Davy Morning Equity Briefing
Mar 30, 2020
Irish business confidence collapses as lockdown tightened
This morning’s Bank of Ireland/European Commission Business and Consumer Pulse surveys paint a bleak outlook, suffering enormous one-month declines and falling to their lowest levels since 2016. Furthermore, the surveys were largely taken before the school closures, business and travel restrictions were imposed to fight COVID-19 and tightened again on Friday by the government. Hence, sentiment is likely to take a further hit in April’s surveys.
Q4 banking data highlight supportive deleveraging ahead of current crisis
The Q4 releases on Friday (March 27th) relating to mortgage arrears and credit/deposit trends to SMEs and large enterprises do not yet capture the impact of COVID-19. However, the arrears data helpfully highlight how the majority of mortgages in arrears are no longer held by the banks. While persistent deleveraging in the SME sector and the significant build-up of business deposits, well in excess of loan balances, provide an important buffer ahead of the difficult times to come.
Basel Committee announces further capital relief measures
The announcement by the Basel Committee of additional capital relief for global banks is welcome — although, the so-called Basel IV measures are expected to be less impactful for Irish banks than elsewhere. This builds on numerous additional regulatory measures in recent weeks as regulators seek to help the banking sector to continue to provide support to the economy against the deteriorating COVID-19 backdrop.
2019 dividends withdrawn in line with ECB recommendation
The announcements by both AIB Group (AIBG) and Bank of Ireland (BIRG) that the 2019 dividends will not be paid should not come as a surprise and will be understood as the prudent course of action. It remains far too early to assess the impact of the pandemic but, given the material uncertainty that it generates, conserving capital resources is the correct measure at this time. Given the significant measures announced by regulators, we would not expect any read-across to AT1 coupons and anticipate that these will continue to be paid.
Further COVID-19 update: actions in Ireland
Grafton has announced a fresh additional COVID-19 update to cover the impact of Irish government measures. It has temporarily closed its Woodies DIY business and its distribution operations have been significantly scaled back. This is not a surprise and would have been anticipated.
Further COVID-19 update
Following on from its earlier update, SIG has now announced the temporary closure of its UK and Ireland trading sites. It will cut staff pay during the shutdown and will also use the closure period to develop a revised strategy and organisational model. The latter will clearly attempt to improve on what have been persistently weak earnings and returns.
Cost and cash measures in response to COVID-19
The marked reduction in demand for Food-to-Go (FtG) products is not unexpected given its strong dependence on workforce footfall. Growth in longer-lived products will only partially offset the decline. In response to COVID-19, Greencore is adjusting its production network and furloughing impacted employees. Full-year guidance has been removed and the interim dividend will not proceed. Planned capex projects will be deferred, while the Board and management teams have agreed to a temporary reduction in pay. A newly agreed short-term committed debt facility increases the group’s liquidity to £265m.
Sites to close for at least two weeks
Irish government restrictions on construction in response to the COVID-19 pandemic will mean the closure of housing sites for the next two weeks. This downtime will have an impact on volumes and the magnitude of this will ultimately depend on the length of downtime.
Facing short-term downtime
The latest Irish government response to the COVID-19 pandemic will lead to downtime in Mincon’s Shannon plant. While the company has significant operations outside there, a large portion of manufacturing activity also takes place in Ireland. Risk to H1 estimates in particular have shifted to the downside and the magnitude will depend on the length of the downtime.
Adjusting forecasts – quality to win out
The recent closure of Primark’s global store estate has led us to materially lower EBIT estimates. Our Primark assumptions are anchored by conservatism — we model a six-month period of full lockdown. Key unknowns include the timing and scale of the post-COVID-19 recovery — we model a gradual rebuild of sales densities from H2 2021. While recognising the impact of COVID-19, ultimately Associated British Foods (ABF) remains a quality operator with strong franchise value in Primark. It is operationally diversified. On our highly conservative estimates, it trades at 16.6x FY2 and a free cash flow yield of 7%. We expect the absolute dividend to be maintained. We believe investors should look through this period of flux. We recommend the shares.
MyHome Property Report, Q1 2020
This quarter’s MyHome report showed a decent start to 2020, with asking price inflation steady at 0.7% and residential transactions bouncing back, but before the impact of COVID-19. However, new listings for sale have run at 50% of normal levels in recent weeks, reducing the overall stock by 10% on last year. So a period of illiquidity in Ireland’s housing market is now likely.