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Today ’s Newsflow Equity Research 10 Sep 2019 07:57 BST Upcoming Events Select headline to navigate to article

888 Holdings Strong performance in Casino/Sports offset Company Events by B2B weakness 10-Sep 888 Holdings; Q219 Results Bovis Homes Group ; Q219 Results Bakkavor Group Full year guidance maintained CPL Resources; Q219 Results Harworth Group; Q219 Results CPL Resources FY19 Results – c.2% outperformance, HD Supply Holdings, Inc.; Q219 Results despite July upgrade Team17 Group; Q219 Results 12-Sep Cairn Homes; H1 results Team17 Group H1’19 First Glance Lufthansa; August 2019 Traffic Stats 13-Sep ; 2019 Interim Dividend - Record Date J D Wetherspoon; Q419 Results Harworth Group H1-19 Results set the scene for promising second half Supermarket Income REIT Planning for new supermarket developments at a cyclical low Irish Economic View Irish consumer sentiment hits 70 month low Economic Events Ireland 11-Sep GDP Q220 12-Sep CPI Aug19 Property Prices Jul19 16-Sep Trade Balance Jul19

United Kingdom 10-Sep ILO Unemployment Rate Jul19

United States

Europe

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888 Holdings Strong performance in Casino/Sports offset by B2B weakness

Group revenue increased +2% yoy to $277.3m (Goodbody: $289m) and EBITDA came in at Recommendation: Buy $41.8m ($44.8m post IFRS16), -20% yoy and slightly behind our forecasts. Divisionally, Closing Price: £1.69 Casino was +9% to $175.4m and Sports +19% to $44.5m. Bingo increased +10% to $19.5m as it benefitted from the Costa Bingo acquisition. Poker declined -24% to $23.1m Gavin Kelleher +353-1-641 0423 and B2B fell -44% to $14.8m. An interim dividend of 3c was declared (H118:4.2c). On [email protected] current trading, constant currency revenue is +9% yoy driven by UK revenue +24%.

Overall, HY19 was a solid outcome for 888 with strong momentum in both its Sport and Casino verticals. However, given the softness in B2B, we will likely reduce our FY19 EBITDA by c.3%, which will bring us in line with consensus of $85m. The continued weakness in B2B is not surprising given the challenging UK landscape for many of 888’s Dragonfish clients post the increase in RGD in April of this year. We believe the following issues should act as supports to the share price (i) a valuation that remains attractive at 6.4x FY20 EV/EBITDA, (ii) it has a complete proprietary portfolio of assets across all verticals, (iii) interesting international optionality and (iv) attractive cashflow characteristics. We continue to believe 888 is one of the most likely candidates to take part in corporate activity.

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Bakkavor Group Full year guidance maintained

Bakkavor has this morning reported H119 results with Group LFL revenues up 2% and Recommendation: Buy adjusted EBITDA of £73.5m, which is c.1.5% below our forecast (GBY £74.7m) and resulted Closing Price: £1.07 in margins down 60bps to 8.0%. Muted LFL sales growth was achieved in the UK (+0.7%) with continued strong momentum seen in the International division (+12.7%). Jason Molins +353-1-641 9141

[email protected] The UK division (c.90% of Group sales) reported modest H119 LFL sales growth of 0.7%, with limited volume growth driven by the challenging consumer backdrop. Adjusted EBITDA

of £70.6m resulted in a 40bps decline in margins to 8.7% (GBY 8.6%). At the operating

profit level, margins declined by 190bps to 4.9% driven by disruption and restructuring costs This document is intended for the sole use of Goodbody Stockbrokers and its affiliates (closure of meals site at Holbeach and investment in marketing insight). The International division (c.10% of Group sales) continued to deliver strong momentum across its key markets, US and China. During the H1 period, LFL sales growth came in at 12.7%. Due to the continued investment in infrastructure to drive further growth, adj EBITDA came in at £2.9m which is down from £4.1m in H118.

Management remain confident in achieving a full year outcome broadly in line with FY18. Despite a “subdued start” to the second half in the UK, the benefit of new business wins and the easing of raw material inflation together with further progress in the International division is expected to underpin the full year performance. At this juncture we are unlikely to make material changes to forecasts, albeit will keep a watching brief on the UK consumer backdrop.

