Liams Last Post : Better day , DCC upgrades , Bank of Ireland fast on their feet

 

Good Afternoon,

 

A better day market wise and DCC was the main news item in Dublin this morning , followed by Bank of Ireland once again stealing a march on AIB with a fresh capital management exercise.

 

This morning we got news from DCC in the form of an IMS release which led to an effective 8% upgrade to earnings. Once again, it is worth noting the upgrade cycle is underway and it follows from Ryanair yesterday.

 

DCC  Energy and the Sercom IT business performed with Energy achieving strong operating profit growth and Sercom seeing stronger trading than expected. Operating profit in each of the other three divisions was ahead of the prior year, with strong recoveries seen in Healthcare and Environmental.  Our EPS forecast will likely increase to 171c (158.2c previously, an 8% upgrade), with 1.3% of this due to stronger GBP and the remainder due to the strong performance of the business and we look now to 191c eps for DCC for the following year. It has always been hard to find an appropriate peer for DCC but I looked at the sector multiple of the UK support services sector which is now 14.1x so putting the 171 current yar forecast eps on the sector multiple would give you an aspirational target which is in the 24 euro range so makes DCC look ok on a uk sector peer comparison. There would appear to be little on the horizon which gives rise to much concern at DCC these days especially in the afternath of the glowing report by the inspector appointed by the Director of Corporate enforcement last week. Certainly DCC came in for a lot of support early on this morning but the stock has been a strong performer already ahead of the IMS so here was little further impetus to drive it ahead today.

 

I was looking at CRH again , noting that it is trading at a valuation premium to Lafarge on P/E terms but on quite similar EV/EBITDA valuations. From our desks in Dublin we have probably not been as aware that the whole sector has retreated in the past few weeks and CRH is amongst the group rather than being an outlier with the recent underperformance. It occurred to me when I was looking at the US sector peer valuations and the European valuations that if one was to construct a synthetic CRH using the valuations of Beacon Roofing and Lowes as a proxy for the distribution business in the USA and using the valuations of Vulcan and Martin Marietta for the purposes of the Materials businesses and applying the European sector multiples for the European operations , that the valuation of CRH would look quite compelling... Unfortunately I had no time to do this.. maybe tomorrow but I am intrigued at the possibility that this route may be the key to highlighting the valuation of CRH.  

 

The Paper sector continues to rally as inventory levels in the USA are at absolute lows showing how tight supply is. 

 

This afternoon saw the announcement from Bank of Ireland re an exchange offer for any and all of five lower tier II debt securities that it has outstanding with par value of €2.9B. These are notes currently covered by the existing government guarantee schemes and the notes have exchange offer price offers from 70.25% to 79.5% of par.  Merrion estimate that if fully subscribed the gain pre-tax could be €729m with =additional benefits such as any gain reducing the €2.8B of incremental equity capital that we estimate the bank requires to reach an 8% equity tier I ratio. 

 

AIB has about €4.4B of dated loan capital outstanding of a similar nature to BoI's, not that they would want or be able to call all of this.  AIB have been lagging Bank of Ireland with these type of issues from the start.

 

Other movers to note is the relative strength now of paddy Power which has found a floor after a bout of quiet softness..and also Tullow which after the placing of last week is steadily gaining momentum.  

 

 

Better markets with the major indices up strongly, the FTSE allshare +2.4% , Europe + 1% , Ireland + 1.2% and wall street + 0.7% 

 

Have a good evening ,

 

Liam 

 

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

Tel.: 353-1-2404171

Mob:353-87-2313505

www.merrion-capital.com

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