Morning Wrap Today ’s Newsflow Equity Research 12 Jul 2016 Upcoming Events Select headline to navigate to article Grafton Group Differentiation still key in a difficult Company Events environment 12-Jul Grafton Group; Q2 2016 Trading Update 13-Jul J D Wetherspoon; Q4 2016 results Abbey Strong full-year results, but Brexit “casts a 14-Jul Hays; Q4 2016 results considerable shadow” on outlook Norwegian Air Shuttle; Q2 2016 results 15-Jul DCC; Q1 2017 IMS Economic View Rear-view mirror, but Irish data set to 18-Jul Givaudan; Q2 2016 results confirm ongoing strong growth CPL Resources Page Group Q2 trading commentary Lufthansa June traffic remains on weak trajectory Mondi Acquisition of consumer packaging business in Russia 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 Grafton Group Differentiation still key in a difficult environment Grafton has reported group lfl sales growth of 4.2% for the first six months of the year, Recommendation: Buy which is broadly in line with our expectations of 4.6%. However the mix is different with Closing Price: £5.17 stronger performances in Ireland / the Netherlands being offset by slower than expected Robert Eason growth in the UK / Belgium. In addition, the contribution from development initiatives is also +353-1-641 9271 ahead of our expectations, adding 7.5% to growth, leaving group sales at £1.23bn versus [email protected] our forecast of £1.22bn. Underlying trends in the UK Merchanting business (72% of group sales) progressively weakened from Q1 (5.3%) to Q2 (1.6%) and indeed were negative in June. This resulted in H1 lfl growth of 3.3% versus our forecasts of 4.1%. As in the last downturn, Selco is proving more resilient with positive growth through Q2 and with further store openings planned for later this year. Irish Merchanting (12% of group sales) delivered strong underlying growth of 11.7% in the first half (12.3% Q1 / 10.9% Q2). This was ahead of our expectations of 10.0%, highlighting strong markets for residential RMI, new housing and non-residential. Both the Irish Retail operations (7% of group sales) and the recently acquired Dutch business (3% of group sales) also performed ahead of our expectations with lfl growth of 6.4% and 5.5%, respectively. Market conditions for the Belgian business (3% of group sales) continue to be more challenging with underlying sales growth down 7.4% in H1. It is no surprise in the outlook that management has highlighted the uncertainty over the near term following the UK referendum decision. This is expected to “weigh on demand in the housing and RMI markets over the remainder of the year”. As a result, we believe the risks to forecasts across the sector lie firmly to the downside and estimates will likely have to incorporate declines in underlying sales for the next 12-18 months. Against the more challenging backdrop in the UK we highlight that Grafton has some key areas of differentiation: (i) the resilience of the Selco business (c.20% of UK sales) in the last downturn and management continues to look to expand the format; (ii) its exposure to more favourable market dynamics in Ireland and The Netherlands (22% of group sales), where growth is expected to remain broadly in line with current trends; and (iii) the balance sheet strength which positions the group well for any opportunities that emerge in its markets. Home… Page 2 12 Jul. 16 Goodbody Morning Wrap Abbey Strong full-year results, but Brexit “casts a considerable shadow” on outlook Abbey has reported Group profit before tax of €61.5m for the year ended 30 April 2016, up Recommendation: Buy 25% yoy. The performance reflects strong trading in the UK in particular, where sales were Closing Price: €12.42 supported by the UK government’s “Help to Buy” scheme and where price rises outstripped Eamonn Hughes costs resulting in an increase in margins. Out of a total of 597 completed sales in the period, +353-1-641 9442 544 of these were in the UK, with 30 in the Czech Republic and 23 in Ireland. In relation to [email protected] Ireland, Abbey notes that more land has been bought in Counties Meath and Dublin and both schemes are under construction. The group finished the year with a UK land bank of 1,498 plots (total group sites of 2,090 with planning permission). On the balance sheet, it had €90.4m cash and €12.7m government bonds at year end. Trading in the early part of the year has been encouraging, but in the outlook, Abbey is clear about the effects that Brexit