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CPL Resources FY19 Results – c.2% outperformance, despite July upgrade

Having guided an outturn ahead of consensus estimates in the Trading Statement in July, Recommendation: Buy CPL more than delivered on that outlook reporting PBT of €24.6m (up 33% YoY) relative to Closing Price: €6.55 our estimate of €24.1m in its FY19 results statement released this morning. At a gross profit level, the outperformance was similarly pronounced, reflected in NFI of €96.3m vs our Gerry Hennigan +353-1-641 9274 estimate of €94.9m. Revenue for the period came in at €564.9m, resulting in adj. EPS of [email protected] 81.0c, compared to our estimates of €569.2m and 80.4c respectively. Cashflow generation also continues to run well ahead of our estimates, resulting in a net cash balance at year-end

of €40.1m, ahead of our estimate of €36.2m, driven by a net cash in-flow for the year to June of €15.9m. Finally, an annual dividend of 19c has been proposed, relative to our expectation of 17c, a 41% increase on FY18.

As in recent periods, a feature is the underlying momentum in the ‘flexible talent’ (previously Temp) segment as opposed to the Permanent placement side of the business. Mirroring the recent trend, gross profit margin increased YoY to 17.0%, up from 15.9% in FY18, despite the increasing NFI bias towards Flexible Talent (+21% YoY, 71% of total NFI), over Permanent placements (+5.5% YoY, 29% of total NFI). Commentary continues to point to greater use of technology to source and match candidates and the robust employment backdrop in Ireland as playing to CPL's strengths in terms of its flexible employment and managed services approach, which has been re-branded as Covalen.

Reflecting political uncertainty in the UK, the outlook statement continues to strike a cautious tone. In the context of that uncertainty, the recent dearth of M&A activity is not surprising, given the perception that the UK remains the primary focus of M&A attention. That said, underlying growth and the positive cashflow generated, signify, in our view, momentum into FY20, the sole surprise in the statement being the announced departure of Mark Buckley, COO & Deputy CEO.

While the potential economic fall-out from an uncertain outcome remains an obvious risk, the strength of CPL's Irish franchise, which accounts for over 80% of operating profit, should see it weather any Brexit headwinds better than most. We would add that a rising net cash balance of €40.1m raises the prospect, as highlighted in our recent report, of a further cash distribution to shareholders given past precedent and an understandable reluctance to acquire in the face of ongoing political uncertainty in the UK. While we maintain our FY20 forecasts given

the current political backdrop we view an upward bias towards FY20 projected PBT This document is intended for the sole use of Goodbody Stockbrokers and its affiliates of €25m.

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Team17 Group H1’19 First Glance

Team17 delivered a very strong H1 update this morning with revenue up 97% y.o.y and Recommendation: Hold broadly in line with our expectation. Gross profit was up 119% with a margin of 49.7%, Closing Price: £3.02 beating our forecast of 48%. Adjusted EBITDA was ahead of our expectations and up 145% y.o.y. Net cash came in at £35.0m up from £16.7m in H1’18. Key drivers of performance Patrick O'Donnell +353-1-641 6013 include: (i) A strong third-party release profile in H1 (My Time at Portia, Genesis Alpha One, [email protected] Hell Let Loose); (ii) A robust performance from the back catalogue and (iii) An improved share of game royalties boosting gross margin. We estimate that FY19 revenue is c.60%

weighted to H1 and with a healthy pipeline of title releases for H2, management add it is comfortable with current guidance for the full year. (Goodbody £51.3m)

The release cadence has been strong in H1. My Time at Portia launched both on Epic and Steam and was a key performer (no.1 globally on Steam in January) followed by a further launch on console. Hell Let Loose launched in June achieving good traction on Steam. Team17 also released several updates supporting back catalogue revenue.

Team17 has a track record of generating solid organic growth, good profitability and healthy free cashflow conversion (>100%) from a portfolio of diverse games/genres. That is combined by a clear ability in managing the lifecycle of its games. It continues to be disciplined in its investment strategy (Max £1m spend per title) and ultimately not depending on major hits to generate attractive returns. We continue to see future growth potential from this portfolio approach but at current valuation levels and given the focus on third-party IP, we remain on Hold.

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Harworth Group H1-19 Results set the scene for promising second half

Harworth Group (HWG:LN), the specialist regenerator of brownfield land and developer of Recommendation: Buy industrial property released H1-19 results this morning. The half saw HWG secure 70% of its Closing Price: £1.33 projected annual land sales completed (1,091 residential plots and 55-acres of commercial development land). This drove sizable value realisation in H1 with revenue of £46.7m from Colm Lauder +353-1-641 6042 the capital gains portfolio over quadruple the £11.1m of H1-18. We now expect to upgrade [email protected] our FY19 figure. However, given the level of activity in H1, costs were higher than forecast at £40m and held asset revaluation gains flat so EPRA NNNAV, at 147p, is marginally behind

our forecasted outturn. Given the timings and higher costs, EPS for the period came in below expectations at 4.7p, but still saw significant growth on the same period last year, rising from 1.7p at H1-18. H1-19 dividends grew by 9.4% y/y versus H1-18, with DPS of 0.3p versus 0.28p in H1-18.

