Morning Wrap

Today ’s Newsflow Equity Research 28 Jan 2016 Upcoming Events Select headline to navigate to article

CPL Resources Strong set of numbers, PBT +25% yoy, Company Events positive outlook 28-Jan Mitchells & Butlers; 29-Jan Rank Group; H116 Interim results

Dalata Hotel Group Acquires the leasehold interest of four hotels for €40m

Mitchells & Butlers Disappointing like-for-like sales continue

Paper & Packaging SCA report weak kraftliner volumes

Economic View Fed leaves its options open Economic Events

Ireland DCC Clearance to dispose of Fannin Compounding 28-Jan Retail Sales Volume YoY 01-Feb Manufacturing PMI Ireland

United Kingdom FBD Holdings Levy proposed on the profits of insurance 28-Jan GDP QoQ companies 01-Feb UK PMI Manufacturing Mortgage Approvals

United States 28-Jan Durable Goods Orders 29-Jan Chicago Purchasing Manager U. Of Michigan Sentiment GDP Annualised QoQ 01-Feb ISM Manufacturing US Manufacturing PMI

Europe 28-Jan Economic Confidence 29-Jan CPI Estimate YoY 01-Feb Eurozone Manufacturing PMI

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CPL Resources Strong set of numbers, PBT +25% yoy, positive outlook

CPL has reported H116 revenues of €216.4m (+12% yoy). The gross margin was up 160 bps Recommendation: Buy yoy at 15.7%, while the conversion ratio (Gross profits to Operating Profit) improved by Closing Price: €6.00 120bps to 22.3%, broadly in line with expectations. Permanent Net Fee Income (NFI) was up 30% yoy, while Temporary NFI was also up strongly (+21%). Underlying PBT was €8.4m, Colm Foley +353-1-641 6042 but adjusted for the €0.85m LTIP, PBT for the period was €7.6m, +25% yoy and 9% ahead [email protected] of expectations. Reported EPS was 21.2c. Net Cash was €27.6m and CPL has increased the dividend by 11%.

Management indicates it is experiencing improvements in its markets, although it notes it is encountering skill shortages in certain sectors, which are creating challenges. The recent clinical professionals business is performing well and in line with expectations, while organic growth continues across key business sectors. Management remains confident in the outlook for the business and expect to deliver continued profitable growth for the remainder of the financial year, despite a somewhat uncertain outlook in many of its markets.

This is a very strong set of numbers from CPL and reflects the strong underlying momentum in the business. The numbers are c. 9% ahead of expectations and while our own forecasts are weighted towards H2 we are likely to make upward revisions to our forecasts although this will be largely offset by a further charge for the non-cash LTIP in H2. These numbers are further evidence of management’s positive outlook, which is reflected in the recent announcement to increase headcount by c. 200 over the next two years. We retain our Buy call.

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Dalata Hotel Group Acquires the leasehold interest of four hotels for €40m

Dalata announced this morning that it has agreed to acquire the leasehold interest of four Recommendation: Buy hotels for an enterprise value of €40m, representing a 9.75x EV/EBITDA multiple. The Closing Price: €4.80 leasehold interest comprises of operating leases with an average term of 18 years Kevin McDermott outstanding. Management has plans to invest a further €14m over the next two years +353-1-641 9162 refurbishing the hotels, including this investment the multiple is 13x. The four hotels are the [email protected] Gibson Hotel in Dublin (252 bedrooms), Croydon Park Hotel in London (211 bedrooms), Clarion Hotel in Cork (198 bedrooms) and Clarion Hotel in Limerick (158 bedrooms), all of which will be rebranded as Clayton hotels over the next year. The underlying EBITDA of these four hotels in 2015 is expected to be €4.1m, we expect management to be able to extract cost synergies and additional revenue synergies from these hotels. As part of the transaction, the Group will also take over the management of the Clarion in Liffey Valley (352 bedrooms) under a short term management contract. Last November, Dalata acquired the freehold interest of the Clarion Hotel in Cork for €35.1m and today’s announcement gives them operational control of this hotel.

Today’s announcement represents another positive investment for Dalata. The acquisition multiple (10x, c13x including capex investment) is not overly stretched as we believe there are good prospects for growth given the market backdrop and the potential for Dalata to deploy its more efficient operating model in the acquired hotels. Following this deal management still has c.€130m to invest in the business. Dalata remains a top pick for us and we re-iterate our BUY recommendation.

