Morning Wrap

Morning Wrap Today ’s Newsflow Equity Research 23 Jun 2021 08:26 BST Upcoming Events Select headline to navigate to article Irish Banks Irish Government to start selling down some Company Events 23-Jun Berkeley Group; FY21 Results of BIRG stake Berkeley Group On track to continue to deliver against medium-term targets Building Materials Further momentum in the recovery of US non-residential Draper Esprit Investment Update tinyBuild Back catalogue performing well as group prepares for Hello Neighbor 2 launch Economic Events Ireland 28-Jun Retail Sales May21 30-Jun ILO Unemployment Rate Jun21 United Kingdom 24-Jun BoE Official Bank Rate 29-Jun BoE Mortgage Approvals May21 30-Jun GDP Q1 Imports Q1 Exports Q1 United States Europe This document is intended for the sole use of Goodbody Investment Banking and its affiliates Goodbody Capital Markets Equity Research +353 1 6419221 Equity Sales +353 1 6670222 Bloomberg GDSE<GO> 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 Euronext Dublin and the London Stock Exchange. Goodbody is a member of the FEXCO group of companies. For the attention of US clients of Goodbody Securities Inc, this third-party research report has been produced by our affiliate, Goodbody Stockbrokers Goodbody Morning Wrap Irish Banks Irish Government to start selling down some of BIRG stake The Irish government has announced a trading plan to start selling down its 13.9% stake in Eamonn Hughes Bank of Ireland. It has a pre-arranged trading plan over the next six months to target that +353-1-641 9442 up to, but no more than 15% of the expected total trading volume in BOI be sold. The [email protected] release also notes the shares will not be sold below a certain price per share, which will be kept under review. Whilst undoubtedly there is a large part of the 14% stake to place over the next 6 months, the move to exit by the State must be seen as a positive development for both the bank and the wider financial sector. Firstly, we believe the stake sale must be seen as an important step in the normalisation of the domestic banking system. Back in early March, the Minister for Finance changed the political narrative, in our view, in a parliamentary speech where he acknowledged headwinds for the banks, linked capital levels to mortgage rates and expressed the desire for banks to be profitable, generate capital and contribute to economic growth. The intention to place BIRG’s shares reinforces this narrative, in our view. Obviously, and not for today, but this raises the obvious question that the journey must start at some stage now on AIB (71% shareholding) and PTSB (75% shareholding, or does the proceeds from any BOI sale allow the State to be actively involved in any PTSB equity raise, which we estimate at potentially €500m for the purchase of Ulster Bank loans if and when it gets to an MOU). Secondly, we wonder does the pending sale now change the narrative in time on the pay caps for the banking sector in Ireland, the lack of variable pay and removal of the bonus tax. This should make the sector better placed to attract talent and deliver better longer-term outturns, bearing in mind this issue was scoring badly for the sector on S and G considerations for investors. This issue is separate from the shareholdings, but over time, particularly whenever the SEARS legislation passes (Senior Executive Accountability Regime), that journey may commence. It may still take time, and obviously the State has large shareholdings in both AIB and PTSB, but it may come on the radar of investors as a positive development. Also, we would anticipate that staff in BOI hugely welcome the news, and at the other banks. Thirdly, from a pure valuation perspective, our current COE at BIRG incorporates a 75bps premium for Irish political system “noise” in relation to the banking system, some of which can be reduced as the removal of stake will lower the State’s perceived involvement. Fourthly, whilst a chunk of BOI is now likely to be placed (though limited in terms of volume each day), we think the trading plan will improve the liquidity in BIRG’s share trading. This document is intended for the sole use of Goodbody Investment Banking and its affiliates The 13.9% stake is currently valued at €675m (150.4m shares). Given recent volume activity, we estimate that it is possible that roughly two-thirds of the stake could be placed over the next 6 months. Should the liquidity indeed improve, that may also attractive potential new investors onto the share reqister, allied to the background consolidation story in Irish banking (exits