ICG has weathered the Irish economic storm relatively well. We expect 2012 to be another difficult year. However, even in a stressed scenario we estimate ICG could comfortably pay a dividend of €1 (Yield 7%) and in our core scenario ICG could increase the dividend to €1.23 in FY 12 (Yield 9%) and €1.98 in FY 13 (Yield 14%), while remaining debt free. This appealing dividend should reward investors in uncertain markets and ICG’s operational leverage (75% incremental margin) will kick in for a future recovery. We re-initiate with a Buy rating.
Irish economy has corrected more than most
Since the Irish economy collapsed four years ago, GDP per capita has returned to 2002 levels, Irish import volumes are back to 1999 levels and passenger numbers on Irish Ferries are back to 2006 levels. The Irish economy has corrected more than most and to some extent, this limits the downside risk in 2012. Moreover, UK visitor numbers to Ireland have turned positive again (+5.3% YTD) and Irish exports are up 4.1% YTD (Sep).
2012 to be another difficult year
For 2012 we factor in RoRo freight volumes of -2% and car volumes to be flat, with small share gains compensating for underlying weakness. We forecast LoLo volumes to be flat, with Irish exports compensating for weaker Irish imports. Industry players (Seatruck, P&O etc) expect flat to modest growth. Once again, we expect yields on Cars (+3%) to compensate for RoRo Freight (-1%). Industry players see the need for higher yields but remain cautious on its implementation. Fuel inflation will be less of a concern in 2012 (0%) than in 2011 (+26%). We forecast 2012 EBITDA of €50m, 7% below consensus. Such a performance would still imply an EBITDA margin of 18.3% (+30bps), ROACE of 17.0% (+170bps) and a 2012 net cash position.
Cash generation strong even in a stressed scenario
ICG generates a lot of free cash (10Y cash conversion rate of 118%) and it nearly all goes to shareholders. On our 2012f forecasts the dividend is covered 1.4x by FCF. We estimate that Passenger/Car volumes would need to fall by 5% with flat yields and Freight RoRo volumes to fall by 10% with yields down 3% for the cover to fall below 1x. Even in this scenario, we would expect the dividend to be paid. ICG management has repeatedly expressed its commitment to the dividend.
Balance sheet strength ensures dividend can grow further
ICG offers an appealing dividend yield of 7.0% double its ten year average of 3.6%. Given the strength of its balance sheet, we estimate ICG could increase the dividend to €1.23 in FY12 (9% yield) and €1.95 in FY13 (14% yield) and still be debt free thereafter. Put another way, we estimate that ICG could distribute excess cash (post dividend) of €140m (40% of market capitalisation) over the next seven years, finance a ship replacement in 2019 and still be debt free thereafter. Its high cash conversion and low tax rate also warrant a high multiple (2012f EV/EBIT 12.1x vs ten year average of 12.1x). We set our DCF target price at €16.20 (WACC 9.0%, LT growth of 2%, terminal EV/EBIT of 12.5x), which implies 13% upside.
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We have a BUY on ICG