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Markets News Tuesday; Irish commercial property values down 56% from peak; Aer Lingus holds Investor Day in London; S&P downgrades Japan’s sovereign credit rating outlook
By Finfacts Team
Jan 26, 2010 - 8:53:23 AM
Irish commercial property values down 56% from peak
Davy analyst Stephen Lyons commented today : "Irish commercial property values are now down 55.6% from peak, according to data for Q4 2009 from IPD. The index fell 4.9% quarter-on-quarter; within this, retail fell 4.9%, office 4.8% and industrial 5.5%. The pace of decline was less than the 8.5% quarterly decline recorded in Q3. Equivalent yields are now over 8% and well in excess of financing costs (based on five-year swap rates of 2.58%), which should ease the rate of decline and suggests that there may not be too much further to go from here. However, the high yields on offer must be viewed in the context of what is a sustainable yield. We note the recent report on competitiveness from the National Competitiveness Council (NCC) which identified high rental costs as one of the greatest obstacles to competitiveness.
The pressure on Irish property prices will likely add to the recent speculation on NAMA loan discounts. A story in today's Irish Independent indicates that banks have been given a stern warning in recent days on the security underlying their loans. It suggests that any loan not supported by property security is now carrying a discount in excess of 30% but banks have the option to go to court to clarify the security attached to the loan, which will limit the discount. However, our forecasts for the banks assume an aggregate discount in excess of the 30%; this translates into a haircut of 35% for ALBK and 27% for BKIR.
The declines in Irish property prices must also be viewed in the context of a return to growth in overseas property markets — which account for a third of NAMA loans — and in particular the UK, which has recently seen five consecutive months of property price increases."
Aer Lingus ; Investor Day – estimates moving back on slower cost saves realisation
Goodybody analyst, Eamonn Hughes, commented today on the Aer Lingus Investor Day in London. The airline today issued a statement to Stock Exchange: "On the revenue side, it is guiding some adjustments to its revenue management model: (i) AERL is looking to unbundle paid product options for passengers; (ii) It is looking to expand into currently un-served short haul markets, including through the Aer Arann franchise agreement; (iii) AERL is considering its long haul connectivity in the long term, particularly to Asia; and (iv) AERL is adopting a multi-channel distribution strategy tailored to each geographic market. Presumably, many of these attributes will take time to deliver meaningfully for the airline, which requires it to streamline it’s IT platform, and there’ll be more detail in the presentations. There is a second RNS this morning on the Aer Arann franchise agreement, much in line with recent media speculation.
On the cost side, we are slightly disappointed with the run rate on the cost saves from the group’s restructuring programme for 2010, though the wider target of €97m still holds. The run rate in the current year (FY10) on the staff cost side is guided at €40m and is c.€10m lower than we had in our models (though they reach an annualised run rate of €50m by year end) and the full saves by end 2012 are also a bit later than we hoped for. The non-staff saves are also trailing our estimates this year and next, with the full €23m run rate in place exiting 2011. The restructuring provision at €40m for this year matches the staff cost saves and our forecasts have 1x as well. Elsewhere, on costs, the fuel bill for FY09 is guided at €332m, circa €14m higher than in our estimates, though we can balance this having previously pitched our yield declines higher than guided earlier, leaving our FY09 Operating Loss (€-87m) broadly unchanged from earlier guidance. AERL is indicating that it has hedged 67% of FY10 fuel at €772/ton and 16% of FY11 at €762/ton, both modestly higher than in our model. AERL guides that fuel should be lower yoy in FY10, which looks right to us.
On the cash side, the statement focuses on gross cash, indicating €825m by end December, from €1,052m at end June. However, with some debt retired in H2, provisionally, the net cash position might not be too far wide of the mark on our €270m target. We presume there is more on that during the presentations.
