Morning Meeting Wrap

In today's Morning Meeting Wrap:

Quick Links
Economic View	Pressure from industrial action must be resisted
Tullow Oil	FY09 Results - No surprises
Glanbia	FY09 results in-line
CRH	Short-term extensions holding back highway funding in the US
Ryanair	US sector rises on yield improvements
Aer Lingus	Two steps forward, one step back!
Irish Financials	Outline verdict end this month from Brussels? / Timing on 3rd force drifting?
Grafton	Merchanting volumes, not surprisingly, affected by snow in January
United Drug	Medco home healthcare JV opens for business
Irish Life & Permanent	Standard Life FY09 Results
ICG	DFDS has identified the Irish sea as a priority for the Norfolkline acquisition

Pressure from industrial action must be resisted

With a plethora of countries in a similar position of late, we are learning some of the unfortunate consequences of a fiscal crisis for the countries involved. When significant sums are needed from international lenders to fund large budget deficits, a key lesson is that power, not literally, but effectively, is removed from national parliaments into the hands of these lenders. The consequences of a government not accepting such a reality is that bond markets would become closed to debt being issued by that country. This has been the fate of Greece over the past few weeks, where the bond markets and then the EU forced its government into further clear austerity measures to reduce its budget deficit. Bond markets had a similar effect on forcing the Irish government into painful, but necessary, reforms in 2009 too. For this, the Irish government has received a lot of credit, be it from organisations such as the ECB or the European Commission, or indeed as reflected in the reduced risk premium paid on Irish Government debt over the past twelve months. This has been in stark contrast to the types of pictures that have been flashed across the world from the protests seen in Athens over the past few weeks. It is unfortunate then that what seemed like a modest level of protests from some Irish public sector workers looks to be developing into something bigger, with announcements of strike action yesterday by some health service workers and actions being taken by other departments. The motivation is to reverse some of the pay cuts that were introduced in the Budget last December. Everyone has a right to express their grievances but these actions will prove to be pointless and are counterproductive. With public sector pay having accounted for one-third of expenditure, the government had little choice but to target this area to achieve required savings and did not have the luxury of invoking these changes over a number of years as was suggested by the public sector unions. The government has clearly stated that changes made will not be reversed. In truth, it has stuck to its word on these issues over the past twelve months and must do the same in the face of these actions. It doesn't have many other options.

FY09 Results - No surprises

As expected, much of the interest in the Tullow FY09 results statement this morning rests on incremental newsflow, rather than the results. In that regard, however, there was little in the way of additional news. Expectations of Ugandan government approval of the pre-emption process, and the subsequent farm-out of Tullow's interest, are anticipated in the coming weeks with both Total and CNOOC in the frame. The suggestion also is that in each partner will have an equal share, with the Ugandans thus succeeding in their objective. Further confirmation is given of first oil from Jubilee by Q4. The total resource base at the end of 2009 was 831.0 mmboe marginally up on the 825.4 mmboe recorded at the end of 2008. As reported over the past week, discussions are taking place with regard to the Kudu gas field offshore Namibia, which may result in Tullow reducing its stake from 70% to c.30%. On the exploration front, no new results are provided with the Likonde-1 well in Tanzania and the Shekhan-1 well in Pakistan still drilling. Variations between the actual results and our forecasts, which were broadly in line with consensus, largely reflect a lower tax charge. Reported PBT of £20.3m compared to our estimate of £16.9m. The lower tax charge, however, contrived to produce adjusted EPS of 6.8p against a forecast of 5.5p. On the balance sheet, net debt of £718.3m was, as guided in the January 27th trading statement (debt/equity of 47%, albeit pre the rights issue in January), while a final dividend of 4.0p was declared, which is directly in line with that declared in H2 and for the full year last year.With results broadly in line with our projections and guidance already provided in terms of full year production (55 - 57 kbopd) and capex (£990m), adjustments to our 2010 forecasts are likely to be limited. That said, with discussion in the post results conference call (9.00am GMT) likely to concentrate on: (i) the commencement of production in Ghana; (ii) the farm-out process in Uganda; and (iii) the inventory of drilling prospects targeted over the rest of the year, the market will be sifting through management commentary and the prospective inventory for potential catalysts for the share price.

