Key Themes this Week. Earnings Focus. Major Markets Last Week. Monday, 23 rd January 2017

Transcription

1 Monday, 23 rd January 2017 Key Themes this Week The 45th US President Donald Trump was inaugurated last Friday as the 45th President of the US. Market reaction in the wake of his speech was relatively muted, with the S&P giving up some early gains from early in the session, and yields on US Treasuries declined following sharp moves higher in the middle of last week. The President struck a strong America first -protectionist tone within his inaugural speech, echoing that of the campaign, and causing the modest declines in the S&P. Overall, we await greater detail on the policy initiatives of the Trump administration, which have as of yet not been forthcoming. Watch out for currency moves Hawkish comments by Fed Chair Yellen last week, who noted the risks from prolonged low interest rates, were in stark contrast to the comments of Donald Trump, who stated that in his view the dollar was too strong. Trump had previously been critical of the Fed for its prolonged low interest rates policy, and called on the committee to begin raising rates. The contrast in the new President s comments highlight his lack of insight into the workings of financial markets, as higher interest rates in the US naturally lead to a stronger dollar given the loose monetary policy of major trading partners like the Eurozone. In our view, c.$1.05 is broadly reflective of the likely course of central bank policy in the US and Eurozone over the coming months. Similarly, we expect the rally in sterling which was seen in the wake of Theresa May s speech last week should be short lived. In our view, the UK economy is in the eye of the storm and has been enjoying robust economic data since the Brexit vote, boosted by the weakness in sterling. We expect this robustness to dwindle as the impacts of uncertainty and complications of negotiations take hold on the UK economy. We continue to expect sterling to trade back to 0.90 against the euro. Key data this week Another area of focus this week will be Manufacturing and Services PMI data in the US and Europe. Equally, the first reading of Q4 GDP for the US is also set to be released. Data in the US has been strong in recent weeks, boosted by the anticipation of a fiscal stimulus plan from the Trump administration. Earnings Focus Q4/16 earnings season picked up pace last week with the majority of US Investment Banks reporting results. Citigroup, JP Morgan, Goldman Sachs and Morgan Stanley beat analyst s earnings expectations primarily driven by a strong performance in each bank s Fixed Income, Currencies and Commodities (FICC) division due to increased client activity arising from President-elect Donal Trump s victory in November Citi saw bond, currency and commodity related income increase 36% on the quarter YoY to $3.01bn and was the highest level since before the financial crisis, however trading revenue within its equity division rose 1 to $694bn. Tight cost controls is a continued focus of management, and Citi s operating expenses fell 9% YoY to $10.1bn, coming in below analyst s forecasts of $10.2bn. Major Markets Last Week Value Change % Move Dow % S&P % Nasdaq % UK Index % DAX % ISEQ % Nikkei 18, % H.Seng 22, % STOXX % Brent Oil % Crude Oil % Gold % Silver % Copper % CRB Index % Euro/USD % Euro/GBP % GBP/USD % Value Change German 10 Year UK 10 Year US 10 Year Irish 10 Year Spain 10 Year Italy 10 Year BoE ECB Fed

2 Core Portfolio Changes David Donnelly, CFA Senior Investment Analyst In a bid to offer higher conviction equity calls to our clients, we are reducing the number of stocks in our Equity Core Portfolio to 20 as of today. These stocks will be equally weighted at each and have been drawn from the old Core Portfolio. We stress however, that these 20 represent our highest conviction calls facing into H1 of this year, and that our investment recommendation on 6 equities and 2 ETFs which have not made the top 20 list has not changed. We maintain the previous recommendation level of each of these names, but merely see greater potential in those included in the 2017 Core Portfolio. We outline the investment case for the new additions to the Core Portfolio over the next 2 pages. As such, we make the following adjustments: Removals Name Rating Performance YTD Kerry Group Outperform -2.1% Irish Continental Group Outperform +1.1% Exxon Mobil Outperform -6.1% Apple Market Perform +3.4% SAP Outperform +1.0% Prudential Outperform -4.7% Pfizer Outperform -2.2% Vodafone Outperform +3.1% ishares DAX ETF Outperform +1.1% Proshares Short S&P 500 ETF Outperform -1.1% Additions Name Rating Performance YTD Greencore Outperform -3. Inditex Outperform -3.9% Source: Bloomberg 2

