22 May 2019

IRES REIT: Linked with €285m property purchase

Today’s Irish Times says that IRES REIT has been named as preferred bidder for a portfolio of 815 apartments that Marathon is selling.  


The report says that the PRS portfolio is expected to transact for a price “in the region of €285m”. The apartments are spread across 16 different developments and all but 50 of the units are located in Dublin (the remainder are in Cork). Previous coverage in The Irish Times suggested that the portfolio is producing a current income of €14.7m, so assuming standard buyers’ costs apply this gives a gross initial yield of c. 5% rising to c. 6% when ERV of €17.7m is achieved.


Last month IRES announced that it had entered into a new revolving and accordion facility, which can be extended up to €600m. At the end of 2018 the group had indebtedness, net of cash at hand, of €300m. Since the start of 2019 the group has acquired 52 units at The Coast in Baldoyle for €14m and agreed a forward purchase deal to acquire 118 units for €38.2m (plus costs) which will be delivered in phases later this year. IRES also has a portfolio of development assets that will require capex to build out. Today’s Times also says that IRES is proposing to recycle capital by selling 43 apartments in its planned Rockbrook development in Sandyford to the local authority for use as social housing for €21.1m.


If confirmed, and assuming the deal closes, this looks like an attractive transaction that will grow the portfolio from the current 2,731 properties to 3,654 by year-end (when the portfolio will have been further boosted by the addition of forward purchase units discussed above). The addition of units in Cork (Ireland’s second city) will expand IRES’ portfolio beyond Dublin for the first time. As an aside, we note that a separate portfolio of 62 apartments in Cork has come to market with a guide price of €17.5m today.


C&C Group Solid FY19 results, risks to the upside

C&C issued solid FY19A numbers reporting a 20.9% increase in adj. EPS to 26.6c (INVe 26.4c; consensus 26.0c) from a 21.5% increase in operating profit to €104.5m (INVe €103.9m, consensus €105.4m) (Table 1). Net revenue increased to €1.57bn (INVe €1.72bn), primarily on the Matthew Clark Bibendum (MCB) contribution.


Management notes a “solid start” to FY20 in line with expectations, with the company targeting double-digit EPS growth in FY20E. While we currently have 12.3% growth to 29.9c pencilled in, consensus at 28.6c implies 7.5% growth, suggesting that the risk to forecasts is to the upside. MCB reported operating profit of €15.7m (INVe €15.2m) from net revenue of €1.01bn (INVe €1.14bn).


Operating margin was marginally ahead of guidance (1.55% versus “below” 1.5%. Management notes that the plan now is “to steadily restore the equity value rather than chase short term growth or synergy”, where value and earnings from a low cost base will take priority. In October 2018, a normalised EBIT margin target of between 2.0% and 2.5% was guided. With the businesses moving from the “Stabilisation” to the “Simplification and Optimisation” phase of the recovery programme, management has upgraded the mid-term operating margin target to 3.0%+. With our FY21E margin at 2.7% the risk to forecasts is again to the upside.


The core business grew operating profit by 3.3% to €88.8m, in line with expectations. Ireland reported a 0.5% increase in operating profit to €40.3m (INVe €40.4m) from a 2.0% increase in net revenue to €219.2m (INVe €226.5m), while GB reported a 6.9% increase in profit to €42.1m (INVe €42.2m) from a 5.0% increase in net revenue to €306.3m (INVe €313.7m).


International has been rationalising its distribution network, which saw profit fall 1.5% to €6.5m (INVe €6.2m) from a 3.2% dip in net revenue to €38.9m (INVe €42.3m). Core brands grew revenue by 5.4% while the super-premium and craft portfolio (7.9% of branded revenues) recording volume growth of 46.2% (LFL +15.0%). In Ireland, Bulmers returned to volume (+1.6%) and revenue (+2.9%) growth, increasing its share of the cider category by 110bps to 60.2%. In Scotland, volumes were flat (MUP impact) but revenue was up 7.1%. Magners recorded a 4.4% increase in volumes with revenue up 5.3%.


C&C is trading at 12.0x FY20E P/E and 10.5x EV/EBITDA, a c.30% and c.10% discount to its European brewing and distribution peers, respectively. 


Irish Economy: Employment growing by more than 1,500 a week

The latest Labour Force Survey release from Ireland’s CSO shows that total employment rose 3.7% y/y (+81,200 jobs) in Q119. On a seasonally adjusted basis, the total number of people at work in this country is at a post-independence high of 2.32m while the official Q119 quarterly unemployment rate improved by 60bps q/q to stand at just 5.0%. The CSO now estimates that the seasonally adjusted unemployment rate was 4.6% in April, which is the lowest it has been since November 2006.


These are clearly very strong numbers. Full-time employment rose 3.5% y/y in Q119 while part-time employment increased by 4.1% y/y. Within the latter, the number of people identifying as being part-time but underemployed has fallen 6.0% y/y (to 106,900) as a strengthening economy has created more opportunities. Furthermore, while a breakdown for Q119 is unavailable, we note that the release shows that private sector employment surged 5.7% between Q118 and Q418, well ahead of the 1.2% increase in total public sector employment over the same period.


