Liams Last Post : MArkets still making heavy weather despite good Q3 earnings reports. ICON and Elan report in Ireland , Kerry interesting

Good Afternoon ,

 

Well the Glue phenomenon continues ,  there seems to be a lot of cashflow going into the market but at the same time this period of consolidation is seeing some selling pressure on some of the irish names.

 

Sterling looked like it was the trigger over the past ten days or so but the sterling extreme weakness has reversed and yet there has been no corresponding easing of pressure on the Irish names.

 

Today , Icon issued results with Revenue of $220.4 was 2.3% light of our forecast of $225m and decreased 2.3% y/y. Excluding FX impact, net revenues were flat. There was an impressive beat on SG&A costs which were $54.4m vs. our forecast of $61.6m. SG&A as a % of revenue fell to 24.7% from 27.7% in Q308. Operating profit of $30.4m, was ahead of our $27.4m forecast and increased by 12.1% y/y. The operating margin increased to 13.8% from 12.0% in Q308. Overall diluted EPS for Q309 is 39.9c, ahead of our forecast of 36.3C and the consensus forecast of 34.3c.  Icon has increased its EPS guidance for 2009 to $1.48-1.52 (excluding a previously booked one time net charge) from $1.38-1.44 previously. Gross new business wins were $296m in the quarter (versus $325m in Q209) and net new business wins were $186m, implying a book to bill ratio of only 0.84x. Book to bill in Q209 was 1.21x. Cancellations were very high in Q3 at $110m and the company states that "higher than normal cancellations held back net new business awards". Cancellations as a % of gross new business wins was 37.2% in Q3 and 6.0% as a % of starting backlog.  The initial reaction to the numbers was for expectations that the stock would fall around `10% , however the management team in the conference call were optimistic and the stock unbelievably at 5pm is actually up +3.5% on the day in US trading.  US investors and analysts seemed to have been well prepared for the high cancellation rate.

 

Elan issued Q3 results this morning. Revenue of $287m was 5% below our expectations due to lower Tysabri revenue, Azactam supply constraining sales and EDT underperforming our expectations by 10%. Adjusted EBITDA of $23.8m was behind our expectations of $41m. Adjusted EPS loss of 11c was slightly behind our 8c expectation. Tysabri numbers, released yesterday by Biogen Idec were below our expectations driven by slower additions in ROW than expected – commercial patients totaled 45,600 compared to our expectations of 46,287. The US net addition rate increased qoq to 108 patients/week from 92. ROW weekly net additions however declined to116 from 169 in Q2. Whilst Biogen yesterday explained some of this decline on seasonal factors, and noted an increase in September (compared to the weaker summer months of July and August) there is a concern that increasing cases of PML (reportedly 17 cases now although this was not confirmed by the company) making European neurologists more cautious of the drug

 

M&T Bank, in which AIB holds a 23% interest reported Q3 EPS of $0.97 yesterday Q3 2009 EPS on a GAAP basis, after the negative impact of 8c from 1x items. The consensus was 70c and the EPS compares to 82c in Q3 2008 and 36c in Q2 2009.  On credit quality, the loan loss provisions in the quarter were $154m compared to $147m in Q2 2009, while net charge offs of $141m in the quarter compare to $138m in Q2, with the most recent quarter skewed higher by one $42m charge off.  Non performing loans increased to $1.23B at September from $1.11B at June. The net interest margin expanded in the quarter to 3.61% from 3.43% in Q2 as the cost of funding declined.  Some further widening of the NIM is possible as the deposit book continues to reprice lower.  The results conference call was very much focused on credit quality.  The stabilisation in the rate of loan losses and provisions, along with a lower rate of new non-accrual formations will likely be taken positively. The tangible common equity/tangible assets ratio has increased to 4.89% at September from 4.49% at June which will also be taken positively.  Overall, it looks as if 2010 EPS forecasts will be increasing for M&T from the c. $3.10 level toward $3.75-$4 level.  We will look to adjust our 2010 M&T earnings contribution higher by c. €10m to €70m.  This is a small positive in the context of AIB's earnings and capital outlook.  M&T's shares finished up $1.05/1.58% yesterday.  A disposal of its M&T stake at current levels would generate c. €550m of capital for AIB.  

