Morning Meeting Wrap

In today's Morning Meeting Wrap:

Quick Links
Economic View	Weather hampers recovery in UK housing and retail sectors
United Drug	Firing on all cylinders - solid start to the year
CRH	Vulcan behind on weaker volumes and asphalt margin pressures Mixed outlook from Dyckerhoff on CRH's two biggest European markets
Smurfit Kappa	Box prices will be key area of focus tomorrow SCA follows on white top kraftliner price increase
Icon	Project cancellations a concern in PPD's Q409 results
Airlines	TUI Travel Q1 results readthrough
Paddy Power	Casino continues to grow at 888
Irish Financials	British Land posts 8.2% increase in values in 3Q to December
Tullow Oil	Ugandan timeline, Ghanaian partners
Norkom	Further expansion in the Asia-Pac region

Weather hampers recovery in UK housing and retail sectors

The UK economy made a weak start to 2010 if surveys from the BRC and RICS are to be believed. The BRC retail sales indicator for January reveals that the value of retail sales was up just 1.2% yoy in January, making for the weakest January since the survey was incepted in 1995. On a like for like basis, the picture is even weaker, with sales 0.7% lower relative to a year ago. This confirms that the reversal of the previous VAT rate reduction (from 15% to 17.5%) led to spending being brought forward to December, especially on big ticket items (like for like sales were up 4.2% yoy that month, the strongest rate of growth in eight years). In addition, the severe weather in January was a further factor in curtailing consumer spending last month.

The same factor was at play in the housing market's weak start to the year, according to the RICS indicator, also released overnight. While the headline balance, which measures price expectations of surveyors, came in at +32 and was relatively unchanged in the month, the new buyer enquiries subcomponent weakened dramatically, dropping from +18 to -20 and indicating a marked fall off in potential purchasers in January. This is the first time in 14 months the new buyers enquiries balance was negative. The new instructions to sell balance also turned negative in the month (fell from 15.2 to -5.5), the first time this component was negative since May 2009. Encouragingly, however, sales expectations of surveyors remained in line with those seen over recent months, indicating that the surveyors attribute the particularly sharp fall off in potential buyers and vendors to January's freezing weather, rather than any underlying weakness. While these surveys indicate that a very muted start to the year was made in the UK, there are also difficulties in discerning any underlining patterns in the economy given the extreme weather at the beginning of 2010.

Firing on all cylinders - solid start to the year

United Drug

United Drug this morning issued an upbeat IMS prior to its AGM later today. In what is largely a qualitative statement, management noted that profits are "in line with budget" and "well ahead of what was a slow first quarter in 2009". Cash flows continue to be strong across the group. Management is guiding PBT, on a constant currency basis, to be "broadly in line" with FY09. We are currently forecasting PBT of €52.6m compared to €53m (ex-exceptionals) in FY09.

At a divisional level, Healthcare Supply Chain (HSC) profits are ahead of last year. In drug wholesale, revenue in the Republic is in line with the same period past year. The Medical & Scientific business is still experiencing slow capital spend from clients but has won new business and the Specials business is continuing to record strong growth. We currently have HSC revenue and profits dipping 1.6% and 2.2%, respectively, over the full year. In Packaging and Specialty (P&S), profits are well ahead of Q109, with the strong US performance reported in H209 continuing through into Q110. This balances the European business, where profits are slightly below last year, as volumes in the UK business have not yet "returned to previous levels". Development of the Medco JV is ahead of schedule but, as flagged, will "incur significant start-up costs" this year - we have €2.6m pencilled in against a total EBITA of €73.3m. The Contract Sales and Marketing Services division is trading strongly, with profits ahead of last year. Alliance is singled out as a strong performer. Our current model has it flat in EBITA contribution over the year.

One uncertainty overhanging the stock, that was removed nine months earlier than expected, was the review of ex-factory prices being negotiated between the Government and drug manufacturers. Although this was due in September 2010, the level of savings anticipated by the Government was flagged in the budget estimates in December 2009 and the new pricing regime (40% price cut in over 300 drugs for which there is a generic already on the market) came into effect on 01 February. At the time of the budget speech, we adjusted our forecasts to reflect the earlier-than-anticipated impact of the pricing review. Although we currently see earnings slipping 2% in FY10 (they declined 9% in FY09), we believe this is the bottom of the cycle, with Government cuts (both capital and recurrent) fully factored in. Indeed, the tenor of this IMS could see marginal upgrades in various parts of the business, although we will await discussions with management at today's AGM before finalising numbers.