In terms of regional performance, unadjusted data show that all of the NUTS2 and NUTS3 regions posted an increase in total employment and a fall in the respective unemployment rate in the year to Q119, with a particularly striking performance recorded in the Mid-East (employment +7.4% y/y) region. The South-West saw unemployment fall by 220bps in the past year to stand at only 4.0%, while the Border region enjoys the lowest unemployment rate across Ireland of just 3.9%. The positive regional trends are worth bearing in mind given frequent commentary to the effect that the fruits of the economic strengthening are not being shared outside of Dublin.


It’s a similar narrative in terms of the different sectors of the labour market, with 12 of the 14 recording annual growth and 13 seeing growth in the quarter.


Growth in employment outpaced the annual increase in the labour force (+2.7% y/y to 2.42m), helping to apply downward pressure on the unemployment rate. The seasonally adjusted participation rate was 62.5% in Q119, a 35 quarter high.


Our FY19 forecasts for the Irish economy assume employment growth of 2.3% y/y and an average unemployment rate of 5.3%. While noting that the above data are for the first quarter of the year and there are risks from the external environment (most notably Brexit), our estimates clearly look to be on the light side. This follows recent strong export data (with the same ‘H2 caveat’ applying). Taken together, we are beginning to wonder if our 4.3% headline GDP growth forecast for 2019 is going to be exceeded. Elsewhere, the tightening in the labour market means that earnings growth is likely to continue to outpace the increase in consumer prices by a wide margin (average weekly earnings were +4.1% y/y in Q418, which compares to the latest (April 2019) 1.7% y/y increase in the CPI). The uplift in real earnings means improved living standards for our people in the near term, although this will need to be monitored closely in terms of the implications for competitiveness.


AIB Group: €750m HoldCo issue 

AIBG yesterday completed a €750m 5yr HoldCo bond issue as part of its continued MREL issuance programme.


The bond issue comes with a coupon of 1.25% and was priced at mid swaps plus 140bps, a 20bps tightening from initial pricing guidance of MS+160bps. The latest MREL bond issue takes total MREL-related funding since last year to c.€3.3bn, and leaves the Group well advanced towards its estimated requirement of c.€4bn (not needed until January 2021).


The bond issue will act as a slight headwind to NIM but is included within both management guidance and consensus forecasts.


Last ditch attempt

Yesterday the UK Prime Minister delivered what she called a bold, new Brexit offer, in a last ditch attempt to secure support for her Brexit deal. In it she outlined a ten point proposal of items that would be included in the Withdrawal Agreement Bill (WAB). This included points such as; i) a commitment to conclude attempts to find an alternative to the Irish backstop arrangement by 2020 (the PM admitted that it could not be replaced in the Withdrawal Agreement); ii) protections on workers’ rights; iii) environmental protections; and iv) most notably an offer for MPs to vote on a second referendum, though this could only occur if the WAB was passed.


PM May will deliver a statement to the House of Commons today, with the Bill reportedly set for a Commons vote in the week commencing the 3rd June, potentially on the 4th or 5th. The points included in yesterday’s offer appeared to be a gamble by the Prime Minister to try and entice Labour support in trying to pass the WAB and on the hope that the vote on a second referendum failed to pass given that in the last indicative vote, it lost by 292 votes to 280.



However given the tone of reports overnight it would seem that PM May's gamble is almost certain to fail. For one the inclusion of a Commons vote on a second referendum has alienated many Tories, including some of those who supported her plan at the third meaningful vote. A meeting of around 40 ERG Tory MPs last night unanimously agreed to oppose PM May's plan. Secondly, the response from Labour MPs has been less than glowing, suggesting that PM May’s plan has had little traction with the opposition.


The arithmetic, if anything now looks more challenging and we would judge that the WAB will probably lose by a greater margin than in the third meaningful vote (on the Withdrawal Agreement only), which failed to pass by 58 votes. This looks to be the last roll of the dice for the PM, who is set to meet the 1922 Committee Chair Sir Graham Brady after the vote to set out a path for her departure.
This will likely trigger a leadership contest over the summer, with a new Tory party leader and therefore new Prime Minister installed at the Tory party conference in September.


Following a short lived jump on the announcement yesterday afternoon, sterling has remained on the back foot as background events post Mrs. May’s speech seem to point to yet another failure to get her deal through in early June. The benchmark EUR/GBP rate is sitting in/around the £0.88 level at the European open this morning, the highest it has been since mid-February. 


Market Orders – Take advantage of volatility

Having traded marginally below 0.85p in the early parts of the month sterling has weakened circa 3.5% versus the euro. The last fortnight has seen cross party talks between Labour and Conservatives fail to reach a consensus and now PM May has provided a new Brexit offer in what appears her final throw of the dice to “deliver” her Brexit deal. With markets hyper sensitive to any Brexit related news market orders are an excellent tool to take advantage of volatility.


Wish to know more, please call the treasury team.


Economic Releases

09.30 UK CPI
09.30 UK PPI
13.30 EZ ECB’s Praet Speaks
15.00 US FOMC Williams Speaks
15.00 US FOMC Bostic Speaks
19.00 US FOMC meeting minutes