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Today ’s Newsflow Equity Research 21 May 2021 08:48 BST Upcoming Events Select headline to navigate to article

Hibernia REIT New US Private Placing to double funding Company Events capacity 24-May Hilton Food Group; Q121 Trading Update 25-May Greencore; Q221 Results Yew Grove REIT Further accretive acquisitions Harworth Group; AGM 26-May British Land Company; FY21 Results Travis Perkins A step in the journey of simplifying its Hibernia REIT; FY Results portfolio Irish Economic View Options to put the public finances back on track UK Economic View Retail Sales Spring into Life – April 2021 Draper Esprit Leads $30m Series A round in Cervest UK Banks CBG provides strong 3Q21 update UK Banks Nationwide FY20 results take Economic Events Irish Banks US banks facing climate disclosures as plays Ireland catch up with EU 21-May PPI Apr21 Wholesale Price Index Apr21

United Kingdom 21-May Retail Sales Apr21

United States

Europe

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Hibernia REIT New US Private Placing to double funding capacity

Hibernia REIT (HBRN:ID) announced this morning that it had placed two unsecured US Recommendation: Buy private placement notes with institutional investors raising total funding of €125m. Closing Price: €1.14

The issue comprises equal amounts of 10- and 12-year notes with an average fixed coupon Colm Lauder +353-1-641 6042 of 1.9%. The notes were placed with five institutional investors, all new lenders to Hibernia. [email protected] Hibernia’s weighted average debt maturity as of 31st March 2021 (its FY) was 3.4 years and cash and undrawn facilities, net of commitments, amounted to €110m. Proforma for the

new notes, the weighted average debt maturity is extended to 5.2 years and cash and undrawn facilities, net of commitments, increases to €235m.

This issuance considerably enhances Hibernia’s financial capacity and represents a clear sign of intent in Hibernia’s progression of the development of Clanwilliam Court and Harcourt Square.

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Yew Grove REIT Further accretive acquisitions

Yew Grove REIT (YEW:ID), the high-income Irish property investor, announced three Recommendation: Buy acquisitions this morning for a total value of €19m as it utilises proceeds following its recent Closing Price: €0.96 equity issue and debt capacity from its revolving credit facility. Colm Lauder +353-1-641 6042 The properties acquired include an industrial building in Dundalk, County Louth and two [email protected] adjoining office properties in Citywest, West Dublin. On completion of these transactions, Yew Grove will have a portfolio of 24 properties with a proforma gross asset value of

approximately €162m and a current annualised rent roll of approximately €12.9m, representing a gross income yield of 7.9%.

The acquisitions announced include exchanging contracts to purchase Blocks E&F, Citywest, West Dublin, for €11m. The property has two adjoining office blocks of 45,972 sq.ft. and is fully tenanted by three multinational tenants paying a current annual rent of €984,000. This represents a net initial yield of 8.2% with a potential reversionary yield of 9.2%. The property has a WAULT of 4.0 years to first break and 6.4 years to expiry.

In Dundalk, Yew Grove has exchanged contracts on Tanola House, a recently constructed high bay industrial building of 86,451 sq.ft. over two adjoining blocks. The property has a 12.5m eaves height, 120 car parking spaces and is tenanted by a US multinational (Anord Mardix) under two leases which together have a WAULT to first break of approximately 8.4 years and a WAULT to expiry of 18.4 years. Tanola House was acquired for ~€8m, with a current annual rent of €601,000 stepping up in approximately four years across both leases to €631,000, representing a net initial yield of 6.9% and increasing to 7.3% at the step up.

The acquisitions announced this morning are both high quality, high income and reversionary properties which will be yield accretive to the Yew Grove portfolio. The rapid deployment of recent raised funds is also encouraging and fast becoming a Yew Grove trademark.

