Good Afternoon ,
Well what a day , We came in expecting a bloodbath , were surprised at the resilience of markets initially and even though the market held up through lunchtime , it would appear that there is no end to it getting dragged down. Confused and uncertain is the tone at the close of business with more bearish sentiment appearing all the time. Just a little bit of stability and calm would go such a long way , the constant whipsawing is tough...
Results from CRH for 2008 results broadly in line with expectations – pretax profits were €1.628bn versus our expectation of €1.624bn (company guidance was in excess of €1.6bn), and down 14.5% from 2007. The key feature is the launch of a fully underwritten 2 for 7 rights issue from the company to raise €1.24bn. The issue price is €8.40 / share. The equity issue is to strengthen the company’s ability to take advantage of a large number of acquisition opportunities that management expect to arise over the next 6-18 months. Management state that raising equity is advance of transacting tactically strengthens their negotiating position as potential vendors will know that CRH would be able to close a deal quickly. While we agree with the principle of an ‘offensive’ equity funding to take advantage of acquisition opportunities that represent good fits at low multiples of cyclically depressed profits, the timing is not ideal in our view – (i) the issue will be dilutive until deals start being transacted, (ii) issuing equity at a discount to share price valuation that already represents a low multiple compounds the dilution, raising the hurdle for the potential acquisitions to become net accretive, and (iii) some investors may be concerned that raising equity pre-emptively may tempt management to transact acquisitions prematurely. On the dilution, we estimate that the rights issue will dilute our previous EPS forecast for 2009 by c.16% to c.€1.55 from €1.84 and our previous 2010 EPS forecast by c.20% to c.€1.65 from €2.06, before investment is made in acquisitions. Therefore, management will have to ensure the delivery of sufficient scale of quality acquisitions at attractive multiples for the equity issue to become accretive over the medium to longer.
The performance of the stock today has been tremendous , it would appear that there were a number of funds which found themselves underweight the stock and were persuaded by the opportunity to take up underwriting and close their weightings back to neutral to drive the stock higher during the day.
C&C released a preclose trading statement this morning in which it stated that adjusted operating profit for FY08/09 will be €90m, which is in line with guidance given in its IMS on January 16th. (our forecasts €89.7m). The group states that revenue is expected to decline 13% and operating margin is expected to decline 3.5% percentage points. Performance across its division in FY08/09 appears in line with expectations. The group will also see a hedging gain of €15m. It will be writing down €11.0m due to excessive stocks and the Clonmel facility will be written down by €130m (will reduce annual depreciation by €8.0m in FY09/10). Net debt at year end was 2.1X EBITDA. The group also announced that it will pay a final dividend of 3c, bringing the full year to 9c, and its initial objective is to sustain an annual dividend of 6c per share. On costs, its reorganization and restructuring is expected to lead to cost savings of €5.0m in FY09/10.
On outlook, the group states that forecasting consumer behavior is difficult in the current environment, with market conditions in both Ireland and GB, getting worse if anything. The group is targeting FY09/10 operating profit within (below) €5m the underlying €82m in FY08/09 (this is adjusted for currency and adds back the depreciation charge). Our current forecasts for FY09/10 are for adjusted operating profit of €66.1m (however this excludes the reduced depreciation charge and the €5m from cost re-organisation.
The presentation that C&C new management team gave was encouraging , the team appear sensible and armed with plenty of experience from their time running Scottish and Newcastle so their plan looks reasonable. It is the first time in a long time that C&C have had anything to say which has been vaguely positive and the stock bounced by 11% on the news. This could yet be one of the surprise performers for 2008.
After the really weak performance by Wall street last night , the market proved to be reasonably resilient today. AIB took til this afternoon to turn negative and closed down -4%. Smurfit kappa was the surprise of the day closing up 11% on thin volume.
Ryanair also shed 4% today to 2.83 along with the whole airline sector.
Independent News and Media fell yet again this time down another 3.7% and DCC which has been drifting also got close to the 10.00 level at 10.22 down -0.8%,
As for the financials , Bank of Ireland slipped below 20c to 19.9c , an inexorable slow sinking….Irish Life was brighter again but closed only +5% despite having been 11% higher at one stage.
Overall markets remain as weak as ever, Ireland closed down -0.8% as CRH proved to be so resilient today. London closed down -3% and Europe did better down only -1.8%. The Dow Jones at 5pm is at 6730 -0.5% and no one knows where it is going next… Never have so many known so little with such low conviction….and company after company across the world warns about profits , cuts it outlook or looks for a bailout.
Have a good evening .
Liam
___________________________________________
Liam Boggan
Merrion Stockbrokers
www.merrion-capital.com
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