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Today ’s Newsflow Equity Research 30 Jul 2021 08:37 BST Upcoming Events Select headline to navigate to article

Kerry Group Strong rebound in Q2 driven by recovery in Company Events Foodservice 30-Jul Air France-KLM; Q221 Results Games Workshop Group; FY21 Results Total Produce Dole IPO priced at $16 per share IAG; Q221 Results Kerry Group; H1 results IAG ‘‘We know that recovery will be uneven’’ 03-Aug Greggs; H1 results

Air France-KLM Q2 beat; balance sheet needs further work Building Materials Saint-Gobain – Accelerated growth in Q2; upgrades for FY21 Building Materials Holcim – Strong Q221 update with guidance raised Paragon Banking Group Trading update shows group is firing on all cylinders FD Technologies Directorate Change – Steve Fisher Economic Events Ireland announces resignation Irish Economic View Housing supply resuming upward march following lockdown United Kingdom

Irish Natwest/Ulster H1 results; Housing United States completions strong; Company climate targets Europe Irish Banks Card spending up +15% yoy in June and +3% mom; Stress test results this evening

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Kerry Group Strong rebound in Q2 driven by recovery in Foodservice

Kerry Group has delivered a robust set of H1 numbers this morning though note it was up Recommendation: Buy against easier prior year comps within the Taste & Nutrition (T&N) division. The T&N division Closing Price: €130.00 reported H1 volume growth of 9.8% (Q2 +18.1%), largely driven by the rebound in volumes within the Foodservice channel (+25% in H1) with Retail remaining resilient (+5.4%). Group Jason Molins +353-1-641 9141 margins also increased by 70bps to 10.0% which resulted in operating profit growth of 13% [email protected] to €357m (GBY €358m).

Key highlights from today’s update are: i) T&N reported H1 volume growth of 9.8% (Q1 2.0%, Q2 18.1%), which compares to our forecast of 8.4%. The strong Q2 performance was primarily driven by foodservice volume growth of 25.2%. In addition to this, retail posted growth of 5.4%, led by Beverage and Food EUMs. By region, APMEA led the volume growth at 14.0%, followed by Europe +10.7%, and Americas +8.1%; ii) Consumer Foods reported H1 volumes up 4.6% (Q1 1.0%, Q2 8.5%) which is slightly ahead of our forecast of 3.3%; iii) Group margins in H1 improved by 70bps to 10.0% as the benefit of improved operating leverage was achieved in the period. T&N margins were up 80bps to 12.4% (GBY +80bps) and Consumer Food margins increased 20bps to 7.2% (GBY +15bps); and, iv) Net debt came in at €1,981m leaving leverage at 1.9x. Over the coming quarters Kerry is expected to complete the €819m disposal of its Consumer Foods Meats and Meals business and the €853m acquisition of Niacet.

In terms of outlook, Kerry has guided to FY21 constant currency EPS growth of 10- 13% including a c.2% dilution from recent disposals/acquisitions. This implies 12- 15% growth excluding the impact of the deals, up marginally from the previous guidance for +11-15% and compares to our current forecast for c.13.5%. Overall, we maintain our positive stance on the stock and note a FY22 PE of c.30x and EV/EBITDA of c.20x still represents a c.30% discount to some of its closest peers.

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Page 2 30 Jul. 21 Goodbody Morning Wrap

Total Produce Dole IPO priced at $16 per share

Dole plc, a newly created company formed for the combination of Total Produce and Dole Recommendation: Buy Food Company, announced last night that it will raise 25m shares at a price of $16 per share Closing Price: €1.89 through an IPO on the New York Stock Exchange. This compares to the revised price range of $16-17 and will result in total gross proceeds of $400m. The shares are expected to begin Patrick Higgins +353-1-641 0403 trading on the New York Stock Exchange on July 30 and the offering is expected to close on [email protected] August 3rd.

Based on our current FY21 estimates, this values Dole plc on an FY21 EV/EBITDA of c.7.5x and c.7x including synergies which compares to Fresh Del Monte on c.8.5x.

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IAG ‘‘We know that recovery will be uneven’’ The group reported a pre-exceptional operating loss of €1,045m for its Q221, in line with consensus at a loss of €1,036m and a €100m beat to our forecast loss of €1,144m. The Recommendation: Hold Closing Price: £1.82 reported operating loss was €967m, partly reflecting an exceptional credit of €145m on fuel

and FX hedges. Mark Simpson +353-1-641 0478 ASKs came in at of 19.245bn (down 78% on Q219), and passenger RASK was 3.54c for the [email protected] quarter, down 26.6% yoy. We had forecast ASKs of 22.5bn and passenger RASK of 3.35c so the outrun was lower capacity but better pricing and a better q-o-q improvement in RASK than we had expected vs the 3.07c reported in Q121.