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Travis Perkins A step in the journey of simplifying its portfolio

Travis Perkins has announced the disposal of its Plumbing & Heating (P&H) business Recommendation: Hold overnight to an affiliate of H.I.G Capital for a cash consideration of £325m. The deal is Closing Price: £16.16 expected to be completed within the next three months. Following on from the recent demerger of Wickes, the P&H deal continues the group’s progress towards focusing on its David O'Brien +353-1-641 9230 higher margin businesses within the portfolio (Merchanting and Toolstation). david.a.o'[email protected]

In FY20 P&H generated revenue of £1,041m putting the EV/Sales multiple at 0.3x (FY19:

0.22x) versus an FY20 operating margin of 1.58% ex-property profits (FY19: 3.3%). In the release management notes that given the group’s ‘strong balance sheet and robust liquidity position it intends to return the net proceeds of the disposal to shareholders in the form of a 35p dividend followed by a share buyback programme subject to market conditions. Given the dividend of c.£79m this leaves c.£246m for share buybacks. The disposal of P&H marginally moved the net debt/EBITDA from 1.74x to 1.67x.

This marks another key step in the in strategic journey for Travis Perkins following the demerger of Wickes. With a more simplified portfolio Travis Perkins can focus on strengthening its core brands and the rollout of the higher growth/margin Toolstation brand.

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Irish Economic View Options to put the public finances back on track

In the context of the surge in government spending and government debt during the Dermot O’Leary pandemic, we are often asked how this is all going to be paid for in the future. If managed +353-1-641 9167 [email protected] correctly, most of the spending introduced since March 2020, like the wage subsidies and enhanced welfare payments, will be temporary, and be rowed back over the coming months as the economy reopens.

Some though will be permanent; the Irish Fiscal Advisory Council (IFAC) estimates that there was €5bn in non-COVID spending introduced in Budget 2021. In Ireland, there are three other risks to the public finances over the coming years: (i) an anticipated €2bn decline in corporate tax revenues; (iii) the €3bn per annum coming from motor-related taxes due to emissions targets, and; (iii) the ongoing costs associated with the aging of the population. A policy choice may be made to reduce spending, but there is also a good chance that taxes will have to be raised in other areas to offset the pressures mentioned here. A new paper by the ESRI this morning lays out a menu of options for the government quantifying the impact of various policy options. Given that they account for 55% of total tax revenue, income tax and/or VAT will likely play a role in any revenue raising decision. Other options posited in the paper include updating the property tax, restricting certain pensions reliefs and a wealth tax. The authors make it clear that these are options, not recommendations.

While the Irish government has been keen to not talk about tax rises or expenditure cuts until the country is well out the far side of the pandemic, there are obvious pressures that must be dealt with in the years ahead. There are other options not included in the paper by the ESRI that may be examined in the context of the new Commission on Taxation that has just been set up. While the fiscal tightening will be nothing like that seen a decade ago, difficult decisions will have to be made to put the public finances back on a stable footing. Research like that published by the ESRI today will help inform that debate.

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UK Economic View Retail Sales Spring into Life – April 2021

The UK retail sector was booming in April as consumers took the opportunity to have a meal Shaun McDonnell outside the home following the reopening of outdoor dining on April 12th. +353-1-641 9127 [email protected]

The UK retail sales index was up 9% mom in April, a 4.2% beat on a consensus estimate of 4.8%, giving an annual growth rate of 46% against a weak comparative in the lockdown last year. Growth of 10% was exhibited on a 2-year basis. Retail sales were 10% above their pre-pandemic (February 2020 levels). Growth occurred in all sectors with the exception of food sales (-0.9% mom). Non-food sales led the charge growing +25% mom, followed by fuel (+11% mom) and non-store sales of +1% mom. These trends are aligned with the reopening as households look to have taken the opportunity to eat out for the first time since the end of last year. For context, non-store retailers reported growth of 56% vs 2019.

More timely credit and debit card spending show this surge continued up until the May bank holiday, where spending levels tapered to 6% below their February 2020 levels (data up to May 13th). However, OpenTable data suggest the tapering may be short lived as restaurant bookings boomed on the back of the return of indoor dining (+73% v 2019 in the week to 17th May), notwithstanding the fact there has been a shift in the number of bookings compared to walk-ins when comparing to 2019, however, we still believe the data to be indicative.

