Morning Wrap

Today ’s Newsflow Equity Research 26 Jan 2016 Upcoming Events Select headline to navigate to article

Greencore Growth momentum continues in Q1 Company Events 26-Jan easyJet; Q1 2016 Results Marston's; Paper & Packaging Weak US pricing and cautious outlook Ryanair; Q1 IMS from Packaging Corp of America 27-Jan ; Greencore; Q1 2016 Results 28-Jan Mitchells & Butlers; 29-Jan Rank Group; H116 Interim results ARYZTA McDonalds see strong pick up in lfls in Q4

Commercial Property Construction capacity likely to limit supply response in office sector

Commercial Property Continued strong returns in Irish market, Retail the star performer Economic Events

Ireland Economic View High debt/GDP level poses threat to 27-Jan Property Prices MoM 28-Jan Retail Sales Volume YoY ’s medium term fiscal sustainability 01-Feb Manufacturing PMI Ireland

United Kingdom Builders Merchants Carpetright reports improving lfl 27-Jan BBA Loans for House Purchase trends in January Nationwide House Price 28-Jan GDP QoQ 01-Feb UK PMI Manufacturing Mortgage Approvals Marston’s Positive trading update for the first 16 weeks of FY16 United States 27-Jan FOMC Rate Decision 28-Jan Durable Goods Orders 29-Jan Chicago Purchasing Manager U. Of Michigan Sentiment GDP Annualised QoQ 01-Feb ISM Manufacturing US Manufacturing PMI

Europe 28-Jan Economic Confidence 29-Jan CPI Estimate YoY 01-Feb Eurozone Manufacturing PMI

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Greencore Growth momentum continues in Q1

Greencore reported strong Q1 results this morning, with total revenues up 6.8% in constant Recommendation: Buy currency. Growth in the UK was particularly strong, with lfl revenues up 7.9% yoy. Closing Price: £3.53 Management has indicated its confidence in delivering a full year result in line with market Liam Igoe expectations (EBITA consensus of £101m, broadly in-line with Goodbody estimates). We +353-1-641 9450 currently forecast FY16 EPS growth of 8.5%. [email protected]

While the overall UK grocery retail market is still challenging, Greencore’s UK convenience operations continues to outperform with lfl growth of 7.9% driven by the continued strong performance in the FTG segment. We assume Greencore’s sales in the segment grew double- digit as the group benefits from the annualisation of new business wins and new product launches. Overall, we estimate 8% growth in the UK FTG business in FY16.

Sales in the US grew 1.3% on a constant currency basis, as continued good growth with key customers offset the impact of the product and customer exits associated with the closure of the Brockton facility in November. We forecast 12% growth for the full year given the easier comparative in coming quarters and a continued ramp up in throughput in the Rhode Island facility.

The Group is currently constructing or ramping up production in 3 different plants across the US and the UK. Progress on all three is in line with expectations.

Overall, today’s strong set of results, particularly the performance in the UK, reinforces our positive view on the stock. Greencore is set for sustained earnings growth over the coming years (we estimate 12% p.a. out to 2018), with -to- Go driving growth on both sides of the Atlantic. The company remains one of our preferred stocks for 2016 given this strong earnings momentum. Home…

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Paper & Packaging Weak US pricing and cautious outlook from Packaging Corp of America

After market close last night, Packaging Corp of America (no.4 containerboard player in the David O’Brien +353-1-641 9230 US) reported Q415 adj eps of $1.08 compared to consensus of $1.03 down yoy from $1.16. david.a.o’[email protected] Management indicated that yoy performance was held back by lower print paper prices, lower corrugated volumes and lower export containerboard prices. Robert Eason +353-1-641 9271 [email protected] In a cautious outlook statement management, flagged yesterday’s news that RISI has reduced containerboard benchmark prices by $15-20/tonne, which will adversely impact performance in Q116. This is the first decrease in RISI pricing since 2009.

