Morning Wrap

Today ’s Newsflow Equity Research 22 Jul 2019 08:34 BST Upcoming Events Select headline to navigate to article

UDG Healthcare Clariant disposes of packaging business Company Events 23-Jul Paragon Banking; Q319 Trading Update Yew Grove REIT Acquisition of portfolio 24-Jul Britvic; Q319 Trading Update Kindred Group; Q219 Results Whitbread Oversubscribed £2bn tender offer complete at Marston's; Q319 Trading Update £49.72 strike price Metro ; Q219 Results 25-Jul AIB Group; Q219 Results FBD Holdings Political narrative on premiums Bankinter; Q219 Results heating up Breedon Group; Interim results Howden Joinery; H1 results Harworth Group Further residential plot sales International Paper; Q219 Results Permanent TSB; Q219 Results Irish Bankers pay cap set to remain/No more share Tyman; H1 results sales before Brexit Unilever PLC; Q219 Results Wizz Air; Q120 Results 29-Jul ; Q219 Results Ryanair; Q120 Results

Economic Events Ireland 22-Jul PPI June19 Wholesale Price Index June19 26-Jul Retail Sales June19

United Kingdom 23-Jul CBI Industrial Trends July19 25-Jul CBI Distributive Trades July19 29-Jul BoE Mortgage Approvals June19

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UDG Healthcare Clariant disposes of packaging business

A statement this morning that Swiss-based Clariant indicates that it has agreed to sell its Recommendation: Buy healthcare packaging business to Arsenal Capital Partners for CHF308m, equivalent to 13.2 Closing Price: £7.79 times adjusted FY18 EBITDA. Gerry Hennigan +353-1-641 9274 In 2018, Clariant’s Healthcare Packaging business generated sales of around CHF135m, [email protected] implying a disposal multiple of 2.3x historic sales. The business has facilities in the USA, France, China and India and employs around 600 employees.

Clariant’s Healthcare Packaging business offers products used to protect pharmaceutical products from moisture and oxygen. This includes customisable, high-quality drop-in products (canisters and packets), Integrated Desiccant Systems and specially designed plastic bottles containing oxygen barrier materials.

UDG’s Sharp packaging unit generated sales of $311m and EBITA of $46m in the year to September 2018, all of the operating profit being derived from the US business. As a benchmark for valuations to UDG’s Sharp packaging unit the Clariant transaction indicates both market appetite and a willingness to pay up for specialist packaging facilities in the healthcare sector.

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Yew Grove REIT Acquisition of portfolio

Yew Grove REIT (YEW:ID), Ireland’s newest REIT with a focus on non-CBD and Recommendation: Buy regional commercial office and industrial assets announced to the market last Friday Closing Price: €1.01 afternoon that it had acquired a portfolio comprising three industrial buildings, totalling 115k sq.ft at the IDA Business and Technology Park, Athlone. The €13m acquisition price reflects a Colm Lauder +353-1-641 6042 net initial yield of 7.6% based on rental income of €1.06m from the portfolio, with [email protected] reversionary potential seeing this rise to 8% in the short to medium term. The acquisition was funded by a combination of equity and a drawdown of debt from the firm’s recently

extended revolving credit facility (now €29.1m).

The three assets are currently let to KCI Manufacturing, PPD Development Ireland, and Signature Ortho Europe, players in the med-tech/pharma space, with the Athlone site being a regional hub for these sectors. The WAULT to break of the combined leases is 3.9 years, with the WAULT to expiry extending to 12.5 years. YEW already owns a building tenanted by KCI (they occupy two buildings there), at the IDA supported business park, where they recently completed a €500k extension to the carpark at the request of the tenants. The acquisition bolsters Yew Grove’s pre-existing portfolio of specialist “white room” industrial locations such as Holly Avenue and Centrepoint Business Park, where the highly specialised tenant fit outs effectively increase the strength of the tenant’s covenant, given the high cost of the immovable interiors installed. Such assets are generally difficult to source in the Irish market, so securing this portfolio of three buildings is significant. Aggregate rent from IDA Athlone is now €1.5m for YEW, with a footprint across the four buildings of 160k sq.ft.

This most recent announcement brings Yew Grove’s total portfolio value to €102.4m, with a rent roll of over €7.9m, excluding rent from the recently vacated Airport Business Park office. The announcement is welcome, especially so soon after the recent €10m equity raise which officially completed just one week beforehand, demonstrating Yew Grove’s capacity to deploy funds quickly, thereby minimising any impact of cash drag. This is a noteworthy positive as the REIT embarks on its recently announced €100m programme of equity raises.

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Whitbread Oversubscribed £2bn tender offer complete at £49.72 strike price

Whitbread has this morning announced the result of its tender offer, with £2bn to be Recommendation: Hold returned to shareholders via the purchase of 40.3m shares at a strike price of £49.72. The Closing Price: £49.02 tender offer was oversubscribed. The strike price represents the average variable average weighted price plus an amount equal to 2% of the average VWAP. Rachel Fox +353-1-641 0442

[email protected] Tender offers will be accepted as follows: (i) all ordinary shares tendered at a price below the strike price or tendered as a strike price tender will be accepted and purchased in full; (ii)

ordinary shares validly tendered at the strike price of average VWAP +2% will be scaled down so the total cost of the shares repurchased does not exceed £2bn. This means that 66.8% of shares validly tendered at this price will be accepted and purchased; (iii) all ordinary shares tendered at a higher purchase price than the strike price (being average VWAP +3% and average VWAP +4%) will be rejected and will not be purchased in the tender offer.