3 2017 Core Portfolio David Donnelly, CFA Senior Investment Analyst 2017 Core Portfolio Name Price Fwd P/E Fwd Dividend Yield Target Weight Glanbia x 0.9% Greencore x 2.6 Ryanair x 0.3% Inditex x 2. Daimler x 4.9% Lloyds x 5.2% AIG $ x 2.1% Bank of Ireland x 3.2% Allianz x 4.9% Facebook $ x 0.0% PayPal $ x 0.0% Alphabet / Google $ x 0.0% General Electric $ x 3.1% Smurfit Kappa x 3.2% CRH x 2.1% Kingspan x 1.3% Royal Dutch Shell x 6. DCC x 2.0% GlaxoSmithKline x 5.2% Verizon $ x 4. Source: Bloomberg 3

4 Inditex - (Outperform) Addition to Core Portfolio Closing Price: 31 Will Heffernan Investment Analyst Key Metrics 2017e 2018e 2019e Revenue ( Bn) EPS ( ) P/E 30.3x 26.5x 23.5x Div Yield 2.2% 2.53% 2.84% Share Price Return 1 Mth 3 Mth YTD Inditex 0.48% -1.73% -4.42% Source: Bloomberg We are adding Inditex to the core portfolio. We believe the company is attractive from a growth perspective, has numerous competitive advantages over peers and has shown itself to be adaptable to the changing nature of retail. Inditex is one of the largest fashion retailers in the world, with eight brands and more than 7000 stores through the world. It employs over 150k people worldwide and has a presence in most major markets. The group s flagship brand Zara is easily recognisable but the company maintains several other brands to cater to different target markets Pull & Bear, Massimo Dutti, Berskha, Stradivarius, Oyosho, Zara Home and Uterque. It has several competitive advantages over its rivals but the most notable one is its unique business model. Unlike traditional fashion retailers they do not design and produce a large collection at the start of the season. Instead they commit to a small collection and results from customer feedback in order to amend or expand it. In order to do this it has one of the most efficient design and distribution networks in retail. It can design, produce and ship an entire collection to stores within the space of a fortnight. This has ensured that Inditex stores are consistently stocked with the latest on-trend fashions that are in high demand. The supply chain is exceptionally nimble in terms of both production and design changes. This allows them to charge a higher full price and discount less than their peers, reducing pressure on gross margins over the long run. In order to run a supply chain along these lines the ability to embrace technology is key. Inditex was one of the first retailers to realise the value add that can be gained from computing in the early 1980 s. It has continued this tradition recently with the widespread adaption of Radio Frequency Identification (RFID) by the chain. RFID allows for inventory management at much quicker speeds. A full stock check can be done in 1 of the original time. Importantly it allows a retailer to be able to quickly gauge what is selling and order more. Rollout of RFID to all Zara stores was completed by the end of 2016 and the company has plans to roll it out to all the other concepts starting with Massimo Dutti. RFID is also quite helpful when it comes to online shopping as it allows Inditex to operate a highly efficient Buy Online Pick Up in Store system by keeping a very accurate check on what each individual store has. Inditex has managed the move to omni-channel retailing (online & high street) very well and continues to see very good sales growth from its online platforms. It has in fact managed to keep pace with the big name online-only retailers in terms of online growth, a feat few other traditional high street fashion retailers have been able to do. All of this has led to consistent YoY revenue growth of c12% which is expected to continue until Unlike other retailers in the space, Inditex s like for like sales (LFL) growth has been driving this. LFL growth reduces the overreliance on new space growth which tends to be more cyclical. Historically, retailers in the fashion and apparel space have been too reliant on new space growth without paying enough attention to LFL growth and this is a trend Inditex will maintain going forward. The US also presents a great opportunity for Inditex in the medium term. Over the past few years US consumers have become substantially more fashion conscious due to the nature of social media platforms and the selfie generation. We believe that Inditex is well positioned to tap into this trend. From a valuation perspective it is currently trading on 31x FY17e earnings. Though this appears elevated at first, from a FCF point of view it consistently outranks peers in terms of cash generation and sales growth. It actually has the best FCF/Sales and sales growth combination in the space. Other retailers are cutting Capex as store openings stall or decline. Some are accelerating Capex in order to boost online capabilities or relocate stores to prime locations. Inditex is in a position to reduce Capex without necessarily affecting growth online sales are healthy and most stores are in prime locations. We believe Inditex will continue to be at the forefront of retail technology and will benefit from the secular shift from high street to online. It should retain the competitive advantage of its unique model as it is too difficult to replicate. This, allied with the group s ability to access multiple target markets through its various brands, leads us to believe it will outperform. 4

