Davy Morning Equity Briefing
Market Comment
First rate rise in a decade but gloomy outlook for UK growth
There were few surprises yesterday as the expected 25bps hike and conditional future rate path were in line with expectations — that is for one further rate hike by end-2018. However, the Monetary Policy Committee (MPC) forecasts are based on an orderly Brexit and upturn in wage growth, and there is little current evidence that either will occur. Finally, the MPC painted a gloomy picture of the UK’s growth potential, putting it at about 1.5% in the medium term – much lower than the 2% OBR estimate. This is due to perennially weak productivity growth which, in our view, will only be exacerbated by Brexit.
Bank of Ireland
Reduces pricing on certain fixed rate mortgages
The move by Bank of Ireland (BOI) follows recent rate reductions elsewhere, with longer dated fixed rate mortgages now becoming more prominent in the marketplace. Given that the reductions only apply to new lending flows, we would not anticipate any material impact on our income forecasts, particularly as we already incorporate rate reductions into our net interest margin (NIM) projections.
LafargeHolcim
A pivot to growth – but first a 4% EBITDA downgrade
We have updated our earnings forecasts for LafargeHolcim (LHN) following the Q3 results last week. We cut our FY17 and FY18 EBITDA forecasts by 3.6% and 4% respectively. The initial update from the new CEO was understandably brief and made sense, with more detail to come with a strategic update in March. His first act was encouraging in itself, cutting the group’s unrealistic profit targets. With expectations now reset, he can focus on his growth agenda – devolving responsibility at country level and simplifying the group structure. For now, we maintain our ‘Underperform’ rating given continued pressure in key end-markets and little by way of valuation support.
IFG Group
A beneficiary of the UK rate rise
All other things equal, we would expect the 25bps increase in UK base rates to boost IFG’s revenue/PBT by circa £2.4m in a full year (adding c.3%/20% to our FY 2018 forecasts respectively). The Q3 update on November 10th will provide a timely update on underlying trading, although it may take longer to draw a line under the legacy Elysian Fuels issue, which IFG has said it is hoping to resolve – and clarify any financial exposure – prior to the year-end.
Total Produce
Acquisition of 50% stake in The Fresh Connection, LLC
Total Produce has announced its second North American acquisition in 2017 (third deal including its increased stake in Oppenheimer) with the acquisition of a 50% stake in The Fresh Connection. The deal provides further momentum to the build-out of the group’s growth platform in the buoyant North American fresh produce market and adds c.US$165m of sales to the revenue base (consolidated). We estimate that the acquisition will add c.3% to our group FY2018 EBITA forecasts and will be both earnings and value accretive.
Air France KLM
Strong Q3 results: unit revenue backdrop continues to improve
In a similar vein to Lufthansa’s and IAG’s recent results, Air France-KLM has capitalised on a solid demand backdrop with another positive pricing performance in Q3. Unit revenue was +4.1%, 2pts stronger than Q2 (+1.9%). Importantly, this is expected to continue into Q4 and long-haul bookings are ahead for the next four months. Elsewhere, net debt and leverage levels also continue to trend positively.
Amadeus IT Group
Solid quarter with in-line EBITDA; Premier Inn a new customer for Hospitality IT
Q3 was another solid quarter for Amadeus with EBITDA in-line with consensus. Looking forward, the content agreements in Distribution and newly-contracted airlines for IT Solutions suggest that the core of the business should continue to track well into the New Year. Additionally, the contracting of Premier Inn for two of the key Hospitality IT modules will be well-received.
Irish economy
Government finances on track ahead of vital November returns
Exchequer returns data for October show that government finances are broadly on track to hit Budget targets in both revenue and expenditure. However, the key month in the final quarter will be November, with over €8bn in tax revenues expected as self-employed and corporate tax returns come due. This is, by some distance, the largest tax month in the year and will go some way towards determining the final fiscal position for 2017.