We had expected cargo to bounce back strongly, but the 0.13m MT carried was better than we had forecast, with this up 55% yoy compared to the 42% increase we had expected.

With regards liquidity, the €10.8bn of total liquidity as at the end of June falls short of the €11.5bn we had forecast, although a) it was still up on the €10.5bn reported as at the end of March and b) IAG had repaid €517m of borrowings within the movements in cash.

Looking into the second half of the year, the statement remains relatively cautious in terms of the recovery, saying ‘‘We know that recovery will be uneven, but we’re ready to take advantage of a surge in air travel demand in line with increasing vaccination rates’’ and adding ‘‘Given the uncertainty over the timing of the lifting of government travel restrictions and the continued impact and duration of COVID-19, IAG is not providing profit guidance for 2021.’’

However, the company intends to operate up to 45% of capacity in Q3 and then up to 75% of its capacity by Q421 so the conference call will be critical in terms of how the market perceives the bridging of these quarters.

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Air France-KLM Q2 beat; balance sheet needs further work

The group released Q221 results recording revenue of €2.75bn (vs company compiled Recommendation: Sell consensus standing at €2.657bn), an operating loss of €752 (vs consensus of €1.111bn) Closing Price: €4.11 and a net loss of €1.489bn (consensus €1.334bn). The better-than-expected outcome on the operating loss and net loss level is the base impact for the exceptional accounting items Nuala McMahon +353-1-641 0498 taken in Q220 on the impairment for the accelerated phase out of the A380s, A340s, fuel [email protected] “over hedge” and a restructuring cost provision for the AF and KLM voluntary departure plans. The group’s network passenger capacity in Q2 stood at 48% of Q219 levels, in line

with guidance of 50%, and with a 44% load factor.

On outlook, AF-KLM expects to operate 60-70% capacity in Q3 (up from 55-65%) and no guidance is provided for Q4 due to the uncertainty over the timing of the reopening of the North Atlantic. In terms of forward bookings in the network business, French domestic, medium haul and long haul routes are seeing load factors of 54%, 55% and 57% in August. While for September this is 21%, 27% and 32%, highlighting the continued short term orientation of bookings. However, Q3 EBITDA is guided to be positive (bloomberg consensus €237.4m). Liquidity stood at €9.4bn while net debt of €8.3bn benefited from the first set of capital measures announced in April. Further, as approved at the group’s AGM in May, additional resolutions that could form part of the second part of capital strengthening measures could be a rights issue, vanilla quasi equity and equity-linked instruments to restore the balance sheet, re-profile debt redemptions, and to reduce the group’s targeted net debt/EBITDA to c.2x in 2023.

Overall, the result highlights the first signs of recovery as evidenced in the booking trends which have benefited from the reopening of the North Atlantic for American citizens to visit Europe. However, the timing of the second part of capital strengthening measures will likely keep investors at bay.

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Building Materials Saint-Gobain – Accelerated growth in Q2; upgrades for FY21

Saint-Gobain released Q2 results last night. It reported 11.9% organic growth in Q221 vs. David O’Brien Q219 a step up on the 9% reported in Q1. This resulted in Q2 sales of €11.8bn, 8.5% ahead +353-1-641 9230 of consensus. Within the lfl growth in Q2, 9.4% of growth stems from volumes (vs 11.7% in david.a.o’[email protected] Q1) while 5.3% was driven by pricing (2.6% in Q1) - all versus 2019 levels. The strong top Robert Eason line performance translated into an operating income increase of 53% versus H119 which in +353-1-641 9271 turn represents an operating margin of 10.7% (H220: 10% / H119:7.6%). The strength in [email protected] the group’s first half performance has underpinned management’s guidance for FY21 operating income to reach “a new all-time high” with H221 operating income “close to the Shane Carberry +353-1-6419118 record second-half performance”. For context, H220 operating income was up 22.4% on a [email protected] like for like basis. Assuming that H221 comes in at the same level of H220 (€2bn) in the

latter half of the year, this would put FY21 operating income at c.€4.4bn, c.7% above Dudley Shanley current consensus. +353-1-641 9174 [email protected]

