davyon2011

January 4, 2011

Research Report: Outlook for year ahead

Davy on 2011

2011 - bumpy recovery set to continue; another year for stock pickers

www.davy.ie Bloomberg: DAVY<GO> Research: +353 1 6148997 Institutional Equity Sales: +353 1 6792816 Davy Research

Davy Research [email protected] / +353 1 6148977

Three big themes will help drive markets higher in 2011 • 2010 was a volatile year in markets as well as sectors.

2011 is also likely to be a good year for stock pickers. • Continuing growth in emerging markets, a slow and

lumpy recovery in developed markets and the impact of operating leverage as volumes recover are likely to be three main themes impacting earnings.

• Markets, however, are not expensive in an historic context and should generate reasonable returns. Risks still abound – buyers beware

• While the scene is set for continuing recovery in earnings, a number of shocks could result in a sell-off in markets.

• These include pressure on the euro in the shadow of sovereign bond concerns, the impact of austerity measures in Europe and slowing growth in China and/or other emerging markets. Stocks with powerful market positions, strong balance sheets and cash flow and high or recovering returns will outperform

• In this document, we have listed the top picks by each sector internationally.

• In industrials, these include CRH, HeidelbergCement, Grafton Group, Travis Perkins and Smurfit Kappa Group. In the consumer space, Kerry, C&C, DCC, United Drug and Paddy Power are conviction buys; in transport, we like Ryanair, easyJet and ICG.

• Small-cap picks include CPL, Total Produce, Petroceltic and Ormonde Mining.

Please refer to important disclosures at the end of this report.

Davy is regulated by the Central Bank of Ireland and is a member of the Irish Stock Exchange, the London Stock Exchange and Euronext. Davy is authorised by the Central Bank of Ireland and regulated by the Financial Services Authority for the conduct of business in the UK. All prices as of close of December 31st. For the attention of US clients of Davy Securities, this third-party research report has been produced by our affiliate, J & E Davy.

Highlighted content

Irish equity market – evidence of operating leverage should emerge in 2011 as volumes recover

Construction and building materials – residential recovery may gain momentum; emerging markets will continue to outperform

Paper and packaging – 2011 is likely to be another positive year for Smurfit Kappa Group

Food and beverage – Kerry Group has strong financial flexibility entering 2011; C&C and Britvic remain our top picks

Pharmaceuticals and healthcare – top-line growth to remain elusive

Airlines – LCCs remain our preferred plays

Gaming – our top picks in the sector are Paddy Power and Ladbrokes

Financials – funding remains the key challenge

Media and technology – cost-cutting complete; focus now on top-line growth

Support services – acquisitions still a strong catalyst for DCC

Resources – high-impact wells should re-focus investor attention on Tullow's exploration potential

Energy and environment – financing remains key catalyst for NTR

mailto:[email protected]

Research Report: Davy on 2011 January 4, 2011

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Contents

Outlook for equity markets in 2011 4 2010 was another year for stock pickers 4 What are the factors likely to drive markets in 2011? 6 Risks still abound; shocks could derail recent rally 7 Key themes will help to filter attractive stock choices 8 Davy's top picks for 2011 10 Market summary 13

Construction and building materials 15 Sector performance in 2010 15 Key themes for 2011 16 How key stocks are positioned for 2011 17 Sector valuation 19

Paper and packaging 21 Sector performance in 2010 21 Key themes for 2011 21 Sector valuation 22

Food and beverage 23 Food sector performance in 2010 23 Key themes for 2011 23 How key stocks are positioned for 2011 25 Beverage sector performance in 2010 27 Re-emergence of M&A activity a key theme for 2011 28 C&C and Britvic remain our top picks; return to premiumisation will benefit the spirits companies 30 Food sector valuation 31 Beverage valuation 33

Pharmaceuticals and healthcare 34 Sector performance in 2010 34 Key themes for 2011 34 How key stocks are positioned for 2011 35 Sector valuation 37

Airlines and other transport 39 Sector performance in 2010 39 Key themes for 2011 39 How key stocks are positioned for 2011 40 Sector valuation 41

Gaming 43 Sector performance in 2010 43 Key themes for 2011 46 How key stocks are positioned for 2011 47 Sector valuation 48


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Financials 49 Sector performance in 2010 49 Key themes for 2011 50 How key stocks are positioned for 2011 51 Banks sector valuation 55 Insurance sector valuation 58

Media and technology 59 Sector performance in 2010 59 Key themes for 2011 59 How key stocks are positioned for 2011 60 Sector valuation 61

Support services 62 Sector performance in 2010 and outlook for 2011 62 DCC – Performance in 2010 62 DCC – Key themes for 2011 62 CPL – Performance in 2010 63 CPL – Key themes for 2011 63 Sector valuation 65

Resources 67 Sector performance in 2010 67 Key themes for 2011 67 How key stocks are positioned for 2011 69 Sector valuation 71

Energy and environment 72 Sector performance in 2010 72 How key stocks are positioned for 2011 72

Stock ratings 74

Important disclosures 76


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Outlook for equity markets in 2011 2010 was another year for stock pickers

A cursory glance at equity market index levels suggests a reasonable year for markets in 2010 with gains of 7-12%. This, however, hides the reality of what was a very volatile year. A 5% fall in the first six weeks was followed by a 15% rally which ended in April. Markets then fell by 16% between April and early July. Q3 was marked by a 10% rally at the start, an almost complete reversal by end-August and the start of the rally in early September which to date has yielded close to 20%.

Table 1: Equity market performance 2010 (local currency)

Ytd Q1 Q2 Q3 Q4

S&P 500 12.8% 4.9% -11.9% 10.7% 10.2%

FTSE Eurofirst 300 7.3% 3.1% -7.9% 6.8% 5.7%

FTSE 100 9.0% 4.9% -13.4% 12.8% 6.3%

Hang Seng 5.3% -2.9% -5.2% 11.1% 3.0%

Nikeii -3.0% 5.2% -15.4% -0.1% 9.2%

ISEQ -3.0% 6.8% -9.4% -7.0% 7.8%

Source: Bloomberg

Cyclical sectors outperformed, but trends were far from clear Again looking at the full-year numbers, cyclical sectors clearly outperformed. This, however, reflects the strong performance of these sectors since September. Prior to that, sectoral trends were very unclear.

Table 2: Sectoral relative performance in 2010

Relative to S&P 500 Relative to STOXX 600 (Europe)

Consumer cyclicals 11.5% 4.9%

Industrials 9.9% 15.1%

Materials 6.3% 15.5%

Energy 4.5% -7.5%

Consumer staples -1.9% 15.9%

Financials -1.7% -13.5%

Information technology -3.27% 7.6%

Telecommunications -0.41% -5.2%

Healthcare -10.7% -2.4%

Utilities -10.6% -16.1%

Source: Datastream

Barry Dixon, Head of Research [email protected]

• A cursory glance at equity market index levels suggests a reasonable year for markets in 2010 with gains of 7-12%. This, however, hides the reality of what was a very volatile year.


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Significant variation in stock performances within sectors As in 2009, the range of performance of stocks within sectors was huge, illustrating how difficult it was to outperform in 2010. Some examples are noted in Table 3. We think this trend is set to continue in 2011 as the market is not yet ready to revalue lower quality companies.

Table 3: Range of stock performances in selected sectors (€)

Sector performance Best performers Worst performers

European building materials -11.0% Holcim (+4.0% ) Italcementi (-33.9%)

European paper and packaging 39.4% DS Smith (64.9%) Smurfit Kappa (17.7%)

European airlines 31.5% Aer Lingus (+68.8%) SAS (-49.4%)

European gaming 2.5% Paddy Power (+24.0%) Ladbrokes (-7.9%)

European beverages 20.3% Carlsberg (+45.2%) Heineken (+10.3%)

Source: Bloomberg; Davy

2010 can therefore be characterised as a volatile year with largely uncertain sectoral trends. Within sectors, there was huge stock variation. This was certainly not an easy environment in which to make money.

Performance of Davy's top picks in 2010 Although our views on stocks and sectors changed throughout the year, particularly on Irish financials, it is noteworthy that seven of our ten large-cap picks outperformed the E300 benchmark, while three of the five small-cap names outperformed.

Table 4: Performance of Davy's top picks in 2010 (local currency)

Performance (%)

E300 Index 7.3%

Large caps

CRH -18.5%

HeidelbergCement -2.8%

Travis Perkins (Stg) 24.2%

Smurfit Kappa Group 17.7%

Ryanair 14.4%

Kerry Group 21.4%

Glanbia 27.4%

C&C 12.4%

Irish Life & Permanent -67.3%

Paddy Power 24.0%

Small caps

Origin Enterprises 50.2%

FBD -10.1%

CPL Resources 24.0%

Petroneft (Stg) 257.0%

Petroceltic (Stg) -13.3%

Source: Bloomberg

• Seven of our ten large-cap picks outperformed the E300 benchmark, while three of the five small-cap names outperformed


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What are the factors likely to drive markets in 2011?

Emerging economies will continue to outgrow the developed world The recovery in developed economies is continuing, albeit at a slower pace than had been expected. The impact of fiscal austerity measures in Europe still remains uncertain; in the US, the impact of the 2009 stimulus programme is likely to dissipate, although the second round of quantitative easing could have a positive impact. Emerging markets remain robust with strong growth likely to continue in India and across most of Asia. Latin America, and in particular Brazil, is also likely to continue to flourish. While there is some question mark over growth prospects in China, the issue is the level at which the Chinese economy will grow. Overall, the picture is therefore broadly similar to this time last year. Top-line growth rates are likely to remain pedestrian in the developed economies with much more attractive growth rates in emerging markets. On this basis, we would still retain a cyclical bias within portfolios with more focus on those names with exposure to the more attractive emerging economies.

Evidence of operating leverage should emerge in 2011 as volumes recover While much has been written about the positive impact of cost-cutting and operating leverage on profits, it is important to note that operating leverage does not materialise until volumes actually start to recover. Throughout 2010, volume growth in the developed world in many economically-sensitive sectors has disappointed. This is particularly true in the case of the building materials/construction-related sectors. We are assuming that volumes will improve in 2011, which should result in a reasonable pick-up in earnings. The market is forecasting circa 13% earnings growth in the US in 2011 with 15% growth expected in European markets. This is based on circa 5% growth in sales in both locations. We would not disagree with this assessment.

Market is trading at an undemanding multiple; equity markets could rise in line with earnings growth In the US, the S&P is trading at 13.1 times 2011 consensus earnings forecasts. This is well below the long-term average of 15 times and certainly considerably below the multiple that one would expect in the early stages of an economic recovery. Similarly, the European market is trading at circa 11 times 2011 earnings, again well below its long-term average of 13 times.

Factors likely to drive markets in 2011 • Emerging economies will continue to

outgrow the developed world

• Evidence of operating leverage should emerge in 2011 as volumes recover

• Market is trading at an undemanding multiple; equity markets could rise in line with earnings growth

• Top-line growth rates are likely to remain pedestrian in the developed economies with much more attractive growth rates in emerging markets

• We are assuming that volumes will improve in 2011, which should result in a reasonable pick-up in earnings


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The market valuation levels appear to be pricing a slowdown in earnings growth in 2011 from current consensus. If current earnings numbers materialise, then the market is attractively valued and index levels should grow at least in line with earnings. 2011 therefore could prove to be a good year for equities. Risks still abound; shocks could derail recent rally

While the scene is set for a gradual recovery in the earnings from developed economies, it is obvious that shocks could result in a significant sell-off in markets, particularly following the recent strong rally. What could these shocks be?

• Continued/increased pressure on sovereign bond yields in peripheral Europe. This could put further pressure on the euro exchange rate as the market starts to question the survival of the currency itself. This will put upward pressure on equity market risk premia.

• A greater-than-expected impact from fiscal austerity measures in Europe. To date, the impact on consumer sentiment and spending has been limited. If, however, further measures have to be introduced, perhaps in response to increased pressure on budget deficits in Europe, then valuations levels will quickly discount the negative impact on corporate earnings.

• Slowing emerging market growth. The Chinese monetary authorities appear to have become more determined to manage inflation and growth and prevent the emergence of asset bubbles. Greater-than-expected tightening of monetary conditions and the knock-on impact on expected growth rates would negatively affect the valuation of many asset classes including equities and commodities.

• Continued upward pressure on input costs may result in further margin pressure as price increases prove difficult.

Possible shocks that could derail the recent rally • Continued/increased pressure on

sovereign bond yields in peripheral Europe

• A greater-than-expected impact from fiscal austerity measures in Europe

• Slowing emerging market growth

• Continued upward pressure on input costs

Figure 1: S&P 5600 P/E chart with LT average

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S&P 500 forward P/E Average Source: Factset

Figure 2: E300 P/E chart with LT average

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FTSE E300 forward P/E Average Source: Factset


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Key themes will help to filter attractive stock choices

We believe a number of existing and emerging themes will help investors to choose stocks that will outperform in 2011.

Strong market positions that facilitate pricing and volume growth and margin recovery Commodity prices continue to rise, putting pressure on the input costs of many companies. This is true for hard commodities such as oil and metals as well as soft commodities including grains and protein.

Figure 3: Dow Jones UBS Energy Index

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Source: Datastream

Figure 4: Dow Jones UBS Industrial Metals Index

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Source: Datastream

Key themes for attractive stock choices • Strong market positions that facilitate

pricing and volume growth and margin recovery

• Strong balance sheets and robust cash flow, providing opportunities for M&A growth potential or other returns-enhancing measures

• Improving returns – structural and cyclical


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Figure 5: Dow Jones UBS Agriculture Index

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Source: Datastream

The challenge for many corporates in 2011 will be how to recover higher input costs in order to maintain/improve margins in an environment where demand recovery is slow. Cost recovery is easier in certain circumstances: • The company has a strong market position, controlling supply at a

local or regional level and with little competition or substitutable products. In this environment, customers have little choice but to pay higher prices.

• Companies in sectors where supply/demand dynamics have improved through industry consolidations and/or recovering demand.

• Where companies have developed/innovated a product which is unique or provides the customer with sufficient value add that he/she is willing to pay a higher price to access this innovation.

We therefore need to look for companies that have one or more of these characteristics.

Strong balance sheets and robust cash flow, providing opportunities for M&A growth potential or other returns-enhancing measures Strong balance sheets and cash generation will be a key differentiator in 2011. In an environment where growth in developed markets is likely to be slow, growth in revenue and profits could be driven through mergers and/or acquisitions. There was a significant pick-up in M&A activity levels in 2010, and this is likely to continue in 2011 as companies with strong balance sheets and cash flows take advantage of attractively-priced acquisition targets. In the absence of a pick up in M&A activity, corporates can look at other shareholder-enhancing options such as a more progressive dividend policy or share buybacks.


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Improving returns – structural and cyclical The market will continue to favour stocks that generate high returns on capital (relative to the cost of capital), creating economic value. Many companies, particularly in cyclical sectors, have emerged from or are still generating returns on capital below the cost of that capital. The challenge for these companies is how to restore these returns, particularly in an environment where recovery in demand is slow. The challenge for investors is to try and quantify the length of time it will take to restore these returns. Davy's top picks for 2011

In this document, we outline the key trends likely to impact our various sectors over the next 12 months and how the stocks we cover are positioned relative to these trends. Combining the characteristics outlined above with attractive valuation levels and our international sector analysis yields our top picks for 2011.

Table 5: Davy: top picks for 2011

Pricing power Debt/EBITDA FCF yield ROIC - WACC EV/IC P/E EV/EBITDA

Industrials

CRH Strong 1.7 8.3% -0.9% 1.04 18.7 7.7

HeidelbergCement Strong 2.9 8.5% 0.2% 0.86 13.0 6.3

Travis Perkins Medium 1.6 4.9% 1.3% 1.17 11.5 7.5

Grafton Medium 2.1 5.4% -1.9% 0.81 17.2 9.4

Smurfit Kappa Strong 2.3 28.2% 3.4% 0.87 4.3 3.8

Consumer

Kerry Strong 1.4 6.3% 8.3% 1.73 12.1 8.5

C&C Medium Net cash 10.3% 6.4% 1.65 11.1 7.5

DCC Strong 0.0 7.5% 8.4% 1.80 11.7 7.1

Paddy Power Strong Net cash 5.2% 72.9% 10.67 17.6 10.1

United Drug Medium 0.9 10.2% 4.1% 1.07 9.1 6.2

Transport

Ryanair Strong 0.2 7.8% 10.5% 1.68 10.6 5.6

easyJet Strong Net cash 10.6% n/a 1.08 10.2 3.9

ICG Medium Net cash 12.0% 16.5% 2.50 10.5 6.2

Source: Davy estimates


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Table 6: Key reasons to buy top picks

Industrials

CRH • Earnings likely to have troughed in 2010; upgrade cycle likely to commence in 2011, driven by operating leverage as volumes recover.

• Strongest balance sheet in the sector which will support acquisition-led growth. • New management team now well established with a strong strategy for improving returns.

HeidelbergCement • Management building credibility with the market; consistent delivery on costs and deleveraging will drive a re-rating.

• Significant US aggregates reserves positions provide strong asset backing. • Key geographies are recovering, especially Germany, Poland, Russia, Indonesia and Turkey.

Travis Perkins • BSS increases the group's market share and leadership in the UK distribution sector. The acquisition provides a new growth vector for the group; we believe Travis Perkins is capable of exceeding its 2011 synergy target of £8m.

• The group's best-in-class margins are sustainable, reflecting scale, good asset backing, a lean management structure and a powerful market position.

• Even after a strong end to 2010, the stock remains very attractively valued on an absolute and relative basis.

Grafton • Decisive action taken by management in lowering operating costs leaves the group in a great position to gain disproportionately from any upturn in volumes.

• The group is highly cash generative and has cut its net debt by over 50% without having had to raise equity. • Backed by a proven management team, Grafton can be considered a geared recovery play. The stock provides

clear value on mid-cycle earnings with the group's valuation underpinned by a solid asset backing.

Smurfit Kappa Group • Positive pricing cycle continues, which could lead to further earnings upgrades. • Lack of new capacity announcements in the industry could result in a longer period of supernormal returns and

cash flow. • Corporate activity possible as balance sheet continues to improve.

Consumer

Kerry • Balance sheet strength a source of future earnings; net debt/EBITDA 1.4x FY 2011. • Rating discount to long-term average and sector; Kerry trades on 12.4x FY 2011 (Davy: 207c EPS +8.3%). • Quality of earnings continues to improve with returns over WACC expanding.

C&C • Magners' performance in GB continues to improve; we believe the company will achieve its target to perform in line with the market at the full-year stage.

• We see lots of potential for the internationalisation of the cider category; C&C's debt-free balance sheet allows the company to explore all options (organic growth, partnership or outright acquisitions).

• C&C is trading on 11.0x forward P/E (versus the sector on 15.0x) and a free cash flow yield of over 10%; we argue that this well-invested business should trade closer to a market multiple given the higher growth and profitability of cider, the debt-free balance sheet and the internationalisation potential of the cider category.

DCC • Consistently employs incremental capital at very high rates of return; significant opportunities for DCC's two largest divisions to repeat or prolong this performance.

• Internal cash generation delivers a strong balance sheet, which facilitates DCC's strategy as a market consolidator. • Focus on operational excellence delivering organic growth despite challenging market conditions.

Paddy Power • Business continues to win market share across all key markets in which it operates. • Good scope for earnings upgrades should retail trends seen in H2 to date carry through into 2011. • Scope for further B2B deal announcements and further geographic expansion over time. • Debt-free balance sheet proves firepower should further M&A opportunities arise.

United Drug • Presence in supply chain outsourcing ex-Ireland is reaching critical mass and delivering growth at group level. • Withstanding Irish regulatory/austerity change more effectively than its competition and is in ideal position to

rationalise the distribution market if opportunity arises. • Internal cash generation and strong balance sheet will fuel further investment-led growth.

Transport

Ryanair • Ryanair, as the lowest-cost producer in the industry, generates sustainable competitive advantages. • Positive pricing cycle should continue given slowing growth, market position and flexibility in asset deployment. • Network improvement is a beneficial effect of the current downturn, leading to a better revenue mix. Moderating

capacity growth with a very young fleet should lead to ever-increasing free cash flows.

easyJet • 12% ROCE target is sensible and implementable; the airline's financial targets are an output of its strategy and not vice-versa.

• Strategy remains focused on growing its network of convenient, primary airports and managing yields, noting that 84% of routes touch a slot-constrained airport; focus remains on execution and delivery of financial and operational performance.

• The focus on flexible growth with 7% capacity slowing to 4-8% from FY2014 onwards allows for positive free cash flow and dividends in the next financial year.

ICG • Business model has sustainable competitive advantages given cost position, slots and highly utilised modern assets. • High free cash flow generation means that ICG will be close to a net cash position by year-end; 7% dividend yield. • Highly operating leverage with competitor retrenchment on tourism likely to be followed by similar actions in the

freight market.



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Table 7: Davy small-cap picks for 2011

Stock P/E EV/EBITDA Key reasons to own

CPL Resources 11.8 4.9 • CPL has a strong management team which has profitably led the company through the economic storm while keeping brand recognition intact.

• It has efficient operations and a strong balance sheet which will allow for accelerated growth.

• The company is leveraged to the faster growing multinational sector.

Total Produce 5.3 4.0 • Total Produce is one of the cheapest stocks, based off any metric, under our coverage.

• The valuation fails to capture the sound underlying business fundamentals and stable earnings base.

• 2011 will most likely be a year of investment as Total Produce looks to expand its position as one of Europe's leading fresh produce companies.

Petroceltic n/a n/a • Petroceltic is currently involved in a drilling campaign that will lead to a submission in early 2011 of a development plan to develop a multi-TCF gas play onshore Algeria. A farm-out of part of its 75% interest is expected in the near term.

• It has significant plans to expand its portfolio through new ventures and has appointed experienced industry management to achieve this. We expect newsflow in 2011.

• The group is well capitalised with c.$100m cash in treasury. It has a large and supportive UK institutional shareholder base to pursue its intended expansion.

Ormonde Mining n/a n/a • Ormonde has a 90% stake in a large brownfield tungsten play in western Spain. Recent price increases (+65% in a year) in tungsten demonstrate an emerging tightness in supply in a market dominated by China and its growing demand for the metal.

• There are no fatal flaws in the tungsten project, which has exceptional operating characteristics and relatively low capital requirements. In our opinion, it is the best undeveloped tungsten project outside of China.

• Ormonde has a JV with Antofagasta in searching for copper in southern Spain. It also has a package of Spanish exploration licences prospective for gold. This portfolio of assets should lead to a substantial re-rating in 2011.


