01 May 2019

AIB Group: In-line Q1 trading update

AIBG issued a customarily brief Q1 trading update this morning. NIM at 250bps (Q418 248bps, FY18 247bps) looks good, NPEs -21% q/q to €4.8bn (7.6% of gross loans) as expected and supported by the €1bn Project Beech disposal.

 

 

A small credit write back was recorded in Q1, but no details on size were given, while management has flagged likely further exceptional costs being booked in 2019 against business restructuring and tracker mortgages (we flagged repeated noisy net negative exceptional issues in our March note). AIB’s mortgage market share was down to 31.4% in Q1 (2018 32%), another issue we have previously flagged and perhaps instructive for their fixed rate mortgage cuts last month.

 

No changes are likely on the back of this update, NIM maybe bit better than expected but exceptional costs being flagged, lighter CET1 outturn and mortgage market share erosion offsetting these.

 

FBD Insurance: Capital distribution potential given stable volume outlook

We have a new note out on today on FBD.

 

Its FY18 performance (stellar at reported level, very good at underlying) again highlights underwriting discipline, moderating claims inflation and strong margin growth even if last year was slightly flattered by prior year reserve movement (reported COR 81%, current year COR 90%), and volume growth remains a challenge and investment returns remain low. However, the Fairfax convertible bond buyback cleans up risks of dilution and with a lower coupon cost.

 

We expect the underlying COR to stabilise around 90%, which, given some modest volume growth, implies ROE gradually moving from c.10% FY18-19E to 12.7% by FY21E, while the potential for highly progressive dividend payout (given existing solvency buffer) should start to take on more importance for the investment narrative.

 

If you haven’t received a copy of the report, please contact the Institutional Equity Sales team.

 

Irish REITs: Property news round-up

Commentary from property agents and the press reflect a positive backdrop for much of the commercial real estate market in Dublin which, in turn, has favourable read-through for the Irish REITs.

 

JLL’s Q119 Dublin Industrial Market Report reveals a steady start to the year, with take-up of 922,535 sq ft recorded. This is +34% y/y but -6% q/q. Given the lumpiness of these data, perhaps a more meaningful comparison is that long-run average quarterly take-up has been of the order of 0.63m sq ft. Rents were flat at €9.75 psf (prime) and up to €6.75 psf (secondary), with the agent expecting prime rents to break €10 psf by year-end. For the full-year JLL expects 2.5m of take-up, in-line with the long-term average, with this activity rate tempered by a limited supply of larger floor plates in prime locations (a deficiency that plays into GRN’s hands given its industrial development land bank at Dublin Airport). JLL also echoes our view that it sees Brexit as a positive for the Irish logistics market.

 

CBRE released its latest Bi-Monthly Research Report overnight. This report cites strong investor demand (a point reflected in the below commentary on today’s Irish Times’ reports), which should deliver “impressive transaction volumes in 2019”. Occupier activity is described as brisk, with office take-up at an all-time high while activity in the industrial and logistics sector is “stymied only by a shortage of modern stock” (echoing JLL’s above comments). Retail is more mixed, with “some further slippage in shopping centre and secondary retail park yields”, although some developers have been advancing new schemes after several years of minimal construction activity. CBRE sees office and industrial yields as having the potential “to experience some further yield compression”.

 

The Irish Times covers a number of Dublin property transactions of note. In terms of larger deals, Hines is looking to raise €180m from the sale of the 182,774 sq ft Bishop’s Square building in the South CBD, which would represent a NIY of 4.04% (likely reflecting the strong covenants, with 86% of the rent roll coming from the government sector). Elsewhere, Chartered Land and Henderson Park Capital have teamed up to buy the Heuston South Quarter development to the west of the CBD for €222m. This comprises 266 apartments, 106,319 sq ft of Grade A office space and a further 48,034 sq ft of commercial space, along with a 3.63 acre development site. The transaction price implies an initial gross yield of 4.6%, this should rise over time as the development asset is built out and reversion is achieved on the in-place assets. In nearby Islandbridge, a 29 apartment scheme at The Mill Works has a guide price of “in excess of €12.5m”, indicating a gross yield of 5.75%. The apartments are well served by public transport and may attract interest from IRES.

 

All in all, the above serves as a further reminder of the favourable conditions being enjoyed by the Irish REIT sector.

 

Irish Economy: Manufacturing PMI reveals a sluggish start to Q2

The latest AIB Ireland Manufacturing PMI release suggests a sluggish start to Q219, with the headline PMI softening to 52.5, its weakest reading in 30 months, from March’s 53.9 outturn.

 

We read this as a somewhat disappointing outturn as we would have expected the extension to the Brexit process to have reduced some of the politically inspired nervousness that was a key factor behind the relatively tepid (by recent Irish standards) Q119 PMI reports.

 

Panellists reported softer demand conditions in both domestic and international markets. Meanwhile, as a result of the aforementioned Brexit distortions, stocks of finished goods rose at the fastest pace in the 21 year series history. On a related note, we are unsurprised to see that the rate of accumulation in pre-production inventories slowed from the series high that was recorded in March.

 

While new order growth has slowed, it remains in positive territory, albeit not to the extent that it could staunch an eighth successive depletion in backlogs of work (even with a three month low in the rate at which employers are adding to headcounts).

 

Ongoing Brexit uncertainty is said to be weighing on sentiment, although it is encouraging to see that nearly half (47%) of panellists expect higher production in one year from now,

 

The ‘B’ word hangs over many of the components in this release, which is not a complete surprise given that, as we have repeatedly noted, political developments at Westminster will be the main driver of short-term economic performance in Ireland. Friday’s Services PMI release is likely to show similar (albeit not as pronounced) distortions.