From a divisional perspective the robust sales performance was broad based. Activity in Kate McCarthy Northern Europe ticked up in Q2 with lfls of +14.5% vs. Q219 (4.8% in Q1), driven by +353-1-641 9005 spending in the RMI market. Southern Europe / Middle East & Africa experienced positive [email protected] momentum with sales up 16.5% versus Q219 (9.5% in Q1), again driven by renovation markets. The Americas division experienced significant growth (+26.3% vs. Q219 and compares to 23.9% Q1). The strength in performance was supported by double digit growth in volumes in addition to double digit price increases (positive price-cost spread) which in turn led to an operating margin of 17% (H220: 15.4% / H119: 9%). More specifically, North America was up c.20% versus Q219 driven by strength in demand for single-family homes. Finally, sales in Asia Pacific were up 16.9% versus Q219 (15.4% in Q1) led by strong demand in China while India lagged due to the challenging health situation.

Yesterday’s release from Saint Gobain highlights the current strength in the building materials sector and has a positive read across for our coverage.

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Building Materials Holcim – Strong Q221 update with guidance raised

Holcim has reported Q221 group EBIT of CHF1,455m which represents lfl growth of 56% David O’Brien which is 10% ahead of consensus and +15% compared to Q219. The beat is driven by +353-1-641 9230 stronger than expected top line performance in all regions particularly in Latam, Europe and david.a.o’[email protected] Asia Pacific. An EBIT margin of 20.2% (Q220: 17.3% / Q219: 19.2%) represents +260bps of Robert Eason growth yoy and 70bps above consensus expectations driven in particular by North America, +353-1-641 9271 Europe and the Middle East. This is encouraging given the concerns raised in [email protected] HeidelbergCement’s Q221 performance yesterday. However, the evolution of price cost is telling us the same story of growing pressure, with a price cost tailwind of €220m in Q121 Shane Carberry +353-1-6419118 falling to €35m in Q221. [email protected]

Momentum in activity levels is expected to continue into H221. In the outlook, management Dudley Shanley has raised guidance for FY21 for lfl EBIT growth of “at least 18%” (up from at least 10% +353-1-641 9174 previously). While this is a welcome, 18% EBIT growth for the year implies H221 EBIT will [email protected]

decline yoy and most of the upside already appears to be baked into consensus. Kate McCarthy

+353-1-641 9005 From a regional perspective the highlights were: [email protected]

• North America experienced lfl sales growth of 6.6% in Q221 (-6.5% in Q121) which resulted in 18% lfl EBIT growth. Management notes strong demand in the US and positive pricing developments. Both HeidelbergCement and Martin Marietta have confirmed their intentions for a second price increase yesterday

• Europe has seen a strong recovery with lfl sales growth of 24% translating in 54% lfl EBIT growth. Both sales, profits and margins have surpassed 2019 levels with robust market demand across all segments and strong recovery in the UK.

• Latin America is the strongest performer of the EM regions with lfl sales growth of 72% (-22% in Q220) and EBIT growth of 92% beating expectations by 7%.

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Page 7 30 Jul. 21 Goodbody Morning Wrap

Paragon Banking Group Trading update shows group is firing on all cylinders

Paragon Banking Group (PAG) has published 3Q21 results for the 3 months to end-June this Recommendation: Buy morning. We don’t get full financials but we do get some detail on B/S and Income Closing Price: £5.48 Statement items. In overall terms the update is very positive and the following key points are worth noting: 1) 3Q represented PAG’s busiest quarter for originations in over a decade John Cronin +353-1-641 9187 with very strong growth achieved in both the Mortgage and Commercial Lending portfolios [email protected] driving net loan growth of +2.2% q/q to £13.09bn (our year-end forecast is for £13.26bn, which now looks a little bit light, especially in light of pipelines). 2) Loan pipelines are far

higher than where they stood at end-3Q20 (BTL +40% y/y at £911m; Development Finance +97% y/y at £386m). 3) Deposits were up to £9.1bn at end-June from £8.6bn at end-March – with further reductions in the cost of deposits (portfolio average savings rate of 0.97% at end-June versus 1.08% at end-March). 4) Impairment charges lower than expected (we don’t get a number) with a hint of potential for writebacks at end-FY21 (“we note the current modelled outputs and portfolio performance are favourable when compared to the Board's expectations at the half year”). 5) The CET1 capital ratio was very strong – and better than what we had expected – at 16.1% at end-3Q (including an accrual for 50% of the final dividend), +10bps q/q (and while we don’t get RWA data, making some sensible assumptions, and backsolving with capital and dividend information, suggests significantly better P&L performance than we had expected – likely a function of high-yielding Development Finance strong loan growth). 6) PAG notes that it continues to engage with the PRA on its IRB application.