As expected, management note that the performance of its key markets, the Midlands and North of England remains resilient, “demand for consented land in our core markets remains strong”. The integration of the new regionally focused teams is assured to be delivering results under the new COO, Ian Ball.

The 70% of the budgeted sales for FY19 were reflected in the sale of 76-acres of engineered land (for £45.6m), and a further £30.3m in sales of land for commercial developments. It was also a busy period for acquisitions, with £18.8m spent on strategic land, and £6.5m spent on an income producing business park (c.9% yield), adding to the £0.9m uplift secured through 18 lease events.

HWG has remained prudent in H1-19 with overall gearing well below sector norms at 10.1% (-2.2% from H1-18). To add further comfort, this remains low when calculated against the income portfolio at 28.2% (-6.1% despite flat revaluations). Total capacity of £53.4m was broadly unchanged from the FY18 update.

HWG has ambitious total return targets (>10% pa) and its “Beds & Sheds” model has continued to deliver into 2019, despite the uncertainty created by local, national and international political events. With the majority of these returns being non-market derived (active management; planning, lettings, and sales), we take comfort in HWG’s ability to deliver in FY19 following a solid H1 and expect upgrades for FY19.

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Supermarket Income REIT Planning for new supermarket developments at a cyclical low

In an interesting sector piece penned by Estates Gazette on UK Supermarkets this morning, Recommendation: Buy it is found that the volume of planning applications for new supermarkets has contracted by Closing Price: £1.07 61% since the peak in 2015, as appetite for new units, particularly from the “Big Four” operators diminishes. The analysis shows that speculative applications have declined sharply Colm Lauder +353-1-641 6042 (9 last year versus 68 in 2012), and 65% of newly planned units in 2018 were for [email protected] discounters (75 of the 115 units were earmarked for either Lidl or Aldi). This finding should auger well for Supermarket Income REIT, as a sharp decline in new supply will help support

valuation and operating metrics for its diverse portfolio of regionally important supermarkets.

The rationale for the fall off in proposals is driven by the supermarket operators, who have refined their growth ambitions to focus on capturing the convenience grocery market, with predominantly smaller stores. For example, the average size of a proposed new Tesco store has been 26,000 sq.ft in the three years since 2016, down from 50,000+ sq.ft in 2012.

Supermarkets have already been the most robust segment of UK retail since the sharp declines started coming through for the broader sector in 2018. As the supply of new supermarkets recedes, it is particularly comforting for existing landlords, like Supermarket Income REIT (SUPR:LN), to see the limited level speculative supermarket development currently in the UK, which if conducted at scale similar to the previous decade would present a risk of weakening market rental values and store operating metrics.

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Irish Economic View Irish consumer sentiment hits 70 month low

Irish consumer sentiment hit a 70-month low in August as Brexit uncertainty reaches a near Alexander Wilson peak, according to the latest data published this morning by KBC. The index fell to 77.2 +353-1-641 9225 [email protected] (down from 85.5 in July), the second largest monthly fall since December 2012 after February 2019. Clearly, the lack of progress in Brexit negotiations is shaking the foundations of the Irish consumers’ confidence.

Within the headline figure, the outlook for unemployment saw the most significant deterioration, down to 54 from 70.9 in July, indicating that roughly one in two consumers

expect unemployment to rise in the next 12 months. Elsewhere, the index for the general This document is intended for the sole use of Goodbody Stockbrokers and its affiliates economic outlook fell to 25.7 (down from 33.2), as such, just over half of those surveyed now expect the economy to weaken in the upcoming 12 months. Finally, turning to major purchases index, a key indicator for residential property purchases, the index fell marginally to 115.1 from 118.9 a month prior.

Consumer confidence surveys can be quite volatile and highly dependent on the political backdrop. In August, while Parliament was on Summer Recess, Brexit uncertainty reached new heights in Ireland and the UK. A fall in consumer confidence is thus no great surprise, but the widespread nature of the deterioration is stark and suggests that big-ticket purchases may be deferred in the short-term until the Brexit fog fades somewhat.

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