Morning Wrap Today ’s Newsflow Equity Research 09 May 2016 Upcoming Events Select headline to navigate to article easyJet Will tomorrow’s cost cutting programme turn Company Events sentiment? 10-May Air France-KLM; April 2016 - Traffic Stats easyJet; Q2 2016 Results Grafton Group; IMS 11-May C & C Group; Q4 2016 Results Dalata Hotel Group Announces new Cork city centre hotel Lufthansa; April 2016 - Traffic Stats 12-May Mondi; Q1 2016 Results SIG; Trading Update Rank Group Trading update due on Thursday Irish Building Materials Construction activity continues to be in growth mode Applegreen Greggs generate robust lfl growth in Q1 Economic Events AIB Group Agrees pay deal with staff, IPO timing Ireland 09-May Construction PMI 12-May CPI YoY United Kingdom 10-May BRC Sales LFL YoY 11-May RICS House Price Balance 12-May Bank of England Bank Rate Bank of England Inflation Report 13-May Construction Output SA YoY United States 13-May Retail Sales Advance MoM U. of Michigan Sentiment Europe 13-May GDP SA YoY 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 easyJet Will tomorrow’s cost cutting programme turn sentiment? easyJet’s interim results to March are due tomorrow. We forecast a loss of £7m vs consensus Recommendation: Hold profit of £4m. As with other airline results over the last few weeks, there is a wide range of Closing Price: £14.16 forecasts given uncertainty over how much of lower fuel costs will be passed back in lower Mark Simpson yields. In this instance Bloomberg has a range of a loss of £15m to a profit of £21m. +353-1-641 0478 [email protected] Our own number is a loss of £7m, with reported yields down 6.5% and reported total unit costs per seat down 5.7%; ex-fuel this is -1.2%. However, on a constant currency basis we forecast total revenue per seat at -4.3% and total cost ex-fuel at +0.8%. It is costs that will be the focus of tomorrows briefing, with easyJet’s CFO, Andrew Findlay, set to reveal the company’s new cost programme. However, can easyJet surprise on this front? So far the company has stated that its ‘easyJet lean’ programme delivered £32m of ‘sustainable savings’ in FY14 and £46m in FY15 and yet ex-fuel unit costs, on a constant currency basis, rose 0.6% and 3.6% respectively. This year, the company has forecast £50m of savings and ex-fuel constant currency costs per seat to be flat to up 1%. Given that, what can easyjet deliver and can it deliver real declines in unit costs as being seen this year by its competitors? Unless it can, we believe that the increasing level of competition from the likes of Ryanair will dominate sentiment and continue this period of relative underperformance. Home… Page 2 09 May. 16 Goodbody Morning Wrap Dalata Hotel Group Announces new Cork city centre hotel Dalata Hotel Group announced last Friday evening that it has acquired a part completed Recommendation: Buy hotel property in Cork city centre for a consideration of €10.2m. The site was granted Closing Price: €4.35 planning permission for a 121 bedroom hotel in February 2006, and the hotel commenced Kevin McDermott construction in 2007, however works ceased shortly after the construction of the structural +353-1-641 9162 shell. Management expects to commence construction by the end of 2016, as it seeks [email protected] permission to complete the hotel from Cork City Council, the hotel should be open in the first half of 2018. Once completed it will be a 4 star Maldron hotel and overall the investment, including the site purchase, will be in excess of €22m. We believe this announcement by Dalata is positive given that the new hotel will be well located in a regional city centre. The Cork hotel market has had a very strong start to 2016 and should continue to benefit from increased economic activity in the city. Following this investment, management has a further €80m to spend on acquisitions. We remain confident in management’s ability to identify good investment opportunities and re-iterate our BUY recommendation. Home… Rank Group Trading update due on Thursday Rank Group will release an IMS on Thursday May 12th, which is likely to cover the first 15 Recommendation: Buy weeks of H2 from January 1st. In terms of our H2 forecasts, we expect 1% revenue growth in Closing Price: £2.41 H2. This follows 3% growth in H1, with the main driver for the slowdown being a tougher win Brian Devitt margin comp in