Vulcan behind on weaker volumes and asphalt margin pressures

CRH

Vulcan Materials has reported a fourth quarter loss per share of $0.10 versus a consensus $0.01 loss. While pricing was very strong at 5% (a pick-up from 2% in Q3 and 3% in Q2, which is very encouraging), sales were 8% behind consensus, thus the variance appears to be down to weaker than expected volumes. Aggregate shipments declined by 23% (versus -20% in Q3), reflecting bad weather, continued weakness in private construction and uncertainty over infrastructure funding. On the outlook for 2010, there are a number of key points of note for CRH:

1. Volume growth to return - Aggregate volumes are expected to be flat to up 5% on the back of stimulus-related infrastructure funding and an increase in residential activity, which will offset ongoing weakness in the non-residential sector;
2. Aggregate pricing is expected to remain robust at 2-3% and the Q4 outturn of 5% should give investors confidence that this is achievable; and,
3. Asphalt volumes to grow strongly but margin pressures - In Q4 asphalt volumes declined by 12%, which was significantly less than the other product categories and in our opinion reflects the resurfacing bias of the stimulus funds.

Vulcan Materials expect this product category to continue to perform strongly in 2010 with 5% growth. However, it notes that higher asphalt prices will not be sufficient to offset rising costs, therefore margins will be lower. As the no.1 asphalt producer in the US, CRH is also expected to benefit significantly from the stimulus funds but the prospect of margin pressures is likely to concern investors. However, we would note that CRH has a significant advantage in the asphalt business versus competitors through its winter-fill programme that allows it to purchase bitumen at seasonally lower prices and meet circa 30% of its annual needs. Our forecasts for CRH's US materials business (circa 40% of group profits) has margins increasing by 90bps in FY10 on the back of a return to volume growth and the annualised impact of cost savings.

Mixed outlook from Dyckerhoff on CRH's two biggest European markets

Yesterday Dyckerhoff released a detailed sales report for the 12 months to the end of December, in which there was commentary on management's outlook for 2010. Of particular note were comments on CRH's two biggest European exposures, namely Poland and the Netherlands (circa 13% and 10%, respectively, of group profits). On the former, Dyckerhoff management expect infrastructure to underpin 9-10% growth in Polish construction activity, which compares to our assumption of slightly less than 9% lfl sales growth in our CRH model. In contrast, the commentary on the Netherlands was a lot more bearish with Dyckerhoff management expecting activity levels to decline by over 9% on the back of continued weakness in the residential /non-residential sectors. This compares with our decline of 6% in lfl sales that is factored in for CRH's Dutch operations but we believe that consensus is even less bearish and hence the Netherlands is one reason why our earnings figures are below that of the street.

Box prices will be key area of focus tomorrow

Smurfit Kappa

Smurfit Kappa is due to issue its Q4 results and we are forecasting EBITDA of €176m, which compares with the consensus range of €165m to €182m (€720-737m for the FY). While our forecasts imply a moderation in the rate of yoy decline to 10% (versus -17% in Q3, -29% in Q2 and -30% in Q1), it will represent a reversal in the recent trend of improving margins (12.0% versus 12.7% in Q3, 12.3% in Q2 and 11.9% in Q1), reflecting the lag effect of passing on higher costs (this is expected to continue into Q1). Given the environment of rising costs, which are now being reflected in higher containerboard prices, the key takeaway from the results will be guidance from management on the extent to which this is getting passed on in higher box prices. Furthermore, comments on how the recent round of containerboard price announcements (€60/tonne from February 1st) is being accepted by the market will also be valuable. It is this pricing momentum that drives our recovery in EBITDA for Smurfit Kappa in FY10 to €851m (versus consensus of €831m) from €731m in FY09. We remain buyers of the stock given the momentum on pricing in the industry (see story below), which will feed into increased profitability, thereby further deleveraging the balance sheet.

SCA follows on white top kraftliner price increase

SCA is the latest kraftliner producer (No.3 player) to announce a €50/tonne increase for European white-top kraftliner, effective from March 1st. This follows on from similar announcements from Smurfit Kappa (No.1 kraftliner producer) and Billerud (No.10), which keeps the momentum on the pricing front.

Project cancellations a concern in PPD's Q409 results

PPD, a direct peer of Icon, issued a poor set of Q409 numbers after the market closed last night, reporting a 60% yoy decline in EPS to $0.16 (27% behind market expectations of $0.22 due to impairment charges) from a 2% drop in revenue to $357.4m (13% ahead of consensus of $317.3m). Although the company reported gross business wins of $465.6m, cancellations totalling $284.9m saw only net wins of $180.7m over the quarter, well behind both Q408 ($679m) and Q309, which in itself was a poor $265m. This represents an unsustainable book-to-bill ratio of 0.51 to 1.0, which follows a 0.84 to 1.0 ratio in Q309 and is well behind the 1.84 to 1.0 recorded in Q408. The cancellation level was driven by three large project cancellations that in total represented c.4% of the year end backlog, which was reported to be $3.0bn. PPD provided comprehensive FY10 guidance in January, which noted that cancellations in Q409 had been greater than expected and that recovery from an anticipated weak first half to the year would be dependent on improving conditions through H110, rather than signs of improvement in Q409. As such, there was no indication of a change to that guidance last night.