 

Irish Economy: Unemployment rate flat at 5.4% in April

CSO data show that the seasonally adjusted unemployment rate was flat at 5.4% in April.

 

This outturn was in spite of a 1,700 m/m fall in the seasonally adjusted number of persons unemployed, which has now fallen below 130,000 for the first time since March 2008.

 

The headline unemployment rate peaked at 16.0% during the last recession but has steadily reduced since then, helped by sustained jobs growth (+2.3% y/y in Q418) which has lifted total employment to an all-time high.

 

With the numbers at work growing by 1,000 a week, we expect to see the unemployment rate fall below 5% for the first time since August 2007 in early 2020.

 

Sainsbury’s solid underlying FY19 but having to wait until 25 Sept for Plan B

At a time when all eyes are on what management’s short to mid-term strategy is going to be now that the Asda deal has been thwarted by the CMA, Sainsbury’s issued solid FY19A numbers, reporting a 7.8% increase in underlying Basic EPS to 22.0p (INVe 20.6p; consensus 20.5p) from a 7.8% increase in underlying PBT to £635m (INVe £615.1m; consensus £627.6m) and 2.1% increase in Group revenue (ex-VAT, inc. fuel) to £29.01bn (INVe £29.19bn; consensus £28.98bn).

 

The company reported LFL sales decline (excl. fuel) of 0.2% in FY19A (INVe +0.5%) with weak Q419A (-0.9%). Reported PBT fell 29.1% to £219m on pension charges, retail restructuring, Asda costs, Argos integration and Bank transition costs. On strategic direction, management has noted that the company “will increase and accelerate investment in the core business” looking to improve over 400 supermarkets this fiscal year and will “increase investment in technology” to make shopping across Sainsbury’s, Argos and the bank as quick and convenient as possible.

 

This will possibly assuage some of investors’ concerns on strategic direction after the failed Asda deal although we will probably have to wait until the Capital Markets Day on the 25th of September before any flesh is put on the bones of the new strategy.

 

Sainsbury’s is currently trading at 10.0x FY20E P/E and 3.5x EV/EBITDA with the share price off c.25% since the original CMA announcement on the 20th of February. It is currently trading at a c.20% discount to the price the day before the Asda deal was originally announced.

 

FOMC announcement tonight

The Federal Open Market Committee (FOMC) is due to announce its latest policy decision at 7pm tonight. We expect it to be one of “no change” with the Federal funds target rate range maintained at 2.25-2.50%.

 

Also with the Fed having laid out as recently as its last meeting, its plans to halt its balance sheet roll-off this autumn, any shift away from this plan at this time seems unlikely. Motivations for sitting tight, apart from avoiding White House cross-fire, include an absence of current signs of growing inflationary pressure and continuing questions over how US-China and EU-US trade talks will conclude. It seems likely that the tone of the published policy statement will be measured in its assessment of these evolving factors tonight.

 

For the Fed, one key issue will be how it balances out its view in light of soft current inflation readings, but on the whole solid economic activity data. At this stage, we wouldn’t expect the Fed to stick its neck out on the line in providing a strong steer to market rate expectations, which point to a reduction in rates later this year, but the feeling may be that markets have got a bit carried away (indeed we still expect one further increase later this year).

 

EUR/USD breaks higher

A slew of decent European data prints were the main driver behind the benchmark EUR/USD rate breaking back over the 1.12 level yesterday. Things started off well when the Eurozone unemployment rate ticked down to 7.77%, its lowest level since Q3 of 2008, just as it was starting its crisis rise to over 12% in Q2 of 2013.

 

This was followed shortly thereafter by a small beat in the overall Eurozone GDP where the QoQ print came in at +0.4% versus a +0.3% forecast. It was the stonking German inflation data that really cemented the break though, the MoM harmonised CPI came in at a whopping +1.0% which smashed the +0.5% market expectation. The next possible event risk up is the FOMC meeting later this evening. As per our FOMC snippet above, we are doubtful the policy statement will set too many (market) hares running.

 

It is however worth noting that as per Chicago Board of Trade CFTC data, their trader’s speculative net EUR/USD position is at the shortest level since mid - December 2016, which is always a decent guide to which way the overall spec community is positioned. As such, if the Fed statement tomorrow evening is perceived to lean to the dovish side (which we don’t expect),  it won’t take too much to send a very short (EUR/USD) spec market running for cover.

 

UK Manufacturing PMI figures due

The UK manufacturing PMI surged three points to a 13-month high of 55.1 in March. With the exception of the ever-volatile Danish survey, this marked the strongest outturn among the full suite of manufacturing PMIs produced by IHS Markit. But this is not because Britain’s factories are a rare bright spot against an otherwise weak global backdrop. Rather, such robust activity was underpinned by a jump in last-minute Brexit stockpiling, with the inventories sub-component climbing to the highest ever recorded for a G7 country’s PMI.

 

While the UK was initially scheduled to leave the EU on 29 March, it is now expected to depart by 31 October by the very latest (initially extended to 12 April). With the imminent threat of a disruptive “no-deal” Brexit having been (largely) taken off the table, it seems likely that firms will now begin to run down some excess stock. Perhaps more importantly still, an additional headwind to activity might be the precautionary plant shutdowns enacted by a number of major automotive manufacturers in April, which in-turn may have rippled through the domestic just-in-time supply chain. For this reason we are looking for a hefty fall in the PMI to 51.5 in April.

 

Economic releases

09.30 UK Manufacturing PMI

09.30 EZ ECB’s DE Guindo Speaks

13.15 US ADP Nonfarm Employment Change

14.45 US Manufacturing PMI

15.00 US ISM Manufacturing PMI

19.00 US FOMC Interest Rate Decision

19.30 US FOMC Press Conference