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KOSPI: Back In Play

Korea's KOSPI index is heavily tied to the performance of severa outside factors, including the value of the Japanese Yen and the US tech sector. So with the S&P 500 hitting new all-time highs, it should come as no surprise that the KOSPI was up +1.2% this morning, heading above our TREND line of resistance at 1943 and closing at 1963. If the rally in US tech stocks can hold and the Yen can shield its fall from grace, expect more good times for the KOSPI.

 

KOSPI: Back In Play - kospi


IS GOOD DATA BAD FOR THE YEN?

Takeaway: If improving economic data helps get the LDP elected to an Upper House majority come July, it’s ultimately structurally bearish for the yen.

SUMMARY BULLETS:

 

  • As it relates to our structural bear case on the Japanese yen, we continue to view marginal improvement in Japanese growth data over the intermediate term as an ultimately bearish factor for the yen on a TAIL duration, as it helps strengthen the LDP campaign ahead of the JUL Upper House elections. Specifically, total LDP control of Japan’s bicameral legislature will give the party that brought us “Abenomics” a free pass to enact any fiscal Policies To Inflate they feel entitled to in the event the Japanese economy fails to achieve their +3% nominal GDP growth targets.
  • Moreover, with control over both houses of the Diet, they’ll be able revise the BOJ’s charter to the extent Kuroda’s team fails to deliver the +2% inflation it has repeatedly promised to help produce. As a reminder, Japan’s YoY CPI actually slowed -20bps in MAR to -0.9%, so there’s a lot of hay to bale on both the growth and inflation fronts from here.
  • We reiterate our view that Japanese policy is set to remain decidedly dovish for the foreseeable future. Much like the mid-to-late 1990s, the growing rift between US and Japanese policy is set to perpetuate sustainable strength on USD/JPY cross over the long-term TAIL. Our call for an improving US economy  – something consensus simply would not agree with even as recently as one month ago – continues to play out in spades. That only insulates our call for the aforementioned policy divergence.
  • Our refreshed immediate-term risk range on the USD/JPY cross is included in the chart below. Simply put, we think now is a great spot to add to your short yen/long Nikkei exposure.

 

The past 24 hours produced some pretty decent MAR/APR economic data out of Japan – arguably the best batch of growth data we’ve seen in roughly a year. Industrial Production, Overall Household Spending, Retail Sales and Housing Starts all accelerated in MAR, while the Manufacturing PMI posted an acceleration in APR. Additionally, Japan’s Unemployment Rate ticked down in MAR:

 

  • MAR Industrial Production: -7.3% YoY from -10.5% prior;
  • MAR Overall Household Spending: +5.2% YoY from +0.8% prior (fastest YoY gain since FEB ’04);
  • MAR Retail Sales: -0.3% YoY from -2.2% prior;
  • MAR Housing Starts: +7.3% YoY from +3% prior;
  • APR Manufacturing PMI: 51.1 from 50.4 prior; and
  • MAR Unemployment Rate SA: 4.1% from 4.3% prior.

 

IS GOOD DATA BAD FOR THE YEN? - 1

 

IS GOOD DATA BAD FOR THE YEN? - 2

 

IS GOOD DATA BAD FOR THE YEN? - 3

 

While some of the aforementioned YoY growth numbers were far less than buoyant from an absolute perspective, the 2nd derivative deltas (i.e. what matters in macro) all moved in the right direction. While we still don’t buy into the consensus view among mainstream economists that monetary Policies To Inflate as causal to sustainable economic growth, we won’t blindly deny Japan this cyclical opportunity to confirm an escape from the country’s third recession in five years.

 

As it relates to our structural bear case on the Japanese yen, we continue to view marginal improvement in Japanese growth data over the intermediate term as an ultimately bearish factor for the yen on a TAIL duration, as it helps strengthen the LDP campaign ahead of the JUL Upper House elections. Specifically, total LDP control of Japan’s bicameral legislature will give the party that brought us “Abenomics” a free pass to enact any fiscal Policies To Inflate they feel entitled to in the event the Japanese economy fails to achieve their +3% nominal GDP growth targets.

