Morning Wrap

Morning Wrap Today ’s Newsflow Equity Research 26 Jul 2021 08:25 BST Upcoming Events Select headline to navigate to article Ryanair Raising recovery targets Company Events 26-Jul Cranswick; Q1 trading update Cranswick Encouraging top line momentum in Q1 Packaging Corp. of America; Q221 Results Ryanair; Q122 Results Irish Banks AIB interested in UB trackers?; PTSB H1 focus 27-Jul Greencore; Q321 Trading Update to be on UB deal; Good read from BOI macro data Hibernia REIT; AGM Virgin Money UK; Q321 Trading Update Irish Banks Stress test results due on Friday; AIB to start 28-Jul Barclays; Q221 Results categorising loans on sustainability basis Smurfit Kappa; Q221 Results Wizz Air; Q122 Results tinyBuild AGM Trading Statement notes FY21 “at least in 29-Jul Forterra; Q221 Results HeidelbergCement; Q221 Results line with expectations” Lloyds Banking Group; Q221 Results Irish Real Estate Capital values still in decline in Q2, but Paragon Banking Group; Q321 Trading Update falls moderating in the office sector SEGRO; Interim Results 30-Jul Air France-KLM; Q221 Results Irish Economic View Savings ratio remained close to Games Workshop Group; FY21 Results IAG; Q221 Results record high in Q1 Kerry Group; H1 results Economic Events Ireland 28-Jul Retail Sales Jun21 United Kingdom 29-Jul BoE Mortgage Approvals Jun21 M4 Money Supply Jun21 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 Ryanair Raising recovery targets The carrier reported a PAT loss of €273m for its Q122 period to end June, with this better Recommendation: Buy Closing Price: €15.79 than our forecast loss of €312m and the consensus loss of €283m. Passenger numbers were 8.1m, with total revenue of €371m helped by stronger than expected ancillary revenues, up Mark Simpson 16% on Q119 levels to €22.05/pax, but weaker than expected ticket pricing, down 35% on +353-1-641 0478 Q119 prices at €23.69/pax. Operating costs came in at €675m, of which fuel accounted for [email protected] €157m. This was a much better performance on costs than we had expected (€765.2m cost forecast), driven by lower staffing and depreciation costs. With regards depreciation, the company commented that it was flat yoy primarily due to the sale of 7 older B737 aircraft and 11 B737 lease handbacks over the past year, offset by the delivery of 3 B737-8200 (“Gamechanger”) aircraft in June. With regards the balance sheet position at the end of June, this came in with total cash of €4.06bn vs our €4bn+ commentary, up from €3.15bn as at the end of March. The key driver to this beyond the €1.2bn bond issuance and €850m bond redemption, with interest rates of 0.875% and 1.875% respectively, was the €787m move in accrued expenses and other liabilities to €2.06bn, which includes unearned revenues at the period end. As far as the outlook statement, management has tightened its passenger forecast for the current year to 90-100m pax vs ‘the lower end of 80m to 120m passengers’. We have 95m passenger as our forecast so will leave that unchanged for the time being, although the bias is probably to the upside given the positive comment carried in the statement that ‘‘We are seeing a strong rebound of pent up travel demand into Aug. & Sept. and we expect this to continue into the second half of FY22, with pre Covid-19 growth planned to resume strongly in summer 2022.” In this context, management have reiterated prior guidance that the likely outcome for FY22 is somewhere between a small loss and breakeven, although the focus of our 12mth valuation of €20.50/share on 1.5x WACC is based on our forecast for record profits in FY23 of close to €1.9bn in that year. This is supported, in our view, by Ryanair’s summary that ‘‘As we look beyond the Covid-19 recovery, and the successful completion of vaccination rollouts, the Ryanair Group expects to have a materially lower cost base, a very strong balance sheet and industry leading traffic recovery.’’ This document is intended for the sole use of Goodbody Investment Banking and its affiliates Home… Page 2 26 Jul. 21 Goodbody Morning Wrap Cranswick Encouraging top line momentum in Q1 Cranswick has released a Q1 trading update this morning in which it noted that Group sales Recommendation: Buy increased by 9.6% yoy with volumes up 7.7%. Within the UK, retail demand remained strong Closing Price: £40.02 with increased sales from the Eye poultry facility. Far East export sales were “well ahead of the same quarter last year” driven by strong market prices despite the continued suspension Jason Molins +353-1-641 9141 of the Norfolk facility. [email protected] The roll-out of the Eye poultry facility has progressed smoothly with the increase in capacity from 1.1m to 1.4m now complete. Furthermore, an additional £10m investment is earmarked, of which an additional £5m is being spent on the cooked bacon facility in Hull and £5m on the breaded poultry facility. While Cranswick is off to a strong start, we are unlikely to make changes to forecasts at this early stage of the year and note management's FY outlook commentary which indicated trading is in line with expectations. We continue to maintain a positive stance on the stock and today’s encouraging update underpins our confidence in the investment case. With the stock trading on a cal. 2022 PE of c.17x, which is a 15% discount to its 3-year average, we reiterate our BUY recommendation. Home… This document is intended for the sole use of Goodbody Investment Banking and its affiliates Page 3 26 Jul. 21 Goodbody Morning Wrap Irish Banks AIB interested in UB trackers?; PTSB H1 focus to be on UB deal; Good read from BOI macro data It was a busy end to last week with the BOI acquisition of Davy on Thursday and then the Eamonn Hughes PTSB acquisition of €7.6bn of Ulster Bank loans on Friday morning. However, it didn’t finish +353-1-641 9442 there, with media speculation emerging on Friday afternoon that AIB is in talks to acquire [email protected] Ulster Bank’s €6.5bn tracker mortgage loan book. Sources said that that AIB will be expected Ronan Dunphy to buy the book at a discount to account for the low yielding nature of the book – which we +353-1-641 9072 estimate is somewhere around 1.0%. [email protected] With a 1% yield, a c.25bps marginal funding cost, a c.35% risk weight, a 14% target capital level, a marginal cost rate of say just c.10% and impairment rate of c.10bps, we estimate a 1% tracker generates a c.10% ROE. As such, we would concur with the reference that the tracker book is likely to trade at a discount. The bulk of the book was written in the mid-2000s, so probably has a proforma residual 9-10 years remaining. We recently estimated a new Irish mortgage generates an 18% ROE for a bank (vs 20% for EU average). There are a few moving parts, but broadly speaking, based on our inputs, every 1% haircut would add c.160bps to the ROE. Obviously, one to watch in the weeks ahead and with c.€25bn of “excess deposits” last December, AIB is always looking for a home for some of that excess liquidity (in addition to its Q2 c.€4bn corporate loan book purchase from Ulster). Bank sector investors are likely to be most focused on the UK banks results this week, with Barclays, Llyods and Natwest all reporting, as well as a number of key European names. PTSB opens the account for the Irish banks on Wednesday, but the results are likely to be overshadowed by last Friday’s announcement of the €7.6bn Ulster Bank loan purchase. The main focus on Wednesday’s PTSB H1 results will be trying to garner insights into the potential timing and order of magnitude of impact of the UB book on the P&L. Our own first stab is that PTSB’s pro-forma FY25 ROE of c.6.5% could potentially move closer to 9% post transaction, but clearly further information is required on both the potential income and cost implications of the assets purchase. Bank of Ireland published its July Economic Pulse data overnight – its monthly readings on consumer, business and housing trends, so is a relatively timely indicator of economic activity. Having rebounded strongly year to date, it started to stabilise in June (only +0.2) and rolled over a little in July (-0.4) to 89.3, mainly due to a lower consumer print as the business pulse was flat, whilst the housing pulse was continued to strengthen. This document is intended for the sole use of Goodbody Investment Banking and its affiliates The data is produced by Bank of Ireland’s own in-house economic team, so probably has some reference to how management might think about the wider macro- economic backdrop and possible inputs to its ECL assumptions.

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