Morning Wrap Today ’s Newsflow Equity Research 11 Jul 2016 Upcoming Events Select headline to navigate to article Irish Building Materials Construction PMI strengthens Company Events further in June 11-Jul Lufthansa; June 2016 - Traffic Stats Taylor Wimpey; Q2 2016 Trading Update US Building Materials Employment growth remains 12-Jul Grafton Group; Q2 2016 Trading Update strong in highway construction segment 13-Jul J D Wetherspoon; Q4 2016 results 14-Jul Hays; Q4 2016 results CPL Resources Trading in-line, albeit with limited detail Norwegian Air Shuttle; Q2 2016 results 15-Jul DCC; Q1 2017 IMS Economic View Bond yields fall to record lows yet again 18-Jul Givaudan; Q2 2016 results Ladbrokes Press reports that Betfred is leading the race for Ladbrokes/Coral stores Greene King Media reports that 90 pubs put up for sale Gaming & Leisure Euro 2016 results appear to have been favourable for bookmakers Economic Events Ireland United Kingdom United States Europe Goodbody Capital Markets Equity Research +353 1 6419221 Equity Sales +353 1 6670222 Bloomberg GDSE<GO> Goodbody Stockbrokers (trading as Goodbody) is regulated by the Central Bank of Ireland. For the attention of US clients of Goodbody Securities Inc, this third-party research report has been produced by our affiliate Goodbody Stockbrokers. Please see the end of this report for analyst certifications and other important disclosures. Goodbody Morning Wrap Irish Building Materials Construction PMI strengthens further in June The Construction PMI came in at 59.7 in June, which is up from the 55.9 in May and Robert Eason +353-1-641 9271 compares to the recent February peak of 68.8. In terms of the individual sectors, they all [email protected] remained in expansion mode with gains on the previous month. Commercial activity was the strongest sector at 62.0 (59.7 in May), followed closely by Housing activity at 61.8 (57.4 in David O’Brien +353-1-641 9230 May). Civil Engineering activity saw the biggest monthly gain at 55.4 (up from 50.5 in May). david.a.o’[email protected] Jason Molins The PMI data shows the continued strength of the Irish construction sector, albeit +353-1-641 9141 with many of the responses in the survey being returned prior to the Brexit vote, it [email protected] remains too early to assess the impact of the vote. Nevertheless, we note that the Sarah Dunne Irish construction sector is still expected to be one of the strongest growth regions +353-1-641 0482 [email protected] in Europe, which is supportive for Grafton (c.20% of group sales). Home… US Building Materials Employment growth remains strong in highway construction segment The breakdown of the May US employment data shows that highways continues to be one of Robert Eason +353-1-641 9271 the strongest construction segments with growth of 6.3% yoy (8% April and 11% March). [email protected] This compares to 5% in residential and 2% in non-residential. David O’Brien +353-1-641 9230 The strong employment data for the highways construction sector is supportive of david.a.o’[email protected] our positive stance on this segment. It also provides comfort that recent weaker Jason Molins trends in contract awards and output data is likely to be down to timing effects, +353-1-641 9141 especially the impact of more favourable weather in Q1 which probably brought [email protected] forward construction activity. Sarah Dunne +353-1-641 0482 [email protected] Home… Page 2 11 Jul. 16 Goodbody Morning Wrap CPL Resources Trading in-line, albeit with limited detail Specific detail in the brief Trading Statement from Cpl this morning, which covers the twelve Recommendation: Buy months to June, is limited to an indication that management is guiding an outcome in line Closing Price: €4.98 with market expectations and a comment on the potential impact of the EU Referendum in Gerry Hennigan the UK. +353-1-641 9274 [email protected] With respect to Brexit the initial assessment of Cpl is it presents “both challenges and opportunities”, which we would read as near term challenges in the UK market and medium term opportunities in Ireland. With regard to the outcome for the year to June, the statement indicates that PBT is anticipated to be in line with market expectations. Our PBT estimate for FY16 stands at €15.5m relative to a consensus estimate of €15.3m and reported FY15 PBT of €14.0m. As of June, we estimate net cash of €34.0m up from €30.5m the prior year. Amid obvious market concern over the fall-out from the EU Referendum in the UK we draw a degree of comfort from the Cpl statement this morning and would highlight an estimated 