Morning Wrap Today ’s Newsflow Equity Research 18 Dec 2020 08:51 GMT Upcoming Events Select headline to navigate to article Hammerson Plan to list on Euronext Dublin Company Events Morses Club 1H20 Results; remains profitable despite Covid-19 challenges Irish Banks Lumbering to deal on Brexit over the weekend? UK Economic View November retail sales fall but outlook improves Economic Events Ireland 22-Dec PPI Nov20 Wholesale Price Indsx Nov20 United Kingdom 18-Dec Retail Sales Nov20 22-Dec GDP Q3 Exports Q3 Imports Q3 Current Account Q3 United States Europe This document is intended for the sole use of Goodbody Investment Banking 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 Hammerson Plan to list on Euronext Dublin Hammerson announced this morning that it is to seek admission of its entire issued share Recommendation: Hold capital to the secondary listing segment of the Irish Stock Exchange (Euronext Dublin) and Closing Price: £0.26 to trading on the main market for listed securities of Euronext Dublin. Colm Lauder +353-1-641 6042 Hammerson is seeking a secondary listing given the importance and scale of its investor base [email protected] and operations in continental Europe and Ireland. HMSO owns and manages prime retail property with a value of £1.2bn in France and £0.8bn in Ireland (Dundrum, Ilac, Pavillions) in addition to significant City Quarters development opportunities in Dublin (Dublin Central Site on O'Connell Street). Alongside its directly managed portfolio, Hammerson also has exposure to Value Retail destinations outside of the UK including La Valleé in Paris and La Roca in Barcelona. Furthermore, as of the 23rd November 2020, around 27% of Hammerson's share capital held by institutional investors is held by investors based in the European Economic Area (excluding the UK). A secondary listing on Euronext Dublin will enable Hammerson to maintain an efficient holding structure across its portfolio and guarantee an EU equivalent trading venue for Hammerson's shares. It is expected that Admission will become effective and that unconditional dealings in the Ordinary Shares on the Main Market will commence at 8.00am on 23rd December 2020. Goodbody is acting as Sponsor to Hammerson plc in connection with the proposed admission to Euronext Dublin. Home… This document is intended for the sole use of Goodbody Investment Banking and its affiliates Page 2 18 Dec. 20 Goodbody Morning Wrap Morses Club 1H20 Results; remains profitable despite Covid-19 challenges MCL published 1H20 results to end-August 2020 this morning. MCL had previously issued its Recommendation: Buy FY19 results only recently on the 27th of November, owing to a significant delay in its Closing Price: £0.44 reporting schedule. The 1H20 results show reduced gross loan growth -23% y/y, to be John Cronin expected given the difficult market conditions and the halt put in place on home collections +353-1-641 9187 at the start if the crisis in March. Customer numbers were down 25.7% to 205k. Adjusted [email protected] PBT came in at £2.3m, very close to our £2.4m forecast. Revenue was -24.3% y/y to £50.2m, driven by the challenges of lending to new and existing HCC customers and lower customer demand during lockdown. Impairments/revenues of 23.5%, is higher than last year’s 19% but it is comforting to note that it is still within of the 21-26% guidance range. Looking at costs, there was a decent beat, adjusted operating expenses (incl. agents commissions) came in c.£8m lower y/y (-15%) to £36.3m. Interest costs were £1.3m slightly lower than we expected as MCL with the current level of gearing still very low. The statement also notes an interim dividend of 1p and whilst below our 1.3p forecast, it is still a good outturn given the market backdrop. Overall, this is a good set of numbers from MCL with the core home credit business performing much better than expected against the challenging backdrop of Covid- 19, remaining profitable. The integration of recent acquisitions is progressing well and will serve to boost returns in a medium-term context. MCL is in the early stages of its product diversification journey and while progress is slow, management mention that the acceleration towards digital working has benefited the group immensely, and the strategy to increase penetration of MCL’s customer base is a sensible one and should