Good Afternoon ,
Kingspan and Paddy Power provided the news to kick start our day in Ireland.
Paddy Power lace their statements with lots of cautious words but reading through them the message is clear. This business is going from strength to strength and is obviously being able to successfully diversify away from a much weaker Irish economy. Paddy Despite challenging economic conditions and adverse impacts on profits from less favourable sporting results and weaker sterling, 2008 was another strong year for Paddy Power. The statement went on to say that the Group is facing additional headwinds, as has already been reflected in market expectations. In this context, the Board is satisfied with progress and momentum in the year to date and remains comfortable with the consensus market forecast for 20009
Paddy Power also announced today that it has acquired 51% of Sportsbet, the Australian online and telephone operator, for initial consideration of €27.2m (6.2x EV/EBITDA) and a maximum consideration of €32.8m depending on performance over calendar 2009 (6.7x proforma). Paddy Power also has a call option to buy the rest of the business in either 2012 or 2013 for between 5 and 7x EBITDA, depending on EBITDA levels. Equity claw-back provisions are also part of the deal depending on performance over the coming years. We view the acquisition as a good strategic move for the company as Australian’s have a relatively high propensity to gamble and regulations are relatively favourable. We expect the acquisition to add c.3% to our EPS number in 2009 and c.5% in 2010 and expect to make additional upgrades due to performance in the underlying business.
Kingspan was the other story , management flagged that the rates of decline in its business is beginning to moderate it did not say it had reached bottom or had stabilised and management was clear that it is not seeing any greenshoots of recovery. That said, management is more confident of what it sees as a bottom level for the business and that it is now closer to that level. Also, it appears that the level of uncertainty to its outlook has eased so the possible level of variance around its expectations has declined. Essentially, the company has seen a consistent level of stability over the past six months in the target project pipeline that it tracks, which followed a period of significant attrition in the pipeline. This gives management a sense of what core level of business is sustainable based on what its customers are confident to progress with in the challenging economic environment. However, the run-rate in business has not fallen to that base level yet, which is why management continue to expect a further contraction in sales in the near term. Our thoughts on forecasts are that we are leaving our 2009 forecasts (EPS of 18c) unchanged. For 2010 we now expect a flat EPS performance at 18c (previously 24c). This reflects a weaker yoy performance in 2010 in access floors, and the rest of the group maintaining the H2 2009 run-rate in activity through 2010 (seasonally adjusted), which implies a lower H1 on H1, offset by the benefit from the incremental impact of cost savings and modestly lower interest charges. Previously, we had expected cost savings would allow growth with flat LFL group sales.
The price opened is down -4% initially but rallied steadily throughout the day to close +4% having been up as high as 9% at one point. And with forecasts hardening for next year at the low end of the range and the market taking what is in reality still poor news so well . However kingspan were amongst the first of the companies to actually tell it straight in December 2007 and the question is whether their pipeline indicator is now telling an accurate tale. If it is , this stock could move very strongly.
Tullow was subject of some more speculation on the news on Kosmos selling their stake in the Jubilee field offshore Ghana in which Tullow has a c. 30% interest. As Sebastian Orsi our Tullow expert pointed out the key thing for Tullow would be more certainty around value. $3B would be a big price, more than 2X what we have in forecasts of NAV for Tullow for a similar proportion of phases I and II. The Kosmos sort of valuation would add over £1/share to our £6.54 estimate ($50/bbl oil assumed) for Tullow. The other likely news items for Tullow is Ngassa, a 600m bbl prospect in Uganda in which Tullow owns 100% interest and which is nearing target depths with a result anticipated in June. Success would add over £1/share to NAV estimates. Also a Potential sell down of interest in Uganda. As the reserve base is proved up, now c. 1B bbls, Tullow will be looking to sell down its high interest to a partner that could bring finance and expertise. Again, this would provide more certainty around value.
Irish Continental Group also released an interim management statement which notes that in the seasonally less busy first four months of the year EBITDA fell by €4.2m to €8m from €12.2m. This compares with our estimate of an €8m reduction over the full year. Turnover fell by 25%, partly offset by a 24% fall in non-depreciation operating costs. In the ferry division Ro-Ro freight volumes were down by 23% yoy in the first four months, with car volumes 5% lower yoy. The car business performed well over Easter (+28%) but the pricing was described as extremely competititive. The rates of freight volume deceline ytd are somewhat higher than we expected, and with yields likely to be under more pressure than we expected, this is likely to offset the benefit of better than expected cost management. This creates downward pressure on our 2009 forecasts, as our current forecast of an €8m fall in profits is unlikely to be sufficiently cautious. Our initial estimate is that we will reduce our profit projections by €3-5m, compared to current forecasts of €58m EBITDA, €34m EBIT and €45m free cash flow. Cash generation characteristics remain quite strong (net debt has been reduced by €11m ytd) and notwithstanding more cautious profit projections free cash flow of €40-42m would represent a 15-16% yield of the current market cap, with the company remaining well positioned to improve profitability when economic activity recovers.
We saw a bit of a rebound in the financials today ,tomorrow is the big day for Irish Life. Don’t be expecting any good news , will be interesting to see how the market reacts to their statement.
Have a good evening,
Liam
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