Morning Wrap

Morning Wrap Today ’s Newsflow Equity Research 26 May 2020 08:37 BST Upcoming Events Select headline to navigate to article ARYZTA COVID-19 challenges to the fore, though liquidity Company Events robust 26-May ARYZTA; Q320 Results 27-May Hibernia REIT; FY Results FBD Holdings Business update on BI cover; test case to 28-May Non-Standard Finance; FY19 Results Norwegian Air Shuttle; Q120 Results go to commercial courts Irish Banks EBA paper on first insights into Covid-19 impact on EU banks Mondi Ferguson CFO joins Mondi Economic Events Ireland 28-May Retail Sales Apr20 United Kingdom United States Europe This document is intended for the sole use of Goodbody Stockbrokers and its affiliates Goodbody Capital Markets Equity Research +353 1 6419221 Equity Sales +353 1 6670222 Bloomberg GDSE<GO> Goodbody Stockbrokers UC, trading as “Goodbody”, is regulated by the Central Bank of Ireland. In the UK, Goodbody is authorised and subject to limited regulation by the Financial Conduct Authority. Goodbody is a member of Euronext Dublin and the London Stock Exchange. Goodbody is a member of the FEXCO group of companies. For the attention of US clients of Goodbody Securities Inc, this third-party research report has been produced by our affiliate, Goodbody Stockbrokers Goodbody Morning Wrap ARYZTA COVID-19 challenges to the fore, though liquidity robust ARYZTA provided a Q3 update (end April) this morning with organic revenues down 21.5%. Recommendation: Hold ARYZTA now expects that COVID-19 will have a material impact on FY20 performance Closing Price: €0.44 though it is not possible to fully assess the consequences that will result from the short and longer-term impact. In a separate release yesterday evening the Group indicated that Jason Molins +353-1-641 9141 following the request from certain shareholders, it will look to hold an EGM by mid-August, [email protected] by which time the strategic and financial review should be concluded. At the end of March 2020, available liquidity was c.€360m. This improved to €385m by the end of April and stood at €389m at 22 May. The next debt maturity is not until March 2021 (€17m). Documentation has now been agreed with the lending banks to adjust the financial covenants (new: net debt:EBITDA <6.0x, Net interest coverage >1.5x) for the test dates ending July 2020 and Jan 2021. ARYZTA reiterated its cost mitigation measures such as: i) adjusting the bakery footprint (8 as of 30 April) and closing production lines; ii) furloughing 30% of headcount; iii) reducing capex spend versus plan by more than €50m; iv) reducing discretionary costs and postponing future Project Renew programmes; v) availing of government support actions; and vi) reduction in salary by the Executive Management (30%), Leadership Team (15%) and Board of Directors (30%) for a three month period. With the backdrop of COVID-19 there was a sharp deterioration seen across all markets (Europe -23.6%, North America -20.4%, Rest of World -14.3%). The deterioration was most evident in April (-49%), with some early signs of recovery in May, particularly the QSR and retail channels, with the past 3 weeks down 33% yoy. Encouragingly, despite the extreme challenges facing the business, a clear focus on cash conservation has enabled the business to maintain a robust financial position. Home… This document is intended for the sole use of Goodbody Stockbrokers and its affiliates Page 2 26 May. 20 Goodbody Morning Wrap FBD Holdings Business update on BI cover; test case to go to commercial courts FBD published a business update this morning in relation to policy coverage for business Recommendation: Buy interruption claims following the outbreak of Covid-19. FBD notes that it has received over Closing Price: €6.98 700 claims under business interruption extensions of its business insurance policies, but that it “is strongly of the view that our business insurance policies do not provide cover for a Eamonn Hughes +353-1-641 9442 pandemic” and has been “advised” as such. FBD notes it is providing support through pro- [email protected] rata refunds, providing cover for unoccupied premises and offering flexible premium options. FBD goes on to add that a number of customers have challenged its policy wordings in relation to policies sold to publicans, with c.1,300 of such policies on its books. Having considered the matter, FBD believes the most efficient way to achieve clarity is for proceedings to be brought by way of a test case to the courts. So, it confirms that litigation between FBD and 3 publican customers has been scheduled for hearing in the Commercial Court in October to determine whether losses due to Covid-19 related closure are covered by FBD’s publican policies. FBD comments that it is “confident in our interpretation of policy coverage” and we note recent Central Bank commentary in Ireland and the FCA in the UK that they were broadly supportive of the insurance industry stance in relation to the pandemic. Indeed, the FCA has also called for a legal test case on the issue, similar to the FBD approach in this instance with its publican policies. We have looked at historical pub turnover and gross profit figures, which for a say c.4 month lockdown, would indicate a full potential exposure of c.