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| Morning Meeting Wrap | |
| 3rd February 2012 | |
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| Economic View | Too early to tell prospects for the public finances |
| Economic View | Sharply lower forecast by the Central Bank |
| Airlines | Malev closure to benefit LCCs |
| Airlines | DAA to give rebates for traffic growth in Dublin |
| Paper & Packaging | The pricing debate heats up |
| CRH | Cemex highlights infrastructure headwind in the US |
| Petroceltic | $101m cash payment pending |
| Food Sector | Kellogg positive finish to 2011 |
| ICG | Discussions fail to save Fastnet Cork-Swansea service |
| Economist: Dermot O'Leary | ||
| Economic View | ||
| Too early to tell prospects for the public finances | ||
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The first piece of news on the Irish public finances in 2012 was released yesterday in the form of the January Exchequer Returns. Due to timing issues around the collection of taxes, reorganisation of departmental budgets and the lagging nature of these returns, we would not pay much of attention to them as it will be some months before a trend starts to emerge. Nevertheless, the headline points from the release are that the overall Exchequer (cash) deficit was down by c€90m to €394m in January 2012. Within this total revenues rose by €900m, while total expenditure rose by €810m relative to January 2011. Within tax revenues, corporation tax receipts are distorted by a late payment that will actually get accrued in the 2011 general government accounts. Income tax was also up strongly, but the comparison is affected by the introduction of the Universal Social Charge (USC) in Budget 2011, but would not have been picked up in the January 2011 figures. Somewhat encouragingly, VAT receipts rose by 3% yoy in January (-14% yoy in December), but some of this improvement is undoubtedly due to the better weather conditions over the recent winter months. On the spending side, voted expenditure (that is, spending that the Government has a direct control over) fell by 2.8% yoy continuing a trend evident for some time.
It is much too early to make any firm conclusions about the prospects for the public finances in Ireland at this stage. Given that the Government's forecast of 1.4% looks optimistic, we would not be surprised if tax revenues fell short of target. | ||
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| Economist: Dermot O'Leary | ||
| Economic View | ||
| Sharply lower forecast by the Central Bank | ||
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The Irish Central Bank sharply reduced its growth forecasts for the Irish economy yesterday in its first Quarterly Bulletin of 2012. GDP growth of 0.5% is now expected in 2012, down from its previous estimate of 1.8%. GNP is forecast to decline by 0.7%, down from +0.7% previously. These forecasts are now very similar to our own forecasts (0.7% GDP, -0.8% GNP), with the weaker outturn in the second half of 2011 meaning the economy was on a slower trajectory coming into 2012, with recession in the euro-zone to lead to a slowdown in export growth. Although the Taoiseach has already disagreed with these more pessimistic forecasts, it is clear that the Government's forecasts for economic growth are under pressure and will have to be downgraded from the current 1.3% GDP growth (0.7% GNP) in 2012. The most likely timing for this is the release of the Stability Update in March/April.
Like us, the Central Bank believes that the Government will still get close to its budget deficit target of 8.6% in 2012, despite slower expected growth. As a result, we do not expect an emergency Budget to be needed in 2012. Growth though is a key variable in the medium-term for Ireland to restore its debt sustainability. Due to the continued contraction in domestic demand, it will be very difficult to come by. | ||
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| Analyst: Dónal O'Neill | Recommendation | Closing Price |
| Airlines | ||
| Malev closure to benefit LCCs | ||
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Following the demise of Spanair last week, Malev, Hungary's national airline, has accepted a similar fate and ceased all operations as of 6am this morning. Earlier this week, the airline had been declared a "strategically important asset" by the Hungarian government, effectively giving it protection similar to bankruptcy. However, it had been ordered to present a liquidity plan by today which would see the airline return to profitable operations. It had also been hoped that Hainan Airlines, China's largest privately held airline, would buy a large stake in Malev having originally suggesting the same back in July 2011. This has clearly been unachievable on both fronts and the board of directors has ordered the airline to ground all planes and cease operations.