TUI Travel Q1 results readthrough

TUI Travel has Q1 results out this morning. It's a bit of a double-edged sword for the airlines since the travel companies are competitors of the airlines though they also generate a gauge on the overall health of the consumer. TUI said it is experiencing a significant improvement in profitability in Q2 and expects its H1 to be in line with expectations. It adds that "the sustained improvements in demand over a number of months leave us more confident that the worst is behind us". Winter booking volumes and pricing "continue to strengthen for the remainder of the season" and the cumulative positions are ahead of the last update. Moving to the summer season, the operator gives more detailed information on trading than in the last release. They say they are "pleased with trading" and customer bookings in the Nordics and UK are up 40% and 6% respectively, having been down 2% and 3% respectively at the time of the preliminaries. Across the board, summer prices are looking good; +9% in the UK, Northern Europe +7%, flat in Central Europe and -1% in Western Europe. We note that TUI has added 3% capacity growth to the UK market to support the increased demand. Its load factor is down 1% to 34%, but it adds that prices have strengthened in recent weeks. In the Nordics, capacity is up 11%, where the load factor is up 4 percentage points to 36%. In Germany, capacity is down 5% after the transaction with Air Berlin and the balance of its portfolio is only recently gone on sale. It is noteworthy we think for the airlines, the increase in capacity at the tour operator, which presumably reflects its view of a stabilising consumer. In addition, the increase in pricing will also allow the airlines to follow (or lead?) the operators, which presumably is supportive of yield progression in the airline space.

Casino continues to grow at 888

Paddy Power

888 has issued a solid set of Q409 results (operating income 2% ahead of consensus). Operating income in the B2C division (c.80% of group) increased by 9% yoy, driven by the Casino business (+13% yoy), which is benefiting from new product roll-out. However, the Poker business continues to experience difficulties, with operating income declining by 11% yoy. The company has seen a strong start to the year with income up 4% yoy (excl the impact of acquisitions). Companies, such as 888, are different to Paddy Power, in that they recruit players through gaming products (poker and casino), while Paddy Power cross sells its sports players into gaming products, resulting in more stable revenues (Paddy Power's Gaming revenue increased by 7% yoy in H109). European operators who lead with gaming are been negatively impacted by a liquidity pull from the US, where certain operators continue to accept bets from US players, which is not as serious as issue for Paddy Power as it is for other operators. Paddy Power will report its FY09 results on 2 March, when we will look for an update on:

1. Sportsbet;
2. UK online market share growth, and
3. its deal with the PMU in France.

British Land posts 8.2% increase in values in 3Q to December

British Land released its 3Q results to the end of December 2009 this morning, revealing an 18% increase yoy in NAV to 438p, as the portfolio valuation moved up 8.2% in the quarter (up 6.1% over the nine months). The valuation gains were seen across the entire portfolio and the company pointed to an improvement in the investment market, with "buyers outweighing sellers". Net equivalent yields for the portfolio moved in 55 bps in the quarter to 6.5%, with yield compression said to be the main driver of valuation uplift as opposed to rental growth, although lfl rental income on the portfolio was up 1.4% in the quarter. These positive results support the signs we have seen from the IPD UK monthly index, which posted a record capital value increase of 3% mom alone in December 2009 and provide some comfort on the UK loan books of the Irish banks, on a relative basis.

Ugandan timeline, Ghanaian partners

Of relevance to Tullow yesterday were comments attributed to government officials in both Uganda and Ghana. With regard to the former, the Minister of State for Mineral Development indicated that he expects Tullow to submit a proposal for a possible partnership in the licences held around Lake Albert this week. Assuming a successful review process, the government would then be in a position to approve the plans by March.

Meanwhile, with much of the recent focus on Uganda, the Wall Street Journal is reporting this morning that the Ghanaian Energy Minister has written to Exxon indicating that its offer for the Kosmos interests offshore Ghana will not receive government approval. The Ghanaian government would appear to be intent on acquiring the Kosmos stake for the State, at what it perceives to be a fair market price. As stated previously, state approval is an important element in the divestment process, a process through which Tullow has negotiated better than most, particularly its US-based partners. That said, while not of direct implication, the stalemate between Kosmos (23.5% of Jubilee) and the state oil company, GNPC (13.75% of Jubilee), complicates the development of the asset, in our view, for the remaining partners, Tullow (34.7% of Jubilee) and Anadarko (23.5% of Jubilee).

Further expansion in the Asia-Pac region

Norkom announced this morning that it has signed a deal with Daiwa Capital Markets (DCM), bolstering its position in the Southeast Asian financial crime and compliance client base. DCM will implement Norkom's Transaction Monitoring and Watchlist applications. Whilst the DCM deal is likely to be initially modest from a group perspective, it builds on the success that Norkom is having in the Asia-Pac region, where since entering the market in late 2006, it has signed 11 new clients and regional revenues now represent c.15% of group.