Morning Wrap Today ’s Newsflow Equity Research 30 Jul 2015 Upcoming Events Select headline to navigate to article Permanent TSB NAV and PT upgrades of 4-5% post Company Events results; PT to €5.00 30-Jul Lufthansa; Q2 2015 Results 31-Jul Bank of Ireland; Q2 2015 Results 04-Aug Travis Perkins; H1 2015 Interim Results 06-Aug Kerry Group; Banks Ulster Bank reports Q2 profit of £80m, helped by impairment releases US Building Materials 3-month extension for highways as politicians inch towards multi-year deal Building Materials Solid results from Saint Gobain and reiteration of guidance Economic View FOMC leaves door open for a September Economic Events Ireland rate hike 30-Jul GDP YoY Economic View Central Bank upbeat on growth but warns United Kingdom on pro-cyclical fiscal policy United States 30-Jul GDP Annualized QoQ 31-Jul U. of Michigan Sentiment Kennedy Wilson Europe Forecasting NAV of £10.70 for end of June (+5%) Europe 31-Jul CPI Estimate YoY Hibernia REIT Comforting update from Management ahead of AGM today Dragon Oil D-DAY for initial acceptances Lufthansa Holding FY guidance despite further fuel savings Ryanair Eating their (pasta) lunch 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 Permanent TSB NAV and PT upgrades of 4-5% post results; PT to €5.00 PTSB’s H1 results yesterday were in line with our estimates. However, the NIM trajectory Recommendation: Hold (100bps H1, but 117bps Q2) was stronger than anticipated as deposits re-price quicker Closing Price: €5.07 towards our medium term targets, supporting forecast upgrades. Adjusted FY15 operating Eamonn Hughes profit is raised by €38m to €110m, largely as we lift our NIM estimate from 107bps to +353-1-641 9442 118bps. The uplift reduces each year out, but we still model a NIM upgrade of 6bps in 2018 [email protected] to 1.78% and a FY18 net income increase of c.3% to €161m in the year of ROE normalisation. Our medium term targets remain unchanged (2018 ROE estimate tweaked from 9.5% to 9.8%), reinforcing the use of our 10% normalised ROE for valuations. But higher earnings estimates in the meantime add a cumulative c.15c to NAV (+3%), whilst other items in the H1 equity number (e.g. gain on Irish CRE sale, higher DTA) add a further c.9c (+2%), driving a combined FY18 NAV uplift of 5%. The NAV uplift means our fair value is raised from €4.80 to €5.00, but we retain our Hold call. Our base case valuation recognises €500m of provision releases (20% of stock). For those that believe that this could prove conservative, every extra €100m would add c.22c to fair value, whilst every 1% ROE boost adds c.36c. Check our note for full details. Home… Banks Ulster Bank reports Q2 profit of £80m, helped by impairment releases Ulster Bank has reported H1/Q2 results this morning. It reported a H1 operating surplus of Eamonn Hughes +353-1-641 9442 £79m, though £55m of impairment releases drove operating profit of £131m, up from £55m [email protected] in H114. In Q2, Ulster generated a £28m pre-provision profit (£51m in Q1), though a £52m impairment release (Q1 zero) leaves operating profit at £80m, ahead of the £51m in Q115. Colm Foley +353-1-641 6042 [email protected] Total income was down £12m from Q115 to £178m (was also -£14m in Q1), primarily driven Sarah Dunne by lower non-interest income though FX also cost c. £4m. However, the net interest margin +353-1-641 0482 in Q2 was down 2bps to 1.93%, which compares with 1.95% in Q1 and 2.14% in Q414 (full [email protected] year FY14 average was 2.27%), attributed to lower returns on free funds. Costs were up £11m from Q1 to £150m, but included £11m net of restructuring/litigation costs, so flat underlying. The £52m impairment release in Q2 follows a zero charge in Q1 and net write- backs of £104m in Q414, with the key features being a £38m release in the mortgage book (write-backs of £13m in Q1, £39m in Q414) and a £37m release in other corporate lending (£12m charge in Q1 after £64m write-back in in Q414). We would also flag the £33m of impairment releases in RBS Capital Resolution in Q2 (on £4.7bn of gross loans), which compares with the £139m of write-backs in Q115 and £712m write-back in Q414. NPLs at Ulster were down £0.2bn to £4.2bn in Q2. The loan to deposit ratio was 108%. These results show that the Ulster Bank franchise continues to accrete to capital for its parent, RBS. Lower free funds returns continue to be a headwind