Good Afternoon,
Looking at the chart of the performance of the ISEQ this week ,the market is as near as dammit flat having been up sharply last Friday at 10am then falling like a stone from 10am through to close of business on Tuesday (Monday being the Bank Holiday in Ireland though stocks traded during the Bank holiday. Wednesday saw a rally in the market which gained momentum on Thursday only for the rally to falter this morning despite the strong performance from the Dow Jones overnight.
The big news this week was the positive conclusion to the Bank of Ireland rights issue though shareholders will look back at the terms of the transaction and the taxpayer will rue the generosity of the Government who converted preference shares at 1.80 compared to an equivalent price now of 1.17c. the underwriters were made to sweat a bit along the way.
Irish Life continues to disappoint given the funding strains and the will they wont they nature of whether they find a solution to the third force which seems to now be something that only they believe in.
Aryzta got away a share placing by UBS (proving their swiss credentials ) and as sure as Eggs is Eggs they did the deal that was expected spending $1.1bn on Fresh Start and Great Kitchens. The deals are immediately earnings enhancing though there was no mention of synergies and the shares rallied sharply off a low rating. My friend and Colleague from Kepler who has been a big fan of the stock while we remained a tad sceptical developed a new angle today suggesting that ultimately as the Aryzta becomes more food service oriented it might itself become a takeover candidate for the Nestle or Unilever…very intriguing..
The details of the Aryzta deal are worth reviewing. Fresh Start Bakeries and Great Kitchens have a combined proforma revenue for FY2010 of USD1.03bn, EBITDA of USD133m for a combined consideration of USD 1.08bn (representing 8.1x proforma EBITDA). Fresh Start Bakeries is described as "a global supplier of specialty bakery products with a leading position in Quick Service restaurant segment" with operations in US, Canada, Germany, Poland, Sweden, Spain, Brazil, Australia and NZ, with three JVs in North America, Chile and Guatemala. It also incorporates Pennant Foods (specialty bakery to Nth Am QSR, foodservice and in-store bakery channels) and Sweet Life (sweet baked goods for Nth Am and Asian QSR). Great Kitchens provides pizza and appetisers to the Nth American retail grocery channel, with a focus on the deli section. The acquisitions have been financed through existing facilities (cash, debt (newly raised and restructured) and USD140m of shares. Net debt following the transactions is expected to be c.3.0x EBITDA (new covenants remain at 3.5x). The acquisitions are expected to be accretive by >45c over 12 months. On outlook, the company has raised guidance for the full year from the previously guided 224c, saying now that it expects EPS yoy growth. This seems driven predominantly by the acquisitions which are expected to be accretive in Q4 and FX benefits, although the company does not indicate that there has been a modest improvement in operations.
Origin issued Q3 numbers with Sales of €1017m in line with expectations. Revenue was down overall 4.8% for Q3, with Food revenue down 6.8% and Agri-Inputs down 4.4%. For the 9 month period Agri-Inputs were down 11.5% yoy an improvement over the half year decrease of 21%. On the traditional agri side, the company saw volume growth of c.10-15% yoy (primarily UK fertilizer) with the revenue decline driven predominantly by reduced commodity prices. As for Masstock, late growing conditions in the UK have delayed the season and the company is expecting an improved performance in Q4 as a result, the company is sustaining its market share. Marine proteins JV continues to provide solid returns benefitting from high demand for Norwegian salmon internationally. Food was down 6.6% in the quarter (with profit down in line with sales). Guidance has remained in line with consensus and our forecasts of 33.9c. Upside from this point may be delivered if Masstock's season extends through to the end of June.
Glanbia co-op have said that the will re-visit the Irish Dairy deal which seems to have been defeated by the smallest of margins and I hear that the key voters could have been at a local hurling match and unaware that the vote was as close originally. Hopefully their timing will be better next time.
Elan got hit as expected by the announcement of the unanimous approval of Gilenia the MS alternative Oral treatment developed by Novartis. The Peripheral and CNS Advisory Committee unanimously supported the approval of Novartis' Gilenia (FTY-720) for RRMS. This makes approval by the FDA almost certain. As expected efficacy was not a question with a unanimous vote on whether the drug would work (25-0). The discussion focussed on the documented safety issues and the panel advised that Novartis' trial the drug at a lower dose although they recommended that approval of the drug should not be delayed whilst that trial is done.
