Good Afternoon ,
This is all about the rate of change of change. What is clear now from multiple companies results is that the rate of slowdown is slowing and this is what the market is now focussed on.
A prime example of this is in the paper sector. This Morning we saw Mondi note that the difficult trading conditions experienced in late 2008 continued in Q1. Underlying operating profit for Q1 is indicated to be similar to Q4 but significantly below a year earlier. Versus Q4, there was an improved result in Europe & International Mondi commented that trading in the Corugated Business ‘remains extremely challenging’, with weak demand continuing to cause price pressure. In Q1 its average recycled containerboard price was 33% lower yoy and at end-Q1 was down 10% ytd, as were its virgin containerboard prices. It notes that despite some evidence that the rapid destocking which started in Q4 08 is ending there remains a high level of economic uncertainty which will continue to create challenges for the remainder of 2009. Also in the sector , SAICA the Spanish containerboard company announced that it is taking two capacity decisions in relation to its French containerboard mill: (i) a planned project to add a new containerboard machine at the site is being suspended, and (ii) an older machine at the mill is to be shut with production to be consolidated onto another recently upgraded machine in the same mill.
So net net in a difficult environment , the packaging companies are cutting costs , shelving plans to add capacity and taking either downtime or capacity out which helps get us nearer to an inflection point. These stocks have been running hard over the past few weeks , All conventional analysis would suggest that they should be avoided but the market is looking at the possibility of the inflection point getting closer and so is moving in advance as the leverage if the inflection does come will be large.
Tomorrow we get Smurfit Kappa numbers. Our Q1 €190m EBITDA forecast compares with €257m a year earlier (-26% yoy) and represents a sequential contraction of €6m (-3%) from the €196m EBITDA reported in Q4. Expected net interest cost is expected to be flat yoy but lower than Q4 2008 reflecting lower variable rates and slightly lower debt levels. We expect little further net debt paydown in Q1 (c.€20m to €3,165m), due to the traditional seasonal H1 build in working capital and because capex which reduce as the year progresses rather than being flat each quarter. The H1 working capital build may be lower than normal given reduced demand and prices. We will be looking for updates on: whether the rate of demand decline has changed, and whether European containerboard prices are still under pressure; Also how quickly the softness in European recycled containerboard pricing is feeding into corrugated box pricing; and management’s view on potential capacity additions in European containerboard. The strengthening dollar is positive in terms of US kraftliner import competition; falling recycled fibre costs and energy costs are helpful. However the key here is simple and Investors are concerned over the scale of the impact on the company from the economic downturn and the 12% gross capacity additions planned for the European containerboard industry in 2009/10. In particular, we expect the downward pressure on EBITDA will erode much of the company’s comfort room over its net debt to EBITDA covenant limit. Addressing such concerns is key to improving the low equity valuation.
The ECB delivered its much anticipated rate cut to 1% today, ECB President Trichet at the press conference said stressed that the ECB had not decided that 1% was the lowest rate possible which is interesting and was unexpected. The ECB made an announcement on unconventional policies also but most commentators were disappointed by the relatively small scale of the announcement that the ECB will buy only around €60bn of covered (or collateralised) bonds. Firm details will be announced until next month.
Continuing my theme of a slowing rate of negative change too there was further noteworthy news today… The US initial jobless claims unexpectedly fell by 34,000 last week, Labor Department data showed today, while a four-week average of new claims declined for a fourth straight week. Initial claims dropped to a seasonally adjusted 601,000 in the week ended May 2 from a revised 635,000 the prior week, the Labor Department said. It was the lowest reading since late January….
Back in Dublin the Minister for Finance Mr Lenihan said it was very encouraging that his Budget had received warm praise from the Commission, the European Central Bank and the other European countries. Glad that he is happy with the job he is doing . If I was him I would be more worried about potential anarchy in the streets as the ministers and TD’s continue to find it difficult to cut the perks they enjoy.
At 5pm , the S&P bank sector index is down 5% as nerves set in ahead of the release of the US banks stress test results due this evening. Earlier confidence inspired by Comments by US Treasury Secretary Timothy Geithner suggesting that no US bank subjected to stress testing, was facing the risk of insolvency as dissipated now. The rally in the US banks last night inspired a stron initial rally in Dublin but this gave way in the afternoon. Bank of Ireland was up +12% at the close having been up +22% at the high of today. AIB was down -2.6% having been up 6% and Irish Life closed up 7.8%.
CRH continued to succumb to the profit taking whch set in yesterday. I have to say it is starting to look very interesting now but today it is down -7%. This helped trigger some profit taking in Grafton -3.8% and Kingspan -3.4%.
.Ryanair looked like it was taking off (pun) yesterday but landed again down -8.5% .
The rally is maturing , there are opportunities but there are also those happy now to begin to take some profits. Time to get selective.
Smurfit tomorrow and lets see how much capital the US banks really need ?
Have good evening
Liam
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