Trading updates signal positive corporate outlook

Investor/ An insider's guide to the market: The mid-point of 2006 is now almost upon us, although the economic and financial landscape is quite similar to that at end-December 2005.

Broadly, global equity markets are currently trading close to the levels that pertained in January, with the exception of the Japanese market, which is down by approximately 6 per cent.

There has, however, been a gradual but very significant rise in short-term interest rates and in bond yields in Europe and the US.

Since the start of the year euro three-month interbank rates have risen from 2.5 per cent to 3.0 per cent and the German 10-year yield has risen from 3.4 per cent to 4.1 per cent. In the US, the scale of the increase has been greater, with three-month money going from 4.5 per cent in January to the current level of 5.4 per cent. Bond yields have also risen as evidenced by the rise in the 10-year treasury yield from 4.5 per cent to 5.2 per cent.

In the currency markets, the most significant change is the resumption of the bear trend in the US dollar. Against the euro the dollar opened the year at a rate of $1.18 and has since fallen to $1.25.

Although the financial markets are going through an unsettled phase, underlying trends in the corporate sector remain extremely positive. Internationally, huge volumes of funds have been committed to private equity and buyout funds, and this is generating high levels of merger and acquisition activity. In general, companies are performing well so that a combination of healthy cashflows and low interest rates is likely to underpin the large appetite for takeovers and buyouts for the foreseeable future.

This week in the Irish equity market several companies issued very positive statements regarding current trading conditions.

Also this week, another new company, Norkom, listed on Dublin's IEX market, which facilitates the listing of smaller and/or early-stage companies. Norkom also listed on London's Alternative Investment Market (AIM).

In conjunction with the listing, Norkom raised €21 million through the placing of existing and new shares to give the company a market capitalisation of €100 million. The company provides software that helps financial institutions combat fraud and other types of financial crime. Its customers include HSBC, AIB, Rabobank and National Australia Group. Its revenues grew by 50 per cent to €18 million in the year to end-March and earnings before interest, tax, depreciation and amortisation were €3.3 million.

As regards current trading conditions, Irish Life and Permanent (IL&P), FBD and Independent News and Media (INM) issued trading updates. After bullish comments at its agm, analysts were expecting good news from IL&P's trading update, and they weren't disappointed. The company is now guiding growth of over 30 per cent in life and pension sales, reflecting the group's leading position in a very buoyant market. On the banking side, mortgage advances were also very strong and IPM estimates that its share of new advances is 22 per cent in the first quarter. The announcement had a positive impact on the share price, which rose by over 2 per cent on the day.

Staying with the financial sector, FBD released a pre-close trading statement, which noted that it is "on course to achieve its operating profit target for the half-year". Claims and other costs are running at anticipated levels and premium income is running slightly ahead of budget. Investors in FBD can also look forward to the payment of special dividends over the next 12 months due to the La Cala development land sale, and the initial gross dividend of €1.60 per share will be paid on August 11th.

Independent News and Media's trading statement was also upbeat. It stated that results for the first half of 2006 were in line with market expectations and that it was confident of delivering another year of double-digit earnings growth. First-half revenue is expected to be up 3 per cent year-on-year due to growth in both advertising and circulation revenues. Operating revenues have grown across all the group's geographical regions in Australia, New Zealand, South Africa and the UK as well as Ireland.

Profit margins are on track to improve further as the benefits of previously announced cost-cutting initiatives kick in. The combination of modest revenue growth and cost control underpins brokers' forecasts of growth in earnings per share of just under 10 per cent for this year.

These three trading updates provide further evidence that the actual performance of the corporate sector remains a very positive feature of the current investment environment.

Investor says...

Trading statements provide further evidence that the actual performance of the corporate sector remains a very positive feature of the current investment environment.