Morning Wrap

Today ’s Newsflow Equity Research 22 May 2019 09:29 BST Upcoming Events Select headline to navigate to article

C & C Group Underlying business stable while MC& Company Events recovery continues 22-May ; C & C Group; FY19 Results IRES REIT Speculation as preferred bidder for €285m Cairn Homes; AGM portfolio ; Q319 Trading Update ; FY19 Results Britvic Solid H1 with full year on track Marks & Spencer; FY19 Results 23-May Hibernia REIT; FY19 Results Mitchells & Butlers; Q219 Results Harworth Group Brief AGM trading update Great Portland Estates FY19 results- Beating expectations but caution ahead UK Banks Close Brothers upbeat 3Q19 statement points to a strong quarter UK Banks Paragon Banking Group reports a very strong set of interim numbers Draper Esprit Portfolio Update Economic Events Ireland US Building Materials ABI back in positive territory but 22-May PPI Apr19 needs to be watched 28-May Retail Sales Apr19 Codemasters Group Codemasters sign GRID Alonso United Kingdom agreement 22-May CPI Apr19 PPI Apr19 UK Economic View Latest Brexit compromise may be the Retail Price Index Apr19 23-May Retail Sales Apr19 end of the road for the PM 28-May BBA Mortgage Approvals Apr19 Economic View OECD economic projections with risks to United States the downside Europe

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C & C Group Underlying business stable while MC&B recovery continues

C&C this morning reported FY19 results, with adjusted EBIT of £104.5m (+21% yoy), in-line Recommendation: Buy with estimates and the Group’s pre-close statement. This was driven by: i) the first-time Closing Price: €3.58 contribution from MC&B of €15.7m (GBY €15.4m); ii) organic revenue growth of 3.2% (GBY +4.9%); and iii) a flat margin outcome at 15.7% (GBY 15.6%). Net debt at year end was Patrick Higgins +353-1-641 0403 €301.6m, better than our €309m forecast due to better working capital in MC&B. [email protected]

Within MC&B, management note that customer service levels have returned to normalised

levels and customer retention, particularly in Matthew Clark (96%), is encouraging. Working capital performance continued to improve through the year and this is expected to continue into FY20. MC&B are now in the ‘simplification & optimisation’ phase of their recovery plan, with cost-savings in logistics and goods not for re-sale identified. Over time, the Groups believes it can increase the penetration of its beer and cider brands into the on-trade by leveraging off Matthew Clark’s distribution reach. Overall, management anticipates a ‘steady- state’ operating margin of 3%+ (GBY FY21 of 2.7%) across the businesses.

By division the Group delivered: i) 2% revenue growth in Ireland (2.6% volumes) with Bulmer’s +1.6%, growing its share of the cider market by 110bps in the period with particularly strong growth in the off-trade channel. Encouragingly, on-trade share also stabilised following the creation of a new branded sales team. Ireland margins declined 30bps to 18.4% reflecting the mix effect of strong wholesale growth and the effect of a €2.6m pension credit unwind; ii) Great Britain underlying revenue growth of 6.3% (vols +2.8%), with Magners +4.4% (vs GB cider was +2.7%) and Tennent’s -0.2% (in-line with the market). Magners growth was delivered in H1 as it benefitted from good summer weather and the World Cup. Tennent’s gained significant share in the Scottish grocery market as weaker brands and private label lost ground following the introduction of MUP; iii) Super-premium and wholesale grew strongly in both core markets; and, iv) International division revenues declined 3.2% (-5% forecast) reflecting continued disruption associated with changes in distributors in EMEA and Asia Pacific.

In terms of outlook, management note that despite the current geo-political uncertainty and challenging weather-related prior year comparative it anticipates double-digit EPS growth in FY20 (GBY +13%), with MC&B particularly strong. Thereafter, it anticipates mid-to-high single digit annual EPS growth (GBY 7.5% FY21), assuming ‘steady-state’ market conditions. Overall, we consider today’s

update as positive and look forward to this afternoon’s CMD which should provide This document is intended for the sole use of Goodbody Stockbrokers and its affiliates more detail on the Group’s strategy, particularly for MC&B.