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Research Report: Davy on 2011 January 4, 2011 Irish market summary

S U M M A R Y Price Change % No. (m) Mkt Wght 10 Yr End 2010 Debt/(Cash)/EBITDA EBITDA €m* Company (c) Wk YTD Shrs Cap €m % Pr/Bk 10 11F 10 11F 12F

CRH 1550 -0.5 -18.5 709 10991 27.3 Dec2010 E 1.12 2.2 1.7 1609.7 1695.3 1768.8 Ryanair Holdings 377 0.8 14.4 1487 5604 13.3 Mar2011 E 2.05 0.8 0.2 781.6 947.4 1125.2 Kerry Group 2497 -2.5 21.4 175 4379 8.3 Dec2010 E 2.82 1.9 1.4 564.5 601.9 620.3 Dragon Oil (USc) 838 3.4 43.6 511 3202 3.9 Dec2010 E 2.06 -1.8 -1.9 716.3 770.7 868.7 ARYZTA 3499 0.8 36.2 83 2898 7.1 Jul2010 P 1.71 3.6 2.3 339.9 456.1 482.2 Elan Corp (USc) 573 -7.1 -6.0 585 2504 5.1 Dec2010 E 14.17 6.6 4.4 127.6 179.2 212.1 Bank of Ireland 38 8.1 -55.5 5299 1987 3.2 Dec2010 E 0.42 764.0 656.0 1128.0 DCC 2360 2.6 21.0 83 1965 4.9 Mar2011 E 2.15 0.3 0.0 268.3 279.3 285.8 Smurfit Kappa Group 730 0.6 17.7 219 1597 2.1 Dec2010 E 0.94 3.4 2.3 908.1 1169.1 1190.9 Paddy Power 3070 0.0 24.0 48 1482 3.2 Dec2010 E 6.68 -0.9 -1.1 129.7 131.6 146.4 Top Ten Companies 1521.2 -0.1 -4.3 36608 78.3 1.46

Tullow Oil (USc) 1967 -2.1 -0.3 888 13046 Dec2010 E 4.75 1.2 1.3 615.3 1201.1 1830.3 Kingspan Group 749 2.0 24.8 166 1245 2.3 Dec2010 E 2.05 1.1 0.8 106.0 110.3 130.7 C&C 338 1.0 12.4 336 1136 2.7 Feb2011 E 1.86 -0.1 -0.7 126.1 135.2 143.0 Glanbia 368 6.7 27.4 294 1081 1.2 Dec2010 E 3.36 2.3 1.8 177.9 185.1 185.4 ICON (USc) 2190 -1.8 7.8 59 965 2.3 Dec2010 E 1.97 -2.0 -2.3 125.8 135.2 157.6 Kenmare (USc) 48 14.3 86.1 2404 865 2.1 Dec2010 E 2.43 5.6 1.7 20.5 101.5 184.0 Grafton Group 345 3.3 17.4 231 798 1.8 Dec2010 E 0.84 2.6 2.1 96.9 108.7 132.7 Amarin Corp (USc) 820 2.0 513.6 99 605 Dec2009 P 13.88 N/A N/A -29.9 -30.0 -30.0 Aer Lingus 108 -1.7 68.8 534 577 0.4 Dec2010 E 0.78 -2.0 -2.0 125.3 145.2 197.5 United Drug 210 0.0 -1.4 240 504 1.2 Sep2010 P 1.36 1.3 0.9 87.1 91.1 93.6 Origin Enterprises 320 1.9 50.2 133 426 0.3 Jul2010 P 2.34 1.5 1.3 72.4 58.6 58.1 Irish Continental Grp 1552 0.0 7.0 25 388 0.6 Dec2010 E 2.45 0.1 -0.3 55.2 60.0 64.0 Petroneft (USc) 110 4.5 268.5 412 338 0.7 Dec2010 E 4.75 N/A -0.6 -2.0 60.6 115.5 Allied Irish Banks 30 -4.5 -75.0 1081 324 0.7 Dec2010 0.52 533.6 539.5 939.0 Irish Life & Permanent 108 8.0 -67.3 277 299 0.7 Dec2010 E 0.13 Independent News & Media 50 1.8 -44.7 550 277 0.5 Dec2010 E 16.09 3.5 2.9 264.9 294.6 300.1 Greencore Group 127 -2.6 -8.6 207 262 0.7 Sep2010 P 1.47 2.4 2.4 79.1 79.1 79.8 FBD Holdings 620 -4.6 -10.1 33 206 0.3 Dec2010 E 1.00 IFG Group 130 4.0 -6.5 124 162 0.3 Dec2010 E 1.42 0.5 -0.1 26.1 30.0 37.3 UTV Media (Stg) 137 -1.0 44.0 96 153 0.2 Dec2010 E 0.93 2.7 2.2 26.6 27.5 29.2 Norkom 150 6.4 2.7 90 135 0.2 Mar2011 E 2.10 -10.8 -7.8 3.2 4.9 6.2 Trinity Biotech (USc) 881 -2.4 132.7 21 135 Dec2010 E 1.44 -3.2 -4.6 17.5 17.3 18.1 Abbey 510 2.0 8.5 25 126 0.2 Apr2011 E 0.74 -6.5 -4.2 14.2 20.1 24.1 Total Produce 38 -0.8 10.3 330 124 0.3 Dec2010 E 0.82 1.4 1.3 52.9 54.3 56.5 Fyffes 37 5.7 -19.6 329 122 0.3 Dec2010 E 0.83 -1.0 -1.1 18.2 19.6 20.5 CPL Resources 253 0.0 24.0 37 94 0.1 Jun2011 E 1.39 -6.0 -6.0 7.7 8.6 10.7 TVC Holdings plc 65 0.0 4.8 101 66 0.1 Mar2011 E 0.76 N/A N/A -8.5 -2.1 -2.1 Donegal Creameries 400 -4.1 86.1 10 41 0.1 Dec2010 E 0.64 2.6 2.4 7.5 7.9 8.0 Readymix 21 0.0 18.0 110 23 0.0 Dec2010 Datalex (USc) 27 -4.6 37.9 72 14 0.0 Dec2010 E 0.54 -3.9 -2.9 3.1 4.6 6.9 Balmoral Intl. Land 2 -25.0 -66.7 583 9 0.0 Dec2010 E 0.16 21.6 21.1 8.7 8.9 8.9 Siteserv plc 5 0.0 -23.1 124 6 0.0 Apr2011 E 0.97 9.0 7.5 16.3 19.1 20.7 AGI Therapeutics (USc) 3 -13.3 -65.3 67 2 0.0 Dec2010 E 0.29 N/A N/A -4.3 -5.4 -5.4 Total Market (ISEQ) 2885.1 0.3 -3.0 48092 100.0 1.37

D A V Y S E C T O R I N D I C E S

Index Change % Mkt Wght Hist Hist Wk YTD Cap €m % Pr/Bk ROE %

Banks 212.3 5.7 -61.2 2312 3.8 0.43 N/A Other Financials 127.2 3.8 -53.9 667 1.3 0.25 15.8 Total Financials 214.6 5.2 -60.4 2978 5.2 0.37 N/A Mid-Caps 2987.9 2.8 1.4 11484 21.7 1.14 10.0 Non-Financials 2789.2 0.3 4.9 45114 94.9 1.68 9.6 Construction 1735.9 -0.1 -14.8 13189 31.6 1.13 5.0 Food & Beverage 4323.8 -0.3 23.1 10467 20.8 2.14 14.9 Resource 227.5 -0.5 7.2 18057 Extractive 43.8 11.0 46.6 1293

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S U M M A R Y ( C O N T I N U E D ) Yield (%) Ent Value / EBITDA Dil. Adj. EPS (c) EPS Growth (%) P/E Ratio Company 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F 10 11F 12F

CRH 4.0 4.0 3.9 8.4 7.7 7.1 75.8 82.7 96.4 -21.0 9.2 16.5 20.5 18.7 16.1 Ryanair Holdings 0.0 0.0 0.0 8.0 6.1 4.4 26.8 35.6 45.6 24.7 32.8 27.8 14.1 10.6 8.3 Kerry Group 1.1 1.2 1.3 9.5 8.5 7.9 191.1 207.0 218.1 14.8 8.3 5.4 13.1 12.1 11.4 Dragon Oil (USc) 0.0 0.0 0.0 4.2 3.7 2.9 76.1 81.9 92.4 51.5 7.7 12.8 11.0 10.2 9.1 ARYZTA 1.1 0.9 0.9 11.4 9.2 8.3 244.0 300.5 314.3 4.0 23.1 4.6 14.3 11.6 11.1 Elan Corp (USc) 0.0 0.0 0.0 31.1 21.8 18.0 -11.4 -13.9 1.8 N/A N/A N/A N/A N/A 322.3 Bank of Ireland 0.0 0.0 0.0 -48.9 -10.6 4.3 N/A N/A N/A N/A N/A 8.7 DCC 3.0 3.2 3.3 7.7 7.1 6.6 191.7 201.0 207.2 8.2 4.9 3.1 12.3 11.7 11.4 Smurfit Kappa Group 0.0 1.1 2.3 5.3 3.8 3.4 60.3 167.9 190.0 N/A 178.5 13.2 12.1 4.3 3.8 Paddy Power 2.8 2.9 3.4 10.5 10.1 9.2 174.7 174.6 204.0 44.7 -0.1 16.8 17.6 17.6 15.0 Top Ten Companies 1.7 1.8 1.8 N/A N/A N/A N/A 18.0 11.2

Tullow Oil (USc) 0.5 0.6 0.6 29.6 15.9 10.6 12.5 54.2 91.1 300.4 334.2 68.1 157.6 36.3 21.6 Kingspan Group 1.3 1.7 2.2 12.8 12.0 10.0 28.5 32.5 42.5 1.2 13.9 30.8 26.3 23.1 17.6 C&C 2.4 2.8 3.0 8.7 7.5 6.5 25.9 30.6 33.3 14.4 18.0 8.8 13.0 11.1 10.2 Glanbia 1.9 2.0 2.1 8.0 7.2 6.7 37.1 39.3 40.9 20.9 6.0 4.2 9.9 9.4 9.0 ICON (USc) 0.0 0.0 0.0 8.3 7.3 5.8 144.6 133.4 158.4 -5.4 -7.7 18.7 15.1 16.4 13.8 Kenmare (USc) 0.0 0.0 0.0 62.1 13.1 6.5 -0.4 2.2 6.1 N/A N/A 170.4 N/A 21.4 7.9 Grafton Group 1.7 2.2 2.9 10.8 9.4 7.4 16.5 20.0 29.8 208.7 21.5 48.7 20.9 17.2 11.6 Amarin Corp (USc) 0.0 0.0 0.0 N/A N/A N/A -28.2 -28.7 -28.7 N/A N/A N/A N/A N/A N/AAer Lingus 0.0 0.0 0.0 1.8 1.3 0.2 6.8 10.8 16.8 N/A 58.6 54.8 15.8 10.0 6.4 United Drug 4.0 4.2 4.4 6.8 6.2 5.7 22.8 23.1 24.5 -2.6 1.2 6.0 9.2 9.1 8.6 Origin Enterprises 2.6 2.7 2.8 6.0 6.8 6.6 37.3 36.5 37.1 3.1 -2.1 1.6 8.6 8.8 8.6 Irish Continental Grp 6.4 6.4 6.4 7.1 6.2 5.4 122.0 147.8 165.9 14.3 21.1 12.3 12.7 10.5 9.4 Petroneft (USc) 0.0 0.0 0.0 N/A 6.9 3.3 -2.3 6.6 15.6 N/A N/A 134.5 N/A 16.6 7.1 Allied Irish Banks 0.0 0.0 0.0 -55.1 -4.6 0.0 N/A N/A N/A N/A N/A 1898.7 Irish Life & Permanent 0.0 0.0 0.0 -34.3 -20.2 40.4 N/A N/A N/A N/A N/A 2.7 Independent News & Media 0.0 0.0 0.0 6.6 5.6 5.2 9.0 12.1 14.7 -62.7 35.3 21.4 5.6 4.1 3.4 Greencore Group 5.9 5.9 6.2 5.8 5.8 5.6 16.7 16.7 17.4 -3.8 -0.1 4.0 7.6 7.6 7.3 FBD Holdings 5.3 5.3 6.5 88.3 136.3 137.6 31.3 54.3 1.0 7.0 4.5 4.5 IFG Group 3.1 3.8 4.6 6.7 5.3 3.6 16.3 17.7 21.9 17.8 8.6 23.7 8.0 7.3 5.9 UTV Media (Stg) 0.0 0.0 0.0 7.7 7.0 6.0 15.6 16.6 17.9 34.4 6.1 8.3 8.8 8.3 7.6 Norkom 0.0 0.0 0.0 30.7 19.1 14.9 2.3 2.9 4.1 -75.7 27.8 39.8 65.4 51.1 36.6 Trinity Biotech (USc) 0.0 0.0 0.0 7.1 5.9 4.3 61.8 64.4 70.3 9.5 4.2 9.2 14.2 13.7 12.5 Abbey 1.7 1.8 1.9 2.0 1.8 1.9 42.0 59.2 71.1 -14.0 41.0 20.1 12.1 8.6 7.2 Total Produce 4.5 4.5 4.7 4.2 4.0 3.7 6.4 7.1 7.5 -1.3 10.5 5.7 5.9 5.3 5.0 Fyffes 4.5 4.5 4.5 2.7 2.3 2.0 4.1 4.7 4.9 -20.5 13.0 4.8 9.0 7.9 7.6 CPL Resources 1.6 1.7 2.3 6.3 4.9 3.4 19.2 21.4 26.3 39.9 11.3 23.0 13.2 11.8 9.6 TVC Holdings plc 0.0 0.0 0.0 N/A N/A N/A -7.0 -1.5 -1.6 N/A N/A N/A N/A N/A N/ADonegal Creameries 4.0 4.0 4.0 6.3 5.9 5.6 66.2 69.2 70.0 125.1 4.4 1.2 6.0 5.8 5.7 Readymix Datalex (USc) 0.0 0.0 0.0 2.3 1.3 0.2 3.8 5.8 8.7 N/A 55.4 49.7 7.1 4.6 3.1 Balmoral Intl. Land 0.0 0.0 0.0 21.9 21.4 21.1 -1.0 0.2 0.2 N/A N/A N/A N/A 6.8 6.8 Siteserv plc 0.0 0.0 0.0 9.4 7.8 7.0 0.5 2.3 3.6 -65.7 330.6 54.6 9.4 2.2 1.4 AGI Therapeutics (USc) 0.0 0.0 0.0 1.4 0.2 N/A -7.1 -8.2 -8.2 N/A N/A N/A N/A N/A N/ATotal Market (ISEQ) 1.7 1.8 1.9 N/A N/A N/A N/A 16.8 10.5

D A V Y S E C T O R I N D I C E S ( C O N T I N U E D ) Yield(%) 5 Year CAGR (%) EPS Growth (%) P/E Ratio 10 11F 12F EPS Dividend 10 11F 12F 10 11F 12F

Banks 0.0 0.0 0.0 N/A N/A N/A N/A N/A N/A N/A 10.1 Other Financials 2.4 2.6 3.1 N/A -55.2 N/A N/A N/A N/A 58.4 3.6 Total Financials 0.5 0.6 0.7 N/A N/A N/A N/A N/A N/A N/A 7.2 Mid-Caps 1.7 1.8 2.0 N/A -33.1 N/A N/A 57.3 N/A 13.7 8.6 Non-Financials 1.8 1.9 1.9 -35.2 -0.4 24.3 25.7 19.9 16.3 13.0 10.8 Construction 3.6 3.7 3.6 -16.0 8.0 -16.2 13.4 20.1 21.2 18.7 15.6 Food & Beverage 1.6 1.6 1.8 3.9 0.3 10.4 11.7 5.1 12.2 10.9 10.4 Total Market (ISEQ) 1.7 1.8 1.9 N/A -25.4 N/A N/A N/A N/A 16.8 10.5


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Construction and building materials Sector performance in 2010

• After posting a decent rebound in 2009 (up 31% following a 47% contraction in 2008), the E300 Construction & Building Materials index underperformed once again in 2010, falling 1%. Although the index was up 14% in Q4, this rally was not enough to offset losses earlier in the year: the index fell in each of the previous three quarters: -2% in Q1, -11% in Q2 and -1% in Q3.

• There was a clear difference in the performance of the heavyside and lightside stocks. The heavyside building materials stocks had a difficult year and some of the sector heavyweights (CRH, Holcim, Lafarge) suffered double-digit share price declines. In contrast, the lightside sector fared much better with a number of stocks posting very decent gains. Wolseley was the big winner, rising 64% in 2010.

• At the beginning of 2010, we identified what we considered would be the mains themes for the European building materials sector for the year. These included the view that cost savings would bring improved results, despite the likelihood of limited top-line growth; that infrastructure would be the only sector within construction where real growth would be achieved, although there would be signs of improvement in residential markets even though non-residential would remain weak; and that corporate activity would resume, although with the caveat of an unwillingness by companies to over-extend balance sheets.

• In relation to how 2010 turned out, results from the European building materials sector did improve, although not by as much as expected. As predicted, revenue growth proved a challenge; we estimate that revenues across our sector universe (excluding the UK housebuilders) rose only 1% last year. But EBITDA growth was just 2%, sharply lower than our expectation entering the year of a double-digit increase.

• Construction markets in 2010 performed largely as expected, although infrastructure disappointed somewhat, particularly in the US. Residential construction did improve in general, although the recovery was patchy and varied by country. It was another difficult year for private non-residential activity, although there are increasing signs that this end-market is finally close to bottoming out.

• While we did not expect that corporate transactions in the sector would dramatically increase in 2010, the actual level of activity was still lower than what we would have envisaged. Indeed, the only transactions of note were Travis Perkins' acquisition of BSS in the UK and Kingspan's acquisition of CRH's insulation assets. CRH itself undertook a number of relatively modest bolt-on transactions.

• In the absence of deals, the sector remained internally-focused. Having re-capitalised in 2009, the building materials sector took the opportunity in 2010 to pay down debt and to improve and extend

Tim Cahill [email protected] Barry Dixon [email protected] Florence O'Donoghue [email protected] Robert Gardiner [email protected]

• After posting a decent rebound in 2009 (up 31% following a 47% contraction in 2008), the E300 Construction & Building Materials index underperformed once again in 2010

• Results from the European building materials sector did improve in 2010, although not by as much as expected

• Construction markets in 2010 performed largely as expected, although infrastructure disappointed somewhat


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maturity schedules. We estimate the sector will end 2010 with net debt/EBITDA of circa 2.3x, which could fall to under 2x by the end of this year.

Key themes for 2011

Volume growth will once again prove a struggle and management of energy costs will be crucial, although earnings may surprise on the upside

• We would have hoped that 2011 would mark a step-up in the pace of the earnings recovery of the building materials sector in Europe. However, with end-markets generally remaining challenging in developed economies, this expectation has been pared back.

• On a weighted average basis, we are forecasting top-line growth of under 4% in 2010. That said, pricing should in general remain robust, albeit with pockets of pressure in certain segments (for example, cement in South Eastern Europe and Africa/Middle East, insulation in some markets where there is overcapacity).

• Higher energy costs, and specifically the sector's ability to recover them through increased pricing, will be a major theme in 2011. This issue was largely redundant in 2010 as fuel costs were broadly stable compared to 2009. The picture looking into 2011 is very different, with recent hikes in energy prices putting pressure on the cement producers in particular.

• But with the full impact of cost savings kicking in – many of which are permanent – even modest top-line growth should have a disproportionate impact on trading profits. Hence our expectation entering 2011 is that EBITDA for the sector will rise by 9% this year (still over 20% off peak). Interest charges should continue to fall, and this will also help earnings.

• Given that current top-line expectations are modest, our sense is that there is upside risk to earnings forecasts for 2011, reflecting the potential operational gearing effect.

Residential recovery may gain momentum, although austerity measures suggest a difficult year for infrastructure

• While housing starts in most countries will remain low relative to historic averages, we expect the recovery in many residential markets to gain momentum in 2011. Housing starts in the US have bottomed out, but the timing and strength of recovery may remain patchy. The outlook for housing in Western Europe appears better, although we expect flat volumes in the UK.

• We expect private non-residential construction to begin to show signs of recovery in 2011, although this improvement is likely to be weighted towards the second half of the year.

• Civil engineering and public construction investment will be challenging markets in 2011 (with some notable exceptions). This

Key themes for 2011 • Volume growth will once again prove a

struggle and management of energy costs will be crucial, although earnings may surprise on the upside

• Residential recovery main gain momentum, although austerity measures suggest a difficult year for infrastructure

• Emerging markets will continue to outperform; further corporate investment likely

• Given that current top-line expectations are modest, our sense is that there is upside risk to earnings forecasts for 2011

• While housing starts in most countries will remain low relative to historic averages, we expect the recovery in many residential markets to gain momentum in 2011


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reflects the impact of various government austerity measures on capital investment budgets.

• Poland, buoyed by EU structural funds and investment required to host the UEFA 2012 championships, is likely to remain Europe's strongest construction market. Germany is expected to be robust, and an improving outlook for residential construction in France will help return the construction sector to growth. It is likely that construction volumes in the UK will be similar to 2010 levels.

• We expect construction activity in Ireland to contract for a fourth consecutive year, albeit at a much more moderate pace.

• In the US, we expect housing starts to improve somewhat from the current depressed level; non-residential should be close to or in recovery by year-end; and infrastructure markets will remain difficult in the context of stretched state budgets and the absence of long-term funding.

Emerging markets will continue to outperform; further corporate investment likely

• There remains considerable scope for the European building materials sector to expand in emerging markets, although this opportunity is currently best available to the cement companies (including CRH) and Saint-Gobain (SGO).

• We believe these businesses will continue to invest in emerging markets during 2011 and beyond. Our favoured emerging markets are India (primarily Holcim), Indonesia (HeidelbergCement), Poland (CRH, HeidelbergCement, Lafarge and Buzzi Unicem), Russia (Holcim, HeidelbergCement, Buzzi Unicem) and Brazil (SGO, Holcim and Lafarge).

• One corporate event of note expected during 2011 is the IPO of SGO's packaging division. This operation has revenues of circa €3.5bn but is non-core to SGO, which nonetheless is expected to retain a majority stake in the business.

How key stocks are positioned for 2011

• The E300 Construction & Building Materials index enters 2011 valued at a multiple of 12.8x, in-line with its long-term average of 13x. But given that this is still the early stage of what should be a cyclical earnings recovery, the sector's valuation does not appear overly demanding.

• CRH looks fairly valued at present based on our 2011 estimates but cheap on an asset replacement cost basis. However, with the next move in earnings likely to be upwards, the stock is cheap in an historic context. In the longer term, the earnings outlook is positive based on management's returns-focussed strategy.

• Of the other heavyside businesses, our preference is for HeidelbergCement and Holcim. HeidelbergCement remains our top pick in the cement sector due to management's efforts to repair the

• Poland, buoyed by EU structural funds and investment required to host the UEFA 2012 championships, is likely to remain Europe's strongest construction market

• There remains considerable scope for the European building materials sector to expand in emerging markets

• Of the other heavyside businesses, our preference is for HeidelbergCement and Holcim


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balance sheet, the strength of the group's aggregates positions and its inexpensive valuation relative to its peers. Holcim's emerging markets exposure and the strength of its balance sheet are reflected in our 'outperform' rating on the stock. Its markets in Asia-Pacific and Latin America contribute 75% of group EBIT. Holcim provides exposure to high-growth markets we favour in 2011 such as India and Brazil.

• Travis Perkins (TPK) ended 2010 strongly, but we think the stock has further to go. Back on 2011 estimates, TPK remains the least expensive of our lightside coverage list, which is very harsh given the quality of the business. While the UK economic backdrop is likely to prove challenging in 2010, we believe TPK can continue to outperform its peers operationally and that synergies from the BSS deal can surprise on the upside.

• We also continue to see Grafton as a geared recovery play backed by a proven management team. Decisive action in lowering its operating cost base has left Grafton in an excellent position to disproportionately gain from any recovery in volumes.

• The other lightside stock that offers decent upside in our view in 2011 is SGO. Operationally, the group did well in 2010 and is capable of building on this. The above-mentioned IPO of the packaging division will generate cash that is likely to be deployed in emerging markets and in consolidating the European distribution market. With a diversified revenue base and decent exposure to both emerging markets and growth areas of construction (energy efficiency), SGO is well positioned.

• Elsewhere, many other building materials stocks look fairly valued entering 2011 and, in the absence of upgrades, may struggle to outperform. Examples include Geberit, Kingspan and Wolseley.

• The UK housebuilders had a tough year in 2010, dealing with a general election, an emergency budget and, more recently, the government spending review. The combination of these events and the prospect of rising unemployment undermined consumer confidence. Revenues slipped as a result, particularly in the second half of 2010. The availability of mortgage finance has also restricted activity and weighed on the sector. We believe the new build industry has largely adjusted to this trading environment and that there is value in the UK housebuilders. A number of stocks trade at significant discounts to their net asset values. Persimmon, Bellway and Abbey stand out as potential relative outperformers in 2011.