On guidance for the year ahead, AERL still claims it is too uncertain, but anticipates that market conditions will remain “extremely challenging”, as per its early January trading statement. It fleshes this out by indicating that revenues will be lower yoy, though we are closer to flat (we have built in a surcharge in Long Haul). It also indicates that the severe weather disrupted bookings for Q1. After the early January IMS, we were hopeful the airline could generate a modest Operating Profit in FY10, but could now see a figure on the negative side of breakeven (provisionally, -c.€20m as our first cut). Having said that, the net cash position should still be stabilising in FY10, which is a critical issue. Provisionally, adjusting our estimates sees c.5-10 cent knocked off our fair value to c.€1.0. We await further commentary at the Investor Day"
President Obama announces initiatives to help middle class families, Jan 25, 2010:
US
The Wall Street Journal reports today that President Barack Obama intends to propose a three-year freeze in spending that accounts for one-sixth of the federal budget—a move meant to quell rising concern over the deficit but whose practical impact will be muted.
To attack the $1.4 trillion deficit, the White House will propose limits on discretionary spending unrelated to the military, veterans, homeland security and international affairs, according to senior administration officials. Also untouched are big entitlement programs such as Social Security and Medicare.
The freeze would affect $447 billion in spending, or 17% of the total federal budget, and would likely be overtaken by growth in the untouched areas of discretionary spending. It's designed to save $250 billion over the coming decade, compared with what would have been spent had this area been allowed to rise along with inflation.
US markets
On Monday, the Dow gained 24 points or 0.23% to 10,197.
The S&P 500 added 0.46% and the Nasdaq rose 0.25%.
Asia
On Tuesday, the MSCI Asia Pacific Index slid for a seventh day, dropping 2%.
The Nikkei 225 dipped 1.78% and China's Shanghai Composite dropped 2.42%.
Goldman Sachs downgraded Chinese bank stocks, saying a slowdown in economic growth and higher borrowing costs are “capping valuations until these overhangs are resolved.” China’s economy, which grew 10.7% in the fourth quarter, has led the recovery from the global recession.
Ratings agency Standard & Poor's today cut Japan’s sovereign credit rating outlook because of diminishing “flexibility” to cope with rising public debt and concern about the lack of a plan to rein in budget deficits.
The agency said policies set out by Prime Minister Yukio Hatoyama’s government“point to a slower pace of fiscal consolidation than we had previously expected.”
Japan’s rating could be cut if the government fails to announce measures to boost economic growth and cut debt, the firm said.
The Bank of Japan on Tuesday kept its policy target interest rate at 0.1% and also put decisions on other policy moves, on hold.
At the end of a two-day meeting, the central bank voted unanimously to leave the unsecured overnight call loan rate at 0.1%, where it has been since December 2008.
The decision follows the BOJ's launch in early December of a new program to offer up to around ¥10 trillion ($111 billion) in three-month funds to financial institutions at a fixed interest rate of 0.1%, to try to raise private demand by making more credit available to markets. There has been strong demand for those funds because the rate is low and banks wants cash heading towards the fiscal year-end on March 31st.
The BOJ also left its economic assessment unchanged, saying Japan's economy"is picking up mainly due to various policy measures taken at home and abroad."
The outlook for Japan is far gloomier now than it was three to four months ago, says Martin Schulz, senior economist at Fujitsu Research Institute. He offers his take on what the BoJ and the government need to do to support the ailing economy, with CNBC's Maura Fogarty:
South Korea's fourth-quarter GDP rose a seasonally adjusted 0.2% on quarter, falling short of analyst expectations, according to data issued today..
In Europe, the Dow Jones Stoxx 600 is down 0.64% Tuesday.
Siemens , Europe’s largest engineering company, today reported the highest quarterly profit in more than two years as the German company cut workers at its lighting unit and lowered administrative expenses.
Goodbody analyst Gerry Hennigan comments: Tullow Oil; Heritage approval, Ugandan choices - - "Heritage Oil announced this morning that shareholders at its scheduled General Meeting yesterday unanimously approved the disposal of its interests in Uganda. Completion of the transaction (total consideration of $1.5bn) now awaits approval from the Ugandan government, which has yet to rule on whether to accept the original Eni offer or accept Tullow’s pre-empted bid. Both bids are based on the same price and terms, with Heritage guiding a Q1 completion date for the transaction. The choice from the Ugandan government perspective would now appear to rest with accepting the development proposals outlined by Eni or a partnership with Tullow. According to the FT this morning, Tullow’s preferred partners to commercially develop the oil discovered around Lake Albert are the Chinese state oil company CNOOC and Total of France."