generate higher returns and better growth potential over time. The impact Covid-19 has had on the home credit market demonstrates the dangers of overreliance on one product and the continued investment in the digital business means MCL is well-placed to benefit from a Covid-19-related increase in market size. Home… This document is intended for the sole use of Goodbody Investment Banking and its affiliates Page 3 18 Dec. 20 Goodbody Morning Wrap Irish Banks Lumbering to deal on Brexit over the weekend? So, Brexit looks like it’s coming down to fishing rights. There are a few issues on the table Eamonn Hughes still, but the gap is wide on fishing - accounting for a mere 0.1% of UK GDP and thereby +353-1-641 9442 putting the other 99.9% at risk! So, as the odds shorten on a deal, we thought it worth [email protected] recapping what that might be worth for the Irish banks. We think about this in the context Barry Egan largely of impairment, new lending activity (mainly SME) and cost of equity (COE). +353-1-641 6059 [email protected] For context on impairments, let’s take AIB which specifically modelled a failed EU/EU trade deal in its ECL disclosures in H1. In June, provisions were €2.44bn. AIB did a Downside Scenario of Failed EU/UK trade talks (10% probability attached) whereby provisions would rise to €2.74bn. So simply removing this scenario and adding the 10% probability back to the base case would reduce impairments by c.€30m, or about 7bps of CET1. It’s not transformational, compared with our €1.47bn full year charge, but it all helps. I suppose, you could argue that banks may feel better about SMEs, which may imply a better outturn. Moving, to new lending, the “outperformer” in H2 was the mortgage market and all trends currently in approvals point to a strong start to 2021, Brexit deal or no deal. We note press reports this morning as well of legislation being put in place on a potential shared equity (30%) affordable housing plan, to come to market mid-2021. So, the main focus will be on SME lending. In the first instance, our new lending forecasts are premised on a negotiated trade deal, so in theory should show no change if we have a deal. However, we have to admit that updated forecasts in November were constructed with Brexit risk bubbling along in the background and evidence of very slow take-up in the government’s €2bn credit guarantee loan scheme. Indeed, the government yesterday indicated more than 15.3k closed or restricted businesses are seeking €110m in aid under a Covid support scheme launched following the October Budget. This might be a case of “chicken and egg” scenario, but a Brexit deal may have the potential to shift to a more positive bias on new lending activity in the SME and/or Corporate lending. Every additional €1bn of new lending (less funding cost) has the potential to add c.3.7% to FY22 pre-provision profit of AIB and c.3.0% to BOI. Finally, we assign an 11.5% COE to our AIB core capital valuation and 12.5% for BOI (premium to reflect risk in its IT transformation plan). Thinking aloud, a Brexit deal (plus knowing we are on a trajectory of vaccine rollout) could argue for lowering our COE by 100- 150bps maybe. A key risk remains further lockdowns until the vaccines are widely available (I was in the city centre last Saturday afternoon and we are definitely going back into lockdown in January given the sheer crowds out and about, reinforced by the health officials comments yesterday evening), but every 100bps reduction in the COE would simplistically This document is intended for the sole use of Goodbody Investment Banking and its affiliates add c.8% to fair values, for some context. Elsewhere, the Central Bank published its 3Q20 Arrears and Repossession stats yesterday. No surprises of note were evident, with all trends similar and positive on a yearly basis, continuing in a downward direction. The outstanding value of PDH mortgages is roughly flat (-0.4% y/y; -0.1% q/q) to €97.5bn, while total outstanding arrears has reached an all-time low of 9.7% of the balance (peak was 22.4% in Dec-12). We would expect this is inevitably the trough before metrics begin to tick upwards in 2021 post the pandemic. A very similar situation emerged for BTL mortgages, down 8.8% y/y (normal run-rate of contraction on a y/y is c.9-11%) to €15.9bn, while total outstanding arrears is at 24.8%.