 

Moreover, with control over both houses of the Diet, they’ll be able revise the BOJ’s charter to the extent Kuroda’s team fails to deliver the +2% inflation it has repeatedly promised to help produce. As a reminder, Japan’s YoY CPI actually slowed -20bps in MAR to -0.9%, so there’s a lot of hay to bale on both the growth and inflation fronts from here.

 

IS GOOD DATA BAD FOR THE YEN? - 4

 

We reiterate our view that Japanese policy is set to remain decidedly dovish for the foreseeable future. Much like the mid-to-late 1990s, the growing rift between US and Japanese policy is set to perpetuate sustainable strength on USD/JPY cross over the long-term TAIL. Our call for an improving US economy  – something consensus simply would not agree with even as recently as one month ago – continues to play out in spades. That only insulates our call for the aforementioned policy divergence.

 

IS GOOD DATA BAD FOR THE YEN? - 5

 

In the interim, however, the USD/JPY cross has indeed backed away hard from the psychologically-important 100 line. This has been driven by repatriation of foreign assets (six consecutive weeks on a net basis) as the yen has approached what appears like historically-favorable rates on a trailing 3-5yr duration.

 

IS GOOD DATA BAD FOR THE YEN? - 6

 

We reiterate our view that consensus – be it Japanese households, Japanese corporations, sell-side actors or buy-side speculators – remain Not Bearish Enough on the Japanese yen from here. That, combined with our thesis as updated above, helps us feel comfortable reiterating our call for yen weakness and Japanese equity market strength with respect to the intermediate-term TREND duration.

 

Our refreshed immediate-term risk range on the USD/JPY cross is included in the chart below. Simply put, we think now is a great spot to add to your short yen/long Nikkei exposure.

 

Darius Dale

Senior Analyst

 

IS GOOD DATA BAD FOR THE YEN? - 7


HSY Continues Its Indulgent Run

This note was originally published April 25, 2013 at 13:52 in Consumer Staples

HSY reported first quarter earnings this morning. The company is largely on track, growing in all categories across multiple channels, including club, and has good marketing support behind the launch of Brookside (dark chocolate, wellness). Second quarter will be challenged based on tougher comps in a historically weaker quarter. Volume should drive performance in the year in which HSY expects a 12% gain in earnings per share (EPS). We like the story, but would prefer a better entry point - perhaps second quarter concerns and performance provide it.   

 

What we liked:

  • Revenue slightly missed consensus $1.83B vs $1.84B, but up a healthy 5.5% (Volume +5.3%; Price +0.5%; FX -0.3%)
  • EPS of $1.09 beat estimates of $1.04, up 13%, and fiscal year guidance adjusted up to $3.61-$3.65 vs previous $3.56-$3.63 - first quarter guidance increases are rare
  • Gained market share in every category that it competes in
  • Higher dollar sell-through for Easter despite shorter season
  • Gross margin +2.4% in the quarter on lower commodity costs of $35MM and supply chain efficiencies
  • Strong brand support for Brookside
  • Focused on continued expansion to emerging markets (China, Brazil, India, and Eastern Europe)

What we didn’t like:

  • Q2 is historically a weaker quarter and is facing higher tax rate and more difficult comps
  • Valuation, though more easily supported in the case of HSY given its growth profile and categories than for the balance of the staples group

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BUD: The Good, The Bad & The Ugly

This note was originally published April 30, 2013 at 09:39 in Consumer Staples

BUD reported first quarter  earnings per share (EPS) this morning and ABI BB is currently down about 3% in European trading – volume was weak across the board and volume guidance was soft relative to expectations.