The release will be welcome news for the sector this morning, and the market should react well to what may only be the beginning of what’s to come this summer as restrictions ease further throughout June in particular and consumers are potentially given the opportunity for walk-in service in pubs and restaurants, or, in other words, live again.

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Draper Esprit Leads $30m Series A round in Cervest

Draper Esprit indicated yesterday that it is the lead investor in a $30m Series A round in AI- Recommendation: Buy powered Climate Intelligence (CI) platform, Cervest. Closing Price: £7.70

The round was supported by current investors Astanor Ventures, Lowercarbon Capital and Gerry Hennigan +353-1-641 9274 Future Positive Capital (part of the Draper Esprit fund of funds programme), as well as new [email protected] investors UNTITLED, the venture fund of Magnus Rausing, and TIME Ventures, the venture fund of Marc Benioff.

Following five years of research, Cervest has developed an automated Climate Intelligence platform, which provides “a unified view of climate risk that’s never before been possible” by combining public and private data sources (i.e. NOAA, ECMWF, CMIP6), machine learning, and statistical science. Cervest plans to use the financing to move into the US and European markets.

In the Trading Update last month Draper management increased guided investment for the current year from £120m to £150m, relative to the £128m outlaid by the PLC in FY21. This latest investment clearly forms part of that investment outlay.

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UK Banks CBG provides strong 3Q21 update

Close Brothers (CBG) has published another upbeat update for the three-month period to John Cronin 30th April (3Q21). In short, the business has delivered a strong performance across all three +353-1-641 9187 divisions once again (with trends pretty consistent with those called out at the stage of the [email protected] interim results), which culminated in a 20bps q/q increase in the CET1 capital ratio to a Barry Egan strong 15.5% (and, as a reminder, its initial IRB application was submitted to the PRA in +353-1-641 6059 December 2020). [email protected]

Starting with the Banking division, loan growth was an impressive +3.2% q/q (+12.8% in

annualised terms) to £8.2bn, driven by: i) strong demand for CBILS loan product ahead of

the 31st March application deadline, particularly in an Asset Finance context; ii) higher

utilisation levels in Invoice Finance in line with the gradual reopening of the economy; and iii) continued high new business volumes in the Motor Finance book – while the Property loan book remained broadly stable. Annualised NIM was broadly stable on 1H21 levels (we don’t get a number) and CBG notes that it remains focused on strict cost management. Notably, CoR fell slightly from the 1H level, owing to a stable credit performance and some modest releases of management overlays in the Retail and Property businesses owing to the improved macroeconomic outlook. Naturally, CBG does retain prudent provisioning levels in overall terms owing to the “uncertain external environment” – but, if the BoE’s MPR projections are proven to be true, the scope for writebacks should be material here. Asset Management delivered annualised net inflow of 6% in the quarter, with managed assets rising to £14.8bn and total client assets growing to £16.0bn. Winterflood’s performance was remarkable once again – no loss days and the statement notes that YTD operating profits are already ahead of FY20 operating profits.

All in all, a short but positive update reinforcing the trends called out at the half- year results stage and it is no surprise to see the CBG stock price up slightly this morning while we are seeing the rest of the sector trade down a bit (at the time of writing).

