12 Jun 2019

Cairn Homes: Reports of progress in Citywest sales process

The Irish Times reports this morning that Urbeo Residential is close to securing an agreement to acquire 282 apartments at Cairn Homes’ scheme at Citywest in Dublin for a price of “in excess of €90m”. 


Cairn had previously indicated that it would pursue a forward sale to the PRS (private rental sector) market at this site, in addition to building 165 units for individual buyers, while the reported sales price is broadly in line with our estimates for this location. Urbeo Residential is a new Irish residential investment platform that focuses on developments with an element of social and supported tenancies and is backed by Starwood Capital and the Ireland Strategic Investment Fund, although we expect that a number of other prospective purchasers have also been taking a close look at the units.


Having launched a sales process for these units in March, it is no surprise to see strong bids emerge given the continuing strong demand from institutional buyers for quality PRS assets. Cairn has identified up to 3,000 units in its portfolio that could be sold to the PRS sector to capitalise on this demand.


Irish Economy: Average earnings rose 3.3% last year

The CSO’s annual Earnings and Labour Costs publication shows that average earnings rose 3.3% last year to a record €38,871.


Total earnings climbed 7.4% to €71.5bn, helped by the aforementioned wage growth and the numbers at work increasing to an all-time high (in addition, average weekly paid hours were +0.4% y/y). The 3.3% rise in average annual earnings represents a quickening on the 1.9% pace of wage growth recorded in 2017 and likely reflects the tighter labour market conditions (unemployment has recently fallen to 4.3%, its lowest level since 2005). Average full-time earnings rose 2.6% in 2018 to €47,596 while average part time earnings increased by 3.5% to €17,651.


Reflecting the economic strengthening, all 13 sectors of the workforce recorded a rise in average annual earnings in 2018. Unsurprisingly, the strongest growth was seen in the booming IT (+7.9% y/y), Construction (+5.7% y/y) and Finance (+5.2% y/y) segments.


Preliminary estimates for Q119 suggest that earnings growth has continued at a sharp pace into this year, with average weekly earnings +3.4% y/y in the opening three months of 2019. With labour market conditions set to tighten further, earnings growth should remain well ahead of increases in the cost of living (the CPI was +1.7% y/y in April), delivering continued improvements in living standards in the short term, although there is an associated cost in terms of competitiveness that needs to be borne in mind.


Symrise Margin progress the key

Strong LFL revenue growth in Q119A maintained the momentum evidenced through FY18A but it is margin progression that is key and with no visibility currently we remain cautious on profit progression. While Symrise reported stronger than expected LFL revenue growth in Q119A, reported revenue only came in 1.4% ahead of our forecast. In the interim period, we forecast that this gain has all but been negated by currency headwinds. As such, while our forecast divisional revenue contribution changes slightly, it nets out only a €1m change in a €3.47bn revenue line. Likewise, as no margin guidance was provided we keep them unchanged, with divisional variance cancelling each other out.


While the market reacted to the better than expected LFL Q119A revenue growth, it is the margin trajectory that is key through FY19E and no guidance was given on that metric. Previously, management guided that FY19E EBITDA margin would be “around 20%” which compares to a five-year historical average of 20.9%. Through FY18A margins contracted 105bps to 20.0% as lower margin acquisitions were integrated into the business and so stabilisation and some expansion (we have 86bps forecast) is baked into market expectations. This overhang remains until H119 numbers are released on the 8th of August, particularly as the company integrates its ADF/IDF acquisition.


Symrise is trading at 35.6x FY19E P/E and 19.2x EV/EBITDA, a 5.1% premium to its peers (15.8% ex-Chr. Hansen).


C&C Time to get the next round in

We believe that C&C is well positioned to deliver sustainable growth. Not only is there clear direction on how the company intends to drive profit growth from MCB, but also the core businesses in Ireland and GB are winning back market share, which we believe is sustainable given the multiple routes to market now available for its products.


