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Today ’s Newsflow Equity Research 07 Aug 2019 08:43 BST Upcoming Events Select headline to navigate to article

Flutter Entertainment Good H1 outcome; FY guidance in Company Events line with market expectations 07-Aug Flutter Entertainment; Q219 Results UDG Healthcare; Trading Statement UDG Healthcare Solid Q3, forecasts maintained, demand- 08-Aug ; 2019 Interim Results driven investment in Sharp IAG; July 2019 Traffic Stats Kerry Group; H1 results 09-Aug IRES REIT; 2019 Interim Results Applegreen Strategic first-time expansion into US MSAs European Airlines Weak demand, weak pricing and rising Brexit risk Irish Banks Ratings agency indicates banks able to absorb new capital buffers UK Banks Secure Trust Bank 1H19 results

Economic Events Ireland 08-Aug CPI Jul19

United Kingdom

United States

Europe

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Flutter Entertainment Good H1 outcome; FY guidance in line with market expectations

Group revenue came in at £1,020m (Goodbody: £1,015m), with underlying EBITDA of Recommendation: Buy £196m, -10% yoy (Goodbody: £174m & consensus £171m). The beat was mainly due to Closing Price: £62.28 lower than expected US investment in H1 (expectations for FY19 US investment remain broadly the same, albeit with a much heavier H2 weighting due to seasonality). Excluding Gavin Kelleher +353-1-641 0423 the US, EBITDA came in at £193m, which was 2% below our expectation, but in line with [email protected] consensus. Adjusted for taxation and regulatory changes, EBITDA would have been +15% yoy. On outlook, the group is noted as continuing to perform well on an underlying basis.

FY19 EBITDA (excluding the US & pre IFRS 16) is expected to be between £420m to £440m (Current company compiled consensus £428m).

The group finished the period with net debt of £356m and net debt/EBITDA of 0.8x. As expected, the dividend was maintained at the same level as last year. The statement notes the group remains on the look-out for further M&A opportunities that meet its strategic and financial objectives.

Overall this is a good update from Flutter. The Online Division appears in good shape. Q2 revenues grew +4% yoy (+10% pre World Cup comparative period) and the group continues to focus on a more recreational and sustainable business. Adjarabet is performing well and while early days there is positive signs on the strategy to grow Betfair Internationally. The performance of the Australian business, with profitability stable in the face of significant taxation headwinds, is a particular standout and highlights the benefits of Sportsbet’s scale and justifies its approach to increase promotional investment in 2018. We are big fans of the group’s US exposure, and the performance during H1 provides significant encouragement. In terms of our numbers, we currently forecast FY19 EBITDA (ex US & pre IFRS 16) of £444m, which is 4% ahead of consensus. We are likely to reduce this by c.£11m (c.2%) to reflect the FY19 EBITDA impact of grey market exits towards the end of Q2 outlined in the statement (includes Switzerland, Serbia, Slovakia and Albania). We would expect consensus to remain broadly unchanged. In summary this is a positive update, and there is more than enough to show the group is well positioned across all its divisions. We continue to like the Flutter Entertainment investment case and it remains our top pick in the sector.

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UDG Healthcare Solid Q3, forecasts maintained, demand-driven investment in Sharp

UDG released a trading update this morning covering the three months to June, in which Recommendation: Buy points of note relate to: (i) reiterated guidance of constant currency adjusted earnings Closing Price: £7.52 growth for the year to September in the range of 5% - 7%; (ii) ongoing underlying strength in Ashfield Communications & Advisory; (iii) a Q3 Ashfield Commercial & Clinical outturn in Gerry Hennigan +353-1-641 9274 line with expectations; and (iv) additional investment on the commercial side of Sharp US in [email protected] response to market demand.

Specific commentary on Ashfield indicates a strong performance in Communications & Advisory, aided by recent dealflow, partly offset by an in-line performance in Commercial & Clinical (guided annual EBITA decline for C&C entering the year of 5%, +1% YoY in H1).

Commentary on Sharp is noteworthy in that it highlights rising demand for commercial packaging in biotech and specialty products. In response to that demand, additional investment in the US commercial business was deployed in Q3. That has served to depress Q3 margins in Sharp resulting in a YoY EBITA decline. Despite that investment, Sharp is expected to achieve double digit revenue growth and mid-single digit operating profit growth for the year to September, the full benefit of the investment materialising in FY20 with a return to normalised operating profit (10%+).

On the M&A front, there was no additional news given prior disclosure of the acquisition of US-based Putnam Associates and UK-based Incisive Health (total consideration $106m, $70m up-front). Relative to net debt as of March of $57m, there remains ample capacity to add further strategic acquisitions.

