Friday 27th May 2011 CONTENTS Market View Overnight rallies in by yaoyufang


									                                                                                                                            Friday 27th May 2011

                                       Market View
                                       European equities are trading higher this morning following overnight rallies in currencies with high correla-
                                       tion to risky assets. Crosses including AUDUSD, the EURUSD and the USDWAN have all pushed higher
Market View: Overnight rallies in      indicating that traders are positioning themselves in growth assets. The rally also comes despite some poor
currencies pushes stocks higher        US data yesterday that showed that the American economy is not growing as fast as economists had previ-
                                       ously anticipated. CPI data in Japan released earlier this morning will also have improved sentiment as it
                                       showed that prices rose in the Japanese economy for the first time in 25 months. This will add weight to
ICG: Large holder sells its stake
                                       bullish arguments that the world’s economy is producing the growth that is required to tackle the massive
                                       debt piles that were accumulated before and during the recession. These debt piles continue to be the cen-
                                       tral issue in Europe with the debate over Greece’s impending restructure driving price action in European
                                       debt markets. There is little in the way of economic data for today barring US Pending Home Sales which
Britvic: H111 slightly ahead on
                                       are expected to have fallen by 1.0% month on month. Expect quiet trading as we head into the later stages
improved weather
                                       of today’s sessions with both the US and the UK markets closed on Monday.

                                       Irish Continental Group - Large holder sells its stake
Company Note: Pulte Group              The Doyle shipping group yesterday sold its 12% stake in ICG via an institutional placing, raising c.€47m.
                                       The 3.1m shares had been accumulated in concert with the investment group One51, which is understood
                                       to also hold c.3m shares, in 2007 at the time of various bids and counter bids to take the shipping operator
                                       private. None came to fruition due, ultimately, to financing conditions at the time. It is reported that yester-
                                       day’s corporate action saw the Doyle holding placed with between 10 and 15 institutional investors and ICG
IRISH PAPERS TODAY                     itself, as part of an on-going share buyback scheme. Yesterday’s move follows a similar institutional place-
                                       ment of Liam Carroll’s 29% stake, completed in November, 2009.

Bruton won’t pull back in wage row     Britvic - H111
(The Irish Independent)                Britvic Plc, the soft drinks company with businesses in UK, France, Ireland and Northern Europe, produced
                                       interim results for the 28 weeks to the 17th April 2011 this morning. Revenue came in at £633m v £627m
Cork group sells 12.5% stake in ICG
                                       expected while EBIT came in at £43.6m v £41.4m expected. The strong results were driven by 4% growth in
(The Irish Times)
                                       its UK, operation primarily due to vastly improved weather in contrast to the same period last year. The
                                       group also experienced strong growth in its international market over the period, up 20% lfl. Ireland has,
Ratings agency gives Ireland a boost
                                       however, remained challenging with a varied performance across the distribution channels. The group also
(The Irish Independent)
                                       announced an interim dividend of 5p per share, an increase of 8.5% lfl. While the group continued to high-
                                       light input cost pressures, CEO Paul Moody, in his outlook stated that the trading in the first few months of
                                       Q3 gives the group further confidence in the full year. Overall the group’s solid beat is a positive for the
                                       beverages' sector.


 Basel III break for banks in EU
 (Financial Times)

 Juncker says aid to Greece is
 (Wall Street Journal)

 Dollar slide supports stocks and
 (Financial Times)
Pulte Group
Moving in right direction, but no growth.
                                                                                                                                         Analyst: Oliver Gilvarry

Previous Close: $7.86                  Price Target: $7.00
                                                                                                                                         Friday 27th May 2011


Pulte Group is the largest national homebuilder in the US with                                      Pulte Geographic Exposure
a 6% market share. It mostly builds single family units with its
target market first time buyers, move-up and active family buy-
ers. The company owns a captive source of construction ma-                          16.98%                                                                                                                 31.60%
terials and also operates a financial services arm providing
                                                                                                                                                                                                                                                                             Gulf coast
financing, title insurance and closing services.

Recent Results – Q1 Numbers                                                                                                                                                                                                                                                  West
In its recent Q1 numbers the group reported revenues of
$805.2m, down 21.1% QoQ. At the operating level, the group                                                                                                                       23.38%
reported a loss of $37m as the 11.4% decline in operating ex-
penses wasn’t enough to offset the fall in revenues. Average        Source: Company numbers
selling prices fell 3% to $249k with home closings down 17%.
EBITDA margins of 5.4% moved back into positive territory
after two quarters of negative numbers. Management is also
guiding for further increases driven by lower construction costs.                                                                    Pulte Landbank
Orders in the quarter were up 1% compared to declines of 15%
for its peer group, which was a big positive. Inventory write-
downs were low, at $1m, and the results lacked a large num-                                                                                                                                         28.91%
ber of exceptionals as compared to previous reporting periods.                                                                                                                                                                                                               East
Guidance for the second half of the year is a return to profit-                                                                                                                                                                                                              Gulf coast

ability.                                                                                                                                                                                                                                                                     Central
Exposure of Group                                                                                                                                                                                                                                                            Other