Malev had a fleet of 22, mostly Boeing aircraft, with orders in place for almost 40 additional aircraft from Russian airframer Sukhoi. In terms of destinations, Malev had very broad coverage throughout Europe with key operations at Budapest, London Gatwick, Madrid and Zurich, with additional services to a number primary and secondary airports across Europe, most particularly in France, Spain, Germany, the UK and Switzerland. Malev's failure had always looked likely given the economic pressures currently weighing on Hungary and it highlights similar pressures being felt by other state airlines on the continent. Nevertheless, a further reduction in capacity (Malev carried c. 4m passengers in 2011) is most welcome and those that look set to gain most are the low cost carriers including Ryanair, easyJet, Norwegian, Vueling but especially Malev's key domestic rival, Wizz Air. | ||
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| Analyst: Dónal O'Neill | Recommendation | Closing Price |
| Airlines | ||
| DAA to give rebates for traffic growth in Dublin | ||
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The DAA has announced plans to offer rebates totalling €1.5m to 30 airlines which increased capacity and opened new routes in Dublin airport in 2011. The refund will be divided up based on the relative contribution of each airline to the increased traffic. Passenger numbers grew 2% in 2011 to 18.7m following 4 consecutive years of declines from 23m to just over 18m in 2010. The growth incentive scheme introduced by the DAA in 2011 offers rebates on airport charges for airlines growing traffic at Dublin, Shannon and Cork over the following three years.
The airlines that stand to gain from the rebate include Aer Lingus, Lufthansa, Etihad, Norwegian and Swiss. | ||
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| Analyst: David O'Brien | Recommendation | Closing Price |
| Paper & Packaging | ||
| The pricing debate heats up | ||
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Yesterday, International Paper released Q411 results in which it reported EPS of $0.66 versus consensus estimates of $0.61. The division of relevance to our coverage is the European Industrial Packaging business, which reported a 2.9% decline in volume yoy (-2.7% in Q311). However, due to input cost reductions, margins improved in the business by 100bps yoy to 6.8%.
Elsewhere, RISI pricing data showed that European containerboard prices fell by €10/tonne in Italy in the last month, while OCC prices increased by €10/tonne. Interestingly, the article outlines conflicting views from industry sources over the chances of the announced price increases being successfully implemented. On the bearish side, some argue that weak paper demand and overcapacity (especially with the start up of the SAICA machine in the UK) will hinder the chances of an increase. However, one large corrugated player indicated that the chances of an increase are realistic given the squeeze on containerboard producers' margins. Furthermore, there is a belief that inventory levels at corrugated plants have been run quite low due to the falling price environment, which will aid containerboard producers. These are not the only conflicting reports within the industry. RISI's US monthly review attached little chance to a price increase in Europe going through, while International Paper management noted on its conference call that it has seen a "firming up and reversal" of export pricing in the Mediterranean basin. It is clear that pushing price increases through is by no means a "slam dunk". As we stated previously, we are leaving our forecasts unchanged until such time as we see prices stabilising or ticking upward. However, we maintain the view that the price announcements and ensuing negotiations highlight the pressure containerboard producers are under and points to a trough in pricing being reached soon. | ||
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| Analyst: David O'Brien | Recommendation | Closing Price |
| CRH | Sell | €15.33 / £12.78 |
| Cemex highlights infrastructure headwind in the US | ||
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Yesterday, Cemex reported Q411 revenue of $3.7bn (+6% yoy) versus consensus expectations of $3.54bn. This translated into EBITDA of $542m for the quarter (+13% yoy) and compares to consensus of $513m. Improved prices in Mexico, strong performances in Northern Europe/Latin America and cost savings were the key drivers of the EBITDA performance.
