Morning Wrap

Morning Wrap Today ’s Newsflow Equity Research 22 Jun 2021 08:36 BST Upcoming Events Select headline to navigate to article Kingspan Strong momentum into Q221, upgrading Company Events forecasts 22-Jun DS Smith; FY21 Results 23-Jun Berkeley Group; FY21 Results Grafton Group Grafton Group go to Finland DS Smith Strong demand in H221 with progress on cost recovery Provident Financial Scheme of Arrangement Update Morses Club Trading update points to accelerating growth in Digital division Irish Banks Capital back in focus with US bank stress tests Economic Events Ireland 22-Jun PPI May21 Wholesale Price Index May21 28-Jun Retail Sales May21 United Kingdom 24-Jun BoE Official Bank Rate 29-Jun BoE Mortgage Approvals May21 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 Kingspan Strong momentum into Q221, upgrading forecasts Kingspan has released its second unscheduled trading update in as many months with all key Recommendation: Buy markets coming in strongly ahead yoy and versus H119. Revenue for H121 is expected to be Closing Price: €76.74 €2.9bn (+40% yoy /+29% vs H119) which implies over 50% yoy growth in sales in Q221 or +37% versus Q219. This is expected to deliver operating profit of €315m (+37% versus David O'Brien +353-1-641 9230 H119) representing an operating margin of 10.9%, a remarkable outcome in the context of david.a.o'[email protected] the raw material inflation at play. Having noted the order backlog was strong in April, management indicates that this has grown further since, while the raw material inflation dynamics are expected to continue at least until the summer. The Group has also completed the acquisition of Logstor, a leading European based manufacturer of technical insulation. The business generated €244m of revenue in FY20 and operating profit of €28m (consideration €253m). This is another impressive update from Kingspan, demonstrating its ability to navigate operational challenges seamlessly. This allied to the group’s positioning to deliver energy efficient building materials aiding the drive for sustainable construction and balance sheet optionality underpins our positive stance on the stock. We are upgrading FY21 trading profit forecasts by 12% to c.€640m implying H221 growth of 5% versus H220 and 22% versus H219. Home… This document is intended for the sole use of Goodbody Investment Banking and its affiliates Page 2 22 Jun. 21 Goodbody Morning Wrap Grafton Group Grafton Group go to Finland Grafton Group has announced the acquisitions of Isojoen Konehalli Oy and Jokapaikka Oy Recommendation: Buy (“IKH”), one of the largest workwear and PPE, tools, spare parts and accessories technical Closing Price: £11.25 wholesalers and distributors in Finland. Management notes that IKH has a track record of over twenty years of uninterrupted growth, a lean cost base and a strong procurement David O'Brien +353-1-641 9230 strategy. IKH distributes over 50,000 SKUs through a network of independently operated david.a.o'[email protected] IKH partner stores third party distributors and ten owned stores located in major cities. The business has also established a presence in Sweden and Estonia. In the twelve months to Feb 2021, IKH generated sales of €158.8m and operating profit of €21m, representing a 13.2% margin. The total transaction value is €199.3m implying initial valuation multiples of 1.25x EV/sales, and 9.5x EV/EBITA both of which look very reasonable. On a proforma basis the acquisition will add 7-8% to group eps. We estimate that the deal will leave proforma net debt EBITDA at 1.5x for FY21 (still net cash pre leases) highlighting the strength of the balance sheet and the optionality that this still provides. Indeed, there is the potential for further firepower should the strategic review of the traditional merchanting businesses in the UK results in a disposal. It is no surprise to see Grafton announce the acquisition of IKH given its long- stated ambition to enter a fourth geography whenever the opportunity presented itself. In addition, we believe the deal size, specialisation of the acquired operations and earnings accretion will tick a lot of boxes for investors. Such is the strength of the Grafton Group balance sheet there remains considerable optionality for capital deployment following the IKH acquisition. Home… This document is intended for the sole use of Goodbody Investment Banking and its affiliates Page 3 22 Jun. 21 Goodbody Morning Wrap DS Smith Strong demand in H221 with progress on cost recovery DS Smith reported FY21 (April year-end) EBITA of £502m, down -24% yoy (-20% vs. 2019). Recommendation: Sell This is -3% behind our forecast (£517m) although it is a slight beat on consensus of Closing Price: £4.32 c.