Points we would draw from the above include the apparent decision to increase near term investment in Sharp with a view to reaping the benefit in future quarters and an implied Q3 outperformance in Ashfield given the unchanged earnings guidance for the full year. In advance of potential FY20 upside arising from the investment in Sharp, we retain our full-year FY19 EPS estimate of 48.3c, which assumes YoY growth of 5%, at the lower end of the guided range. (Scheduled conference call at 8.00am this morning to provide detail on the above - +44 203 037 9299, Password UDG Healthcare).

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Applegreen Strategic first-time expansion into US MSAs

Applegreen has announced that it has conditionally acquired a 40% holding in 23 on-highway Recommendation: Buy service plazas in Connecticut, USA (CT service plazas). The deal will be marginally dilutive in Closing Price: €5.30 FY19 due to the additional debt service costs incurred though management expects it to be accretive thereafter as the sites deliver an improvement in operational performance. Indeed, Jason Molins +353-1-641 9141 it sees significant future earnings growth potential through the addition of new tenants, [email protected] catering facilities and electric vehicle charging bays.

Applegreen (40% interest) has entered into a consortium shareholder agreement with IST3 investment foundation (40%) and TD Greystone Asset Management (20%) to acquire JLIF Holdings (i.e CT service plazas). The deal will cost Applegreen an initial $37.6m for its 40% interest and based on an enterprise value of $229m and with EBITDA of $14.5m, the transaction implies an EV/EBITDA multiple of 15.8x. While leverage will pick up marginally in FY19, the Group expects to remain broadly on-track with its deleveraging objective for FY20 (i.e 2.5x net debt/EBITDA vs GBY 2.6x). Separately, Applegreen has entered into a call option agreement with Greystone, exercisable in five years post completion of the deal, which will enable Applegreen to increase its interest in CT service plazas to 60% and take majority control. The deal is expected to complete in Q319 subject to approval from Connecticut Department of Transportation.

CT Service plazas are 23 well-established and fully invested on-highway service plazas located on the heavily trafficked I-95, I-395 and Route 15 highways which run between New York and Boston. The plazas have exclusive rights granted under a long-term concession agreement with the Connecticut Department of Transport. The agreement has 25 years remaining, with the potential to extend for a further 10 years. Roughly 91% of revenue generated in the plazas is from long-term anchor tenants including McDonalds, Dunkin’ Donuts, Subway and Alliance Energy.

We consider the acquisition to be another significant strategic step for Applegreen. It grows the Group’s exposure to non-fuel food and beverage earnings and, importantly, gives the company access to the highly regulated (with high barriers to entry) US motorway service areas for the first time.

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European Airlines Weak demand, weak pricing and rising Brexit risk

We have published a post-results wrap on the lead LCCs in which we have cut our FY20 Mark Simpson forecasts for Ryanair and easyJet in the face of continuing weakening economic data. +353-1-641 0478 [email protected] We remain cautious that the broad capacity cuts being proposed will get ahead of a Nuala McMahon weakening demand picture, with the latest manufacturing PMI for July representing the +353-1-641 0498 fastest rate of month-on-month contraction for over 6 years. The last time this level was [email protected] seen in 2012/13 when passenger growth turned negative. In addition, the sector is again reflecting the rising risk of a ‘Hard Brexit’.

With fares expected to remain down yoy over the current peak quarter (RYA -5.6% yoy, Wizz -4.2%, EZJ -1.9%), combined with the political and economic risk highlighted above, we cannot see any short-term catalyst for a positive rerating.

Looking into next year, fundamentals are more encouraging given our view that MAX delays will not bunch deliveries into next summer, that capacity discipline to hold and that yields may begin to stabilise. With unit fuel costs expected to be more favourable next year, margins should improve, although we would still maintain that this improving picture is too distant to count for now.

With regards the lead LCCs, we summarise our views below; - Ryanair: Uncertainty over the carrier’s fare guidance (H2 fares implied as +7% yoy vs down 6% in H1) will persist until the next release in early November. We think this asks too much and drop our FY20f fares to -3% and our PAT to €778m (from €828m). - easyJet: We lift our FY19f pre-tax to £420m (from £412m) based on Q4 fares of - 1.9% yoy; however, a 1ppt change equals an £18m swing. More importantly, the +3% capacity guidance for FY20 means that yields would need to rise 3% yoy to hold our FY20 £468m forecast; this looks demanding and we cut of forecast to £447m. - Wizz: Demand in the CEE remains strong and confidence in the sustainability of its model means Wizz has upped its capacity target for the year. Wizz is the only airline delivering significant profit growth this year and remains our top pick in the sector.

In summary, this is a tough peak summer environment and we see the sector range-bound until after the next Brexit deadline.

