Friday, September 28 08:59:39
The ISEQ is up 10 points this morning at 3,282 as the Quarter looks like ending on a positive note. World markets are generally up slightly either on technicals or a general view that Spain is doing enough to put off direct intervention. Today's banking stress test will be important however and the credibility of the figures is crucial.
Irish Continental is once again in the news and is examined by NCB Stockbrokers:
Irish Continental traded robustly in the first half of 2012 and remained strongly cash generative, despite facing sluggish markets and a continued fuel headwind. The E111.5m tender offer to repurchase 24.9pc of its equity at E18.50 per share is striking for its scale and positive for equity returns and earnings (circa +11pc). The sale of Feederlink for up to E29m is further evidence of strong value creation. Irish Continental retains a strong balance sheet, is highly cash generative (FCF yield 11.3pc) and offers a secure 5.6pc yield at a time of sustained low interest rates. It will also be a major beneficiary of an ultimate recovery in economic activity. We re-iterate our buy stance.
Irish Continental continues to face sluggish demand and high fuel costs. Interim operating profit fell by E1.4m in the seasonally less significant H1, despite fuel costs rising by E4.5m. This was a robust performance, notably within the larger Ferries division, where profits were unchanged. Tourist car volumes and yields were positive over the important summer period, while freight was weaker. The Group's 24.9pc tender offer, which closes on 4 October, will boost EPS by 11-12pc. If not fully taken up, a possibility in view of the stock currently trading within 3pc of the tender offer price, the enhanced buyback authority to be conferred at the EGM on 2 October remains in place until the earlier of the next AGM or November 2013. This further underpins the stock price.
Fuel remains a challenge, with the 2012 bill estimated to be E30m up on 2009. This must ultimately be borne by customers, but excess capacity and sluggish demand have delayed full recovery. Nonetheless, operating profit growth from E26.5m in 2009 to a forecast E28m in 2012 shows disciplined fuel cost pass through, as well as a clear focus on optimising cost performance.
The Group has announced the sale of Feederlink, the North Sea feeder operation, for up to E29m, subject to regulatory clearance. This will generate a profit on sale of over E20m and represents over 20x the unit's EBITDA run rate. In our view, this demonstrates further value creation and highlights conservative asset valuations. The near-term trading outlook remains flat, though the downturn will eventually ease in Ireland and the multinational and agri/food sectors continue to trade well. Capacity reductions on the oversupplied long sea routes, not served by the Group, would also deliver volume growth to Irish Continental. We forecast adjusted EPS of 110 cent in 2012, 127 cent in 2013 and 136 cent in 2014, post the buyback.
Irish Continental's 5.6pc dividend yield is secure and compares with Irish 2020 sovereign yields of sub 5pc, following recent strong performance. Pro-forma, post the tender offer and the sale of Feederlink, net debt is a comfortable 2x EBITDA and the free cash flow yield is 11.3pc. We see scope for this dividend to be grown over the next few years, in view of modest medium to long term capex needs. While financial leverage remains low, operating leverage is very significant, as circa 75pc of incremental revenues fall to post-tax earnings. This is an attractive combination in our opinion, providing secure dividend income, and exposure to prospective economic recovery. We re-iterate our buy stance according to NCB Stockbrokers.