5 Greencore - Anticipate valuation gap to close Closing Price: GBp Stephen Hall, CFA Investment Analyst Key Metrics 2017e 2018e 2019e Revenue ( Bn) EPS (GBp) P/E 14.8x 13.3x 12.1x Dividend Yield % 3.0% Share Price Return 1 Mth 3 Mth YTD Greencore 6.7% -5.7% -4.3% Source: Bloomberg On the 30th of December, Greencore completed the acquisition of Peacock Food, the fast-growing US convenience food manufacturer which was previously announced on 14 th November for $747.5m. This accelerates the company s goal to be a fast growing, international convenience food leader. The deal was done at 10.4x EV/EBITDA, which drops to 10.0x when incorporating the benefit of the US tax asset and 8.5x when the $15m of proposed cost synergies are incorporated. This deal should be immediately accretive to earnings, and the targeted return is ahead of the cost of capital in year 1. We believe the rationale for the acquisition of Peacock is compelling. Firstly, the combined business has the potential to transform Greencore s market and channel position in the US and create a strong platform for long term profitable growth. The financial leverage of the business hasn t materially changed post the completion of the transaction; the newly combined Greencore will have a Net Debt/ EBITDA ratio of 2.5x. The acquisition will be immediately accretive to earnings, and the targeted return is ahead of the cost of capital in year 1. The combined company will be highly cash generative which will enable the enlarged Group to quickly deleverage its balance sheet and management remains committed to a progressive dividend policy with intended pay-out ratio target of 30-40% of earnings. Peacock manufactures convenience food products for large US consumer packaged goods ( CPG ) customers including Tyson Foods, Kraft-Heinz and Dole which increases the opportunity to cross sell products. Peacock operates from seven large, well-invested facilities with a track record of quality and safety, and expertise in automation, project engineering and packaging. This broader set of capabilities should create significant opportunities to bring new products to existing customers and to further develop new channels and customers. It also provides a range of services to customers alongside its core manufacturing offering, including processing and packaging, ingredient sourcing and materials management, project engineering and commercialisation, warehousing, and distribution. The organic growth prospects of Peacock s business look very attractive, as it operates within high growth segment of the market. It has a long standing relationship with its existing customers and has extended the length of contracts in recent years similar to Greencore s operations in the UK. It also has an impressive track record of revenue and earnings growth over the past 5 years. Management also sees the recent trend of outsourced manufacturing increasing in future years. The vast majority of the Greencore Group s facilities operate in a chilled supply chain environment, albeit certain facilities operate in ambient and frozen environments. Peacock is primarily focused on fast growing segments such as breakfast sandwiches, chilled meal kits and salad kit components which diversify its product offering. Greencore s existing US business supplies a range of convenience food products to US customers, particularly in the convenience channels coffee shops. Ultimately, we agree with management s assessment that the new deal will add significant scale to the combined business. Its portfolio of products are all situated in high growth segments of the food sector. The acquisition will open the business to new customers, new sales channels, extend its geographic reach and enhances its operating capacity which significantly de-risks the company in our view. Greencore is coming to the end of a heavy investment phase in the UK, meaning capex requirement should peak in FY17e, leading to a big step up in Free Cash Flow (FCF) generation from FY18e onwards. Greencore will be able to ramp up US sales without significant additional capex outlay which should improve operating leverage in the business and accelerate the deleveraging profile of the business. We are happy to pick up Greencore at current market prices. Greencore s CEO, Patrick Coveney at its EGM in December also said Brexit has had absolutely no impact on the business to date. The 12 month consensus target price is GBp , which offers investors 27.4% upside potential off current market prices if achieved. We feel valuations look reasonable too, currently trading at 14.8x FY17e earnings, dropping to 13.3x by FY18e. Greencore trades at a 24. discount to the broader Euro Stoxx 600 Food and Beverage Index at 19.6x FY17e earnings. 5

