28 Mar 2019
Mortgage approvals rebound in February after sluggish start to the year
BPFI mortgage approvals for February rebounded slightly after the sluggish start to the year seen in January, with €757m in new approvals during the month, a 13% m/m increase vs January 2019 and a 10% increase vs February 2018.
The value of approved mortgages on a 12-month running total basis is now at €10,175m, and in our view is a good leading indicator of the likely level of drawdowns in the market over the following 12 months. By volume of approved loans, there were 3,364 applications approved in February, an 11% increase vs the previous month and a 7% increase vs February 2018. Average approval values were fairly steady at €225k, with the monthly range of average approvals stuck between €214k-226k (5.6% range) since March 2017, indicating the constrictions that CBI mortgage lending rules are having on mortgage values.
We continue to expect c.€10bn in total drawdowns in Ireland in 2019, a c.15% increase vs the €8.7bn seen in 2018.
Cairn Homes: Planning granted for additional apartments at Marianella
Cairn Homes has been granted planning permission to build an additional 107 apartments at its Marianella scheme in Rathgar.
The company had originally been granted permission to build 22 houses on this site but owing to the strong demand for its apartment product, particularly from those trading-down from larger properties in the area, Cairn applied last November for a change of planning permission at this 2.3 acre portion of the development. Cairn recently launched the sale of the last remaining units at the existing site, including eight penthouse apartments, some of which are likely to sell for more than €1m.
This is a sensible move from the group given the strong demand for its premium apartments at Marianella, and the shortage of similar product to come to the market in recent years.
Irish Economy: NTMA cancels another €500m of legacy debt
Ireland’s NTMA yesterday announced the cancellation of another €500m of the Irish 2049 Floating Rate Treasury Bond (€0.5bn of which remains outstanding following this move).
These bonds are linked to the landmark IBRC transaction in 2013, which was a major milestone on Ireland’s journey back to creditworthiness. To date the NTMA has repurchased €14.5bn (nominal) of the €25bn of bonds issued as part of the ‘Prom Note’ deal, with €1.0bn of these repurchases taking place in the year to date. All of the bonds were held by the Central Bank of Ireland, whose holdings have previously attracted adverse comment from the ECB relating to monetary financing concerns, although Frankfurt has since acknowledged the progress made in reducing the stock of IBRC-related assets. While the effective servicing cost of the IBRC-related bonds is immaterial (as the Central Bank repatriates most of its profits to the Exchequer), the repurchases serve to improve the optics of Ireland’s headline debt metrics.
The continued tidying up of legacy matters is another reminder of the progress the State has made in recent years. We expect that the remaining IBRC-related bonds will be repurchased over the medium term, several decades ahead of their scheduled maturity dates (which run to June 2053).
Kerry Group Momentum flagging
Kerry Group is facing revenue growth hit by the Tesco contract loss, limited trading margin expansion forecast for FY19E and free cash flow set to dip on increased capex spend required to deliver growth. We tick up our FY19E revenue forecasts 1.3% to €7.00bn but clip our trading profit margin assumptions for the year by 7bps and 6bps for Taste & Nutrition and Consumer Foods, respectively. That, along with a higher assumption on group eliminations drops through to a 1.0% dip in FY19E forecast trading profit to €877.3m. Tweaks to our depreciation, amortisation and net interest charge assumptions, however, results in little change to our forecast adj. EPS (up 0.3% to 385.5c).
Having spent over €490m net on 10 acquisitions and an investment in a joint venture, Kerry ended FY18E with net debt of €1.72bn and ND/EBITDA at 1.8x. With €325m already committed to two deals in FY19E and capex forecast at €329.1m, we currently forecast net debt to tick up to €1.85bn with ND/EBITDA remaining at 1.8x at year-end FY19E. Leveraging the balance sheet to 2.5x FY19E ND/EBITDA could release €685m to fund further corporate activity in FY19, which if allocated to acquisitions, at current multiples (15.0x EBITDA), could add a further 2.6% to FY20E adj. EPS. Kerry is trading at 25.4x FY19E P/E and 18.9x EV/EBITDA, broadly in line with its peers (ex-Chr Hansen).
