NCB forecasts recovery in Irish shares

NCB Stockbrokers says the equity market will recover in 2008 despite the tougher global trading outlook.

Earnings growth in the current year is forecast at 5% for firms listed on the ISEQ, against an anticipated 18% last year, said NCB in its 2008 Irish Equity Outlook.

But despite the significant dip in the earnings outlook “we see scope for equity valuations to recover and ratings to expand from the current 9.1x 2008 earnings”, said NCB.

It won’t all be plain sailing however as concerns mount over the health of the British and US economies while European growth rates have also started to moderate.

However it expects the following Irish stocks to perform this year:

CRH — proven diversified model, trading at a multi-year low rating of 8.1x and with a free cash flow yield of 11%.

AIB — current valuation equates to 5.8x Irish, British and Capital Markets operations. Yield of 5.5% adds support.

DCC — defensive business mix, with expected upside from further acquisitions and likely stock buybacks.

IAWS — growth model well-established and Origin Enterprises subsidiary counters commodity risk.

Grafton — trades at 7.2x (below consensus) 2008 EPS — holds valuable strategic positions in growth markets and is a mid-term consolidation candidate.

Among smaller names, NCB favours United Drug, Origin Enterprises, Total Produce, CPL and Zamano.

Meanwhile, it points out that against a backdrop lower global earnings in the current year markets are down in 2008 to date with the ISEQ down 4.6% while the S&P 500 and the FTSE All Share were down similar amounts.

From an Irish perspective, the worries about the global economy are compounded by the appreciation of the euro against the dollar and sterling with NCB warning that the challenges will be difficult to overcome.

In 2007 the Irish stock market lost 26% of its value haven risen by 28% in 2006.

The decline reflected fears about the impact of house building on the broader economy as well as fears that lower growth in the US and Britain would further undermine the Irish economic growth story.

Furthermore, several of the listed Irish companies from Kerry Group to Ryanair are affected by weakness in the dollar and in sterling from an earnings point of view.

However, strong balance sheets will boost acquisition activity in 2008 and help improve profits.

Furthermore the brokers see little likelihood of dividends being cut while the increase in the number of share buybacks in the past six months by companies including CRH, Ryanair, Grafton and Paddy Power further highlights Irish managements’ confidence in their own companies, said NCB.