All in all, this update was a bit more positive than we had been expecting and while the stock price has performed strongly of late we think this update will drive consensus upgrades and will drive the stock price higher over the coming days. This update also presents significant positive readacross for OSBG (whose stock price has lagged of late) given BTL trends. We still see 14% upside to the current PAG stock price (and our TP of 624p for PAG now needs to be revised). In a nutshell PAG is a specialist lender that presents a compelling equity investment case – with strong growth in niche lending markets, structural underlying NIM enhancement, good cost control, sound asset quality proven TTC, capital return, and consistently high dividends.

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FD Technologies Directorate Change – Steve Fisher announces resignation

FD Technologies has announced that Steve Fisher, one of its Non-executive Directors has Recommendation: Buy announced his resignation from the Board and is due to step down in January 2022. It Closing Price: £22.55 follows his appointment to a full-time senior executive position at Salesforce, where he previously was employed and therefore prevents him from devoting the required time to his Gerry Hennigan +353-1-641 9274 current role at FD Technologies. [email protected]

The group Chairman, Donna Troy, notes that a search is already underway for a

replacement with enterprise technology development expertise as the group seeks to capitalise on the opportunities available to KX.

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Irish Economic View Housing supply resuming upward march following lockdown

With home completions flat on 2019 levels and housing starts surging as restrictions were Dermot O’Leary eased in April, it is now likely that new supply in 2021 will be above 2019 levels. In the +353-1-641 9167 [email protected] context of the prolonged lockdown of the sector since the pandemic began, this is an extraordinary result. It is driven by three factors.

First, there was upward momentum in new supply coming into the pandemic, as evidenced by a pool of units that were in the system. Second, and somewhat linked, is the surge in apartment construction, particularly in Dublin. Yesterday’s CSO data shows that apartment completions were up 62% from 2019 levels in H1 2021. Separate data show that 81% of

housing under construction at the end of 2020 was apartments. Third, the surge in housing This document is intended for the sole use of Goodbody Investment Banking and its affiliates commencements in April/May 2021 (+250% relative to 2019) illustrates the ongoing resilience of the demand environment in the housing market. This has been highlighted by the growth in orderbooks of the quoted housebuilders in recent results.

Even if supply comes in above 2019 levels of 21K, it will be modestly so and still well below our estimated annual household demand level of c.35K. There are three important components to this supply – private, PRS and social. It is clear that the pandemic has not hampered demand from any of those three components, suggesting that supply will resume an upward trend in the coming quarters.

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Irish Banks Natwest/Ulster Bank H1 results; Housing completions strong; Company climate targets

Natwest had H1 results out this morning in which it records a net impairment release and Eamonn Hughes provided revised (higher) guidance on distributions. Our UK analyst will give you a more +353-1-641 9442 detailed assessment of the figures, but we just looked at some of the figures/commentary in [email protected] relation to Ulster Bank. Natwest basically repeats the recent disclosures by AIB and PTSB in Ronan Dunphy relation to the sale of certain assets to both of the Irish banks. In relation to the sale to +353-1-641 9072 PTSB, it references that it will receive a minority non-controlling stake in PTSB but “no [email protected] estimate of any financial effect of the potential transaction can be made at the date of approval of these accounts”. In relation to the actual operating performance at Ulster Bank in

Q2, NII was down €5m sequentially due to lower lending activity, which partially drove a

6bps reduction in NIM to 1.43%. Net loans were €0.4bn lower in the quarter to €19.4bn.

Costs were up in the quarter, but Ulster Bank only took €1m of impairments or 2bps, showing the benign backdrop and it references improvements in asset quality. Its charge even includes an uptick in post model adjustments from December (from £204m to £230m), but Natwest does reference that the increase in other PMAs reflects the judgment that continuing actions on the phased withdrawal of Ulster Bank RoI from the Irish market will lead to higher/earlier crystallisation of losses.

There is very little new per se in the Natwest release in relation to the recent transactions and underlying trading at Ulster Bank. It appears the announcement in mid-Q1 of the departure from Ireland is already seeing the loan book roll over, but it’s reassuring nonetheless that the asset quality of the loans that AIB and PTSB are set to purchase remain very strong.

