02 May 2019

Dalata: Positive AGM statement

In its AGM statement released today, Dalata notes that trading in the first four months of 2019 is in-line with its expectations and ahead of the first four months of 2018.

 

 

On a 'like for like' basis, RevPAR in Dalata’s Dublin hotels was up 2.4% in the period - a positive outperformance given that the wider Dublin market has been effectively flat YTD. In Regional Ireland, RevPAR growth has been positive and “ahead of the market as a whole”. In its UK portfolio, on a LFL basis, RevPAR was up 3.0% in Q1, while the group noted that, in all but one city, its hotels outperformed the market in RevPAR growth. Trading in the second quarter is described as “encouraging” and the outlook for the first six months of the year is “positive”. 

This is a positive update, particularly the group’s outperformance relative to local markets, and is consistent with our RevPAR forecasts for FY19.  

Irish REITs: JLL index points to capital growth

The latest JLL Irish Property Index shows a steady start to Q119, with overall returns of 0.6% q/q and +6.1% in the year.

 

Capital values were +0.6% q/q and +2.2% y/y, led by Industrial (+2.9% q/q) with Office delivering +0.3% q/q and Retail +0.2%. ERVs were +0.1% q/q and +1.0% in the year, with all of the quarterly growth delivered by the 20bps move in Industrial, as both Office and Retail were flat.

Looking ahead, JLL says it expects “overall returns to remain positive for 2019, albeit at a more modest rate than we have become accustomed to in the last few years”, a view that we share.

The broad improvement in capital values has positive read-through for the REITs’ investment properties. 

Kerry Group Solid Q119 IMS

Kerry issued a solid Q119A IMS this morning and reaffirmed FY19E guidance of 6 to 10% adj. EPS growth on a constant currency basis. The company reported a 10.3% increase in Group revenue (INVe 6.5%) where LFL growth of 3.1% (INVe 3.5%) comprised of a 3.3% increase in volume (INVe 3.4%) but a 0.2% dip in pricing (INVe +0.1%) on lower raw material costs. Acquisitions contributed 4.7% (INVe 2.3%) to reported revenue growth which was also augmented by a 2.5% FX tailwind (INVe 0.7%). Group trading margins increased by 10bps (Taste & Nutrition +10bps, Consumer Foods -10bps), in line with our expectations.

 

At the divisional level, Taste & Nutrition reported 3.7% LFL revenue growth (INVe 4.2%) comprising 3.8% volume (INVe 4.0%) and -0.1% pricing (INVe +0.2%) while in Consumer Foods the underlying business grew 0.5% (volume 0.8%, pricing -0.3%) in line with our expectations (INVE volume 1.0%, pricing -0.5%). On a regional basis in T&N, the APMEA region was again the key driver with volume growth of 9.3% (9.7% in Q118A) but both Europe and the Americas continued to report solid growth at 2.4% and 2.6% respectively.

The primary beat on our forecasts was not on the core business but a stronger than expected contribution from the acquisitions and a greater FX tailwind, with the main business growing as expected, hence no change in full year guidance. We would expect little change to consensus numbers on the back of this IMS, but any will be marginally to the upside.

Kerry is trading at 25.5x FY19E P/E and 18.8x EV/EBITDA, a c.5% discount to its peers, ex-Chr Hansen. 

FOMC decision (May)

Overnight, the US Federal Open Market Committee (FOMC) held its main policy rate range steady. As such, the Federal funds target rate range remains at 2.25-2.50%. There was, however, a technical adjustment made, with its Interest on Excess Reserves Rate (IOER) lowered by 5bps to 2.35%. This is a move aimed at guiding the effective federal funds rate towards the middle of the target range after having drifted close to the upper end for some time now.

 

Meanwhile, the tone of the published policy statement and Fed Chair Jerome’s Powell’s accompanying press conference was a measured one. He was particularly keen to stress that the FOMC was comfortable with rates where they were. This seemed to be an effort to send a message to investors eyeing the prospect of the Fed moving to lower rates later this year, resulting in a sell-off on Wall Street and in Treasury markets. Overall, we continue to suspect the FOMC will be persuaded to raise the funds rate one further time this year.

 

UK political developments

On Brexit there are various reports this morning suggesting that Prime Minister Theresa May is considering the possibility of conceding one of her previously stated red lines and accepting some form of Customs Union with the EU in order to break the Brexit deadlock as part of the ongoing talks with Labour. It is being reported that PM May will try and wrap up these talks by next week but any possible deal with Labour which includes a Customs Union would likely face stiff opposition from Tory Eurosceptic MPs, but with support from the opposition it could possibly pass. The last indicative vote on a Customs Union failed to pass by just 3 votes. However this would not totally resolve the Brexit hurdles as regulatory checks would still be needed, meaning the issue of the Irish backstop would not totally be resolved.

 

Secondly, Defence Minister Gavin Williamson was fired overnight, following what has been described as credible evidence that he was behind a leak over a government decision to offer a contract to the Chinese company Huawei to help build the UK’s 5G network. He is being replaced by Penny Mordaunt. 

Thirdly, 27.6% of Peterborough constituents signed a recall petition removing Labour MP Fiona Onasanya, following a speeding offence. This means that there will now be a by-election in the marginal seat of Peterborough, which Labour only won by 607 votes in the 2017 general election, though a date has yet to be set. 

Lastly, UK local elections are being held today, where the big point to follow is how many seats the Tory party loses given widespread reports of a voter backlash given Brexit. 

Super Thursday

Today is a busy day on the on the economics front with an MPC announcement and BoE Inflation Report due. We expect the committee to hold the Bank rate steady at 0.75%, where it has been since August last year. It is not completely impossible that members sanction the third rate hike in the cycle. However we judge this to be unlikely.

 

The committee as a whole is likely to remain fretful over downside risks to the economic outlook. Moreover there has been very little in terms of signalling from members which could ease what would be a significant shock to markets if rates were raised. Even so a tightening may well attract more serious discussion this time. Meanwhile we fully expect the asset purchase levels to remain frozen (gilts £435bn, corporate bonds £10bn). 

The Inflation report will give the MPC the opportunity to reassess medium-term economic prospects. The committee’s existing judgement (from February’s IR) is that over its three year forecast horizon, demand growth in the UK exceeds that of supply. This results in some build-up of inflation pressures, resulting in the need for gradual and limited increases in interest rates to prevent CPI inflation from overshooting its 2% target over the medium-term.

 

Economic releases

09.00 EZ Manufacturing PMI

09.30 UK Construction PMI

10.00 EZ EU Economic Forecasts

12.00 UK BoE Interest Rate Decision

12.00 UK BoE Inflation Report

12.30 UK BoE Gov Carney Speaks