01 Oct 2018
Manufacturing PMI points to a strong Q3
The latest Manufacturing PMI data for Ireland show a solid end to Q318. The IHS Markit release shows that the headline PMI came in at 56.3 in September, slightly down on the previous month's 57.5 reading, but in-line with the average pace of growth implied by headline PMIs since the start of 2018.
Firms reported good growth in both new orders and output, leading to further increases in employment, but cost pressures remain a feature. Interestingly, backlogs of work fell for the first time in 17 months in September despite higher demand.
National accounts data show that the Irish economy expanded by 2.5% in GDP terms in Q2. While that was flattered by an easy comparable (GDP contracted by 0.4% in Q118), we note that the implied pace of growth in the manufacturing sector picked up slightly in Q3, raising the prospects for another good print when the next quarterly national accounts are released. Services PMI data due for release on Wednesday will provide further clues in this regard.
FBD Insurance: Fairfax convertibles repurchased in capital reorganisation
FBD Insurance has announced that it has entered into an agreement to purchase and cancel the €70m 7% convertibles notes held by Fairfax Financial Holdings, for approximately €86m in cash. The repurchase of the convertible bonds will be funded through a combination of existing cash resources and a new €50m subordinated bond issue. The convertible debt owned by Fairfax came with a mandatory conversion trigger if the FBD Group 30-day volume weighted average share price remained above €8.50 for a period of six months, starting on 23rd September 2018. As such, they were set to be converted into an approximately 19.2% equity stake in FBD on or before the 23rd March 2019.
The repurchase agreement represents a discount of approximately 3% to the 6 month volume weighted average price as at 28th September. The benefits for FBD of the capital reorganisation are the lack of any dilution for existing shareholders that the conversion of the debt would have caused, and the expected reduction in interest costs on the new subordinated issue (coupon on this still to be confirmed) when compared against the existing convertible debt coupon.
IRES/Housebuilders: Daft.ie data shows continued growth in residential asking prices
Ireland’s largest property website, Daft.ie, has released its Q318 house price report. The report shows continued growth in prices, albeit not quite at the same pace that had been evident in recent years. On an annual basis, asking prices were +6.6%, down from 8.9% a year ago. Price growth is somewhat skewed away from the Dublin market, which is a feature of Central Bank mortgage rules on the maximum permissible LTV and LTI levels for most new borrowing (average asking prices in the capital are c. 81% higher than in the rest of Ireland).
The annual rate of inflation in Dublin prices was 5.9% in Q318, its lowest since late 2016, while the other cities posted growth of between 5.1% y/y (Cork) and 8.3% y/y (Waterford). Apart from the Central Bank rules, increased supply is also contributing to the moderation of price inflation. The website had listings for just under 25,000 properties on September 1st, which is 4% above year-earlier levels, while within that there has been a strong increase in new housing output (albeit off a muted base), particularly in the ‘family home’ segment of the market.
Irish Economy: Consumer clues in latest KBC and CSO releases
Releases from the CSO and KBC/ESRI provide some insights into the health of the Irish consumer. KBC and the ESRI released their monthly consumer sentiment index overnight. At a headline level, this slumped to a 21 month low of 96.4 (from the previous month’s 102.4 reading). This dip is likely influenced by expectations around the external environment, with Brexit and international trade tensions contributing to rising nervousness among Irish households. A further contributing factor may be next week’s budget, where the prospects for a lift to household disposable incomes are constrained by the very limited fiscal space available to policymakers. The CSO released retail sales data for August on Friday. On a headline level these show a somewhat mixed performance, with m/m declines posted in both volume (-3.3%) and value (-1.9%) terms, but growth on an annual basis (volumes +2.6%, value of sales +1.9%).
Core (ex-auto) sales show a stronger backdrop, with growth on both monthly (volume +0.8%, value +0.6%) and annual bases (volume +4.0%, value +3.2%). An examination of the 13 different segments (as per the NACE classifications) of the retail sector reveals broad growth, with annual increases recorded in eight of the 13 on a volume basis, while 10 of the 13 saw annual growth in value terms. Encouragingly, the strongest growth was seen in consumer discretionary items (in volume terms electrical goods were +18.5% y/y, furniture & lighting +10.3% y/y and department store sales +8.2% y/y). With employment (+3.4% y/y in Q218) and average weekly earnings (+3.3% y/y in Q218) both showing strong growth, it is no surprise to broad improvements in the retail sector. The sharp dip in consumer sentiment since these data were collected may prove temporary – at a minimum, we note that consumer confidence has shot up to multi-month highs in each of the past four Januarys as tax cuts (modestly) lifted pay packets (this should happen again in January 2019) – while a resolution of some of the Brexit and/or trade issues in the coming weeks should see sentiment improve.