FY09 results in-line

Glanbia's FY09 results this morning were in-line with expectations, with adjusted EPS of 30.7c compared with 31.0c forecast. Glanbia's nutritional ingredients operations, which included Optimum Nutrition for the full year in FY09 (extra six months), increased operating profit by c.5% yoy. The business has been integrated well into Glanbia which has continued to grow the nutritional business by c.8% though the recession. However, the USA cheese operations have had to contend with weaker prices from 2008, which has impacted reported sales and profits for the Idaho cheese business as well as the New Mexico cheese JV. US cheese prices did improve sequentially into H209, though they remained at levels below those prevailing in H208. The two main Ireland businesses have also had contrasting performances, again determined by the movement of dairy product pricing. The bulk ingredients business suffered its largest ever loss in FY09 due to the sharp fall in international dairy commodity prices in 2008/9, and the fact that milk price reductions were insufficient to offset these falls. However, the performance in H209 in this area was close to break-even as commodity prices eased up later in the year. Given the earnings volatility in the bulk ingredients division, management is investigating the possibility of a disposal to the co-op of the dairy Ireland businesses which would generate the double headed positive of: (i) removing a low margin, volatile business; and (ii) possibly increase liquidity in the medium term. Glanbia provided limited details in terms of outlook. However, with the results broadly in-line with our expectations, we expect to make only minimal adjustments to our FY10f EPS (excluding the potential impact of a disposal of the Irish Dairy business). We expect that the market will view these as a strong set of results and anticipate a positive share price performance, driven by the positives attributable to the disposal of the Irish Dairy business.

Short-term extensions holding back highway funding in the US

The uncertainty over highway funding in the US caused by the core federal programme operating under short-term extensions is apparent again in the obligated data, as states / local transportation agencies remain reluctant to commit funds to projects. In the five months to the end of February over $11bn has been obligated to highways, up from $9.5bn in FY09. However, without the stimulus funds from the American Recovery & Reinvestment Act, this would have only been $4bn, less than half the 2009 figure. This not only highlights the importance of the stimulus funds, but how critical it is for the Senate to vote on measures this week that would extend the core federal highway programme to the end of the current fiscal year and inject funds into the highway trust fund. Any progress on the latter will be positive for heavy side companies like CRH, for which infrastructure represents circa 40% of its US business.

US sector rises on yield improvements

On Monday evening, United Airlines published February traffic statistics. Consolidated load factors were up 5.7 percentage points in the month, but the headline grabber was the estimate of PRASM (passenger revenue per available seat mile) up 17-19%, well ahead of expectations. Commentary at an industry conference yesterday, highlighting international premium bookings up 25% yoy in the month, set the stock alight, up 8% initially yesterday before drifting back. In addition, Delta indicated 16% unit revenue growth is forecast for March from 8% in February and American led the sector yesterday - up over 9% - with comments that preliminary data showed that its February unit revenues were up 6.5-7.5%. Overall, the US airline sector was up nearly 3%. Cathay had results out this morning and was up 2%. While the European airlines came off the floor on the US open early afternoon, it was still a down day. Nevertheless, it is clear that industry observers continue to focus on yield progression at the airlines as the primary share price driver.

Monthly traffic stats from the Europeans don't show yields, only volumes, so we can only surmise on the yield front for the moment. We find it uncanny that the 5 main quoted LCCs in the past week all reported load factor declines in February, whilst the flags all showed improvements. Having said that, the declines at RYA and EZJ were the first since March 2009 and it is also noteworthy that the 300bps decline at RYA this February exactly matched the 300bps improvement in February 2009. So perhaps the correct comparable is actually the flat performance on February 2008. As we flagged last week after publication of its traffic stats, the pax volume trends for February at RYA make it difficult to see how the airline can reach our Q410 pax estimate of 14m. However, the other side of the equation could be that slower volumes could ease pressure on yields. On a relative basis, we would feel a bit more comfortable saying this about RYA than EZJ, given the fact that this February was the first time that EZJ's monthly capacity growth outpaced RYA's in at least 18 months. Ryanair's yield guidance for Q410 is for 5-10% declines, while we have -3% pencilled into our forecasts. Management recently indicated that by mid-February last year, it had already launched 2 free seat sales, with no such equivalent events this year, which would have positive implications for yields. With capacity growth continuing to run in negative territory across the flag peers in February and loads staying very positive, the risk bias to yields - as in the US - must still be upwards.

Finally, BAA had February traffic stats out this morning. Traffic was up 2.4% helped by a low base, impacted by snow last year. While LHR remains resilient (+5.3% and +2.7% underlying ex-snow), the CEO does indicate that "other airports are beginning to see encouraging signs", with domestic traffic up by 1.1% for the first time in two years. This will be helpful for the likes of RYA, EZJ and BA, which would be key players in the UK domestic market.

Two steps forward, one step back!

