Good Afternoon ,
After the strong run in CRH ahead of the trading update the news that the company ultimately released was on the disappointing side with a downgrade to earnings. Interesting though that the group has just give up ground to where it was 3 trading days ago with a -8% decline on the day. We are likely to be downgrading H1 and full-year forecasts (but not H2) – our initial guess is by a low-mid single digit percent of our underlying full-year estimates. (H1 traditionally accounts for circa one third of full-year profits)
CRH’s AGM update this morning noted that H1 is going to be even weaker than previously expected, but the company remains cautiously upbeat that the rate of underperformance in H2 will moderate (effectively an unchanged H2 outlook). Weak weather in January & February had already been flagged as exacerbating weak underlying demand, but unfavourable weather trends have since continued leading to a lower than normal seasonal demand pick-up in Q2 to date. The company now expects that the H1 profit decline will be sharper than it previously expected. H2 is unlikely to be able to catch up for the greater than previously expected shortfall in H1, so the H1 impact is likely to feed through to full-year forecasts.. Acquistion activity year to date was c.€0.3bn, but excluding the c.€225m Yatai deal which was agreed in early 2008, but not closed until early 2009 activity was quite low at c.€100m or less (the prior year figure was €1.2bn, of which c.€240m was on small-mid sized deals). Deal opportuities are still not expected to pick-up until H2. We have a BUY recommendation on CRH.
One stock which was suddenly a focus of attention today was Paddy Power. The stock was up 6% today and we look forward to their AGM statement next Thursday. Irish retail is obviously tough at present (we are forecasting 10% LFL decline in amounts staked) but they have been doing well on cost reduction - further detail on this is progressing will be of interest. Commentary from peers to date has been relatively good on performance ytd, particularly in online gaming. Football also seems to be making up for some of the bad weather and horse racing cancellations earlier in the year. Also of interest for the sector is talk that Congressman Barney Frank is introducing an amendment to the Online Gaming Legislation in the US (possibly today). We expect that Paddy Power would adopt a wait and see approach if the US legislation was amended- they won't be jumping into the US market immediately. It will be good for all stocks in the sector though.
The Banks continue to be strong and continue to stir debate about haircuts and imminent disasters . I think the market has finally taken to heart that the Government statement that it does not want to nationalise the banks and that therefore NAMA ultimately has to deal the loans at valuations which play to the political fudge and so the banks run and run.AIB was +14% , Bank of Ireland +26% today and it looks like the momentum is growing here…
The pull back today has eased the pain for those who had hoped the rally would reverse and allowed some get out of short positions which had turned sour.
There is a bit more two way flow now though but the stocks which had lagged are more likely to gap up if anyone tries to buy a serious block. CRH was joined in the profit taking group by Kingspan who surrendered -3.6% and Grafton was barely down at the close.
Elan gave up 4% today as the market still awaits the outcome of the Citibank led strategic review. I have to say I think the pullback in the stock probably provides an opportunity to trade the stock on the longside ahead of the review announcement which is imminent .
United Drug issued H1 results this morning. Reported revenue was €850.9m, 2.4% ahead of our forecast of €830.7m. EBITA was €33.6m, in line with our €33.7m forecast. Adjusted Net Income was 3.8% behind our forecast at €24.8m due to a higher than expected interest expense (€5m versus expected €3.7m). Adjusted EPS was 10.63 cent compared to our forecasts of 10.92 cent (our understanding is that our forecasts were around the mid point of market expectations). The Healthcare Supply Chain business delivered revenue of €717.5m (down 3.9% yoy but 3.8% ahead of our forecast of €691.5m); operating margins of 3.42% (down 20bps from H1 2008, but ahead of our 3.18%). This division has faced a number of specific difficulties in H1 including a scheduled Irish generic drug pricing reduction, a similar reduction in Northern Ireland and a significant slowdown in spend on Medical & Scientific equipment in both the ROI and the UK. On a positive note, the pre-wholesale business remains robust; Packaging and Speciality Services reported revenue of €56.7m (up 35% yoy but 19% behind our expectations of €70.2m); EBITA of €2.37m was 56% behind our expectations reflecting an operating margin of 4.19% (versus 10.41% in H1 2008 and our forecast of 7.7%). As previously announced, delays in the newly acquired US business, Sharp, had impacted on expected revenue in the period, as too had the loss of a large contract in the UK. The company noted that the other European packaging businesses are seeing good demand and that MASTA (the vaccines provider in the UK) has seen poor travel vaccine volumes offset by higher demand for flu vaccines. Contract Sales and Marketing reported revenue of €76.6m (up 36% yoy and 11% ahead of our forecasts); EBITA for this division was €6.7m (against our forecasts of €6.4m) with margins slightly behind our forecasts of 9.2% at 8.7% (down 47 bps yoy). The company is seeing strong demand across its operations and new business wins during the period from Novartis, Lundbeck and NAPP. Cross selling into its newly acquired businesses is already providing a benefit. On outlook, the company reiterated its guidance that it expects pre-tax profits at least in line with 2008. Most of the issues reported in these results have been highlighted previously. We are alarmed by the level of decline in Packaging but comforted to a degree by a level of resilience in the Healthcare Supply Chain division. We note that headwinds remain for the business (not least the imminent HSE drug payment review). Our current forecast is for EPS of 22.9 cent for FY 2009. We have a Hold recommendation on United Drug.
Holcim and Lafarge also released figures today , Lafarge in line but Holcim figures were below expectations even though emerging markets did relatively well. The massive EBIT margin deterioration (-580bp) is a big surprise to the market this morning.
The Airlines were up today with Aer Lingus playing s game of catchup and rallied 1.7% to 65 c at the close having flattered a bit higher earlier. Ryanair moved up to the 3.56 level +6% today.
European markets were stronger today +1.25% with the Dow Jones up 0.55% ahead of the Bank Stress Test numbers and the Jobs figures today which showed a decline in the rate of job losses with -491k job losses a positive surprise for the market which was expecting a figure of -695k.
Have a good evening
Liam
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