Monday insight: The Irish stocks that are undervalued following the uncertainty of Covid

AIB headquarters in Dublin. The bank is currently trading at €1.90, and analysts say they see upside of around 40pc in the share price

Ellie Donnelly

Shares in AIB, Cairn Homes and Dalata are among the most undervalued Irish stocks, according to market analysts, based on the gap between current prices and stockbrokers’ target prices.

Uncertainty and disruption caused by Covid has driven down prices across a number of sectors and names where analysts are anticipating likely recovery.

Cairn Homes is currently trading at €1.06 in Dublin and analysts see an upside of around 50pc in the stock price.

Property groups including Yew Grove Reit and Hibernia Reit are also tipped to improve in the second half of this year, according to Goodbody ­analysts.

Firms operating in the construction industry here are expected to benefit from the huge demand for housing.

Meanwhile, there is considerable pent-up consumer demand, some of which is expected to be spent in the tourism sector, once economies fully reopen.

In the case of Ireland’s largest hotel group Dalata, analysts see upside of around 20pc.

“Against a backdrop of Irish Government policy lagging other countries in terms of opening up economies, there are some concerns amongst international investors on the pick-up in economic growth in Ireland. However, we believe activity levels have been as strong as other economies despite the more conservative approach to handling Covid-19,” Robert Eason, co-head of equities – capital markets, at Goodbody, said.

“As a result, we believe there are a number of significant opportunities for stocks that are listed on the Iseq that also have a major exposure to the Irish economy and have the biggest discount to our current price targets. These are AIB, Cairn and ­Dalata,” Mr Eason added.

Last year technology firms were the big winners in the global stock markets.

Aidan Donnelly, head of equities at stockbrokers Davy, said one of the main drivers of markets so far this year has been sector rotation that has been predominantly driven by what is happening in bond yields globally.

“What has happened this year is we have seen rotation into the sectors that were poor performers last year, so, financial, industrial stocks, materials stocks, energy stocks,” Mr Donnelly said.

“They have been the big performers this year. Most of it has been driven by what has happened in the bond market. We have seen bond yields move higher since the start of the year, both in US and Europe,” he added.

AIB is currently trading at €1.90, analysts see upside of around 40pc in the share price.

Within an Irish context, the strong performance by the industrial and material sectors has benefited companies such as Kingspan and construction giant CRH.

“There has been a sectoral tailwind behind a lot of the names that have been doing well in Ireland” Mr Donnelly said.

“[On] the construction materials side of it, the other big positive has been the announcement in the States that they are hoping to get an infrastructure bill across the Senate and the House.”

In Ireland, there have also been a number of “stocks specific” movements.

“If you look at the top performers on a year-to-date basis, there is a few stocks specific stories in Ireland, things like the on-going deal with Total Produce to acquire the rest of Dole, that’s been a very strong performer. [With] the likes of the oils and gas – Petroneft, Kenmare – there is no stock specific stories behind them, it is just what is going on [in the markets],” Mr Donnelly said.

Petroneft is up 393pc so far this year, while Mozambique focused Kenmare Resources is up 34pc.

Looking forward, Mr Donnelly said risks remain including the Delta variant, as well as freight and logistics costs, which is “problematic for an awful lot of companies, particularly in an island nation”.

Other companies tipped by analysts at Goodbody for an improvement in performance include Woodie’s owner Grafton Group, DCC, Greencore, and paper-packaging giant Smurfit Kappa.

Convenience food provider Greencore will publish a trading update this week, the same day that Smurfit Kappa releases its second quarter results.

AIB will also be in the spotlight on Friday as one of the two Irish banks included in the latest round of European stress tests.

Goodbody analysts Eamonn Hughes and Ronan Dunphy anticipate AIB and Bank of Ireland will “fare extremely well” in the tests given their high starting capital ratios and high provision coverage.

Their current estimates of common equity tier 1 capital sees AIB trend at a ratio of around 15pc from 2021 to 2023, after the bank acquires the Goodbody and Ulster Bank loan books.

They see Bank of Ireland’s CET1 ratio in excess of 13pc following the expected KBC and Davy deals.

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