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Today ’s Newsflow Equity Research 25 Jun 2020 10:00 BST Upcoming Events Select headline to navigate to article

easyJet ‘Smaller for longer’ seems to be the new mantra Company Events 26-Jun Marston's; Q220 Results FBD Holdings Trading update reflects divvy deferral, Tesco; Q121 Trading Statement prudent BI provision 29-Jun Draper Esprit; FY20 Results 30-Jun easyJet; Q220 Results Sumo Group FY20 Trading Update (“In Line”) 02-Jul DS Smith; FY20 Results

Harworth Group Acquisition of Midlands industrial estate Economic View UK and EU take softer positions in Brexit talks Irish Banks European Council formally adopts EU banking package

Economic Events Ireland

United Kingdom

United States

Europe

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easyJet ‘Smaller for longer’ seems to be the new mantra

The company announced a placing of up to 15% of its current shares in issue. Priced at 5% Recommendation: Hold discount, this is expected to raise £419m. In addition, management expects to complete a Closing Price: £7.40 further £300m of sale and lease back agreements, with a similar level already completed. These will add to the £2.4bn of liquidity that management have built following some £1.4bn Mark Simpson +353-1-641 0478 of cash raised via debt financing. [email protected]

However, we feel that this latest funding round is backing a company whose new mantra

appears to be ‘Smaller for Longer’, with its current fleet set to shrink from 337 aircraft as at the end of March 2020 to 302 by September 2021. This plan reflects management’s view that demand will not reach 2019 levels until 2023, with this narrative more aligned with comments by network carriers as against other LCC peers.

Additionally, management plan for Q420 capacity to September will circa 30% of its previously planned operations. This compares to ’s plan to fly 60% of its August schedule and WIZZ’s intent to fly 60% of its planned capacity for the September quarter (which includes +10% yoy growth).

Updates on cash burn were positive as were easyJet’s commentary about good pricing for current sales. However, they also stated as a positive that they expect to get FY21 ex-fuel unit costs down to FY19 levels. However, if they see the market demand remaining at sub- 2019 levels until 2023, where do they expect the pricing power to come from to drive better margins and returns over the shorter to medium term?

To us this looks to be a business that is retrenching when compared to its LCCs peers, leaving us with our Hold rating unchanged.

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FBD Holdings Trading update reflects divvy deferral, prudent BI provision

FBD announced yesterday afternoon it has rescheduled its AGM to July 31st (was originally Recommendation: Buy May 8th) and that in light of the recommendation of EIOPA for EU insurers, it will be not be Closing Price: €6.76 proceeding with the proposed dividend payment for FY19 which would require approval at the AGM. However, instead, the timing of distributions to shareholders will be kept under Eamonn Hughes +353-1-641 9442 review when the uncertainty from Covid-19 has receded and FBD notes a 178% solvency [email protected] capital ratio currently “even while continuing to deduct the 2019 dividend, treating it as foreseeable”. So it feels to us that FBD is still keen to pay the dividend (is still accruing for

it), but it depends on the outcome of trading over the next few months and the business interruption (BI) court case in October. FBD provided an update on BI claims on May 25th, confirming litigation with a number of publican customers relating to BI cover, with a hearing scheduled in the Commercial Court in October 2020. FBD reiterated that its business insurance policies “do not provide cover for a pandemic” but is making a precautionary reserve of €22m to cover costs (likely to be a probability weighted outcome to a range of outcomes and to be taken in H1).

FBD notes that GWP is down 3% for the first 5 months, having started Q1 strongly, with policy count +1% but lower average rates due to competitive pressures and lower insurable sums (latter largely in the liability account). FBD has also indicated that it will refund c.€7m of motor premiums (in line with expectations) and similar to guidance from the rest of the industry as it records lower frequency and also that it expects commercial premium refunds also of €7m. The profit impact of refunds is offset by the reduction in claims frequency. Overall, motor, liability and property claims experience has been benign and there were no significant weather events to date. Finally, investment returns due to widening credit spreads and falls in risk assets is running at -1% year to date.

The removal of the FY19 dividend proposal from the AGM is no surprise, but we believe its continued accrual in solvency capital reflects FBD’s desire to presumably pay it should the October court case move in its favour. In this light, its prudent provision of €22m compares to our prior estimate of a potential €28m at risk. FBD’s solvency capital ratio was 192% in December. We estimate the higher reserve for BI cover will have reduced that by c.7ppts, higher reserves by c.2-3ppts and the investment income hit (P&L and OCI) accounting for the balance. We are a little disappointed by the 3% GWP decline, but probably understandable in the context of lower commercial insurable values as customer change tact through the Covid-

19 downturn. FBD is now likely to incur losses in H1, but we would envisage a This document is intended for the sole use of Goodbody Stockbrokers and its affiliates small profit for the full year as H2 normalises.

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Sumo Group FY20 Trading Update (“In Line”)

The Sumo AGM Statement published this morning included an update in respect of FY20 Recommendation: Buy trading. It noted that it is currently trading in line with expectations for FY20 (Goodbody Closing Price: £1.96 Revenue of £51m) and it continues to see recruitment as one of the key challenges. The group is focused on expanding size through targeted acquisitions. It also notes that the Patrick O'Donnell +353-1-641 6013 business continues to manage COVID-19 challenges effectively and is benefiting from overall [email protected] increased player engagement. The business development pipeline is strong and its first acquisition (Lab 42) in FY20 is performing well since acquisition in May. Recent traction with

regard to some of the IP Sumo has developed has been positive with Little Orpheus and Spyder rating highly on Apple Arcade and Sackboy A Big Adventure announced at the PS5 Reveal.