US players are now trading on 5-6x EV/EBITDA compared to the European players that trade on 6.5x (Smurfit Kappa) to >8x (DS Smith). Historically, US players in the sector have traded at a premium to European players, however, a reversal in this relationship is merited given the growth prospects for both groups in the year ahead (US players 1-3% EBITDA growth versus 6% for Mondi, 12% for DS Smith and 13% for Smurfit Kappa).

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ARYZTA McDonalds see strong pick up in lfls in Q4

McDonalds reported strong Q4 results yesterday afternoon, with US comparable sales up Recommendation: Buy 5.7%. This strong performance follows +0.9% in Q3 and negative lfls for the two years prior Closing Price: €40.92 to that. The Group benefitted from the launch of the All Day Breakfast in October and the Liam Igoe mild weather conditions. Management expects continued positive top-line momentum across +353-1-641 9450 all regional segments in 2016. [email protected]

QSRs represents 34% of ARYZTA’s sales in North America (17% of Group), with the likes of McDonalds and Subway key customers for the bakery. The strong pick up in underlying sales performance from McDonalds provides a positive backdrop for Aryzta. The Group is due to report Q2 results to the end of January on March 14th.

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Commercial Property Construction capacity likely to limit supply response in office sector

In its annual review, Aecom reports that output in the construction industry grew by 14% Colm Foley +353-1-641 6042 yoy in 2015. However, at €12.3bn it remains well below the peak output achieved in 2007 of [email protected] more than €38bn. While Aecom expects to see continued strong growth, “in the double digits”, it warns that capacity constraints are beginning to show, which could put a brake on Eamonn Hughes +353-1-641 9442 the recovery in construction. Aecom notes that many specialist contractors in areas such as [email protected] facades, steel and concrete already have their order books full well into 2016 and that there Sarah Dunne are a limited number of firms still operating that can deliver the large scale projects. +353-1-641 0482 [email protected]

A separate report in the Irish Times highlights the shortage of construction apprenticeships over the last number of years, although notes that new entrants are starting to pick up, more than doubling from 380 in 2013 to 730 last year.

We highlighted the issue of capacity in our recent sector note “Building on solid foundations” and noted that we are already seeing build cost inflation reflected in tender prices (+3% in H115). We believe the lack of capacity in the construction sector will be a key factor in the delayed delivery of new office space and therefore is likely to push the supply response out towards the end of the decade. In the residential sector we believe build cost inflation is likely to pick up in the short term and have factored build cost inflation into our numbers starting at 2.5% in 2016 and rising to 4% by 2020. However, we believe new entrants to the industry, migrants returning home and the re-entry of those on the live register will help keep a cap on build cost inflation.

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Commercial Property Continued strong returns in Irish market, Retail the star performer

IPD released Q415 data yesterday for the Irish market. The index recorded a 6% total return Colm Foley +353-1-641 6042 for all property in Q415, with a 1.2% income return and 4.7% capital growth, broadly in line [email protected] with the previous quarter. The Q4 outturn brings the annualised return to 25% yoy and compares to the annualised total return of 28.5% in Q315. Eamonn Hughes +353-1-641 9442 [email protected] Office returned 5.6%, Industrial was 5.7% while returns from Retail are now outpacing the Sarah Dunne other sectors at 7% growth in Q4. The moves continue to be driven by Capital growth. +353-1-641 0482 [email protected]

The data shows that the annualised growth rate continues to slow, although it is worth noting that returns remain very strong at +25%. The Q4 data is supportive of NAV progression at the REITs and reflect strong underlying dynamics in the rental market, where we estimate that prime Grade A rents in Dublin will rise to €65 sq ft by the end of this year (+18%) after 22% growth in 2015.