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Mitchells & Butlers Disappointing like-for-like sales continue

Mitchells & Butlers released a trading statement this morning for the first 17 weeks of FY16 Recommendation: Hold (to 23rd Jan). Management reported lfl sales of -1% yoy (vs PY comp of 1.7%) compared to Closing Price: £2.83 our H1 forecast for flat lfl sales. The figure represents a pick up on the first 8 weeks of the Kevin McDermott period which recorded lfl sales of -1.6%. Food lfl sales were -1.5% yoy and drink was -0.6%. +353-1-641 9162 In the two week Christmas period, lfl sales grew by 2% against a tough PY comp of 4.8%. In [email protected] the year to date, M&B has acquired 2 new sites and converted a further 12 sites. While management commented on a “good” Christmas, it also noted that “trading conditions remain tough, particularly as we go into the post-holiday season”.

Overall a disappointing update from Mitchells & Butlers. While there has been an improvement from the beginning of the year, the run-rate of growth is insufficient to reach our H1 revenue forecast. Given the National Living Wage it will be difficult for the group to mitigate the slight shortfall in revenues. On this basis the risk to FY forecasts is to the downside. As there are no significant signs of improvement, we retain our HOLD recommendation.

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Paper & Packaging SCA report weak kraftliner volumes

SCA has reported Q415 revenue of SEK29bn (+6% yoy) compared to consensus of David O’Brien +353-1-641 9230 SEK29.5bn (1.7% miss). However, group operating profit of SEK3,454m came in 3% ahead david.a.o’[email protected] of consensus. Robert Eason +353-1-641 9271 The division of most relevance for our coverage is Forest Products which reported a 2% [email protected] decline in kraftliner volumes for Q415 against a difficult comparative (+14% in Q414, +4-6% in Q115-Q315), nonetheless this is the first quarterly decline in kraftliner volumes in two years.

The extent of the turnaround in SCA’s reported volume growth trends is surprising given the macro economic backdrop. This, coupled with weakness in benchmark prices, will make the kraftliner market a key focus of ’s Q415 results on February 10th.

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Economic View Fed leaves its options open

Members of the FOMC were stuck between a rock and a hard place at their latest policy Dermot O’Leary +353-1-641 9167 meeting. In the six weeks since its decision to raise interest rates for the first time in almost [email protected] a decade, financial markets have had a torrid time as concerns grow about the health of emerging market economies. At the same time, little has changed with regard to the domestic US economy. Employment growth continued at a solid pace in December, continuing the gradual tightening of the labour market.

In the end, last night's FOMC statement gave a nod to these international developments ("The Committee is closely monitoring global economic and financial developments and is assessing their implications") but also reiterated its belief that gradual policy tightening is likely over the coming months ("The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate"). The Committee is buying itself time. If it flip-flopped again on the possible impact of EM weakness, it risked losing all credibility, but financial markets may yet force its hand to hold off over the next six weeks.

Certainly, the market does not believe that the Fed will be able to continue to raise rates at the pace that the infamous dot plots suggest. Market expectations currently suggest an 18% probability of an increase at the March meeting. A lot of data will be known by that stage but we are still of the view that likely emerging wage pressures will mean that further rate hikes will come. We have pencilled in a 0.75% increase this year.

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DCC Clearance to dispose of Fannin Compounding

Industry sources indicate that the Competition and Consumer Protection Commission (CCPC) Recommendation: Hold has approved Baxter Healthcare's proposed acquisition of Fannin Compounding. The ruling Closing Price: £52.45 was made on the basis of a so-called “failing firm” defence i.e. as Fannin Compounding had Gerry Hennigan suffered historical and ongoing financial losses it was likely to exit the market if the proposed +353-1-641 9274 acquisition by Baxter was prohibited. The ruling is unusual in that it effectively creates a [email protected] monopoly, given Fannin and Baxter were the only suppliers of compounded chemotherapy medicines in Ireland, but was agreed on the basis that failing to do so would lead to a substantial lessening of competition, should Fannin exit the market.

Fannin was part of the DCC Healthcare Division in Ireland. It had a 40-45% share of the compounded chemotherapy medicines in the State in 2011, but that had reportedly declined to 30-35% in 2014. DCC appointed PWC to find a suitable purchaser in January 2015, subsequent to which, Baxter, Fannin’s main competitor, was reportedly the only entity that submitted an acceptable bid.

While any consideration from the transaction is likely to be marginal, if any, we would view the disposal as positive from a DCC perspective and see no impact to our forecasts as outlined in our recent report on January 18th (15% of FY16 operating profit of £300.5m from Healthcare).

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FBD Holdings Levy proposed on the profits of insurance companies

Press reports (Irish Independent) highlight that Alan Kelly, Minister for Environment, is to Recommendation: Restricted propose the introduction of a 0.5% levy on Insurance firms' profits. The levy, which would Closing Price: €6.47 require both the introduction of legislation and Cabinet approval, would be used to provide Eamonn Hughes assistance to those affected by the flooding crisis. +353-1-641 9442

[email protected] On our forecasts, FBD is not expected to return to profitability until 2017 so any levy on profits would not affect the company this year. Indeed the company noted in its interim results that its current target is “returning to profits by the end of 2016”.

