01 Apr 2019
AIBG: €1bn non-perfoming loans disposal
AIB Group has this morning announced that it is selling a gross €1bn non-performing loan (NPL) portfolio to Everyday Finance DAC as part of a consortium arrangement with Everyday and affiliates of Cerberus Capital Management. AIBG will receive cash consideration of €0.8bn for the portfolio of loans primarily backed by investment asset properties, with this portfolio constituting €0.75bn of risk weighted assets.
The portfolio incurred an operational loss of €11m for AIBG in FY18 and is made up of c.2,200 customer connections and c.5,000 property assets. Pro forma, the disposal will reduce NPEs down to around €5bn or 8% of gross lending, and support management’s previously stated target of getting NPEs to less than 5% of gross loans by year end.
Although no information has been disclosed as to what level of provisions were set against this portfolio, we estimate that the disposal will generate c.25bps of FLCET1 through the RWA reduction, and would expect a significant profit to have been generated (c.€150-200m or c.30-40bps of FLCET1) on the sale given average provision coverage levels of c.40% on impaired loans within AIBG’s property and construction segment at FY18. The sale should also boost ROTE by c.5-10bps given the loss being generated on the portfolio.
HBRN: Closing the gap
Hibernia REIT (HBRN) has today announced that it has exchanged contracts to sell 77 Sir John Rogerson’s Quay (77 SJRQ) in the Dublin Docklands for €35m. These proceeds will be returned to shareholders in due course, starting with a €25m buyback.
The sale price for 77 SJRQ is modestly ahead of the December 2018 book value. The asset in question was acquired for €28.7m in February 2018 and simultaneously let to IWG on a long lease. The sale price gives HBRN an ungeared IRR on the investment in excess of 15%.
The net sales proceeds will be returned to shareholders, commencing with an initial share buyback up to a maximum consideration of €25m. The buyback will commence tomorrow and while it “may continue until 31 December 2019 subject to market conditions”, we would note that €25m equates to around 12.5 days of ADV.
This is not the first time that HBRN has recycled capital – it has previously offloaded assets in central Dublin and the Docklands at a premium to book value. However, this is the first time that the group has bought back its own stock. To us, a NAV-accretive (and EPS neutral) buyback is a reasonable step towards addressing the valuation anomaly that sees HBRN offload ‘real assets’ at a premium to book value, while its share price simultaneously sits at a deep discount to NAV (on Friday the shares closed at €1.336, 20% below the end-September EPRA NAV).
YEW: Giving back
Yew Grove REIT (YEW) has today announced an interim dividend payment of 1.1c in respect of Q119.
This payment will be made on 13 May to shareholders on the register on 12 April (ex-div 11 April) and is fully comprised of a Property Income Distribution (PID).
This move is consistent with the dividend policy set out at the time of last year’s IPO. We see YEW declaring dividends of 7c in respect of FY19, putting the shares on an Irish REIT sector-leading yield of 7.03%.
IRES REIT: Daft.ie report read-through
Ireland’s largest property website, Daft.ie, released its latest report on Irish house prices yesterday. Key points below.
At a headline level, the report shows a strong backdrop to the housing market, with all 54 sub-markets covered by the release (25 parts of Dublin, the country’s other four cities and the remaining 25 counties) recording quarterly growth in asking prices in Q119. This is the first time since mid-2016 that every market has posted quarterly growth and only the third time this decade.
The uniform improvement is partly linked to timing issues arising from the Central Bank’s macro-financial rules, which slap loan-to-income and loan-to-value limits over the majority of new mortgage lending in a calendar year (as opposed to on a rolling 12 month basis). The official Residential Property Price Index posted 22 successive months of increase before going a little off the boil around the turn of the year (the past three releases have shown modest monthly declines) and our sense was (and remains) that this was down to seasonal (Central Bank calendar year regime) issues, with the large mismatch between supply and demand continuing to point to ongoing increases in house prices and rents into the medium term at least. In terms of regional trends, price inflation in lagging in Dublin relative to the rest of the State, with this likely due to a combination between much higher average asking prices in the capital (which cause the Central Bank rules to have more bite) and a disproportionate share of all new build activity occurring in and around the city (due to the economics of new build making more sense in the Greater Dublin Area than in other parts of the country).
Average asking prices were +5.9% y/y in Q1, representing a faster rate of increase than the 5.5% y/y posted in Q418. We see house price inflation (based on transaction prices) of 5% in 2019, with the Daft.ie release suggesting little that would warrant a change in that view.
Irish Economy: Manufacturing PMI read-through
The latest AIB Ireland Manufacturing PMI release suggests a stable picture in March, with the headline PMI (53.9) barely changed relative to February’s 54.0.
We would have expected a softer reading given all of the Brexit headlines, but this looks like it turned out to be a double-edged sword, as the uncertainty prompted manufacturers to build pre-production inventories at the fastest pace in the c. 21 year series history for a second successive month.
Overall client demand dipped slightly from February, although there was increased demand from overseas, notably from the UK (which may have been inspired by similar precautionary inventory build to what we’re seeing on this side of the Irish Sea).
Interestingly, firms added to headcounts at the fastest pace since October, presumably due to a need to fulfil customer orders ahead of the UK’s (originally scheduled) departure date from the EU. There were some favourable developments on the margin side, with the rate of cost inflation easing to a 27 month low, although growth in selling prices cooled a little in February.