In terms of regional trends, aggregate volumes in the US declined 4% yoy during Q4 (-8% in Q3 and -7% in Q2), while pricing increased 6% yoy (+11% in Q3 and +9% in Q2). Cement pricing remained steady, increasing 1% yoy and finishing flat for the year. Management commented that the increased demand for building materials in the US is being driven by improved performance in the residential and non residential segments, while infrastructure remains weak as stimulus funds wind down. Furthermore, on the conference call management noted that a new Highways Bill would not be in place by the end of March when the current continuing resolution ends. Europe continued its dual performance, with the North performing well, partly aided by weather, while the Mediterranean countries continue to struggle. Germany, France and the UK reported robust performances driven by strong residential activity and improving commercial markets. However, Southern Europe remained difficult with cement volumes in Spain declining 40% during the quarter. Overall, the trends are not surprising. We maintain our view that a weak infrastructure performance will offset a potential cyclical recovery in the US. While in Europe CRH's relatively large exposure to Iberia/Ireland (c.8% of European sales), a struggling Benelux (c. 25% of European sales) and a slowing Switzerland (c20% of sales) will result in a year of top-line declines. Given our cautious view on the outlook for FY12, we see flat earnings for the year. Moreover, we are not willing to pay 19x forward earnings for the stock given the lack of a recovery and maintain our SELL recommendation. | ||
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| Analyst: Gerry Hennigan | Recommendation | Closing Price |
| Petroceltic | Buy | £0.08 |
| $101m cash payment pending | ||
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A statement from Petroceltic this morning has outlined that all the administrative hurdles towards completion of the farm-down to Enel have been passed. As such, Enel has been formally acknowledged as a partner (18.375% interest) in the Isarene licence in Algeria enabling the payment of funds to Petroceltic under the terms of the agreement. Those funds, to be paid in cash within 30 days, currently exceed $101m ($103m in our model) being the aggregate of 24.5% of exploration costs incurred prior to April 2010 ($36.75m) and 49% of the cost of the recently completed appraisal campaign. A final bonus payment (up to a maximum of $75m) on approval of the Declaration of Commerciality is due to follow later in the year. We assume a bonus payment of $37.5m in our cashflow for the current year.
While this morning's statement was widely anticipated, it is nevertheless welcome and ensures that Petroceltic is fully funded beyond the end of the current year. Pending catalysts in Algeria include submission of the field development plan (completed and awaiting formal request) and an expected farm-down of a further 18.4% tranche to an operator later in the year. | ||
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| Analyst: Liam Igoe | Recommendation | Closing Price |
| Food Sector | ||
| Kellogg positive finish to 2011 | ||
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Kellogg reported a 6% increase in its "internal net sales" for Q411 yesterday (6.5% for full-year). The main contributors to growth were its core North American market (+6.6%) along with Latin America (+10%), while European sales fell by 1.3% in Q4, reflecting similar trends from other international food companies. All of the sales growth, however, was price driven, with slight decreases in Q4 and flat sales for the full-year. The company reaffirmed its FY12 guidance, where they are targeting internal sales growth of 4-5% with eps growth of 2-4%, with lower profit growth arising from planned investment in sales growth (e.g. through promotions).
Irish food plcs will be reporting later this month and we expect that both Kerry and Glanbia will continue to show positive volume growth for 2011, albeit at a slower pace in H2 and we anticipate a positive outlook into 2012, despite the challenging economic environment that all the food companies are encountering. | ||
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| Analyst: Colm Foley | Recommendation | Closing Price |
| ICG | Buy | €14.95 |
| Discussions fail to save Fastnet Cork-Swansea service | ||
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It was announced yesterday that the owners of the Cork - Swansea ferry service have failed to raise adequate funds to sustain the service and will therefore not be recommencing crossings in March as planned.
While Fastnet has not been competing directly with ICG on any of its routes, it may have a knock-on positive effect on the closest access point to the south-east, the Rosslare-Pembroke route, where ICG accounts for c.65% of the RoRo market and c.40% of the passenger market. | ||
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