03 Apr 2019
Irish Economy: Services PMI shows a slightly slower pace of growth
The latest AIB Ireland Services PMI release points to a slightly slower pace of growth in activity in March, with the headline PMI moderating to 55.3 from the previous month’s 55.9 amid Brexit-inspired nervousness.
While a little softer than the February reading, March’s headline Business Activity index points to a sharp increase in overall activity. However, the sub-indices point to some concerns about the external backdrop. While New Orders posted a “marked increase”, the rate of expansion in New Export Orders eased to its slowest in the current 28 month sequence of growth. Employment expanded at a faster rate, which may be explained by firms seeking to fulfil client orders ahead of the originally scheduled ‘Brexit date’ and/or a sense that lifting staffing is a preferable response to resilient demand at this point in the cycle than the sunk cost of capex. Furthermore, the forward-looking Business Confidence index slumped to a six-and-a-half year low as Brexit uncertainty weighed on sentiment.
On the margin side, cost inflation cooled to a four month low despite upward pressure on transport, fuel and staff costs. This headline move likely fed into the softening of end-product inflation to a 10 month low.
The Composite PMI for Ireland came in at 54.1 in March, down from February’s 55.4 outturn. In our recent Irish Economy Monitor we noted that “Brexit headlines are a risk to the March data” and that has proven to be the case. Assuming a benign resolution to the ongoing political developments in Westminster, we would expect to see the economy pick up steam in response to this.
Irish Economy: Underlying deficit €0.5bn better than forecast in Q119
Exchequer Returns for March have a familiar feel to them, with good growth in tax revenue, a sharp increase in spending and an underlying deficit that is better than profile (guidance) all present.
Year to date tax receipts are +7.1% to €12.8bn, with growth seen in every tax heading bar Corporation Tax (which is -1.6% y/y, a fall of €9m in cash terms). This outturn means that tax revenues are 1.2% or €157m better than profile for Q1, while in the month of March tax receipts were 4.6% ahead of forecast.
Total gross voted (discretionary) expenditures were +6.6% y/y, but 2.2% lower than profile for the period. Capital expenditure is running 10.1% below profile even after a 13.7% y/y increase in spend. The undershoot is probably due to a combination of capacity and timing issues, with the main areas of underspend being housing and ‘business, enterprise and innovation’. Current expenditure is +6.2% y/y but 1.7% behind profile, with notable undershoots recorded in education and housing. In other spending news, we note that national debt interest costs were €25m lower than profile and €137m (6.6%) below year-earlier levels, helped by the favourable yield environment.
Excluding transactions with no general government impact produces an underlying Q119 deficit of €2.2bn, which is €461m or 17.6% better than the -€2.6bn profile. Last October’s Budget guided a €75m general government deficit for 2019, so on the strength of the Q119 numbers Ireland looks like it is heading for a second successive (modest) surplus, albeit much depends on near-term political developments in the UK.
Irish Economy: Unemployment falls to a post-crisis low
The latest Monthly Unemployment release from Ireland’s CSO shows that the seasonally adjusted unemployment rate fell 20bps m/m to a post-crisis low of 5.4% in March. There were 131,300 persons unemployed last month, representing a decline of 3,400 m/m.
The unemployment rate peaked at 16.0% in early 2012 during the recession before falling by around two-thirds to its current level, buoyed by a surge in total employment (the numbers at work are at their highest since independence). Youth unemployment remains a challenge, however, with the 13.4% rate for under-24s more than double the headline rate.
While growth expectations have moderated (we recently trimmed our 2019 and 2020 GDP forecasts by 20bps (to 4.3%) and 50bps (to 3.3%) respectively) of late, they remain above trend, which is likely to put continued downward pressure on the unemployment rate here. This, in turn, has positive implications for many sectors.
