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Morning Wrap
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Dragon Oil Q3 IMS - Rising cash pile, despite higher capex
Equity Research
14 Oct 2014
Upcoming Events
Company Events
14-Oct
Economic View Modestly expansionary budget likely to be
announced today
16-Oct
UK Economic View BRC retail sales disappoint in September
17-Oct
21-Oct
Bellway; Q4 2014 Results
SABMiller; Q2 2015 Results
Bwin.Party; Q3 2014 Results
Diageo; Q1 2015 Results
Iluka Resources; Q3 2014 Results - Production Report
Mondi; Q3 2014 Results
Syngenta; Q3 2014 Results
Travis Perkins; Q3 2014 IMS
William Hill; Q3 2014 Results
PetroNeft Update on Drilling activity
Builders Merchants Carpetright / Bellway point to robust activity
levels in the UK
Wolseley Kesko highlights difficult markets in Finland
SIG Further disposal of non-core assets
C & C Group SABMiller sees Europe weaker in Q2
CPL Resources Positive trends in Morgan McKinley employment
monitor
Economic Events
Ireland
14-Oct
Budget 2015
United Kingdom
14-Oct
BRC Sales Like for like YoY Sep
CPI YoY Sep
15-Oct
ILO Unemployment Rate 3 mths Aug
United States
15-Oct
US Fed Release Beige Book
Retail Sales Advance MoM Sep
Empire Manufacturing Oct
17-Oct
Univ of Michigan Confidence Oct
Europe
14-Oct
16-Oct
ZEW Survey Expectations Oct
CPI YoY Sep
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Goodbody Morning Wrap
Dragon Oil Q3 IMS - Rising cash pile, despite higher capex
With average production for Q3 and September (80.5 kbopd and 82.5 kbopd respectively)
previously outlined on October 10th, the focus of attention in the Dragon Oil IMS this
morning largely relates to commentary regarding capex, the Q3 net cash position, the
enhanced recovery programme and marketing.
Cash balance, net of abandonment liabilities, amounted to $1.9bn as of September, relative
to the $1.8bn recorded in June and our year-end target of $2.0bn ($2.7bn gross
expectation). Q3 net entitlement of 55%, relative to 52% in H1 and an annual estimate in
our model of 45%, reflects higher capex spend ($171m in Q3), given an average realised Q3
price of $85/bbl, directly in line with our estimate for H2. Capex guidance for 2014 has been
increased to $600m from $500m previously, with a further c.$100m outflow for exploration.
$2.0bn in capex is now guided over the period 2014 – 2016, up from $1.5bn previously.
While much of the latter reflects increased exploration activity, we would stress that the
higher spend in Cheleken is recouped through the PSA.
The gradual roll-out of the water injection programme and installation of jet pumps continues
to elicit favourable commentary, even if hard data on the impact of the programme is largely
absent. The intention now is to add electrical submersible pumps to those programmes in
H2’15. There is no update on the distribution arrangement with Socar, which expires at the
end of the year, and limited incremental commentary on the Petroceltic approach.
As expected, confirmation on annual production growth guidance in the range of 10% - 15%,
and target production of 100 kbopd by 2015 is re-affirmed. We would add that just five of
the six new development wells brought on stream in Q3 were on production, the sixth being
suspended. Despite that, average production achieved in September was 82.5 kbopd
(previously outlined) proving a degree of confidence in the guided exit rate for the year of 87
– 90 kbopd.
On balance, with much of the positive newsflow in terms of production growth
outlined on Friday, data points of note are limited. That said, the rising cash pile,
despite a dividend yield of almost 5%, continues to demonstrate the cash
generative nature of Dragon’s Caspian Sea asset.
Home…
Page 2
14 Oct. 14
Recommendation: Buy
Closing Price: £5.38
Gerry Hennigan
+353-1-641 9274
gerry.f.hennigan@goodbody.ie
Goodbody Morning Wrap
Economic View Modestly expansionary budget likely to be announced today
Irish fiscal policy has proved in the past to be a contributory factor to boom-bust episodes in
the Irish economy. Electoral cycles had a big role to play in this and with the next general
election in two years’ time, there was always a risk that Budget 2015 and 2016 was going to
Dermot O’Leary
+353-1-641 9167
dermot.c.oleary@goodbody.ie
be more about political gains than economics. Latest reports suggest that the Minister is
stretching prudence in the Budget 2015 package to be announced at 2.30pm today, although
the 3% budget deficit target will still be achieved.
