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Today ’s Newsflow Equity Research 22 Jan 2020 09:08 GMT Upcoming Events Select headline to navigate to article

Forterra Downgrades to FY20 profits but challenging Company Events conditions are expected to “gradually improve” 22-Jan ; Q220 Trading Update J D Wetherspoon; Q220 Trading Update Berkeley Group An increased capital return programme 23-Jan CPL Resources; Q220 Results for the next two years 24-Jan Givaudan; FY19 Results Marston's; Q120 Trading Update J D Wetherspoon extends its long run of market out 28-Jan ; Q1 trading Paragon Banking; Q120 Results performance in Q2 UDG Healthcare; Q120 IMS Virgin Money UK; Q120 Trading Update Sumo Group In-line pre-close Trading Update from Sumo 29-Jan ; Q320 Results

Irish Economic View FTB supports form key part of party pledges on housing IRES REIT Fianna Fáil row back on rent freeze proposals – Goodbody (IRES:ID) UK Banks Close Brothers Group (CBG) trading update notes slower loan growth Economic Events Ireland 22-Jan PPI Dec19 Wholesale Price Index Dec19 28-Jan Retail Sales Dec19

United Kingdom 22-Jan CBI Ind. Trends Total Orders Jan20 24-Jan CIPS Manuf. PMI Jan20 CIPS Services PMI Jan20 28-Jan CBI Distributive Trades Survey Jan20 29-Jan Nationwide House Price Jan20

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Forterra Downgrades to FY20 profits but challenging conditions are expected to “gradually improve”

Forterra has this morning issued a trading update ahead of FY results set to be released on Recommendation: Buy March 10th. Here are our main takeaways: Robert Eason +353-1-641 9271 • PBT “in line” – Management has stated that FY19 PBT is expected to be “in line with the [email protected] Board’s expectations”. This follows the previous guidance issued on October 22nd which stated PBT would be “modestly below last year’s result (2018:£64.8m)”. This is broadly consistent with our FY19 PBT forecast of £62.3m.

• Challenging conditions to “gradually improve” – Management has flagged that the challenging market conditions experienced in H2 are set to “gradually improve”. That said, the group anticipates that the H1 performance will be weaker yoy as the tougher conditions in H219 roll into H120. We believe that the tougher than anticipated conditions in H1 will lead to c.£2m coming off our FY20 PBT forecast which is currently at c.£64m.

• Desford plant expansion progressing as planned – Management also flag that the expansion of its Desford plant (95m extra brick capacity) is “progressing to plan” with the initial structure set to be completed by spring.

Although FY19 numbers are "in line" with expectations, it looks like there will be some small downgrades (c.3% on our numbers) to FY20 profit numbers as the tougher market conditions in the latter half of 2019 roll into H120. That said, just as Forterra highlights in the update, we continue to believe that the fundamentals in UK brick market remain “strong” (low inventory levels and high reliance on imports), and with Forterra trading on 9x EV/EBITDA versus its closet peer Ibstock on c.10x, Forterra remains our preferred play in the sector.

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Berkeley Group An increased capital return programme for the next two years

Berkeley has announced an increased capital return programme for the next two years. Recommendation: Hold Originally the company had set out targets to return £280m per annum which has now been David O'Brien increased to £500m. The implied yield increases from c.4% to 7.7%. The capital return will +353-1-641 9230 revert to £280m thereafter. david.a.o'[email protected]

The company indicates that it could increase its output by 50% over the next six year given the large regeneration sites it will undertake. Over that six year period the company has reiterated its expectation to generate £3.3bn of PBT with annual profits to be in an range of £500-700m. On average this represents an annual PBT of £550m which compares to our average forecast over that period of £585m. Given the management team’s track record of delivery, we believe these forecasts are well underpinned.

We have long recognised Berkeley as one of the highest quality plays in the sector. With the stock now yielding 7.7% together with continued comfort on forecasts, the share price looks well underpinned.

