29 May 2019

Dalata: Broad-based tourism growth in April

Following growth of 5.5% y/y in Q1, trips to Ireland by overseas residents grew by 4.3% y/y in April, bringing the YTD increase to 5.1%.  


Amongst the main markets for inbound travellers, and contrary to recent trends, the greatest y/y increase in April came from the British market which posted 5.1% growth, ahead of 3.7% growth from residents of the US and Canada and 3.3% growth from residents of Europe (ex. GB). In the first four months of the year however, the North American market continues to display the strongest increase at 8.3%, followed by the European (ex. GB) and British markets at 6.2% and 2.4% respectively.


While the North American market has been the primary driver of strong growth in tourism volumes in recent times, this month’s data highlight the broad-based nature of the growth with all geographical segments on an upward trajectory. Not all markets are created equally however, at least from the perspective of the Irish hotel industry, given that North American visitors have a much higher propensity to stay in hotels while in Ireland, and they also spend more on average per visit. As such, YTD growth of 8% in this segment is positive for hotel operators such as Dalata.


Irish Economy: Strong retail sales performance in April

Retail sales data for April, released by the CSO, show a very strong performance.  


Headline retail sales volumes were +2.1% m/m and +4.0% y/y, with the value of those sales +2.4% m/m and +3.5% y/y. Core sales, which strip out the volatile Motor Trades, were -0.5% m/m and +5.6% y/y in volume terms, with the value of those sales +0.9% m/m and +4.6% y/y.


Data for the 13 segments of the retail sector show that nine posted annual growth in volume terms, with the same number seeing annual growth in the value of sales. There was particularly strong growth seen in a number of discretionary areas (Electrical Goods +25.9% y/y and +12.8% y/y in volume and value terms respectively; Hardware Paints and Glass +14.8% y/y and +14.2% y/y on the same basis).


With (i) unemployment having fallen to its lowest since late 2006 and the numbers at work currently rising at a rate of 3.7% y/y; (ii) wage inflation (3.4% y/y in Q119) running at twice the annual rate of growth in the CPI; and (iii) disposable incomes being further boosted by income tax cuts it is no surprise to see good growth in consumer spending, notwithstanding the negative effect on sentiment arising from a more uncertain external backdrop.


Irish REITs: PRS and hotel deal read-through

Today’s Irish Times carries a number of pieces of note to the Irish REITs.


To start with the PRS sector, a real estate fund managed by DWS has agreed to pay €108m to acquire 214 apartments being developed by Cosgrave in Dún Laoghaire (south-east Dublin). This is the third PRS sale by Cosgrave in the suburb, following the 2016 sale of 197 units for €72.5m (€368k/unit) to Tristan Capital and SW3 and the 2017 disposal of 319 apartments for €132m (€414k/unit) to Patrizia. The implied price per unit from this latest deal is €505k.


The apartments that are the subject of this latest transaction will be completed in stages from September of this year through to next February. According to the Irish Times, the transaction price implies a gross yield of 4.89% and while these new units are exempt from the rent caps, we note that the end-December book value of IRES’ PRS units equated to a gross yield at fair value of 6.1%, while the end-March book value of HBRN’s residential units works out at an gross yield of 5.0% (after adjusting the reported equivalent yield of 3.9% for direct property costs and standard purchaser costs).


We also note that Kennedy Wilson has placed its Portmarnock Hotel & Golf Links asset on the market with a guide price of €50m. We wouldn’t think that there’s any read-through to its extensive PRS, office and retail holdings here (2,257 multifamily units and 1.5m sq ft of commercial space) as Portmarnock is one of only two hotels (the other being The Shelbourne in Dublin) that KW has in this market.
In terms of the PRS units, IRES seems quite the outlier here from a book value standpoint, although some of this is reflected in the 11% premium the stock trades at relative to its end-2018 NAV.


Total Produce Deal deliberations 

We believe that debt will not be an issue for completion of Tranche 2 and 3 of the Dole deal, but the level of shareholder dilution required to part-fund the deal will depend on underlying cash generation and timing. Under our current forecasts, we believe that Total Produce can incorporate Dole into its numbers (i.e. take up Tranche 2 of the deal increasing its stake to 51%) without breaking debt covenants (ND/EBITDA of 3.5x) by year-end FY20E. This is before incorporating the cash that could be generated from any potential sale of non-core Dole assets.


In debt terms, Total Produce could concurrently take up Tranche 3 but we believe that it will not do so at that time. We believe that it will look to maximise the debt element of any deal in the two years out to year-end 2022. Total Produce is trading at 11.0x FY19E P/E and 8.4x EV/EBITDA, a discount to a loosely-based range of peers. That said, as no “peer” has the geographic footprint or business spread of Total Produce, we value the company on a DCF basis.


Risk off as China goes on the offensive

US stocks slipped again yesterday as the continuing trade spat between the US and China continued to stoke fears of a global economic slowdown. This time it was the turn of the Chinese to adopt the more combative tone. Chinese authorities yesterday raised the idea of potentially restricting the export of rare earth materials to the US. Rare earth minerals are crucial to many large manufacturing industries in the US such as electronics, oil production and renewable energy. It’s estimated that almost 80% of the imported US rare earth materials are sourced from China and as such any restrictions would have a huge impact on the US manufacturing sector.


With risk aversion rearing its head yet again, safe haven currencies such as JPY, CHF and the USD (to a lesser extent) all benefitted overnight. In an even more telling sign of an imminent US slowdown, the bench mark US treasury ten year yields opened this morning at fresh 20 month (Sep 2017) lows of 2.22%. 


No change BoC

The Bank of Canada makes its policy announcement later today. Governor Poloz recently remarked that he still believes interest rates will continue to rise once headwinds to growth dissipate but we can’t see a rate increase until after Canadian national elections in October at the very earliest. It is worth noting however, that the Canadian yield curve has begun to price in a small chance of a cut in rates this year, a feature that is common to many developed market curves at present. This time however the central bank looks set to maintain its overnight rate target at 1.75%.



With the EU elections over, focus will turn to discussions over who will head the central bank as Mario Draghi is due to stepdown later this year. Some of the early favourites to replace Draghi are Jens Weidman, Claudia Buch, François Villeroy de Galhau, Benoît Cœuré, Erkki Liikanen and Olli Rehn. With so many names up for the job, all with different policy views, investors will be watching closely while volatility levels could rise. The next few months could see a period of political shadow boxing and will keep markets in suspense.


Economic Releases

09.00 EZ ECB Financial Stability Review