may have, saying that prospects “for the short, medium and long term are now very unclear”. It adds that the impact will emerge over the coming period but that the “Referendum outcome is a material short term negative shock”. In relation to Ireland, which is “still recovering from last decade’s financial crisis prospects seem brighter”, but “Brexit casts a considerable shadow”. Home… Economic View Rear-view mirror, but Irish data set to confirm ongoing strong growth While everything pre-Brexit seems somewhat rear-view mirror material, the latest set of Dermot O’Leary +353-1-641 9167 national accounts for Ireland, to be released later this morning, will nonetheless provide a [email protected] comprehensive snapshot of the Irish economy. Along with the national accounts data for Q1, we will also get the release of the final 2015 figures and the latest balance of payments position. What will be looking out for? The first estimate of 2015 revealed an increase in GDP of 7.8%. While revisions can occur, the scale of the changes on this occasion should be somewhat less given that there are no material methodological changes to be introduced this time out, unlike the major changes that occurred at this stage last year. As for Q1 2016, the high-frequency indicators suggest that we should expect more of the same in terms of growth. The composite PMI, for instance, averaged above 60 in the opening three months. Retail sales growth was running at close to 9%, while house completions grew by 20%. Merchandise trade is also likely to have made a contribution. However, as is always the case with Irish data, the influences from multi-national activity in relation to aircraft-leasing, R&D and services exports and imports can have a large bearing on the final outcome in a quarter. Our focus, therefore, will be on core domestic demand. We are forecasting growth of 5% for this variable in 2016. Home… Page 3 12 Jul. 16 Goodbody Morning Wrap CPL Resources Page Group Q2 trading commentary Following updates from Staffline and Robert Walters last week and Cpl yesterday, PageGroup Recommendation: Buy (formerly Michael Page) is the latest recruitment company to provide an update on the Closing Price: €4.90 current state of the market in a Q2 trading statement this morning. Gerry Hennigan +353-1-641 9274 In its Q1 statement in April, PageGroup reported a 4.9% YoY increase in Net Fee Income [email protected] (+3.6% on a constant currency basis), with the UK turning in a similar, flat outcome to that reported in Q2’15. At the time, the UK market was singled out as one of three regions (Greater China, UK and Brazil) that experienced “challenging market conditions”. Factors cited for the UK performance were the timing of Easter, but also uncertainty surrounding the EU Referendum. In its release this morning for the three months to June, Group NFI increased 8.0% annually (3.7% on a constant currency basis) with the UK (24% of NFI) down 2.3% and Europe (includes Ireland) up 22.7% YoY (13.6% on a constant currency basis). Commentary on the outlook indicates that challenging market conditions continue in Greater China, the UK and Brazil. Specific to the UK, the statement adds that the “environment leading up to the vote caused a slightly weaker result in June. With continued uncertainty in the UK following the Referendum result, we will continue to focus on driving profitable growth”. Of note was a 7% YoY decline in Financial Services in the UK. In contrast to Robert Walters, PageGroup has signalled ongoing uncertainty in the UK in the wake of the EU Referendum, which based on the trend ytd would suggest further weakness in Q3. That said, a bias to Ireland (74% NFI) and exposure to the Healthcare and Pharma sectors in the UK (c.16% NFI exposure) would suggest that Cpl is insulated better than most from the fall-out from Brexit. Home… Page 4 12 Jul. 16 Goodbody Morning Wrap Lufthansa June traffic remains on weak trajectory Yesterday’s June traffic shows Group capacity rose by 2.4% (versus our 2.8% estimate). Recommendation: Hold However, load factor was -2.6pts (we estimated flat yoy). For Q2 as a whole, Group capacity Closing Price: €11.12 rose by 2.2% (est 2.4%). Load factor was -2.5pts (est -2pts). Jack Diskin +353-1-641 9193 Regionally, the Americas looks to be weakest with load factor -4pts, similar to its May [email protected] performance, highlighting our concerns around supply on North Atlantic and weak demand on South Atlantic.