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Economic View High debt/GDP level poses threat to Ireland’s medium term fiscal sustainability

In its latest fiscal sustainability report, the European Commission has warned that Ireland Juliet Tennent +353-1-641 9469 faces high medium-term risks. This is due to the still high debt/GDP ratio which the [email protected] Commission forecasts to be at 99.8% at the end of 2015 (Goodbody forecast 95%). This leaves Ireland vulnerable to shocks to both interest rates and economic growth with the Commission estimating the probability of the debt level being higher than it currently is in 2020 at 30%, although it is worth noting that this does not take account of the proceeds of any sales of bank stakes. The Commission also highlights private sector debt and credit flows, NPLs at the banks and house price growth as potential “challenges”.

While the Commission does not expect there to be any short-term (1 year) fiscal sustainability challenges, its warnings on Ireland’s high debt level are a reminder to the next government that fiscal discipline needs to be maintained. Indeed, the EC fiscal rules, to which Ireland is subject, should help in this regard.

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Builders Merchants Carpetright reports improving lfl trends in January

Carpetright has issued a Q3 trading update for the 13 weeks to January 23rd. Lfl growth Robert Eason +353-1-641 9271 increased by 2.4% in the UK (+3.7% in H1) in the period, reflective of a slight softening in [email protected] lfl’s in the pre-Christmas period. However, lfl’s improved significantly in the first four weeks of January, increasing 6% yoy. In the Rest of Europe lfl sales were up 4.2% yoy (+5.5% in David O’Brien +353-1-641 9230 H1), reflective of a continued recovery in the Netherlands and Ireland, in particular. david.a.o’[email protected]

Sarah Reilly While full year gross margin guidance has been revised downwards to a decline of 100- +353-1-641 6080 150bps (50-100bps decline previously) management’s full year profit expectations remain [email protected] unchanged. Jason Molins +353-1-641 9141 [email protected] The softening in growth in the UK in November / December is reflective of similar trends reported in the merchanting sector to date. However, we take a lot of comfort from the reported recovery in lfl growth in January, underpinning our view that growth will remain robust for the UK merchanting sector into 2016.

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Page 5 26 Jan. 16 Goodbody Morning Wrap

Marston’s Positive trading update for the first 16 weeks of FY16

Marston’s released a trading statement this morning for the first 16 weeks of FY16 (to 23rd Recommendation: Hold Jan). In Destination and Premium (D&P), lfl sales were +3.0% yoy (vs PY comp of 2%) Closing Price: £1.51 compared to our H1 forecasts for 2.8%. Both food and drink were ahead of last year at Kevin McDermott +2.5% and +3.4% respectively. In the key two week Christmas trading period (to 2nd Jan), +353-1-641 9162 lfl sales grew by 4.9% despite a tough PY comp of 4.8%. In D&P, management noted that [email protected] operating margins are ahead of last year. Plans are on track to open at least 20 new pub- restaurants and 5 lodges in FY16 with seven pubs and three lodges expected to open in H1.

In Taverns, managed and franchised pub lfl sales were 2.7% ahead of last year compared to our H1 forecasts for 2.4%, with 5% growth over the two week Christmas period. In Leased, profits are estimated to be c.3% ahead of last year.

This is a positive update from management for the first 16 weeks of FY16 and gives us comfort on forecasts. The lfl sales are performing well and the estate growth strategy is positive. However, we do retain concerns over the negative FCF (pre- disposals) and the highly leveraged balance sheet. In addition, we expect the NLW will impact margins as we move through the year. We maintain our HOLD recommendation.

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Page 6 26 Jan. 16 Goodbody Morning Wrap