What we liked:

  • Beat on EPS ($1.16 versus $0.98 consensus), but entirely due to below the line items (tax rate, lower interest expense year on year)
  • Pricing remained robust leading to constant currency organic revenue growth of +1.5% against a reasonably difficult comparison (Q2 comps ease, Q3 and Q4 stiffen) despite a decline in volume

What we didn’t like:

  • Volume softness across multiple regions save for Asia Pacific with organic volume declining 4.1% against the most difficult comparison of the year
  • Market share decline in the U.S. (0.5%)
  • Lack of operating leverage (unsurprising, given volume declines) as constant currency EBIT grew only 0.2% on constant currency revenue growth of +1.5%
  • Gross margin declined 1.33% against the most difficult comparison of the year
  • Cautious volume commentary on Brazil (industry flat to down low-single versus prior view of low to mid-single digit growth)

Stepping back for a moment and looking at BUD within the context of the broader consumer staples group, we continue to struggle to find names that we are comfortable with over almost any duration given what we see as the currently stretched state of valuations.  With BUD, we have good visibility on double digit EPS growth driven by continued strong pricing, merger synergies (eventually) and below the line items - even factoring in continued volume weakness.  The company’s FCF yield (7%) remains attractive relative to the group.  Based on that context, we are going to keep BUD on our preferred list.  We expect a couple of European sell-side downgrades, just because that is how those analysts generally roll, but we think BUD continues to make sense once the impact of this quarter shakes out.


HOT REPORT CARD

Takeaway: HOT - we like it

In an effort to evaluate performance and as a follow up to our YouTube, we compare how the quarter measured up to previous management commentary and guidance

 

 

OVERALL:  

 

BETTER - Despite selling 4 assets YTD and some FX headwinds, HOT slightly raised guidance on its core business.  Bal Harbour sales greatly exceeded expectations.  HOT maintains that it will return excess cash to shareholders and that debt levels will not be reduced further

 

HOT REPORT CARD - h34

 

 

US LODGING OUTLOOK

  • BETTER:  Customers and developers are confident.  HOT remains upbeat on the US economy. Sequester has not had an impact given it's less 2% of its business.  HOT expects Q2 and 2013 US REVPAR to be in the high end of its 5-7% guidance range.
  • PREVIOUSLY: "Business activity continues to rise but with very few new build hotels coming on stream. So occupancies remain at near peak levels. If the U.S. economy continues on this trajectory, the basic laws of supply and demand suggest that we'll see strong growth in room rates for the next few years."

CORPORATE BUSINESS

  • SAME:  Transient rates are up over 5%.  Group business continued to pace in the mid-single digits.  
  • PREVIOUSLY: "Corporate and retail transient momentum is strong. Rooms sold in opaque channels are declining improving rate realization. Group pace is tracking in the mid-single digits for the year.  Group business in the cycle has come back slowly but steadily and companies remain careful about growing their cost base." 

LATIN AMERICA/CENTRAL AMERICA

  • SAME:  1Q was similar to 4Q.  Mexico was strong (+10% REVPAR) but Argentina woes continue (-15% REVPAR).  Local inflation has significantly slowed travel into Argentina.  HOT expects Latin America to remain challenged in the near-term due to Argentina.
  • PREVIOUSLY:  "Business travel in Mexico is up, and American leisure travel is coming back. We expect Mexico to be the engine of Latin American growth for us in 2013. At the other end of the spectrum is Argentina, where we have two large owned hotels. Argentina REVPAR is declining while local inflation hits 25%, squeezing our margins. The inflation devaluation gap is hurting Argentina's competitiveness, and hitting exports and travel. This is only likely to get worse until the devaluation resets the equation. Brazil hit a soft spot as China slowed, but is now recovering."

CHINA

  • WORSE:  REVPAR was up 5.4% (local currency), an acceleration from flat growth in Q4; Beijing was particularly soft, given its government exposure.  Southern China 1Q REVPAR was up 10%.  Q1 results in-line with its long-term outlook on China.  HOT expects China REVPAR to grow in the middle of the 5-7% guidance range for Q2 and FY 2013 from prior guidance of being at the high end of that range. 
  • PREVIOUSLY:  "With that behind us, we're seeing demand pick up as government activity starts to resume and business returns to normal....In January, Chinese REVPAR was up 6%. The transition is still ongoing with significant meetings coming up in March when the new leadership formally takes over at multiple levels and new policies are announced. As such we expect the rate of growth to pick up as the year progresses and year-over-year comparisons also become easier."