for all the Irish banks, but the releases continue to show the potential for capital tied up in the provision stock. We anticipate only modest NIM progression at BOI (H1 2.25% from 2.22% Q414) and lower impairment charges in its H1’s tomorrow. Home… Page 2 30 Jul. 15 Goodbody Morning Wrap US Building Materials 3-month extension for highways as politicians inch towards multi-year deal Yesterday, the House of Representatives easily passed a three-month extension for the Robert Eason +353-1-641 9271 federal highway programme (current authorisation expires in two days). At the same time, [email protected] the Senate is moving towards the passing of a six-year highway programme (looks for growth from $41bn in 2015 to $49bn in 2021, representing growth of 3% p.a.) with a vote David O’Brien +353-1-641 9230 today. However, this is unlikely to get fully approved ahead of the six-week August break. david.a.o’[email protected] Therefore, the 3-month extension is seen as a compromise as the House was originally Sarah Reilly seeking a 5-month extension. +353-1-641 6080 [email protected] There appears to be some optimism that the three month extension is sufficient time for the House and the Senate to reconcile their differences over a multi-year programme. Any resolution over a multi-year highway programme will be a positive for the heavyside building materials companies. However, in the meantime there is clear evidence that states are sourcing their own funds which is leading to a robust backdrop for aggregate volumes, as highlighted in yesterday’s results from HeidelbergCement. Home… Building Materials Solid results from Saint Gobain and reiteration of guidance After market close yesterday Saint Gobain released H115 results with operating income of Robert Eason +353-1-641 9271 €1.183bn. While behind Bloomberg consensus of €1.39bn, we believe the latter does not [email protected] fully account for the reclassification of the packaging business into discontinued. Lfl sales increased by +2.1% in Q2, representing a return to growth (-1.2% in Q1) and reflects David O’Brien +353-1-641 9230 easing comparatives (6.8% Q114 and 1.6% Q214). In addition, management reiterated david.a.o’[email protected] guidance for lfl organic profit growth in the current financial year. Sarah Reilly +353-1-641 6080 By geographic area the key takeaways are: (i) France remains weak, with lfl sales down 3% [email protected] in Q2 (-5% Q1); (ii) North America remains an area of strength, with lfl sales picking up post a weather impacted Q1 (+5% Q2 / -10% Q1); and (iii) Across Europe, trends improved aided by easing comparatives (+2% Q2 / 1% Q1) but partly offset by Germany being slightly down in Q2 (-6% Q1). It is off note that within the distribution business, the UK has reported further organic growth and “a particularly upbeat trend emerged in the Nordic countries, the Netherlands, Southern Europe and Brazil”. Overall, this latest set of results from the building materials sector reinforces our view on construction markets; namely strengthening conditions in the US, while Europe continues to show muted progress with some areas of stronger growth, especially in the UK. The comments on the Netherlands and the Nordics are positive for CRH and Wolseley (10% and 15% of group sales), respectively, while the challenging markets for France / Germany are of note for SIG (collectively c.45% of group sales). Home… Page 3 30 Jul. 15 Goodbody Morning Wrap Economic View FOMC leaves door open for a September rate hike The FOMC once again gave themselves the maximum amount of wriggle room for when the Dermot O’Leary +353-1-641 9167 first rate hike will come in last night’s policy statement. It continues to believe that the [email protected] economy is “expanding moderately”, with a similar adjective used to describe the performance of household spending. It upgraded its view of the labour market somewhat, reflecting the solid data over the past six weeks and stated that the “underutilization of labor resources has diminished since early this year”. However, the committee continues to be sanguine about inflation risks, saying that it “continued to run below” its “longer-run objective”. In terms of forward-looking statements, the only change was that the committee would see it appropriate to raise the fed funds rate when it has seen “some” further improvement in the labour market.