• Travis Perkins (TPK) ended 2010 strongly, but we think the stock has further to go

• We continue to see Grafton as a geared recovery play backed by a proven management team

• The other lightside stock that offers decent upside in 2011 is SGO

• Among the UK housebuilders, Persimmon, Bellway and Abbey stand out as potential relative outperformers in 2011

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S H A R E P R I C E A N D P E R F O R M A N C E Price 12 Month Mkt. Cap Change % (€) Rel to E300 sector % Pr/Bk Debt/EBITDA Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2010 2011B U I L D I N G M A T E R I A L S CRH (CRH ID) 1550 2195 1170 10991 -0.5 15.7 -18.5 0.2 5.6 -17.5 1.12 2.2 1.7 Readymix (RYX ID) 21 27 16 23 0.0 -14.3 18.0 0.7 -21.7 19.4 Buzzi Unicem (BZU IM) 854 1212 716 1634 -0.5 18.8 -24.3 0.1 8.5 -23.4 0.70 3.0 2.4 Cimpor (CPR PL) 507 650 401 3407 -3.0 17.1 -21.1 -2.4 6.9 -20.2 1.76 2.6 2.1 HeidelbergCement AG (HEI GY) 4690 5150 3140 8794 0.3 12.1 -2.8 1.0 2.3 -1.6 0.81 3.5 2.9 Holcim (HOLN VX) 7065 8480 6045 18484 -0.1 13.9 4.0 0.6 4.0 5.2 1.22 2.8 2.3 Italcementi (IT IM) 633 1025 536 1487 -4.2 18.1 -33.9 -3.5 7.9 -33.1 0.53 3.0 2.7 Lafarge (LG FP) 4692 6195 3629 13440 0.0 11.6 -18.8 0.6 1.9 -17.9 0.78 3.8 3.4 European building materials (8) 1155 1362 908 58260 -0.3 13.8 -11.0 0.3 3.9 -9.9 0.97 3.1 2.6 Eagle Materials (EXP US) 2825 3279 2179 932 -1.4 10.2 16.0 -0.8 0.7 17.4 2.75 2.6 2.2 Martin Marietta (MLM US) 9224 9981 7261 3137 -2.5 5.8 10.4 -1.9 -3.4 11.7 2.97 2.6 2.2 Owens Corning (OC US) 3115 3618 2298 2900 -2.9 14.8 30.0 -2.3 4.9 31.6 1.05 2.3 1.7 Vulcan Materials (VMC US) 4436 5889 3570 4250 -3.0 7.3 -9.9 -2.4 -2.1 -8.8 1.41 6.4 4.9 Cemex (CX US) 1071 1246 765 8000 -1.3 14.9 -3.1 -0.7 4.9 -1.9 6.42 6.8 5.7 US building materials (4) 1276 1552 1023 11220 -2.7 9.0 6.2 -2.1 -0.5 7.4 1.56 3.4 2.7 Global building materials (12) 1268 1482 1016 67993 -0.7 12.9 -8.0 0.0 3.1 -6.9 1.05 3.2 2.6

B U I L D I N G M E R C H A N T S Grafton Group (GN5 ID) 345 365 233 798 3.3 18.6 17.4 4.0 8.3 18.8 0.84 2.6 2.1 Hornbach Holding (HBH3 GY) 9950 10050 6252 796 1.5 12.1 44.6 2.2 2.3 46.3 1.04 1.7 1.6 Travis Perkins plc (TPK LN) 1058 1058 665 2980 4.5 27.3 28.2 5.2 16.3 29.7 1.16 2.6 1.6 Wolseley plc (WOS LN) 2046 2051 1223 6783 -0.7 15.9 69.4 0.0 5.9 71.4 1.89 0.6 0.3 Builders merchants (4) 1018 1021 651 11356 1.1 18.3 54.6 1.7 8.0 56.4 1.44 1.4 1.0 Home Depot (HD US) 3506 3649 2707 42917 -2.1 12.6 29.7 -1.5 2.8 31.2 3.05 1.1 1.1 Home Retail Group (HOME LN) 189 295 189 1798 -3.6 -9.1 -31.1 -3.0 -17.0 -30.3 0.55 -0.7 -0.7 Lowe's (LOW US) 2508 2822 1959 25852 -3.7 7.2 14.7 -3.1 -2.1 16.1 1.88 0.8 1.0 Kingfisher plc (KGF LN) 263 267 199 7249 -2.4 9.0 18.7 -1.7 -0.5 20.2 1.17 0.0 -0.1

B U I L D I N G C O M P O N E N T S Kingspan Group (KSP ID) 749 749 500 1245 2.0 23.8 24.8 2.7 13.1 26.4 2.05 1.1 0.8 Geberit (GEBN VX) 21620 21990 16040 7127 -0.2 11.2 39.6 0.5 1.5 41.3 5.13 -0.8 -1.1 Rockwool (ROCKA DC) 71600 73800 45800 2111 -2.4 5.3 17.2 -1.8 -3.9 18.6 1.89 0.1 -0.1 SIG plc (SHI LN) 129 138 91 886 5.3 12.6 18.5 6.0 2.9 20.0 0.91 2.0 1.6 Wavin NV (WAVIN NA) 1140 1440 863 579 1.6 12.1 -18.6 2.2 2.3 -17.6 1.02 2.3 1.7 Building components (5) 1815 1833 1297 11947 0.1 11.4 27.6 0.8 1.7 29.1 2.57 0.3 -0.0

O T H E R B U I L D I N G Hill & Smith (HILS LN) 278 377 235 249 4.8 14.8 -16.7 5.5 4.9 -15.7 1.62 1.2 1.0 Saint-Gobain Group (SGO FP) 3850 4018 2849 20436 -1.1 11.6 1.1 -0.4 1.9 2.4 0.94 1.7 1.5 Uralita (URA SM) 350 434 350 691 0.0 -2.0 -14.2 0.7 -10.5 -13.2 2.04 2.5 1.8 Wienerberger (WIE AV) 1429 1587 970 1679 1.5 17.3 11.8 2.2 7.1 13.2 0.52 2.1 1.5

I R I S H H O U S E B U I L D I N G Abbey (ABBY ID) 510 520 405 126 2.0 12.6 8.5 2.7 2.8 9.8 0.74 -6.5 -4.2

U K H O U S E B U I L D I N G Barratt Developments plc (BDEV LN) 89 142 70 997 0.6 23.1 -26.2 1.3 12.4 -25.3 0.29 2.8 2.0 Bellway plc (BWY LN) 670 826 511 943 3.1 26.8 -15.5 3.7 15.7 -14.4 0.78 -0.9 0.5 Berkeley Group (BKG LN) 890 933 742 1361 -2.1 7.2 12.0 -1.4 -2.1 13.4 1.31 -3.2 -2.4 Bovis Homes plc (BVS LN) 414 454 327 642 2.8 20.9 -1.7 3.5 10.4 -0.5 0.78 -2.0 -0.1 Persimmon plc (PSN LN) 417 508 337 1463 0.6 19.7 -8.4 1.3 9.3 -7.3 0.74 0.4 -0.3 Redrow plc (RDW LN) 136 152 98 488 0.9 26.3 5.2 1.6 15.3 6.5 0.94 4.3 2.7 Taylor Wimpey plc (TW/ LN) 32 44 22 1174 2.3 28.7 -16.4 3.0 17.5 -15.4 0.69 4.6 3.1 Construction and Housebuilding (8) 1003 1211 814 7194 0.9 20.1 -9.3 1.6 9.7 -8.2 0.66 1.1 0.9

U S H O U S E B U I L D I N G Beazer Homes (BZH US) 539 688 321 305 -0.9 25.7 19.1 -0.3 14.8 20.6 0.92 N/A N/AD R Horton (DHI US) 1193 1497 971 2842 -1.9 15.3 17.4 -1.2 5.2 18.9 1.45 2.7 3.0 KB Home (KBH US) 1349 1933 980 887 -2.9 15.8 5.5 -2.3 5.7 6.8 1.73 N/A 8.7 Lennar (LEN US) 1875 2071 1272 2590 1.1 19.7 57.1 1.8 9.3 59.0 1.38 15.8 8.5 NVR (NVR US) 69102 75300 60416 2911 -2.2 8.1 4.0 -1.5 -1.3 5.3 2.39 -2.6 -1.6 Pulte Homes (PHM US) 752 1339 621 2147 -0.2 16.5 -19.6 0.5 6.4 -18.6 1.25 N/A 7.0 Ryland Group (RYL US) 1703 2568 1437 561 -3.8 13.3 -7.5 -3.2 3.5 -6.4 1.37 N/A 2.4 Toll Brothers (TOL US) 1900 2315 1602 2354 -4.1 2.7 8.1 -3.4 -6.3 9.4 1.23 N/A 5.8 FTSE E300 Constr. & Mats. (E3CONS) 1490 1587 1199 -0.7 9.5 -1.2

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V A L U A T I O N EPS (c) EPS Gth % Div Yield % Div Cover EV/EBITDA P/E 2010 2011 2012 10-12 2010 2011 2010 2010 2011 2012 2010 2011 2012

B U I L D I N G M A T E R I A L S CRH (CRH ID) 76 83 96 27.2 4.0 4.0 1.2 8.4 7.7 7.1 20.5 18.7 16.1 Readymix (RYX ID) Buzzi Unicem (BZU IM) 32 54 85 169.1 2.1 2.2 1.8 6.8 5.7 4.7 27.1 15.9 10.1 Cimpor (CPR PL) 37 41 44 18.2 3.9 3.9 1.9 8.0 7.1 6.4 13.6 12.4 11.5 HeidelbergCement AG (HEI GY) 296 362 457 54.4 2.1 2.7 3.0 7.2 6.3 5.4 15.9 13.0 10.3 Holcim (HOLN VX) 330 416 536 62.2 2.5 2.8 1.9 8.0 7.3 6.5 21.4 17.0 13.2 Italcementi (IT IM) 10 30 45 359.3 1.9 2.0 0.8 5.5 5.0 4.4 64.1 21.2 14.0 Lafarge (LG FP) 330 379 445 34.7 4.3 4.3 1.7 7.7 7.1 6.4 14.2 12.4 10.5 European building materials (8) 3.2 3.4 1.7 7.5 6.7 5.9 18.2 15.1 12.3 Eagle Materials (EXP US) 59 61 101 70.3 1.4 1.4 1.5 15.1 14.0 9.4 47.9 46.7 28.1 Martin Marietta (MLM US) 197 264 370 88.3 1.7 1.7 1.2 13.8 12.3 9.9 46.9 34.9 24.9 Owens Corning (OC US) 154 210 270 75.0 0.0 0.0 N/A 7.9 6.6 5.5 20.2 14.8 11.6 Vulcan Materials (VMC US) -53 -16 76 N/A 2.3 2.3 N/A 20.5 16.3 11.9 N/A N/A 58.4 Cemex (CX US) -71 -12 34 N/A 0.0 0.0 N/A 11.3 9.6 7.9 N/A N/A 31.3 US building materials (4) 2.0 2.0 1.4 13.0 11.0 8.7 30.3 22.8 23.2 Global building materials (12) 3.1 3.2 1.7 8.2 7.3 6.3 18.6 15.5 13.2

B U I L D I N G M E R C H A N T S Grafton Group (GN5 ID) 16 20 30 80.7 1.7 2.2 2.7 10.8 9.4 7.4 20.9 17.2 11.6 Hornbach Holding (HBH3 GY) 905 987 1039 14.8 1.3 1.3 6.8 5.1 4.8 4.6 11.0 10.1 9.6 Travis Perkins plc (TPK LN) 75 92 104 38.4 1.1 1.7 6.3 10.9 7.5 6.5 14.0 11.5 10.1 Wolseley plc (WOS LN) 74 120 158 113.4 0.0 1.2 N/A 9.8 8.2 7.0 27.6 17.1 12.9 Builders merchants (4) 0.5 1.4 9.7 9.5 7.6 6.6 20.0 14.5 11.7 Home Depot (HD US) 198 223 261 31.8 2.7 2.9 2.1 8.9 8.4 7.8 17.7 15.8 13.4 Home Retail Group (HOME LN) 21 21 23 7.5 7.8 7.8 1.4 3.3 3.2 3.0 9.0 8.9 8.3 Lowe's (LOW US) 140 164 191 36.1 1.7 1.9 3.3 7.5 7.3 7.2 17.9 15.3 13.2 Kingfisher plc (KGF LN) 20 22 24 23.9 2.5 2.9 3.0 6.5 5.7 5.1 13.4 11.9 10.8

B U I L D I N G C O M P O N E N T S Kingspan Group (KSP ID) 29 32 42 48.9 1.3 1.7 2.9 12.8 12.0 10.0 26.3 23.1 17.6 Geberit (GEBN VX) 1060 1140 1237 16.7 2.5 2.5 2.0 14.6 13.4 12.2 20.4 19.0 17.5 Rockwool (ROCKA DC) 2254 3023 4264 89.2 1.3 1.5 2.3 8.6 6.9 5.8 31.8 23.7 16.8 SIG plc (SHI LN) 7 9 11 57.8 0.0 2.3 N/A 8.9 7.7 6.8 18.5 14.3 11.7 Wavin NV (WAVIN NA) 25 69 101 305.6 0.0 0.0 N/A 7.9 6.5 5.2 45.6 16.5 11.2 Building components (5) 2.0 2.2 2.3 11.7 10.2 8.9 22.8 19.4 16.3

O T H E R B U I L D I N G Hill & Smith (HILS LN) 37 34 38 1.9 4.5 4.8 2.9 4.8 4.6 4.0 7.5 8.2 7.3 Saint-Gobain Group (SGO FP) 273 315 315 15.2 3.2 3.5 2.2 6.3 5.8 5.8 14.1 12.2 12.2 Uralita (URA SM) 7 11 15 102.9 0.7 1.3 2.8 9.8 8.5 7.4 48.3 32.3 23.8 Wienerberger (WIE AV) -20 11 63 N/A 0.0 0.0 N/A 12.2 10.3 8.0 N/A N/A 22.8

I R I S H H O U S E B U I L D I N G Abbey (ABBY ID) 42 59 71 69.3 1.7 1.8 4.9 2.0 1.8 1.9 12.1 8.6 7.2

U K H O U S E B U I L D I N G Barratt Developments plc (BDEV LN) 3 10 14 439.6 0.0 0.0 N/A 8.2 5.4 4.6 34.9 8.6 6.5 Bellway plc (BWY LN) 30 34 45 53.4 1.5 1.6 3.0 14.3 12.9 10.0 22.7 20.0 14.8 Berkeley Group (BKG LN) 62 73 83 33.7 1.8 2.0 3.9 6.9 6.3 5.9 14.3 12.2 10.7 Bovis Homes plc (BVS LN) 8 18 24 209.7 0.0 1.9 N/A 25.3 15.5 12.0 52.4 22.8 16.9 Persimmon plc (PSN LN) 21 32 43 111.1 1.8 2.2 2.7 9.7 7.8 6.0 20.2 12.9 9.6 Redrow plc (RDW LN) 3 7 9 242.1 0.0 0.0 N/A 23.1 14.0 10.8 50.2 20.5 14.7 Taylor Wimpey plc (TW/ LN) 1 3 4 328.3 0.0 0.0 N/A 11.1 7.7 5.5 31.1 12.2 7.3 Construction and Housebuilding (8) 0.9 1.2 4.6 10.6 7.9 6.3 23.4 13.1 9.6

U S H O U S E B U I L D I N G Beazer Homes (BZH US) -57 -138 -35 N/A 0.0 0.0 N/A N/A N/A 47.9 N/A N/A N/A D R Horton (DHI US) 77 23 70 -9.1 1.3 1.3 5.1 16.8 18.1 10.0 15.5 51.9 17.0 KB Home (KBH US) -125 -36 86 N/A 1.9 1.9 N/A N/A 21.0 16.9 N/A N/A 15.8 Lennar (LEN US) 36 65 125 252.1 0.9 0.9 2.2 30.7 21.5 12.2 52.8 28.9 15.0 NVR (NVR US) 3050 3857 6391 109.5 0.0 0.0 N/A 9.7 9.8 5.8 22.7 17.9 10.8 Pulte Homes (PHM US) -252 5 51 N/A 0.0 0.0 N/A N/A 18.8 17.3 N/A N/A 14.9 Ryland Group (RYL US) -183 -36 60 N/A 0.7 0.7 N/A N/A 20.3 13.9 N/A N/A 28.3 Toll Brothers (TOL US) -2 -2 48 N/A 0.0 0.0 N/A N/A N/A 31.0 N/A N/A 40.0

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Paper and packaging Sector performance in 2010

• The global paper and packaging sector enjoyed a strong performance in 2010 with the European index increasing by almost 40% and the US sector rising by over 13%.

• In Europe, Smurfit Kappa Group (SKG) underperformed the sector, rising by 17.7%, having significantly outperformed in 2009 (+240%). It also underperformed its main peers, Mondi (+58.2%), SCA (+26.4%) and DS Smith (+64.9%).

• This performance was driven by rising forecasts – our 2010 and 2011 EBITDA forecasts increased by over 8% during 2010.

• 2009 has proved to be the trough year for earnings in this cycle with SKG's EBITDA bottoming out at €741m. We are now forecasting EBITDA growth of 23% in 2010 and a further 29% in 2011.

Key themes for 2011

Positive earnings momentum likely to continue

• Recycled containerboard prices increased by almost one-third in 2010, while kraftliner prices rose by nearly 50%.

• The spread between recycled containerboard and recovered paper (OCC) remains at about €50/tonne below the previous peak.

• With continuing upward pressure on OCC prices, at least one additional containerboard price increase is likely. This will result in further upward pressure on corrugated box prices, which is positive for SKG's earnings momentum.

• We believe that SKG's EBITDA will peak in 2012 at over €1.2bn, implying a very attractive 2012 EV/EBITDA of 3.4 times.

US imports – prospects are diminishing

• One of the key risks to positive European pricing momentum and to SKG's earnings momentum is an increase in containerboard imports from the US which would disrupt European pricing dynamics.

• With a weakening euro/dollar exchange rate and the prospects improving for a kraftliner price increase in the US in Q1 2011, we believe the likelihood of a sharp increase in imports has diminished.

Strong cash generation will result in rapid deleveraging – accretive to equity holders

• Based on our current EBITDA forecasts, we estimate that SKG will generate free cash flow of circa €400m in 2011, resulting in an acceleration in debt paydown. This would accrete directly to shareholders.

• 2011 is likely to be another positive year for SKG. We are confident of reaching our 12-month price target of 1200c, representing over 60% upside from current levels.

Barry Dixon [email protected]

• The global paper and packaging sector enjoyed a strong performance in 2010

• We are now forecasting EBITDA growth for SKG of 23% in 2010 and a further 29% in 2011

Key themes for 2011 • Positive earnings momentum likely to

continue

• US imports – prospects are diminishing

• Strong cash generation will result in rapid deleveraging – accretive to equity holders

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Research Report: Davy on 2011 January 4, 2011 S H A R E P R I C E A N D P E R F O R M A N C E Price 12 Month Mkt. Cap Change % (€) Rel to E300 sector % Pr/Bk Debt/EBITDA Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2010 2011

European Sector Smurfit Kappa Group (SKG ID) 730 825 565 1597 0.6 7.5 17.7 -0.1 -7.0 -25.9 0.94 3.4 2.3 Mondi (MNDI LN) 514 558 338 3076 0.5 6.5 58.2 -0.2 -7.8 -0.4 1.21 1.7 1.1 SCA (SCAB SS) 10550 10820 8505 8297 -0.2 4.2 26.4 -0.9 -9.8 -20.5 1.06 2.4 1.9 Smith (David S.) (SMDS LN) 202 210 104 1022 -3.1 5.6 64.9 -3.7 -8.6 3.8 1.42 1.8 1.4 Stora Enso (STERV FH) 790 790 530 6233 2.0 9.5 35.0 1.3 -5.2 -15.1 1.13 1.9 1.6 UPM-Kymmene (UPM1V FH) 1322 1341 745 6874 0.7 15.6 58.9 0.0 0.0 0.0 1.00 2.3 1.7 European paper & packaging (6) 818 828 575 27099 0.5 8.7 39.4 -0.2 -6.0 -12.2 1.07 2.3 1.7 US Sector International Paper (IP US) 2724 2863 1988 8901 -1.2 5.8 8.8 -1.9 -8.4 -31.5 1.84 2.1 1.6 Pkg.Corp.America (PKG US) 2584 2690 2058 1979 -1.6 -2.3 20.1 -2.3 -15.4 -24.4 2.71 1.0 0.4 Temple Inland (TIN US) 2124 2482 1575 1710 -0.5 -1.8 7.6 -1.2 -15.0 -32.3 2.63 1.6 0.8 Weyerhaeuser (WY US) 1893 4560 1260 7578 -0.1 10.0 27.9 -0.8 -4.8 -19.5 1.32 3.5 2.9 US paper & packaging (4) 444 480 355 20169 -0.8 5.8 13.1 -1.4 -8.5 -28.8 1.69 2.3 1.6 Paper & packaging (10) 530 536 389 47268 0.0 7.4 29.3 -0.7 -7.1 -18.6 1.27 2.3 1.7 FTSE E300 Forestry & Paper (E3PAPR) 994 1008 560 0.7 15.6 58.9


European Sector Smurfit Kappa Group (SKG ID) 60 168 190 215.2 0.0 1.1 N/A 5.3 3.8 3.4 12.1 4.3 3.8 Mondi (MNDI LN) 36 51 61 70.2 2.2 2.8 3.2 5.3 4.4 3.7 14.3 10.1 8.4 SCA (SCAB SS) 887 1031 1099 24.0 3.8 4.0 2.2 7.1 6.1 5.6 11.9 10.2 9.6 Smith (David S.) (SMDS LN) 16 21 22 40.7 3.0 3.5 2.6 6.1 5.1 4.6 12.8 9.8 9.1 Stora Enso (STERV FH) 74 77 79 7.0 2.5 3.1 3.7 6.8 6.2 5.6 10.7 10.3 10.0 UPM-Kymmene (UPM1V FH) 94 101 107 13.1 3.4 3.8 2.1 7.1 6.1 5.6 14.0 13.1 12.4 European paper & packaging (6) 3.0 3.4 2.7 6.5 5.5 4.9 12.3 10.0 9.2 US Sector International Paper (IP US) 202 275 325 60.6 1.5 1.8 5.1 5.7 4.8 4.2 13.5 9.9 8.4 Pkg.Corp.America (PKG US) 163 215 263 61.0 2.3 2.3 2.7 7.0 5.5 4.8 15.9 12.0 9.8 Temple Inland (TIN US) 90 180 255 183.3 2.1 2.1 2.0 7.1 4.5 4.0 23.6 11.8 8.3 Weyerhaeuser (WY US) 40 50 107 166.3 1.1 3.2 2.0 13.7 11.5 8.4 47.3 37.9 17.8 US paper & packaging (4) 1.4 2.4 3.5 7.5 6.1 5.2 19.8 14.3 10.6 Paper & packaging (10) 2.3 3.0 2.9 6.9 5.7 5.0 14.7 11.5 9.8


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Food and beverage Food sector performance in 2010

• The European food producers sector outperformed the wider market, finishing the year with an impressive 19.7% return.

• Across the Atlantic, the US food products sector rose 9.4%. This is the second solid year of impressive returns for the sector.

Key themes for 2011

Gross profit margin pressures to become more pronounced

• The big move in soft commodities in the latter half of 2010 poses a material threat to gross profit margin for food manufacturers in 2011. The current cycle presents a more challenging dynamic than 2007/2008 given depressed consumer confidence and spending.

• PPI data for the UK and US show that food manufacturers are finding it difficult to achieve price increases. The ability of companies to hedge, and the execution of this hedging, will be very important.

• Potential gross margin compression will need to be managed alongside sustained high levels of A&P spend. This fits with our central thesis that the cost of generating a unit of revenue will remain elevated in 2011.

Frugality likely to become an enduring condition

• Even if the recession, as measured conventionally, is proclaimed over, we wonder whether it might catalyse a structural shift in consumption. We are thinking here of variables such as structurally higher unemployment, the poverty rate and the trend in household real income – all in the context of more limited credit availability.

• Thus frugality may be an enduring condition, especially in the Anglo-Saxon world and those European economies subject to austerity programmes. Therefore we see the emergence of price compression, i.e. a narrowing of the price range within categories and greater restriction on companies to raise prices for value creation (i.e. beyond the requirement to recover input cost rises).

• Volume, not price, is key to relative value growth. Where volume is dissipated, SKU rationalisation will be necessary for productivity.

• The more exposure enterprises have to other economic regions (Asia-Pacific, South America), the greater their underlying growth potential. We think the better long-term prospects in these markets lie with those ingredient companies whose technologies can adapt traditional recipes (food and beverages) to packaged form.