The stabilisation, simplification and optimisation of MCB is one key driver for the C&C business over the coming two years. With stabilisation successfully completed in FY19A, management is now focussed on simplification of both the Matthew Clark and Bibendum businesses and through that the improvement of business margins.


The upgrade in “stable state” margin target to 3% from the 2.0% to 2.5% range was the upside surprise to FY19A numbers although, as we discuss in this note, with the sector average margin at 2.95% this would appear to be achievable. The current focus is on MCB but while it is forecast to account for 66.1% of FY20E revenue, the lower-margin nature of the business means it is only expected to contribute 22.3% to FY20E operating profit. As such, the core business remains key and here we see encouraging signs that increasing market share in both Ireland and GB would suggest past regulatory and competitive hurdles have been met and crossed, and that both divisions are returning to profit growth. This, we believe, will be augmented by growth opportunities from the channels to market provided by MCB, Admiral Taverns and the AB InBev distribution deal.


Despite having appreciated 38.5% YTD, C&C is still only trading at 12.7x FY19 P/E and 10.8x EV/EBITDA, a 26.9% and 4.8% discount to its brewer and distribution peers, respectively.


Labour look to stop no-deal Brexit

It is being reported that today Labour will initiate a cross party effort to try and reduce the scope for a new Conservative party leader to deliver a ‘no-deal’ Brexit. This comes amidst discussion, particularly from former Brexit Secretary Dominic Raab, that no deal Brexit could be achieved by simply failing to bring Brexit back to Parliament, including with talk of proroguing (suspending) Parliament to help achieve this. Channels for Parliament to take control of the Brexit process are more limited now, with the Withdrawal Agreement Bill having not been taken to Parliament it is now not possible for amendments to be attached to such legislation to alter the course of events. As such Labour appears to be looking at using today’s opposition day debate, to attempt to gain control of the parliamentary agenda on 25 June.


Lib Dem & SNP support

Labour is expected to be backed by the likes of the Liberal Democrats and the SNP, plus some others, to seek measures including legislation, to help avoid a no-deal Brexit, while also preventing a future PM from proroguing Parliament to force Brexit through. Parliament has on balance been opposed to no-deal Brexit, so any action to avert no deal could pass the Commons. Note though that a Bill brought by Labour’s Yvette Copper in April, seeking an extension to avoid no-deal, passed by just one vote.


For sterling, positive steps that reduce the prospect of no-deal would likely provide a key footing to the pound, where nervousness over heightened no-deal Brexit risks amidst the Tory leadership race have weighed on the currency of the late.


Trump goes after the Fed, again

US President, Donald Trump, yesterday renewed his attack on the Federal Reserve ahead of their scheduled 19th June rate announcement. Using his favoured conduit of communication, Twitter, he positively hammered the Fed. Blaming them solely for a consistently strong dollar, he tweeted “this is because the euro and other currencies are devalued against the dollar, putting the U.S. at a big disadvantage. The Fed   interest rate way too high, added to ridiculous quantitative tightening! They don’t have a clue!” 


Fed Chair, Jerome Powell, is standing fast against Mr. Trump’s onslaught, vowing that the Fed will not bow to any type of political pressure. One would have to think that if the Fed cut rates either at next week’s meeting (unlikely) or at the following one at the end of July (probable), Mr. Trump will surely claim it as a personal victory.


UK labour market figures

The headline unemployment rate held steady at 3.8% in April, matching market expectations and our forecast, leaving the rate at multi decade lows. Meanwhile, stripping out the more volatile bonus numbers to give an impression of underlying pay growth trends, earnings growth rose from 3.3% to 3.4%. That was above the 3.2% market expectation and our own 3.1% forecast. Following comments from external Bank of England MPC member Michael Saunders on Monday, which pointed to the Bank needing to raise rates sooner than markets expect, the figures gave sterling a little bit more impetus yesterday.


Economic Releases

09.15 EZ ECB President Draghi speaks
10.00 EZ ECB’s De Guindos speaks
13.30 US CPI
19.00 US Federal Budget Balance