Novozymes Steady progress in difficult conditions
Novozymes' revenue growth is pegged in the mid-single digit range and margins appear to have plateaued over the past three years. Management’s preference for organic growth also reduces the upside potential from acquisitions. Running our model forward a year and updating for FX drives a 0.9% increase in our FY19E FD EPS forecast to DKK11.53 despite a 0.8% pullback in EBITDA to DKK5348 and 1.2% reduction in revenue to DKK1.51bn. The EPS increase is driven by a lower net interest charge (DKK56m versus DKK96m previously) and a 100bps reduction in forecast tax rate to 20.0%, rather than improved underlying business expectations, where we have pull-back is our Household Care and Agriculture & Feed divisional forecasts. Our forecasts, which imply net income growth of only 3.6% from revenue growth of 4.8% and a 21bps dip in EBIT margin to 28.1%, reflect management’s cautious guidance.
The company expects a strong performance from new products to be offset by geopolitical risk, uncertainty on progress in the Middle East and weak agricultural markets. While Novozymes retains a strong balance sheet and could augment organic growth with strategic acquisitions, as we have flagged previously, management prefers to grow the company organically, bringing new products to market through its R&D pipeline. We presume that this is still the case given that a further DKK2bn stock buyback programme was announced in the FY18 results release. The stock has recovered from its over 6% dip on the day of its FY18 results and is trading at 27.1x FY19E P/E and 17.1x EV/EBITDA, a c.3% discount to its peers.
Parliament fails to find consensus on path forward
Last night UK MPs were given a free vote on eight alternative plans for Brexit, with Cabinet ministers abstaining. The proposals ranged from revoking Article 50, holding a second referendum, remaining in a customs union, to leaving the EU without a deal. As expected, none of these commanded a majority, meaning that the way forward for the UK parliament remains shrouded in mystery. One positive (for Remainers at least) was that the narrowest defeats were proposals for a customs union (defeated by 8) and a second referendum (defeated by 27), while the heaviest defeats were handed to No deal, Managed no deal and EEA/EFTA proposals. Parliament also voted 441 to 105 in favour of a Statutory Instrument which amended the definition of “exit day”. This will now be 22 May if MPs approve the Withdrawal Agreement, or 12 April if they fail to do so.
May offers up PM role in attempt to bolster support
Attention now shifts to whether the government will choose to hold a third “meaningful vote” (or MV3) tomorrow (if it is even allowed to by House of Commons Speaker). In an effort to shore up support for her deal from her own party, the Prime Minister told the 1922 Committee of backbench Tory MPs that she would not lead Britain into the “second phase of the Brexit negotiations” if it meant that her deal was approved by Parliament. A clear attempt to sway the more ambitious Brexiteers to back her deal. But she also needs to win the support of her confidence and supply partner the DUP, who told Sky News yesterday that they could not “be in favour of something that threatens the union”. Talks between the Conservatives and the DUP will continue today, but as things stand the Prime Minister faces a monumental task in winning the backing of the Northern Irish party, Eurosceptics and Labour waverers. Sterling is lower amid the continued uncertainty with EURGBP trading back at 0.8550.
ECB’s Praet: Need for solid monetary policy case for tiered rates
The ECB’s chief economist Peter Praet says there needs to be a solid monetary-policy case before officials act to mitigate side effects of negative interest rates on banks. “For tiering, we need to be convinced that it would address a monetary-policy question in an efficient way’’. Praet is also of the view that all options to mitigate the side effects from negative deposit rates are firmly on the table. “We have to be ready for all the possible instruments that we could use.’’
These comments echo the sentiments of ECB President Draghi comments earlier this year about the possibility of a new round of long-term loans.
10.00 EZ Consumer Confidence
11.15 US FOMC Member Quarles Speaks
12.30 US GDP
13.30 US FOMC Member Clarida Speaks
14.00 US FOMC Member Bowman Speaks
17.15 US FOMC Member Williams Speaks