Good Afternoon ,
Well the results season is in full flow now , today we had numbers from Irish Life and Permanent and Glanbia and FBD
Our views on Irish Life & Permanent post the results are consistent with our prior view. The key points we note are the significant earnings forecast reductions given credit quality outlook , that funding remains concern although ECB usage has moderated since year end. The Capital position looks resilient. Even with bank losses we expect the group capital position should improve in 2009 given life capital generation. Furthermore, while they may be higher cost, the group retains options to release capital in the life business. This is in sharp contrast to its Irish peers where losses are eroding the capital ratios. As such, the risk of dilution appears lower. On an Embedded Value basis, the end 2008 book value ex intangibles (software at this point rather than goodwill) is c. €9.50 share. If management can continue to fund the bank through the continuing dislocation in credit markets, the risk of dilution seems significantly lower than for its Irish peers, consistent with our prior view. While acquisitions are less likely in the current environment, IL&P’s franchises would look attractive for a corporate/financial player with a funding advantage. Irish Life results were received positively and the stock closed +27% today.
Glanbia reported adjusted EPS of 35.86c which was up 18.5% yoy and slightly ahead of our expectation of 35.4c. The group's Ingredients division reported operating profit of €82.5m, which was broadly in line with our forecast of €82.8m and 3.0% down yoy. The division was impacted by a poor performance from the Irish ingredients business, with lower margins as the prices paid for milk lagged the global diary price. On outlook, the group states that it expects a strong performance from the Nutritionals business, due to a full year contribution from Optimum and investment in innovation. In its US Ingredients business the group notes good domestic demand for Cheese. However, lower prices for cheese and whey will make the environment more challenging year on year and a lower performance is expected (we would note our forecasts already incorporate this). In Irish Ingredients, the outlook in FY09 is quite difficult due to the pricing imbalance, and the group expects this business to breakeven (we had previously forecast margins of 2.0%). The Consumer Foods business noted a particular slow down in the last few months of the year as the economic downturn had its effects on consumer spending. The outlook for this division is described as “satisfactory” with an emphasis on cost management. Agribusiness & Property outlook is expected to be “extremely challenging” with farm incomes reduced dramatically. On outlook, the group stated that based on current market conditions it now expects FY09 earnings to be in the range of low to mid single digit growth (previously managment guided for double digit). We are likely to reduce our numbers. The key driver of the downgrade is the Irish Ingredients business which is now expected to only breakeven in the current year given the imbalance between raw material and selling prices.
Glanbia results were also well received and the stock was up+15%
CRH was the subject of much debate here as we had previously thought that the probability of them going for a rights issue was low. Got that wrong... but typical of CRH management to tap the market early and position themselves for future opportunities. CRH’s presentations yesterday outlined a very tough outlook for trading in 2009. Volume demand continues to weaken and is the key challenge. Pricing remains relatively resilient, with positive trends continuing in materials and softening in elements of the products and distribution divisions. Margins continue to be impacted by the operational leverage of the sales reduction and to some extent at the gross margin level where pricing pressure exists. Margin pressure is partly offset by significant and ongoing cost savings initiatives and by easing raw material costs (particularly energy related costs). Europe continues to deteriorate further with the weakness continues across the board, though some regions are proving relatively resilient (infrastructure in Switzerland and Poland). In the US, the stimulus package is a positive for public construction (and already feeding through to contract leads), residential continues to be weak, and non-residential demand will fall off over the year as the backlog winds down. Overall, trading is weaker than we had assumed (more so in Europe than in the US) but not radically.
More important now than the results is the Rights issue and Management estimates that the €1.24bn rights issue adds c.€2.5bn to its previous acquisition firepower of €1.5bn (for 2009 and 2010 combined) giving a total of c.€4bn. The challenge for management is to acquire at valuations even lower than it is issuing equity at. We are encouraged that management are also aware of this, and that they are focussed on only buying quality assets that are very complementary and so give immediate integration potential, so returns can be driven by synergies rather than depending on market recovery. Management also stressed than it is a buyers market and that valuations are far from the bottom and that they still don’t see themselves making any large moves before late 2009 and through 2010. CRH is at an attractive valuation with CRH’s EV at sub enterprise value and the revised 2009f P/E is less than 10x, before allowing for any upside from investment in acquisitions. We had thought that Management might not issue stock at these depressed levels but they have and balance sheet is now strengthened and the company which was one of the strongest stocks in the sector probably becomes the strongest from here and is in an enviable position to take advantage of the likely flow of opportunities to buy assets at attractive prices.
CRH stock traded ex rights today and staged a strong rally +14.5% and this fed through to positive sentiment across the market in general with Travis Perkins +7% and Grafton +10% and kingspan +7%
FBD which we don’t officially cover released results which were initially very disappointing to the market but the market rallied from the weakest point where it was -16% to close only -5.6% lower.
C&C continued to strengthen after the presentation yesterday and the stock was up +9.2%. Paddy Power which is on the road with a good story also did well and rallied +4.7%
The Irish Government confirmed yesterday that it will implement a mini Budget before month end to address the worsening fiscal position. Both higher taxes and spending cuts are probable. Projected tax revenue (based on the exchequer returns published yesterday) is now likely to fall approx €2.5/3.0bn short of the revised projection of €37bn detailed in January. The exchequer returns showed that overall tax revenue fell by 24% for Jan-Feb 2009 vs. 2008. While property related taxes continued to show sharp declines, corporation tax declined by 37%, VAT by 17% and income tax by 7.4%. The exchequer deficit worsened to €2.08bn vs. €124.8m in the same two months of 2008.
An interesting day , lots of news , some downgrades but strong rallies… Food for thought . Companies are doing ok here in tough conditions and the smart one are positioning themselves for the future.
Wall Street rallying after a horrendous few days. Last Wednesday was also the high point of the week , it would be nice if the market picked up from here and took everyone by surprise… It would be good to have something to look forward to after a period of uncertainty …
Have a good evening
Liam
___________________________________________
Liam Boggan
Merrion Stockbrokers
www.merrion-capital.com
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