Davy Morning Equity Briefing

May 26, 2020

Market Comment

Claimants data point to 2% jobs gain as Irish economy reopens

Yesterday’s (May 25th) update on income support claimants showed total numbers rose slightly to 1.28m, but that 35,600 had indicated they will soon return to work and are receiving their last payments — pointing to a 2% rise in employment. This no doubt reflects the phased reopening of Ireland’s economy, which began on May 18th, easing restrictions on the construction and retail sectors.

CRH

Better signs – highway contracts and homecentres

The value of US highway contracts awarded by state departments of transportation (DOTs) rose 33% year-on-year (yoy) even as the US shut down. April’s contracts showed the largest yoy dollar increase in more than two years. This likely reflects early-year planning so awards could slow with a lag. However, at the very least they show the rude health of the state bidding season pre-COVID. Meanwhile, last week’s results from Home Depot and Lowes provided some interesting read-through for CRH’s US products business. The group is a leading supplier of masonry, pavers, patio and garden products to the two groups. Both retailers recorded strong sales growth, with Lowes going so far as to name-check CRH’s Oldcastle business for its flexibility and responsiveness through the crisis.

FBD Holdings

Court date set for business interruption test case

The test case before the Commercial Court will set a precedent for whether FBD’s pubs policies provide cover for business interruption related to COVID-19. This approach will provide clarity for all rather than the alternative of many independent legal challenges and individual arbitration cases. FBD’s position has not wavered with respect to coverage, but the wording on the pub policy is not as strong as that on its standard business policies. Pubs represent 2% of total premiums and any insurable loss would be lowered by recent trends and cost savings.

Mondi

New CFO with strong credentials; graphic paper demand remains weak

Mondi’s new CFO, Mike Powell, is joining at an interesting time. The outlook for the business (or any business for that matter) has rarely faced such uncertainty. However, Mondi’s liquidity and balance sheet position are strong, and Powell’s financial restructuring skills will not be required just yet. It will, however, be interesting to see how the company’s capital allocation strategy will evolve and how the new CFO will influence the deployment of the strong sustainable cashflow being generated by the business. If history is anything to go by, shareholders should benefit.

ARYZTA

Q3 update – passed the nadir but significant uncertainties remain

ARYZTA has passed through the eye of the COVID-19 storm with revenue scars highlighting the unprecedented operating backdrop. With sales declining by nearly 50% in April, ARYZTA moved quickly to adapt its capacity and operating model to ameliorate cash burn. Green shoots through May (sales down 33%) likely reflect the earlier easing of restrictions in the key North American market. However, an improving trendline will be juxtaposed against continued economic and strategic uncertainties – the latter reflecting the range of possible outcomes arising from the strategic review and upcoming shareholder requisitioned EGM. On first glance, we see c.25% downside to our FY 2020 EBITDA.