01 Feb 2019

Irish Economy: Manufacturing PMI softens in January

The latest AIB Ireland Manufacturing PMI release shows that the manufacturing sector had a slow start to the year, with the headline PMI easing to 52.6, its lowest level since October 2016. That said, such a reading still indicates a solid rate of expansion in the sector.

The headline reading was dragged lower by a combination of factors, including lower production growth (which eased to 10-month low), slower growth in new business (which expanded at its slowest pace in 26 months) and a lower rate of new job creation (which eased to a 16-month low). With new order growth slowing, manufacturers depleted backlogs of work at the fastest rate since August 2016. Post-production inventories increased for the second consecutive month however with respondents attributing this to both new product launches planned for the new year and an element of stockpiling in the face of Brexit. On the margin side, input cost inflation remained sharp with rising raw material costs a key factor behind this, but output charges also increased in the month.


Despite the easing in the PMI indices in recent months, which respondents have attributed to both domestic and international markets, firms, on balance, have remained optimistic about the year ahead. A majority of firms predict output growth over the coming year, with expectations of increased customer orders, enhanced marketing efforts and strength in export markets cited as reasons to be optimistic. Of course, the most significant cloud on the horizon remains Brexit with no signs of an imminent improvement in conditions.


Symrise acquisition


After the market closed last night, Symrise announced the acquisition of US-based ADF/IDF, a natural ingredient provider for pet food. American Dehydrated Foods/International Dehydrated Foods which was founded in 1978, is a specialised producer of sustainable meat and egg-based nutrition ingredients from 10 production facilities primarily based across the southern States of America. The Springfield MO based company also has two research facilities. It operates in two business segments producing meat-based (62% of EBITDA) and egg-based (38%) ingredients for key multinationals with which it has long-standing relationships producing recurring and stable revenue.


The company paid $900m, to be financed through a mixture of debt and equity, for a company generating an EBITDA of c.$51m for revenue of $220m. It implies what could be considered a fairly rich 17.6x EBITDA multiple, particularly as Symrise is currently trading at 15.5x FY19E EV/EBITDA. Management notes that the acquisition will be immediately earnings accretive in the first year after completion, which is subject to the customary closing conditions. In justifying the price paid, it is also guiding that the deal comes with significant tax benefits and “cost synergies” which it is guiding will bring the deal multiple down to 13.3x.


At first glance this would appear to be a strategic acquisition for Symrise, building on its Diana business in what is a fast growing, high margin area. The 23% EBITDA margin quoted is slightly above the company margin of 21.0% achieved in FY17A and the 20.2% we are anticipating when the company releases its FY18 results on the 13th of March. That said, we are always cautious when a company justifies a high acquisition price on tax benefits and expected synergies and augur caution on the monetary upside this deal will bring to Symrise over the short to mid-term.


Dollar firms after "frank, concrete and constructive" trade talks


Trade talks progress


Both Beijing and Washington claim to have made progress in high-level US/China trade talks. US Trade Representative Robert Lighthizer said that his discussions with Vice Premier Liu He had focused on structural reforms by China, a long running gripe of Washington. Lighithizer also stated that he and Treasury Secretary Steve Mnuchin were considering a trip to Beijing to resume negotiations after the Lunar New Year Golden Week (which starts on Monday). Meanwhile, state news agency Xinhua reporting that the two sides had a “frank, concrete and constructive discussion" and had "agreed to further strengthen cooperation". It also confirmed plans to receive Mr Lighthizer and Mr Mnuchin for a mid-February summit.


Trump & Xi Jinping to meet?


However, earlier in the day President Donald Trump said that any final deal to avert additional tariffs being imposed on a further $200bn of Chinese exports by March 1 would most likely be made between himself and his Chinese counterpart Xi Jinping. On this front the President remarked that he may try to combine this with another planned trip to meet North Korea Supreme Leader Kim Jong-un. Overnight reports suggest this is set to be held in the Vietnamese coastal city of Da Nang in late-February. In spite of the positive trade rhetoric from both sides, Asian market sentiment is mixed following the release of the Caixin manufacturing PMI which fell 1.4pts to a near-three year low of 48.3 in addition to poor South Korean export figures. The Hang Seng is off 0.3%. While the Shanghai Composite has rallied 1.3%. The dollar took a bid tone into yesterday’s European closing session, with the euro falling off the daily highs to back under $1.1450 and the yuan weakening to 6.7380.

U.S. payrolls due


December’s US labour market report saw headline non-farm payrolls increase by a very strong 312k, the largest monthly rise since February 2018. This was also accompanied by a net 58k upward revision to the last two months estimates of jobs gains. A look through the sector detail of the report revealed that the job gains were fuelled by the service sector, where payrolls rose 227k in December versus the 146k gain seen in November. Here, the gain was likely exaggerated by “payback” from the forest wildfires which covered large swathes of the US in smoke in previous months and disrupted outdoor activities. Today’s labour numbers will be faced with further distortions because of the government shutdown, with around 800,000 Federal workers having missed their pay cheque whilst around 380,000 of those workers were not at work at all. The shutdown may also have knock-on implications for wider businesses reliant on government related business. However even allowing for a squeeze from this, we are pencilling in a solid 230k non-farm payroll gain in January.


Economic releases


UK       9.30      Manufacturing PMI

EU       9.00     Manufacturing PMI (final)          

           10.00    CPI ‘flash’ estimate

           10.00    Ex food, energy, alcohol & tobacco (prel.)

US      13.30    Non-farm payrolls

           13.30    Unemployment

           13.30    Average earnings

           13.30    Average weekly hours

           14.45    Manufacturing PMI (final)