Today’s statement validates the robustness of the business model throughout COVID-19 and highlights the opportunity set for growth in the outsourcing space. On the basis of this morning’s statement, we will be keeping forecasts unchanged. We continue to see Sumo as a net beneficiary of outsourcing trends, as franchises get bigger and games as a service lengthens the game lifecycle, this should strengthen its relationships with publishers and platforms.

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Harworth Group Acquisition of Midlands industrial estate

Harworth Group (HWG:LN) announced a further deal this morning, with the latest transaction Recommendation: Buy involving the £10.1m purchase (excluding acquisition costs) of the three fully let industrial Closing Price: £1.04 units making up the Thorns Road Industrial Estate near Dudley in the West Midlands. The price reflects an attractive 10.2% net initial yield which should be immediately accretive to Colm Lauder +353-1-641 6042 the Group’s income producing portfolio with a net initial yield of 6.8%. The transaction [email protected] represents a sale and lease back in part, with the vendor, Xandor Automotive Brierley Hill agreeing to take a 15 year lease of its 240,000 sq.ft premises on completion of the deal,

while taking a further 15,000 sq.ft in a smaller unit on a short term lease. The remainder of the space (110,000 sq.ft) is let to Sunrise Medical, a mobility products specialist on a lease expiring in July 2022.

The Industrial Estate is currently under-rented with a reversionary yield of 12.8%. The short WAULT on the Sunrise Medical unit and short let Xandor unit provide near term asset management opportunities to extract further income from the Estate. The £1.1m passing rent generated per annum can be enhanced over the medium term through the optionality provided by 4.2 acres of open land associated with the site which is less than ten miles from Birmingham City Centre (approximately 5 miles West of the M5 Ring Road at Junction 3).

Overall, the acquisition is another example of Harworth meeting its investment criteria and strategy of growing its income producing portfolio through the deployment of capital on high yielding industrial properties with further asset management potential. This process should be further supported by the recent appointment of Richard Bousfield to the newly created position of Head of Income. To date, Harworth’s income producing portfolio has been resilient in the face of COVID, with rent collection rates in line with previous periods. The deal was financed from Harworth’s existing financial capacity, most recently reported at £64m between cash and available debt. The busy period continues for Harworth as we note 1,400 acres of non-core land in the North East have recently been launched for sale at a guide price of £5.5m.

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Economic View UK and EU take softer positions in Brexit talks

With the chances of a no-deal exit from the transition phase mounting in recent weeks, we Alexander Wilson welcome media reports this morning pointing to an easing of the positions taken by both the +353-1-641 9225 [email protected] UK and the EU. The biggest sticking point in negotiations so far have been the “level playing field” and state-aid, but ahead of the key EU-UK future relationship talks next week, the FT notes that Brussels has said they are willing to come to a compromise on the issue. The EU’s chief Brexit negotiator, Michel Barnier, has said his team are willing to work with Britain on a “credible and operational” framework when it comes to level playing fields. Meanwhile, in Westminster, sources say Prime Minister Johnson is open to a compromise by maintaining the right to deviate from standards in areas such as state aid in exchange for tariffs imposed on the UK’s exports.

Markets should respond positively to this news, although it is important to bear in mind that significant points of contention still remain, above all the EU will not risk the integrity of the single market. Elsewhere, access to waters for fishing purposes is still something both sides cannot agree on. Despite the challenges that lay ahead, news over the past few days provide some evidence that both sides of the table are willing to take a softer stance, which is encouraging as intensive talks start up on June 29th.

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Irish Banks European Council formally adopts EU banking package

The European Council yesterday formally adopted exceptional rules to facilitate bank lending Eamonn Hughes in the EU. The package of measures was adopted by the European Parliament on June 19 +353-1-641 9442 and the Council notes it will become applicable at the latest by end June. The package was [email protected] first published in Q219, but with a number of amendments adopted in recent months as Barry Egan Covid-19 unfolded. To recap, these included a prudential backstop for NPLs including +353-1-641 6059 preferential treatment of NPLs guaranteed by public guarantees; a 2 year extension to the [email protected] transitional arrangements relating to the implementation of IFRS 9; the temporary re- introduction of a prudential filter for sovereign bond exposures to reduce volatility; flexibility

for supervisors to mitigate volatility in banks’ internal models for market risks; targeted

changes to the leverage ratio and one year delay in its implementation; and the earlier introduction of some capital reliefs for banks under CRR 2 with most focus on SMEs and infrastructure loans.

Besides the regulatory mitigation around provisioning, some helpful additional “wins” for the bank sector in recent months have included the recent technical paper on software investment (a recent study estimated a potential 22bps benefit across the EU sector though we anticipate more at the Irish banks given the level of software investment to date), SME risk weights (Irish banks have similar SME exposures as EU peers as a share of the loan book) and sovereign bond addbacks (sovereign bonds are 8.7% of total assets at Irish banks vs 12% average across the EU). All in all, the measures potentially represent some helpful regulatory benefits for capital at the Irish (and EU) banks, but the adoption of the EU banking package has been well flagged in recent weeks.

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