Health and wellness trend should burgeon

• The trend to health and wellness should burgeon in that better diet equals better health equals less healthcare spending in the future

John O'Reilly [email protected] Foods Cathal Kenny [email protected] Jack Gorman [email protected] Aiden O'Donnell [email protected] Beverages Brian Fagan, CFA [email protected] Barry Gallagher [email protected]

Key themes for 2011 • Gross profit margin pressures to

become more pronounced

• Frugality likely to become an enduring condition

• Health and wellness trend should burgeon

• Agriculture – technology advances to continue; elimination of EU milk quota will be positive for Irish dairy sector

• Consensus estimates remain bullish

• Balance sheet capacity to fuel M&A activity and buybacks

• Emergence of returns as a valuation yardstick

• Volume, not price, is key to relative value growth


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(playing to our frugality theme). Products that are more a function of marketing than provable efficacy will, however, struggle.

• Eating out will remain a vital part of social engagement, but value (satiety and volume protein/carbohydrate at an affordable price) will be key.

• We think that the guiding principle should be to invest in food companies that are adapting/adaptable to existing and prospective trends. Stock selection, rather than sector rotation, is key.

Agriculture – technology advances to continue; elimination of EU milk quota will be positive for Irish dairy sector

• We remain highly disposed to agriculture and within agribusiness to those input companies that are advancing technologies to overcome the negative externalities of traditional science. For example, we have a very positive attitude to bio-solutions that can reduce antibiotic use in livestock or carbon dioxide and methane emissions.

• We believe that the trend in agricultural commodity prices is upward but that there could be significant inter-year volatility. Specifically, we note the 2015 dateline to eliminate the EU milk quota. This will be very positive for the Irish dairy sector.

Consensus estimates remain bullish

• Consensus is forecasting 9% EPS growth for European food producers in 2011. The sector, trading on 15x, commands a higher multiple than its US counterpart.

• Consensus estimates for the S&P 500 Food Producers Index for 2011 are looking for EPS growth of approximately 5% (following growth of 9% in 2010). The sector now trades on a forward P/E multiple of c.13x, which is well below its ten-year average of 16x.

Balance sheet capacity to fuel M&A activity and buybacks

• Balance sheet capacity is becoming a feature of the food industry; we believe that management teams will be under pressure to harness excess financial capacity either through M&A or share buybacks.

• This financial flexibility, coupled with a subdued revenue environment in developed markets, is a perfect backdrop for increased levels of M&A activity. Sectors where we expect consolidation include specialist food ingredients, dairy (branded and primary), UK food and bakery.

Emergence of returns as a valuation yardstick

• Since equities troughed in March 2009, investors have rewarded companies that have delivered earnings and margin expansion; to date, the quality of those earnings has not been questioned.

• We believe the market will slowly move towards a more returns-based valuation model. Against this backdrop, those companies that consistently deliver returns over WACC should outperform.

• Stock selection, rather than sector rotation, is key

• We believe that management teams will be under pressure to harness excess financial capacity either through M&A or share buybacks

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Kerry Group – strong financial flexibility entering 2011

• 2010 was a stellar year for Kerry as it leveraged its 'go-to-market' strategy and further enhanced margins.

• The balance sheet continues to strengthen, driven by excellent cash flow generation. Kerry has very strong financial flexibility entering 2011.

Glanbia – exciting prospects for nutrition business

• The recovery in global dairy product prices throughout 2010 offered a very favourable tailwind. This led to a strong recovery in the company's Dairy Ireland division. We forecast a relatively flat year for this division as we look into 2011. We expect profits to increase slightly in the US Cheese and Global Nutritional division in 2011 and remain excited by the prospects for the nutrition business.

• The 4.5x sales multiple recently paid by GSK for the MaxiNutrition business in the UK underscores the value in Glanbia's nutrition operations.

Greencore – a year of significant change ahead

• 2011 will be a year of significant change for Greencore. The proposed merger with Northern Foods (in a new entity called Essenta) was announced in November 2010 and is expected to close in March 2011 subject to no rival bids.

• The combined entity will be able to extract sizeable synergies. Essenta will now have the benefit of scale as it negotiates its way through the tough UK environment.

Speciality baking ingredients – ARYZTA, CSM

• For ARYZTA, the Fresh Start Bakeries acquisition was smart given that it increases the group's exposure to the quick service restaurant sector – the one area of food service that is growing.

• The company has previously demonstrated its ability to sweat the assets of its acquisitions and drive earnings. It expects these acquisitions to add 0.45c to earnings in FY 2011.

• For CSM, investor interest in 2011 is likely to focus on its lactide initiative in Thailand and the ongoing integration of US bakery business Best Brands.

• The lactide facility in Thailand should be completed by the end of 2011 with customer shipments expected in Q1 2012. While execution risk remains, management commentary on the opportunity is positive. Positive newsflow such as customer contracts could well act as a catalyst for the share price in 2011.

• The integration of Best Brands has progressed well since the announcement in February 2010.

• Kerry's balance sheet continues to strengthen, driven by excellent cash flow generation

• Essenta, the new entity to result from the proposed merger of Greencore with Northern Foods, will be able to extract sizeable synergies

• For ARYZTA, the Fresh Start Bakeries acquisition increases the group's exposure to the quick service restaurant sector

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Sweetener ingredients – Associated British Foods (ABF), Südzucker, Tate & Lyle

• With steady demand and the threat of a third year of supply deficits, global sugar pricing looks set to remain high into 2011. In Europe, indications are that average harvest levels and lower import availability will support another year of strong pricing. This secures a positive margin environment for the sugar operations of ABF and Südzucker.

• In the starch and corn sweetener markets, the rapid escalation in raw material costs over the past four months is still being fed into end-user markets. The impact on demand will become more visible in 2011.

• Modified starches carry a better chance of margin protection. We will watch for the experience of both Tate & Lyle and Südzucker in this regard; early signals are reasonably positive. In the more commoditised markets, this may be a more difficult process. However, other factors (such as industry capacity utilisation or relative substitution costs) can be influential in areas such as the annual HFCS pricing round (Tate & Lyle).

• We also note with interest the increasing presence of stevia in end-user markets. This is a competitive threat to sugar and high-intensity sweeteners and a boon for those that manufacture the bulking agents (e.g. dextrose, erythritol) required in stevia applications.

• Of course the companies we cover in this segment have additional interests. European bio-ethanol production will become more significant for both Südzucker and ABF in 2011. The demand and margin dynamics at ABF's retail operations, given tough economic conditions and rising raw material prices, will be watched closely.

• Common to each of the sweetener companies is a strengthening balance sheet. This may prompt increased internal investment and renewed M&A activity across each of the three companies.

Origin – balance sheet flexibility a key advantage

• The reconfiguration of the group portfolio sees Origin enter 2011 with tremendous financial flexibility. Should management exercise this financial flexibility via acquisitions, we expect the shares to respond positively. The core business, based on its Q1 update, remains in excellent health.

Fyffes – positive momentum following difficult 2010

• After a tougher H1 2010, trading conditions and pricing have been stronger. The company should enter 2011 with some positive momentum.

Total Produce – enters 2011 in a strong position

• Total Produce should consolidate its position as one of the largest fresh produce concerns in Europe. Although M&A activity in 2010 was limited, we expect more on that front in 2011.

• With pricing set to remain high as we enter 2011, this secures a positive margin environment for the sugar operations of ABF and Südzucker

• European bio-ethanol production will become more significant for both Südzucker and ABF in 2011

• The strengthening balance sheet of each of the sweetener companies may prompt increased internal investment and renewed M&A activity

• Total Produce should consolidate its position as one of the largest fresh produce concerns in Europe

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Beverage sector performance in 2010

• The global beverage sector finished the year up 20.3%, outperforming the E300 and the S&P 500.

Table 8: Price performance

% change ytd

Britvic 19.7%

C&C 12.4%

Carlsberg 45.2%

Diageo 12.8%

Heineken 10.3%

Pernod Ricard 17.4%

Global beverages sector 20.3%

Source: Davy

• Unlike 2009, when the brewers materially outperformed the spirits companies, 2010 was more a stock pickers market with winners and losers spread across both sub-categories.

• Carlsberg was the best-performing stock in our universe for the second consecutive year as the Russian beer market recovered strongly following an increase in excise duty from January 1st 2010. It benefitted from improved performance in the Northern and Western Europe division, and management set aggressive medium-term operating margin targets that the market liked.

• C&C experienced another eventful year and outperformed the broader Irish market in 2010 following significant recovery in 2009, although it did underperform versus its global drinks peers.

• Management continued to implement its strategy to correct the underperformance of Magners versus the GB cider category. There was also ongoing M&A activity as C&C disposed of its spirits business, which included the valuable Tullamore Dew brand. This left C&C virtually debt-free.

• Britvic, on which we initiated coverage with an 'outperform' recommendation, performed strongly despite a challenging consumer environment in GB and Ireland. The Fruité acquisition provided the first indication of Britvic's strategy regarding European expansion.

• The global beverage sector trades at a P/E multiple of 15.2x 2011 estimates.

Table 9: P/E multiple

Britvic 11.3

C&C 11.8

Carlsberg 13.8

Diageo 14.3

Heineken 13.4

Pernod Ricard 15.9

Global beverages sector 15.2

Source: Davy

• Carlsberg was the best-performing stock in our universe for the second consecutive year


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• On a relative basis, the sector looks expensive compared with the broader market. The beverage sector is now trading at a 40% premium to the market versus a historic average of 20%.

Re-emergence of M&A activity a key theme for 2011

• After a relatively quiet 2010, with Heineken's acquisition of FEMSA (announced in January) the only major M&A story, consolidation in the sector could re-emerge as a major theme in 2011.

• Following the last round of consolidation in 2007 and 2008, most of the beverage companies have spent the past two years disposing of non-core assets, focusing on cash flow and rebuilding their balance sheets. The process is now more or less complete, and we believe 2011 will see the major beverage companies once again focus on M&A.

• The global beer market has evolved over the past decade and has seen significant consolidation. On a pro-forma basis, beer sales by the top ten players now account for c.65% of total global sales compared with less than 40% at the start of the century. However, the top ten spirits producers account for only 20% of the total estimated spirits market.

• The scale benefits from consolidation in the spirits sector are obvious. A full suite of category brands means that a strong bargaining position with wholesalers and retailers can be formed; that strong regional distribution platforms can be built; and that marketing spend can be leveraged around increasingly polarised global brand families. There are clear improvements in operating margins and returns associated with increased scale. This is particularly evident in the case of Pernod, which jumped from being the number-seven player in spirits in 1994 to the number-two today.

Diageo –– a strong candidate for M&A activity

• Diageo's strong balance sheet and lack of activity over the past decade make it a prime candidate for M&A activity. Diageo has stated its desire to acquire the 66% stake that it does not hold in LVMH's Moët Hennessy. While the benefits of this deal are clear, we are unsure that LVMH is a willing seller.

• In the absence of this, however, there are plenty of opportunities for Diageo. The arrival of an activist shareholder at Fortune Brands means that a number of interesting assets may become available for sale, most notably Jim Beam.

• We estimate that Diageo could spend £5-6bn without having to raise fresh equity while still remaining below the 3.5x net debt/EBITDA required to maintain its single "A" credit rating.

M&A could re-emerge as a major theme in 2011 • Diageo – a strong candidate for M&A

activity

• Pernod – would like to grow by acquisition when debt falls

• Remy Cointreau – interested in a range of categories

• Scope for increased consolidation activity in beer sector

• Cider an appealing category; C&C is likely to remain a take-out target

• Diageo's strong balance sheet and

lack of activity over the past decade make it a prime candidate for M&A activity

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Pernod – M&A unlikely in the short term but would like to grow by acquisition when debt falls

• While Pernod is unlikely to be involved in M&A in the short term given its high level of debt, it will look to grow by acquisition once debt falls to 3-4x EBITDA.

• Pernod would like to acquire a premium US whiskey or a premium Tequila brand. If it does look for exposure to premium whiskey, it strikes us that a takeover/merger of Brown Forman (BF) would be compelling. Pernod would bolster its US position with Jack Daniels and BF would get the benefit of Pernod’s global distribution network.

Remy Cointreau – interested in a range of categories

• Remy Cointreau has announced that it intends to dispose of its champagne division and will re-invest the proceeds in its spirits division.

• It is interested in all categories with the exception of other cognac brands and the ultra-competitive vodka category.

Scope for increased consolidation activity in beer sector

• While the beer sector is already highly consolidated, we believe there is scope for increased activity in 2011. Carlsberg has stated that it will focus acquisition spend on its fast-growing Asian division, while the Foster beer business is likely to be on the block following the demerger from the underperforming wine business. Carlsberg rapidly de-leveraged over the past two years, and we forecast net debt/EBITDA of circa 2x by end-2010. This gives it significant firepower, although we expect acquisitions in Asia to be smaller bolt-on transactions.

• We believe Heineken is likely to remain focused on the integration of FEMSA in the early part of 2011. Given the growth in craft beers in developed markets, it is possible that we will see consolidation among these smaller players or among the global players looking to pick up niche but high-value brands.

• The most fanciful story we have heard recently is that ABI could attempt a merger with SABMiller. However, this is unlikely. Despite being the one and two players globally, there is no significant overlap in their geographic footprint with the exception of the US market. It has been suggested that Molson Coors would buy SABMiller's stake in the US joint venture Miller Coors and thus alleviate this problem.

Cider an appealing category; C&C likely to remain a take-out target

• Finally, cider remains a very attractive category with its strong growth rates, high operating margins and broad appeal to both male and female consumers.

• As the category continues to grow internationally, we believe C&C is likely to remain an attractive take-out target given its established profitable brands, production capacity, high cash generation and debt-free balance sheet.

• Given the growth in craft beers in developed markets, it is possible that we will see consolidation among these smaller players or among the global players looking to pick up niche but high-value brands

• Cider remains a very attractive category with its strong growth rates, high operating margins and broad appeal to both male and female consumers

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23 Davy Research

C&C and Britvic remain our top picks; return to premiumisation will benefit the spirits companies

• Given the sector's material outperformance of and premium to the overall market, we prefer those stocks that have the support of an attractive valuation. C&C trades on 11.8x next year's earnings, while Britvic trades on a multiple of 11.3x. Both stocks have a number of potential catalysts over the coming 12 months.

• For C&C, these catalysts include the debt-free balance sheet; the recovering share in the GB cider category; the potential for accretive M&A; and the internationalisation of cider. Britvic, on the other hand, should continue to demonstrate consistent, strong earnings growth; increasing share in high-value convenience and impulse channels; further M&A; and growth of the international business, particularly in the US and Australia.

• Among the large-cap names, Pernod Ricard and Diageo will benefit from the continued growth in emerging markets. Pernod in particular is in a commanding place given its distribution strength in Asia and its strong position in Cognac. Both companies will gain from an ongoing (albeit relatively slow) recovery in the US market.

• C&C and Britvic have a number of potential catalysts over the coming 12 months

31 30

31 Davy Research

Research Report: Davy on 2011 January 4, 2011 Food S H A R E P R I C E A N D P E R F O R M A N C E Price 12 Month Mkt. Cap Change % (€) Rel to E300 sector % Pr/Bk Debt/EBITDA Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2010 2011

I N G R E D I E N T S Kerry Group (KYG ID) 2497 2703 2050 4379 -2.5 0.9 21.4 -0.2 -4.1 1.4 2.82 1.9 1.4 Danisco (DCO DC) 51000 51750 34250 3263 0.3 16.3 46.1 2.7 10.5 22.1 1.85 1.2 1.0 Givaudan (GIVN VX) 100900 104700 82650 7453 0.0 4.6 44.6 2.4 -0.7 20.9 2.50 1.4 1.0 IFF (IFF US) 5559 5577 3977 3320 -1.7 2.7 44.6 0.6 -2.5 20.8 5.25 1.6 1.2 McCormick (MKC US) 4653 4771 3556 4621 -2.8 2.6 37.8 -0.5 -2.6 15.2 4.64 1.3 1.0 Sensient Tech (SXT US) 3673 3747 2498 1363 -3.3 4.9 49.4 -1.0 -0.3 24.9 2.07 1.7 1.3 Ingredients (7) 1832 1862 1343 26817 -1.0 4.7 38.8 1.3 -0.5 16.0 2.87 1.5 1.2

D A I R Y P R O C E S S I N G Donegal Creameries (DCP ID) 400 470 190 41 -4.1 0.0 86.1 -1.8 -5.0 55.5 0.64 2.6 2.4 Glanbia (GLB ID) 368 368 243 1081 6.7 13.6 27.4 9.2 8.0 6.5 3.36 2.3 1.8 Dairy Crest (DCG LN) 423 425 329 658 2.7 14.2 20.5 5.2 8.5 0.7 1.79 2.3 2.1 Danone (BN FP) 4702 4824 3996 30465 -2.4 4.2 9.8 -0.1 -1.0 -8.3 2.07 1.9 1.7 Dean Foods (DF US) 884 1853 726 1203 4.5 17.9 -47.6 6.9 12.1 -56.2 1.12 5.4 4.9 Koninklijke DSM (DSM NA) 4261 4284 3043 9606 0.3 13.2 23.6 2.6 7.6 3.3 1.34 0.2 0.0 Nestle SA (NESN VX) 5475 5660 4835 151746 -2.4 4.6 29.2 -0.1 -0.6 8.0 2.99 0.0 0.2 Parmalat SpA (PLT IM) 205 213 173 3552 -1.4 6.5 5.0 0.9 1.2 -12.3 1.09 -3.8 -4.0 Robert Wiseman (RWD LN) 343 527 313 282 -3.5 3.2 -31.0 -1.2 -2.0 -42.4 1.53 0.3 0.2 Saputo (SAP CN) 3958 3985 2749 6114 -0.2 5.5 45.2 2.2 0.2 21.3 3.72 0.3 -0.2 Dairy processing (15) 1907 1957 1488 209336 -2.0 5.1 23.9 0.3 -0.1 3.6 2.54 0.5 0.5

F R U I T D I S T R I B U T I O N Fyffes (FFY ID) 37 47 30 122 5.7 12.1 -19.6 8.2 6.5 -32.8 0.83 -1.0 -1.1 Total Produce (TOT ID) 38 40 32 124 -0.8 -3.9 10.3 1.6 -8.6 -7.8 0.82 1.4 1.3 Chiquita (CQB US) 1402 1830 1118 473 -1.1 21.6 -16.9 1.3 15.6 -30.5 0.89 3.1 2.4 FDP (FDP US) 2495 2508 1925 1113 -1.2 10.2 20.8 1.1 4.7 0.9 0.92 0.9 0.5 Fruit distribution (4) 4457 4531 3724 1831 -0.7 11.9 5.0 1.6 6.4 -12.3 0.90 1.6 1.2

S P E C I A L I T Y B A K I N G ARYZTA (YZA ID) 3499 3500 2582 2898 0.8 7.0 36.2 3.2 1.7 13.8 1.71 3.6 2.3 Canada Bread (CBY CN) 4576 5625 4200 871 -0.4 7.3 -1.2 1.9 2.0 -17.5 N/A N/A N/ACSM NV (CSM NA) 2619 2627 1855 1728 1.7 12.2 42.5 4.1 6.6 19.1 1.64 2.6 2.2 Panera Bread (PNRA US) 10121 10642 6565 2294 -4.8 -2.1 61.8 -2.5 -6.9 35.2 5.18 -0.9 -0.8 Ralcorp Holdings (RAH US) 6501 6929 5435 2667 -2.3 1.8 16.5 0.0 -3.2 -2.7 1.28 3.6 2.7 Speciality baking (6) 5750 5852 4342 10810 -1.4 4.6 33.9 0.9 -0.6 11.9 1.82 2.5 1.8

F O O D M A N U F A C T U R E R S Greencore Group (GNC ID) 127 147 104 262 -2.6 -10.6 -8.6 -0.3 -15.0 -23.6 1.47 2.4 2.4 Associated British Foods (ABF LN) 1181 1182 820 10894 -0.9 8.2 48.3 1.4 2.9 23.9 1.76 0.7 0.7 Cranswick (CWK LN) 860 908 726 476 -0.2 -0.7 13.1 2.2 -5.6 -5.5 1.88 0.7 0.4 Northern Foods (NFDS LN) 63 72 42 343 1.4 1.7 -3.0 3.8 -3.4 -19.0 N/A 2.3 2.0 Premier Foods (PFD LN) 19 37 16 539 -1.1 15.5 -44.3 1.2 9.8 -53.4 0.42 3.6 3.2 UK food manufacturers (5) 1007 1016 740 12262 -0.8 8.0 34.3 1.5 2.6 12.2 1.55 1.3 1.2 ADM (ADM US) 3008 3371 2451 14355 -2.5 0.6 2.8 -0.2 -4.4 -14.1 1.32 1.5 1.1 Conagra Foods (CAG US) 2258 2628 2114 7416 -1.3 2.0 4.8 1.1 -3.1 -12.4 1.97 1.3 1.1 General Mills (GIS US) 3559 3893 3357 16902 -2.5 -2.3 7.5 -0.1 -7.2 -10.1 4.27 1.8 1.6 PZ Cussons (PZC LN) 401 409 235 2002 0.3 1.9 53.2 2.7 -3.2 28.0 2.82 -0.9 -1.1 Tyson Foods (TSN US) 1722 2040 1247 4852 -3.4 5.5 50.1 -1.2 0.3 25.5 1.26 0.8 0.7 Unilever NV (UNIA NA) 2330 2402 2094 79906 -1.7 7.2 2.4 0.7 1.9 -14.4 4.69 0.8 0.6 Food manufacturers (12) 1286 1326 1162 137958 -1.8 4.9 7.1 0.5 -0.4 -10.5 2.86 1.1 1.1

A G R I B U S I N E S S A N D P R I M A R Y P R O D U C E R S Origin Enterprises (OGN ID) 320 340 210 426 1.9 -4.5 50.2 4.3 -9.2 25.6 2.34 1.5 1.3 Austevoll (AUSS NO) 4960 4960 3130 1291 6.0 16.0 46.4 8.5 10.2 22.3 1.56 1.4 0.9 Carrs Milling (CRM LN) 632 653 425 64 -0.9 -2.4 54.3 1.5 -7.2 28.9 1.60 1.2 1.3 K+S (SDF GY) 5636 5665 3594 10787 -0.2 9.6 40.9 2.2 4.2 17.8 4.73 0.4 0.1 Nutreco (NUO NA) 5679 5910 3799 1994 -0.9 5.0 44.6 1.5 -0.3 20.8 2.51 0.7 0.3 Agribusiness (9) 2692 2719 2007 35511 -0.5 5.1 22.5 1.8 -0.2 2.4 3.46 0.8 0.4

S W E E T E N E R S Associated British Foods (ABF LN) 1181 1182 820 10894 -0.9 8.2 48.3 1.4 2.9 23.9 1.76 0.7 0.7 ADM (ADM US) 3008 3371 2451 14355 -2.5 0.6 2.8 -0.2 -4.4 -14.1 1.32 1.5 1.1 Agrana Beteiligungs (AGR AV) 7809 7850 5688 1109 1.1 9.0 23.9 3.5 3.6 3.6 1.21 1.6 1.3 Corn Products (CPO US) 4600 4727 2661 2598 -4.1 3.5 68.4 -1.8 -1.7 40.7 1.88 2.9 1.7 Illovo Sugar (ILV SJ) 2760 3371 2435 1434 -2.2 11.5 3.0 0.1 6.0 -13.9 2.28 0.6 0.6 Südzucker (SZU GY) 1993 2039 1394 3773 -1.4 21.0 37.0 0.9 15.0 14.5 1.24 1.2 1.1 Tate & Lyle (TATE LN) 518 545 389 2813 0.3 -1.2 23.6 2.7 -6.2 3.3 2.76 1.6 1.0 Tongaat Hulett (TON SJ) 10850 10950 9500 1286 0.2 6.7 30.4 2.6 1.4 9.0 2.07 1.3 0.8 Sweeteners (8) 1966 2007 1578 38262 -1.6 5.4 22.8 0.7 0.1 2.6 1.55 1.3 1.0 FTSE E300 Food Producers (E3FOOD) 1652 1696 1325 -2.3 5.2 19.7

32 Davy Research

Research Report: Davy on 2011 January 4, 2011 V A L U A T I O N EPS (c) EPS Gth % Div Yield % Div Cover EV/EBITDA P/E 2010 2011 2012 10-12 2010 2011 2010 2010 2011 2012 2010 2011 2012

