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Today ’s Newsflow Equity Research 19 May 2020 08:48 GMT Upcoming Events Select headline to navigate to article

Greencore Challenging H1 as COVID-19 took grip Company Events 19-May DCC; FY20 Results UDG Healthcare H1 in line, guidance remains withdrawn First Derivatives; FY20 Results UDG Healthcare; Q220 Results DCC FY20 Results – Focus on market opportunities 20-May ; Q220 Results ; FY2020 First Derivatives FY20 Results – Tata deal, amid 21-May Hilton Group; Q120 Trading Update lengthening sales cycles ; FY20 Results 22-May Cranswick; FY results Irish Banks CSO survey highlights difficulties facing ; H1 results enterprises in the lockdown 26-May ARYZTA; Q320 Results

Economic View Franco/German debt mutualisation proposals a double-edged sword for

Economic Events Ireland 22-May PPI Apr20 Wholesale Price Index Apr20

United Kingdom 19-May ILO Unemployment Rate Mar20 20-May CPI Apr20 PPI Apr20 Retail Price Index Apr20 21-May Retail Sales Apr20 CBI Industrials Trends Orders May20

United States

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Greencore Challenging H1 as COVID-19 took grip

Greencore has this morning reported H1’20 results with adjusted EBIT of £38.3m, down Recommendation: Buy c.14% yoy, primarily driven by the impact of COVID-19 in the final month of the quarter. Closing Price: £1.51 The company notes that following a significant impact in the first six weeks of H2’20, Group revenues are now c.40% below prior year levels on a pro-forma basis. Coupled with Jason Molins +353-1-641 9141 previously announced cost mitigation measures, the Group is now returning to modestly [email protected] positive EBITDA. Importantly, the balance sheet is in good shape, with £267.5m of available liquidity and confirmed eligibility for the CCFF programme. In addition, its banking covenants

are being waived for the Sept 2020 and March 2021 test periods. As well as reiterating its previously announced decision to not proceed with an interim FY20 dividend, the Group announced that the final FY20 and interim FY21 dividends would also be cancelled.

The key highlights from today’s update include: i) Food to Go (FTG) saw H1’20 pro-forma revenue declines of 2.1%, primarily due to the negative COVID-19 impact in the final two weeks of the quarter. Weekly demand had been down as much as 70% in the first six weeks of H2’20 and is now down c.60%; ii) Within the other convenience categories, pro-forma revenues increased by 4% with cooking sauces benefitting from strong demand in the final two weeks of the half. In the first six weeks of H2’20, revenues are running c.5% ahead of last year; and iii) Net debt (excl. IFRS16) came in a £311.1m resulting in Net Debt:EBITDA of 2.1x.

As expected, FY20 guidance remains withdrawn. The Food to Go channel is likely to remain subdued for the remainder of FY20 as there is only a gradual easing in social restriction measures. Consequently, we expect to materially lower our FY20 forecasts.

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UDG Healthcare H1 in line, guidance remains withdrawn

Having withdrawn guidance for the year to September in the Trading Update on April 15th, Recommendation: Buy that remains the case as outlined in the Interim Results statement from UDG this morning, a Closing Price: £6.24 stance that is hardly surprising given the ongoing uncertainty surrounding the timing and economic impact of the pandemic. Entering 2020 the expectation was for cc diluted adj. Gerry Hennigan +353-1-641 9274 earnings growth in the range of 7% - 9% for the year to September, relative to FY19 [email protected] earnings of 47.3c under IFRS 15 & 16. Events subsequently, led us to reduce our FY20 adj. EPS forecast by 14% to 43.5c, implying a YoY decline of 8% in our report issued on May 7th

(‘Resetting the FY20 ‘bar’ to reflect the COVID-19 backdrop), a projection that we maintain.

In terms of H1, UDG reported adj. EBITA of $81.3m, relative to our projection of $79.3m, resulting in cc adjusted diluted EPS of 22.0c (+16% on a cc basis), directly in line with the estimate in our model of 22.1c. Relative to a medium-term EBITA growth target of 5% - 10%, Ashfield delivered 5% underlying growth, driven, as expected, by Communications & Advisory (+8x% YoY underlying), compared to an EBITA outturn for Commercial & Clinical in line with the previous year. On the packaging side, Sharp maintained recent momentum delivering YoY underlying growth in operating profit of 24%. Within Sharp UDG also added incremental capacity of the order of 15% when it acquired a packaging facility in May close to its Allentown, Pennsylvania base at a cost of just $5m. As previously stated in the April Trading Update, the interim dividend has been suspended.