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UK Banks Nationwide FY20 results take

Nationwide has published FY20 results for the 12-month period to 31st March 2021 this John Cronin morning. Underlying profits of £790m were +68% y/y – and the £485m 2H20 print was up +353-1-641 9187 materially on the 1H level (+59% h/h). The material improvement was driven by: i) [email protected] significant NIM expansion (+8bps y/y to 121bps for FY20, which implies a NIM above this Barry Egan level in the second half as NIM came in at 115bps in 1H20), bolstering NII (+12% y/y, or +353-1-641 6059 £336m) despite slightly lower average loan balances (the NIM expansion is a function of [email protected] Nationwide passing through lower rates to savers); and ii) impressive cost reduction (in the first half), with administrative expenses down £94m (or 4%) y/y to £2.22bn. Indeed, the

improvement in the Cost/Income ratio y/y really captures the strong performance that

Nationwide delivered – with a more than 8 percentage points reduction to 67.5% (FY19:

75.9%). Elsewhere, impairment charges were down slightly y/y on lower loan balances while cost of risk was broadly flat (4bps in FY20 versus 3bps in FY19) – notably, Nationwide’s impairment charge in 2H20 of £51m was significantly below the 1H20 level (£139m). Consistent with peers, arrears remain low (for example, just 0.43% of mortgages are >3MIA compared with 0.43% at end-FY19), though Nationwide notes that this has, in part, been supported by government support schemes and payment deferrals and acknowledges in the report that it is still a very uncertain environment. Nationwide printed a strong CET1 capital ratio of 36.4% at end-FY20 (+190bps h/h) which positions the society well for impending RWA density inflation and we have received very detailed guidance on this point already (notably, Nationwide flags that its new residential mortgage IRB models were submitted to the PRA for approval earlier in 2021). Notably, the h/h CET1 ratio improvement was partly driven by some RWA density reduction (in addition to the income growth) as reduced PDs were applied in the unsecured book as well as more favourable treatments for SME and infrastructure lending in the commercial loan book.

Notably, the quantum of ‘member financial benefit’ delivered to its customers was just £265m for FY20 (FY19: £735m), which, the company notes, is below Nationwide’s target of £400m and the report states that “we expect this to return to in excess of £400 million”. This is an important point to consider in our view when one contemplates how mortgage spreads in the broader market might evolve as well as in relation to any considerations regarding an inflection point in the context of retail deposit pricing. We will join the investor / analyst call at 14:00 BST and will report back on any further material observations as appropriate following this and our more detailed review of the results materials.

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Irish Banks US banks facing climate disclosures as plays catch up with EU

We note overnight that the Biden Administration has issued an executive order instructing Eamonn Hughes Treasury Secretary Janet Yellen to report (has a 180 day deadline) with other members of +353-1-641 9442 the Financial Stability Oversight Council to report on how they plan to reduce risks to [email protected] Financial Stability. Ms Yellen noted the council will work to improve climate-related financial Barry Egan disclosures to better measure their impact. +353-1-641 6059 [email protected] Of course, it’s good to see the US ramp up its drive on climate-related matters, but it is playing catch-up. In a European context in recent months, we have had the introduction of

the EU Taxonomy (of sustainable activities), the SFDR (Sustainable Finance Disclosures

Regulation) and discussion papers form both the ECB and the EBA to name a few. Also, on

April 21st, the EU Commission issued their proposed changes to strengthen EU sustainability reporting through the Corporate Sustainability Reporting Directive (CSRD). This directive will significantly enhance the scope of the exiting NFRD (Non-financial Reporting Directive) to cover all large undertakings as well as all those listed on EU regulated markets, with the exception of micro-entities. CSRD, which will be mandatory, sets out in far greater detail the non-financial information that entities should report. The first standards are due for adoption by 31 October 2022, a tight timeline. It is expected that the new directive will capture <50k corporates across the EU (75% of EU turnover) compared with the <12k currently. Elsewhere, we note this morning that the CMA (Competition & Markets Authority) is seeking views on guidance for businesses on Green claims.

The US is playing catch-up with Europe on corporate sustainability disclosures, but of course, it’s better late than never. The drive for greater disclosures is clearly a step in the right direction and earlier this week the ECB in its Financial Stability Review noted central banks are increasingly embedding climate risk issues into their financial stability assessment and supervision (there will be climate stress tests next summer). Closer to home, a new Climate Action Plan for Ireland will be launched with the renewed National Development Plan this summer. The direction of travel is clear and disclosure and regulatory requirements are only going in one direction.

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