Symrise note out today
The primary driver for Symrise is the ADF/IDF acquisition (we presume completion in Q319). Having spent $900m on ADF/IDF and factoring in the capex spend guided to support organic growth, the stretched balance sheet precludes further acquisitive catalysts. Updating for FY18A results, revised assumptions, inclusion of the ADF/IDF acquisition and increased share numbers, our FY19E FD EPS forecast dips 1.3% to 2.47c from a 3.3% increase in EBITDA to €723.1m and 4.8% increase in revenue to €3.47bn. At the time the ADF/IDF deal was announced in February, we opined that at 17.6x EBITDA, Symrise had paid a rich price. While it is demonstrably a good fit with the Diana business, we still are of that opinion, despite management guiding that the deal comes with significant tax benefits and cost synergies, which in theory would bring the deal multiple down to 13.3x. Symrise raised €400m gross from a share placement to part fund the ADF/IDF deal, with the remaining c.€395m being debt funded. As such, our year-end FY19E forecast net debt rises to €1.57bn (€2.08bn including the pension deficit) from €1.38bn in FY18A. This implies ND/EBITDA of 2.2x (3.0x including the pension deficit) which gives little financial flexibility over the short term. It drops to 1.7x in FY20E (2.4x including pension deficit). Symrise is trading at 32.7x FY19E P/E and 17.9x EV/EBITDA, a 3.0% premium to its peers (13.2% ex-Chr. Hansen). Ian Hunter (+353 1 4210466)
Chr Hansen Q219 behind
Chr. Hansen issued Q219A numbers marginally behind both our and consensus expectations, reporting a 15.8% increase in FD EPS to €0.44 (INVe €0.44, consensus €0.45) from a 10.7% increase in operating profit to €78.8m (INVe €81.2m, consensus €81.0m) and a 7.6% increase in revenue (8.0% LFL) to €283.7m (INVe €284.8m, consensus €288.0m). While earnings were in line, EBITDA and EBIT were c.3% behind our and market expectations. Management has reiterated FY19 guidance of organic revenue growth in the 9-11% range with an EBIT margin of around 29.5% and free cash flow “around last year” levels. On a divisional basis, Cultures & Enzymes reported EBIT growth of 12.0% to €53.3m (INVe €53.6m, consensus €54.0m) from an 8.0% increase in revenue to €166.0m (INVe €166.6m, consensus €168.0m). Both were 0.5% below our and 1.2% below market expectations. The division recorded 11.0% organic revenue growth (INVe 11.0%, consensus 10.4%).
Health & Nutrition came in well behind expectations, reporting a 3.8% increase in EBIT to €19.3m (INVe €21.4m, consensus €21.0m) from a 9.3% increase in revenue to €62.5m (INVe €64.0m, consensus €65.0m), with organic growth of 6.0% (INVe 10.5%; consensus 12.8%).
North America actually recorded “slightly negative” growth and APAC “declined” due to the timing of orders. The Natural Colors division reported a 20.0% increase in EBIT to €6.0m (INVe €6.2m, consensus €6.0m) from a 4.5% increase in revenue to €55.2m (INVe €54.2m, consensus €56.0m). The division recorded LFL revenue growth of 5.0% versus our and market expectations of 7%. As per the last few quarterly releases, these numbers have come in behind our and market expectations. This quarter is was the Health & Nutrition division that has disappointed, last quarter it was the Natural Colors. Ian Hunter (+353 1 4210466)
After a marathon seven-hour Cabinet meeting, the UK Prime Minister, Theresa May, announced that the UK would seek a further (shortish) extension of Article 50 at next week’s emergency Brexit summit. In order to devise a “way forward” for the EU27 (upon which an extension would be conditional), she reached out to Leader of the Opposition, Jeremy Corbyn, to try to forge a new parliamentary consensus. If the two fail to reach an agreement, the Prime Minister has pledged to hold a “run-off” vote in the House of Commons between her agreed deal and alternative options. She has pledged to honour the result of this X Factor-style showdown, providing that Mr Corbyn makes the same commitment. The two leaders are set to meet today but we are sceptical whether there is sufficient time for a change in Brexit strategy given the proximity to next week’s EU Summit.
Tories still divided
At the same time this serves to sow further division with the Eurosceptic wing of the Tory party, not least after Downing Street confirmed it would lay a parliamentary order on 11 April to make preparations for European Parliament elections but pointed out that the poll could be cancelled at any date up until 22 May. Further opposition has come from her confidence and supply partners, the DUP, who said the decision was “little surprise” given her “lamentable” handling of the Brexit negotiations.
Note also that Sir Oliver Letwin MP is expected to put forward a motion this afternoon that is designed to clear a path for a bill sponsored by Yvette Cooper MP which is designed to take a no-deal Brexit off the table. Overall markets have taken last night’s announcement positively. Sterling is higher across the board with the pound gaining almost 1% against the single currency.
UK services PMI for March falls below expectations
March’s Services PMI surprised on the downside with the index falling 2.4pts to 48.9, its first time below the 50 breakeven level since July 2016 (the month following the EU referendum held on 23 June 2016). Market expectations had been for a small fall to 50.9 (Investec 51.3). The details of the report clearly point to ongoing uncertainties over Brexit and UK politics impacting the environment in the dominant service sector. New orders fell for a third consecutive month, its longest series of monthly falls since 2009, with IHS Markit noting “widespread reports of domestic political uncertainty” constraining demand. The decline in the Services PMI outweighed the 3pt rise in the Manufacturing PMI (to 55.1), such that the Composite reading dropped to 50 exactly (signalling stagnant growth in the UK economy). Overall the PMI points to Brexit uncertainty continuing to weigh on the economy, but with little sign of a Brexit breakdown on the horizon, these downward pressures are likely to drag in April as well.
09.30 UK Services PMI
10.00 UK Retail Sales
13.15 US ADP Nonfarm Employment Rate
13.30 US FOMC Member Bostic Speaks
15.00 US ISM Non-Manufacturing PMI