Grosvenor venues in H2. In Grosvenor venues we are looking for revenue to +353-1-641 9415 be flat yoy. The Luton casino, a 2005 Act casino opened in September could be a tailwind [email protected] that will offset the impact of a strong win margin in H215. In terms of Mecca venues, we expect revenue in H2 to be -2% yoy, in line with the trend in H1. In Digital, we expect revenue growth of +24% in Grosvenor and +7% in Mecca. However, given the new digital platform launched in March, the key focus will be on how growth has trended since launch. Rank’s share price is -14% ytd which we believe is due to both (i) general UK uncertainty arising from Brexit risk and (ii) relatively weak consumer leisure trends in 2016 so far. However, we don’t believe this is reflective of the underlying momentum in the business. The group delivered a strong H1 update in January which demonstrated the highly cash generative nature of the Grosvenor casino estate and some evidence of a stabilisation in Mecca bingo. We continue to like the Rank investment case and believe medium term digital growth has the potential to drive a re-rating for the stock. We re-iterate our BUY recommendation. Home… Page 3 09 May. 16 Goodbody Morning Wrap Irish Building Materials Construction activity continues to be in growth mode The Irish Construction PMI for April was 56.4. While down from 62.3 in March, it shows that Robert Eason +353-1-641 9271 the construction sector continues to be firmly in growth mode. All three segments are [email protected] contributing to this growth with Housing at 58.4, Commercial 56.5 and Civil Engineering 52.4. David O’Brien +353-1-641 9230 david.a.o’[email protected] Irish construction sector growth remains firm and amongst our coverage Grafton Sarah Reilly Group has the biggest exposure at circa 20% of group sales. Indeed, it is due to +353-1-641 6080 release an update tomorrow and we are expecting the strong trends reported in [email protected] Jan-Feb to have continued. Jason Molins +353-1-641 9141 [email protected] Home… Applegreen Greggs generate robust lfl growth in Q1 Greggs, the Food-to-go (FTG) bakery, provided a Q1 trading update this morning. The Group Recommendation: Buy saw total sales growth of 5.7% in the period, with lfl sales up 3.7% yoy. This follows 4.9% Closing Price: €4.40 and 2.3% lfl sales growth in Q4 and Q3 respectively. Key drivers of growth were breakfast, Patrick Higgins hot sandwiches and ‘Balanced Choice’ options. Greggs has opened 43 new sites, of which 23 +353-1-641 0403 were located at travel locations. A further 55 shops have been refurbished. [email protected] Applegreen now operate six Greggs shops (under franchise) in the UK. Gregg’s continued robust lfl sales performance and increasing focus on travel locations underpins Applegreen’s Food-to-go focused strategy. With significant scope for expansion in both Ireland and the UK, a proven FTG-focused business model and attractive cashflow characteristics, we forecast strong mid-teens earnings growth for Applegreen over the medium term. Home… Page 4 09 May. 16 Goodbody Morning Wrap AIB Group Agrees pay deal with staff, IPO timing According to press reports over the weekend, AIB is set to agree average pay increases of Recommendation: N/R 2.2% with staff following recommendations made by the Workplace Relations Commission. Closing Price: €8.20 The deal has been agreed with management and the Financial Services Union, which is set to Eamonn Hughes ballot members in the coming weeks. The commission recommended pay increases of 0.9- +353-1-641 9442 3.0%, with the higher figure for top performers in the bank. In addition, the FSU has also [email protected] secured an extension of job security for staff up until February 2018. Elsewhere, reports this morning (Irish Times) also suggests the government will need to press the button this month if it is considering an IPO of the bank this year, given typical 5-6 month timelines in these types of transactions. However, the article notes the recent bank sector sell-off as not providing a helpful backdrop. Our forecasts have costs up 4.8% in the current year as AIB absorbs an uplift in regulatory costs, but also underlying wage inflation, with our cost inflation forecasts trending at 3.0% thereafter (2017-19f). As such, our cost growth rate sits a little higher than the figures provisionally agreed with the unions.