With respect to the balance sheet, net debt stood at $58m in September (Net Debt / EBITDA of 0.3x) compared to our expectation of $83m, the outturn benefiting from a c.$20m working capital inflow, which, while expected to unwind in H2, points to the previously guided normalised cash conversion ratio improving from 60% - 65% to a range of 65% - 70%. Having already outlined available credit in excess of $200m, funding, even in a protracted downturn, would appear to be ample, amid a series of previously outlined initiatives aimed at mitigating the cost base.

With H1 results in line, and clarity on the outcome of the year awaiting greater stability in the regions of interest (US and Continental Europe), we believe UDG will continue to trade within its recent range. That said, sector exposure, particularly to the biotech industry, which is more likely to avail of the outsourced services provided by service companies such as UDG, allied to the strength of its packaging business in the US, would suggest a return to growth as and when economic

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DCC FY20 Results – Focus on market opportunities

Amid typically limited explicit guidance for the year ahead, and an FY20 (March) outturn Recommendation: Buy marginally ahead of our expectations, the market focus in the results statement from DCC Closing Price: £59.84 this morning, in our view, will be on commentary regarding divisional performance since March and the opportunity set for a company positioned to avail of such opportunities. Gerry Hennigan +353-1-641 9274 Specific points of note in that regard include: (i) the strength of the energy portfolio exiting [email protected] FY20; (ii) confirmation of balance sheet strength (cash resources of c.£1.5bn); and (v) commentary around the M&A opportunity that may unfold as the economic reality of the

pandemic beds in. All are likely to be topics of discussion in the post results conference call scheduled for 9am this morning (+44-207-1928338, Passcode 4087851).

In terms of the outturn to March, commentary in February that the Group’s operating profit is expected “to be in line with current market consensus assuming normal weather conditions for the balance of the financial year” proved accurate relative to an unchanged FY20 EBITA projection of £487m in our model. A full year dividend of 145p (+5% YoY) has been recommended, thus maintaining a track record of growth dating back over two decades, a reflection both of surplus funds (Net Debt / EBITDA of 0.1x) and implicit confidence in the outlook for the year.

At a divisional level, despite generally mild weather conditions during the winter months and the onset of lock-downs in Europe on traffic and thus Retail volumes, Energy accounted for 75% of reported group operating profit (£368.5m, +10% YoY). Healthcare (12% of Group EBITA), reported operating profit of £60.5m, relative to our forecast of £66m, ‘flat YoY, but up 8.6% on an underlying growth allowing for disposals, a backdrop, which, in our view, should benefit from the pandemic. Lastly, an EBITA outturn of £65.3m relative to our £76m projection in Technology points to YoY growth of 1%, amid expectations that corporate and consumer demand to enable remote working should provide a tailwind for Q1’21.

While incremental news in terms of M&A is limited, we believe an historically disciplined approach to dealflow may prove fruitful should opportunities unfold for DCC as expected, amid commentary in the outlook statement of such opportunities in the US. In the absence of explicit guidance, we maintain our FY21 estimates as outlined in our recent report (‘How bad can it get’) and a positive stance, which we view as underpinned by commentary on the respective divisions and a c.65% - 70% EBITA bias towards H2.

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First Derivatives FY20 Results – Tata deal, amid lengthening sales cycles

With headline detail on the annual outturn to February previously outlined in the Trading Recommendation: Buy Update on April 9th, commentary on the impact of COVID-19 over the period since year-end Closing Price: £28.80 provides a focus of attention, in our view, in the FY20 results statement from FD this morning. Points of note in that regard, relate to an affirmation of lengthening sales cycles. Gerry Hennigan +353-1-641 9274 Assuming a conservative approach to FY21 sales (i.e. no growth), combined with limited cost [email protected] mitigation to date (suspension of final dividend, non-essential business travel and a short- term deferral of the summer graduate intake) we reduce our FY21 EBITDA projection as per

the FD definition from £51.8m to £39.9m.

Relative to our FY20 estimates of revenue of £240.4m, EBITDA (as per the FD definition) of £46.7m and PBT of £22.4m, FD delivered an actual out-turn of £237.8m (+9% YoY), £45.5m (+17% YoY) and £18.3m (+9% YoY) respectively. A breakdown of the revenue line saw an ongoing bias towards software sales (62%, +13% YoY), compared to YoY growth of 3% in consulting. In terms of the source of the FY20 revenue outturn, 75% of sales were attributed to its traditional Fintech franchise, half of which derived from managed services, with 20% from Martech and the remaining 5% from the ‘Other’ category, which increased 26% YoY, albeit off a low base to £11.7m.

