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Morning Wrap Today ’s Newsflow Equity Research 21 Oct 2015 Upcoming Events Select headline to navigate to article Economic View Mortgage credit standards tightened in Q3 Company Events 21-Oct Home Retail Group; Q2 2016 Results 22-Oct Ladbrokes; Q3 2015 Results US Building Materials ABI back into positive territory in Norwegian Air Shuttle; Q3 2015 Results Travis Perkins; Q3 2015 IMS September 23-Oct William Hill; Q3 2015 Results 27-Oct Carpetright; Q2 2016 Results Geberit; Q3 2015 Results Kerry Group Strong FY15 from Chr. Hansen 28-Oct C & C Group; Q2 2016 Results St Gobain; Q3 2015 Results Origin Enterprises Yara positive update Fyffes Announce expansion of farming capacity Paper & Packaging PCA notes lower containerboard Economic Events export prices, guidance for Q4 below expectations Ireland Economic View New Governor maintains CB independence United Kingdom 22-Oct Retail Sales Ex Auto Fuel YoY United States Kenmare Resources Weak outlook from Base Resources 23-Oct US Manufacturing PMI Europe Commercial Property NAMA reports H115 net income of 22-Oct ECB Main Refinancing Rate 23-Oct Eurozone Services PMI €473.5m, exceeds FY14 Euro Area Second Quarter Government Debt Eurozone Manufacturing PMI Eurozone Composite PMI Mincon Group Mining remains a headwind for Atlas Copco in Q3 Goodbody Capital Markets Equity Research +353 1 6419221 Equity Sales +353 1 6670222 Bloomberg GDSE<GO> Goodbody Stockbrokers (trading as Goodbody) is regulated by the Central Bank of Ireland. For the attention of US clients of Goodbody Securities Inc, this third-party research report has been produced by our affiliate Goodbody Stockbrokers. Please see the end of this report for analyst certifications and other important disclosures. Goodbody Morning Wrap Economic View Mortgage credit standards tightened in Q3 There have been numerous signs that the macro-prudential rules introduced by the Central Dermot O’Leary +353-1-641 9167 Bank continue to impact on the property market. The latest bank lending survey from the [email protected] Central Bank, released yesterday, provided another. Although there was no change in demand for mortgages reported in Q3 by the banks, credit standards tightened modestly. This is the second quarter this year that credit standards have tightened. On the demand side, the unchanged position followed a modest reduction in Q2, while this followed a substantial increase in demand in the prior two-year period. Housing market prospects, consumer confidence and the general level of interest are also contributing positively to demand, but the regulatory regime is affecting negatively. The effect of the macro-prudential rules is also seen on the supply side, with LTV sizes and other loan size limits tightened. We always suspected that the introduction of these rules would result in a slowdown in the residential market in the short-term. In the medium-term, however, we remain of the view that the shortage of supply relative to demand should result in a reacceleration in price inflation. Home… US Building Materials ABI back into positive territory in September The Architecture Billings Index (ABI: a 9-12 month leading indicator for the US non- Robert Eason +353-1-641 9271 residential sector) returned to positive territory in September with a reading of 53.7 versus [email protected] 49.1 in August. It has now been above the critical 50 level for six of the nine months of the year. The more forward indicators of project inquiries and design contracts also remained David O’Brien +353-1-641 9230 positive at 61.0 and 53.2, respectively (versus 61.8 and 55.3 previously). david.a.o’[email protected] Sarah Reilly Since Wolseley reported a slowdown in the industrial segment of its US business +353-1-641 6080 there has been some concern about the wider non-residential market. The strength [email protected] of the ABI in September is therefore encouraging. Home… Page 2 21 Oct. 15 Goodbody Morning Wrap Kerry Group Strong FY15 from Chr. Hansen Chr. Hansen reported a strong outcome to FY15, with organic growth of 10% for the year, Recommendation: Hold including 11% for its Q4. The company earns high margins at 27% on its Cultures & Closing Price: €69.32 Enzymes businesses, despite an increased spend on R&D. Hansen anticipates continued Liam Igoe organic growth of 8-10% next year. +353-1-641 9450 [email protected] The results set a positive backdrop for Kerry’s functional ingredients business. Kerry will provide a Q3 update on November 3rd. We are forecasting lfl growth of 3.5% in continuing volumes in the period. Home… Origin Enterprises Yara positive update The Scandinavian fertiliser manufacturer, Yara, reported a 15% increase in its Q3 EBITDA Recommendation: Buy and noted a 5% fall in its European fertiliser deliveries during the period. The