EUROPE 

  • SAME:  Q1 REVPAR was soft (-1.3% in local currency), largely due to weakness in London, suggesting possible oversupply post Olympics.  Ex London, Europe was flat.  Southern Europe saw growth.  Groups are smaller and booking later.  1Q is not really a material quarter for Europe to its tough to extrapolate trends. HOT continues to expect Europe to exhibit modest (2-3%) REVPAR growth in Q2, but below its 5-7% worldwide guidance range.
  • PREVIOUSLY:  "Europe remained at a stalemate during 2012 and we're not expecting much different in 2013, even though southern European bond spreads suggest rising confidence."

SG&A

  • BETTER:  SG&A was 6% lower in 1Q.  They only spent $4MM of the $10MM severance costs guided for Q1. Higher costs are expected for the rest of the year.  HOT maintained its +3-5% SG&A guidance.
  • PREVIOUSLY: "In Q4 and into Q1, we have been making additional adjustments, incurring some severance cost of approximately $9 million in Q4 and potentially another $10 million in Q1. These costs are included in our SG&A growth estimate of 3% to 5% for 2013."

TIMESHARE

  • BETTER:  Vacation ownership is expected to generate ~$175MM in cash flow in FY2013 excluding Bal Harbour, up from prior guidance of $150MM for 2013. 
  • PREVIOUSLY: "In the last four years, we've generated almost $800 million in cash from the timeshare business, expect to do another $150 million to $200 million this year. So, we would have $1 billion in cash coming out of our timeshare business over the last five years. So we're running that business more for cash than earnings growth, and that has worked very well for us." 

BAL HARBOUR

  • BETTER:  HOT raised its Bal Harbour cash flow forecast from $100MM to $150MM for FY2013. 86% of the residences have been sold and only 40 units remain.  HOT expects to completely sell out by the end of the year.
  • PREVIOUSLY:  "Bal Harbour, $460 million in cash last year, more cash this year. That's gone from being a place where we were putting money in to finish the project to significant amounts of cash coming out of it. That'll all be done this year in 2013, we hope to finish, sell out this year."

VACATION OWNERSHIP CONTRACTS

  • SAME:  Originated contract sales of vacation ownership intervals and the number of contracts signed were flat compared to 2012.
  • PREVIOUSLY: "Our Vacation Ownership business, we're assuming that we will maintain a flat business"

 


HOT 1Q13 CONF CALL NOTES

Takeaway: We like hotels generally and HOT specifically due to our outlook for more asset sales and share repurchases

Solid quarter and higher guidance. We still think the numbers are conservative

 


"Overall, the global lodging recovery continues along the trend lines we’ve been seeing. Tight supply is driving higher room rates in North America, and our footprint continues to expand in the growing economies. We are seeing more interest among real estate buyers for both vacation ownership and our owned hotels"

 

- Frits van Paasschen, CEO

 

 

CONF CALL NOTES

  • Business is doing better than they expected across the board
  • They expect to complete the sell-out of BH this year. Only 40 units left.
  • In China business is generally picking up, 1Q RevPAR was up over 5%.  Results were soft in Beijing as it was more dependent on government business.  The government transition is not complete until March.  Meanwhile, across markets in the south, RevPAR was up nearly 10%.  The quarter's trends were in-line with the long-term trend HOT sees in China
  • Revenue grew by nearly 6% elsewhere in Asia. India was slower, Indonesia, Thailand and Malaysia were strong. Smart capital in India is moving to convert their brands.
  • 1Q European RevPAR was flat, ex London.  Weak start in London, suggesting oversupply post Olympics. Q1 is the off-season in Europe so its hard to draw conclusions for the full year based on these results. 
  • Argentina mess is spilling into Uruguay
  • North America RevPAR was up 6% and ex Canada up 7%
  • Government travel is about 2% of their business so the sequester is less of drag on their business 
  • Africa & the ME - RevPAR up over 7%. Business there is good. 
  • After their time in China, they increased occupancy by 6 percentage points in 2012 alone.  HOT doubled the number of SPG active members and SPG now accounts for 55% of our occupancy.  They grew outbound travel from China to their hotels globally by 52%.  And since the relocation, they've signed 54 deals, meaning our pace of signings is up by about 40%.  And 45 hotels have opened.

