 11.5 2.2 10.1% 3.2% 2.04 10.85 0.74 03/12e 8,355 283 3.4% 218 2.6% 169 15.6% (47) 0.0 -0.2 25.7 0.2 6.8 6.8 8.8 11.7 1.8 10.2% 3.5% 2.02 12.78 0.82 Ireland/Airlines • Aer Lingus passenger stats and Irish airport tax • The Facts: Aer Lingus' total booked passenger numbers in February 2011 were 574,000, a decrease of 13.6% compared to February 2010. Short haul booked passengers were 536,000, a 13.3% decrease on February 2010 while long haul booked passengers in February 2011 were 38,000, a decrease of 17.4% on February 2010. The reduction in numbers reflects the fall in planned capacity and a lower load factor (67.4% versus 69.9%). Available Seat Kilometres (“ASKs”) fell -13.8% with short haul down -16.3% and long haul down -7.5%. The figures were also impacted by the industrial dispute at the start of the month with the IMPACT cabin crew union, which has subsequently been resolved. • Our Analysis: The new Irish Government has committed to abolish the Travel Tax as part of its Programme of Government. The tax was temporarily reduced from €10 to €3 on March 1st as part of the outgoing Government’s last Budget. A permanent reduction in the airport tax allows the airline to increase average fares without damaging demand by too much given the relative size of the tax to average shorthaul fares. Aer Lingus average short-haul fare in 2010 was €85.92. Clearly a positive for the airline, but it must be cautioned that the document does say that the new Government intends to abolish “the Travel Tax as part of a deal with airlines to restore lost routes”. There have been issues with agreeing this in the past, but given the falling passenger numbers and hefty regulatory airport charges the new Government should make a large effort to make an agreement with the airlines. Brian Devine +353 1 611 5847 [email protected] BUY Ireland/Industrials • DCC to acquire Total Butler? • The Facts: According to the Sunday Times DCC has partnered up with private equity group MRH to acquire selective assets from Total’s UK oil business. • Our Analysis: The article (06/03/11) states that Ion Equity, a private equity group, will bid for Total’s 800 branded petrol stations which MRH is competing for while DCC is bidding to acquire Total’s oil distribution business, Total Butler. Other bidders for Total’s British assets include TPG Capital and Greenergy, the British fuel supplier. • We believe DCC would have the financial capacity to acquire Total Butler on its own given its balance sheet strength (Net debt to EBITDA of 0.2x), with no material debt repayments until FY2015. • Conclusion & Action: Last month DCC increased its UK oil distribution market share following the purchase of Pace Fuelcare Ltd. In our report “Plenty of fuel in the tank” we stated that Total’s subsidiary, Total Butler would fit well with DCC’s existing operations, as it would significantly enhance the Group’s modest presence in Southern England. Total Butler is a significant regional player with an estimated UK market share of 2% with operations across Southern England, the Midlands, East Anglia and Yorkshire. Acquisition discipline has been a distinctive feature of DCC management and we estimate it has paid on average an EV/EBIT multiple of less than 6.0x, excluding synergy benefits, since entering the UK oil distribution market. Conor Harnett +353 1 611 5917 [email protected] NCB Stockbrokers Ltd is regulated by the Central Bank of Ireland. NCB Stockbrokers Ltd is a member of the Irish Stock Exchange and the London Stock Exchange Morning News & Views Global Update • Last Friday’s US employment report for February showed a strong increase of 192,000 in the non-farm payroll. The January increase was revised up to 63,000 from 36,000 and still looks to have been impacted by severe weather conditions. Allowing for positive demographics, the non-farm payroll needs to be growing above the 150,000 per month mark to achieve a slow improvement in the unemployment rate, confirming the economy’s capacity for self sustaining recovery. Recent feedback from the weekly jobless claims figures, the ADP private sector employment survey, the labour market sub-indices in the manufacturing and non-manufacturing PMIs, and now from the non-farm payroll itself, all support the view that the labour market has arrived at this point. • The US unemployment rate ticked down again in February to 8.9% from 9.0% in January. The peak was at 10.1% in October 2009 and a clear downward trend has recently become established. When the Fed made its first official interest rate hike in the previous cycle in June 2004, the unemployment rate had fallen from a peak at 6.3% in June 2003 to 5.6% and had established a clear downtrend. However, in June 2004 the core US inflation rate was trending up again whereas it is still trending lower at present, and the level of the unemployment rate was a lot lower than currently, implying considerably less residual deflationary slack in the economy. These are the reasons why the Fed is still easing rather than contemplating its first tightening move. However, with official interest rates rising across the emerging / commodity rich / creditor economies, and possibly starting to rise soon in the UK and Eurozone, the potential for further inflationary stimulus of the US economy through Dollar depreciation means that the Fed’s hitherto total control over US monetary policy could soon begin to be gradually compromised by global economic and market forces. • The Bank of England’s monetary policy committee meets on Thursday this week. No changes to the conventional or unconventional monetary policy stance are expected just yet and markets will have to wait for the minutes, issuing about two weeks after the meeting, for feedback. However, the minutes of the previous meeting showed a further significant tilt towards the hawkish view. A third member of the nine-person monetary policy committee was now looking for a rate hike. Two of these wanted a 0.25% increase while the original dissenter was now looking for 0.5%. One member was still looking for more quantitative easing, but appeared to be wavering. The other five members, including the Governor, were generally acknowledging that inflation risks have been rising. The prospect of a BOE rate hike by mid year has certainly become very real. However, with the economy increasingly under the influence of severe fiscal retrenchment, unemployment still high and money / credit growth still very weak, the actual outcome will remain heavily dependent on the unfolding economic data. • US retail sales figures for February will be a focus point on Friday. • The S&P500 index of US shares closed 0.7% lower at 1321 last Friday and the future is at 1314 currently. The ten-year US Treasury bond yield is fairly stable at 3.48% currently. • Asian equity markets were mixed last night and weaker on balance as the oil price hits a new recent high ($106.27 per barrel of WTI currently) in response to an intensification of the conflict within Libya and ongoing worries that political instability could spread to key oil producing states like Iran and Saudi Arabia. Energy related shares were stronger against the trend. Gold is close to its recent all-time high at $1,436 per ounce currently. The Chinese premier has stated that Chinese growth will be led by domestic consumption and that controlling inflation will be a policy priority. The Shanghai Composite index of Chinese shares is firmer this morning. Bernard McAlinden +353 1 611 5933 [email protected] NCB Stockbrokers Ltd is regulated by the Central Bank of Ireland. 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