C&C Solid Christmas trading update

10 January 2019

In a short post-Christmas trading update issued this morning, C&C has reported that trading across the Group for the four month period to 31 December 2018 was “in line with expectations” including through the key Christmas trading period.

Given that Matthew Clark and Bibendum were in the process of being stabilised after the extent of the disruption in the months prior to acquisition had been quantified and that Christmas is a key trading period for the business, it is heartening to note that operational delivery and customer service in both companies has been “very strong and ahead of plan”. Across the rest of the Group, positive trading has continued with management guiding that revenue is tracking mid-single digit ahead of last year.
 
The risk to FY19E numbers after the H119A results was whether or not the business would perform to expectations over the key Christmas period. With management noting that the MCB financial contribution will be as guided at the time of the H119A results and that the business is expected to deliver full-year FY19E results in line with expectations, that perceived risk has been more than addressed. Indeed, management notes that Matthew Clark and Bibendum now have stable platforms with real growth potential. At the Group level, a strong balance sheet and normalised cash flow conversion of 60-70% of EBITDA has management noting that the company is “poised to provide enhanced shareholder returns”.
 
AIB Group: EBS to match Bank of Ireland mortgage cashback offer
 
In a further sign of heightened competitive tendencies within the Irish mortgage market, AIBG’s specialist mortgage unit EBS has increased its cash back offer from 2% to 3%, and now matches the market leading proposition on offer from BIRG.
 
Cash back offers are proving very popular in the Irish mortgage market (being offered by BIRG, EBS and PTSB) but have come in for some criticism by the Central Bank of Ireland and some consumer groups, as they make price comparisons more difficult for many borrowers. However we do not expect any regulatory restrictions on their use beyond recent CBI regulations requiring lenders to spell out the pros and cons of such products to both new and existing borrowers.
 
The move by EBS is also perhaps indicative of the continued positive progress being made by Bank of Ireland (BIRG) on market share gains after their return to the broker market in Q418, with Ulster Bank also reported (Irish Times) to be spending €1.4m on its new mortgage switcher campaign in response to the general increase in competitive pressures within the segment. We expect broadly stable market shares for the five main incumbent banks in 2019 vs 2018, with some potential for BIRG (29% FY18e) to make small incremental gains at AIBG’s expense (33% FY18e).
 
Irish REITs: CBRE reports showcase strong office and industrial dynamics
 
CBRE yesterday released its Q418 Dublin Office MarketView and Dublin Industrial & Logistics MarketView reports.
 
The Office MarketView release shows that 2018 was a vintage year for take-up, with a record 364,057 sq m (3.9m sq ft) of take-up in the capital last year, roughly a tenth above the previous (also record) year. Take-up in the final three months of the year was 143,840 sq m (1.5m sq ft). Encouragingly, the agents say that there was almost 150,000 sq m of space reserved at the end of last year, which signals that the good momentum should continue into this year. The TMT sector is a particularly strong source of demand, accounting for 51% of 2018 take-up, helped by the jumbo deal inked by Facebook (at 80,000 sq m or 860,000 sq ft, it is the largest ever single deal in the city) in Q418. The headline vacancy rate across the city fell 123bps q/q to 6.09% at end Q4, with the Grade A vacancy rate in the key Dublin 2 and 4 postcodes standing at just 4.3%. Prime office rents were flat throughout 2018 at €700 per sq m (€65 per sq ft). Prime yields were flat at 4% in Q418, “but will potentially trend stronger during 2019”.
 
Turning to Industrial, a healthy 94,284 sq m of take-up was recorded in Q4, bringing the FY18 total to 304,530 sq m (3.2m sq ft). As a yardstick, average annual take-up over the past decade has been of the order of 230k sq m / 2.5m sq ft, so last year’s take-up was well above ‘normal’. Given the recover in capital values in the space, it is no surprise that 69% of last year’s take-up involved lettings. Prime rents were flat at €106 per sq m / €9.85 per sq ft in Q418, but CBRE sees them rising 6.5% this year, “rendering further speculative development viable in some instances”. Such development would be timely, given that CBRE estimates that there was 30,785 sq m of prevailing demand at end-Q418, driven by structural factors such as E-commerce and Brexit, while the vacancy rate at Dublin’s 25 leading industrial parks fell 19bps q/q to just 8.04% by year-end. Yields hardened to 5.1% in Q418, “with some further hardening anticipated in 2019”.
 
