17 Jan 2019

Cairn Homes: Hits FY18 unit sales target but revenue behind on mix

Cairn Homes this morning released a trading update covering the period to 31 December.  The group completed 804 unit sales in FY18, slightly ahead of its guidance for 800 units, although revenue of c.€337m was 3.7% behind its €350m guidance.

This was due to a lower ASP in H2 (11% lower than H1) brought about by mix effects – Cairn has commenced sales of lower-priced duplex properties and has held back the sale of some high-priced penthouse apartments at Marianella, while it also accelerated the delivery of some Part V social housing units in FY18. As such, we don’t see any negative read-through for FY19 and a 50bps beat on gross margin (20.5% vs guidance of 20%) provides additional comfort in this regard. Cairn expects to report operating profit in FY18 of c.€53m and closing net debt of c.€140m.


Cairn’s forward sales pipeline remains strong and includes 344 units with a sales value of €159.5m. The group also provided additional information on potential returns to shareholders. Having already signalled that it intends to commence regular dividends from FY19 earnings, it intends to seek shareholder approval to convert a substantial part of its share premium account into distributable reserves which will pave the way for “share buybacks in addition to dividends”, while we also see scope for special dividends in due course.


This is a solid trading statement from Cairn, notwithstanding the miss on FY18 revenue which we don’t see as having negative knock-on implications for FY19 or beyond.


Irish Economy: Property price growth moderates again


The latest RPPI release from the CSO shows a further moderation in house price inflation in November.


Prices nationally were 7.1% higher than one year previously, but this rate of growth was the weakest since July 2016 and follows the recent peak in inflation of 13.3% in April last year. Also illustrating the loss of momentum in price growth in recent months was the first m/m decline (-0.5%) in house prices in 23 months in November. A similar picture was evident in Dublin where the annual rate of price growth moderated to 5.0% in November from 6.1% in the previous month and 13.0% in April. Dublin also recorded its first m/m decline in 19 months with prices 0.7% lower in the month. Outside of Dublin, prices were 9.3% higher y/y but declined by 0.1% m/m in November.


An easing in price growth was always likely in H218 given challenging base effects (prices surged by more than 5% in Q317 alone) and FY18 inflation looks set to come in close to (but slightly below, barring a strong rebound in December) our forecast of 8%. Looking ahead, we expect this moderation to continue and forecast that prices will rise by 5% this year, with various indicators suggesting that the affordable end of the market remains stronger than at higher price points.


Chr. Hansen Q119A numbers


Chr. Hansen issued a solid set of Q119A numbers, 5.4% ahead of Investec forecasts but 2.5% behind consensus at the FD EPS line and 1.7% behind at the revenue line. The company reported an 11.4% increase in FD EPS to €0.39 (Investec €0.37, consensus €0.40) from a 9.4% increase in EBIT to €70.8m (Investec €67.6m, consensus €73.0m) and 5.9% increase in revenue (10% LFL) to €269.4m (Investec €256.5m, consensus €274.0m). Management has re-iterated guidance of organic revenue growth in the 9-11% range, an EBIT margin around the 29.5% and free cash flow of c.€196m, as in the previous fiscal year.


On a divisional basis, Cultures & Enzymes (71.9% of Q119A EBIT) reported a 3.5% increase in EBIT to €50.9m (Investec €50.1m, consensus €55.0m) from a 3.8% increase in revenue to €161.0m (Investec €157.3m, consensus €167.0m). The division recorded 10% organic revenue growth.  Health & Nutrition (20.1% of  Q119A EBIT) reported a 26.8% increase in EBIT to €14.2m (Investec €11.6m, consensus €13.0m) from a 15.1% increase in revenue (17% LFL) to €55.6m (Investec €49.4m, consensus €53.0m). Natural Colours (8.1% of Q119A EBIT) reported a 32.6% increase in EBIT to €5.7m (Investec €5.9m, consensus €5.0m) from a 3.3% increase in revenue (6% LFL) to €52.8m (Investec €49.8m, consensus €54.0m).


While Health & Nutrition was well ahead of forecasts, the main Cultures & Enzymes division disappointed with margins over 100bps lower than the market expected. Management attributed this to “initiatives in strategic priorities” to support long-term growth and an increase in sales and application support resources.


May wins by 19 votes


The UK government, last night, won the vote of no confidence tabled by Labour leader Jeremy Corbyn by 325 votes to 306, a majority of 19. This compares with an effective majority in the Commons of 13. This was no surprise bearing in mind that the DUP had previously insisted that it would support the Conservatives in this vote. Mr Corbyn has indicated that he may table several such motions in the future. We suspect that his intention is to continue to try to maintain the line that the Labour Party's main Brexit objective is to fight a General Election and deflect pressure to call for a second referendum which he judges could be politically toxic (as well as being contrary to his personal inclinations). Also there is a feeling that the Conservatives may fracture at some stage as the PM attempts to gather a consensus on Brexit across both sides of the House.


In search of cross-party consensus


PM May says she will continue to work to deliver the referendum result. She invited opposition leaders to start talks looking to find cross party consensus and indeed she commenced talks with a number of leaders yesterday evening. However note that Mr Corbyn refused to hold “substantive” talks unless the PM ruled out the prospect of a no-deal Brexit. Meanwhile Ian Blackford, the SNP’s Westminster leader, said a second referendum and an extension of the Article 50 process had to be “on the table”.  Speaking late last night, PM May said she was “disappointed” that Mr Corbyn “has not so far chosen to take part – but our door remains open”. The absence of Labour from talks, looks to limit the scope for a cross party solution being progressed ahead of Monday, when May is set to respond on a motion with a statement laying out her next steps on Brexit. Given the seismic events over the last few days, sterling is little changed from yesterday’s closing levels.


RICS survey for December shows that the UK housing market is softening


The RICS survey for December provided further evidence that conditions in the UK housing market are softening. It showed that the house price balance had weakened from -11% to -19% (consensus -13%, Investec -10%), the lowest outturn since August 2012. Furthermore surveyors were the gloomiest on record in their three-month outlook for house sales with the net expectations balance coming in at -28%. RICS reported that a combination of political uncertainty and buyer affordability were the main headwinds facing the housing market at the current time.


Economic Releases


10.00 EZ CPI

13.30 US Building Permits

13.30 US Initial Jobless Claims

13.30 US Philadelphia Fed Manufacturing Index

15.45 US FOMC Member Quarles