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IRES REIT Speculation as preferred bidder for €285m portfolio

The Irish Times this morning notes that IRES REIT has come out as the preferred bidder for Recommendation: Hold the Marathon XVI portfolio, currently being marketed by and Eastdil secured. In a Closing Price: €1.61 release to the market just before 9am, IRES confirmed the speculation and noted that the deal is subject to completion of due diligence, board approval, and exchange of binding Colm Lauder +353-1-641 6042 contracts. The XVI portfolio, earning its name from the 16 locations over which the 815 units [email protected] are spread, was launched at a guide price of €240m, with the Irish Times article noting that IRES is set to pay €285m for the apartments.

The Marathon portfolio has a current annual rent roll of €14.7m, so the price reflects a net initial yield of 4%, with the prospect of this rising further to c.4.8-5% as the 2% vacancy in the portfolio is let and rent reviews are progressed (though this will be a slow process given the 4% rent cap). IRES can also bring considerable cost efficiencies to the management of these assets and we expect this to provide a significant boost to the net yield (IRES currently achieve a gross to net on its portfolio of 19% versus 25% in the wider market).

The sale would be the largest single PRS transaction in the Irish market for several years and comes after the recent Marathon disposal of the Heston South Quarter scheme for €222m. The Irish Times article notes that the units in the XVI portfolio are let at below the prevailing market rate at €1,530 per month, meaning the portfolio comes broadly in-line with the current average rent of €1,654 for properties in IRES’s portfolio.

This would be a significant and important transaction for IRES as it continues to scale up its portfolio. The REIT likely just about has the financial capacity under its current credit facilities and in the context of REIT legislation to make this acquisition with existing funding facilities, however medium and longer-term projects (like its agreed forward purchases and its own developments like Rockbrook) will require further consideration of funding in the future.

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Britvic Solid H1 with full year on track

Britvic this morning a H1 adj. EBIT of £83.7m which compares to our forecast for £83.9m Recommendation: Buy and represents 4% growth yoy. The Group delivered total organic revenue growth of 1.9% in Closing Price: £9.38 the period (vs. +1.5% forecast), Underlying margins (after adjusting for the pass-through impact of the sugar tax) were up 30bps in the period (vs. +40bps forecast) coming in at Patrick Higgins +353-1-641 0403 10.9%. [email protected]

The key highlights from today’s statement are as follows: i) GB Stills retained momentum

with revenue growth of 4.8% (vs. +2.5% forecast) in period continued momentum of Robinsons and a positive mix effect; ii) GB Carbs revenue performance (+2.2%) was driven by pricing (+7.2% ex sugar tax). As expected volumes declined (-4.5%) were in part due to the tough prior year comparative which included an element of forward buying ahead of the sugar tax introduction; iii) France remains weak at -5.5% (vs. -3.5% forecast) driven by volumes (-8.4%) largely due to declines in private label sales; iv) In Ireland, the group focused on value over volume, particularly for Ballygowan which resulted in broadly flat revenues though volumes declined 4.5%; v) Brazil delivered a strong performance in the period (+8%) driven by with strong growth in the ready-to-drink portfolio; and, vi) International also performed strongly (+20% vs. 18% forecast) driven by new business wins in the travel and export channel and further expansion with Walmart in the US.

Overall reported EBIT margin was 10.9% which is broadly in-line with our estimates. When adjusting for the pass-through impact of the sugar levy, underlying margin was up 30bps. Brand contribution margin declined 320bps to 35.5% which reflects the impact of the sugar levy though we note is c. 110bps better than our estimate. Net debt was a touch worse than forecast at £654m (£640m forecast) which largely reflects a higher than expected working capital outflow due in part to Brexit preparations.

In terms of outlook, management highlighted that, with a range of marketing and innovation plans, it remains confident that the Group will achieve full year market expectations. Overall, we retain our positive stance on the stock, noting our FY19 EBIT estimate of £216.5m is near the top-end of the consensus range.

