Good Afternoon ,
I have been accused of losing my niche and that my kast post is more fun to read when I am being a bear .
Today I will try and soothe the angry bears by providing some bear material but I have to say I am becoming increasingly bullish on the prospects for the market in Ireland and the market is finding the floor I was hoping for.
The market opened a little lower range traded to the upside for the morning then with the opening of Wall Street , markets spiked higher and closed just off the highs of the day.
So the bear news ….We had a meeting with Dave McCarthy, FD of IL&P yesterday. The main highlight was his bearishness about the weak trading environment in both the bank and life business. The capital position/generation outlook is weakening as credit quality declines sharply in the bank. The difficult funding environment for the bank is not a surprise but limits strategic options. Overall, our earnings forecasts for both the life and bank franchises are at risk of further downgrades for 2009 and 2010. Our key concern is that the group's capital buffers will be eroded. IL&P's relatively stronger capital position becomes less significant as the bank franchise funding weakens and the group's strategic options are increasingly subject to political ends. One of the most worrying things mentioned was the fact that Deposits were still flowing out and traditional UK Insurers who would have been big depositors in Ireland are simply keeping their funds on Deposit in their home market. The outflow of funds and the reliance on ECB funding means that Irish Life is as reliant on state backing as AIB and BOI though for different reasons (Funding not capital)
And another Irish Stock fell victim to the rapid deterioration of conditions in the Pharma Industry. ICON at 5.15pm is now down -18% having been as low as -25% down on the day . The fall follows the profit warning from PPD , the largest player in the CRO industry (Outsourced Clinical Trials). .PPD noted "unprecedented cancellation levels, significant rescheduling of existing backlog and lower than expected authorisations". Following on from Kendle's profit warning yesterday, the high levels of cancellations seen in these results must be a concern for the sector as a whole although we note, without the one large cancellation reported, the cancellation rate would have been 23% which is in line with PPD's average rate. PPD reduced their earnings guidance by 20%.
Both Kendle and PPD saw an elevated level of cancellations in the quarter. Kendle reporting a 43% cancellation rate, PPD a 37% cancellation rate (although 14% related to one large biotech contract). Our forecasts have assumed an increase in cancellation levels to an average of 18% for the year (up from c.12% in 2008). This may prove to be a little low given the reports we have to date. Following Kendle’s results we had assumed ICON would have been unconcerned with their current expectations for the full year due to Kendle’s relative size (about 50% of ICON’s revenue). Following PPD’s results, management is likely to have more to consider, in terms of the competitive environment that may ensue over the next few quarters as a result of the decline in PPD’s new business. We would be concerned that the expectations of a tougher trading environment may lead ICON management to lower expectations for the full year at the time of Q1 results. Given that management set reasonable expectations for 2009 in January (given the issues the company encountered towards the end of 2008), our best guess for such a downgrade would be setting the mid point at the current low end of the range which is $1.40 which would be a c.4.1% downgrade. Sentiment towards the sector has been ravaged over the last few days so the market is imputing a much more bearish scenario than a 4% downgrade.
Elsewhere the banks slowly have recovered from the sharp declines over the last few days. Interesting levels methinks…
The food stocks are struggling suggesting some sector rotation to the more cyclical stocks. INM which has announced the second postponement of their results and is in pressured negotiations with bond holders has rallied 9% today. Takes faith to believe that the Bond holders will rollover from their very strong relative position.
Elan reported Q1 results this morning. Reported revenue of $242.9m was 7% below our expectations primarily on weaker than expected EDT revenues of $59.7m versus our forecasted $78m. The company reported an adjusted EBITDA loss of $6m. Adjusted loss per share of 22 cent was larger than our anticipated 12 cent loss. This was a 14% yoy decline in EDT revenue. The company noted that EDT in Q1 2008 benefited from milestone payments associated with approval of Luvox Cr and Zanaflex. EBITDA in the EDT business declined $4.1m to $20.7m yoy. The other major miss on the revenue side was in Azactam where a 29% decline in yoy revenue was attributed to drug shortages. No update was provided on the strategic review, except that it was ongoing and that it would “communicate … progress at the appropriate time”.
Still Sunny , Hang in there …..
Have a good evening.
Liam
___________________________________________
Liam Boggan
Merrion Stockbrokers
www.merrion-capital.com
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