of KBC and Ulster Bank) and current cheap valuations. Given recent share price moves, with the stock down 17% from its recent highs, BIRG is now trading on just 6.4x FY23f earnings, 3.6x pre-provision profit and 0.55x P/TNAV for ROEs that are potentially 9-10% in 2023, so is very cheap, in our view and we think the earnings momentum bias still remains to the positive. BIRG’s capital is also strong, anticipated to be 13.5% at year end. Home… Page 2 23 Jun. 21 Goodbody Morning Wrap Berkeley Group On track to continue to deliver against medium-term targets Berkeley released FY21 (to April 30th) this morning. For us the four key takeaways are: i) Recommendation: Hold PBT has come in at £518m having previously been guided to be a “similar” level to last Closing Price: £46.40 year’s £504m; ii) Sales prices remain “firm” (same language used in April trading update) whilst build cost inflation, having been “stable” in 2020 has increased to c.4% since the start Shane Carberry +353-1-6419118 of 2021; iii) With respect to previously flagged surplus cash of £450m, Berkeley has [email protected] announced that it will return £228m of surplus capital via a B share scheme. This is in excess of the scheduled returns for 21/22 (i.e. £280m per annum); iv) The focus is clearly on the medium-term with the Group targeting a planned 50% increase in delivery over the business plan period (2024/25). The medium-term guidance for an average PBT of £500m per annum out until 2025 remains in place. Revenue came in at £2.2bn versus our forecasted £2bn. The main deviation was mix as ASP came in at £770k versus our forecasted £725k although volumes were also a touch ahead (4%) at 2,825 versus our 2,723. Ultimately this translated into PBT of £518m, ahead of previous guidance for PBT to be a “similar” level to last year’s £504m and indeed our forecast of £504m, although consensus was already £518m. The group finished the year in a net cash position of £1.1bn. On current trading the group note “resilient sales” and that enquiry levels in London are now running ahead of pre-pandemic levels which it believes signals “the return of confidence to the London market”. The group continue to note sales prices as “firm” and cancelation rates at “normal levels”. Much like we have heard from peers, cost inflation has been an issue thus far in 2021. Berkeley is now seeing cost price inflation of the order of 4% since the start of 2021, broadly in line with what peers have noted. Berkeley previously announced that it had £450m of surplus capital which it would either return to shareholders or use for land opportunities. The Group has this morning announced that £228m of this surplus capital would be returned to shareholders subject to approval at its AGM. The remaining £227m will be retained for allocation to incremental land investment over the course of the next 24 months. The group has also firmly committed to 50% increase in delivery over the business plan period (24/25). Whilst this is ahead of our expectations, the changing mix will ultimately leave our PBT forecasts broadly unchanged. Indeed the group remain committed to its medium-term guidance for a pre-tax ROE of at least 15% and a PBT of an average £500m per annum (until 2025). Overall a solid update from Berkeley Group and the announcement of the excess This document is intended for the sole use of Goodbody Investment Banking and its affiliates capital return will be welcomed. We don’t envisage any material changes to profitability numbers on the back this morning update. Home… Page 3 23 Jun. 21 Goodbody Morning Wrap Building Materials Further momentum in the recovery of US non-residential The latest Architectural Billing Index (6-12 month leading indicator for the non-residential David O’Brien sector) from the American Institute of Architects shows further momentum in May with an +353-1-641 9230 overall score of 58.5 (April: 57.9, March: 55.6). In the release it is noted that demand for david.a.o’[email protected] design services continues to grow at a vigorous pace with the score for May one of the Robert Eason highest in the index’s 25-year history. The increase in May represents the fourth consecutive +353-1-641 9271 month of growth with the commentary very positive around the current strength. The level [email protected] of inquiries came in at 69.2 (April: 70.8, March: 66.9), while the level of design contracts continued its upward pattern with a score of 63.2, this follows on from a jump in April to Shane Carberry +353-1-6419118 61.7 from 55.7 in March.

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