Davy Research

Davy Morning Equity Briefing

Market Comment

Irish rental market inflation still well ahead of 4% cap

The latest Residential Tenancies Board (RTB) data show residential rents post another robust gain in Q4 2017, up 6.4% on the year nationally and 5.2% in Dublin. A year after the introduction of rent pressure zones across the major population centres, for both new and existing tenancies, inflation continues to surpass the mandated 4% cap. As we suggested at the time, the measure has probably led to unintended distortions in the market, with outsiders operating with an information deficit versus insiders. Indeed, international evidence suggests that turnover and supply is reduced and prices are ultimately pushed up by rental caps in the long run.


ONE Kingfisher progress but UK macro a key risk

The Kingfisher investment thesis hinges on the potential for earnings to step up materially over the coming three years. In this respect, its January 2018 performance (retail profits of £849m, broadly in line with our own expectations) is less relevant. The group has contended with difficult end-market conditions and the acceleration of ONE Kingfisher over the past 12 months, keeping profits broadly flat on a year-on-year (yoy) basis. In fact, ONE Kingfisher progress is notable. However, a more difficult UK environment is now clearly impacting on B&Q, while cash has also disappointed. We continue to believe that expectations around the programme, its balance sheet capacity and the stock in general remain muted. We reiterate our ‘Outperform’ recommendation.

IFG Group

Full year 2017 in line with trading update

FY 2017 results were in line with the trading update announced on February 2nd with no material updates provided on either Elysian Fuels or a potential sale of the Saunderson House business. Across both James Hay and Saunderson House, customer acquisition continues apace, while the pricing changes introduced in the second half of 2017 will improve returns in the James Hay business.

Norwegian Air

Equity issuance provides breathing space

As developments go, issuing new equity equivalent to 24% of one’s market cap in order to improve equity levels and announcing a weaker-than-expected Q1 update, is about as difficult as it gets. If there are positives to be spun from this, then in the context of long held and valid concerns around Norwegian’s leverage (14.1x trailing adjusted net debt/EBITDAR, now going to 13.6x, versus 0.5-1.5x for easyJet, Ryanair and Wizz), this helps to set a more stable base for this summer’s expansion. In addition, the upsized raise (NOK200m added this morning) suggests that shareholders are willing to support Norwegian for now. We remain cautious on the ‘strategic review’ of the rewards programme, however, Air Berlin’s sale of its rewards programme in late 2012 (to help liquidity) is a negative precedent.

Eland Oil and Gas

Short delay at Opuama drilling operations

We see the news that there has been a delay due to faulty rig engines as a normal infield operational problem and should have a short period of related disruption. It bears no relationship to the earlier export problems experienced by the group. News that all four producing wells collectively hit output of over 23,000 barrels per day (b/d) gross in March should be seen positively by shareholders.

Green REIT

Strong letting to TD at One Molesworth Street

Green REIT has announced the letting of the top (fifth) floor at One Molesworth Street to TD Global Finance. This has achieved an exceptionally strong rent of €70/sq. ft., which sets a new benchmark in the Dublin office market. It also further de-risks the development with 88% of the office space now let.

Virgin Money Holdings

Signs asset management partnership with Aberdeen Standard Investment

The partnership with Aberdeen Standard Investment (ASI) has strategic merit, enabling Virgin Money (VM) access to a broader suite of investment products and digital expertise. While the partnership will be earnings dilutive from 2019 onwards, this should be offset by 40bps capital gain generated on the sale of its stake in its asset management entity together with the longer-term potential for greater growth.