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Harworth Group Brief AGM trading update

Harworth Group, the specialist regenerator of brownfield land in the Midlands and North of Recommendation: Buy England released a brief trading update in advance of yesterday’s AGM. In the statement. Closing Price: £1.33 Owen Michaelson, CEO took the opportunity to confirm that trading so far this year has been in line with the board’s expectations. Good progress has been made with applications for Colm Lauder +353-1-641 6042 1,715 residential plots and 1.4m sq.ft of commercial space submitted. Permissions at key [email protected] sites have also been granted, notably for 87,500 sq.ft of commercial space at Sinfin Business Park in Derby, which will ultimately be accretive to the income portfolio. Plot sales for 650

units out of the c.1,000 we anticipate for the year have already been completed or agreed, with some sites for commercial development also being sold, raising total proceeds of £30.3m from disposals. An extra £1m of rent has been secured in the period through 12 new and renewed lettings. The company also notes it is making progress on sourcing a new Finance Director, with news to come in due course.

On the outlook, demand for new, affordably priced homes, and for commercial space under 100,000 sq.ft is assured to be solid, with value gains expected to be weighted towards the second half of the year. Overall, a comforting roundup of progress achieved in the year to date.

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Great Portland Estates FY19 results- Beating expectations but caution ahead

Great Portland Estates (GPOR:LN) delivered solid FY19 numbers this morning with EPRA NAV Recommendation: Sell growth of 1% to close the year at 853p (up from 849p at H1) as values rose 0.2% for the Closing Price: £7.66 year. However, while the portfolio saw capital value growth overall in FY19, we note that values in fact fell in H2 (-0.4%) showing that even an operationally supreme London Colm Lauder +353-1-641 6042 specialist is not immune to the weakening trends in the UK as increased uncertainty weighs. [email protected]

Net rental income on a like-for-like basis came in at 1.2% for FY19 with 1.9% growth for

offices being offset by -0.6% contraction in retail rents. The office performance outpaced the MSCI benchmark for Central London offices of 0.7% annualised rental growth to Q1-19, with no surprises in the declines seen for retail.

The value declines in H2 were echoed by a downgrade to rental guidance for FY20 as management pull growth expectations by 100bps to +1.5% to -2.0% (previously +1.5% to - 1.0% when GPOR upgraded expectations at H1). If such a weakening in market rents occurs this will have a direct impact on capital values in FY20. Even with the positive income performance this year, the outlook going forward shows the risk weighted to the downside for growth in rents for FY20.

GPOR has had another robust lettings performance in FY19 as it grew rent roll by an impressive 6.2% to £100.4m achieving an average premium of 6.9% to March 2018 ERV expectations. Lettings in the new flexi space category contributed significantly to this outperformance with 87,600 sq.ft let at an average 30% premium to ERV. Overall, 78 new lettings (326,000 sq.ft with an annual rent of £24.5m) were agreed in FY19, with notable pre-lettings at Hanover Square, significantly de-risking this ambitious development.

GPOR has delivered another operationally supreme year. Developments continue to be aggressively de-risked with substantial pre-lettings while disposals continue to create a defensive, and war ready, balance sheet. We continue to see GPOR as one of the best ways to get exposure to London, however, our caution on frothy valuations in the market mean we remain concerned and expect further valuations declines.

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UK Banks Close Brothers upbeat 3Q19 statement points to a strong quarter

CBG reported that the Banking loan book was +1.5% q/q, representing +6.0% annualised John Cronin growth, which is a strong performance and means the loan book is +3.6% for 9M YTD. It +353-1-641 9187 was also encouraging - though unsurprising - to note: i) NIM broadly in line with the FY18 [email protected] outturn; and ii) the bad debt ratio remains low "with continued strong credit performance Colin Jackson across the business". +353-1-641 6050 [email protected] Banking represented 74% of CBG revenues for the 1H19 period to put things in context. Asset Management reported continued strong inflows with managed assets up to £10.9bn Barry Egan +353-1-641 9492 (£10.3bn at end-1H19), which is a very positive outturn - but somewhat expected given [email protected] CBG's consistently positive inflows as well as supportive well-known market movements.