As is often the case in Ireland, most of the major details of the budget have already been
leaked at this stage. There will targeted spending measures announced in the areas of social
housing and education. On the taxes side, the top rate of tax is likely to be cut by 1% while
there may also be changes to the universal social charge. Important announcements are also
expected in relation to the corporation tax regime. Following the recent furore over water
charges, some form of tax relief is likely to be announced on this front.
While we have been advocating a neutral budget, which in our view would allow
the budget to fall to 2.1% of GDP next year, it is clear that Budget 2015 will be
modestly expansionary. According to the Irish Times, the Budget will contain fiscal
easing of €1bn in total, with €500m in tax measures and €500m in spending
increases. With a 2.7% of GDP target, the Government cannot be accused of being
reckless, but our preference would have been to make further progress towards a
primary surplus that would put the debt on a steadier downward trajectory.
Moreover, the clamour for higher spending and tax cuts is only likely to get louder
in Budget 2016.
Home…
UK Economic View BRC retail sales disappoint in September
BRC retail sales disappointed in September with like-for-like values falling by 2.1% yoy
versus expectations of a 1% yoy increase. This is the largest decrease since April 2013. In
total, retail sales values fell 0.8% yoy. In line with recent trends, the weakness is driven by
food sales, which in total fell 1.7% yoy, while the non-food sector rose 3% yoy. However,
the BRC also noted weakness in Clothing & Footwear sales with the unseasonably warm
weather weighing on sales of autumn and winter clothing.
The recovery in consumer spending in the UK has been underpinned by the
strength of the labour market which is expected to continue. However, the very
competitive landscape in the supermarket sector is likely to continue to have a
negative impact on the value of food sales.
Home…
Page 3
14 Oct. 14
Juliet Tennent
+353-1-641 9469
juliet.c.tennent@goodbody.ie
Goodbody Morning Wrap
PetroNeft Update on Drilling activity
PetroNeft provided an update this morning on drilling activity in Siberia in which it outlined
Recommendation: Buy
that the vertical section of the T-5 well on the Tungolskoye field has been completed ahead
Closing Price: £0.06
of scheduled drilling of the horizontal section. 8.2m of net oil pay was encountered, which
flowed at a rate of 100 bopd. Post completion of the horizontal section, which is likely to take
3 – 4 weeks, PetroNeft hopes to achieve a much higher flow rate. Assuming a successful
outcome, it is anticipated that the well can be brought into production in December / January
Gerry Hennigan
+353-1-641 9274
gerry.f.hennigan@goodbody.ie
once winter roads are in place.
Separately, drilling has commenced on the first new production well on the Arbuzovskoye
field, a process that is expected to complete by the end of the month. In total, the schedule
of activity calls for 3 to 5 wells to be brought on stream over the coming months.
The recommencement of drilling activity by PetroNeft reflects an easing of funding
restrictions post the farm-down to Oil India. The challenge now is to demonstrate
that management can lift production towards licence processing capacity of c.14
kbopd.
Home…
Builders Merchants Carpetright / Bellway point to robust activity levels in the UK
Carpetright has released a trading update for the 11 weeks to October 11th. Lfl sales in the
UK have increased by 7% yoy compared to 6% in the 13 weeks to July. In the European
business, which includes Ireland, Belgium and the Netherlands, the trend in lfl’s has also
improved coming in at -0.5% in the last 11 weeks versus -3.5% in the 13 weeks earlier.
Continued focus on promotional activity has driven strong sales growth in the UK and
management notes that trading in Europe continues to improve particularly in the
Netherlands. As a result, both the Dutch and Belgian businesses will be profitable in H1.
In its FY14 results (July end), Bellway reported a 34% increase in sales (split H1 40%, H2
29%) which beat consensus by 1.3%. Pre-Tax profits are up 75% on last year and were 3%
ahead of consensus. The company remains positive on the outlook for the UK with a record
forward order book (+36% yoy) and expectations for 10% volume growth in 2015 (21%
2014, split 25% H1 / 18% H2).
Overall, the updates from both Carpetright and Bellway point to robust trends in
the UK, albeit at more mature rates of growth, all of which has a positive read
through for Grafton, Howden Joinery, SIG and Travis Perkins. Indeed, we get the
first direct update on the sector from Travis Perkins on Friday when it issues a Q3
IMS.