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J D Wetherspoon extends its long run of market out performance in Q2

JDW released a Q220 “business update” this morning for the 12 weeks to 19th January. LFL Recommendation: Hold sales for the period were +4.7%, while total sales were +4.2%. For H1, 25 weeks to January Closing Price: £15.95 19th, LFL sales increased by +5.0% and total sales were +4.9%. This compared to our HY forecasts of +5% and +4.4%. At the Q1 stage, LFL growth was running at 5.3% and total Paul Ruddy +353 1 641 6024 sales growth was +5.6% but the Q219 comparative was +7.2% so this marks another good [email protected] performance from a LFL perspective. Since the start of the year the group has opened one new pub and has sold five and

reconfirmed that it intends to open 10-15 new pubs in the full year. In the year to date, it

has spent £85m this year buying freeholds which is a ahead of our FY expectations of £60m. This document is intended for the sole use of Goodbody Stockbrokers and its affiliates As a result, it has guided to FY Net Debt to be between £780-£820m (3.6x ND/EBITDA at the midpoint), versus our expectations of c.£740m although we would note there will be a positive P&L impact from the higher level of freehold reversions. On outlook, JDW reiterated that it anticipates a trading outcome for this financial year in line with its previous expectations (GBYf £104.3m PBT pre-IFRS16). This is another good update from JDW given the tough comparative and it extends its long period of out performance of the market. However, there is probably not enough in today’s update to push the share price substantially higher given the group continues to trade at a premium to peers (CY P/E of 20.3x and 11x EV/EBITDA incl higher ND).

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Sumo Group In-line pre-close Trading Update from Sumo

Sumo Group released a pre-close Trading Update this morning ahead of FY19 results due on Recommendation: Buy April 1st in which it indicated an outturn “at least in line with market expectations”. The Closing Price: £1.97 statement adds that a number of significant contracts were secured towards the end of the year, underpinning forecasts for the current year. Cash balances as of December stood at Patrick O'Donnell +353-1-641 6013 £12.9m. Headcount increased 174 YoY to stand at total year-end employment of 766. [email protected]

In our sector report issued last week we increased our PT on Sumo from £2.00 to

£2.45 in recognition of Sumo’s positioning and an expectation of further dealflow. The statement this morning underpins that expectation, in our view.

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Irish Economic View FTB supports form key part of party pledges on housing

With the Irish general election campaign in full swing, political parties have tried to outdo Dermot O’Leary each other in their promises on the key issues of housing over the past few days. While there +353-1-641 9167 [email protected] are different features to each of the party proposals, the common feature is a promise to increase social housing provision dramatically over the coming years.

The two largest parties – Fianna Fáil (FF) and Fine Gael (FG) – yesterday announced significant supports for home ownership and first-time buyers. FF will introduce a special savings scheme giving FTBs a 33% top-up on their saving for a home over a three-year time

period. In addition, it will retain and expand the Help-to-Buy scheme, with the maximum This document is intended for the sole use of Goodbody Stockbrokers and its affiliates payout increasing to €25K (from €20K currently). FG continues to highlight the virtues of its Rebuilding Ireland package of support for the housing sector but pledged yesterday that it would also increase the HTB scheme payout, in its case up to €30K.

These demand-side supports bring back memories of the 2000s period and will be inflationary to the market. While announcing supply-side initiatives is hardly a vote-getter for politicians, these must be part of solving the deficit in the housing market. The proposals announced over the past few days will be supportive for Irish housebuilders, but there is a risk that prospective FTBs may hold off on purchase in the very short-term prior to the introduction of these schemes.

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IRES REIT Fianna Fáil row back on rent freeze proposals – Goodbody (IRES:ID)

Fianna Fáil, Ireland's largest opposition party (and currently leading in election opinion polls) Recommendation: Hold announced its housing policy proposals yesterday afternoon. The most welcome piece of Closing Price: €1.55 news from an IRES perspective being the ruling out of a rent freeze. A number of initiatives to promote home ownership, and to help renters were also announced, including a €600 tax Colm Lauder +353-1-641 6042 credit for those renting. Fianna Fáil received legal advice that a rent freeze would be [email protected] unconstitutional so this would suggest the idea should be off the table for the other political parties, but Sinn Fein still included it in its proposals. Nonetheless, with neither of the two

largest parties now likely to propose a rent freeze of any description (Fine Gael have yet to announce their housing proposals but most recently rejected a rent freeze bill in December), this will be well received by PRS investors.

