Morning Wrap

Today ’s Newsflow Equity Research 02 Aug 2016 Upcoming Events Select headline to navigate to article

Travis Perkins H116 behind forecasts, Consumer Company Events disappoints 02-Aug ; Interim Results 04-Aug Mondi; H1 16 results HeidelbergCement Italcementi H1 results challenging with UDG Healthcare; Q3 Trading Update outlook muted US Building Materials Weak results and data from US construction Economic View Irish manufacturing hit by Brexit GVC Holdings Announces refinancing at very attractive rate & positive start to H2 Lufthansa Q2 contains few surprises and few sources of comfort Applegreen maintain momentum in Q2 and reiterates FY guidance Economic Events Britvic Barr impacted by challenging market conditions in Ireland H1 03-Aug ILO Unemployment Rate July 2016

GameAccount Network New American Simulated Gaming contract announced United States

Europe 02-Aug PPI June 2016 03-Aug Retail Sales June 2016

Goodbody Capital Markets Equity Research +353 1 6419221 Equity Sales +353 1 6670222 Bloomberg GDSE

Goodbody Stockbrokers (trading as Goodbody) is regulated by the Central Bank of Ireland. For the attention of US clients of Goodbody Securities Inc, this third-party research report has been produced by our affiliate Goodbody Stockbrokers. Please see the end of this report for analyst certifications and other important disclosures. Goodbody Morning Wrap

Travis Perkins H116 behind forecasts, Consumer disappoints

Travis Perkins has reported operating profits of £194m (pre property profits of £192m). This Recommendation: Hold represented growth of 5% yoy and came in 9% behind our expectations primarily driven by Closing Price: £15.44 a weaker outturn in the Consumer Division. Robert Eason

+353-1-641 9271 While lfl sales growth of 6.5% was in line with Goodbody forecasts operating profit of £44m [email protected] was 14% behind our forecasts as operating margins came in at 5.7% versus 6.7% forecast and 5.9% a year ago. Management noted that and Toolstation continue to invest in their value proposition resulting in gross margin declining by 40bps versus our expectation of a 40bps increase. This will lead to speculation regarding the impact of Bunnings entry into the UK DIY market and will be queried on the conference call.

A slowdown in lfl sales growth for General Merchanting from 4.7% in Q116 to 1.1% in Q216 is no great surprise given the recent uncertain backdrop. The Contracts business proved more resilient with lfl growth of 3% in Q2 versus 2% in Q1. Plumbing and Heating remains challenging with lfls slowing to -1.4% (+2.2% in Q1).

Net debt of £510m compared to Goodbody’s forecast of £427m and £447m at Dec-15 end. The key variances versus our forecasts are an exceptional income tax payment of £42m and higher capex (£119m vs Goodbody forecast £95m).

With regard to the outlook, management notes that the early signs from the lead indicators that it tracks are mixed and as a result the group is taking “a more cautious stance to end market demand in Q4 2016 and 2017”. However, management further notes that July trading has gradually improved through the month which may provide the market with some comfort. As is the case with all the merchants in our coverage, there is downside risk to forecasts.

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HeidelbergCement Italcementi H1 results challenging with outlook muted

Italcementi has reported H116 results, with reported revenues down 2% yoy and recurring Recommendation: Buy EBITDA down 8%. Adjusting for the sale of CO2 rights, recurring EBITDA was up 2%. The Closing Price: €75.05 standout region was North America (recurring EBITDA >100%) which continues to offset the Jason Molins rest of the regional exposure which saw a decline in recurring EBITDA. Management notes +353-1-641 9141 that it is confident of achieving a “slightly higher” operational result in H216 compared to [email protected] H215. In H215 recurring EBITDA stood at €312m.

We note that consensus EBITDA for FY16 previously stood at €651m and the implied guidance suggests that this is more likely to be closer to €615m-€620m. While the recent strong results from HeidelbergCement was likely to lead a marginal upgrade in numbers, the results from Italcementi are likely to soften that impact.