The group completed a £482m share buyback earlier this year and following this completion of the tender offer, which will result in £2bn shares being repurchased, Whitbread will have returned a total of £2.5bn to shareholders. The statement notes that the company is not planning on any further returns of capital.

Given our concerns around the UK macro backdrop, soft trading in Regional UK YTD (Q120 RevPAR: -6.4%), and lack of visibility on forward trading around short lead corporate travel (c.25% of bookings) we believe risk to Whitbread numbers remains to the downside. We previously highlighted that the tender offer was providing a valuation support. However, following the completion of this capital return, and confirmation there will be no further return, we believe that at c.23x FY20 P/E and 19x FY21 P/E valuation looks high given the weak trading outlook.

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FBD Holdings Political narrative on insurance premiums heating up

A report compiled by the Department of Justice showing insurance awards declined by 9% Recommendation: Buy between 2013 and 2017 was the lead story in the Sunday Business Post yesterday, with the Closing Price: €9.26 article suggesting that claims by the industry that premium rises are due to rising court awards are misleading. The Department of Justice report was commissioned to assess prior Eamonn Hughes +353-1-641 9442 changes made to the limits of court awards through the District, Circuit and High Courts. [email protected] However, the report did note an increase in Circuit Court awards, which is often a key reference point for the types of injury claims most directly comparable to the ones settled by

insurers and the PIAB. Data on claims settled with customers directly is generally not available, except in the published data from the insurance companies. Recently, insurers have also flagged fraudulent claims as a factor in rising claims costs.

After losses of €1.1bn between 2013-17, the insurance industry returned to profitability in 2018 and likely again in 2019. However, this return to profitability has seen the rhetoric around insurance premiums ramped up in recent months and saw the bosses of the main insurers appear in front of the Oireachtas Finance Committee in recent weeks. Indeed, declining bond yields also pressure the investment returns of insurers, implying the need for greater returns from underwriting to generate adequate returns for shareholders.

We note the comment from the Junior Minister Michael D’Arcy in response to the SBP article that “the premiums have to be reduced immediately”. Whilst the likes of FBD did record some prior year reserve releases in 2017 and 2018, potential returns on equity (ROE) of c.12% this year and c.10% next year are hardly excessive, indeed the latter probably similar to its COE. Notwithstanding, the political narrative is heating up markedly for the sector, which of course is not helpful, and doesn’t look set to dissipate any time soon.

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Harworth Group Further residential plot sales

Harworth Group (HWG:LN), the specialist brown-field developer focused on the North of Recommendation: Buy England, announced last week the sale of three further parcels of engineered land for a total Closing Price: £1.30 consideration of £22.2m at two of its major developments in Yorkshire, capable of delivering 441 new homes. These latest sales put Harworth Group significantly ahead of its annual Colm Lauder +353-1-641 6042 target of plot sales for 1,000 residential units, with c.1,200 having been sold already in the [email protected] year-to-date.

At Waverley in Rotherham, Harworth’s largest development site, 10.7-acres of land was sold to Taylor Wimpey, a national housebuilder, for the construction of 175 family homes. This was the fourth parcel of engineered land acquired by Taylor Wimpey at the Waverley site since 2012. Barratt Homes acquired the second, 11.7-acre plot at Waverley, capable of delivering 177 homes due for commencement in the second half of the year, bringing the total number of residential plots on land sold at Waverley to 1,568, since 2012.

The third plot sold was at the Prince of Wales development in Pontefract to regional housebuilder Avant Homes. The 8-acre site has capacity for 89 homes.

There are two takeaways from these transactions, the first being that demand for residential development land in one of Harworth’s core regions, Yorkshire, remains strong. The second is that engineered parcels of “ready-to-go” land remain popular with large housebuilders, with each of the three purchasers being repeat customers of Harworth Group. Overall, the company is now primed for a strong performance in the second half of the year, which should see Harworth further exceed the target of 1,000 plot sales, which has already been surpassed roughly halfway through the year.

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Irish Banks Bankers pay cap set to remain/No more share sales before Brexit

The FT reports that the junior Minister for , Michael D’Arcy, has defended Eamonn Hughes the pay caps for the banking sector. The Minister noted that he is “satisfied” that the pay cap +353-1-641 9442 is appropriate. Elsewhere, Mr D’Arcy also ruled out any further sale of the government’s [email protected] stakes in AIB or BOI before Brexit. Colin Jackson

+353-1-641 6050 The government has been considering an expert report into remuneration in the banking [email protected] sector, so Minister D’Arcy’s comments on the topic are the first from a senior government source on the issue notwithstanding some recent speculation the expert report was calling Barry Egan +353-1-641 9492 for more relaxed restrictions for the sector. In the context of pay, the pay cap is only one [email protected] factor (though highly visible), with restrictions also on the payment variable pay and a super

tax also on variable pay if it did manage to get paid, so this may become the new battleground for the sector. In relation to the share sales, Mr D’Arcy noted that it was still to be decided whether to focus on selling AIB shares first or to offload the residual stake in BOI, noting it will depend on market conditions and how the stocks are performing.

The junior minister’s comments on the pay cap are politically understandable as we possibly consider a general election at some stage over the coming 12 months, so is hardly a surprise, though disappointing. Also, the comments in relation to no plans for further sell-downs ahead of Brexit is unlikely to surprise.

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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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Goodbody has provided investment banking services to AIB Group, Applegreen, ARYZTA, Cairn Homes, Datalex, Draper Esprit, FBD Holdings, First Derivatives, Flutter Entertainment, Grafton Group, Greencore, Hibernia REIT, ICG, IFG Group, IPL Plastics, Kingspan, OneSavings Bank, Origin Enterprises, Playtech, Rank Group, Supermarket Income REIT and UDG Healthcare in the past 12 months.

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