10 Jul 2019

Origin Enterprises - Brexit concerns overshadowing a strong business

Concern over Brexit’s potential impact is weighing on the agricultural sector. 

This comes at a time when Origin has made a decision to expand its geographic footprint into Brazil.


Farm income has remained above input costs over the past 12 months, which is positive for sentiment. In tandem, the cost of seeds and fertilisers have been rising, which should lift Origin’s revenue albeit with little impact on margins. That said we believe that the impact of Brexit on the farming sector, including the level of farm subsidies, input costs, output demand (therefore revenue) and labour costs will remain an overhang, at least in the short to mid-term.

 

When assessing balance sheet strength, the key ND/EBITDA hurdle for Origin is at H1, given the seasonal nature of the business. At H119A, net debt was €238.8m with ND/EBITDA at 2.6x. As such, we believe that the current focus will be on integrating the Brazilian business, while over time management will build its presence in the country through acquisitions.

 

Fed Chair Powell

This afternoon, Fed Chair Jerome Powell will deliver his semi-annual monetary policy testimony to the House Financial Services Committee at 3pm. He will also give testimony to the Senate Banking Committee tomorrow, again at 3pm. There is a chance, as occasionally happens, that the text of his testimony will be published earlier. In the past this has occurred at 1pm or 2.45pm (Irish time). 

 

This speech tends to be a major one for hints on monetary policy and given that markets are still fully pricing in a 25bp cut in the fed funds rate at the 31 July FOMC meeting, his comments today may confirm such a move or push back expectations to a later meeting. Our own view is that the Fed will wait until September to ease policy via a 25bp cut. Note that the minutes to the last FOMC meeting will also be released at 7pm (Irish time) and may shed some light on policy deliberations.


Brexit update

Parliament yesterday passed the Northern Ireland Executive Formation Bill, designed to keep Northern Ireland running while its own parliament, Stormont, is not functioning. The bill includes an amendment by ‘remainer’ Tory MP Dominic Grieve that instructs parliament to report progress on restoring power-sharing in the province every fortnight. This amendment was passed by just one vote (294 to 293). While seemingly innocuous, this makes it very difficult for any Prime Minister to suspend or ‘prorogue’ parliament for the purposes of achieving a no-deal Brexit. A separate amendment to enable the recall of parliament while not in session, was not selected for debate by the Speaker, while a third amendment on the government needing to approve the progress reports was accepted for debate, but defeated by four votes. 

 

Separately, the two Conservative leadership contenders, Boris Johnson and Jeremy Hunt, took part in their sole head-to-head TV debate last night. This is very unlikely to have changed the chances of BoJo’s likely victory, with bookmakers showing the former Foreign Secretary 1/20 on to win.


US – China trade talks

Chinese and US trade officials held constructive phone conversations yesterday as trade talks resume. The phone call between the two sides was the first confirmed contact since Xi and President Donald Trump met last month and agreed to resume talks. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin spoke on the phone with their Chinese counterparts Chinese Vice Premier Liu He and Commerce Minister Zhong Shan. The resumption of talks is a start, however, no further details were given regarding what may happen going forward but will hopefully help ease market uncertainty and bolster global sentiment.

 

Economic Releases

09.30 UK GDP

09.30 UK Industrial Productions

09.30 UK Manufacturing Production

15.00 US Fed Chair Powell Speaks

18.30 US FOMC Member Bullard Speaks

19.00 US FOMC Meeting minutes