€110m for FBD. FBD presumably will also incur some legal costs through the whole process. However, with adjustments due to more current likely turnover and margin run-rates due to social distancing (based on gross profit if to open now) and other variable cost savings, we estimate a potential full exposure of <€30m across its pub portfolio should FBD lose its case, which could equate to 7-8% of its NAV. We estimate that FBD had €93m of excess capital last December with a solvency capital ratio of 192% (or €128m prior to the accrual of its FY19 dividend, or pro forma 207% capital ratio), so the insurer has substantial financial resources even in any adverse outcome (and we are no legal experts on this issue at all), bearing in mind that any adverse finding would also likely strengthen its hand with its reinsurers. Home… This document is intended for the sole use of Goodbody Stockbrokers and its affiliates Page 3 26 May. 20 Goodbody Morning Wrap Irish Banks EBA paper on first insights into Covid-19 impact on EU banks The EBA yesterday published a detailed preliminary assessment of the impact of Covid-19 on Eamonn Hughes the EU banking sector. It found that the capital accumulated by the banks in recent years +353-1-641 9442 and the capital relief provided by regulators give the sector an average of 5ppts buffer above [email protected] its overall capital requirements (OCR) which should allow banks to withstand the potential Barry Egan credit risk losses, derived from a sensitivity analysis based on the 2018 stress tests. +353-1-641 6059 [email protected] On asset quality, the EBA notes that asset quality is likely to deteriorate, which could reach levels similar to those recorded in the sovereign debt crisis, with a surge of NPEs expected by the end of the year. Its sensitivity analysis suggests credit risk losses up to 3.8% of RWAs (range 2.3-3.8% or €169-291bn, plus lower income & other impacts could see impact hit €380bn in total), so the sector would on average have capital to cover losses under a most severe credit shock whilst maintaining a buffer equivalent to >1ppt above its OCR. However, state-guarantees introduced across Europe might soften this impact and the EBA guidelines on loan moratoria might provide some breathing space. However, once the crisis is over, banks will have to rebuild capital buffers, which given low market valuations would risk high dilution to existing shareholders in some instances. High LCRs and central bank support have allowed banks to weather the first months of the COVID-19 crisis without major liquidity concerns. It notes the cautious approach to re- opening economies and the risks that GDP might take longer than initially expected to return to pre-Covid levels. Banks have ample liquidity buffers though it noted that operational pressures exist on dealing with the operational aspects of applications for payment breaks and staff working from home. Banks must adapt further to the challenging technological environment. Structurally, it also notes that lending margins are likely to remain low as a result of the central banks’ stimulus. Low profitability will likely push some banks to embark on more ambitious digitalisation strategies, which might be helped by the recent EC proposal to frontload the non-deduction of prudently valued software assets. It adds that further pressure on profitability and faster digitalisation might also stress the need to address overcapacity and for consolidation in the sector, at national or EU level. Elsewhere, in the data annex, we note that the EBA references an average P2R in Ireland of 2.8% and P2G of 1.1% (Tab F24 in data annex, the latter is helpful since it wasn’t previously disclosed). In a note published last Friday (Reopen, Resuscitate, Reignite – Q2 Healthcheck), This document is intended for the sole use of Goodbody Stockbrokers and its affiliates our economics team estimated that Ireland is unlikely to return to pre-Covid economic activity levels (2019) until 2023. Also following recent IMS statements, it is clear that loan books are likely to shrink this year and NIMs contract further (BOI guided NII up to c.10% lower than prior expectations). But most focus will be on the impairment line, where the banks started increasing impairment charges in Q1.

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