I N G R E D I E N T S Kerry Group (KYG ID) 191 207 218 14.2 1.1 1.2 6.9 9.5 8.5 7.9 13.1 12.1 11.4 Danisco (DCO DC) 2925 3174 3559 21.7 1.8 2.0 3.2 9.4 8.7 7.7 17.4 16.1 14.3 Givaudan (GIVN VX) 5919 6541 7152 20.8 2.2 2.7 2.6 11.0 10.3 9.4 17.0 15.4 14.1 IFF (IFF US) 343 384 412 20.1 1.9 2.1 3.3 10.2 9.2 8.2 16.2 14.5 13.5 McCormick (MKC US) 261 280 305 17.1 2.2 2.4 2.5 11.5 10.7 10.0 17.9 16.6 15.3 Sensient Tech (SXT US) 215 235 259 20.2 2.2 2.3 2.7 10.1 9.1 8.5 17.1 15.6 14.2 Ingredients (7) 2.0 2.3 3.1 10.2 9.4 8.6 16.2 14.7 13.6

D A I R Y P R O C E S S I N G Donegal Creameries (DCP ID) 66 69 70 5.7 4.0 4.0 4.1 6.3 5.9 5.6 6.0 5.8 5.7 Glanbia (GLB ID) 37 39 41 10.4 1.9 2.0 5.3 8.0 7.2 6.7 9.9 9.4 9.0 Dairy Crest (DCG LN) 46 48 50 8.8 4.6 4.8 2.3 6.2 5.9 5.8 9.3 8.8 8.5 Danone (BN FP) 273 307 339 24.1 2.7 3.0 2.2 11.6 10.5 9.4 17.2 15.3 13.9 Dean Foods (DF US) 80 84 96 20.0 0.0 0.0 N/A 7.6 7.0 6.7 11.1 10.5 9.2 Koninklijke DSM (DSM NA) 328 340 377 14.9 3.1 3.3 2.5 7.9 7.7 7.0 13.0 12.5 11.3 Nestle SA (NESN VX) 324 349 392 21.0 3.2 3.5 1.9 10.8 10.5 9.8 16.9 15.7 14.0 Parmalat SpA (PLT IM) 11 11 12 14.3 2.4 2.4 2.1 5.7 5.3 4.8 19.5 19.5 17.1 Robert Wiseman (RWD LN) 37 30 34 -7.1 5.3 5.3 2.0 4.1 4.5 4.1 9.4 11.5 10.1 Saputo (SAP CN) 225 241 285 26.9 1.6 0.0 3.5 10.6 9.6 9.3 17.6 16.5 13.9 Dairy processing (15) 3.0 3.4 2.0 10.4 9.9 9.2 16.5 15.3 13.7

F R U I T D I S T R I B U T I O N Fyffes (FFY ID) 4 5 5 18.4 4.5 4.5 2.5 2.7 2.3 2.0 9.0 7.9 7.6 Total Produce (TOT ID) 6 7 7 16.8 4.5 4.5 3.8 4.2 4.0 3.7 5.9 5.3 5.0 Chiquita (CQB US) 107 173 175 64.3 0.0 0.0 N/A 7.1 5.6 5.1 13.2 8.1 8.0 FDP (FDP US) 178 215 250 40.4 0.0 0.0 N/A 8.0 6.7 5.3 14.0 11.6 10.0 Fruit distribution (4) 4.5 4.5 13.6 6.8 5.7 4.9 12.2 9.5 8.7

S P E C I A L I T Y B A K I N G ARYZTA (YZA ID) 244 301 314 28.8 1.1 0.9 6.6 11.4 9.2 8.3 14.3 11.6 11.1 Canada Bread (CBY CN) 315 335 366 16.2 0.5 0.0 13.1 6.9 6.3 5.8 14.5 13.7 12.5 CSM NV (CSM NA) 182 190 206 12.8 3.4 3.5 2.1 9.2 8.3 7.6 14.4 13.8 12.7 Panera Bread (PNRA US) 358 435 500 39.7 0.0 0.0 N/A 11.4 9.9 8.5 28.3 23.3 20.2 Ralcorp Holdings (RAH US) 468 543 587 25.4 0.0 0.0 N/A 8.9 6.9 6.5 13.9 12.0 11.1 Speciality baking (6) 1.7 1.9 7.1 10.0 8.0 7.2 16.3 14.0 12.9

F O O D M A N U F A C T U R E R S Greencore Group (GNC ID) 17 17 17 4.0 5.9 5.9 2.2 5.8 5.8 5.6 7.6 7.6 7.3 Associated British Foods (ABF LN) 72 77 82 12.9 2.0 2.2 3.0 8.5 8.2 7.7 16.4 15.4 14.5 Cranswick (CWK LN) 73 79 85 16.0 3.2 3.5 2.6 7.2 6.6 5.9 11.8 10.9 10.2 Northern Foods (NFDS LN) 6 7 8 30.9 7.2 7.2 1.3 5.6 5.1 4.8 10.5 9.0 8.0 Premier Foods (PFD LN) 5 5 6 27.5 0.0 0.0 N/A 4.9 4.4 4.1 4.2 3.7 3.3 UK food manufacturers (5) 2.2 2.4 3.4 7.3 7.0 6.6 14.1 13.0 12.1 ADM (ADM US) 300 293 323 7.5 2.0 2.0 5.0 7.2 6.5 6.1 10.0 10.3 9.3 Conagra Foods (CAG US) 175 192 213 21.2 3.8 4.3 2.0 7.3 6.8 6.3 12.9 11.8 10.6 General Mills (GIS US) 248 269 291 17.3 3.1 3.4 2.2 9.0 8.3 7.6 14.4 13.3 12.2 PZ Cussons (PZC LN) 17 20 19 9.1 1.6 1.8 2.6 11.9 10.2 9.1 23.6 20.5 21.6 Tyson Foods (TSN US) 219 184 205 -6.4 0.9 0.9 13.7 3.9 4.2 3.8 7.9 9.4 8.4 Unilever NV (UNIA NA) 151 161 176 16.9 3.5 3.7 1.8 11.5 10.5 9.5 15.5 14.4 13.2 Food manufacturers (12) 3.1 3.1 2.3 9.1 9.1 8.4 13.9 13.9 13.2

A G R I B U S I N E S S A N D P R I M A R Y P R O D U C E R S Origin Enterprises (OGN ID) 37 37 37 -0.5 2.6 2.7 4.6 6.0 6.8 6.6 8.6 8.8 8.6 Austevoll (AUSS NO) 488 625 472 -3.3 3.1 4.0 3.1 5.2 4.3 4.8 10.2 7.9 10.5 Carrs Milling (CRM LN) 65 72 77 17.9 3.8 4.0 2.7 5.3 5.2 4.6 9.7 8.8 8.3 K+S (SDF GY) 210 334 390 85.9 1.6 2.5 2.3 12.2 9.1 7.9 26.9 16.9 14.5 Nutreco (NUO NA) 409 433 485 18.6 2.9 3.2 2.5 7.9 7.1 6.4 13.9 13.1 11.7 Agribusiness (9) 2.1 2.6 2.5 10.9 9.1 8.3 19.3 15.5 14.0

S W E E T E N E R S Associated British Foods (ABF LN) 72 77 82 12.9 2.0 2.2 3.0 8.5 8.2 7.7 16.4 15.4 14.5 ADM (ADM US) 300 293 323 7.5 2.0 2.0 5.0 7.2 6.5 6.1 10.0 10.3 9.3 Agrana Beteiligungs (AGR AV) 476 576 658 38.2 2.5 2.5 2.4 7.4 6.9 6.1 16.4 13.5 11.9 Corn Products (CPO US) 291 369 389 33.5 1.2 1.3 5.2 9.7 6.4 5.6 15.8 12.5 11.8 Illovo Sugar (ILV SJ) 101 157 205 103.5 2.4 3.1 1.5 8.8 7.1 6.2 27.4 17.6 13.5 Südzucker (SZU GY) 121 125 132 9.2 2.4 2.6 2.5 7.8 7.7 7.5 16.5 16.0 15.1 Tate & Lyle (TATE LN) 42 46 50 16.7 4.5 4.5 1.8 7.4 6.7 6.3 12.2 11.2 10.4 Tongaat Hulett (TON SJ) 647 771 982 51.9 3.0 3.6 2.0 7.4 6.5 5.4 16.8 14.1 11.0 Sweeteners (8) 2.2 2.4 3.4 7.5 6.8 6.3 13.1 12.5 11.4

31 Davy Research

Research Report: Davy on 2011 January 4, 2011 Beverage S H A R E P R I C E A N D P E R F O R M A N C E Price 12 Month Mkt. Cap Change % (€) Rel to E300 sector % Pr/Bk Debt/EBITDA Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2010 2011

C&C (GCC ID) 338 360 266 1136 1.0 8.6 12.4 3.7 4.0 -5.7 1.86 -0.1 -0.7 Global Sector Anheuser-Busch InBev (ABI BB) 4280 4585 3399 68686 -2.2 2.1 17.6 0.4 -2.2 -1.3 2.63 3.0 2.3 Carlsberg (CARLB DC) 55850 60750 36700 11429 -1.7 3.0 45.2 0.9 -1.3 21.9 1.41 2.2 1.7 Constellation Brands (STZ US) 2215 2234 1483 8213 -2.7 4.3 48.8 -0.2 -0.1 24.8 1.79 4.0 3.5 Davide Campari (CPR IM) 487 499 352 2828 -1.3 5.8 33.5 1.3 1.4 12.1 2.44 2.3 1.6 Diageo (DGE LN) 1185 1215 1000 34552 -3.5 0.7 12.8 -0.9 -3.5 -5.3 5.85 2.1 1.8 Heineken (HEIA NA) 3669 3855 3290 21134 -1.5 2.8 10.3 1.1 -1.5 -7.4 1.86 2.4 2.0 Molson Coors Brewing (TAP US) 5019 5093 3890 6767 -3.5 2.2 18.9 -0.9 -2.1 -0.2 1.28 0.5 0.1 Pernod Ricard (RI FP) 7036 7207 5533 18593 -2.1 12.1 17.4 0.5 7.4 -1.4 2.02 4.7 4.0 Remy Cointreau (RCO FP) 5295 5390 3396 2569 -1.0 4.9 48.7 1.7 0.5 24.8 2.44 2.5 2.1 SABMiller (SAB LN) 2257 2306 1650 41688 -2.7 7.9 27.6 -0.1 3.4 7.1 2.61 1.6 1.2 Beverage (10) 5349 5482 4199 215025 -2.4 4.0 20.3 0.2 -0.3 0.9 2.43 2.6 2.1 Britvic plc (BVIC LN) 473 518 398 1323 -3.0 -5.9 19.7 -0.5 -9.8 0.5 N/A 2.5 2.1 FTSE E300 Beverages (E3BEVG) 1996 2048 1580 -2.6 4.4 19.2


C&C (GCC ID) 26 31 33 28.4 2.4 2.8 3.2 8.7 7.5 6.5 13.0 11.1 10.2 Global Sector Anheuser-Busch InBev (ABI BB) 241 286 324 34.5 1.1 1.4 5.3 9.6 8.3 7.5 17.8 15.0 13.2 Carlsberg (CARLB DC) 3623 4193 4705 29.9 1.0 1.1 6.7 8.6 7.7 6.9 15.4 13.3 11.9 Constellation Brands (STZ US) 175 192 213 21.8 0.0 0.0 N/A 16.4 15.1 14.1 12.7 11.5 10.4 Davide Campari (CPR IM) 27 31 34 24.6 1.3 1.4 4.4 11.9 10.4 9.4 17.9 15.7 14.3 Diageo (DGE LN) 79 86 95 19.2 3.4 3.6 2.0 10.6 9.9 9.1 14.9 13.7 12.5 Heineken (HEIA NA) 239 272 303 26.5 2.0 2.3 3.3 7.8 7.1 6.3 15.3 13.5 12.1 Molson Coors Brewing (TAP US) 360 387 417 16.0 2.2 2.4 3.3 9.1 7.8 7.2 14.0 13.0 12.0 Pernod Ricard (RI FP) 423 471 534 26.1 2.1 2.3 2.8 13.7 12.5 11.2 16.6 14.9 13.2 Remy Cointreau (RCO FP) 229 263 297 29.7 2.5 2.6 1.7 16.2 14.1 12.6 23.1 20.1 17.8 SABMiller (SAB LN) 119 136 152 27.6 2.2 2.5 2.4 13.5 11.9 10.8 18.9 16.6 14.8 Beverage (10) 1.9 2.2 3.3 10.6 9.4 8.5 16.5 14.5 13.0 Britvic plc (BVIC LN) 35 40 46 31.5 3.7 4.2 2.0 8.8 7.5 6.5 13.6 11.8 10.3

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34 Davy Research

Pharmaceuticals and healthcare Sector performance in 2010

• It was a lacklustre year for broader pharma and healthcare indices. Absolute performance was flat to moderately positive; relative outperformance, in the case of European and US healthcare, was modest.

• In the US, the biotech sector outperformed its pharma counterpart. • The performance of the larger Irish companies in 2010 broadly

mirrored that of the main US and European sectors. Smaller caps were driven by specific product or earnings performance.

Table 10: 2010 performance

Stock/Sector Price 12-month high 12-month low % chg 2010

Elan ($) 5.73 8.24 4.25 -6.0

United Drug (c) 210 285 195 -1.4

ICON ($) 21.90 30..31 18.93 7.8

Trinity Biotech ($) 8.81 8.93 3.76 132.7

Amarin Corporation ($) 8.20 8.49 0.93 513.6

AGI (c) 3 9 3 -65.3

E300 Healthcare 1317.4 1348.2 1172.5 6.3

SPX Healthcare 364.8 382.5 324.1 0.7

Source: Davy

Key themes for 2011 Top-line growth to remain elusive

• The traditional pharma industry continues to face a 'wall of worry' regarding patent expiries. It is estimated that less than half of the patent cliff has been experienced to date; IMS estimates that c.25% of the US market ($70-80bn) faces generic competition in 2011-2015.

• R&D productivity still lags this anticipated revenue decline. Austerity measures will also ensure that price inflation in the Western world, especially Europe, is muted.

• It remains too early to assume that the patent cliff has been fully factored into sector earnings. Genericisation in 2009/2010 has in some cases been more rapid and aggressive than expected.

Cost pressures to highlight outsourcing, strong balance sheets

• Scarce revenue growth at industry level will continue to support the more strategic outsourcing that has begun in the CRO and manufacturing/supply chain segments.

• A valuation premium will continue to be placed on strong balance sheets and organic cash flow generation

• The M&A activity witnessed in 2009/2010, also an attempt to meet this revenue shortfall, could continue into 2011.

Jack Gorman [email protected] Aiden O'Donnell [email protected]

Key themes for 2011 • Top-line growth to remain elusive

• Cost pressures to highlight outsourcing, strong balance sheets

• More encouraging regulatory messages

• The known unknowns

• A valuation premium will continue to be placed on strong balance sheets and organic cash flow generation


35 Davy Research

More encouraging regulatory messages

• Introduced in the US in 2008, REMS (risk evaluation and mitigation strategies) is becoming more standard in FDA drug approvals. Used to restrict the patient population that can access the product, a REMS approach provides the FDA with another tool to approve drugs whilst safeguarding against patient risk. This could become even more prevalent in products with high risk/high benefit profiles (e.g. Multiple Sclerosis, Alzheimer's Disease (AD)).

• Moreover, some of big pharma's spending power is being refocused on personalised, precision medicine and orphan drug innovation. These are smaller opportunities, but there are many of them. An upturn in related product approval may also emerge here in the future.

The known unknowns

• The events from left-field can often have the greatest impact on sector trends. As such, we will watch for other catalysts such as emerging market growth, R&D breakthroughs, biosimilars, shareholder activism and the pharma/food interface.


Elan – Tysabri to remain the key driver of sentiment

• Tysabri's longer-term potential should become more visible in 2011. The rollout of the JC-virus assay will help the market to better understand the risk/benefit profile; we will also have a clear view on the impact (if any) of oral competition. Current valuations assume a bearish outlook for the product, which looks harsh to us.

• The strengthened balance sheet and the prospect of AD pipeline news in 2011/2012 mark Elan out as having significant upside potential.

United Drug – returning to more robust earnings growth

• United Drug should build on the robust financial performance it demonstrated in 2010. We expect its less directly regulated activities ex-Ireland to grow solidly, and market leadership will allow it to endure regulatory and economic pressures in Irish wholesaling.

• Supplemented by M&A, the prospect of mid- to high-single-digit earnings growth is possible in 2011/2012. This is also supported by consistently strong returns on capital.

• REMS is becoming more standard in FDA drug approvals, providing the agency with another tool to approve drugs whilst safeguarding against patient risk

• Tysabri's longer-term potential should become more visible in 2011

• United Drug should build on the robust financial performance it demonstrated in 2010

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ICON – some issues to resolve for it and the sector

• The burning issue for the CRO sector is whether it can manage increased upfront costs of strategic relationships alongside the choppiness of slower backlog conversion. Specifically for ICON, the market will also seek effective resolution of the central labs problem – anticipated to reach breakeven by the end of Q2 2011.

• ICON's absolute and relative rating mark this out as an attractive entry point. We firmly believe ICON will be one of a handful of global CROs that will secure strategic partnerships with the pharma/healthcare industry. Managing the margin in the near term will shape how the stock performs in 2011.

Small caps

• Pipeline developments will drive small-cap sentiment. The launch of the PDX instrument is a key catalyst for Trinity Biotech, with the net cash position and the potential for a share buyback offering support in the interim. Amarin, after the recent announcement of strong top-line data for AMR101, looks set for a NDA submission in 2011 and prospective partnering activity.

• The burning issue for the CRO sector is whether it can manage increased upfront costs of strategic relationships alongside the choppiness of slower backlog conversion

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Research Report: Davy on 2011 January 4, 2011 S H A R E P R I C E A N D P E R F O R M A N C E Price 12 Month Mkt. Cap Change % (€) Rel to S&P 500 sector % Pr/Bk Debt/EBITDA Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2010 2011

U S B I O T E C H Elan Corp (USc) (ELN US) 573 818 433 2504 -7.1 7.9 -6.0 -4.5 7.2 -11.6 14.17 6.6 4.4 Amgen (AMGN US) 5490 6114 5036 38744 -5.2 1.1 3.8 -2.6 0.4 -2.3 2.28 -0.4 0.0 Biogen Idec (BIIB US) 6705 6822 4622 11935 -2.3 1.7 34.1 0.4 1.0 26.1 3.10 0.2 -0.0 Genzyme (GENZ US) 7120 7291 4716 13774 -2.0 -3.0 55.4 0.7 -3.7 46.2 2.71 -0.5 -1.2 Gilead Sciences (GILD US) 3624 4945 3183 21976 -2.1 -3.7 -10.4 0.6 -4.3 -15.7 4.86 -0.2 -0.3 US biotech (5) 2717 2945 2453 88933 -3.6 -0.5 7.8 -1.0 -1.2 1.4 2.91 -0.2 -0.1

U S L A R G E C A P Bristol Myers Squibb (BMY US) 2648 2793 2244 33855 -1.4 1.8 12.2 1.3 1.1 5.5 N/A N/A N/ALilly (Eli) (LLY US) 3504 3806 3225 30181 -2.6 1.0 5.0 0.1 0.3 -1.3 3.27 0.0 -0.3 Johnson & Johnson (JNJ US) 6185 6603 5702 126872 -2.7 -2.5 2.7 0.0 -3.2 -3.4 3.22 -0.5 -1.0 Merck & Co. (MRK US) 3604 4103 3182 82936 -2.7 1.4 5.5 0.0 0.7 -0.8 1.95 0.3 0.0 Pfizer (PFE US) 1751 2000 1414 104761 -2.6 4.3 3.0 0.1 3.6 -3.1 1.55 0.6 0.2 US large cap (6) 553 584 533 433924 -2.5 0.7 3.0 0.2 0.0 -3.1 2.35 0.3 -0.1

E U R O P E A N P H A R M A AstraZeneca (AZN LN) 2922 3385 2732 48022 -3.2 -5.2 3.6 -0.5 -5.8 -2.5 2.76 -0.1 -0.3 GlaxoSmithKline (GSK LN) 1240 1319 1095 75058 -3.9 -0.5 -3.0 -1.2 -1.2 -8.8 6.03 0.9 0.6 Merck KGAA (MRK GF) 6026 7231 5730 13100 -0.2 -0.1 -6.9 2.5 -0.8 -12.4 1.32 2.3 1.6 Novartis (NOVN VX) 5495 6025 5055 115934 -1.8 7.6 15.2 0.9 6.9 8.4 2.05 1.2 0.7 Roche (Sws) (ROG VX) 13700 18600 13020 112800 -0.5 3.6 -7.7 2.2 2.9 -13.2 10.22 1.1 0.7 Sanofi-Aventis (SAN FP) 4785 5769 4457 62730 -2.5 2.7 -13.1 0.2 2.0 -18.3 1.21 0.1 -0.2 Shire Pharma (SHP LN) 1543 1567 1220 10107 -0.4 -0.2 31.6 2.4 -0.8 23.8 6.17 0.4 -0.3 European pharma (13) 917 937 813 543040 -2.0 2.8 3.9 0.7 2.2 -2.2 2.87 0.8 0.4

S M A L L C A P S P E C I A L I T Y P H A R M A AGI Therapeutics (USc) (AGI ID) 4 13 3 2 -13.3 -0.1 -65.3 -10.9 -0.8 -67.4 0.29 N/A N/AProstrakan (PSK LN) 104 115 45 244 13.8 21.3 23.5 17.0 20.5 16.2 N/A 15.2 1.3 Salix Pharmaceuticals (SLXP US) 4696 4815 2425 2032 -3.0 2.0 97.9 -0.4 1.3 86.1 7.88 -3.7 -2.0 Vectura Group (VEC LN) 70 76 33 266 0.8 -1.0 -4.3 3.6 -1.7 -10.0 1.70 N/A N/ASmall cap speciality pharma (13) 661 676 461 3881 -1.6 1.1 33.5 1.1 0.4 25.5 5.08 6.8 -5.8

S U P P L Y C H A I N A N D D I S T R I B U T I O N United Drug (UDG ID) 210 277 197 504 0.0 1.5 -1.4 2.8 0.8 -7.3 1.36 1.3 0.9 Arseus (RCUS BB) 1138 1140 815 355 1.6 15.0 41.4 4.4 14.2 33.0 1.72 2.4 2.4 Celesio (CLS1 GY) 1860 2550 1596 3164 0.5 2.8 5.1 3.3 2.1 -1.2 1.27 2.9 2.6 Mediq (MEDIQ NA) 1400 1641 1225 835 -0.1 7.7 8.6 2.7 7.0 2.2 1.68 1.5 1.1 Oriola (OKDBV FH) 319 546 313 483 -1.5 -19.7 -27.5 1.2 -20.2 -31.8 1.42 1.0 0.4 Pharma wholesaling (8) 1271 1529 1150 5702 0.3 1.6 4.9 3.0 1.0 -1.4 1.33 2.7 2.3 Capita Group (CPI LN) 697 826 636 4972 -3.2 3.9 -4.3 -0.6 3.2 -10.0 7.97 1.6 1.2 Supply chain services (4) 646 669 508 19944 -3.4 4.6 22.7 -0.8 3.9 15.4 4.79 0.9 0.5 Owens & Minor (OMI UN) 2943 3260 2602 1392 -3.3 1.1 10.0 -0.6 0.4 3.5 2.26 0.2 0.1 Thermo Fisher (TMO UN) 5536 5594 4212 16436 -2.8 5.6 24.2 -0.1 4.9 16.8 1.47 0.4 0.0 Medical & scientific (5) 3007 3258 2531 30837 -3.1 2.9 18.5 -0.5 2.2 11.4 2.13 0.1 -0.1 Amedisys (AMED UW) 3350 6311 2312 726 -0.7 14.5 -26.2 2.1 13.7 -30.6 1.16 0.2 -0.1 Contract sales/mkting (5) 958 1216 716 1657 -2.5 12.0 5.4 0.2 11.2 -0.9 1.15 0.9 0.2