Aryzta: FY18 in line, EBITDA growth forecast, capital raise underwritten
For the first time in a number of years, Aryzta has issued numbers broadly in line with our and market expectations and announced that the €800m capital raise is now fully underwritten (previously only volume underwritten). Looking forward, management is guiding that its underlying performance is expected to be “stable” and that the effects of Project Renew should impact the P&L such that the company is guiding mid- to high-single-digit organic EBITDA growth for FY19E. Overall this will be seen as positive for the stock as management look to deliver some signs of recovery in FY19E as it moves into its “multi-year turnaround” programme. On the mechanics of the financial year the company reported a 72.5% decrease in Group adj. EPS to 55.4c.
At the operating level, Group EBITDA was down 28.2% to €301.8m from a 9.5% decrease in revenue to €3.43bn. LFL revenue slipped 1.2% and the EBITDA margin contracted 228bps to 8.8%. On a divisional basis, Europe (57.0% of FY18A EBITDA) reported a 18.5% decline in EBITDA to €172.0m from a 1.6% decline in revenue to €1.71bn. North America (29.8% of FY18A EBITDA) EBITDA collapsed 47.1% to €89.9m from an 18.4% dip in reported revenue to €1.47bn. Rest of World (13.2% of FY18A EBITDA) reported a 2.2% increase in EBITDA to €39.9m despite a 0.9% decline in reported revenue to €256.8m. Net debt/EBITDA was at 3.83x calculated as per Syndicated Bank Facilities Agreement terms.
UK this week:
Brexit related news will remain all-consuming in the UK this week and should maintain its status as the primary driver of the pound. The Conservative Party conference kicked off yesterday in Birmingham and is due to run up to Wednesday with PM May taking to the stage on the final day. While events could hardly get any worse for Mrs May than they did last year, she will keep an ear to the ground on proceedings at unofficial or ‘fringe’ meetings at the periphery of the conference. In particular, reports suggest that former Foreign Secretary and leadership hopeful Boris Johnson is speaking at an event on Tuesday evening. From a data perspective, the most important economic indicators will probably be the PMIs – manufacturing is published on Monday and services on Wednesday. We note too that a number of MPC speakers take to the stage next week including Silvana Tenreyro, Andy Haldane and Jonathan Haskel.
US this week:
After its move last week, the FOMC has now raised rates at eight straight ‘press conference meetings’. The issue now is to assess whether and when the Fed will pause, perhaps next year, or if it follows its ‘dot plot’, where the Fed funds target range would reach 3.25%-3.50% by end-2020, from 2.00%-2.25% now. In this respect, markets will be on closer lookout for clues from senior Fed officials and will watch for any signals from Fed Chair Powell who speaks to NABE on Tuesday. A number of his FOMC colleagues are also out in force. As ever, markets will be attuned to Friday’s jobs data, bearing in mind that this measure of pay growth hit a nine year high last month and that at 3.9%, the jobless rate is more than 0.5% below the Fed’s estimate of its equilibrium level. The ISM indices and the ADP payroll survey are also due this week.
Europe this week:
After last week’s Italian budget shenanigans took the markets by surprise, focus now turns again to European data. The Euro area release calendar is relatively meagre, although after a drop of close to 5% over the past two months (12% for overseas orders), we will be interested to see the extent of any rebound in German new manufacturing orders. The recent weakness does appear to be related to car specific reasons and not jitters over global trade. Final PMI data for August are also scheduled for Monday and Wednesday.
Canada and US reach NAFTA compromises
Late yesterday Canada agreed to join a revamped NAFTA deal which had been reached between the US and Mexico just hours before the deadline. Though no detail has been released about the compromises struck between the two, the US administration said that an “accommodation” had been reached. The new agreement will be called the United States Mexico Canada Agreement (or USMCA), with US President Donald Trump arguing that NAFTA had “a bad connotation because the United States was hurt very badly by NAFTA for many years”. While this improves its chances of being approved by the US Congress, the White House has said that the new deal will be voted on after the mid-terms. This may complicate its passage, given speculation that the Democrats may win back control of the House. For the meantime, however, the agreement saw the Canadian dollar firm to a four-month high of $1.2814 and the Mexico peso to $18.5422. In Asian equity markets, the Nikkei is up 0.5%. Note that markets on both the Chinese mainland and Hong Kong are closed for the “National Day Golden Week” holiday.
09.00 EC Manufacturing PMI
10.00 EC Unemployment rate
15.50 UK BoE’s Tenreyno speaks
16.00 US Fed’s Kashkari speaks
17.15 US Fed’s Rosengren speaks
17.30 EC ECB’s Villeroy speaks