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ISEQ steady-Irish Continental examined

Thursday, September 13 09:06:21

The ISEQ is steady this morning at 3,257, up 7 points as markets await the extent and scope of Fed action later today.

Irish Continental is examined in the context of the introduction of lower sulphur requirements for shipping. NCB Stockbrokers comments:

The European Parliament this week backed legislation to reduce sulphur levels in shipping fuels. This change has been under discussion for some considerable time and does not come as a surprise. The impact on Irish Continental will be modest.

Analysis: From 2015, tougher rules on sulphur emissions will apply in the Baltic Sea, North Sea and the English Channel. Irish Continental's Irish Ferries network is minimally impacted, with only a part of the Ireland-France route affected. The container operations will also be impacted, though, post the announced sale of Feederlink, this is much less material.

Ultimately, higher fuel costs must be passed on to customers in the form of higher pricing. The Group employs surcharges in its freight operations and dynamic web-based pricing/yield management in the tourist market as a means of aiming to recoup higher fuel costs. These are projected to have risen E30m in the past 3 years and some lag in recovery inevitably results.

However, the policy on recovery, allied to an unhedged fuel position, has been followed consistently. Additionally, Irish Continental's fleet is well-invested and modern, ensuring that the Group is at no competitive disadvantage in relation to fuel. High fuel costs are likely to be a factor in driving transport industry consolidation/rationalisation.

 Conclusion & Action: We re-iterate our buy stance on Irish Continental, given its strong free cash generation (pro forma 11.5pc FCF yield), secure 6pc dividend yield (which we see growing in the future) and operating leverage to any recovery in volumes in its core markets. We estimate that 75pc of incremental revenues in the ferries business falls to post-tax earnings, while the terminal also enjoys high operating leverage.

Irish Continental goes ex-div (33 cent) on 19 September. On 2 October, shareholders will vote at an EGM on the tender offer to repurchase up to 24.91pc of the Group's outstanding equity at E18.50 per share. Assuming that it is approved at the EGM, tender offer forms are due to be submitted by 4 October according to NCB Stockbrokers.