company Closing Price: €6.53 states that the global farm outlook for fertiliser application remains supportive, especially for Liam Igoe European countries benefiting from lower exchange rates. +353-1-641 9450 [email protected] While Origin’s European customers may also benefit from a competitive standpoint due to a weaker currency, this does not apply to Origin’s UK customers, where a strong sterling continues to negatively impact on farm incomes. Home… Page 3 21 Oct. 15 Goodbody Morning Wrap Fyffes Announce expansion of farming capacity Yesterday afternoon, Fyffes announced a $30m investment in additional capacity in its melon Recommendation: Buy business as well as the expected acquisition of a Costa Rican banana farm for $15m. The Closing Price: €1.52 former includes the leasing of c. 2,500 ha, the purchase of 100 ha, 4 packing stations and Patrick Higgins other equipment for $18m and a further $12m investment in working capital. +353-1-641 0403 [email protected] The Costa Rican purchase was flagged in the Group’s FY14 results in March (and consequently is in our numbers), whereby Fyffes provided a vendor loan to a supplier of c. $7m (which was accounted for under working capital movements) with the intention to acquire the assets in FY15 for $15m (with the $7m loan paid back through fruit agreements). Fyffes has been operating the asset under lease since FY14. Finally, Fyffes has closed its Irish defined benefit scheme to future accrual and liability. This will result in a once-off payment of €20m (€10.5m higher than the balance sheet valuation) and will increase operating profits by c. €1m on a full year basis. In addition, €4.5m is payable under the merchant navy ratings pensions scheme (provisioned for on the balance sheet). Overall, the various transactions/payments will see our net debt figure move to c. €58m (vs net cash of €10m forecasted previously), or 1x net debt/EBITDA. With capacity in melon farms close to full utilisation (17m cases), yesterday’s announcement will expand capacity by c. 25% (4m cases) and provides Fyffes with room to grow in the medium term. The expansion illustrates the strength of the division’s performance, with market share in US winter melons growing from 23% when it was acquired in 2008 to 35% this year. Home… Paper & Packaging PCA notes lower containerboard export prices, guidance for Q4 below expectations Packaging Corp of America has reported Q315 eps of $1.26 compared to consensus of $1.28. David O’Brien +353-1-641 9230 Corrugated volumes increased by 1.3% yoy during Q3 compared to +2.1% in Q2 and +4.4% david.a.o’[email protected] in Q1. While not being specific on which region, management notes that containerboard export prices are lower. Guidance of $1.03 for Q4, which includes a headwind of $0.10 for Robert Eason +353-1-641 9271 maintenance, compares to consensus of $1.17. [email protected] These results appear pretty lacklustre from Packaging Corp with some softness coming from the print paper business. Corrugated volume growth in the US is solid but unspectacular. We await further commentary from management on containerboard export prices. Given that kraftliner imports to Europe are making little or no profit, we believe the scope for pricing downside to Europe is relatively limited or deliveries will reduce materially. Home… Page 4 21 Oct. 15 Goodbody Morning Wrap Economic View New Governor maintains CB independence Yesterday’s announcement that Philip Lane will become the next Governor of the Central Dermot O’Leary +353-1-641 9167 Bank is only a surprise due to the intense speculation that it would be awarded to his nearest [email protected] challenger for the role over recent weeks. In terms of credentials on international finance, Professor Lane has few peers, having achieved his PhD in Harvard, written extensively in peer-reviewed journals and taught alongside the outgoing Governor in Trinity College for years. He will be an important intellectual asset at the ECB Governing Council. Perceived lack of independence has been a criticism levelled at the Central Bank in the past, given that Governors have tended to come from within the ranks of the civil service. Governor Honohan was the first to break that trend, while the appointment of Philip Lane will ensure that independence is maintained. Home… Kenmare Resources Weak outlook from Base Resources While Q3 production volumes from Base Resources this morning all showed healthy QoQ Recommendation: Hold increases (ilmenite +2.3%, rutile +7.3%), it is the comments on the current market outlook Closing Price: £0.02 that draws attention. As expected, Zircon demand remained relatively stable through Gerry Hennigan September, but pricing for ilmenite and rutile came under further pressure towards the end +353-1-641 9274 of the quarter as “competition for sales increased”.