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US Building Materials Weak results and data from US construction Yesterday, Vulcan Materials reported Q2 results below consensus with adjusted EPS of $0.90 Robert Eason cents compared to consensus of $1.01 cents, resulting the share price being down 6%. The +353-1-641 9271 miss was primarily driven by top line weakness, on the back of wet weather in May combined [email protected] with slower than expected large project starts. Of particular note was the decline in David O’Brien aggregates volumes of 5% in May, compared to April and June which increased 8% and 6%, +353-1-641 9230 david.a.o’[email protected] respectively. On the conference call management was clear that while growth so far in infrastructure activity in 2016 has been slightly slower than expected, the underlying Jason Molins fundamentals are strong and it is just a matter of timing. Guidance for FY16 has been +353-1-641 9141 [email protected] maintained, with management noting this will be dependent on: (i) the ability of customers to recover weather-delayed volumes from Q2; and (ii) the absence of further delays in Sarah Dunne +353-1-641 0482 several large projects. [email protected]

Separately, US annualised construction spend for June came in below expectations, with total annual spend -0.6% mom compared to consensus of +0.5%. This compares to May which came in at -0.1% (revised from -0.8%). On a monthly basis, construction spend was flat in June yoy resulting in Q216 growth of just +2.4% compared to +11.4% in Q116. Weaker trends continued across most segments with Highways -3.7% following the -1.3% reported in May. Non-residential activity trends were also weaker at -1.2% (May +2.4%) largely driven by public activity at -5.0% (May -2.2%), with private non-residential proving a bit more resilient at +1.9% (May +5.8%). Growth in residential activity declined to +2.0% (3.6% in May) however this is in the context of a very strong Q116 which increased by 12.8%.

Overall we consider the trends seen in US construction activity in recent months as slightly concerning in addition to the disappointing results from Vulcan Materials. However we note that the poor performance from Vulcan Materials is in contrast to recent results from HeidelbergCement and the recent upgrade in guidance by CRH, which we suspect was primarily driven by its US operations. We therefore remain positive on the outlook for the US construction sector, indeed highlighting that much of the rhetoric from Vulcan Materials’ Q2 statement and conference call was also positive, noting growing backlogs and a strengthening pipeline. Data watch however in the coming months will become increasingly important.

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Economic View Irish manufacturing hit by Brexit

More than four weeks on from the vote, we are starting to get official evidence of the impact Dermot O’Leary +353-1-641 9167 of Brexit. Yesterday, it was confirmed that the UK manufacturing PMI fell to 48.2 in July, its [email protected] worst reading since February 2013 and lower than initially flagged in the flash reading. This morning’s manufacturing PMI for Ireland suggests that the shock is also affecting businesses here, with the headline index also falling to a three year low of 50.2 (53.0 in June), leaving it only modestly in expansionary territory.

New export business decreased marginally for the second time in three months as sterling weakness impacted. Production dropped for the first time in over three years, while new orders were broadly stagnant. Encouragingly, employment in the sector continued to grow, while output prices increased. It is unlikely, however, that these latter trends will continue.

The PMI results for Ireland are consistent with a separate survey published by IBEC this morning, which highlights the concerns of Irish exporters as a result of the Brexit shock and resulting sterling weakness. That survey showed how vulnerable Irish exporters are to currency fluctuations, with only a quarter having hedging in place. The more important services PMI will be published this Thursday (4th August), but there are clear signs already that the Brexit uncertainty and sterling weakness is affecting Irish businesses.

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GVC Holdings Announces refinancing at very attractive rate & positive start to H2

GVC has this morning announced that it has entered into an agreement with Nomura to Recommendation: Buy refinance its debt. This Nomura debt of €250m will replace its existing €400m facility with Closing Price: £6.40 Cerberus, of which €386m remained outstanding on August 1st. In this morning’s announcement the group notes that it had €154m of net debt on July 24th (ex player Gavin Kelleher +353-1-641 0423 balances). The new facility agreement will be signed on 31st October 2016 and will have an [email protected] initial maturity of 1 year, with an extension period of 6 or 12 month post initial maturity. The rate on the new debt is 2% above Euribor with a 0.0% floor, which compares to 11.5% with a Euribor floor of 1% on the current Cerberus facility. We had assumed that the group would refinance the Cerberus facility but that the rate would be 7.25%.

In addition to the announcement of the refinancing, this morning’s release also provides an update on recent trading. In July lfl revenues per day were +26% yoy or 31% yoy in constant currency. The group notes that this was boosted by the Euro tournament, but we believe July 2015 was a soft comparative. In terms of our H2 expectations, we currently have 2% reported yoy revenue growth. While significant migrations remain to be completed, and the July outcome may be heavily Euro driven, the bias to our numbers remains to the upside. We will await until H1 results in September to have a look at forecasts in more detail.

Overall, this morning’s announcement should be viewed very positively for GVC. We have continuously highlighted that the refinancing of its expensive Cerberus debt would be a positive catalyst. Firstly, interest costs have come down significantly but more importantly, having this onerous debt off the balance sheet should help drive a higher rating for its equity. We would also note that net debt appears to be running below expectations which is a reflection of its strong cash generation. And to top everything off, the current trading underlines that bias to numbers remains to the upside. We re-iterate our BUY recommendation.