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Market Data Top 10 Covered Companies

Company Price Mkt Cap Absolute Relative to European Sector P/E (LC) (LCM) 1 Day 1 Week 1 Mth Ytd 1 Day 1 Week 1 Mth Ytd 2016f 2017f CRH 24.45 19,942 0.8 7.1 -7.5 -8.4 0.5 1.4 -0.5 -1.5 15.7 12.7 Ryanair 13.86 18,974 -3.0 -3.7 -7.7 -7.7 -3.3 -8.8 -0.6 -0.7 14.9 12.0 AIB Group 5.40 14,745 12.0 10.2 -30.4 -18.9 11.6 4.4 -25.1 -12.8 10.5 16.4 IAG 5.53 11,231 -1.5 1.5 -8.4 -9.5 -1.8 -3.9 -1.4 -2.7 6.9 5.6 HeidelbergCement 67.61 13,415 2.3 7.0 -10.5 -10.6 1.9 1.4 -3.6 -3.9 12.6 12.1 73.50 12,921 0.3 2.7 -1.4 -3.7 0.0 -2.8 6.1 3.6 22.3 19.5 Wolseley 34.44 8,956 1.0 5.3 -6.5 -6.7 -0.0 0.4 -3.1 -3.0 14.1 12.5 Bank of Ireland 0.30 9,812 -2.3 5.9 -11.9 -10.4 -2.6 0.4 -5.2 -3.6 11.1 10.1 easyJet 15.73 6,248 -0.4 -3.0 -8.6 -9.6 -1.4 -7.4 -5.4 -6.1 10.5 9.7 Mondi 11.69 5,676 0.8 - -14.0 -12.4 0.5 -5.3 -7.4 -5.8 9.9 9.8

Indices ISEQ performance

% Price 1 Day 1 Week 1 Mth Ytd 7,000

ISEQ 6,341.96 -0.55 2.96 -6.00 -6.62 6,800

FTSE 100 5,990.37 1.33 5.58 -4.23 -4.04 6,600 DAX 30 9,880.82 0.59 5.21 -7.89 -8.03 6,400 CAC 40 4,380.36 0.54 6.19 -6.06 -5.54 6,200 FTSE Eurofirst 300 1,340.76 0.36 5.77 -6.89 -6.73 6,000 Nasdaq 4,468.17 -2.18 -0.08 -11.49 -10.77 5,800 S&P 500 1,882.95 -1.09 1.27 -8.64 -7.88 5,600 Dow Jones 15,944.46 -1.38 1.13 -9.16 -8.50 5,400 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Nikkei 225 17,163.92 2.72 4.55 -8.55 -9.82

Exchange Rates

Current Px 1 day Px 1 Week Px Dec15 Avg Ytd

Stg/€ 0.763 0.757 0.768 0.737 0.753 STOXX 600 performance US$/€ 1.087 1.085 1.090 1.086 1.085 CHF/€ 1.106 1.104 1.094 1.087 1.092 420 410 JPY/€ 129.077 128.473 126.683 130.676 128.134 400 Bonds 390 380 Yield 1 Day Yld 1 Wk Yld 1 Mth Yld 3 Mth 370 360 US 2 Yr 0.84 -0.00 0.84 -0.15 0.21 350 US 10 Yr 2.00 0.00 0.02 -0.24 -0.04 340 330 UK 2 Yr 0.42 0.01 -0.01 -0.19 -0.10 320 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 UK 10 Yr 1.71 0.02 0.09 -0.21 0.06

BD 2 Yr -0.45 0.01 -0.03 -0.45 -0.11

BD 10 Yr 0.44 0.07 0.03 0.44 0.00

Irish 10 Yr 0.90 0.02 -0.05 -0.25 -0.13

Commodities FTSE 250 performance

% Current 1 day 5 day 1 Mth 1 Yr Brent (ICE $/bbl) 33.10 4.09 2.86 -12.64 -33.27 18,000 Gasoline (NYM $/Gal) 1.05 -0.14 -3.52 -17.29 -22.55 Heat Oil (NYM $/Gal) 1.04 5.68 2.92 -8.48 -36.78 17,500

Nat.Gas 2.19 0.41 2.34 7.89 -26.57 17,000 Gold $/oz 1,116.25 0.24 1.82 4.49 -13.37 16,500 Silver $/ozt 14.38 0.35 1.48 1.27 -19.53 Copper U$/MT 4,507.50 0.14 0.88 -3.39 -18.89 16,000

Wheat $/BU 4.77 -1.70 0.21 1.93 -8.19 15,500 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

Source : FactSet

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