The group’s geographic exposure to the US housing market is                                                                                                                      26.42%
diverse with 32% of it’s assets in the East of the country, with
21% in Central US, 23.4% in the Gulf coast and 17% in West          Source: Company numbers
coast. Exposure is concentrated in areas that have seen the
greatest impact of the US housing downturn. Landbank expo-
sure in these worst hit areas is 63%, but the group has taken
57% writedowns on its portfolio compared to the peers average
of 45%, reducing the risk of writedowns to the asset base.
                                                                                    US New Privately Owned Housing
US Housing Market                                                            2250
US housing numbers continue to be weak with recent trends                    1650

showing continuing house price declines and increasing                       1450
month’s supply. In the first time buyer market, foreclosure lev-             1050
els are attracting buyers, which is a negative for Pulte given                650
that 45% of 2010 closures were focused on first time buyer








market. As can be seen from our graphs, New Home Sales
remain at historic lows and are only slightly above recent lows.
There appears to be little sign of a recovery in such sales and
the large level of foreclosure properties on the market is mak-
                                                                    Source: Bloomberg
ing selling conditions difficult for homebuilders.
Pulte Group

Balance sheet

At Q1 the group had net debt of $2bn with cash of $1.426bn.                                    US Existing Homes Sales SAAR
Debt within the group has declined since Q110 by 21%, but                   7.3
cash balances have declined by a similar amount. Debt levels                6.8
within the group are high, but the next major maturity is 2014              6.3
with $655m due and then 2015 with $870m due. Book value

per share at the end of Q1 was $5.49, a drop of 10c from Q4. It             4.8
should be noted that the group has a large amount of Deferred               4.3
Tax Assets, which currently stand at $2.6bn. This is currently              3.8









off balance sheet and a number of quarters of profitability
would allow the group to take a significant amount of this back
onto the balance sheet. In such an event, the group would add
$6.79 per share to the group book value.
                                                                     Source: Bloomberg


Pulte Group is managing a difficult US housing market through
cost efficiencies and its aggressive write-downs on balance
sheet assets compared to peers. The order growth of 1% com-
                                                                      Descriptive Stats                                                                                                                      Shareholders
pares to a 15% decline by its peers, with the only other peer
that reported a positive gain was Toll Brothers.                Year to date        2.93%                                                                        William Pulte                                                                                            10.87%
                                                                52 Week High        $11.29                                                                       Fidelity Management                                                                                      10.15%
Despite these positives, being the group’s land-bank and prop- 52 Week Low           $6.13                                                                       Vanguard Group                                                                                           4.46%
erty assets are located in States that have faced the worst of Reuters                                                                                           State Street                                                                                             4.15%
the US housing crisis. Recent housing numbers appear to
                                                                Bloomberg          PHM US                                                                        Thornburg Investments                                                                                    4.08%
show no improvement with New Home Sales continuing to fall
since the end of the tax credits last year. Existing Home Sales
remain well above recent lows, but foreclosure properties are a                      FY10                                                                                                               FY11e                                                             FY12e
major part of these numbers. The group can continue to re-           Revenue $m                                               4,497                                                                     4,025                                                             4,661
duce costs, but volume growth is required to deliver profitabil-     Operating Profit                                            -452                                                                     32                                                                    165
ity. The improvement in margins in Q111 was also experienced         Net profit                                                  -773                                                                    -28                                                                           89
in Q1 and Q2 of 2010 with falls in Q3 and Q4. We believe vol-        EPS $                                                      -1.87                                                                   -0.08                                                                  0.23
ume growth will not return this year in the majority of states the
                                                                     DPS                                                          0.00                                                                  0.00                                                                   0.00
group operates in, making further margin expansion reliant on
                                                                     P/E                                                              N/a                                                                N/a                                                              33.18
cost cutting which will only provide limited increases.
                                                                     Div Yield                                               0.00%                                                                      0.00%                                                             0.00%
Valuation of the group is not cheap at 1.4x Q111 BV until you
add in the Deferred Tax Assets. The group is then trading at         Source: Company numbers; Dolmen estimates

0.6x BV. It has to be noted that the DTA will only be released
after four quarters of profitability by the group according to
management and $1.83 per share relates to specific assets
and may not be released unless aggressive tax planning is

Therefore, given the problems still within the US Housing sec-
tor and the difficult operating conditions facing the group we
value the group at 0.75x BV based on a partial release of DTA,
giving a BV of $10.45. We have a Neutral recommendation
with a price target of $7.00 due to these headwinds and the
lack of visibility for the coming quarters. A reversal of our view
would occur if we saw sustained recovery in New Home Sales
in coming months.
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