A net debt balance (ex.leases) at period end of £49m up from £16.1m at the start of the year reflects the £43m outlay for the final tranche of Kx equity not held, a balance that we believe has peaked and will decline in FY21. We would add that the historically conservative bias towards growing market share, exemplified by a ‘growth with profits’ model, in marked contrast to many of its software peers, mitigates liquidity risk, amid prior confirmation of gross cash available of £64m (includes £35m of funds drawn from the Group’s available finance facilities), and a further £15m in undrawn revolving credit facilities at FD’s disposal.

While we have sharply reduced our FY21 EBITDA estimates to reflect limited cost mitigation in the face of COVID deferred sales, we maintain the view that the market opportunity for the Kx platform continues to expand. Underpinning that outlook is a separate announcement this morning that First Derivatives has signed a global partnership with Tata Consulting Services (TCS), which will see the core time-series capability of Kx deployed in TCS’s IoT and analytics solutions. We would add that dealflow and partnerships ytd with Sumitomo Mitsui, Keysight Technologies and an oil services company provides additional evidence of the

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Irish Banks CSO survey highlights difficulties facing enterprises in the lockdown

The Central Statistics Office (CSO) yesterday published the latest instalment of its Business Eamonn Hughes Impact of Covid-19 Survey yesterday, covering the period April 20-May 3. The latest report +353-1-641 9442 shows that similar to the first version of the survey, almost 24% of enterprises had ceased [email protected] trading either temporarily or permanently (23% had closed temporarily). The survey shows Barry Egan that 33% of businesses had let staff go temporarily whilst 6% had let go staff permanently, +353-1-641 6059 with 37% of companies recording decreased working hours. Interestingly, one in six of [email protected] enterprises that had ceased trading temporarily by April 19 had recommenced trading by May 3. Just over 30% of respondents reported that turnover was 75-100% less than normal

with <15% reporting it was 50-74% less than normal with another c.15% reporting it was

25-49% below normal.

From a financing perspective, enterprises largely responded (68%) that there was no change in their ability to access finance between April 20 and May 3. However, in a key question in the survey for us, 5.5% of respondents indicated they only had cash resources to survive another 1 month, 16.8% had resources for up to 3 months, with 13.9% up to 6 months. 49% of respondents had resources for > 6 months (65% for large companies and 46% for SMEs). There were 11.8% “Don’t Knows” and 3.0% were “Not Confident”. Elsewhere, just over half of enterprises (51%) have availed of government support.

In relation to the SME sector, AIB flagged in its IMS last week that 13% of its SME customers have sought payment breaks, though when larger businesses and real estate in the CIB division are included and incorporating modifications and/or covenant changes this figure was probably higher. BOI last week indicated that 23% of SME customers have sought payment breaks. Payment breaks are buying some time but with around 1 in 4 enterprises having cash resources to only last 1-3 months, this is clearly a concern given large components of the government’s SME support plan still needs to be implemented and/or require legislation, so time is of the essence.

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Economic View Franco/German debt mutualisation proposals a double-edged sword for Ireland

With diverging initial policy responses, political disagreements and underwhelming joint fiscal Dermot O’Leary efforts, it is safe to say that the EU is not having a good crisis. Germany and France +353-1-641 9167 [email protected] yesterday though took an important step towards correcting this record by committing to a new €500bn recovery fund that would be distributed by way of grants rather than loans. The proposal states that the money would be borrowed by the EU and spent through various EU programmes to help those regions most affected by the COVID-19 crisis.

At this stage, this is just a German-Franco proposal, and would have to be ratified by the other 25 member states. Some countries, such as Austria and Netherlands, are opposed to debt mutualisation of this kind and would prefer to make money available by way of loans instead. The EU Commission is set to publish its own plans on May 27th, which will then be discussed by EU finance ministers and then by leaders at their next summit on 18/19 June. Given the EU’s record on these issues, there is room for disappointment, but the fact that Germany has accepted some form of debt mutualisation in the EU for the first time is a major step forward.

There are some strings are attached to these proposals, some of which are particularly important to Ireland. Specifically, the joint statement pledges to introduce “effective minimum taxation” and “fair taxation of the digital economy, ideally based on a successful conclusion of the OECD work, and establishing a Common Corporate Tax Base”. The threat to Ireland’s corporate tax base is well known at this stage, but any further collective efforts will also include a deepening of the union. In the context of the cost of this crisis, the potential loss of corporate tax revenues in the coming years looks rather small, but the important goal will be to minimise the loss to Ireland’s competitiveness. For Ireland’s part, a redoubling of efforts to improve competitiveness in areas beyond taxation, such as education, is now required.

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