27 Feb 2019

Permanent TSB: FY18 results - Strong underlying performance

PTSB FY18 results confirm the solid progress previously flagged throughout the year on new lending growth, stable margins and significant NPE reduction.

Underlying income of €442m (INVe €441m) was more or less flat y/y (FY17 €443m), with operating costs similarly fairly stable at €331m (FY17 €329m) and €10m lower than our expectations, leaving underlying pre impairment profit -2.6% at €111m (INVe €101m). Impairment charges of €17m (FY17 €48m) continued to benefit from the strong macro backdrop, but a large exceptional cost line of €91m (FY17 €13m), primarily made up of €66m in relation to NPL disposals and €20m in relation to the legacy tracker mortgage issues. New lending volumes of €1.5bn were up 50% y/y and included a 43% growth in new residential mortgage lending as PTSB’s market share grew to 15.1% (FY17 12.6%) and represented the biggest gainer within the market last year. NIM of 178bps was slightly down on last year (FY18 180bps) but consistent with management guidance, while NPEs reduced by €3.6bn to €1.7bn after the two previously disclosed portfolio disposals/securitisations which have brought NPEs to 10% of gross loans (FY17 26%). Reported FLCET1 decreased to 12.2% (FY17 15.0%), but management pro forma at 14.0%.


Overall underlying performance looks strong, but exceptional costs were quite high and capital headwinds remain a challenge.


FBD Holdings: FY18 results first take


FBD has issued its FY18 results this morning. Key points below.


In terms of the headline numbers, the group delivered GWP of €371.5m; a €50m profit before tax (consensus €30.4m); an NAV of 818c (consensus 748.5c) and ROE of 15%.


GWP fell just 1% in what is a highly competitive environment (as indicated by the insurance components of the CPI), as new business volumes climbed 11%. The COR was a keen 81.2%, representing a 500bps improvement y/y. This was helped by positive prior-year reserve developments totalling €28.7m and the delayed introduction of the 2% Motor Insurance Insolvency Compensation Fund levy; which were partly offset by net Storm Emma costs of €6.6m. The loss ratio was 56.3% (FY17: 62.9%) and the cost ratio was 24.9% (FY17: 23.3%), the latter due to higher reinsurance, IT, wage, GDPR and regulatory costs. The annualised total investment return was -50bps (FY17: +120bps), which FBD views as “disappointing” notwithstanding markets having been, in its own words, “challenged”.


A dividend of 50c has been declared, which is more than 2x the 2017 dividend (24c) and well ahead of consensus of 25c.


During the year FBD purchased (and cancelled) the €70m Fairfax convertible bond at a cost of €86m. It issued non-convertible debt of €50m at a lower (5%) coupon rate.


In terms of the outlook, FBD says that “more moderate inflation is evident across the claims environment though the cost of claims continues to remain high”. It also notes the slow pace of legal reforms in Ireland, particularly given that the key recommendations of the Cost of Insurance Working Group were published two years ago. The group expects to deliver a COR in the low 90s (versus 90% in FY18 on a ‘current year’ basis), absent exceptional weather, and is targeting a low double-digit ROE through the cycle. The headline ‘beat’ should be welcomed by the market today, and while it has been helped by prior-year reserve developments, we would note that an end-2018 NAV of 818c translates into a P/B of 1.08x, which seems light for a business delivering double-digit ROE.


Yew Grove REIT: New report


Since making its stock market bow in June, Yew Grove REIT (YEW) has deployed all of the capital raised from its IPO along with utilising most of its revolving credit facility (rcf) in assembling a high-yielding, well-tenanted and diversified (by commercial property segment and within Ireland) portfolio.


YEW raised net proceeds of €72.8m from June’s IPO. These proceeds, bolstered by a €19.9m debt facility and portfolio income, have supported c. €90m of investments. These deals represent a marriage of blue chip tenants and very high yields – the annualised rent roll of €7.35m represents a gross yield at fair value of 8.2%. While the rcf has c. €2m of remaining headroom, the recent strong NAV performance facilitates expanded debt capacity in due course. YEW may also elect to raise additional equity if suitable acquisition opportunities arise (our forecasts do not assume this, however). 


In the background, Irish commercial property market conditions remain very helpful for YEW. Office take-up is buoyant; the industrial and logistics space is being aided by Brexit-influenced supply chain recalibrations; and in the background we estimate that Irish headline growth led the rest of the EU in 2018, with good momentum envisaged for this year (we see Irish GDP +4.5% in 2019).


YEW’s pre-Christmas trading update saw management express its confidence in its previously guided 7c DPS for FY19E. We think this is attainable, helped by a combination of asset management initiatives, income reversion, tight cost management and strong contributions from acquisitions. Furthermore, the in-place rent roll (and lengthy WAULT of 4.9 years to break / 7.4 years to final maturity as at end-2018) provides considerable reassurance on the achievement of this target. This represents an Irish REIT sector-leading yield of 6.9%. We think this should act as a magnet for income investors, with yield compression and rental growth adding good capital momentum. If you haven’t already received a copy of the report, please contact the Sales desk here.