FY09 trading statement tomorrow.
"Tullow is due to release its trading statement tomorrow for the twelve months to December ahead of the publication of annual results on March 10th. While the current clear focus of attention surrounds events in Uganda, in the absence of a definite decision from the Ugandan government, and reports that a firm decision on the Heritage bid has been deferred for two weeks, much of the statement is likely to focus on recent and pending drilling activity and operational detail. With regard to the former, given results last week from Tweneboa-2 (Ghana) and Kasamene-2 (Uganda), drilling newsflow is more likely to address the inventory of prospects to be drilled over the coming months, rather than provide fresh newsflow. On the operational front, we anticipate detail on: (i) production; (ii) capex; (iii) net debt; (iv) hedge position; and; (v) the average realised price for the year (average FY09 Brent and UK gas prices of $62/bbl and 31p/therm, respectively).
In line with guidance, our forecast for average production for the year is 57.8 kbopd with an increasing bias towards oil (66%) as opposed to gas (34%). The trend over the recent past has been for a progressive increase in capex (FY09 & FY10 estimates of £750m and £650m), with the recent announcement that Tullow had secured additional $250m headroom on its debt facilities pointing towards an upward, rather than downward capex bias. Net debt at the end of October was outlined in the IMS in November as £664m, and compares to our year-end target of £773m. Aside from the above, sources of additional news beyond management efforts to pre-empt in Uganda, could well rest with portfolio management and new venture activity, areas in which Tullow has been active in the past."
Currencies
The euro is trading at $1.4083 and at £0.8677.
For live currency updates, check the right-hand column of the Finfacts home page.
The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.
The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009.
On Friday, the index rose 34 points or 1.1% to 3,204 - - and closed down 2.8% in the week.
On Monday this week, the BDI rose 19 points or 0.6% to 3,223.
The FT Alphaville blog reports that latest data, according to broker Icap, forecasts around 1,400 dry-bulk-carrier deliveries this year.
According to Icap, at no point during 2009 did the rate of delivery exceed 60 vessels in one month - - but even if this rate of delivery were maintained throughout 2010 it would still equate to slippage of around 50%.However, in light of the sheer size of the order book, and despite high levels of slippage, the market still faces the prospect of continued tonnage growth.
Goodbody's chief economist, Dermot O’Leary, comments: "Monetary policy decisions on both sides of the world will be the driver of markets over the next two days. Following on from last week’s jitters about the impact that tightening policy in China will have, the imminent implementation of higher bank reserve requirements continues to weigh on Asian markets in particular overnight (down 2%-3%). In the US, the two-day policy meeting gets underway today, with uncertainty still remaining over the approval of Chairman Bernanke for a second term in office.
Given that it is likely to be more of the same from the Fed in its statement tomorrow evening, this latter issue is likely to attract more attention than the former. There is no doubt that liquidity has played a very important role in the exceptional performance of equity markets over the last nine months and the removal of this liquidity is a threat to the market. However, tightening in China is a special case, with expectations that economic growth of up to 13% may be seen at some stage this year. It would be plain dangerous for officials there to fail to rein in some of the stimulus, as a bubble would, no doubt, emerge. Tightening of US policy would be a more dangerous phenomenon, but such a move still looks some way off at this stage.
In the last five recessions, interest rates did not rise until 22 months after the end of the recession, on average. This ranged from 14 months in the 1970s to 32 months in the early 2000s. Taking this historical precedent, adding in the amount of spare capacity that has to be worked through and taking on board the still rather dovish commentary from the Fed, leads us to believe that rates will not rise at all this year. We may see some withdrawal of some of the emergency operations in the US this year, but we would not change the view that we expressed in our Equity Outlook that this should not be a major issue until H2 of this year."