Finally, on Winterflood, it is encouraging to note that profitability was "solid" in 3Q19, with Eamonn Hughes performance broadly in line with that of 1H19. +353-1-641 9442 [email protected] All in all, this is a positive trading update which should serve to reinforce CBG's predictability at churning out strong risk-adjusted returns.

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UK Banks Paragon Banking Group reports a very strong set of interim numbers

PAG's 1H19 results were very strong across all key metrics based on our preliminary review John Cronin of the numbers. Zoning in quickly on some of the key points: Underlying PAT +8.7% y/y to +353-1-641 9187 £79.8m, with loan and margin growth in both the Mortgages and Commercial Lending [email protected] divisions underpinning this strong performance (whoever said that the banking sector is Colin Jackson structurally challenged form a profitability growth perspective?!) - notably, NIM was +8bps +353-1-641 6050 to 224bps despite the slight rise in average deposit costs. Opex +15.3% y/y but numbers [email protected] are skewed due to Iceberg and Titlestone, which had been well flagged - indeed, PAG has been clear about its technology investment intentions too - so, a 60bps uplift in Cost/Income Barry Egan +353-1-641 9492 y/y (to 42.8% from 42.2% in 1H18) is pretty moderate all things considered. [email protected]

CoR of 8bps, which is a big jump from the 3bps CoR reported in 1H18 but reflects the Eamonn Hughes introduction of IFRS 9 (provision charges in Mortgages actually fell while charges in +353-1-641 9442 Commercial Lending rose due to its relative growth rate and higher TTC provisioning [email protected] expectations). Net loans +3.3% on the end-FY18 position (+10.4% y/y) with continued very strong Professional BTL originations growth a key driver of loan book expansion (+11.2% y/y and +17.4% h/h). Very impressive deposits growth of +37% y/y, which demonstrates a flexible funding model.

Strong CET1 capital ratio of 13.7% at end-March, with a strengthened statement in relation to IRB progress: "We have made significant progress in the development of our second generation buy-to-let IRB models. Once these have been through their final governance reviews we will be ready to submit the first module in our IRB application process...submission of the first applications...is expected in the second half of the current financial year", which should be warmly received by the market (and PAG's UK leverage ratio of 6.5% at end-1H19 speaks of the upside potential here).The Interim dividend of 7.0p per share, up from 5.5p for 1H18. Indeed, the outlook commentary was all very positive too - in relation to BTL, underserved commercial customer lending, and Idem.

On a final note, while CCFS and OSB have already reported 1Q19 trading updates for the three months to 31st March, the positive results and, more particularly, the positive outlook commentary from PAG this morning should serve to reinforce the message that these specialist lenders can continue to enjoy strong loan growth despite the relatively subdued macroeconomic backdrop (as well as look forward to IRB credit risk models migration in time). On the lending outlook specifically, PAG

noted the following: "Despite the political uncertainties, professional landlords are This document is intended for the sole use of Goodbody Stockbrokers and its affiliates carrying on with their businesses and continuing to develop and expand their portfolios."

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Draper Esprit Portfolio Update

A statement from Draper Esprit this morning outlines updates on three of the core portfolio Recommendation: Buy companies – Transferwise, UiPath and Perkbox. Closing Price: £4.73

Transferwise – Statement highlights a Transferwise valuation post a recent $292m fund Gerry Hennigan +353-1-641 9274 raising of $3.5bn. The net effect is that the fair value of TransferWise in Draper Esprit’s [email protected] Gross Portfolio has, as a result, increased from £13.1m as at 30 September 2018 to £27.7m as at 31 March 2019. The statement adds that Draper has sold part of its stake in

Transferwise, which in combination with the sale of three other companies from the Seedcamp portfolio has seen Draper generate £18.1m in cash from Seedcamp I and II. With the remaining stake held in Transferwise valued of over £12.0m it remains a core portfolio holding.

UiPath – Confirmation is provided on the recently announced closing of a Series D investment round in UiPath that raised $568m at a post-money valuation of $7bn. Draper Esprit secured a holding in UiPath when the Group acquired a 5% stake in Earlybird Digital East Fund I for $20m. At the time, UiPath was valued at $3bn, and made up 85% of the DEF valuation. The fair value of UiPath in Draper Esprit’s Gross Portfolio at 31 March 2019 is now over £30.0m.