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Lufthansa Q2 contains few surprises and few sources of comfort

Given its Q2 Adj EBIT was disclosed in its recent profit warning, Lufthansa’s full Q2 release Recommendation: Sell this morning contains few surprises. As a reminder, Adj EBIT came in at €582m (-4% yoy) Closing Price: €10.73 on –4.1% RASK and +1% ex-fuel CASK. The outlook reads as per July 20th’s profit warning; Jack Diskin highlighting geopolitical uncertainties and reduced visibility over bookings. +353-1-641 9193

[email protected] Of most interest in this morning’s financials was (1) the regional drivers of weaker RASK, and (2) the drivers behind a slowdown in cost momentum. On pricing, South America (RASK

-24%) and Asia (-8%) were the weakest regions, while Europe reported a slight improvement over Q1 (N America unchanged at -3%). The deterioration in Asia is of note, particularly as supply dynamics become more challenging in H2. As such, it has reduced capacity for H2 on the back of a number of route cancellations to Asia/LatAm.

On costs, the weaker performance relative to the FY guidance run-rate was explained by route charges and other costs. This now leaves Lufthansa with much work to do in H2 to reach the -3% guidance, particularly as restructuring items begin to annualise.

The details provided this morning reaffirm our view that earnings improvement in H2 will be challenging and that revised FY16 consensus of €1.47bn Adj EBIT will need to be lowered. We look to its conference call for more detail on the forward booking environment, along with comments on the security of a dividend being paid out of FY16 earnings (consensus €0.56/GBY €0.43c).

The conference call is at 9.15am CET /8.15am GMT. UK: +44 203 059 5869. USA: + 1 760 294 1674.

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Applegreen Greggs maintain momentum in Q2 and reiterates FY guidance

Greggs, the Food-to-go (FTG) bakery, released H1 results this morning, with total sales Recommendation: Buy growth of 6% (5.7% in Q1) and lfl sales growth of 3.8% (3.7% in Q1). Key drivers of growth Closing Price: €4.20 continues to be the breakfast day part and ‘Balanced Choice’ options. The Group has opened Patrick Higgins 68 new shops and refurbished a further 86. On outlook, Greggs has made an encouraging +353-1-641 0403 start to H2 and is alert to any change in demand arising from the current economic [email protected] uncertainty. Management reiterated FY growth expectations.

Applegreen operate six Greggs shops (under franchise) in its service stations in the UK. Gregg’s continued robust lfl sales performance and rollout of its investment programme underpins Applegreen’s Food-to-go focused strategy. With significant scope for expansion in both Ireland and the UK, a proven FTG-focused business model and attractive cashflow characteristics, we retain our positive stance on the stock.

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Britvic Barr impacted by challenging market conditions in H1

A.G. Barr, the UK soft drinks company, provided a H116 trading update this morning in Recommendation: Buy which it reported lfl sales declines of -2.9% for the period. Overall market conditions were Closing Price: £6.22 difficult with both deflation and volume declines. In addition, weather conditions in June and Patrick Higgins into July also weighed on sales. The Group continues to reformulate its product range to +353-1-641 0403 meet consumer trends, particularly low sugar. [email protected]

On outlook, the Group expects to meet its full year profit expectations assuming market conditions improve. Looking into FY17, management has highlighted that the weaker sterling will negatively impact input costs.

In its Q3 results, Britvic reported organic revenue declines of 1.5% in the UK, with deflation and poor weather in June also key contributors to its declines. Despite the headwinds in the UK, we retain our positive stance on the stock given: i) its resilient performance in previous recessions; ii) its low sugar portfolio bias; iii) international growth opportunities; and iv) capex driven cost savings.

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GameAccount Network New American Simulated Gaming contract announced

GAN has announced the win of a new Simulated Gaming contract with an undisclosed Recommendation: Hold American casino operator. The identity of the client will be announced following the receipt of Closing Price: £0.34 commercial/regulatory consents. It is expected that the contract will launch before the end of Brian Devitt 2016. This is the fifth new contract signed in 2016 and brings the total number of contracts +353-1-641 9415 won by the group to fourteen, thirteen in the US. [email protected]

This is another encouraging update from GAN and follows on from a number of recent contract wins this year. The challenge for GAN now is to turn cash flow positive in order to arrest concerns over underlying cash depletion. Although this contract will not have a meaningful financial impact until 2017, the fact the group continues to win new Simulated Gaming deals shows the product has traction in the US.