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Irish Banks Ratings agency indicates banks able to absorb new capital buffers

The DBRS ratings agency published on the Irish banks yesterday, with a focus on asset Eamonn Hughes quality, income and capital. +353-1-641 9442 [email protected] The agency noted that Irish banks continued to improve asset quality in H1, However, the Colin Jackson NPE ratio of 6.7% remains above the 5% level referenced by the EBA. DBRS noted that +353-1-641 6050 whilst sales to investors are expected to remain the main strategy to reduce NPLs further, it [email protected] remains important for banks to continue to seek alternatives to reduce NPEs organically, by working with borrowers to resolve NPLs and enforcing the loan collateral. Barry Egan +353-1-641 9492

[email protected] Whilst profitability in H119 was down yoy, NII “remains robust” at the banks. DBRS flagged

the costs associated with dealing with legacy issues.

DBRS considers the capital position of the banks remains good, supported by their recurrent ability to reinforce capital through retained earnings and significant progress in de-risking. The banks easily dealt with the introduction of the countercyclical buffer (CCyB) in July of 1% and the uplift in the O-SII buffer by 0.5% to 1.0%. DBRS believes that the capital position should help them deal with the impact of TRIM and higher requirements that could result from the introduction of a systemic risk buffer (SyRB) in Ireland, if implemented.

Our CET1 targets already incorporate a net 1.0% rise in requirements in 2021 from an SyRB introduction (CCyB introduction had over a 1-year lead-in). This drives target CET1 ratios of 14.0%, 13.5% & 13.25% for AIB, BOI & PTSB respectively. Our actual CET1 forecasts for AIB are 16.5-17.0% over the next 3 years, around 13.7-13.8% at BOI and 14.5-15.2% at PTSB, so all above our target levels.

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UK Banks Secure Trust Bank 1H19 results

Secure Trust Bank (STB) published interim results for the six-month period to 30th June John Cronin 2019 this morning, reporting underlying PBT of £18.8m for the period, +13.9% y/y – a +353-1-641 9187 decent pace of growth even if considerably slower than recent growth rates (for example, [email protected] underlying PBT was +35.9% y/y for FY18 to £36.7m). Some key observations to call out on Colin Jackson the Income Statement: i) NIM of 6.7% for 1H19, down materially on the 7.6% NIM reported +353-1-641 6050 for 1H18 (and 7.4% for FY18 as a whole) – NIM has been on a downward trajectory owing to [email protected] derisking (mix shift and move to better quality lending) as well as higher funding costs, particularly owing to the subordinated debt issuance in FY18 (but higher deposit costs too); Barry Egan +353-1-641 9492 ii) Cost/Income ratio improved to 55.9% (56.7% in 1H18) as cost growth was maintained at [email protected] a lower pace than revenue growth; and iii) CoR down 20bps y/y to 1.7% (note: 1.8% for

FY18, so pretty flat h/h) in response to derisking (though, interestingly, Motor Finance CoR was +70bps y/y to 5.6% - which provides some, albeit limited, readacross for CBG).

The further growth in profitability (on a y/y basis) in 1H19 was driven by net loan book expansion (+23.9% y/y to £2.28bn) with new originations for the period +16.6% y/y to £712m. Real Estate Finance, once again, proved the strongest growth contributor – with net loans +24.7% y/y to £879m. Interestingly, Retail POS lending saw exceptionally strong growth of +32.2% y/y to £672m – with the Chairman’s statement flagging that STB has developed a particular niche in the season ticket finance market. Motor Finance net lending balances were +10.2% y/y to £300m and STB reminds us, once again, that it quit writing new subprime motor loans in January 2017 (and the assets that have replaced the legacy assets are lower risk but lower margin). Elsewhere, Invoice Finance loans were +17.7% y/y to £221m; mortgage balances were £113m at period-end (+203.5% y/y though STB elected to cease originating new business in 1Q19 owing to NIM compression trends, something our regular readers will be acutely familiar with). Deposits growth was healthy, with deposit balances at 30th June of £2.0bn, +20.8% y/y and +8.3% h/h.

STB is well capitalised at 30th June, reporting a CET1 capital ratio of 12.8% and a total capital ratio of 15.2% - and a high leverage ratio of 9.5%. The CEO strikes a slightly cautious tone in the outlook statement, noting that further “good progress” is expected in 2H19 but that STB needs “to be mindful that our own and other external forward looking economic indicators are pointing to a period of low business confidence and tepid economic growth” – hardly surprising given external forces.

Overall take, a healthy but slowing loan growth; slower profitability build and NIM

of 6.7% for 1H19 well below Bloomberg 6.96% consensus NIM for FY19 as a whole This document is intended for the sole use of Goodbody Investment Banking and its affiliates (no reliable half-year consensus numbers). CoR improved y/y to 1.7% but is pretty flat on a h/h basis – reassuring nonetheless.

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