Home…
Page 4
14 Oct. 14
Robert Eason
+353-1-641 9271
robert.v.eason@goodbody.ie
David O’Brien
+353-1-641 9230
david.a.o’brien@goodbody.ie
Sarah Reilly
+353-1-641 6080
sarah.k.reilly@goodbody.ie
Goodbody Morning Wrap
Wolseley Kesko highlights difficult markets in Finland
Kesko has reported that sales in its Finnish Building Materials distribution business (No.1
player ahead of Wolseley) declined by 3% in September. As there was one extra trading day,
we estimate the underlying figure was nearer c.7%, representing the third consecutive
month of decline.
In the recent results presentation, Wolseley’s management noted the challenging
Recommendation: Buy
Closing Price: £31.48
Robert Eason
+353-1-641 9271
robert.v.eason@goodbody.ie
backdrop in Finland (3-4% of group sales), while trends were more positive in
Denmark and Sweden (6-7% and 3-4% of group sales, respectively). As a result,
Wolseley’s management expects lfl sales to be slightly positive in the Nordics,
which is consistent with our estimates.
Home…
SIG Further disposal of non-core assets
SIG has announced this morning that it has disposed of ICE Energy, a specialist designer and
Recommendation: Buy
installer of ground source heat pumps and solar PV systems. This business has faced difficult
Closing Price: £1.47
market conditions following a disappointing uptake of the UK Government’s Renewable Heat
Incentive Scheme.
The consideration for the divestment is a nominal cash payment of £1, with a potential earnout of up to £5m, dependent on performance to Mar-19. In addition, SIG is providing a
£0.85m interest bearing loan, payable in 5 years. The disposal will lead to an exceptional
charge of £8m (£1m cash), of which £3.3m was recognised in H114.
The disposal of ICE Energy follows a similar announcement in the first half that it
had sold Miller Pattison, another non-core asset. This will allow the group to focus
solely on its core distribution businesses.
Home…
Page 5
14 Oct. 14
Robert Eason
+353-1-641 9271
robert.v.eason@goodbody.ie
Goodbody Morning Wrap
C & C Group SABMiller sees Europe weaker in Q2
SABMiller said it saw a 5% increase in its net producer revenue (NPR) in H1 to end
September, though this slowed to 3% in Q2. Most of the growth was derived from
developing regions. In Europe, NPR fell 2% in Q2 though was still positive for the half year.
The UK saw strong growth (+11%) driven by sales of the Peroni Azzurro brand, while some
of the continental markets were adversely impacted by poor peak summer weather. In the
US, revenues increased by 2%, with growth in premium products, including its Reds (apple
Recommendation: Hold
Closing Price: €3.93
Liam Igoe
+353-1-641 9450
liam.a.igoe@goodbody.ie
flavour beer) and Smith & Forge Hard Cider brands offsetting weaker sales in some of the
core beers.
The update from SABMiller underscores the fact that the core beer markets for the
big brands remain challenging, with growth coming from niche premium products,
including cider. C&C reports its H115 results on 29 October in which we expect
contrasting performance in the US (negative) and Ireland (improving) to be a
highlight.
Home…
CPL Resources Positive trends in Morgan McKinley employment monitor
Morgan McKinley released its monthly employment monitor for September today.
Professional jobs available rose by 30% yoy while at the same time the number of
candidates seeking jobs has fallen 23%. The squeeze has led to higher incidences of counter
offers and increasing salaries. It is worth noting that it this is not just happening in a few
sectors but is prevalent across all sectors “from finance to tech, engineering and HR”.
The results of the employment monitor reinforce our positive view on CPL. We
expect to see wage pressure to increase going forward following an extended
period of low or no wage growth from employers.