Perkbox – Confirmation was also provided on a £13.5m Perkbox equity funding to support its expansion plans. No update on post- funding valuation. Perkbox was valued at £21.7m in the Draper Esprit portfolio as of September with a Draper interest in the range of 11% - 15%.

Amid prior speculation on potential funding rounds in all three of the above assets, the primary item of newsflow in the above from our perspective is the £18.1m cash realised from the partial sale of Draper’s holding in Transferwise. The cash injection provides additional funding for Draper for the current fiscal year (March) and adds to a track record that prior to the announcement this morning has seen Draper dispose of interests in 12 assets, 11 of which were part of the 24 assets that comprised the portfolio at IPO.

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US Building Materials ABI back in positive territory but needs to be watched

The Architectural Billings Index (a 9-12 month leading indicator for US non-residential David O’Brien construction activity) returned to growth territory in April with a reading of 50.5, up from +353-1-641 9230 47.8 in March. In addition, the more forward indicators of “Inquiries” and “Design Contracts” david.a.o’[email protected] also both improved (by circa one point) to 60.9 and 52.1, respectively. Robert Eason

+353-1-641 9271 Despite the improvement, the economist at the American Institute of Architects (AIA) is [email protected] relatively cautious noting that “in contrast to 2018, conditions throughout the construction sector recently have become more unsettled”. While the sector “may not be at a critical Sarah Stokes +353-1-641 0482 inflection point, the next several months of billings data will be indicative of the health of the [email protected] industry going into 2020”.

Sean Blaney It is encouraging to see the ABI back in positive territory but we note the caution +353-1-6419222 of the AIA. As a result, we will be watching the ABI closely in the coming months. [email protected] The US non-residential sector is a key segment for Ferguson, CRH, HeidelbergCement and Kingspan.

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Codemasters Group Codemasters sign GRID Alonso agreement

Codemasters announced this morning that Fernando Alonso has signed as a Race Consultant Recommendation: Buy and will appear in the Company's new GRID game, set to be released on 13 September 2019 Closing Price: £2.15 across Xbox, PC and PS4. This is the fourth iteration of the GRID franchise and fits in with Codemasters strategy of successfully investing around its core franchises, following the last Patrick O'Donnell +353-1-641 6013 release of DIRT Rally 2.0 on February 26th. Signing Fernando Alonso is a high-profile [email protected] addition to the Codemasters in-house skill set, which will help in developing a high-quality player experience. Players will also have the chance to enter a series of in-game events

against some of Alonso's Esports driving team 'FA Racing', across multiple classes of racing

before coming face to face with the former World Champion in a final event. This document is intended for the sole use of Goodbody Stockbrokers and its affiliates

The latest addition strengthens Codemasters core franchises further and fits in with its pre-IPO ambition of adding at least two new releases per annum set to release across major console platforms and PC. Combined with an in-game esports competition, Codemasters continues to use esports as a key tool in enabling the growth of its franchises to a broader player base as it seeks to expand its offering following recent announcements with Motorsport Network and continued progress with F1 esports.

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UK Economic View Latest Brexit compromise may be the end of the road for the PM

Theresa May’s final throw of the dice to get her Brexit deal across the line in the House of Dermot O’Leary Commons appears to be dead before it is even published. +353-1-641 9167 [email protected]

In a speech yesterday, the PM (for now) laid out a ten-point plan that effectively tried to placate a plethora of different factions with open-ended tweaks to her original deal. These included further reassurances on replacing the backstop (for the DUP), an enhanced role for Parliament in the next stage of Brexit (for those worried about what a new PM will do), pledges on workers’ rights and the environment (for the Labour front bench) and a commitment to ending free movement of people (for the Brexiters in both main parties), among others. Instead of hoovering up votes to close the 60 vote gap from Meaningful Vote 3 (MV3), it appears that the gap is actually increasing; as of this morning, Buzzfeed notes that there are already 60 Tories that have stated that they will vote against the new deal (including 26 who have switched from voting in favour of MV3). Boris Johnson is among those who have stated they will vote against. The Labour Party have also come out against the new plan despite a pleading letter from the PM to Corbyn last night. At this stage, it is not even clear if the vote will take place.