  • Hope to derive 80% of their profits from fees by 2016 by selling more assets
  • Will not reduce debt further and will use FCF to invest in high ROI investments and the balance will be returned to shareholders in the form of buybacks and dividends.
  • Transient rate was up over 5% in the quarter. Hawaii was particulary strong, N.E was weaker. Expect that NA will come in at the high end of their guidance range.
  • Group pace continues to pace along in the mid single digits. NA will remain their strongest region in 2013.
  • Expect modest RevPAR growth in Europe in 2Q.  Companies are watching their costs, groups are smaller and bookings are closer in. No signs that things are improving right now. 
  • China: As expected they saw business pick up in Q1. RevPAR increased 5.4% in 1Q in constant currency. New government has been asking officials to reign in their spending and lifestyles.  Harder hit are the north and western regions. Some impact from bird flu in the Shanghai region. They are monitoring the situation closely. Believe that new supply will be absorbed in the next 9-12 months. Expect China to be at the midpoint of their 5-7% guidance.
  • They will begin to break out greater China in their releases going forward
  • Impact on travel into Japan from North and South Korea issues
  • India remains sluggish but sequentially better
  • A&ME was the fastest growing region in 1Q.  UEA is booming with RevPAR growth of 14%.  Egypt was up 30% in the Q. Expect these trends to conitnue in 2Q.
  • Latin America was dragged down by Argentina which was down 27%. Argentina accounts from 15% of owned RevPAR.  Mexico was up 10% as US guests return. Expect LA growth to remain challenged in 2Q.
  • Owned portfolio: Impacted by Argentina. US owned hotels and in particulary Bal Harbor results were very strong. YTD they have sold an additional 4 hotels which will reduce earnings by $8MM from guidance given in 4Q. 
  • VOI: trends remain stable. Resort business was up sharply.  Cash flow from this business remain strong. 
  • Adding inventory in Orlando
  • Bal Harbour significantly exceeded their expectations. 
  • SG&A was down YoY, reduced costs due to restructuring and easy comps. Some of the severance costs and other costs were delayed this year. They incurred $4MM of severance so far vs. prior guidance of $10MM
  • Japan headwinds impacted FX

 

Q&A

  • Were buyers earlier in the Q when the stock was under $60. They are opportunistic buyers of their stock.
  • Why did HOT's RevPAR in China materially outperform Smith travel numbers in China?
    • Geographic mix and they generally outperform the index with their brand. Mix of new hotels also helps.
  • Overall M&A environment: It's still a lumpy market on the UUP and Luxury asset side. Qualitatively, there is more interest than 12 months ago. Sense is that volume should continue to pick up.  They are still not seeing an active market for large portfolio sales (> $1BN), still a ones and two's market.
  • They do have the ability to sell most of their European assets and distribute that cash efficiently to shareholders. They have no cash trapped in Europe now. They should have no issues repatriating cash from asset sales.
    • Can structure sales as either asset sales or stock sales
  • VOI:  By having scaled back their business they have very favorable IRR's that nicely exceed WACC. Happy to keep the business in their portfolio given the cash flow generation and the syngeries. For example, they are moving the Westin St John's into VOI. More efficient than an asset sale
  • They have worked on their assets to make them ready for sale. In theory, they can achieve their asset sale targets before 2016 but it just depends
  • Regarding their buyback activity, look to past behavior as an indicator of future activity
  • US is better than they expected RevPAR wise. Trending at high end or netter in 2Q bc of holiday shift. China is a little softer. Europe is really unchanged - still projecting 2-3% growth since 1Q doesn't really matter.
  • Any impact from air traffic furlough from last week.  Think its was brief enough that they did not see an impact
  • Incentive fees: 60% of SS mgmt properties are paying incentive and about 75% outside the US. In the US, it's in the 30% range. 
  • Outside of group business, their visibility is somewhat limited 
  • Have some modest FX headwinds from Japan and Canadian and AU impact is also negative... all in to the tune of $3-4MM. They may also have some more severance charges. SG&A is also fairly lumpy.
  • In some cases they have a preferred time to sell due to tax issues or the need for renovations
  • Group Pace: low to mid single digit pace - same as before

 

HIGHLIGHTS FROM THE RELEASE

 

HOT 1Q13 CONF CALL NOTES - H1

 

