Davy Research

Davy Morning Equity Briefing

Market Comment

UK consumer sentiment at odds with spending data

UK Gfk consumer confidence fell to a post-Brexit low of -12 in July down from -10 in June and worse than the consensus expectation. Nonetheless, despite the worsening sentiment surveys, retail data suggest UK households continue to spend fuelled by leverage and savings rundown. Retail sales bounced back in June following a couple of softer months and yesterday’s CBI survey of retailers pointed to a weather-related bounce in sales in July.

Bank of Ireland

Strong capital position; underlying PBT ahead on lower impairments

While uncertainties remain, the stronger than anticipated FL CET1 of 12.5% should provide reassurance regarding BOI’s ability to recommence dividend payments with FY 2017, particularly given the deduction for a potential dividend (c.15bps) and a 10bps timing impact in advance of the expected life assurance dividend in H2. Elsewhere Impaired loan / NPE progress is ongoing while lending is impacted by STG movements and a cautious approach to the UK mortgage market.

Forterra plc

H1 results should confirm good start to the year

The Forterra share price has been a big winner thus far in 2017, gaining over 50%. We expect interim results will confirm a solid first-half for the group as it has benefited from a healthy new housing market in the UK. The consensus EBITDA forecast for 2017 has risen by almost 10% since the start of the year and there may be scope for further upward, though likely modest, revisions. While the stock has re-rated, it still does not look expensive at circa 11.5x our current 2017 EPS estimate of 23.4p. A further attraction is a prospective dividend yield of 3.5%.

Saint-Gobain Group

Cyber-attack mars an otherwise good H1 result

A late June cyber-attack has had a significant negative impact on SGO’s H1 results. The attack reduced EBIT by €65m (4%) so the result fell short of estimates. That event overshadows a robust margin performance especially in Flat Glass and HPM. While FY17 consensus likely moves lower to reflect the event we suspect investors will look past the issue. Presuming the right controls are now in place the stock is in good shape. End-markets are improving, price increases are offsetting cost inflation and the group’s financial position is secure.

Ardagh Group

Showing its metal with impressive synergies from Beverage Can assets

The stand-out feature from Ardagh’s Q2 results was the significant improvement in the underlying margins of the Metal Packaging business in the Americas. This augurs well for the future and underscores Ardagh’s relentless focus on performance. It also highlights the group’s ability to grow in what are stable sectors via acquisition. Other attractive features of the investment case include a decent dividend yield and significant free cash flow generation potential. The latter can help facilitate the transfer of value over the next four years from debt to equity to the tune of over 35% of the current share price.


Rising ilmenite prices

Huntsman, a large titanium dioxide (TiO2) producer, guides ‘modest’ increases in raw material costs in the near term. This is in-line with Kenmare’s recent comment that it agreed further price increases for contracted ilmenite volumes in H2 2017. Elsewhere it was reported that support in Chinese domestic ilmenite prices last week has impacted seaborne trade, ending short lived lows in mid-July where the price of imported ilmenite was reported to have dipped below $200/tonne for the first time since April.

Air France KLM

Regaining the long haul offensive and aiding consolidation

We think the creation of one single, global JV and the cross ownerships of AFKLM/Delta/China Eastern/Virgin of one another signals a much stronger collaboration and adds a more long-term nature to the consolidation benefits. The investments by Delta and China Eastern of 10% stakes now provides both short-term recapitalisation of c.€750m (or €500m net after Virgin stake) and signifies that it has the close backing and interest from two of the largest airlines in two of the world’s largest markets (namely, the US and China). The outlook statement is positive in today’s H1 results and we move our rating to Outperform with a €15PT.


Double digit operating profit growth for the year

Continuing the positive momentum from the beginning of the year,IAG expects its operating profit for 2017 to show a double-digit percentage improvement year-on-year (previously it indicated an “improvement”. The group expects second half passenger unit revenue (passenger revenue per ASK) to show an increase versus last year, at constant currency (Davy currently +10.2% at €2807m operating income, consensus €2,887m). We retain our Outperform rating.