6 Green Reit - Still Trading at a Valuation Discount Closing Price: 1.28 Will Heffernan Senior Investment Analyst Key Metrics 2017e 2018e 2019e Revenue ($ Mn) EPS ($) P/E 14.1x 16.5x 17.4x Div Yield % Share Price Return 1 Mth 3 Mth YTD Green REIT -5.47% -7.91% -6.71% Source: Bloomberg In addition to the changes to the core portfolio we also wish to highlight Green REIT. Since its low in November it had recovered 16.. It has since sold off and is now 7. up on its November lows. Despite the recent recovery in share price it still trades at a 21.3% discount to the consensus January 2017 year-end NAV forecast at The current development pipeline is projecting a 39% return on cost in the current environment while the properties may add as much as 10c per Net Asset Value once complete. In December 2016, it announced that it has signed a lease agreement with an international business services provider for 100% of its newly refurbished office building at 32 Molesworth Street in Dublin 2. The building is roughly 32,000 sq. ft. and the agreement is for 20 years, with breaks in year 10 and 15, at a price of per sq. ft. It now has an unexpired lease term of 7.8 years. The REIT offers a dividend yield of 2.7%, ahead of the ISEQ Index average at 1.9% for FY17. Despite the recent recovery in its share price, we continue to see value at current market prices given its long visible rental income pipeline to high quality tenants including Vodafone and Pioneer Investments. 6

7 New Structured Product Offering Cantor Fitzgerald is proud to announce two new structured products for Q1, the Euro Blue Chip Kick Out Bond III and the Protected Star Performers Bond III. For more details please contact your Cantor Fitzgerald Ireland portfolio manager. Euro Blue Chip Kick Out Bond III The Euro Blue Chip Kick Out Bond III offers returns linked to the performance of four blue chip European equities: Adidas, Danone, Inditex and CRH. Investors can enjoy potential returns of up to 10% per annum (not-compounded). The product is a 5 year investment term, with 9 potential opportunities to redeem every 6 months form year 1 to the final valuation date. The guarantor of the product is the international investment bank Societe Generale (Moody s A2, S&P A, Fitch A). The product has a minimum investment of 10,000 and the closing date is 9th March Protected Star Performers Bond III The Cantor Fitzgerald Ireland Protected Star Performers Bond III (the Bond or Investment ) is a 5- year term Investment with 90% capital protection at the Final Maturity Date provided by BNP Paribas S.A. This Bond provides investment returns linked to the BNP Paribas MS - Allocation Fund Stars Index (BNPIAFST Index), which measures the performance of 4 leading investment funds which have been screened and selected by Morningstar. Each fund is equally weighted in the Index. The Index also has an innovative risk control mechanism which can automatically reduce exposure to the basket of 4 funds in times when their volatility is high and subsequently increase exposure to the basket of 4 funds when their volatility is low. This bond provides 170% exposure to the Index and the risk control mechanism can in turn provide further exposure of a maximum of 150%, thus the maximum potential exposure to the basket of funds is 25. 7

8 From the News - Monday Headlines Trump Attack on media sets tone for start of Presidency Paddy Power Betfair Revenue rises despite big customer wins Samsung Battery defects cause Galaxy Note 7 fires General Electric Eyes investment boost amid hopes of US tax reform France Left-winger tops ex-pm Valls in French Socialist primary Apple Main manufacturer Foxconn considering moving jobs stateside Cantor in The Media Bloomberg News Online: Bond Market Storm Builds Behind Wall Street's Serene Yield Call - Justin Lederer Clip 8

9 This Weeks Market Events The Week Ahead Monday Tuesday Wednesday Thursday Friday Corporate Corporate Corporate Corporate Corporate Green REIT - H1 Verizon - Q4 SAP - FY16 PayPal - Q4 ebay - Q4 Greencore - Q1 Chevron - Q4 Economic Economic Economic Economic Economic N/A EU - Composite PMI US - Manufacturing PMI GE - IFO expectations UK - Q4 GDP US - Services PMI US - Q4 GDP US - Durable Goods US - Consumer Sentiment Upcoming Events 30/01/2017 N/A 31/01/2017 Apple Q1, Pfizer Q4 01/02/2017 Siemens FY16 02/02/2017 Daimler FY16, RD Shell FY16, 03/02/2017 Intesa Sanpaolo FY16, 30/01/2017 EA Business Confidence, US CPI 31/01/2017 DE Unemployment Rate, EA 2016 GDP 01/02/2017 EA Manufacturing PMI, US Fed Meeting 02/02/2017 GB BOE Meeting, GB Inflation 03/02/2017 CN Manf. PMI, US Non-Farm Payrolls 9

10 Cantor Publications & Resources Daily Note Each day we produce a market commentary outlining critical economic and company developments. We leverage off our global network of analysts and investment professionals to provide clients with critical insights from our local teams first thing in the morning. Click Here Monthly Investment Journal Each month our Private Client and Research departments collaborate to issue a publication which highlights the performance of our flagship products, funds and our core portfolio, including the Green Effects fund, most recent Private Equity deals and structured product investment opportunities. Click Here Investor Podcast Series Cantor Fitzgerald Ireland regularly publishes updates to our Investor Podcast Series. Each podcast provides a timely review and analysis of the investment landscape and features contributions by sen-ior analysts and portfolio managers. To listen to the latest in our Investor Podcast Series click here 10