HOT 1Q13 CONF CALL NOTES - H2

  • Adjusted EBITDA was $315 million, which included $58 million of EBITDA from the St. Regis Bal Harbour residential project
  • Worldwide Systemwide REVPAR for Same-Store Hotels increased 5.0% in constant dollars (4.6%
    in actual dollars).... Systemwide REVPAR for Same-Store Hotels in North America increased 6.2% in constant dollars (6.2% in actual dollars).
  • In 1Q13, HOT "signed 26 hotel management and franchise contracts, representing approximately 6,200 rooms, and opened 18 hotels and resorts with approximately 4,000 rooms"
    • 20 are new builds and 6 are conversions from other brands. 
  • At March 31, 2013, the Company had approximately 400 hotels in the active pipeline (~100,000 rooms)
  • Special items... totaled a charge of $5 million (after-tax), included a loss of $8 million (pre-tax), primarily related to the sale of three wholly-owned hotels.
  • Excluding special items, the effective income tax rate in the first quarter of 2013 was 31.3%
  • Net income... included a tax benefit of $70 million, in discontinued operations, as a result of the reversal of a reserve associated with an uncertain tax position related to a previous disposition. The applicable statute of limitation for this tax position lapsed during the first quarter of 2013.
  • During the first quarter of 2013, 18 new hotels and resorts (representing approximately 4,000 rooms)
    entered the system.... five properties (representing approximately 900 rooms) were removed from the system.
  • Excluding owned hotels in Argentina, REVPAR at Worldwide Owned Hotels increased 5.3% in constant dollars (4.9% in actual dollars).  Excluding owned hotels in Argentina, internationally, REVPAR at owned hotels increased 4.2% in constant dollars (3.7% in actual dollars). REVPAR at owned hotels in Argentina decreased approximately 27% in constant dollars driven by economic instability in the country.  Excluding owned hotels in Argentina, margins increased by approximately 100 basis points.
  • Total vacation ownership revenues increased... primarily due to increased revenues from resort operations, the transfer of the Westin St. John from owned hotel revenues to vacation ownership revenues, and a favorable adjustment to loan loss reserves. 
  • Originated contract sales of vacation ownership intervals and the number of contracts signed were flat... The average price per vacation ownership unit sold increased 0.5% to approximately $16,200, driven by inventory mix.
  • HOT's residential revenues were $132 million.... realized residential revenues from Bal Harbour of $129 million and generated EBITDA of $58 million. During the first quarter of 2013, the Company closed sales of 38 units at Bal Harbour and realized incremental cash proceeds of $127 million associated with these units. From project inception through March 31, 2013, the Company has closed contracts on approximately 86% of the total residential units available at Bal Harbour and realized residential revenue of $939 million and EBITDA of $219 million. 
  • SG&A decreased ... primarily due to organizational changes in the second half of 2012 and non-recurring professional expenses recorded in the prior year. The Company continues to target a 3-5% increase for the full year.
    During the first quarter of 2013, the Company completed certain changes to its organizational structures
    in the Americas division. The Company recorded an expense for severance costs of approximately $4
    million associated with these changes.
  • Gross capital spending during the quarter included approximately $17 million of maintenance capital and
    $81 million of development capital
  • During 1Q13, HOT  completed the sales of three hotels; the Aloft and Element hotels in Lexington, Massachusetts and the W New Orleans - French Quarter for cash proceeds of approximately $61MM. These hotels were sold subject to either long-term management or franchise contracts. The Company recorded a loss of $8MM associated with these sales. In addition, following the end of the first quarter the Company completed the sale of the W New Orleans for cash proceeds of approximately $65MM.
  • In 1Q13 and through April 5, 2013, HOT repurchased nearly 1MM shares at a total cost of ~$56MM and a weighted average price of $59.35 per share. As of April 5, 2013, approximately $624MM remained available under the Company’s share repurchase authorization
  • At March 31, 2013, HOT had gross debt of $1.275 billion, cash and cash equivalents of $529 million (including $142 million of restricted cash)... including $472 million of debt and $20 million of restricted cash associated with securitized vacation ownership notes receivable, was $1.198 billion.

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