Davy Morning Equity Briefing
Mortgage market surges in early 2017
New data released this morning by Banking & Payments Federation Ireland (BPFI) show that €628m of mortgages was approved in February, up 68% on last year. Encouragingly, mortgage lending volumes were up 52% on the year. The average loan approved rose to a fresh high of €208,200, up 10.7% on the year. The early data are showing stronger trends than our forecast for the mortgage market to expand from €5.7bn in 2016 to €6.9bn in 2017.
Transformation to a US business takes another leap forward as decision taken to exit Nordic region
Wolseley’s interim results constitute another solid showing by the group, although the reported outcome was flattered by the sharp weakening of sterling relative to the US dollar. A stand-out is the acceleration of organic revenue growth in Q2. Strategically, Wolseley is increasingly a US-dominated business (over 80% of trading profit) where it offers market-leading exposure to what are fragmented sectors. Hence it is no real surprise that the group will switch its reporting currency to US dollars. It may be more of a shock that Wolseley will fully exit the Nordic region but it has been clear for some that Europe has been increasingly peripheral to the group. Wolseley will also get a name change and pending shareholder approval will be called Ferguson plc. The Wolseley share price has gained over 25% in the past year and we are likely to upgrade underlying forecasts to reflect the pick-up in revenue momentum.
Raises synergy guidance; underlying trading broadly in line with expectations
Given the pre-announcement in January, there are no real surprises in the 2016 numbers reported by Ladbrokes Coral. Operating profit came in at £283m versus previous guidance of £275-285m. What the market was really looking for though was an update on synergies and current trading. In relation to the former, the company did not disappoint with cost synergy guidance raised from £65m to £100m. Encouragingly, this number does not include revenue synergies which we think are yet to come. In terms of current trading, the picture remains mixed with Digital net gaming revenue up 20% but retail staking still down 5%. Given the scale of Ladbrokes Coral's retail business, this clearly tempers the overall earnings picture with little change to overall 2017 numbers expected at this point. Most of the synergy uplift is expected to come through in 2018.
FY 2016 results; 4% special dividend pay-out implies 10% total yield in 2017
The 7% constant currency earnings growth in Hostelworld’s FY 2016 results – despite weak macro conditions – highlights the robust organic growth capabilities in its model. The announcement of a special dividend meanwhile illustrates both its high FCF generation and the board’s focus on shareholder value. The ordinary and special dividends together imply a 10.2% yield on the current share price, 6 percentage points of which is recurring. While we will be leaving our 2017 earnings estimates broadly unchanged, we see upside in the company’s multiple set (8.8x EV/EBITDA and 12.3x P/E).
FY 2016 results in line with expectations; market opportunities continue to expand
Datalex’s 18% adjusted EBITDA growth in 2016, which is exactly in line with expectations, continues its impressive record of double-digit earnings growth in each of the past seven years. There were also strong commercial developments in the year with the Lufthansa contract in particular providing further impetus to the company’s sales aspirations with Tier 1 airlines globally. Datalex is guiding to 15-20% adjusted EBITDA growth in 2017, and while we will be reducing our 2017 estimates in line with this guidance (c.5-6% reduction), we will be increasing our expected growth in 2018 to 17-18%, so our absolute 2018 forecasts ($16.9m adjusted EBITDA) will remain broadly unchanged. The stock is trading at 16.1x FY 2018 EV/EBITDA.
Bank of England sets stress test assumptions
The Bank of England’s 2017 stress test will incorporate a similar set of assumptions to those used in 2016, with larger falls in both UK and global GDP and a large increase in the bank’s base rate to 4% by end-2017 being the notable differences, which is likely to have a greater impact on internationally-focussed UK banks. The BoE will also undertake a biennial exploratory scenario, an assessment of banks’ response to a structurally more challenging long-term environment, although it will not be used to assess capital adequacy.