Good Afternoon ,
The first friday of the week , the last Friday of February and the month end window dressing rally came to an abrupt end as the attempted mid week rally fizzled out.
At least we had the big surprise rally on Wednesday which perked us all up and kept us interested and Wednesday was particularly pleasant after the big slump on Tuesday which I remember as a particularly depressing day. Good to have one day per week where optimism and hope stirs us with enthusiasm.
Grafton numbers this morning were interesting, equally interesting was the sheer number of UK analysts who follow what is a small company but one with an impressive track record and it is also the number 4 player in the UK market. The focus was very much on the outlook but Grafton impressed with strong cash flows and by their conviction that they will be profitable and cash generative this year. The confidence was underscored by their decision to pay a dividend (in the way of a share repurchase scheme) of 5c. This is significantly lower than the 12c of last year but management indicated that they would aspire to continue to make two semi annual payments. LFL sales fell in both Ireland and the UK in January and February. The level wasn’t quantified as management believe the figure would be very misleading as sales trends in the two months were distorted by (i) the snow storms, and (ii) some builders taking extended Christmas holidays. However, management did say the decline was ‘double digit’ and was a level that was ‘not particularly surprising’. Management consider that the sales trend in March will be more relevant and will update on this in the IMS due in late April. In relation to the UK, management don’t disagree with the view of Travis Perkins that the UK builders merchant market is likely to see a peak-to-trough volume decline of c.25%.
The economic news today was interesting with German Consumer confidence rising unexpectedly according to the German GFK index which was released yesterday. Elsewhere according to IMF data German GDP declined by -2.1% in Q4 and the IMF expects German GDP to contract -2.5% this year.
Official EU figures have confirmed that the annual rate of inflation in the euro zone dropped to 1.1% in January.The fall brought the rate to its lowest point since July 1999. It was down sharply from the 1.6% that the Eurostat data agency recorded in December. This should pave the way for the ECB to cut rates by a further 50bp in March.
European Bank for Reconstruction and Development, the European Investment Bank and the World Bank have pledged to invest €24.5 billion to fight the financial crisis in central and eastern Europe with a mixture of equity and debt financing, credit lines and risk insurance. The EIB will provide €11 billion of lending facilities, while the World Bank will provide support totalling about €7.5 billion.
In Ireland , there was a surprise increase in Residential mortgage lending in January rising from €350 million to €482 million, The amount lent for residential property mortgages was equivalent to the total advanced during the final three months of 2008. Despite this monthly increase, the annual rate of mortgage lending continued to decline, dropping to 5.4 per cent from 5.8 per cent in December, the bank said in its statistics. Overall private sector credit increased by €3.3 billion in January, although this monthly increased brought the annual rate of increase down 0.5 per cent to 6 per cent.
We look forward with baited breath to see what the AIB results will bring on Monday, March 2nd. Our adjusted EPS forecast of 63c is slightly below the recently guided 66c. While we expect a relatively robust performance at the operating profit level (+9% y/y) loan loss provisions of c. €1.8B (1.39% of average loans) are expected to reduce underlying PBT to €878m, a 63% y/y decline. The implied loss before tax is €280m in H2. The outlook for credit quality will be one of the key concerns for investors. The November trading update indicated an anticipated loan loss provisions (llps) range of 0.90% to 1.10% for 2009. The recent (February 2009) trading update indicated that credit quality had deteriorated further and management was increasing its base expectations for 2008 llps (to c. 100 bps from 75 bps) as well as accelerating c. €500m of llps into 2008 from 2009 in the form of an IBNR
We anticipate AIB will generate losses at Group level over the next two years. These losses are expected to erode the capital base of the company. At this juncture we expect AIB’s equity tier I capital ratio to decline to 4.9% in 2010. Incorporating the €3.5B of Government preferred shares, we expect the core tier I capital ratio to remain above 7%. While we anticipate losses over the next two years, we expect AIB will pay the Government pref coupons in cash (the impact is incorporated into our net interest income forecasts) rather than shares given it has sufficient distributable reserves to do so.
In the near term, equally important to the asset quality outlook is liquidity. Management guided for low-teens deposit growth in 2008 in its November trading update and the loans/deposit ratio was anticipated to fall to c. 150%. It was also indicated that no material outflows of deposits were seen around the timing of the introduction of the Irish Government bank guarantee (end September). While interbank spreads have declined, reducing funding costs, term-debt funding markets for banks remain essentially closed. A current update on funding flows will be of interest.
The comments earlier this week by Minister Lenihan talking on RTE radio about investors removing deposits from the Banks continues to gain momentum with stories abounding of people taking cash out quietly and of course the banks share prices continue to slide. This Minister needs to get some savvy advisers and re-assure the public soon. Publicly saying that the withdrawals had not reached critical levels only creates more unease rather than offering confidence. I fear there is lack of understanding of basic communication here. There will be much interest on AIB and what they say if anything about this on their conference call.
The US market dealt with news of the latest bailout of CITI which was widely as expected in terms of details but the announcement was taken as disappointing with the US government ending up owning 36% of CITI .
The horrible number was the revised Q4 US GDP number which was revised to -6.2% from a prior estimate of -3.8% . This is the worst quarterly performance since Q1 1982.
US market opens down sharply and oil prices falling again.
Looks like a dreary end to a dreary month.
Am looking forward to the match the Ireland vs England Game tomorrow , not to mention the French/welsh match this evening.
Hope you have a great weekend ,
Look forward to March…. At least the days are getting longer…(should probably say Brighter , they feel like just taking longer and longer)
Liam
___________________________________________
Liam Boggan
Merrion Stockbrokers
www.merrion-capital.com
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