74% NFI exposure to the Ireland (16% estimated exposure to the UK) as a differentiating factor for Cpl over some of its peers. Home… Economic View Bond yields fall to record lows yet again The extraordinary downward march in government bond yields continued on Friday, with the Dermot O’Leary +353-1-641 9167 Netherlands 10-year bond becoming the latest to fall into negative yield territory for the first [email protected] time. The move came on a day when the IMF warned on the possible growth implications for the euro area of the UK’s decision to leave the EU. The agency downgraded its GDP projection to 1.4% for 2017 (from 1.7% pre-Brexit), but added “a strong caveat that this is an early assessment”. By the sounds of it, we can expect further downgrades in the coming months, given that its assessment is based upon the UK getting a “Norway-style” deal in its negotiations with the EU. Tied into the move in bond yields last week, another notable feature in markets was the further decline in inflation expectations. Measured by the 5 year/5 year breakeven swap, inflation expectations in the euro area now stand at just 1.25%, a new record low. It is noteworthy that recent instances of aggressive ECB stimulus were preceded by sharp falls in this indicator. Further ECB cannot be ruled out, but with rates already in negative territory, the law of diminishing returns is now in existence. Another surprising feature of the move in bond markets on Friday was that US Treasury yields also fell despite what was a relatively strong employment report (287,000 jobs created in June). It appears that the market is dismissing the report as it largely reflects a pre-Brexit world and is thus not instructive as to where the US economy is actually headed over the coming months. Bond markets look to be pricing in a gloomier outlook than most equity markets. Home… Page 3 11 Jul. 16 Goodbody Morning Wrap Ladbrokes Press reports that Betfred is leading the race for Ladbrokes/Coral stores According to press reports over the weekend (Sunday Times), Betfred is the closest operator Recommendation: Buy to acquiring Ladbrokes and Coral shops from the divestment programme needed to complete Closing Price: £1.15 the merger. In its provisional findings into the merger, released on May 20th, the CMA Gavin Kelleher outlined that 350-400 shops would have to be divested to appease local competition +353-1-641 0423 concerns. Betfred is the 4th largest retail bookmaker in the UK with 1,378 shops. According [email protected] to the article at the weekend, it states that should Betfred be allowed to buy the shops by the CMA, any shops it is unable to buy could be acquired by BoyleSports. It also notes that most of the shops are under the Ladbrokes brand. Overall, the report that Betfred is the leading operator to buy these shops comes as no surprise. There is no doubt that the recent Brexit vote and subsequent worries regarding the UK consumer have an impact on valuation. However, we continue to believe that a merger of Ladbrokes and Coral will drive significant upside from current levels. Home… Greene King Media reports that 90 pubs put up for sale According to reports in the Sunday Times yesterday, Greene King has put 90 of its worst Recommendation: Buy performing pubs up for sale, the majority of which are tenanted. It also highlights the fact Closing Price: £7.46 that this is part of a move towards managed pubs with a focus on food. The article states Kevin McDermott that the sites will be sold off in small batches and not packaged together, with management +353-1-641 9162 hoping to raise as much as £30m from the disposals. [email protected] Management has previously highlighted that it would look to focus on its managed pubs estate and therefore we would see this as a positive move. The disposals would represent c.3% of its overall pub estate. Greene King remain our top pick in the pub sector. This news highlights that the group is continually focussed on operating a fully optimised and quality estate. Home… Page 4 11 Jul. 16 Goodbody Morning Wrap Gaming & Leisure Euro 2016 results appear to have been favourable for bookmakers Given the UEFA European Championship 2016 ended last night, we believe it is worthwhile Gavin Kelleher +353-1-641 0423 examining the results in order to assess their implications for bookmakers. At a high level, it [email protected] appears that results would have been quite favourable. Throughout the tournament, just 41% of games were won by the favourite, compared to 50% in the 2014 World Cup and 58% Kevin McDermott +353-1-641 9162 in Euro 2012.