Aer Lingus published headline trading data yesterday, with revenues 3% ahead of expectations and costs 2% above our forecasts. However, the main focus is on developments with the unions. After a board meeting yesterday, management indicated that it is still seeking to deliver the previously targeted €97m of cost savings across the airline. In the past, it has mentioned that it could seek circa 1,100 redundancies (1.6x the original target) and cut additional capacity, should it fail to reach agreement on its original plan - "Plan B". However, last night, management indicated its willingness to proceed with the plans as agreed with the four supportive union groupings and compulsory redundancies with the cabin crew. Previously, we were forecasting an Operating Loss of €36m in FY10, though how events play out with staff in the next few days and weeks could obviously impact this figure, diminishing visibility in the short term on the FY10 outturn (particularly in H1). For the moment, we are provisionally keeping our headline revenue (SH yields flat, LH +4% due to surcharges) and cost assumptions unchanged until we get clarity on a resolution. We're happy still recommending the stock with a €1.05 fair value, with the market likely to become more comfortable when we get final visibility on how the restructuring plan plays out. It feels like its two steps forward, one step back, but the net result is that AL is still moving forward! Please see our note out this morning for more details.

Outline verdict end this month from Brussels? / Timing on 3rd force drifting?

Press reports this morning indicate that Brussels is expected to outline its verdict on the restructuring plans of the country's two largest banks by month end. This would tie in with the recently flagged announcement that the regulator would be in a position to set out the revised capital target levels and the transfer of the first tranche of loans into NAMA around the same time. We are of the view that the Irish banks ultimately need to get to an 8% core equity ratio by 2014, at which stage they can dis-engage from the State. Anticipated profits from 2012 to 2014 would mean they need to get to 6.0-6.5% at the bottom of the cycle, driving our gross €4bn requirement at AIB and €2.7bn at BOI. Effectively, every 1% higher would drive up these requirements - with circa €100bn and €90bn of risk weighted assets anticipated at both banks respectively at the trough, roughly every 1% adjustment equates to an additional €1bn capital requirement.

Elsewhere, we note commentary this morning that Irish Nationwide is indicating that its merger plans with EBS are progressing slowly, given the workload for management around its NAMA transfers. This presumably means that the timeframe on the merger is drifting, which will have implications for the timing on which ptsb may be invited into the fold.

Merchanting volumes, not surprisingly, affected by snow in January

The latest figures released yesterday from the Builders Merchants Federation showed UK merchanting volumes declined by 13.7% yoy in January, which represents a reversal in the improving trend since Jun-09 (-0.1% December, -1.8% November, -6.3% October and -8.5% September). These figures should not come as a big surprise to the market; indeed, we highlighted the likelihood of a dip in the trend last month due to the severity of the weather in the UK. While February should also be affected by the weather, one would expect this to be to a much lesser degree, considering that the comparable period last year also experienced adverse weather conditions. Therefore, this is only a hiccup and we believe the improving trend will be evident again in the February/March data. This is supported by recent comments from companies in the sector. For example, Travis Perkins guided that on a weather-adjusted basis, lfl merchanting sales were down 5% in January and -1% in February, while Grafton reported that "modest like for like growth returns to a number of UK activities".

Medco home healthcare JV opens for business

It has been reported that the United Drug Medco home healthcare joint venture opened for business in the past few days. The JV, which is based in Northampton, will be providing services to patients that are being treated at home rather than in a hospital sector. Such services are usually provided to patients with long-term complex conditions such as cancer and HIV, although it has been expanding into other areas over the past few years. The UK market is estimated to be worth c.£1bn and currently covers 100,000 patients with one dominant provider, Healthcare at Home. One issue facing the expanding sector is that of patient monitoring and compliance outside the hospital setting. As Medco routinely provides this type of feedback in the US, it is the differentiator this JV brings to the sector. We currently have the JV pencilled in as a loss maker for United Drug in FY10 (€2.6m) and FY11 (€2.0m), as it establishes a UK-wide infrastructure to enter a market dominated by two players, Healthcare at Home and BUPA Home Healthcare.

Standard Life FY09 Results

Standard Life released FY09 results this morning following on from Q4 new business sales figures on February 3rd. Ireland is included within Europe in the results, with the only relevant comment being that domestic sales in Ireland increased by 10% in constant currency to £512m (2008: £413m). At the half year stage, they reported an increase of 8% in constant currency and it appears they have taken some market share during the year. ILP announced last week that new business sales were down 32% for FY09 against an expected decline of 36%.

DFDS has identified the Irish sea as a priority for the Norfolkline acquisition

During its FY09 results conference call yesterday, DFDS outlined its integration plans for the Norfolkline acquisition. Having announced the deal just prior to Christmas, at a punchy EV/EBITDA multiple of 8.8x, DFDS is keen to realise some of the DKK135m in identified synergies. In a detailed eleven stage integration plan, the "Irish Sea Turnaround" task is ranked second, which illustrates the cost pressures that certain operators are under on the Irish routes. Time will tell whether Norfolkline retains its current routes (to Liverpool from both Belfast and Dublin), but we would expect a certain amount of rationalisation to take place over the next six/nine months. ICG is well positioned to benefit from any reduction in capacity on the Irish Sea, as its low-cost business model and advantageous sailing slots into the UK (principally Holyhead), offers a more compelling offering, especially to freight traffic.