Home…
Page 6
14 Oct. 14
Recommendation: Buy
Closing Price: €6.80
Colm Foley
+353-1-641 6042
colm.j.foley@goodbody.ie
Goodbody Morning Wrap
Market Data
Top 10 Covered Companies
Company
AIB Group
Price
Mkt Cap
(LC)
(LCM)
1 Day
1 Week
Absolute
1 Mth
Relative to European Sector
P/E
Ytd
1 Day
1 Week
1 Mth
Ytd
2014f
2015f
0.10
52,621
-3.8
-4.7
-12.2
-9.8
-3.8
-0.4
-6.0
-7.9
76.5
86.6
CRH
16.22
12,057
-1.3
-8.9
-12.6
-11.4
-1.3
-4.8
-6.4
-9.5
18.8
14.4
Wolseley
31.48
8,391
0.7
-4.0
-3.9
-8.1
0.5
-0.2
3.9
-1.2
17.0
14.2
6.74
9,332
-0.3
-10.5
-10.8
7.6
-0.3
-6.5
-4.5
9.8
17.9
13.4
52.41
9,214
0.2
-3.7
-5.8
3.8
0.2
0.6
0.9
5.9
18.9
17.0
Bank of Ireland
0.28
8,970
-1.1
-10.4
-13.7
9.9
-1.1
-6.3
-7.6
12.2
18.7
13.0
IAG
3.24
6,013
-0.4
-12.7
-13.3
-19.3
-0.4
-8.8
-7.2
-17.6
n/m
n/m
13.40
5,296
-0.6
-8.7
-3.9
-12.8
-0.8
-5.1
3.8
-6.2
n/m
n/m
Tullow Oil
5.30
4,818
0.7
-12.9
-25.1
-38.1
0.3
-9.8
-18.1
-31.3
9.7
12.7
Mondi
9.66
4,690
1.0
-4.0
-9.1
-7.6
1.0
0.3
-2.7
-5.7
11.5
11.1
Ryanair
Kerry Group
easyJet
ISEQ performance
Indices
Price
1 Day
1 Week
1 Mth
Ytd
5,200
ISEQ
%
4,462.65
-0.61
-7.37
-8.96
-1.69
5,100
FTSE 100
6,366.24
0.41
-3.01
-6.47
-5.67
DAX 30
8,812.43
0.27
-4.31
-8.69
-7.74
CAC 40
4,078.70
0.12
-4.85
-8.17
-5.06
4,700
FTSE Eurofirst 300
1,293.91
0.07
-4.17
-6.44
-1.71
4,600
Nasdaq
4,213.66
-1.46
-5.41
-7.75
0.89
S&P 500
1,874.74
-1.65
-4.58
-5.58
1.43
Dow Jones
16,321.07
-1.35
-3.95
-3.92
-1.54
Nikkei 225
15,300.55
-
-3.72
-4.06
-6.08
Px 1 day Px 1 Week
5,000
4,900
4,800
4,500
4,400
4,300
4,200
Oct-13
Jan-14
Apr-14
Jul-14
Exchange Rates
Px Dec13
Avg Ytd
Stg/€
Current
0.790
0.788
0.785
0.832
0.811
US$/€
1.268
1.263
1.257
1.378
1.351
CHF/€
JPY/€
STOXX 600 performance
1.208
1.210
1.213
1.225
1.218
350
136.132
136.253
137.222
144.829
139.424
345
340
Bonds
335
330
Yield
1 Day
Yld 1 Wk
Yld 1 Mth
Yld 3 Mth
325
US 2 Yr
0.42
-
-0.10
-0.14
-0.02
320
US 10 Yr
2.28
-
-0.14
-0.33
-0.24
315
UK 2 Yr
0.53
-0.03
-0.10
-0.15
-0.30
UK 10 Yr
2.17
-0.05
-0.19
-0.36
-0.44
BD 2 Yr
310
-0.05
0.01
0.03
0.01
-0.06
BD 10 Yr
0.85
0.01
-0.01
-0.19
-0.35
Irish 10 Yr
1.71
0.02
0.06
-0.14
-0.59
Commodities
%
1 day
5 day
1 Mth
1 Yr
88.89
-1.46
-2.72
-8.46
-20.12
Gasoline (NYM $/Gal)
2.26
-0.10
-2.72
-10.46
-15.47
Heat Oil (NYM $/Gal)
2.56
-0.13
-0.74
-6.70
-15.75
Nat.Gas
3.92
1.48
1.58
1.53
3.71
1,229.00
0.82
0.99
-0.20
-2.88
17.41
0.87
0.35
-6.60
-19.10
6,802.00
1.57
0.70
-0.79
-4.53
5.05
1.35
-0.49
0.55
-27.01
Gold $/oz
Silver $/ozt
Copper U$/MT
Wheat $/BU
Source : FactSet
Page 7
14 Oct. 14
Jan-14
Apr-14
Jul-14
FTSE 250 performance
Current
Brent (ICE $/bbl)
305
Oct-13
17,000
16,500
16,000
15,500
15,000
14,500
Oct-13
Jan-14
Apr-14
Jul-14
Goodbody Morning Wrap
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Goodbody Morning Wrap
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14 Oct. 14