11 Regulatory Information Issuer Descriptions: (Source: Bloomberg) Greencore: Greencore Group plc manufactures and distributes a diverse range of primary foods and related products, food ingredients and prepared foods to the consumer and industrial sectors. Inditex - Industria de Diseno Textil, S.A. designs, manufactures and distributes apparel. The company operates retail chains in Europe, the Americas, Asia and Africa. Historical Record of recommendation Greencore: We have upgraded our recommendation for Greencore, to Outperform from Not Rated, as of 25/11/2015. Inditex - We have initiated coverage of Inditex with an Outperform rating, as of 23/01/2016. None of the above recommendations have been disclosed to the relevant issuer prior to dissemination of this Research. Date of distribution The first date of distribution is the same date as this report unless otherwise specified. All regulatory disclosures pertaining to valuation methodologies and historical records of the above recommendations can be found on the Cantor Fitzgerald Ireland website here: This material is approved for distribution in Ireland by Cantor Fitzgerald Ireland Ltd. It is intended for Irish retails clients only and is not intended for distribution to, or use by, any person in any country where such distribution or use would be contrary to local law or regulation. Cantor Fitzgerald Ireland Ltd ( CFIL ) is regulated by the Central Bank of Ireland. Cantor Fitzgerald Ireland Ltd is a member firm of the Irish Stock Exchange and the London Stock Exchange. Where CFIL wishes to make this and other Cantor Fitzgerald research available to Retail clients, such information is provided without liability and in accordance with our terms and conditions that are available on the CFIL website. No report is intended to and does not constitute a personal recommendations or investment advice nor does it provide the sole basis for any evaluation of the securities that may be the subject matter of the report. Specifically, the information contained in this report should not be taken as an offer or solicitation of investment advice, or to encourage the purchased or sale of any particular security. Not all recommendations are necessarily suitable for all investors and CFIL recommend that specific advice should always be sought prior to investment, based on the particular circumstances of the investor either from your CFIL investment adviser or another investment adviser. CFIL takes all responsibility to ensure that reasonable efforts are made to present accurate information but CFIL gives no warranty or guarantee as to, and do not accept responsibility for, the correctness, completeness, timeliness or accuracy of the information provided or its transmission. This is entirely at the risk of the recipient of the report. Nor shall CFIL, its subsidiaries, affiliates or parent company or any of their employees, directors or agents, be liable to for any losses, damages, costs, claims, demands or expenses of any kind whatsoever, whether direct or indirect, suffered or incurred in consequence of any use of, or reliance upon, the information. Any person acting on the information contained in this report does so entirely at his or her own risk All estimates, views and opinions included in this research note constitute CANTOR IRELAND s judgment as of the date of the note but may be subject to change without notice. Changes to assumptions may have a material impact on any recommendations made herein. Unless specifically indicated to the contrary this research note has not been disclosed to the covered issuer(s) in advance of publication. Past performance is not a reliable guide to future performance. The value of your investment may go down as well as up. Investments denominated in foreign currencies are subject to fluctuations in exchange rates, which may have an adverse affect on the value of the investments, sale proceeds, and on dividend or interest income. The income you get from your investment may go down as well as up. Figures quoted are estimates only; they are not a reliable guide to the future performance of this investment. Conflicts of Interest & Share Ownership Policy It is noted that research analysts' compensation is impacted upon by overall firm profitability and accordingly may be affected to some extent by revenues arising other CANTOR IRELAND business units including Fund Management and Stock broking. Revenues in these business units may derive in part from the recommendations or views in this report. Notwithstanding, CANTOR IRELAND is satisfied that the objectivity of views and recommendations contained in this note has not been compromised. Nonetheless CANTOR IRELAND is satisfied that the impartiality of research, views and recommendations remains assured. Our conflicts of interest management policy is available at the following link; Analyst Certification Each research analyst responsible for the content of this research note, in whole or in part, certifies that: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research note. R Dublin: 75 St. Stephen s Green, Dublin 2. Tel: ireland@cantor.com web : Twitter Linkedin : Cantor Fitzgerald Ireland Cantor Fitzgerald Ireland Ltd is regulated by the Central Bank of Ireland. Cantor Fitzgerald Ireland Ltd is a Member Firm of The Irish Stock Exchange and The London Stock Exchange..