The releases serve as further reminders of the strong fundamentals of the commercial property market in Ireland – namely, buoyant take-up which is preserving elevated rents in Dublin along with contributing to downward pressure on yields. In turn, the tight supply in the capital is likely to push occupier demand more towards the regions (IDA Ireland’s recent 2018 end-year report showed that job creation outside of the capital had firmed to a 17 year low).
 
Irish Economy: NTMA gets 2019 off to a flyer
 
Yesterday’s syndicated bond sale by the NTMA was very successful, with enough demand generated to cover all of Ireland’s funding goal for FY 2019, had the agency been so minded.
 
The agency sold a new 10 year bond maturing in May 2029 at a yield of just 1.123%. Some €4bn in proceeds was raised from this, which was more than 4.5x covered by an €18.1bn orderbook, the largest ever received by the Sovereign for a syndicated bond sale. Some 180 individual accounts put in orders, led by banks (44%), asset managers (27%), hedge funds (11%), pension/insurance funds (9%) and official institutions (9%). In terms of geographic sources of demand, Irish accounts accounted for 22% of demand, followed by Germany, the UK (both 19%), Nordics (12%), Other Europe (11%), France (8%) and Other Countries (including Asian and US accounts) making up the remainder.
 
The NTMA had targeted €14-18bn of issuance for 2019, so to receive more than €18bn of demand for the first of a series of bond sales this year is a very positive start to these endeavours. In terms of the pricing of the sale, the implied negative real yield achieved stands in stark contrast to the coupons of 4.4% and 5.9% on the Sovereign bonds maturing in 2019. Ireland’s ability to refinance its legacy borrowings at such low rates further enhances the financial position of the State, which has recently transitioned back into running fiscal surpluses.
 
May suffers second defeat in as many days
 
The first day of the resumption of the Brexit debate resulted in the government’s second defeat of the week in the Commons, this time by 308 votes to 297. This time it was on an amendment, controversially permitted for vote by Speaker John Bercow, forcing the government to inform the Commons how it will proceed within three days, if it is defeated in Tuesday’s vote on PM May’s Brexit deal. Under the terms of the Withdrawal Act, the government would have had 21 days to respond. In what looks like a government loss of up to 100 next week, we would in any case have expected Mrs May to react quickly by asking for concessions from the EU on her Brexit plan. Moreover although there is much talk about the Commons ‘taking back control’ from the government, there does not seem to be a clear majority for any specific deal in Parliament (or indeed ‘no deal’) and it might be that at the end of the day a version of the PM’s deal scrapes through the Commons at the last minute.
 
The Pound is weakening so far this morning, with EURGBP edging towards 0.9050, 100 points higher from where we started this week.
 
UK Dec retail sales soften
 
The BRC reported that retail sales were flat year-on-year in December on a total sales basis, the first time since 2008 that the high street has failed to increase its sales in the most crucial month for Christmas. On a like-for-like basis retail sales shrunk 0.7% on the year, the worst performance since October 2017. Separate figures showed that annual growth in spending by Barclaycard customers had slowed from 3.3% in December to just 1.8% in December, the weakest pace since March 2016.
 
FOMC adopt ‘Patient’ stance
 
After yesterday’s onslaught of (mostly dovish) Fedspeak, the release last night of the minutes (19 December FOMC meeting) showed the Fed shifting to a more cautious tone with patience now seemingly the order of the day. Indeed, the minutes noted that the “Committee could afford to be patient about further policy firming”, a word Fed Chair Powell also used in comments last week and one which we have heard from other Fed members too, over recent days. On the risk outlook, the meeting minutes showed participants viewing risks to be “roughly balanced”, but the minutes do however state that some noted that “downside risks may have increased of late.”
 
US & China trade concerns
 
There are numerous references to the trade dispute; the key line here is that “in part, the deterioration in risk sentiment appeared to stem importantly from uncertainty about the state of trade negotiations between China and the United States”. Note that despite the more cautious tone on risks and the evidence of greater willingness to be patient, the assessment of the economic outlook is still a solid one and the minutes (as the statement did) continue to flag that participants generally “judged that some further gradual increases in the target range for the federal funds rate” would be needed to meet the Fed’s mandate. The dollar weakened further through yesterday with that move continuing but not accelerating after the release of the FOMC minutes.
 
Today’s economic calendar
 
15.00    EU        ECB’s Draghi presents 2017 Annual report
16.30    US        Fed’s Kashkari speaking
18.00    US        Fed’s George speaking
18.00    US        Fed’s Kaplan speaking