A further proposal announced today centres around planning permission for PRS developments, with Fianna Fáil aiming to give local authorities the power to refuse permission for units that would be purely build-to-rent, favouring mixed tenure developments instead with the idea being to reduce bulk purchases of developments by institutional investors. This proposal is unlikely to affect developments already in progress, but future schemes may be burdened with further conditions and planning restrictions.

Overall, despite the possible headwinds from the proposed changes to the planning regime, the main concerns surrounding a rent freeze have been assuaged which should provide some scope for recovery in the IRES share price which is 17% below its high just before the Rent Freeze Bill was proposed by Sinn Fein (and supported by Fianna Fáil at the time) in December.

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UK Banks Close Brothers Group (CBG) trading update notes slower loan growth

Close Brothers Group (CBG) issued a pretty cautious pre-close trading update ahead of the John Cronin half-year end on 31st January. The trading update covers the five-month period to 31st +353-1-641 9187 December 2019. Firstly, on the Banking division, the loan book grew by just 0.4% in the [email protected] period to £7.68bn, which represents a significant slowdown on the 3.1% growth reported for Colin Jackson the same period last year (and the 5.7% y/y growth reported in FY19, i.e., the year to 31st +353-1-641 6050 July 2019) – and implies shrinkage in the final two months of 2019 (the book was +0.9% [email protected] q/q for 1Q20). This morning’s update notes that Retail was broadly flat (though, notably, there was some growth in Motor Finance in the UK – though this was offset by weaker Barry Egan +353-1-641 6059 activity in Ireland), the Commercial book grew modestly (with the growth coming in the [email protected] specialist lines), while there was a slight decline in Property over the five months to 31st

December (though redemptions were unusually elevated in December).

We understand, in broad terms, that the slowdown in the growth rates is a reflection of subdued demand rather than a shift in risk appetite from a supply standpoint (though CBG does, of course, note its focus on “prudent underwriting” within the statement) and there is no evidence, at this juncture, that this trend has reversed post-election. NIM came in at 7.8% for the five-month period, marginally down on the 7.9% print for FY19 – which should not come as a surprise. However, bad debts increased modestly to 0.8% of net loans (FY19: 0.6%), which feels like a structural shift in run rate towards normalised levels following years of subdued impairments – while this is a negative trend, it should not come as a great surprise (though it will not be constructive for positive investor sentiment this morning all the same).

On a more positive note, Asset Management reported strong net inflows. Flow growth, together with positive market movements, drove an uplift in managed assets to £12.6bn at 31st December (from just £11.9bn at 31st October) while total client assets grew to £14.0bn at 31st December from £13.4bn at 31st October. The update on Winterflood was as positive as could be expected too, with a reference to a “slow start to the year” married with an observation that there was an “improvement in trading activity” towards the end of 2019. The outlook statement is consistent with what was conveyed at the stage of both the FY19 results (24th September 2019) and the 1Q20 trading update (21st November 2019).

Overall, this is a cautious trading update. Loan book growth has slowed materially – and shrunk in the final two months of the year (a demand issue), with no signs

yet of growth re-emerging. Another negative trend was the pick-up in the bad debt This document is intended for the sole use of Goodbody Stockbrokers and its affiliates ratio to 0.8% (from 0.6% for FY19) – though CBG did flag this (in qualitative terms) in the 1Q20 trading update. NIM was in line with expectations. Asset Management saw very strong growth in the final two months while it was reassuring to see that Winterflood saw an improvement in trading activity towards the end of the year. However, given the Banking book represents the lion’s share of PBT (86% of FY19 adjusted operating profit, excluding central costs), we see the (much) slower loan growth and the rise in bad debts offsetting the other positive points and we see some selling pressure in early trading today – especially given CBG’s recent outperformance relative to the sector. CBG trades at 1.85x 1Y forward TBV for a 16% 1YF RoTE using FactSet consensus, meaning it is the second most expensive stock (MTRO is the most expensive on these metrics) in the UK Financials universe with an implied CoE south of 10%.

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