Morning Wrap Today ’s Newsflow Equity Research 06 Apr 2021 08:36 BST Upcoming Events Select headline to navigate to article Air France-KLM Confirmation of a €4bn package to Company Events recapitalise the business 07-Apr Hilton Food Group; FY20 Results Yew Grove REIT; Final Q4 Div Irish Banks Avant expands regional focus / Easter news 08-Apr Supermarket Income REIT; Ex Div Q3 13-Apr Givaudan; Q121 Results wrap up Economic View Why Biden’s corporate tax proposals matter for Ireland Economic Events Ireland 07-Apr Industrial Production Feb21 08-Apr CPI Mar21 United Kingdom 07-Apr CIPS Services PMI Mar21 08-Apr RICS House Price Balance Mar21 CICPS Construction PMI Mar21 09-Apr Haliax House Prices Mar21 13-Apr BRC Retail Sales Mar21 Construction Output Feb21 GDP Feb21 Industrial Production Feb21 Manufacturing Production Feb21 Trade Balance Feb21 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 Air France-KLM Confirmation of a €4bn package to recapitalise the business In the widely publicised capital strengthening measures needed for Air France-KLM, the Recommendation: Hold group has announced a €4bn package to recapitalise Air France and its Holding company, Closing Price: €5.14 which has been approved by the EC. Currently, the package consists of the conversion of €3bn in the French state loan into perpetual hybrid bonds instrument and a capital increase Nuala McMahon +353-1-641 0498 of €1bn (which will include a private placement to institutional investors, a public offering [email protected] and a priority period allowing all shareholders to support the transaction). Discussions also remain ongoing with the Dutch State and the EC regarding further capital strengthening measures for KLM, and other measures are expected to be announced ahead of the group’s AGM in May. As part of the announced plan, the French state will participate in the capital increase while keeping its stake under 30% (currently 14.3%), as will China Eastern Airlines while the Dutch state and Delta will not subscribe at this time. As the group's shareholder equity will remain negative after this first step, additional measures to strengthen the group's Balance sheet are still underway. “The objective of such additional measures will be to further reinforce the Group’s equity situation and reduce its Net Debt/EBITDA ratio circa 2.0x by 2023. In order to achieve this, specific delegations would be then required and submitted at the Group’s next General Meeting, scheduled on May 26”. The group has also provided Q1 guidance noting they continue to be negatively impacted by the “surge in the third wave of the pandemic in several European countries of air travel restrictions taken by a significant number of countries”. Air France-KLM expects the operating result for the first quarter of 2021 to be around -€1.3 billion, and EBITDA to be around -€750 million, which is below Q4 2020 EBITDA and as indicated at the FY20 results presentation. On outlook, “and in particular at the beginning of the summer, the Group still expects a significant recovery in demand, assuming the positive effects of the accelerated vaccination campaigns in several countries could trigger less stringent restrictions on passenger travel across those countries”. While the group’s Q1 outlook is broadly as expected, confirmation of the recapitalisation plan has also been widely publicised. The market will await a further announcement on additional measures to be taken by Air France-KLM ahead of its AGM on May 26th. Home… This document is intended for the sole use of Goodbody Investment Banking and its affiliates Page 2 06 Apr. 21 Goodbody Morning Wrap Irish Banks Avant expands regional focus / Easter news wrap up Just catching up on a few stories given the long Easter weekend break. First up was the story Eamonn Hughes in the Irish Times late last week that Avant Money (owned by Bankinter) was expanding the +353-1-641 9442 range of locations for its low-cost mortgage offering. Avant initially launched in the Irish [email protected] mortgage market last September, with its headline 1.95% mortgage rate for <60% LTVs Barry Egan initially just targeting the five largest cities and related commuter belts. However, it has now +353-1-641 6059 expanded the coverage to include another six large towns/cities, a move the lender says will [email protected] give it >70% coverage and will extend this further in time. It has also extended the number of brokers it uses, up from 19 to 32, and will be adding to its panel over the coming months. The article suggests Avant accounted for almost one in five switcher mortgages in February. Moody’s published a report on the Irish banking system (on Thursday) maintaining its Stable outlook for the system. Moody’s anticipates lower loan loss provisions and a rise in new lending to benefit the banks in 2021 and notes the Irish banks front loaded provisions in 2020 which is set to absorb a likely increase in NPLs as government support phases out. Moody’s noted the positive trends from borrowers returning to servicing debt post payment breaks and it expects banks will likely start selling NPL portfolios again this year. Ahead of its AGM on May 6th, AIB has included a resolution for voting that will allow it to buy back up to 4.99% of its shares from the Minister for Finance without seeking further shareholder approval (this would be >€300m based on the current market capitalisation). Resolution 13 is proposed pursuant to a Directed Buyback Contract and any purchases will have to be agreed with the Minister and be subject to ECB approval. Prior approval is required given it would be deemed a related party transaction. AIB was also seeking renewal of its existing buyback capacity to purchase up to 10% of its shares. The FT runs with the story that Italian and French banks’ exposure to their own sovereign debt has hit record highs since the pandemic began, with domestic government debt held by eurozone banks up €140bn to €2.1trn in the year to end February according to FT estimates, though it is down from highs earlier in the pandemic. The FT notes that Italian bank domestic sovereign bond holdings equate to 18% of total assets and almost 2x their total capital, the highest in Europe. Staying on the sovereign bond theme, we note the FT story that Aviva Investors has written to Finance Ministers and heads of Central Banks in 21 countries urging them to address climate risks, the first time it has written to sovereign issuers. Aviva noted that climate change creates financial risks for countries and the investors in their debt. The mortgage market is broadly equally split into banks offering cashbacks and This document is intended for the sole use of Goodbody Investment Banking and its affiliates those offering lower headline rates. Avant competes in the latter and the expansion of its offering on a regional basis follows the news last week that PTSB is expanding from the cashback sector into the non-cashback sector. Both lenders look to be positioning themselves to pick up business from an exiting Ulster Bank, but the moves will also add incrementally to the competitive backdrop as well. Moving onto AIB, the renewal of the buyback capacity is no surprise and the ability to effect a directed buyback will add to AIB’s capital management toolkit if the opportunity presents itself and would make sense given the 0.5x P/TNAV multiple. Moving to the sovereign bond holdings. For instance, at year end, AIB held €7.72bn of Irish government bonds. This equates to just 7% of total assets c.70% of total capital, and whilst up from 5% and 50% respectively in the prior year, these figures are still below the average risk exposures noted by the FT. Home… Page 3 06 Apr. 21 Goodbody Morning Wrap Economic View Why Biden’s corporate tax proposals matter for Ireland In her first speech as Treasury Secretary, Janet Yellen yesterday laid out the very different Dermot O’Leary approach to international relations that would be adopted by the US under President Biden. +353-1-641 9167 [email protected] The US will reengage with the rules-based international order that involves multilateral cooperation on the number of issues around trade, finance, the environment, and taxation. Following last week’s announcement on the plans to finance its huge infrastructure plan by raising taxes on multinationals, Yellen confirmed US plans to engage internationally on a global minimum tax rate. Agreement on such a proposal would, in Yellen’s view, end a “thirty-year race to the bottom” on corporate tax rates. Given the role that multinationals play in output, employment, and tax revenues in Ireland, changes to the rules governing the taxation of multinational corporations will have vitally important implications. US corporations play the most significant role in this by far. Changes to the way multinationals are taxed have been in train for some time at OECD level under the Base Erosion and Profit Shifting (BEPS) process.