Cairn Homes: EGM approval paves way for special dividends


Cairn Homes’ shareholders yesterday approved a motion at its EGM to increase the distributable reserves of the company by the transfer of up to €550m from its share premium account. The company will now seek approval of the transfer from the High Court.


Having already signalled that it intends to commence regular dividends from FY19 earnings, this move will give Cairn the scope to initiate special dividends and/or share buybacks in due course. We forecast dividends of 50% of FY19E’s PAT (4.2c/share or 3.3% yield), rising to 60% in subsequent years (6.3c/share or 5.0% yield in FY20E and 7.1c/share or 5.6% yield in FY21E). However we still expect the group to end FY21E with a net cash balance of €173m providing the group with significant resources for additional returns to shareholders.


IRES REIT: Site in Sandyford sold for €10m/acre


Today’s Irish Times reports that a consortium involving Avestus and Ares has paid €38m or €10m/acre for a 3.81 acre site in Sandyford (South Dublin).


The site in question was offered for sale last year with a guide price of €36m by receivers Duff & Phelps on behalf of NAMA. It has in-place permission for the development of 459 apartments along with 454 car parking spaces, with recent regulatory changes indicating the potential for an enlarged scheme of up to 539 apartments, subject to planning.


This site is located adjacent to IRES REIT’s Rockbrook development bank, where the REIT has submitted a planning application for the development of “approximately 428” apartments. IRES has significant infrastructure (mainly car parking) already in situ.


It remains to be seen what the consortium’s intentions for this site will be, but we note the potential for collaboration with IRES, should the parties wish to pursue that option.


Dalata: Further strong tourism growth in January


Following a record year in 2018 when inbound visitors increased by 6.9%, trips to Ireland by overseas visitors increased by 11.2% y/y in January.


All four geographical segments recorded impressive y/y growth in the month, with visits by British residents +10.4%, European (ex. GB) visitors +12.2%, USA/Canada visitors +12.3% and trips by residents of other countries +9.4%. While new hotel room supply is finally arriving in Dublin and is likely to constrain upward momentum in RevPAR this year, the latest data highlight the urgent need for additional accommodation in the city.


Although still very early in the year, continued strong growth in inbound visitors is clearly positive for accommodation providers such as Dalata.


Brexit negotiations ongoing


UK Prime Minister, Theresa May, delivered a statement on Brexit to the House of Commons yesterday outlining how the government intends to proceed. Firstly, Mrs. May outlined the current state of UK-EU talks. There was not much in terms of additional detail here but she summarised that recent discussions had focused on what was needed on the backstop arrangement for it to be passable through the UK parliament. Discussions also touched on the Political Declaration and again what could be done to reassure the UK. Talks are set to continue over the coming days, with the Attorney General Geoffrey Cox returning to Brussels yesterday. PM May and Jean Claude Juncker will then reconvene and take stock of developments before the ‘meaningful vote’.




Mrs. May did however lay out a timetable of votes and marked mid-March as a very busy political period. As had been widely expected, Mrs. May confirmed that the second “meaningful vote” on her deal would take place by 12 March. Subsequent to that vote, if Parliament rejects her deal, the House would then hold another vote on 13 March on whether Parliament accepts the UK leaving without a deal on the 29 March. If Parliament rejects “no deal” there will then be a third vote on 14 March on whether Article 50 should be extended. There is no specific detail on how long an extension would be but Mrs. May did point out that if Brexit was delayed beyond June, the UK would need to participate in the European Parliamentary elections and highlighted the message that would send, hinting that the PM’s preference would be for only a short extension, possibly two months, ending before June. Sterling rallied on the news of a possible extension with the benchmark EUR/GBP rate breaking lower through levels not seen in almost two years.


Fed’s Powell: ‘No Rush’ to Hike Rates


Fed Chair Jerome Powell said crosscurrents and conflicting signals including disappointing data on retail sales and other aspects of the economy that contrast with steady hiring, wage growth, and ongoing low unemployment have prompted a more patient monetary policy approach. Fed’s comments offer some insights into the future policy guidance. Powell’s statements continue to support the Fed’s dovish tilt which could bolster global sentiment as the outlook for more easy money remains for now.


After raising rates four times in 2018, and anticipating further hikes in 2019, the Fed in January switched to a "patient" stance as concerns about the global economy took root, and markets voiced doubts about the U.S. economic recovery.


Economic releases


10.00 EZ Consumer Confidence

13.30 US Wholesale Inventories

15.00 US Factory Orders

15.00 US Durable Goods Orders