C R O ICON (USc) (ICLR US) 2190 2999 1922 965 -1.8 5.7 7.8 0.9 5.0 1.4 1.97 -2.0 -2.3 Charles River Labs (CRL US) 3554 4156 2825 1532 -2.5 5.6 12.9 0.2 4.9 6.2 1.70 2.3 2.3 Covance (CVD US) 5141 6325 3793 2490 -2.5 11.0 0.8 0.2 10.3 -5.2 2.28 -1.1 -1.1 Kendle (KNDL US) 1089 2153 783 121 -3.2 17.2 -36.4 -0.5 16.5 -40.2 0.70 3.2 2.4 Parexel (PRXL US) 2123 2516 1485 922 -5.8 17.0 61.1 -3.2 16.2 51.5 2.84 0.7 0.3 PPD (PPDI US) 2714 2782 2091 2409 -3.9 5.6 23.9 -1.3 4.9 16.5 2.57 -2.1 -2.2 CRO (6) 1913 2234 1661 8441 -3.2 8.5 13.5 -0.5 7.8 6.7 2.15 -0.3 -0.5

D I A G N O S T I C S Trinity Biotech (USc) (TRIB US) 881 890 384 135 -2.4 6.3 132.7 0.3 5.6 118.9 1.44 -3.2 -4.6 Orasure (OSUR US) 575 677 325 199 -3.9 6.2 21.1 -1.2 5.5 13.9 2.60 N/A N/ASmall cap diagnostics (10) 1936 1990 1532 8419 -2.6 17.4 7.9 0.1 16.6 1.5 2.91 0.7 0.4 S&P 500 Pharma & Biotech (S5PHRM) 338 357 302 -2.7 0.7 6.3

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Research Report: Davy on 2011 January 4, 2011 V A L U A T I O N EPS (c) EPS Gth % EV/Sales EV/EBITDA P/E 2010 2011 2012 10-12 2010 2011 2012 2010 2011 2012 2010 2011 2012

U S B I O T E C H Elan Corp (USc) (ELN US) -11 -14 2 N/A 3.4 3.0 2.7 31.1 21.8 18.0 N/A N/A N/A Amgen (AMGN US) 511 530 574 12.3 3.2 3.4 3.0 6.9 7.3 6.4 10.7 10.4 9.6 Biogen Idec (BIIB US) 496 565 593 19.5 3.5 3.4 3.2 7.9 7.5 7.9 13.5 11.9 11.3 Genzyme (GENZ US) 187 410 516 176.7 4.1 3.3 2.6 14.8 12.7 7.9 38.2 17.4 13.8 Gilead Sciences (GILD US) 367 406 450 22.6 3.6 3.3 3.1 6.3 6.0 5.8 9.9 8.9 8.1 US biotech (5) 3.5 3.4 3.0 7.7 7.6 6.8 12.7 11.2 10.1

U S L A R G E C A P Bristol Myers Squibb (BMY US) 215 225 200 -6.9 2.3 2.2 2.3 6.5 6.1 7.3 12.3 11.7 13.2 Lilly (Eli) (LLY US) 485 454 417 -13.9 1.8 1.7 1.7 5.1 5.2 5.6 7.2 7.7 8.4 Johnson & Johnson (JNJ US) 493 526 569 15.4 2.6 2.3 2.1 8.0 7.0 6.2 12.5 11.8 10.9 Merck & Co. (MRK US) 343 389 402 17.4 2.6 2.5 2.4 5.9 6.1 5.8 10.5 9.3 9.0 Pfizer (PFE US) 221 231 229 3.6 2.4 2.2 2.2 4.9 4.5 4.6 7.9 7.6 7.6 US large cap (6) 2.4 2.2 2.1 6.2 5.8 5.6 10.1 9.5 9.3

E U R O P E A N P H A R M A AstraZeneca (AZN LN) 425 419 395 -7.1 1.9 1.8 1.8 4.6 4.1 4.2 6.9 7.0 7.4 GlaxoSmithKline (GSK LN) 95 120 128 35.3 2.6 2.5 2.3 7.9 6.6 5.9 13.1 10.3 9.7 Merck KGAA (MRK GF) 635 704 734 15.6 2.0 1.7 1.5 8.0 6.5 5.9 9.5 8.6 8.2 Novartis (NOVN VX) 499 524 539 8.0 3.4 2.9 2.7 10.5 9.3 8.9 11.0 10.5 10.2 Roche (Sws) (ROG VX) 1303 1435 1575 20.9 3.3 3.2 2.9 8.6 7.8 7.0 10.5 9.5 8.7 Sanofi-Aventis (SAN FP) 689 665 608 -11.7 2.1 2.0 1.9 5.2 5.0 5.0 6.9 7.2 7.9 Shire Pharma (SHP LN) 90 102 117 29.0 4.0 3.4 3.0 11.8 9.6 8.2 17.1 15.1 13.2 European pharma (13) 2.7 2.5 2.3 8.0 7.2 6.7 10.7 10.0 9.7

S M A L L C A P S P E C I A L I T Y P H A R M A AGI Therapeutics (USc) (AGI ID) -7 -8 -8 N/A N/A N/A N/A 1.4 0.2 N/A N/A N/A N/A Prostrakan (PSK LN) -3 2 5 N/A 2.4 1.9 1.6 N/A 19.6 6.5 N/A 46.0 19.8 Salix Pharmaceuticals (SLXP US) -8 150 294 N/A 7.7 4.4 2.8 65.2 16.0 7.4 N/A 31.3 16.0 Vectura Group (VEC LN) -3 -4 -5 N/A 4.0 4.6 4.8 N/A N/A N/A N/A N/A N/A Small cap speciality pharma (13) 5.1 3.7 2.8 N/A 41.0 8.1 N/A 29.5 15.2

S U P P L Y C H A I N A N D D I S T R I B U T I O N United Drug (UDG ID) 23 23 24 7.3 0.3 0.3 0.3 6.8 6.2 5.7 9.2 9.1 8.6 Arseus (RCUS BB) 97 114 126 29.8 1.1 1.1 1.0 9.5 8.6 7.8 11.7 10.0 9.0 Celesio (CLS1 GY) 153 165 186 21.5 0.2 0.2 0.2 7.6 7.1 6.6 12.2 11.3 10.0 Mediq (MEDIQ NA) 144 150 161 11.6 0.4 0.4 0.3 7.4 6.7 6.0 9.7 9.4 8.7 Oriola (OKDBV FH) 10 25 32 214.7 0.3 0.2 0.2 13.1 7.1 5.8 31.4 12.8 10.0 Pharma wholesaling (8) 0.2 0.2 0.2 8.0 7.3 6.7 12.3 10.9 9.7 Capita Group (CPI LN) 43 47 52 18.7 1.8 1.7 1.4 11.0 9.9 8.8 16.0 14.7 13.5 Supply chain services (4) 1.3 1.1 1.0 10.6 9.2 8.0 17.3 15.8 13.9 Owens & Minor (OMI UN) 192 205 223 15.9 0.2 0.2 0.2 8.0 7.4 6.6 15.3 14.4 13.2 Thermo Fisher (TMO UN) 364 415 403 10.7 2.1 1.9 1.7 10.6 9.1 7.7 15.2 13.3 13.7 Medical & scientific (5) 1.8 1.6 1.5 11.5 9.9 8.6 17.9 15.7 15.1 Amedisys (AMED UW) 424 338 344 -18.9 0.6 0.6 0.5 4.2 4.7 4.1 7.9 9.9 9.7 Contract sales/mkting (5) 0.6 0.5 0.5 5.7 4.9 4.5 10.8 12.2 11.0

C R O ICON (USc) (ICLR US) 145 133 158 9.6 1.2 1.0 0.9 8.3 7.3 5.8 15.1 16.4 13.8 Charles River Labs (CRL US) 188 231 265 41.0 2.3 2.3 2.2 10.5 10.0 9.2 18.9 15.4 13.4 Covance (CVD US) 212 281 332 56.6 1.6 1.5 1.3 10.6 8.9 7.4 24.3 18.3 15.5 Kendle (KNDL US) 42 65 59 40.5 0.8 0.7 0.7 8.4 6.8 6.0 25.9 16.8 18.5 Parexel (PRXL US) 108 127 156 44.0 1.2 1.0 0.8 8.3 6.9 5.4 19.7 16.7 13.7 PPD (PPDI US) 104 148 170 63.0 2.0 1.7 1.4 10.9 7.8 6.5 26.1 18.3 16.0 CRO (6) 1.7 1.5 1.3 10.0 8.3 7.0 21.6 17.3 14.8

D I A G N O S T I C S Trinity Biotech (USc) (TRIB US) 62 64 70 13.7 1.4 1.3 1.0 7.1 5.9 4.3 14.2 13.7 12.5 Orasure (OSUR US) -5 -4 9 N/A 3.6 3.3 2.9 N/A N/A N/A N/A N/A 63.9 Small cap diagnostics (10) 2.0 1.8 1.7 8.9 8.0 7.2 19.0 17.2 15.6

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Airlines and other transport Sector performance in 2010

• Airline stocks, largely regarded as early cyclical recovery plays, outperformed in 2010. All airlines under our coverage universe performed above the FTSE E300 benchmark index. Indeed, the FTSE 300 travel and leisure index was one of the best-performing sectors with airlines outperforming within this sub-sector.

• The Davy global index of low-cost carriers (LCCs) was up 20.4%, and the Davy index of European network airlines was up 31.5%. This compared with a 7.3% rise in the FTSE E300 index.

• The network airlines are now trading at their book value against the LCC index at 1.7x book.

Key themes for 2011

Long-haul capacity is accelerating

• One area of caution required when looking at global airlines is the level of capacity growth. Although markets are still in recovery mode and demand can improve – with traffic usually driven by some multiplier of GDP +/- 2x – the prospect of long-haul capacity showing double-digit growth this winter certainly looks ambitious. Short-haul market growth in low-single-digits appears to be a lower-risk bet.

• The Middle Eastern airlines continue to add double-digit capacity, with the majority of passengers connecting to longer-haul destinations. In the North Atlantic, despite recent joint ventures, there appears to be strong competition between alliances and significant expansion from North American airlines. Europe-Far East, as expected, is recording significant double-digit growth. As already indicated, growth rates within Europe look low with Ryanair and easyJet pulling capacity from their main UK bases.

Operating leverage works in both directions; some uncontrollable costs rising

• Last year we argued that, for the stronger airlines, 2011 is nearing mid-cycle when some of the effects of the cost restructuring programmes and revenue recovery will start to flow through.

• However, some uncontrollable costs – notably the €/£ cost of fuel – are rising.

• In addition, other parties in the value chain (notably governments) are raising taxes (APD increases in the UK and Germany, albeit offset by a reduction in Ireland, and the likely introduction of an EU emissions tax scheme for all airlines operating in/out of Europe in 2012).

• Charges at regulated airports and route charges are increasing. • In the absence of further revenue recovery, the sharp improvement in

earnings may slow and the comparables may become more difficult.

• All airline stocks outperformed the overall market in 2010

Stephen Furlong [email protected] Joshua Goldman [email protected]

Key themes for 2011 • Long-haul capacity is accelerating

• Operating leverage works in both directions; some uncontrollable costs rising

• Consolidation is continuing


40 Davy Research

• The focus on capital expenditure reductions through deferral and capacity and cost reductions has plugged the negative free cash flow positions of the airlines. The downturn has led the airlines to restructure their costs.

• Further cost reduction will be largely through capacity growth and operating leverage. Reinvestment in fleets, notably on long haul, will resume.

Consolidation is continuing

• Downward pressure on revenues has, in our view, led to quicker consolidation in the marketplace towards the stronger players. Long haul is now largely serviced through the global alliances, and we expect M&A to continue in 2011.


LCCs remain our preferred plays

• Given their structural advantage in the marketplace, the slowing of capacity growth, their focus on returns with very young aircraft fleets and their track record, we continue to favour the LCCs (Ryanair and easyJet) over the networks with their more volatile earnings streams.

• easyJet's strategy and its focus on achieving 12% ROCE appear sensible, and Ryanair should continue to benefit from a better mix of higher unit revenue bases and fewer aircraft. Both airlines are underpinned by strong cash flows and dividend potential.

Aer Lingus most interesting of the networks; recovery of global players may stall

• With cash burn stabilised, a reduction in the Irish APD tax, very low valuation and potential consolidation/alliances news in 2011, Aer Lingus is our preferred play of the networks.

• Although the major network airlines are cyclical recovery plays, we believe that there is a danger of recovery stalling somewhat. We continue to believe that Lufthansa is the best positioned of the networks, leading us to be more cautious on BA/Iberia and Air France KLM.

• Having had a very favourable opinion of the sector in 2010, we believe that a more balanced view is needed for 2011 and prefer more bottom-up fundamental stories.

Irish Continental Group shows value

• In the shipping sector, we like Irish Continental Group (ICG). ICG remains supported by dividend yields of 7% and free cash flow yields of mid-teens and should be debt-free by 2011. Airline capacity withdrawals have helped car tourism, and we expect capacity withdrawals in the freight market to provide further impetus.

Top picks for 2011 Our top picks for 2011 – based on business model, valuation and industry capacity discipline – are Ryanair, easyJet and ICG.

More balanced view of sector needed in 2011; we prefer bottom-up fundamental plays • Cash flow stories of LCCs Ryanair and

easyJet are our preferred plays

• Of the networks, Aer Lingus remains a potential consolidation play

• Recovery of global network airlines may stall

• ICG continues to be an attractive investment

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L O W C O S T A I R L I N E S Ryanair Holdings (RYA ID) 377 420 303 5604 0.8 -2.1 14.4 2.9 -5.6 -13.6 2.05 0.8 0.2 Air Arabia (AIRARABI UH) 82 108 78 777 0.3 1.7 -4.8 2.4 -1.9 -28.0 0.72 -10.8 -4.2 AirAsia (AIRA MK) 253 274 111 1700 -3.2 -4.9 117.8 -1.2 -8.3 64.6 2.11 4.7 3.9 Airtran Hldgs. (AAI US) 739 750 424 748 -1.6 -3.7 51.5 0.4 -7.1 14.5 2.10 2.5 1.9 Air Berlin (AB1 GY) 371 447 297 316 -3.6 0.8 -1.3 -1.6 -2.7 -25.4 0.55 3.3 2.7 easyJet (EZJ LN) 440 497 349 2205 2.5 0.0 28.7 4.6 -3.5 -2.7 1.25 0.1 -0.4 GOL Linhas (GOL US) 1538 1855 1062 3105 0.5 -7.7 7.2 2.6 -11.0 -19.0 2.53 1.8 1.4 JetBlue (JBLU US) 661 759 472 1451 -1.6 -5.7 29.8 0.5 -9.0 -1.9 1.27 3.0 2.5 Norwegian Air (NAS NO) 11750 15700 8500 522 -0.8 1.2 8.8 1.3 -2.4 -17.7 2.27 3.0 4.7 Southwest Airlines (LUV US) 1298 1426 1063 7243 -1.7 -5.5 21.5 0.4 -8.8 -8.2 1.74 0.1 -0.5 Tiger Airways (TGR SP) 186 224 145 587 2.5 -1.7 N/A 4.7 -5.2 N/A 4.70 3.1 3.1 Virgin Blue (VBA AU) 43 77 28 726 -1.4 3.2 -11.3 0.7 -0.4 -32.9 1.02 3.3 2.1 Vueling (VLG SM) 973 1330 763 291 -3.2 12.1 -21.2 -1.1 8.2 -40.4 1.51 -3.0 -3.7 Westjet Airlines (WJA CN) 1407 1466 1145 1530 1.0 1.7 28.1 3.1 -1.9 -3.2 1.42 0.1 1.4 Low cost airlines (14) 1165 1214 959 26806 -0.4 -3.3 20.4 1.7 -6.7 -9.0 1.66 1.3 0.9

E U R O P E A N N E T W O R K A I R L I N E S Aer Lingus (AERL ID) 108 117 56 577 -1.7 3.9 68.8 0.4 0.2 27.6 0.78 -2.0 -2.0 Air France KLM (AF FP) 1363 1440 885 4092 -1.2 1.2 23.9 0.9 -2.3 -6.3 0.61 2.0 1.4 British Airways (BAY LN) 273 286 184 3663 -2.2 3.7 50.5 -0.2 0.0 13.8 1.73 1.9 1.2 Finnair (FIA1S FH) 504 550 363 646 3.1 0.8 34.4 5.3 -2.8 1.6 0.77 2.2 1.1 Iberia (IBLA SM) 320 332 198 3045 -1.1 3.7 68.3 1.0 0.0 27.2 1.87 -2.9 -2.7 Lufthansa (LHA GY) 1636 1777 1034 7490 -2.0 -0.2 39.2 0.1 -3.8 5.2 0.96 0.6 0.6 SAS AB (SAS SS) 2250 5233 2070 826 -4.8 1.3 -49.4 -2.8 -2.3 -61.8 0.52 9.0 2.2 Turk Hava Yollari AO (THYAO TI) 540 620 355 2625 1.5 -6.1 12.6 3.7 -9.4 -14.9 1.28 2.4 2.3 Euro network airlines (8) 488 511 329 22963 -1.4 0.6 31.5 0.7 -3.0 -0.6 0.98 1.1 0.8

O T H E R A I R L I N E S AMR (AMR US) 779 1016 596 1939 -1.9 -11.7 7.8 0.2 -14.8 -18.5 N/A 4.9 3.6 Cathay Pacific (293 HK) 2145 2410 1280 8109 -2.4 -8.2 58.1 -0.3 -11.4 19.5 1.60 0.9 0.8 Delta Airlines (DAL US) 1260 1493 997 7425 0.9 -10.7 18.5 3.1 -13.8 -10.5 N/A 2.7 1.8 Qantas (QAN AU) 254 298 217 4395 0.1 -0.3 3.4 2.3 -3.8 -21.8 0.97 1.2 1.1 Singapore Airlines (SIA SP) 1530 1650 1350 10665 0.1 -0.9 19.7 2.2 -4.4 -9.5 1.27 -1.3 -1.3 United Continental Holdings (UAL US) 2382 2953 1223 5641 -0.3 -16.5 97.4 1.8 -19.5 49.2 N/A 1.5 0.9 US Airways (LCC US) 1001 1207 486 1208 -1.1 -13.0 121.3 1.1 -16.1 67.3 N/A 2.6 2.1

A I R P O R T S Aeroports de Paris (ADP FP) 5907 6478 5159 5846 -1.5 0.2 4.9 0.6 -3.4 -20.7 1.72 2.6 2.6 Copenhagen Airp. (KBHL DC) 177500 177500 118000 1869 8.7 14.9 44.7 11.0 10.8 9.4 3.92 2.2 2.3 Fraport (FRA GY) 4716 4878 3440 4335 -2.3 4.2 30.0 -0.2 0.6 -1.7 1.66 3.9 4.2 Uniq. Zurich Airport (FHZN SW) 38200 38400 29250 1876 0.4 9.5 45.4 2.5 5.7 9.9 1.39 2.5 2.2 Flughafen Wien (FLU AV) 5123 5123 3311 1076 2.3 8.4 47.2 4.4 4.6 11.3 1.30 4.1 4.7

S H I P P I N G A N D P O R T S Irish Continental Grp (IR5A ID) 1552 1705 1400 388 0.0 0.3 7.0 2.2 -3.2 -19.1 2.45 0.1 -0.3 A.P. Moller-Maersk A/S (MAERSKA DC) 4914000 5145000 3680000 28976 -1.7 8.1 39.0 0.3 4.3 5.1 1.22 0.9 0.6 Attica Enterprises (ATTICA GA) 66 190 57 107 0.0 -7.0 -65.1 2.1 -10.3 -73.6 0.19 64.0 N/ACarnival Corp (CCL US) 4611 4659 3014 28253 -2.4 8.3 55.7 -0.4 4.5 17.7 1.54 2.6 2.0 DFDS (DFDS DC) 41800 42450 34200 833 0.9 10.6 16.7 3.0 6.7 -11.8 1.02 3.2 2.5 Finnlines (FLG1S FH) 797 945 705 373 -0.9 10.5 15.5 1.2 6.7 -12.7 0.89 10.0 N/AForth Ports (FPT LN) 1345 1417 1025 717 -2.8 -0.2 22.9 -0.8 -3.7 -7.1 2.52 3.9 3.6 Viking Line (VIK1V FH) 3215 3950 3000 347 0.0 0.5 -14.3 2.1 -3.0 -35.2 2.14 1.6 N/AShipping (5) 1627 1776 1520 2048 0.2 5.7 -5.7 2.3 2.0 -28.7 0.96 5.1 1.2

T O U R O P E R A T O R S Kuoni Reisen (KUNN SW) 45425 45925 29400 1107 1.5 11.5 54.2 3.7 7.6 16.6 2.26 -2.1 -1.8 Thomas Cook (TCG LN) 190 272 172 1897 -0.6 -1.0 -14.9 1.6 -4.5 -35.7 0.94 1.5 1.4 TUI Travel (TT/ LN) 246 308 190 3207 -2.2 13.5 -0.3 -0.1 9.5 -24.7 1.38 0.4 0.4

T R A N S P O R T L O G I S T I C S Deutsche Post (DPW GR) 1270 1446 1118 15355 -0.4 2.9 -5.8 1.7 -0.8 -28.8 1.57 0.7 0.5 DSV A/S (DSV DC) 12330 12330 8350 25788 1.7 9.0 31.2 3.8 5.2 -0.8 3.88 2.2 1.5 FedEx (FDX US) 9301 9562 7011 21885 -2.0 -1.0 19.2 0.0 -4.5 -9.9 1.94 -0.0 -0.1 Kuehne & Nagle (KNIN VX) 13000 13550 9305 12478 -0.8 5.3 53.3 1.3 1.6 15.9 5.97 -1.0 -1.2 Oesterreichische Post (POST AV) 2473 2473 1820 1670 2.3 9.3 30.0 4.4 5.5 -1.7 2.47 -1.0 -1.0 Panalpina Welttransport (PWTN SW) 12050 12850 6875 2410 -1.0 8.9 117.0 1.1 5.1 64.0 3.45 -2.2 -2.0 TNT NV (TNT NA) 1975 2349 1762 7433 4.7 7.4 -8.1 6.9 3.6 -30.6 3.12 1.0 0.8 United Parcel Service (UPS US) 7258 7376 5615 53613 -2.2 0.4 35.4 -0.2 -3.2 2.3 8.44 1.0 0.8 FTSE E300 Travel & Leisure (E3LEIS) 1316 1348 972 -2.1 3.7 32.3

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Research Report: Davy on 2011 January 4, 2011 V A L U A T I O N EPS (c) EPS Gth % EV/Sales EV/EBITDA P/E 2010 2011 2012 10-12 2010 2011 2012 2010 2011 2012 2010 2011 2012

L O W C O S T A I R L I N E S Ryanair Holdings (RYA ID) 27 36 46 69.8 1.7 1.4 1.1 8.0 6.1 4.4 14.1 10.6 8.3 Air Arabia (AIRARABI UH) 5 8 8 60.0 1.0 1.0 1.0 13.0 8.1 6.5 16.4 10.2 10.2 AirAsia (AIRA MK) 28 30 35 24.8 3.7 3.2 2.9 9.2 7.8 7.2 9.2 8.4 7.3 Airtran Hldgs. (AAI US) 37 53 73 98.0 0.6 0.5 0.6 6.8 5.7 6.5 20.0 13.9 10.1 Air Berlin (AB1 GY) -42 7 45 N/A 0.2 0.2 0.2 5.5 4.7 3.6 N/A 50.2 8.2 easyJet (EZJ LN) 30 43 55 84.2 0.6 0.5 0.4 7.4 4.8 3.6 14.8 10.2 8.1 GOL Linhas (GOL US) 49 103 133 174.1 1.3 1.1 1.1 9.0 6.9 6.5 31.6 14.9 11.5 JetBlue (JBLU US) 40 55 64 60.0 1.0 0.9 0.8 5.9 5.0 5.9 16.5 12.0 10.3 Norwegian Air (NAS NO) 257 953 1392 442.2 0.6 0.8 0.8 13.2 9.1 7.3 45.8 12.3 8.4 Southwest Airlines (LUV US) 74 90 101 36.5 0.8 0.7 0.6 5.4 4.1 3.6 17.5 14.4 12.9 Tiger Airways (TGR SP) 11 14 19 75.9 1.9 1.6 1.4 14.5 9.9 9.3 17.2 13.3 9.8 Virgin Blue (VBA AU) 1 4 5 420.0 0.6 0.5 0.5 6.6 4.5 3.2 43.0 12.0 8.3 Vueling (VLG SM) 146 138 169 15.5 0.1 0.0 N/A 1.2 0.2 N/A 6.7 7.1 5.8 Westjet Airlines (WJA CN) 80 110 149 86.3 0.8 1.0 0.9 4.3 5.2 4.5 17.6 12.8 9.4 Low cost airlines (14) 0.9 0.8 0.8 6.5 5.3 4.6 16.5 12.0 9.7