Our economics team notes that new dwelling completions in Q2 of 5,021 was at the high end of the forecast range set out in our BER Tracker earlier this week. Completions were 55% above the Q2 2020 lockdown lows, but 5% above Q2 2019 levels. In H1 overall, completions were effectively flat on 2019 levels suggesting that the pandemic merely stalled the upward trend in new housing supply in Ireland rather than reversing it. Indeed, as we pointed out earlier this week, there has been a surge in housing commencements since the Irish construction sector reopened in April. Housing commencements grew by 250% relative to the same period in 2019 in April and May. This suggests that the upward trend in completions will recommence in the coming quarters.

Any improvement in completions trends into H2 or 2022 will obviously help in relation to mortgage activity as well in due course for the banks, so one to watch.

This document is intended for the sole use of Goodbody Investment Banking and its affiliates Elsewhere, we note the FT story that 50 large investors – as represented by the Institutional Investors Group on Climate Change - are demanding that companies publish details of efforts to tackle climate change and give shareholders a vote on their plans, arguing that many businesses making “net zero” commitments for 2050 are taking little tangible action now. They are looking for companies to make a board director responsible for those actions and allow investors to vote annually on progress on the plan, where it is permissible in local law.

Groups like the IIGCC agitating for change and improved disclosures on climate related matters has added clout given the importance of these funds on company registers. Climate related requirements on the banks are also being escalated through regulatory demands as well, so the direction of travel is very clear for the banking sector.

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Page 10 30 Jul. 21 Goodbody Morning Wrap

Irish Banks Card spending up +15% yoy in June and +3% mom; Stress test results this evening

The Central Bank published June credit and debit card statistics yesterday showing aggregate Eamonn Hughes card spending was up 3% from May and up 15% yoy. Preliminary data for July to date (19th) +353-1-641 9442 shows spending is broadly in line with June. Obviously, there were large month on month [email protected] jumps in accommodation (+184%) and restaurants/dining (+41%) as the economy

reopened (larger yoy rises).

The data shows that spending patterns are back at pre-pandemic levels which is helpful in terms of thinking about card fee activity for the banks.

Elsewhere, we note the Governor’s blog on digital money. He noted the responsibility for regulators to consider digitalisation and in relation to a digital euro, he suggested it is not a question of “if” but rather “how and when” it will be introduced. In relation to cryptocurrencies, he suggested the negatives currently outweigh the benefits, but we shouldn’t ignore the positive elements of the underlying technology. The financial landscape is changing and central banks are adapting to the change through work on the digital euro, ongoing developments in the EU regulatory framework and wider international developments.

An interesting blog from the governor on a complex topic. The direction of travel is reasonably clear, so it is important that the regulators move with the developments to set out the rules of the game as the financial system develops.

However, the main regulatory focus later today is likely to be EBA stress tests, though the results are set to be published after the market close. There are plenty of moving parts in the stress tests and obviously the starting CET1 and provision coverage levels will be important inputs. All banks are likely to see large CET1 drawdowns under the adverse stress test but when we look at the macro economic stresses to be imposed in the test, there are some hopeful signs on a relative basis for the Irish banks. Whilst the commercial property price decline in the adverse scenario for Ireland at -40% (deviation from base case) is large, it is not much worse than the -33% for the EU and -38% for the UK, but the decline in residential house prices at -8% (deviation from base) compares to -23% for the EU and - 30% for the UK. Elsewhere, GDP declines for Ireland at -13% (deviation from base) are similar to the -13% for the EU and -14% for the UK.

With the ECB having already acknowledged it will remove the system-wide This document is intended for the sole use of Goodbody Investment Banking and its affiliates dividend ban, the importance of the stress tests has been somewhat diminished. However, when it made its dividend decision last week (July 23), the ECB did reference that “when assessing a bank’s capital trajectory and its distribution plans, supervisors will take a forward-looking view duly informed by the results of the 2021 stress test”. So, we think it less relevant the absolute CET1 drawdown under the stress test, but more where banks place on a relative basis. For the record, our forecasts incorporate the resumption of distributions at both AIB and BOI at FY21 results. And indeed, the world has somewhat moved on already from the end December balance sheets used in the stress tests with the macro backdrop somewhat better and significant structural change in the domestic banking system – through the exits of KBC and Ulster Bank – that probably strengthens the position of the remaining incumbents.

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Other disclosures

We would like to inform you that Eamonn Hughes holds shares in AIB Group We would like to inform you that Dudley Shanley holds shares in CRH We would like to inform you that Robert Eason and Dudley Shanley hold shares in Kingspan

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