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Today ’s Newsflow Equity Research 08 Jun 2020 08:42 BST Upcoming Events Select headline to navigate to article

SEGRO Acquisition of prime West urban warehouse Company Events estate 08-Jun Frontier Developments; FY20 Trading Update 10-Jun Air France-KLM; May 20 Traffic Stats Frontier Developments FY20 Trading Update Economic View UK & Ireland move to a faster reopening schedule Irish Construction PMI PMI contracts in May but at a slower pace than April Irish Government set to make changes to loan guarantee scheme Amigo Holdings Market update shows significant increase in complaints, formal sales process falls through

Economic Events Ireland

United Kingdom

United States

Europe

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SEGRO Acquisition of prime West London urban warehouse estate

GRO announced a sizeable urban warehouse park acquisition this morning. The North West Recommendation: Hold London deal sees SGRO acquire the 23-unit (and 8-acres of land) Perivale Park for £202.5m Closing Price: £8.93 from Federated Hermes. The 34-acre, 600,000 sq.ft urban warehouse park in Perivale was purchased at a net initial yield on acquisition of 3.5%. This reflects a strong price based on Colm Lauder +353-1-641 6042 current income levels, but in-situ rents are low (25% to 50% behind the market for such a [email protected] prime location). If this park was fully rack rented (rents marked to market - £12.50 psf ERV for this warehouse park) this yield could rise to ~4.4%. The WAULT on this portfolio is

modest (3.4 years to break) which provides the opportunity to capture this rental upside in the relative near term.

Perivale Park is located off Horsenden Lane South, within half a mile of the A40 (Western Avenue), which connects to Junction 16 of the M25 in the west and Central London in the east. The park is ideally situated for central London access and the national motorway network. The scheme contains a selection of modern industrial units and warehouses, some with accompanying office space, with 24-hour on site security and set within a landscaped environment. Perivale is also situated just 100 metres from an underground station. The 8- acres of land on the site is currently let for use as a vehicle compound, but this provides a medium term opportunity for further development which will enable SGRO to capture further attractive income streams, with a development yield on cost typically of 6-7%.

Overall, this is decent acquisition of an under-rented portfolio. In our initiation we noted how urban logistics was a significant rental growth opportunity, and assets such as Perivale highlight this capability. Portfolios of this scale are in very high demand and tend not to come to market often in London, one of SGRO’s key growth regions. SGRO has local knowledge of the tenant base, with the site located between Greenford and Park Royal, worth a combined £1.5bn to SGRO which should further help with executing the asset management potential at Perivale.

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Frontier Developments FY20 Trading Update

Following the trading update on 20 May 2020 which confirmed a strong finish to the financial Recommendation: Hold year, Frontier flagged revenue of c. £76 million (Goodbody: £71m) for FY20. Operating profit Closing Price: £19.40 is anticipated to be at least £16 million against our previous forecast of £13.7m, representing a 21% margin (Goodbody 19%), reflecting the possible benefit of enhanced DLC sales. Patrick O'Donnell +353-1-641 6013

[email protected] It has been a strong finish to the year for Frontier Developments, most notably driven by the lockdown with Planet Zoo selling particularly well. This was also

evidenced in our Goodbody Analytics monthly sales tracker which also detected strong performances for JWE in April particularly. In terms of the FY21 release profile, Frontier plan to release Planet Coaster on console this summer and then plan an Elite Dangerous upgrade after Christmas. That is in advance of a significant roll out of licensed IP from FY22 onwards. We continue to retain a degree of caution on that roll out strategy given the execution risks, though we did move to a HOLD recommendation given some clarity around the nature of the IP coming in FY22 and onwards.

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Economic View UK & Ireland move to a faster reopening schedule

Having been outliers in the speed at which they have allowed their economies to reopen from Dermot O’Leary lockdown, both the UK and Irish governments now appear to be taking steps to address this. +353-1-641 9167 [email protected]

Ireland begins stage 2 of its reopening plan today, with retail units allowed to open and travel restrictions loosened somewhat. It was also announced by the Taoiseach on Friday that several features of the subsequent phases will be brought forward by three weeks, with the final phase now commencing on July 20th as opposed to August 10. For example, hotels will now be allowed to open at the end of June.

In the UK, it was reported over the weekend that outdoor areas of pubs and restaurants This document is intended for the sole use of Goodbody Investment Banking and its affiliates would be allowed to reopen on June 22, ahead of the planned date of July 4. PM Johnson is reportedly worried about the consequences for the labour market of the prolonged shutdown, having been warned last week that up to 3.5m jobs were at risk in the UK.

The faster reopening of the economy does not come without risks in terms of the transmission of the virus. Indeed, the transmission rate in parts of England are very close to one. However, given that the UK and Ireland were such outliers, the faster reopening of the economies is welcomed. Given that wage furloughs will remain in both countries in the coming months, it may be some time before we can truly tell what the longer-term impact of the coronavirus lockdown is.