E U R O P E A N N E T W O R K A I R L I N E S Aer Lingus (AERL ID) 7 11 17 145.4 0.2 0.1 0.0 1.8 1.3 0.2 15.8 10.0 6.4 Air France KLM (AF FP) -69 123 205 N/A 0.2 0.2 0.1 2.7 1.8 1.2 N/A 11.1 6.6 British Airways (BAY LN) 9 23 28 199.0 0.5 0.4 0.3 3.9 2.7 2.4 29.6 11.7 9.9 Finnair (FIA1S FH) -6 27 38 N/A 0.5 0.4 0.3 7.1 4.5 3.7 N/A 18.5 13.2 Iberia (IBLA SM) 4 9 16 311.4 0.1 0.0 N/A 1.5 0.7 N/A 84.1 35.2 20.4 Lufthansa (LHA GY) 141 137 194 37.0 0.2 0.2 0.2 3.0 2.8 2.4 11.6 11.9 8.4 SAS AB (SAS SS) -388 190 324 N/A 0.4 0.3 0.3 17.5 4.5 3.6 N/A 11.9 6.9 Turk Hava Yollari AO (THYAO TI) 65 72 94 44.5 0.9 0.8 0.6 7.2 5.9 4.5 8.3 7.5 5.8 Euro network airlines (8) 0.3 0.3 0.3 3.8 3.1 2.5 22.6 12.0 8.4

O T H E R A I R L I N E S AMR (AMR US) -129 22 118 N/A 0.4 0.4 0.4 6.6 4.9 3.8 N/A 36.2 6.6 Cathay Pacific (293 HK) 300 266 247 -17.6 1.2 1.1 0.9 5.3 5.3 5.0 7.1 8.1 8.7 Delta Airlines (DAL US) 180 226 240 33.1 0.7 0.6 0.5 5.0 3.9 3.5 7.0 5.6 5.3 Qantas (QAN AU) 11 26 33 189.1 0.6 0.5 0.5 4.8 3.7 3.2 22.1 9.9 7.6 Singapore Airlines (SIA SP) 119 147 161 35.5 0.9 0.8 0.7 4.1 3.5 2.9 12.8 10.4 9.5 United Continental Holdings (UAL US) 430 481 551 28.0 0.4 0.3 0.3 3.4 2.5 2.3 5.5 5.0 4.3 US Airways (LCC US) 225 250 290 29.2 0.4 0.3 0.3 4.2 3.6 3.0 4.5 4.0 3.4

A I R P O R T S Aeroports de Paris (ADP FP) 298 316 339 13.8 3.0 2.9 2.8 9.0 8.6 8.1 19.8 18.7 17.4 Copenhagen Airp. (KBHL DC) 9458 9958 10430 10.3 5.4 5.3 5.1 10.4 10.0 9.6 18.8 17.8 17.0 Fraport (FRA GY) 181 213 233 28.7 3.2 3.3 3.1 10.1 9.8 8.8 26.0 22.2 20.2 Uniq. Zurich Airport (FHZN SW) 2119 2422 2730 28.8 4.0 3.7 3.5 7.9 7.3 6.8 18.0 15.8 14.0 Flughafen Wien (FLU AV) 346 347 334 -3.3 3.4 3.6 3.4 10.0 10.3 9.8 14.8 14.8 15.3

S H I P P I N G A N D P O R T S Irish Continental Grp (IR5A ID) 122 148 166 36.0 1.4 1.3 1.1 7.1 6.2 5.4 12.7 10.5 9.4 A.P. Moller-Maersk A/S (MAERSKA DC) 558304 526695 619273 10.9 1.2 1.3 9.3 3.3 3.2 2.8 8.8 9.3 7.9 Attica Enterprises (ATTICA GA) -24 N/A N/A N/A 1.6 N/A N/A 85.4 N/A N/A N/A N/A N/ACarnival Corp (CCL US) 247 300 355 43.5 3.3 3.0 2.7 12.6 10.8 9.5 18.7 15.4 13.0 DFDS (DFDS DC) 3181 3045 4986 56.7 1.0 0.8 0.7 8.2 6.6 5.1 13.1 13.7 8.4 Finnlines (FLG1S FH) 17 44 77 361.0 2.3 0.6 0.5 14.0 2.9 2.9 47.6 18.1 10.3 Forth Ports (FPT LN) 56 61 71 26.7 2.2 2.3 1.9 13.7 13.0 12.0 24.0 22.2 18.9 Viking Line (VIK1V FH) 72 94 102 42.7 0.8 0.7 0.7 10.2 8.2 8.3 45.0 34.2 31.5 Shipping (5) 1.3 0.8 0.7 10.8 5.6 4.8 17.7 15.1 10.3

T O U R O P E R A T O R S Kuoni Reisen (KUNN SW) 2760 3548 4250 54.0 0.3 0.2 0.2 6.6 5.5 5.0 16.5 12.8 10.7 Thomas Cook (TCG LN) 23 26 28 22.0 0.3 0.3 0.2 4.5 4.1 3.7 8.3 7.4 6.8 TUI Travel (TT/ LN) 22 24 27 23.3 0.2 0.2 0.2 4.6 4.3 3.9 11.2 10.4 9.1

T R A N S P O R T L O G I S T I C S Deutsche Post (DPW GR) 113 122 130 15.0 0.4 0.3 0.3 5.0 4.5 3.9 11.2 10.4 9.8 DSV A/S (DSV DC) 603 785 933 54.9 0.8 0.7 0.6 11.5 9.6 8.3 20.5 15.7 13.2 FedEx (FDX US) 517 628 715 38.3 0.7 0.7 0.7 6.2 5.3 4.7 18.0 14.8 13.0 Kuehne & Nagle (KNIN VX) 525 627 704 34.1 0.7 0.7 0.6 14.1 11.9 10.3 24.8 20.7 18.5 Oesterreichische Post (POST AV) 163 166 168 3.1 0.6 0.6 0.6 5.6 5.5 5.3 15.2 14.9 14.7 Panalpina Welttransport (PWTN SW) -77 660 790 N/A 0.4 0.3 0.3 12.6 9.1 7.5 N/A 18.3 15.3 TNT NV (TNT NA) 139 161 183 32.3 0.8 0.7 0.7 7.0 6.4 5.7 14.2 12.3 10.8 United Parcel Service (UPS US) 353 417 481 36.3 1.6 1.5 1.4 10.4 9.2 8.1 20.6 17.4 15.1

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Gaming Sector performance in 2010

After a very strong year in 2009 when the sector was up 47%, gaming stocks underperformed in 2010, down 10.4%. All of the stocks in the universe posted negative returns with the exception of Paddy Power which was up 24%.

Table 11: Gaming sector performance in 2010

Paddy Power +24%

William Hill -5.1%

Sportingbet -6.3%

Unibet -7.8%

Ladbrokes -7.9%

PartyGaming -18.4%

bwin -29.4%

888 Holdings -49.1%

Gaming sector -10.4%

There were several key themes at play in the last year, some of which we expect to continue in 2011. The principal ones were as follows:

Consolidation kicked off in earnest

• bwin and PartyGaming announced a merger of equals during the summer with the combined group set to dwarf all of its major online competitors in terms of size. The merged entity will be the number- one in online sports-betting, casino and bingo and the number-three in online poker behind two US-facing sites. The merger will deliver at least €55m in synergies and potentially more should regulation of markets work out favourably. The deal, which is expected to close in March 2011, will form a group with net cash on its balance sheet and a very strong strategic position to grow within a rising industry. The announcement of the deal left people wondering what smaller operators may do in response.

Regulation of online markets continued, albeit at a slower pace than previously anticipated

• Italian regulation was the biggest disappointment of 2010. Poker cash games and casino were initially expected to go live in Q1 2010, but the new regulations were the subject of several legal challenges from land-based operators. In the end, no new products went live in 2010 and the latest expectation is that the new products will finally be regulated by the end of Q1 2011. These delays made it extremely challenging for companies to provide earnings guidance for the year, with bwin probably the company that suffered the most in this regard given the size of its Italian business.

• France regulated its online gaming sector during the summer, allowing licensed operators to provide online poker and sports-betting. Casino

David Jennings [email protected] Simon McGrotty [email protected]

• All of the stocks in the gaming universe posted negative returns with the exception of Paddy Power which was up 24%

Key themes of 2010 • Consolidation kicked off in earnest

• Regulation of online markets continued, albeit at a slower pace than previously anticipated

• Concerns regarding the impact of European regulation and taxation started to weigh on the online names

• Concerns that UK retail bookmaking was in "structural decline" weighed on William Hill and Ladbrokes

• Paddy Power continued to deliver on its strategy

• Betfair finally came to the market

• Italian regulation was the biggest disappointment of 2010


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games, however, were not permitted under the new regulatory framework. Early results have been mixed with good growth in poker but a significant reduction in the size of the online sports betting market due to a punitively high turnover tax rate. There has been some suggestion that French authorities may review the effectiveness of the new regulations sooner than the end of 2011 review already scheduled.

• Denmark was due to regulate its market on January 1st 2011, but this has now been delayed until at least next summer. Again, this is due to land-based operators making legal challenges to the new regulations – this time on the basis that online operators will be subject to lower taxes than their land-based equivalents.

• Elsewhere, momentum seemed to build towards adoption of regulation. Several German states expressed an interest in moving to a regulate and tax model, with current national restrictions due to expire at the end of 2011. Greece is also expected to regulate its market over the coming 24 months, although the shape and timing of regulation in both countries remain uncertain. Spain and the Netherlands are believed to be considering further regulatory change also.

• Finally, in the US, hopes that 2010 could see the federal government overturn the Unlawful Internet Gaming Enforcement Act (UIGEA) have faded, leaving prospects for federal change any time in the next two years now looking remote. With Republicans now in control of the House and the incoming chairmen of House Financial Services, House Judiciary and House Ways and Means all opposed to legislative change, the best prospects for US regulation now appear to be at state level. To this end, New Jersey looks to be the best imminent prospect for operators with a bill now passed by the State Senate and likely to be passed by the State Assembly early in the new year. Should it then be passed by the governor, it will be subject to a state-wide referendum, likely to be held in November 2011. All of this means that it will be at least another 12 months before listed operators are likely to be able to re-enter the US.

Concerns regarding the impact of European regulation and taxation started to weigh on the online names

• As the year went on, our concerns grew about what regulation of further European markets would mean for the combined earnings base of bwin-PartyGaming over the next two to three years. These concerns were based primarily on the group’s experience in France (5% of combined revenues) since regulation where a combination of a ban on casino, necessary high marketing spend to win market share and an unattractive sports-betting offering (thanks to high taxes) all implied that the earnings profile there would remain highly uncertain for some time to come. Furthermore, early indications suggested that both Greece (7% of bwin-Party’s combined revenues) and Germany (25% of combined revenues today) could apply similar restrictions to casino, leaving us questioning what the medium-term earnings outlook for the group really looked like. Others in the market appeared to share these

• Several German states expressed an interest in moving to a regulate and tax model, with current national restrictions due to expire at the end of 2011

• In the US, hopes that 2010 could see the federal government overturn the Unlawful Internet Gaming Enforcement Act (UIGEA) have faded, leaving prospects for federal change any time in the next two years now looking remote

• As the year went on, our concerns grew about what regulation of further European markets would mean for the combined earnings base of bwin-PartyGaming over the next two to three years


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concerns, leading both stocks to underperform in Q4. For the year as a whole, bwin was down 29.4% while PartyGaming was down 18.4%.

Concerns that UK retail bookmaking was in “structural decline” weighed on William Hill and Ladbrokes

• The UK retail bookmakers also underperformed broader markets as gross win/shop declines continued into H1 2010. William Hill’s gross win per shop was down 1% (OTC -8.1%, FOBT +9.3%), while at Ladbrokes it was down 1.5% (OTC - 6.1%, FOBT +5.8%). There remained a marked contrast between the performance of over-the- counter sports-betting and FOBTs in the shops with machines continuing to perform very well as the product offering in William Hill shops in particular was improved.

• Nonetheless, we felt that the market lost sight of the fact that, in overall terms, the UK bookmakers are performing better than in previous recessions. Fears that the retail business is in structural decline abounded with people citing the fact that 60% of William Hill’s customer base is over the age of 45 along with the emergence of smart phones as key reasons for this. While the former statistic is indeed a concern longer-term, we remain of the view that the numbers simply do not back up the structural decline hypothesis. Since the peak, William Hill’s gross win per shop has declined by only circa 5.5% in this recession – this compares with -8% during the early 1990s recession. Similarly, Ladbrokes – clearly an underperformer relative to William Hill – still has not registered declines as big as those in the early 1990s.

• If anything, our concerns in relation to both UK bookmakers remain on the online side. Approximately 20% of William Hill’s revenues come from unregulated markets and are mainly casino-based revenues, leaving material regulatory risk should more countries adopt the French model of regulation. For Ladbrokes, we feel the risk is more transaction-based – we would like to see management find organic solutions to the faltering online business (new hires, heavier investment, clearer focus on sports-betting) rather than attempting bolt-on acquisitions to buy its way out of a muddle. At the time of writing, Ladbrokes has announced that it is in early stage talks with 888 about a possible take-over; we do not think that now is the right time to be buying online casino assets.

Paddy Power continued to deliver on its strategy

• After a very active 2009 when the company completed two acquisitions in Australia while also securing a B2B contract with the PMU in France, it was no surprise that 2010 was a year of consolidation for the group as it bedded in the new parts of the business.

• Encouragingly, trends in the retail business improved with the Irish business posting its first positive percentage change in gross win per shop in the second half of the year. UK retail also made a more

• If anything, our concerns in relation to both UK bookmakers remain on the online side

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meaningful contribution to EBIT as the estate matures and continues to grow in size.

• The online business continued to perform very well with strong top- line growth being matched by further heavy investment in people across the business. Late in the year the company announced 1,440 jobs to be created over the next three years across the group. We believe that this signals an intent to secure further B2B deals in the coming year(s) as well as additional geographic expansion.

Betfair finally came to the market

• The much-anticipated IPO of Betfair finally took place and at a valuation that represented a significant premium to the sector. However, the first earnings release by the company did not go well, with Q2 data signalling a sharp slowdown versus the first (World Cup) quarter. The stock now sits 25% below its IPO price, and we fear that the stock may continue to underperform based on regulatory and tax concerns that could further affect the group.

Key themes for 2011

As we enter 2011, there are several trends that we think will continue to present opportunities for investors.

Regulation will continue to drive share prices

• We expect Italy and Denmark will regulate to varying degrees in 2011. In the US, New Jersey and possibly California may also move to adopt regulatory models.

• Potential moves by Germany and Greece will be closely scrutinised to assess the impact both will have on those already operating in both jurisdictions. Spain, Denmark and (further afield) Australia should provide further catalysts for European online operators.

Further consolidation is likely

• In response to the marriage of bwin and Party, other operators are undoubtedly examining the merits of getting together.

• 888, Sportingbet, Betsson and Unibet are among a host of smaller operators that are likely to be keen to secure tie-ups with larger operators or between themselves.

We believe the multi-channel operators could outperform online names

• We believe that fears over the UK retail industry are overblown and that this could lead to a re-rating if the early signs of cyclical recovery are seen in 2011.

• This is in contrast to the online space where we believe continued uncertainty regarding regulation could continue to drag on the stocks.

• The online business continued to perform very well with strong top- line growth being matched by further heavy investment in people across the business

Key themes for 2011 • Regulation will continue to drive share

prices

• Further consolidation is likely

• We believe the multi-channel operators could outperform online names

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For the reasons above, our top picks in the sector are Paddy Power and Ladbrokes (in that order). We believe that as investors start to fully value Paddy Power’s Australian business, they will recognise more clearly the cash-generating potential of that business. Add to this the scope to do secure B2B deals and the operational leverage in the retail business and we see good potential for further upgrades. In the case of Ladbrokes, notwithstanding our concerns that it may try to buy its way out of its online troubles instead of focussing on self-help solutions, we feel there is good scope for it to improve its retail performance in 2011, with the introduction of new gaming machines a primary driver. We retain a 'neutral' stance on William Hill on the basis that we like the prospects for retail recovery but remain concerned about regulatory risk in its online business. For the online operators (bwin-PartyGaming and Betfair), this risk is magnified. Concerns that current revenue streams could be badly dented by future restrictions on casino in key markets remain high. In the case of Betfair, we remain concerned by the tendency of governments to adopt turnover-based tax systems rather than gross profits-based systems – something that clearly hinders betting exchanges. All in all, we see little reason to believe these names will outperform until such uncertainty subsides.

• Our top picks in the sector are Paddy Power and Ladbrokes

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Paddy Power (PWL ID) 3070 3080 2275 1482 0.0 9.3 24.0 2.1 5.4 -6.2 6.68 -0.9 -1.1 PartyGaming (PRTY LN) 239 375 239 979 -2.1 -14.4 -18.4 -0.1 -17.4 -38.4 4.41 -1.5 -1.9 Ladbrokes plc (LAD LN) 123 163 123 1297 -2.1 -3.5 -7.9 0.0 -6.9 -30.4 4.12 1.8 1.5 William Hill plc (WMH LN) 171 217 156 1395 -1.3 6.8 -5.1 0.8 3.0 -28.3 1.44 1.6 1.5 888 Holdings Plc (888 LN) 55 120 36 220 -3.7 26.0 -49.1 -1.6 21.6 -61.5 2.41 -1.8 -1.4 bwin (BWIN AV) 2949 4850 2930 1062 0.7 -8.8 -29.4 2.8 -12.0 -46.6 3.70 -2.2 -1.7 New Unibet Group (UNIB SS) 14050 23000 11700 443 1.7 11.1 -7.8 3.9 7.1 -30.3 2.85 -0.7 -1.0 Sportingbet (SBT LN) 62 80 54 364 2.2 3.4 -6.3 4.4 -0.2 -29.2 3.43 -0.8 -1.0 Online operators (5) 260 391 253 3068 -0.2 -5.1 -23.5 1.9 -8.5 -42.2 3.56 -1.4 -1.5 Overall gaming (8) 441 563 434 7242 -0.7 0.0 -10.4 1.4 -3.5 -32.3 3.06 0.5 0.2 FTSE E300 Travel & Leisure (E3LEIS) 1316 1348 972 -2.1 3.7 32.3


Paddy Power (PWL ID) 175 175 204 16.8 2.8 2.9 2.0 10.5 10.1 9.2 17.6 17.6 15.0 PartyGaming (PRTY LN) 17 18 19 11.5 0.0 0.0 N/A 8.5 7.6 6.6 13.9 13.2 12.5 Ladbrokes plc (LAD LN) 14 14 16 20.6 4.5 4.5 2.5 6.5 6.1 5.2 9.1 9.0 7.5 William Hill plc (WMH LN) 20 19 21 7.0 3.2 3.7 3.7 5.7 5.7 5.0 8.6 9.1 8.0 888 Holdings Plc (888 LN) 3 3 3 11.6 1.2 2.4 4.8 9.0 9.1 7.6 17.7 18.0 15.8 bwin (BWIN AV) 104 189 213 104.3 1.5 2.7 2.3 11.9 7.1 6.1 28.3 15.6 13.9 New Unibet Group (UNIB SS) 1119 1109 1315 17.5 5.8 5.9 1.4 8.1 8.0 6.8 12.6 12.7 10.7 Sportingbet (SBT LN) 6 7 7 14.0 2.4 2.8 4.1 5.9 5.2 4.5 10.0 9.4 8.7 Online operators (5) 1.8 2.3 3.6 8.9 7.2 6.2 16.0 13.5 12.2 Overall gaming (8) 2.7 3.1 3.0 7.4 6.8 5.9 12.4 11.9 10.4


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Financials Sector performance in 2010

• 2010 proved to be another rollercoaster year for Irish financials. The first quarter was relatively calm with results announcements broadly as expected, predictably highlighting the funding/impairment challenges facing the sector.

• At the end of March, extensive statements from the Regulator and government outlined the capital requirements produced by the new Prudential Capital Assessment Review (PCAR) process. Bank of Ireland (BKIR) would need €2.7bn and Allied Irish Banks (ALBK) €7.4bn to hit a core equity ratio of 7% allowing for future losses (both NAMA and non-NAMA). Anglo Irish Bank, requiring at least €22bn, proved the biggest shock. Higher-than-expected NAMA discounts were a key factor: tranche 1 loans transferring to the agency attracted a weighted average haircut of 47% compared with initial government estimates of 30% (September 2009).

• Yet April was a strong month for the Irish banks. Investor sentiment improved following the initial NAMA transfer and apparent clarification of the banks' capital needs. On April 26th, BKIR announced its plan to raise a gross €3.4bn (net €2.9bn) to meet its PCAR requirement. The ISE financials index (ISEF) rose 8.2% in April, bringing the year-to-date return to 13.5% at that point.

• BKIR successfully completed its fundraising and secured EU approval for its restructuring plan in July, but any relief proved short-lived. As term funding markets grew increasingly difficult, investors began to focus on the banks’ ‘funding cliff’ at end-September when close to €30bn term funding matured. Banks appeared to have comfortable collateral positions to meet this, allowing for an element of pre-funding in January-April, but rating agency downgrades (S&P sovereign and individual bank downgrades in September hit particularly hard) added to the pressure as banks lost rating-sensitive corporate deposits.

• Persistent speculation that NAMA discounts might be even higher culminated in an end-September announcement that ALBK needed €10.4bn instead of €7.4bn due to an anticipated 60% discount on remaining NAMA loans. BKIR's capital was deemed sufficient at that juncture. Since then the acuteness of the funding situation has become increasingly evident, leading to a more than doubling in reliance on monetary authorities by end-November.

• The EU/IMF package, announced in late November, brought new conditions: banks would be required to ‘overcapitalise’ to a core Tier 1 ratio of at least 12%, while the sector would undergo a 'fundamental downsizing and reorganisation'. The Credit Institutions (Stabilisation) Act introduced the requisite legislation to enable the Minister for Finance to restructure the industry, including imposing losses on subordinated debt. The ISEF ended the year down 61%.

Emer Lang [email protected] Stephen Lyons [email protected]

• 2010 proved to be another rollercoaster year for Irish financials

• The EU/IMF package brought new conditions: banks would be required to ‘overcapitalise’ to a core Tier 1 ratio of at least 12%, while the sector would undergo a 'fundamental downsizing and reorganisation'


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Key themes for 2011

Funding remains the key challenge

• Irish authorities acknowledge that at the root of the Irish problem ‘is a domestic banking system which at its peak was five times the size of the economy, and which is now under severe pressure’. An overreliance on wholesale funding to drive that growth left Irish banks horribly exposed to increasingly jittery markets during 2010 and led to a sharp increase in Irish banks’ reliance on the ECB short-term facility.

• A 'fundamental downsizing and reorganisation' of the system is now viewed as 'essential' to improving the sector's funding profile. 'Ambitious' target loan-to-deposit ratios are to be established for each bank in consultation with the ECB, EC and IMF, to be achieved by end-2013. The Regulator’s Prudential Liquidity Assessment Review (PLAR) will set 'an adjustment path to these targets', having identified non-core assets.

Strategy is initial 'overcapitalisation'

• Ahead of this 'fundamental downsizing and reorganisation', banks are to be ‘immediately’ capitalised to a new target core Tier 1 ratio of at least 12%. This compares with the 8% (including equity of 7%) originally established by the Irish Regulator in his initial PCAR published on March 30th 2010.

• The incremental capital required to achieve the new target was quantified at €5.3bn for ALBK, implying that it still needed to raise €9.8bn. Having already successfully raised a net €2.9bn, BKIR must raise a further €2.2bn; Irish Life & Permanent (IPM) needs €98m; and EBS requires €463m. They are obliged to raise the additional equity by end-February 2011 (end-May in IPM's case).