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 24.34 19,849 -0.5 5.9 -8.0 -8.9 0.1 3.5 0.2 -0.9 15.6 12.7 Ryanair 14.08 19,276 -2.2 -2.3 -6.2 -6.2 -1.6 -4.5 2.1 2.0 15.2 12.2 IAG 5.62 11,424 0.5 3.0 -6.8 -7.9 1.2 0.7 1.5 0.1 7.1 5.7 AIB Group 4.92 13,437 -3.5 -1.6 -36.6 -26.1 -2.9 -3.8 -30.9 -19.6 9.6 14.9 HeidelbergCement 66.02 13,099 -2.2 3.3 -12.6 -12.7 -1.6 1.0 -4.8 -5.0 12.3 11.8 Kerry Group 73.00 12,833 0.7 -1.4 -2.1 -4.3 1.3 -3.6 6.6 4.1 22.1 19.4 Wolseley 34.26 8,909 -1.7 4.0 -7.0 -7.2 -1.7 2.0 -2.1 -2.0 14.0 12.4 Bank of Ireland 0.30 9,586 -3.6 -2.3 -14.0 -12.4 -3.0 -4.5 -6.3 -4.7 10.9 9.8 easyJet 16.31 6,478 -0.5 1.9 -5.2 -6.3 -0.5 -0.1 -0.3 -1.0 10.7 9.9 Mondi 11.92 5,788 -2.5 -0.4 -12.3 -10.6 -1.8 -2.7 -4.5 -2.8 10.2 10.0

Indices ISEQ performance

% Price 1 Day 1 Week 1 Mth Ytd 7,000

ISEQ 6,327.06 -0.46 0.75 -6.22 -6.84 6,800

FTSE 100 5,877.00 -0.39 1.68 -6.04 -5.85 6,600 DAX 30 9,736.15 -0.29 2.25 -9.24 -9.37 6,400 CAC 40 4,311.33 -0.58 2.91 -7.55 -7.02 6,200 FTSE Eurofirst 300 1,323.46 -0.67 2.33 -8.09 -7.94 6,000 Nasdaq 4,518.49 -1.58 0.67 -10.50 -9.76 5,800 S&P 500 1,877.08 -1.56 -0.17 -8.92 -8.16 5,600 Dow Jones 15,885.22 -1.29 -0.64 -9.50 -8.84 5,400 Jan-15 Apr-15 Jul-15 Oct-15 Nikkei 225 17,110.91 0.90 0.92 -8.83 -10.10

Exchange Rates

Current Px 1 day Px 1 Week Px Dec15 Avg Ytd

Stg/€ 0.759 0.755 0.762 0.737 0.752 STOXX 600 performance US$/€ 1.083 1.082 1.088 1.086 1.084 CHF/€ 1.100 1.098 1.095 1.087 1.091 420 410 JPY/€ 128.457 128.276 127.673 130.676 128.059 400 Bonds 390 380 Yield 1 Day Yld 1 Wk Yld 1 Mth Yld 3 Mth 370 360 US 2 Yr 0.86 -0.01 0.86 -0.14 0.22 350 US 10 Yr 2.00 -0.05 -0.03 -0.24 -0.08 340 330 UK 2 Yr 0.41 -0.01 -0.05 -0.20 -0.15 320 Jan-15 Apr-15 Jul-15 Oct-15 UK 10 Yr 1.69 -0.03 -0.01 -0.23 -0.07

BD 2 Yr -0.47 -0.02 -0.07 -0.47 -0.14

BD 10 Yr 0.39 -0.02 -0.08 0.39 -0.12

Irish 10 Yr 0.91 -0.00 -0.06 -0.23 -0.16

Commodities FTSE 250 performance

% Current 1 day 5 day 1 Mth 1 Yr Brent (ICE $/bbl) 30.50 -5.22 9.40 -19.50 -37.49 18,000 Gasoline (NYM $/Gal) 1.08 - 6.50 -14.28 -19.59 Heat Oil (NYM $/Gal) 1.01 - 14.79 -11.08 -37.84 17,500

Nat.Gas 2.16 0.89 1.89 6.36 -27.73 17,000 Gold $/oz 1,106.60 0.94 0.44 3.59 -14.53 16,500 Silver $/ozt 14.22 0.35 1.21 0.14 -22.00 Copper U$/MT 4,454.00 -0.31 2.46 -4.53 -20.19 16,000

Wheat $/BU 4.76 - 0.85 1.71 -10.28 15,500 Jan-15 Apr-15 Jul-15 Oct-15

Source : FactSet

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