The development is the latest in a long line of embarrassments in Theresa May’s premiership. Her legacy will of course be as the PM who promised to deliver Brexit but failed. But the reaction to May’s attempts at compromise is also just another reminder of the impossibility of finding majority support for one version of Brexit. This impossibility has been ever-present since the result of the EU referendum almost three years ago. A very significant cohort of the population is going to be disappointed either way. A new PM won’t change this fact.

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Economic View OECD economic projections with risks to the downside

The macroeconomic backdrop is set to remain weak with further downside risks to forecasts, Alexander Wilson according to the latest OECD economic outlook. The global economy is expected to grow by +353-1-641 9225 [email protected] 3.2% in 2019 (down from 3.3% in the March projections) and 3.4% in 2020. The drivers of slowing growth in recent quarters a familiar - trade wars between China and the US and Brexit uncertainty. On the other hand, strong labour market dynamics are expected to continue despite falling investment and as such household spending will continue to act as a driver of domestic demand.

While euro area growth has been revised upwards to 1.2% in 2019 (from 1%) and 1.4% in 2020 (from 1.2%), economic activity will remain at subdued levels. Weakness in the euro area has been most acute in the manufacturing sector, with the PMIs slipping into contraction for the previous 3 months. The OECD highlight the divergence between performances in services and manufacturing, a trend which is expected to continue. In this context, a looser fiscal stance is recommended to spur the economy on top of ongoing accommodative monetary policy. Elsewhere, Ireland’s economic growth is projected to slow but will continue to grow at a healthy clip, up 3.9% in 2019 and 3.3% in 2020, with significant stimulus coming from strong construction investment.

There is no doubt we are late-cycle, with the OECD’s projections underscoring the headwinds facing the global economy moving forward, but there is life in it yet, with major economies expected to grow modestly over the two-year forecast horizon. Large margins of error exist in forecast at the present time given the binary outcomes the economy faces in the form of trade negotiations and the Brexit process.

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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.

Regulatory Information Goodbody Stockbrokers UC, trading as “Goodbody”, is regulated by the Central Bank of Ireland. In the UK, Goodbody is authorised and subject to limited regulation by the Financial Conduct Authority. Goodbody is a member of the Irish Stock Exchange and the London Stock Exchange. Goodbody is a member of the FEXCO group of companies. This publication has been approved by Goodbody. The information has been taken from sources we believe to be reliable, we do not guarantee their accuracy or completeness and any such information may be incomplete or condensed. All opinions and estimates constitute best judgement at the time of publication and are subject to change without notice. The information, tools and material presented in this document are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities.

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

Goodbody Stockbrokers acts as corporate broker to AIB Group, Applegreen, ARYZTA, Cairn Homes, Datalex, Draper Esprit, FBD Holdings, First Derivatives, Grafton Group, Greencore, Hibernia REIT, ICG, IFG Group, IPL Plastics, Kingspan, Origin Enterprises, Paddy Power Betfair, Playtech, Rank Group, UDG Healthcare, and Yew Grove REIT The list of companies for which Goodbody acts as market maker and on which it provides research, is available at Regulatory Disclosures

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Other disclosures

We would like to inform you that Robert Eason holds shares in Kingspan We would like to inform you that Robert Eason holds shares in SIG

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This information was current as of the last business day of the month preceding the date of the report. An affiliate of GSI may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in this company. Investors should be aware that an affiliate of GSI may have provided investment banking or non-investment-banking services to, and received compensation from this company in the past 12 months or may provide such services in the next three months. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer. All transactions by US persons involving securities of companies discussed in this report are to be effected through GSI.

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Private customers having access, should not act upon it in anyway but should consult with their independent professional advisors. The price, value and income of certain investments may rise or may be subject to sudden and large falls in value. You may not recover the total amount originally invested. Past performance should not be taken as an indication or guarantee of future performance; neither should simulated performance. The value of securities may be subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities.

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