Notwithstanding the more unsettled backdrop, the forward-looking Confidence index rose to a three month high in March, with firms strongly optimistic on the 12 month outlook. Just over half of panellists expect output to rise over the coming year. We would echo this optimism, with our views set out in detail in last week’s Irish Economy Monitor report release – “External uncertainties weigh on an otherwise bright outlook”.
Givaudan Digesting Naturex
We see little in Givaudan’s numbers to change our outlook on the stock. We believe that there is little chance of upside surprise from acquisitions. Not only is the company in the early stages of digesting its biggest deal in nine years but also is focussed on improving internal efficiency through its Givaudan Business Solutions platform.
We pull back our FY19E revenue forecasts by 0.8% to CHF6.07bn, primarily on a lower expected contribution from Naturex. The lower-margin nature of the Naturex business has also driven the 216bps contraction in FY19E forecast EBITDA margin to 21.4%, resulting in a 9.9% reduction in our EBITDA forecast to CHF1.30bn. This is magnified at the EBIT and earnings lines by the increased depreciation and amortisation charges associated with the acquisition. While our forecast FD EPS dips 16.4% to CHF82.3, it still represents 15.4% growth over FY18A given that those reported earnings were 15.1% and 8.8% behind our and consensus expectations.
While Naturex was by far the largest acquisition Givaudan has made in over nine years it has not unduly stretched the company’s balance sheet. We forecast that at year-end FY19E net debt will have fallen to CHF2.53bn from CHF2.85bn in FY18A leaving ND/EBITDA at 1.95x. Expanding this to 2.5x could release CHF720m which if committed to debt-funded acquisitions at current multiples (15.0x EBITDA) could add 2.3% to FY20E FD EPS.
Givaudan is currently trading at 30.9x FY19E P/E and 20.1x EV/EBITDA, an 8.5% premium to its European peers, ex-Chr. Hansen. Ian Hunter (+353 1 4210466)
UK this week
After last week’s UK Parliamentary shenanigans, yet again, it’s all about Brexit this coming week. Today MPs will seek to whittle down the number of alternatives to the Prime Minister’s Brexit deal through a second round of “indicative votes”. Eight motions have been proposed and will be debated sometime between 3:30pm and 6:00pm (at the latest), after which the Speaker of the House of Commons will select which will be put to a vote at 8:00pm. Results are expected around 10:00pm but the leading option appears to be the customs union mooted by Ken Clarke MP which (after a recount) was defeated by just six votes in the first round last week. Please see our ‘Thought of the day’ piece below for more in-depth analysis.
US & China this week
Alongside Brexit, global investors have also been fretting about what lies ahead for the global economy. Indeed market expectations of the likely course for monetary policy have adjusted markedly to such concerns over the past week. Fears have been heightened by worries over whether bond market moves (a negative spread between 3m T-bills and 10-year Treasuries, in particular) are signalling an impending recession, triggering a further wave of nervousness which risks becoming self-reinforcing. This week a number of top tier US data releases are due (March’s non-farm payrolls, ISM index and February’s retail sales) and will be eyed for signs of whether this nervousness looks overdone from a look at the hard economic data.
From China, the ‘official’ and Caixin PMIs released earlier this morning provided reassurance that the Chinese economy has found its feet in March and that the stimulus put in place by the authorities amidst worries over growth momentum is starting to have the desired effect. The Caixin manufacturing PMI climbed to 50.8, from 49.9 in February amidst expectations for an effectively steady 50.0. The ‘official’ manufacturing PMI also climbed to 50.5, from 49.2 and beating expectations of 49.6.
Europe this week
In the Euro area, worries over the growth backdrop have been evident this week too, with the 10-year Bund yield touching lows not seen since 2016 (-0.09%). In this context, key for next week will be industrial output figures for Germany and Spain, amidst fears that weakness in this sector is at the heart of a slowing in economic momentum and threatening to spill over to the other segments of the Euro area economy. EU19 ‘flash’ HICP will also be a key release to watch on Monday. Finally, for UK focused investors trying to gauge the impact of ongoing Brexit uncertainties on the UK economy, the March manufacturing and services PMIs will be key releases to watch. Our best bet is that the manufacturing index will have dropped by a point to 51.0 whilst services will be steady at 51.3.
Thought of the day
Reports suggest that if any single proposal is able to command a majority in today’s round of ‘indicative votes’, MPs will then seek to turn this non-binding display of parliamentary will into a legally-binding commitment on the government.
Having sensed that a softer Brexit is now in the works, some 170 Eurosceptic MPs (including 10 cabinet ministers) wrote to the Prime Minister at the weekend demanding a departure from the EU with or without a deal. There are also mumblings that the Prime Minister is considering whether to bring back the Withdrawal Agreement to the Commons, with Thursday apparently pencilled in, though other days have been mentioned.
There is also talk that May’s deal could be pitched in a run-off against any winner from tonight’s indicative votes. Note, however, that its confidence and supply partners the DUP still appears unwilling to support it, with Sammy Wilson MP saying that the party would not vote for it even if it was brought to the Commons a "a thousand times”. Against this chaotic backdrop, it is perhaps unsurprising that the Sunday papers were full of speculation about a snap general election. The opposition Labour party can smell blood, with Shadow Foreign Secretary Emily Thornberry warning it now looked likely that Labour would put down another vote of no confidence in the government to get a general election. But while the likelihood of another general election has risen over recent months, how it would solve the current deadlock in Westminster is unclear.
09.30 UK Markit PMI Manufacturing
10.00 EZ Unemployment Rate
10.00 EZ CPI
13.30 US Retail Sales
14.45 US Markit PMI Manufacturing