ICG agm statement noted that the generally positive trends identified in its IMS on May 13 have continued. Year to date, passenger numbers have increased
11% (+10.4% in May) and car volumes have declined 4% (May IMS -5.6%). RoRo freight volumes are down 13% YTD versus the prior year compared to a YTD
decline of 15.1% in May. The company comments that the Ro-Ro market is showing signs of modest growth, although excess capacity continues to affect ICG.
Container freight volumes have increased 10% YTD (+10.5% in May) with terminal lifts in Dublin & Belfast +6% (+5.6% previously). Overall the company comments
that forward bookings for Irish Ferries have been strong in recent weeks. The company also states that the weak euro, while benefitting exports from Ireland
and inward tourism, is leading to fuel costs running at 25-30% above 2009 levels. Previous commentary from the company indicated that the 2010 fuel bill
would be in the region of €38-39m versus 2009's cost of €31.5m. Overall, we do not see our forecast for 2010 EBITDA of €55m changing materially on the back of
this statement. We reiterate our Buy recommendation on the stock.
Tullow has announced that the Mahogany-5 appraisal well (TLW 23%) on the Jubilee field offshore Ghana encountered 23m of net oil pay over a 51m gross interval. Fluid samples and pressure data have confirmed the reservoir is in communication with the Mahogany-4 well. The successful result tightens the potential resource range in the southeast Jubilee area around the expected case of c.300m bbls. Looking ahead, management will be assessing development options for the area. In the near term, the Owo-1 exploration well on the Deep Water Tano block (49% TLW) is expected to spud over the next month.
Norkom FY results Adjusted EPS of 9.4c equals 21.6% yoy growth (14.7% ahead of our expectations). Revenue growth of 2.6% was 1% below our forecast but operating margin of 18.6% was well ahead of last year (17%) and our forecasts of 16.7%, achieved by close management of SG&A and COGS. The other major adjustment for adjusted EPS was the higher than expected element of costs paid in options which the company adjusts out. Cash generation very strong with FCF of €15.2m (€7.4m in 2009), achieved in part by increased share payments, tighter working capital and some prepayment of work booked in FY2011. Net cash at the end of the period was €41.6m. The outlook statement is upbeat stating the company has "navigated through the bottom of the crisis in [its] core markets." Demand is appearing in both traditional (US) and emerging markets as well as through newly developed avenues (insurance, healthcare, and smaller potential customers through channel partners). Of particular note are signs that demand is returning in the US and Norkom notes "recent wins in the region" suggesting it is competing effectively against Actimize in that geography. We will revert with any changes to our forecast for FY2011 following an investor meeting with management at 9.00am. Overall a strong performance in difficult times underlying the quality of the company. Cash levels, increasing demand and ability to compete in the US make acquisition possibility more and more likely.
Homebond released its registration data for May. This structural insurance data, coupled with similar data from Premier Guarantee, is a proxy for housing starts in Ireland. The number of registrations in May increased 155% to 456 from 179 in April (131 in March, 149 in both February and January) and up 122% from the 205 registrations in May 2009. Meanwhile, the Construction Industry Federation (CIF) released data stating that the number of residential units completed in the first four months of 2010 was 4,925, down from 10,041 in the same period in 2009. The CIF is forecasting that a maximum of 10,000 houses will be completed this year and again in 2011.
So a newsy week in a market where the general tone of all the corporate news was positive with upgrades being the order of the day against a macro backdrop still very uncertain due to the strains in sovereign markets continuing and the ramifications being felt in the banks sector with funding worries driving fears about double dips.
The Irish government came in for strong criticism for their management of the economy with reports on the Banking sector blaming the Government for its lack of regulation and saying the disaster was largely self made…Needless to say Brian Cowan the Taoiseach has brushed off any criticism. He comes in for some criticism in the Wall Street Journal so the Golden image of the leader who is delivering austerity to Ireland is himself now very much in the spotlight for his role in the mess.
Have a great weekend
Liam
___________________________________________
Liam Boggan
Merrion Stockbrokers
Tel.: 353-1-2404171
Mob:353-87-2313505
www.merrion-capital.com
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