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Market Data Top 10 Covered Companies

Company Price Mkt Cap Absolute Relative to European Sector P/E (LC) (LCM) 1 Day 1 Week 1 Mth Ytd 1 Day 1 Week 1 Mth Ytd 2016f 2017f CRH 27.06 22,071 -1.5 0.8 3.4 1.3 -0.9 1.1 1.1 9.1 17.0 13.5 AIB Group 7.34 20,046 12.9 12.9 33.2 10.2 13.6 13.3 30.2 18.6 16.1 22.3 Ryanair 11.77 15,170 -1.4 1.1 -0.6 -21.6 -0.8 1.4 -2.9 -15.6 14.2 11.1 HeidelbergCement 75.05 14,891 -0.9 5.1 9.8 -0.8 -0.3 5.4 7.4 6.8 14.5 13.2 Kerry Group 77.00 13,537 0.6 -0.0 -5.2 0.9 1.2 0.3 -7.4 8.6 23.3 20.6 Wolseley 41.96 10,912 -0.3 2.8 5.6 13.7 -0.2 1.9 2.4 6.6 16.6 14.6 IAG 4.01 8,143 -1.3 -0.7 5.1 -34.4 -0.7 -0.4 2.8 -29.4 5.0 5.0 Mondi 15.29 7,424 -0.1 4.2 6.8 14.6 0.5 4.5 4.4 23.4 12.2 11.7 Paddy Power Betfair 87.40 7,316 -0.7 -0.1 5.9 -3.8 -0.5 -1.0 2.7 -9.8 28.4 23.3 DCC 67.75 5,978 0.4 0.3 1.9 19.7 0.6 -0.6 -1.2 12.2 21.0 24.2

Indices ISEQ performance

% Price 1 Day 1 Week 1 Mth Ytd ISEQ 5,800.95 -1.14 -0.66 0.89 -14.59 6,800 FTSE 100 6,693.95 -0.45 -0.24 1.77 7.23 6,600 6,400 DAX 30 10,330.52 -0.07 1.30 5.67 -3.84 6,200 CAC 40 4,409.17 -0.69 0.48 3.16 -4.91 6,000

FTSE Eurofirst 300 1,339.15 -0.61 -0.43 1.96 -6.84 5,800

Nasdaq 5,184.20 0.43 1.70 6.61 3.53 5,600 S&P 500 2,170.84 -0.13 0.11 3.23 6.21 5,400 Dow Jones 18,404.51 -0.15 -0.48 2.54 5.62 5,200 Aug-15 Nov-15 Feb-16 May-16 Nikkei 225 16,635.77 0.40 0.09 6.08 -12.60

Exchange Rates

Current Px 1 day Px 1 Week Px Dec15 Avg Ytd

Stg/€ 0.846 0.842 0.836 0.737 0.788 STOXX 600 performance US$/€ 1.117 1.118 1.097 1.086 1.115 CHF/€ 1.080 1.081 1.083 1.087 1.094 420

JPY/€ 114.363 114.604 116.418 130.676 123.089 400

Bonds 380

Yield 1 Day Yld 1 Wk Yld 1 Mth Yld 3 Mth 360

US 2 Yr 0.68 0.03 0.68 0.09 -0.09 340 US 10 Yr 1.52 0.07 -0.05 0.08 -0.31 320

UK 2 Yr 0.17 0.06 0.03 -0.02 -0.35 300 Aug-15 Nov-15 Feb-16 May-16 UK 10 Yr 0.73 0.05 -0.08 -0.13 -0.87

BD 2 Yr -0.62 0.01 -0.00 -0.62 -0.14

BD 10 Yr -0.10 0.02 -0.06 -0.10 -0.37

Irish 10 Yr 0.42 0.02 -0.04 -0.04 -0.54

Commodities FTSE 250 performance

% Current 1 day 5 day 1 Mth 1 Yr 18,000 Brent (ICE $/bbl) 42.14 -0.75 -3.06 -16.31 -19.29 17,500 Gasoline (NYM $/Gal) 1.32 - -0.15 -12.82 -25.54 17,000 Heat Oil (NYM $/Gal) 1.31 - -1.16 -13.50 -17.71 16,500 Nat.Gas 2.77 -3.65 3.71 -7.23 2.03 Gold $/oz 1,349.65 0.57 1.55 0.72 22.87 16,000 Silver $/ozt 20.51 2.35 4.75 6.60 40.87 15,500

Copper U$/MT 4,907.00 1.11 0.77 2.58 -6.00 15,000

Wheat $/BU 4.08 - -1.69 -5.23 -18.33 14,500 Aug-15 Nov-15 Feb-16 May-16

Source : FactSet

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Issuer & Analyst Disclosures

Analyst Certification The named Research Analyst certifies that: (1) All of the views expressed in this research report accurately reflect my personal views about any and all of the subject securities and issuers. (2) No part of my remuneration was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this report.

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