 

We also have had a good look again at the Ryanair sensitivity to jet Fuel sensitivity for 2011. For Fiscal Year to Mar 2011 we project Ryanair will consume 2.04m tonnes of jet kerosene and our FY11 forecast of 24.2c EPS / €363m net income incorporates a fuel cost assumption of $620 / tonne. The last update indicated that 50% of the Q1 requirement (c.0.25m tonnes) is hedged at $662 / tonne. Relative to $620 this impacts FY11 earnings by €6.6m / 0.44c. For the remaining 1.78m tonnes, the sensitivity to each $10 / tonne (c.$1 / barrel of crude) is €11.1m / 0.74c. Therefore, the current spot rate of $685 compared to the $620 assumption would impact earnings by €72.4m / 4.83c (in addition to the €6.6 / 0.44c above). Effectively, if $685 / tonne persists our earnings figure for FY11 would be reduced by €79m / 5.3c, or 22% in percentage terms, all else equal. This would require another 3.8% yield growth in FY11 to offset this, on top of the 4% growth our model already assumes (or +7.8% yoy in total). The may be some slight mitigation The forecast assumes a $/€ rate of 1.43 on fuel. At least half of the FY11 $ requirements have already been hedged. A 1.49 rate from here could boost the FY11 assumed average to 1.46 from 1.43. Each 1c on $/€ rate on fuel changes earnings by €5.5m / 0.37c. (Analysts: John Mattimoe / Killian Jones)

 

Grafton had some supportive news today in the form of Home Retail Group results for the 26 weeks to August 29^th. Of indirect relevance to Grafton was the performance of Homebase (Grafton is involved in builder's merchant in the UK, not retail DIY). Homebase saw LFL sales up 3% in the period (consistent with trends flagged in earlier updates), partly aided by favourable weather. Homebase's gross margin fell by 325bps (due to promotional activity) but its operating profit rose by 66% (off a low base) reflecting strong tightening of operating costs. Management noted that both Homebase and Argos (where LFL sales fell 2%) traded ahead of expectations with tight cost control a highlight. It continues to plan cautiously for consumer demand for H2.

 

FBD – Motor insurance premiums to continue increasing according to a survey of Irish motor insurance companies by consultancy firm Deloitte, published yesterday indicated that most are planning further rate increases in 2010 after c. 15% increase over the past year.  About half of insurers expect 5% to 10% increases while 20% expect to increase premiums more the 10%.  The increase in required rates is attributed to a decline in profitability and lower levels of capital in the industry after repatriations to parent companies.  While headline rates are increasing, lower levels of cover have reduced the overall impact on gross written premium.  Motor insurance represents slightly less than half of FBD's GWP.  We expect FBD's GWP to decline 5% in 2009, followed by a 5% increase in 2010 as rate increases feed into the book.  

 

In terms of interesting defensive ideas . Kerry is worth looking at … Kerry hosted an analyst day yesterday at its new Ingredients R&D facility in Beloit, Wisconsin. The day was set up by the company to display both its Ingredients capabilities, which the Beloit centre brings together under one roof, and its new "One Kerry" strategy instigated by CEO Stan McCarthy. Strategically the company is focusing on driving leverage from the numerous acquisitions accumulated by the company over the past decade. Whilst this information is not new (the company has been talking about the "Go-to-Market" strategy for some time now), seeing the company's capabilities under one roof, and talking to an invigorated management team made the potential success of the strategy more tangible. There was anecdotal evidenceof a considerable increase in sales activity, within one of the previously tangential areas of the ingredients business, due to the cross selling and joint project/product development work being done in Beloit. This is the first tangible signs of a strategy, which has always made logical sense and being well received, actually delivering in terms of sales.

 On the cost side, the company is moving into a SAP implementation for the support units over the next few months, which will be rolled out to the supply chain areas in 2011. Looking ahead, if management continues to remain focused on maximizing cross selling and product development maximization, this new facility provides the opportunity for the company to outperform its official topline growth targets of 2-4%, particularly as the strategy is rolled out through Asia-Pacific and EMEA. Combined with margin accretion through further cost rationalization and SAP driven savings, and the potential earnings growth over the medium term could be significant.

 

So today , after an bright start , Markets nosedived on thin volume only to encounter a US market which was not for turning and so in the afternoon all European arkets rallied. It is a see saw , been going on since mid September , the results season is proving tp be more resilient than I thought though there is precious little evidence of sustainable demand recovery as yet and hence the volatility.  I think that sector rotation siwhat is going on here , a move to more defensive stocks and locking in of profits.

 

 

 

Have a good evening

 

Liam  

 

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

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