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Irish Construction PMI PMI contracts in May but at a slower pace than April

The Irish construction PMI released this morning highlights that activity continued to contract Robert Eason in May, albeit at a slower pace than the trough seen in April. At a headline level, the PMI +353-1-641 9271 posted a reading of 19.9 in May, a better reading than the 4.5 in April but still well into [email protected] contraction territory. All three broad categories covered by the survey contacted with David O’Brien Housing activity reading 21.4 (4.9 in April), Commercial reading 25.6 (4.9 in April) and Civil +353-1-641 9230 Engineering activity reading 14.9 (4.9 in April). A similar picture is painted by looking at the david.a.o’[email protected] New Orders and Employment indices, both remained firmly in contraction territory, albeit not quite as negative as April. Furthermore it should come as no surprise that the 12 month Shane Carberry +353-1-6419118 outlook from construction firms remained pessimistic, however with the economy beginning [email protected] to re-open and hopes of return to some sort of normality, confidence was at its highest level

in three months.

Overall there are no major surprises in the PMI release and as the economy re- opens it will be interesting to monitor the construction PMI to gauge how quickly the sector can ramp back up.

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Irish Banks Government set to make changes to loan guarantee scheme

The Sunday Times reports that the government is expected to make changes to the level of Eamonn Hughes government backing to the €2bn Covid-19 loan guarantee scheme. Presently, the +353-1-641 9442 government will guarantee 80% of an individual loan but it only applies to 50% of a lender’s [email protected] Covid-19 portfolio, so effectively just a 40% portfolio guarantee. The report flags that the Barry Egan Finance Minister will likely lift the 50% lending cap and may even abolish it. However, the +353-1-641 6059 report adds that Ireland is not expected to follow Britain’s bounce-back loan scheme which [email protected] offers 100% guarantees (with a 2.5% interest rate and no repayments in the first year). Legislation in relation to the Irish scheme is currently being developed and is anticipated to

be ready in time for the new government to pass. The changes could be announced as early

as this week and the scheme will be open to banks, credit unions and non-bank lenders.

We had previously highlighted the 50% portfolio limit was unworkable, so whilst we very much welcome the potential development, in reality, we had always expected it to be raised/removed and it will only bring the effective guarantee level to the minimum we would deem workable (we would prefer higher). The €2bn loan guarantee scheme forms part of a €6.5bn liquidity support from government (€2bn capital plan, the €2bn loan scheme, €2bn of tax warehousing and €0.5bn of other supports). Our economics team last week estimated that drawdowns in the UK’s loan guarantee schemes of £31bn mapped onto Ireland would imply potential Irish SME loan scheme drawdowns of almost €3.5bn, materially higher than the current scheme on offer. In addition, we have previously estimated that total potential liquidity requirements of both SMEs & larger corporates could be as much as €12.5bn in total, higher than the potential €6.5bn on offer. Having said that, the government’s initiatives on Friday to accelerate the pace of removal of lockdown restrictions by 3 weeks may modestly ease some of the funding constraints on businesses implied by the prior elongated timetable.

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Amigo Holdings Market update shows significant increase in complaints, formal sales process falls through

Amigo Holdings (AMGO) published a market update this morning in which it states that the Recommendation: Buy business has seen a significant increase in customer complaints in recent weeks, with the Closing Price: £0.17 Voluntary Requirement agreed with the FCA (as announced on 27th May) to reach a decision on a backlog of complaints (which have arisen principally in 2020) expected to cost at least John Cronin +353-1-641 9187 £35m, with potential for this to be materially higher. AMGO also expects a material rise in [email protected] provisioning in respect of future complaints within the full year results which are expected to be announced by the end of June and, thus, the Board will not be recommending a final

dividend for year ended March 2020 (in line with our expectations). AMGO had £18.7m of unutilised provisions at 31st December and we forecast a further £73.4m of complaints costs over our forecast horizon (equating to total complaints costs of £100m from FY19F-FY21F, of which £7.9m had been utilised at 31st December).

Separately, the statement notes that while the formal sale process (FSP) identified a number of potential acquirors of AMGO who made indicative offers materially above where AMGO’s shares were trading at the time of offer, with AMGO announcing on 27th May that the Board received a proposal from a potential acquiror stating that it was prepared to announce a firm intention to make an offer of 20.9p per share for AMGO, the potential acquirer has now withdrawn from the FSP citing the “current market environment”, leading to Board to conclude the FSP. Given the conclusion of the FSP and the Relationship Agreement dispute with Richmond Group (RG), chairman Stephan Wilcke has served formal notice of resignation, with a departure date expected after the upcoming general meeting on 17th June, assuming the residual shareholders do not vote in favour of removing the current Board and appointing the directors proposed by RG. Finally, on this point, AMGO announced during market hours on Friday that it has been informed by RG that it has placed all of its shares in AMGO (60.66% of the company) with a broker, with irrevocable instructions to sell 1% of the company every trading day until RG’s stake is reduced to zero unless all proposals are approved by residual shareholders at the upcoming general meeting, with the statement noting that there are no circumstances in which those sell instructions can be cancelled or amended by RG, quashing questions over whether RG will follow through on this threat.

Stepping back, this morning’s announcement again raises concerns over the size of the potential complaints hole at AMGO, highlighting the need for regulatory clarity with respect to lending practices, while the conclusion of the FSP likely removes some share price support. All eyes are now on June 17th to see whether residual shareholders back James Benamor’s vision for the business, with Friday’s

announcement highlighting his intentions should the proposals fail to receive the This document is intended for the sole use of Goodbody Investment Banking and its affiliates appropriate majority.

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