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Markets: Ryanair's profit warning sends shares sliding; UK services jump
By Finfacts Team
Sep 4, 2013 - 12:06 PM

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Michael O'Leary, CEO of Ryanair (left) with Ray Conner, Boeing Commercial Airplanes president and CEO, Paris, June 2013.

Ryanair Holdings Plc today issued a trading update and cautioned that while it remains comfortable with its H1 guidance, a recent weakness in forward yields into Q3 suggests that there will be no upgrade to full year guidance, as the airline now expects the full year outturn will be at the lower end of its full year net profit range of €570m to €600m. However if fares and yields continue to weaken over the coming winter there can be no guarantee that the full year outturn may not finish at or slightly below the lower end of this range.

Ryanair's Michael O'Leary said: "As indicated during our Q1 results presentation on July 29, close in late bookings in July had been at weaker than expected yields due primarily to the heatwave in Northern Europe and weaker sterling/euro exchange rates. The close in booking pattern returned to some normality in August, which will ensure that our H1 guidance remains unchanged, which is for a small increase in H1 profits over the prior year H1 comparable.

However in recent weeks we have noticed a perceptible dip in forward fares and yields into September, October and November, which is we believe due to a combination of factors:

  • Increased price competition and some capacity increases in the UK, Scandinavia, Spanish and Irish markets;
  • The continuing effect of austerity and weak economic conditions across Europe;
  • Weaker sterling/euro exchange rates.

We will respond to this lower yield outlook by selectively reducing our winter season capacity, thereby cutting our full year traffic target from over 81.5m to just under 81m. We are also rolling out a range of lower fares and aggressive seat sales particularly in those markets mainly UK, Scandinavia, Spain and Ireland.

Ryanair remains confident that we will continue to hit our revised passenger targets albeit at lower fares and yields than originally expected. Accordingly it is prudent to advise shareholders that our full year profit after tax (PAT) guidance will now be at the lower end of our €570m to €600m range.

However even at or slightly below this full year number of €570m PAT, Ryanair cash flows and balance sheet remain in rude good health and there is no change to our recently announced plans to complete share buybacks of at least €400m (€177m already completed in FY March 2014) and up to €600m via a combination of dividends and/or buybacks in FY March 2015."

Ryanair shares have plunged 89 cent or 13% to €5.89.

Ryanair Weak yields see FY14 profit at lower end of guidance: Dónal O'Neill of Goodbody, comments -- "Ryanair has released a surprise trading update this morning highlighting; a) increased price competition in UK, Ireland, Nordics and Spain, b) weak economic conditions in Europe, and c) weak £/€. Ryanair had intended to park 50-60 aircraft in the winter, down from 80 last year, to allow it to grow to 81.5m passengers for FY14. It now intends to reduce that capacity growth assumption and will park 70 aircraft, which implies capacity growth of +2.7% in H214 versus the +5% expected to hit just below 81m passengers.

Management remains happy with the outlook for H114 profit, but now expects FY14 net profit to come in at the lower end of its €570m to €600m guided range. It has reiterated the strength of its balance sheet and said that there will be no change to its planned buybacks and dividends for FY14 and FY15.

This is a surprise statement from Ryanair and comes contrary to some of the commentary from the peer group and indeed Ryanair’s own commentary at its June investor days. Given the markets mentioned, we expect the price competition could be coming from Norwegian, Aer Lingus and IAG (Iberia and Vueling). We expect to downgrade our forecasts to somewhere in the range of €570-580m from €655m (- 14%) for FY14."

Irish Economy 2013: Services PMI back to 2007 level boosted by 'fake' exports

Eurozone services returned to growth in August; French activity shrunk

France like Ireland is run for the benefit of the old

SME interest rates dip in Italy and Spain

Irish Economy 2013: Budget deficit at €7.3bn year to-date in August

August’s survey of UK service providers signalled continued strong growth of activity and new business. Activity rose at the sharpest pace since December 2006, while growth in new work was the best seen since May 1997.

Capacity continued to be tested, with backlogs of work rising at the sharpest pace for over 13 years.

However, employment broadly stagnated, in part due to an inability of service providers to replace leavers.

The headline seasonally adjusted Business Activity Index registered 60.5 in August. Improving on July’s 60.2, the latest reading was the highest in over six and-a-half years. Over a quarter of the survey panel registered an increase in activity.

Latest data showed that growth was principally supported by a rise in new business. There were many reports of an ongoing strengthening of market confidence which helped companies convert enquiries into hard contract wins. Marketing and an improvement in the housing market were also noted as reasons for higher sales volumes.

Growth of new business has now been recorded for eight successive months and the latest increase was the sharpest seen for over 16 years.

Economic View: Tight expenditure control means public finances well on track; Dermot O'Leary of Goodbody comments - - "Unlike in 2012, tight control of public spending continues to be the main feature of the latest Exchequer Returns, released yesterday evening. As a result, Ireland looks well on track to hit budget deficit targets for 2013 overall.

Gross voted spending fell by 3.4% yoy in the first eight months of the year, coming in some €531m below original government estimates. It is encouraging to see the restraint in current spending (down 3% yoy), but not so welcome is the 13% yoy decline in capital spending, putting spending 14% below expectations in the year to date.