£500m. Group EBITA in H121 was £230m (-34% yoy) which put H221 at £272m (-12%). Volume growth, particularly in ecommerce and FMCG has been a driver of top line David O'Brien +353-1-641 9230 performance with revenue coming in 3% ahead of our forecasts and a touch behind david.a.o'[email protected] consensus (-1%) while the EBITA margin dipped slightly to c.8%, a touch behind our forecast (50bps) with management highlighting the increase in input costs and volatility in OCC costs. Net debt has come in slightly better than forecast at £1,795m (£2,315m including working capital finance and put liability). This compared to our forecast of £1.9bn as creditors benefited from the strong price increases in both containerboard and OCC. Overall, industry dynamics remain strong with positive sentiment on both demand and corrugated pricing which will likely see consensus move higher The key highlights are: (i) The strong demand backdrop evident in H221 with corrugated volume growth of 8%. This compares to a decline of -1% in H121; (ii) While the OCC headwind is highlighted, particularly in Q4 (up c.€60/tonne ytd in Europe), management note that the costs are starting to be recovered with ‘good initial progress’. Management also note that packaging prices have started to increase and the group expects to fully recover the input cost inflation; (iii) In the outlook statement, management notes that the volume momentum in the final quarter of FY21 has continued into the new year. While management notes that there is still uncertainty over the overall economic environment, its confidence is reiterated in the demand environment. Overall a positive release from DS Smith with the demand backdrop remaining robust into the new financial year, albeit uncertainty still lingers around the macroeconomic environment. The next few months will be telling in terms of recovering higher input costs through the successful implementation of box price inceases. Home… This document is intended for the sole use of Goodbody Investment Banking and its affiliates Page 4 22 Jun. 21 Goodbody Morning Wrap Provident Financial Scheme of Arrangement Update Provident Financial Group (PFG) issued an update in relation to its Scheme of Arrangement Recommendation: Buy during the course of yesterday’s trading day. Firstly, PFG has recruited Jon Yorke as customer Closing Price: £2.11 advocate in respect of the Scheme and he will deal with customer queries, attend the Scheme meeting, and issue a report to the Court on his findings. Yorke has hired a law firm, McCarthy John Cronin +353-1-641 9187 Denning, to provide advice through him to any customer who requires it. Secondly, PFG will [email protected] amend the Scheme terms to specify that any surplus cash generated by CCD between the Scheme becoming effective and the completion of the wind-down of the division, will also be paid to creditors with valid claims under the Scheme. However, the RNS goes on to note that it is highly unlikely that there will be any surplus cash resulting from the wind-down – which is hardly surprising. Additionally, PFG appointed EY to undertake an independent valuation assessment of CCD, which “further supports PFG’s position that CCD has no value and that if the Scheme is not endorsed by the Court, it is highly likely that the CCD companies would commence insolvency proceedings and CCD would not be in a position to make any compensation payments to customers”. On a final note, the RNS also noted that one potential offer was received for CCD but that it was only to wind-up the division and the financial terms were less attractive than the impact of PFG managing the run-off of the division itself – this should not surprise but further reinforces the point that no third party sees value in CCD either. PFG has noted that an additional £5m of costs are expected to be incurred as a result of the communication plans now in place as well as the extended duration of the Scheme process. Our own reading of the update is that the additional steps taken by PFG are all designed to minimise the risk that the creditors and/or the Court fail to approve the Scheme. The findings of the EY report are helpful in the context of adding further credibility / strength to its message that it will place CCD into liquidation if the Scheme is not approved (if that were needed) and that complainants will suffer a worse outcome in that eventuality – indeed, we have been writing that for some time and we would point to distinct differences between the PFG CCD and the Amigo Holdings (AMGO) Schemes.

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