Tax revenues are running modestly below (€57m or 0.2%) expectations. Within this, VAT receipts are the biggest underperformer (down 0.4% yoy and €245m behind expectations). Corporation tax is the big outperformer, coming in €242m ahead of expectations.

Excluding one-off items such as bank capital injections, bank guarantee fees and Central Bank income, we estimate the deficit fell from €11.6bn in August 2012 to €10.1bn in August 2013. Although Budget 2014 will be subject to a greater degree of uncertainty this year due to its earlier timing, the government looks on track to beat its 7.5% of GDP budget deficit target for 2013. See our note this morning for more details."

AIB Group Launches €500m covered bond, priced at MS+180bps: Eamonn Hughes of Goodbody comments - - "AIB yesterday announced that it has completed a €500m 5-year ACS issue at MS+180bps. AIB indicates that the deal was placed with c.90 international investors. Goodbody Capital Markets was co-manager on the transaction. The issue was part of the bank’s €20bn mortgage covered securities programme.

The deal pricing compares to the 3 year MS+270bps issue in late November last year and 3.5 year issue in January at MS+185bps. So the pricing reflects the improvement in recent months for Irish paper, as the economy stabilises and house prices turned positive for the first time in 5 years on an annual basis in June (was also positive in July).

The Irish banks need to wean themselves from monetary authority funding in due course. In June, monetary authority drawings totalled 16% of financial liabilities at AIB compared with 9% at BOI, so the margin headwinds on normalisation will be higher at the former. Having said that, Irish banks continue to issue term funding at rates cheaper than we model into our forecasts (average just under 4%), so supporting our margin improvements thesis at the banks."

Banks: AIB CEO appears at Oireachtas Finance Committee hearing: Eamonn Hughes and Colm Foley comment - - "As flagged yesterday, AIB’s CEO appeared before the Oireachtas Finance Committee yesterday. BOI and Ulster Bank are pencilled in today and PTSB for tomorrow. The main focus was the mortgage market and progress with distressed borrowers.

AIB indicated that it met the Central Bank’s target of 20% of mortgage customers in arrears receiving a sustainable solution in Q2. This would require the bank to offer 6,200 solutions in Q2, but the bank made 8,600 offers. The latter included 5,894 customers that were threatened with legal action since these customers were typically in arrears for between 2.3-3.0 years and had consistently failed to contact the bank. Since the point of contact about 20% of these customers had recommenced repayments. He outlined that 14,000 customers that had slipped into arrears this year are now back on track but that one-quarter of buy to let customers had made no repayments in the past 6 months. On the latter, the bank indicated it needs to set up action on rent receivers. He reiterated the comments that c.20% of customers in arrears were strategic defaulters and for instance noted that 2,000 customers in arrears had deposits greater than the amount of their arrears. He wrapped up by indicating that AIB had agreed permanent solutions with 4,400 accounts and that a total of 12,500 offers have been made to customers in relation to resolving arrears. On capital, the CEO indicated that it expected to pass the stress tests planned for next year.

The CEO indicated that mortgage write-offs in H1 were €38m, already itemised in the H1 results. We estimate that AIB has written off €161m of residential mortgages over FY10-H113, which equates to just 5% of the €3.385bn stock of provisions in June. We would anticipate write-offs ultimately equate to provisions."

US Markets

In New York Tuesday, the Dow rose 24 points or 0.16% to 14,834.

The S&P 500 added 0.42% and the Nasdaq advanced 0.63%.

Asia Markets

The MSCI Asia Pacific Index rose 0.3% Wednesday.

Japan's Nikkei 225 gained 0.54%; China's Shanghai Composite rose 0.21%; Korea's Kospi index slid 0.04%; Australia's S&P/ASX 200 slipped 0.27% and in Mumbai, the Bombay Stock Exchange the S&P BSE India Sensex Index climbed 1.76%.

Europe Markets

In Europe, the Dow Jones Stoxx Europe 600 fell 0.52% in mid-morning trade Wednesday.

In Dublin, the ISEQ is down 2.44% because of the Ryanair tumble.

European Benchmarks

Irish Share Prices

Key Index Performance Statistics

Euribor Rates

AIB Daily Report

Bank of Ireland Daily Report

Currencies

The euro is trading at $1.3175 and at £0.8431.

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.

Commodities

The Baltic Dry Index, a measure of shipping costs for dry commodities, hit an all-time High of 11,771 on the 21st of May, 2008. From that time it reversed and on the 5th of December, 2008 it hit a low of 663 - - close to a 1986 low.

On Thursday, July 15, 2010, the index fell for the 35th straight session, by 9 points, or 0.537%, to 1,700 points, Bloomberg report.

On Tuesday, the BDI rose 29 points 2.25% to 1,168.

Global rebalancing — the tanker scrapyard index?

Crude oil for October 2013 delivery is currently trading on the Chicago York Mercantile Exchange (CME/Nymex) at $107.73 down 81 cents from Tuesday's close. In London, Brent for October delivery is trading on the International Commodities Exchange at $115.02. The North Sea benchmark accounts for two-thirds of the global market.

Finfacts, July, 15, 2013:  US West Texas Intermediate oil benchmark jumps in July - - margin between WTI and Brent falls.

Gold spot price

The spot price of an oz of gold is trading on the CME in Chicago at $1,403.50 down $8.50 from Tuesday's closing.

Gold had hit a record high of $1,921.15 a troy ounce on Sept 06, 2011.

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