• BKIR intends to seek to generate the required capital through a combination of ‘internal capital management initiatives, support from existing shareholders and other capital markets sources’. It raised €700m in December in a LT2 debt management exercise, leaving a residual €1.5bn. The Irish government will subscribe for this capital should the bank not be in a position to raise it within the proposed timeframe.

• IPM plans to raise the additional amount from its own resources, while ALBK noted that the Irish state will subscribe for the incremental capital requirement that it does not raise from ‘other sources’. The government injected €3.7bn in December.

Timeline stretches well into 2011, prolonging uncertainty

• From the banks’ perspective, key steps are the initial recapitalisation by the end of February; a plan to run further ‘more transparent’ PCAR stress testing in March; and a new liquidity review (PLAR).

• Although haircuts on senior debt have been emphatically ruled out, subordinated debt is to play a role in generating capital. The Credit Institutions (Stabilisation) Act outlines a range of measures allowing

Key themes for 2011 • Funding remains the key challenge

• Strategy is initial 'overcapitalisation'

• Timeline stretches well into 2011, prolonging uncertainty

• A 'fundamental downsizing and reorganisation' of the system is viewed as 'essential' to improving the sector's funding profile

• The incremental capital required to achieve the new target is €5.3bn for ALBK, implying that it still needs to raise €9.8bn; BKIR must now raise a further €2.2bn; IPM needs €98m; and EBS requires €463m

• Although haircuts on senior debt have been emphatically ruled out, subordinated debt is to play a role in generating capital


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the Minster for Finance to enforce burden-sharing by way of a 'subordinated liabilities order' on junior debt.

• BKIR has already raised €700m capital in December in a voluntary subordinated debt management exercise.

• A key issue for any bank hoping to raise capital in the market by end- February is that it may not be able to give any assurances at that stage that the March PCAR will not produce an incremental capital requirement.

• Of the €85bn support package, €8bn is directly available to support the recapitalisation, while a further €2bn is available for state ‘credit enhancement’ support if required. A €25bn contingency fund is designed for further capital support if it is needed.

• Banks will be required to run down non-core assets and securitise and/or sell portfolios or divisions — measures that were already planned, albeit they may now be required to go further. The promise that the state will provide credit enhancement, if needed, should help expedite the process. Banks must produce asset disposal plans by end-April 2011.


Bank shares remain subject to massive uncertainty, and this looks set to persist for many months to come. Key issues for valuation are as follows: • how ‘immediate’ (end-February 2011) capital requirements will be

satisfied; • the results of the proposed March PCAR, in particular whether it will

give rise to further capital requirements; • to what extent subordinated debt contributes to capital; • whether ‘other capital market sources’ (BKIR) can contribute to

capital; • whether the strategy of overcapitalisation can restore access to

wholesale funding markets and at what cost; • the results of the Regulator's Prudential Liquidity Assessment Review

(PLAR), planned for Q1 2011; • what asset disposals will be made in light of the PCAR/PLAR and

what impact this will have on both capital and earnings potential; • how we should consider ‘normalised’ earnings at this juncture; further

disposals may reduce these, while the earlier 2013 timeframe looks over-optimistic.

The degree of uncertainty has prompted us to move our recommendations on ALBK and BKIR from 'neutral' to 'under review'.

Allied Irish Banks

• ALBK's capital requirements have risen steadily since its original PCAR requirement was put at €7.4bn at the end of March 2010, based on its NAMA tranche 1 haircut of 43% (subsequently revised to

• Of the €85bn support package, €8bn is directly available to support the recapitalisation, while a further €2bn is available for state ‘credit enhancement’ support if required. A €25bn contingency fund is designed for further capital support if needed.

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42%). The group had hoped to raise up to €4.9bn of this from self-help measures, primarily asset disposals, leaving a residual of €3.5bn, which could have been satisfied through conversion of its government preference shares. The haircut increased to 48.5% in tranche 2, creating some uncertainty over the capital requirement, but it was not until end-September when the Regulator revealed that the remaining NAMA assets would transfer at a discount of 60% that the enormity of the capital shortfall emerged.

• ALBK's capital requirement was increased by €3bn to €10.4bn to meet the target core equity ratio of 7%. The group planned to raise €5.0bn of this internally, with the remaining €5.4bn to be raised by a government underwritten rights issue in November 2010. The successful disposal of its Polish businesses (€2.5bn) and its stake in M&T (€0.9bn) created €3.4bn of equity, but in the absence of a sale of the UK operation, the underwritten rights issue was increased to €6.6bn.

• ALBK's new core Tier 1 target of 14% increased the residual equity capital requirement to €9.8bn. In December, the government injected €3.7bn, leaving a residual €6.1bn to be raised by end-February. Unless a UK sale (put on hold recently) can be expedited with state credit enhancement, it is likely that much of this will have to come from government, leaving its stake in ALBK in the high-90% region.

• Subordinated debt of over €4bn may contribute something: although the EC is determined to protect holders of senior debt, holders of subordinated debt are expected to share the pain where state aid is substantial.

• Uncertainty over the fate of ALBK is understandably keeping investors on the sidelines.

Bank of Ireland

• BKIR successfully completed its initial capital-raising in 2010; secured EC approval for its restructuring plan; incorporated an authorised UK bank; and sold BIAM, its asset management subsidiary – the first of a number of assets it is required to sell under its plan – to State Street.

• Notwithstanding its undoubted progress, funding conditions remained far from normal, with concerns over the Irish sovereign compounding the challenge. BKIR revealed in its mid-November IMS that it lost €10bn of rating-sensitive deposits in Q3 in the aftermath of sovereign/bank ratings downgrades, forcing it to raise reliance on the ECB from a net €8bn at the halfway stage to a net €20bn at that time.

• Under the government/Regulator ‘overcapitalisation’ strategy, the bank’s immediate challenge is to raise €2.2bn more equity by the end- February deadline. It intends to seek to generate this through a combination of ‘internal capital management initiatives, support from existing shareholders and other capital markets sources’.

• It raised €700m swapping guaranteed senior debt for LT2 subordinated debt in December. The source of the residual €1.5bn

• Under the ‘overcapitalisation’ strategy, the bank’s immediate challenge is to raise €2.2bn more equity by the end-February deadline


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capital – be it further debt management, asset sales or further government capital – will dictate to what extent existing equity shareholders face possible dilution.

• BKIR still faces significant challenges as we head into 2011, but its progress to date in raising capital from market sources puts it in a relatively better position than the other Irish state-aided banks for which total government ownership (Anglo, EBS, INBS) or almost total government ownership (ALBK) is inevitable.

Irish Life & Permanent

• IPM's attractive life and pensions franchise has stabilised, enjoying a significant recovery in operating profits in 2010 as retail persistency, which had proved particularly costly in 2009, began to normalise. Corporate persistency continues to be an issue, but the 2010 outcome – expected to be up 70% on 2009 (per its mid-November IMS) – will reflect a change in the assumption.

• Ireland has operated an attractive tax deduction regime for pension contributions. Proposed restrictions on tax deductibility under the four-year austerity programme, which aims to raise €700m from the industry, will clearly affect the life and pensions business but it is too early to predict how this cost will ultimately be shared among pensions providers and their customers.

• Extreme volatility in IPM's share price continues to be driven largely by the bank, which has faced challenging funding and impairment issues. Its funding has been protected under the systemic government guarantee scheme, although it remains the only one of the six covered institutions that has not been the recipient of any state aid (NAMA or government capital).

• As currently structured, IPM is confident that it can meet its required incremental capital of €98m on top of its earlier requirement of €145m from internal sources; €100m of this will come from a recently completed VIF securitisation.

• Management’s professed preferred strategy of spinning out the bank and merging it with EBS has been thrown into confusion by an increased capital target for EBS (sale process delayed with final bids due January 17th) and by market turmoil which makes any hoped-for fundraising increasingly difficult.

• A deep bank-related discount leaves the shares trading at a modest proportion of group embedded value (12%). Outperformance hinges on having some line of sight over restoring the bank to profitability. Pending more clarity on how this can be achieved, we are moving our IPM recommendation to 'neutral'.

FBD

• FBD's mid-November IMS confirmed that anticipated rate hardening, particularly for home and business insurance, is beginning to have a positive impact, albeit a modest one. Policy volumes in the second half of 2010 were running broadly in line with the previous year, reversing

• Management’s professed preferred strategy of spinning out the bank and merging it with EBS has been thrown into confusion by an increased capital target for EBS and by market turmoil which makes any hoped-for fundraising increasingly difficult

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the trend of contraction in previous periods and leaving FBD's gross written premiums marginally up on the prior year.

• At that stage claims trends were also positive, prompting FBD to raise its full-year operating EPS guidance to 105-110c from 95-100c previously. However, 2010 ended as it began, with heavy snowfalls leading to treacherous conditions for motorists and homeowners alike. This may impact on claims – exceptional weather-related events in the early part of the year cost FBD €12m. Although brokers predict the recent bout of challenging weather may drive house insurance premiums up a further 5-10%, this will take time to come through.

• Challenges facing the non-underwriting businesses remain, yet FBD’s property and leisure businesses in Ireland and Spain continued to deliver operating profits and cash flows in the second half of 2010 (to mid-November). FBD’s financial services businesses reportedly delivered further solid performances in difficult market conditions.

• As the only solely Irish quoted general insurer, with a strong brand, a number-two market share and an expense advantage over its competitors, FBD remains an attractive value play. A dividend yield of 5.3%, which is well covered, is an added attraction supporting our 'outperform' rating.

IFG

• Following the acquisition of James Hay, IFG's UK business now accounts for 55-60% of group profits. The enlarged UK pensions administration business includes IPS and James Hay, and all aspects of the integration are reported to remain on, or ahead of, schedule. The group also runs a separate fee-based advisory business, Saunderson House, in the UK.

• The other key division is the group’s international business which operates in a number of centres (Isle of Man, Jersey, Cyprus and Switzerland). It experienced slower activity levels in Q3 2010 despite maintaining its margin, leaving it 8-10% behind expectations.

• Not surprisingly, trading conditions in Ireland remain difficult and the group retains its objective to return it to a neutral contribution.

• Net debt is likely to have fallen to mid-teen millions by end-2010 (Davy: €16.5m). This is down from €44.4m at end-2009 and implies a net debt-to-EBITDA of 0.6x. The group's significant cash generation will allow it to grow organically and through acquisition while at the same time pursuing a progressive dividend policy.

• A key strength of IFG is its visible recurring revenue streams across its main divisions. A weaker near-term outlook for the international business is disappointing, but the continued successful integration of James Hay – given its transformational impact on the group – is significant, as is news that the UK division generally is well on track.

• IFG trades at an undemanding 6.8x our 2011 earnings forecast. We retain our 'outperform' rating.

• FBD's mid-November IMS confirmed that anticipated rate hardening, particularly for home and business insurance, is beginning to have a positive impact, albeit a modest one

• FBD remains an attractive value play

• A key strength of IFG is its visible recurring revenue streams across its main divisions

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Research Report: Davy on 2011 January 4, 2011 Banks S H A R E P R I C E A N D P E R F O R M A N C E Price 12 Month Mkt. Cap Change % (€) Rel to E300 sector % ROE % Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2011 2012

Allied Irish Banks (ALBK ID) 30 179 27 324 -4.5 -13.0 -75.0 -1.5 -16.1 -72.3 N/A N/A 0.0 Bank of Ireland (BKIR ID) 38 121 26 1987 8.1 19.4 -55.5 11.4 15.3 -50.7 N/A N/A 4.7 Banks (2) 212 754 156 2312 5.7 12.2 -61.2 9.0 8.4 -57.0 UK Banks Barclays (BARC LN) 262 383 255 37135 -3.0 -0.7 -2.2 0.0 -4.1 8.3 6.6 8.3 9.8 Lloyds Banking Group (LLOY LN) 66 78 47 52173 -5.5 5.8 33.8 -2.6 2.1 48.1 2.9 8.9 12.4 RBoS (RBS LN) 39 58 31 49606 -4.9 1.1 38.1 -2.0 -2.4 52.9 1.4 5.1 7.0 UK banks index (3) 131 169 108 138914 -4.6 2.3 19.1 -1.7 -1.2 31.8 Austrian Banks Erste Bank (EBS AV) 3514 3559 2510 13289 0.4 16.6 34.8 3.5 12.6 49.3 7.3 9.6 10.7 Raiffeisen Bank (RBI AV) 4100 4275 2901 8016 0.3 8.3 3.8 3.5 4.5 14.9 11.7 12.2 13.8 Austrian banks index (2) 2353 2387 1704 21305 0.4 13.3 22.7 3.5 9.4 35.8 Benelux Banks KBC (KBC BB) 2550 3800 2547 9127 -3.1 -5.6 -16.1 -0.1 -8.9 -7.1 16.4 15.0 17.0 Dexia (DEXB BB) 260 498 258 4801 -4.2 -7.9 -41.7 -1.3 -11.1 -35.5 8.4 6.9 7.7 Benelux banks index (2) 634 1008 633 13928 -3.5 -6.4 -26.7 -0.5 -9.7 -18.9 French Banks Credit Agricole (ACA FP) 950 1368 802 22825 -2.8 0.7 -23.1 0.2 -2.8 -14.9 5.4 8.6 10.1 BNP Paribas (BNP FP) 4761 5960 4148 57056 -4.0 4.4 -14.8 -1.0 0.8 -5.7 11.6 11.8 12.3 Societe Generale (GLE FP) 4022 5220 3033 30021 -4.5 12.7 -17.8 -1.6 8.8 -9.1 9.5 10.6 12.0 Natixis (KN FP) 350 482 314 10178 -2.5 3.2 -1.3 0.5 -0.4 9.2 7.9 8.4 9.2 French banks index (4) 776 996 657 120081 -3.8 5.5 -16.3 -0.8 1.8 -7.3 Greek Banks Alpha Bank (ALPHA GA) 380 884 380 2030 -5.7 -11.0 -53.7 -2.8 -14.1 -48.7 0.9 3.8 7.2 EFG Eurobank (EUROB GA) 375 871 362 2020 -2.6 -2.3 -52.4 0.4 -5.7 -47.3 N/A 2.5 6.8 Emporiki (TEMP GA) 165 463 120 845 -0.6 36.4 -62.3 2.5 31.7 -58.3 N/A N/A 18.1 Natl. Bank of Greece (ETE GA) 605 1874 605 5784 -3.4 -6.8 -64.1 -0.4 -10.0 -60.3 4.8 8.1 9.8 Greek banks index (4) 207 590 207 10679 -3.5 -4.4 -61.6 -0.5 -7.7 -57.5 German Banks Commerzbank (CBK GY) 555 735 545 6561 -2.4 -1.0 -5.6 0.7 -4.4 4.5 12.3 5.0 11.8 Deutsche Bank (DBK GY) 3910 6038 3660 36343 -1.1 6.9 -20.9 2.0 3.2 -12.4 7.2 10.4 10.4 Deutsche Postbank (DPB GY) 2080 2727 1994 4551 0.5 -4.4 -9.1 3.6 -7.7 0.6 4.2 7.2 9.0 German banks index (3) 456 646 436 47456 -1.1 4.5 -16.2 2.0 0.9 -7.3 Italian Banks Intesa Sanpaolo Spa (ISP IM) 203 320 197 25947 -5.0 1.1 -35.6 -2.1 -2.4 -28.7 4.7 6.0 7.0 Unicredit SpA (UCG IM) 155 231 149 29835 -6.0 3.6 -30.8 -3.1 0.0 -23.4 2.7 5.4 7.1 Banca Monte Dei P. (BMPS IM) 85 133 83 5699 -4.0 3.1 -30.7 -1.0 -0.4 -23.3 2.1 4.3 5.6 UBI Banca (UBI IM) 655 1051 641 4186 -4.8 2.2 -34.8 -1.9 -1.3 -27.8 2.1 3.7 5.0 Mediobanca (MB IM) 666 883 577 5735 -2.8 5.0 -19.9 0.2 1.3 -11.3 6.2 8.8 9.5 Italian banks index (5) 2330 3533 2269 71402 -5.2 2.7 -32.2 -2.2 -0.9 -24.9 Nordic Banks Danske Bank (DANSKE DC) 14300 15460 11490 13404 -1.1 0.4 21.0 1.9 -3.1 33.9 4.8 9.8 11.2 Nordea (NDA SS) 7315 7600 6030 32981 -0.6 6.3 14.6 2.5 2.6 26.9 10.6 11.4 11.6 SE Banken (SEBA SS) 5610 5650 3884 13729 -0.2 11.9 44.5 2.9 8.1 60.0 6.8 9.7 9.9 DNB NOR ASA (DNBNOR NO) 8190 8315 6095 17127 -0.1 11.6 39.0 3.0 7.7 53.9 11.1 11.6 12.0 Svenska Handelsbanken (SHBA SS) 21490 22650 18280 14943 -1.4 4.1 20.2 1.7 0.5 33.1 12.3 12.5 12.8 Swedbank (SWEDA SS) 9380 9855 6270 9963 -0.7 7.4 50.9 2.3 3.7 67.1 7.4 9.6 10.1 Nordic banks index (6) 1179 1190 866 102146 -0.7 6.8 26.4 2.4 3.1 39.9 Portuguese Banks Banco Comercial P. (BCP PL) 58 92 58 2732 -4.3 -1.0 -31.1 -1.3 -4.4 -23.8 4.8 5.7 6.6 Banco Espirito Santo (BES PL) 288 499 279 3360 -3.3 3.2 -37.0 -0.3 -0.3 -30.3 7.5 6.8 6.5 Banco BPI (BPIN PL) 139 230 139 1247 -4.5 -0.3 -34.7 -1.5 -3.7 -27.7 10.1 11.1 11.9 Portuguese banks index (3) 219 364 217 7339 -3.9 1.0 -34.5 -0.9 -2.5 -27.5 Spanish Banks Banco Popular Espanol (POP SM) 384 600 381 5281 -3.2 -2.3 -25.2 -0.2 -5.7 -17.2 7.0 7.2 8.3 BBVA (BBVA SM) 756 1315 708 33951 -3.2 6.8 -40.6 -0.2 3.1 -34.3 14.6 13.4 15.3 Banco Sabadell (SAB SM) 295 453 295 3728 -3.1 -1.4 -23.9 -0.1 -4.8 -15.7 7.2 5.6 7.5 Banco Espanol Credito (BTO SM) 620 919 593 4262 -3.5 1.4 -27.6 -0.5 -2.1 -19.8 9.8 9.7 10.9 Banco Santander (SAN SM) 793 1198 730 66033 -2.5 8.6 -31.4 0.6 4.9 -24.0 11.7 13.1 13.9 Spanish banks index (5) 662 1037 619 113255 -2.8 6.9 -33.6 0.2 3.2 -26.5 Swiss Banks Credit Suisse (CSGN VX) 3767 5640 3704 35740 -1.7 6.0 -12.8 1.4 2.4 -3.5 15.2 15.6 15.7 UBS AG (UBSN VX) 1535 1848 1340 47036 -1.7 6.5 13.3 1.4 2.8 25.4 14.6 12.9 13.1 EFG International (EFGN SW) 1280 2025 1070 1502 -0.6 16.0 6.1 2.5 12.0 17.4 10.3 11.3 18.7 Julius Baer Group (BAER VX) 4380 4445 3075 7239 0.5 19.8 42.6 3.6 15.7 57.9 11.2 12.3 12.5 Swiss banks index (4) 552 633 467 91517 -1.5 7.4 2.8 1.6 3.7 13.8 European banks index (43) 442 552 414 740334 -2.9 4.9 -13.5 0.1 1.3 -4.2 FTSE E300 Banks (E3BANK) 530 624 489 -3.0 3.6 -9.7

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V A L U A T I O N EPS (c) EPS Gth % Div Yield % Div Cover Price/Book P/E 2010 2011 2012 10-12 2010 2011 2010 2010 2011 2012 2010 2011 2012

Allied Irish Banks (ALBK ID) -55 -5 0 N/A 0.0 0.0 N/A 0.52 0.54 0.53 N/A N/A N/A Bank of Ireland (BKIR ID) -49 -11 4 N/A 0.0 0.0 N/A 0.42 0.43 0.39 N/A N/A 8.7 Banks (2) N/A N/A N/A 0.43 0.45 0.40 N/A N/A 10.1 UK Banks Barclays (BARC LN) 27 36 47 71.2 1.9 2.7 5.4 0.63 0.60 0.54 9.6 7.2 5.6 Lloyds Banking Group (LLOY LN) 2 7 11 463.0 0.0 0.0 N/A 0.97 0.90 0.79 34.8 10.1 6.2 RBoS (RBS LN) 1 4 5 342.5 0.0 0.0 N/A 0.60 0.58 0.55 32.6 10.9 7.4 UK banks index (3) 1.9 2.7 9.7 0.71 0.68 0.62 20.2 9.3 6.4 Austrian Banks Erste Bank (EBS AV) 227 322 408 79.7 1.8 2.0 3.5 1.10 1.02 0.91 15.5 10.9 8.6 Raiffeisen Bank (RBI AV) 412 438 579 40.5 1.0 1.8 10.3 1.20 1.09 0.96 9.9 9.4 7.1 Austrian banks index (2) 1.5 1.9 5.1 1.14 1.05 0.93 12.8 10.3 8.0 Benelux Banks KBC (KBC BB) 559 549 595 6.6 3.8 3.9 5.8 0.85 0.79 0.74 4.6 4.6 4.3 Dexia (DEXB BB) 43 41 51 20.0 0.0 2.5 N/A 0.51 0.44 0.39 6.1 6.4 5.1 Benelux banks index (2) 3.8 3.4 8.1 0.69 0.62 0.56 5.0 5.1 4.5 French Banks Credit Agricole (ACA FP) 104 175 225 116.8 4.7 6.8 2.3 0.48 0.46 0.43 9.2 5.4 4.2 BNP Paribas (BNP FP) 659 731 829 25.7 4.4 5.0 3.1 0.84 0.77 0.70 7.2 6.5 5.7 Societe Generale (GLE FP) 500 610 739 47.7 4.2 5.2 2.9 0.75 0.70 0.65 8.0 6.6 5.4 Natixis (KN FP) 44 50 55 26.4 6.9 7.1 1.8 0.62 0.59 0.57 8.0 7.0 6.4 French banks index (4) 4.6 5.6 2.8 0.70 0.65 0.61 7.8 6.3 5.4 Greek Banks Alpha Bank (ALPHA GA) 5 25 60 N/A 0.0 0.0 N/A 0.47 0.45 0.42 73.8 15.2 6.3 EFG Eurobank (EUROB GA) -5 18 57 N/A 0.0 0.0 N/A 0.50 0.49 0.45 N/A 20.6 6.6 Emporiki (TEMP GA) -220 -37 15 N/A 0.0 0.0 N/A 1.28 1.49 1.99 N/A N/A 11.0 Natl. Bank of Greece (ETE GA) 49 81 116 134.5 0.0 1.8 N/A 0.58 0.55 0.51 12.3 7.4 5.2 Greek banks index (4) N/A 1.8 N/A 0.56 0.54 0.51 15.7 9.7 5.9 German Banks Commerzbank (CBK GY) 106 39 120 13.4 0.0 0.0 N/A 0.66 0.61 0.54 5.2 14.2 4.6 Deutsche Bank (DBK GY) 370 576 629 69.9 1.9 2.6 4.9 0.76 0.71 0.64 10.6 6.8 6.2 Deutsche Postbank (DPB GY) 109 200 274 151.7 0.0 0.0 N/A 0.82 0.76 0.70 19.1 10.4 7.6 German banks index (3) 1.9 2.6 7.1 0.75 0.69 0.63 9.6 7.6 6.0 Italian Banks Intesa Sanpaolo Spa (ISP IM) 20 26 33 67.3 4.2 4.9 2.3 0.48 0.47 0.45 10.3 7.7 6.2 Unicredit SpA (UCG IM) 9 19 25 177.8 1.9 4.5 3.0 0.46 0.44 0.43 17.2 8.1 6.2 Banca Monte Dei P. (BMPS IM) 5 10 13 165.2 2.4 2.8 2.5 0.36 0.36 0.34 17.0 8.5 6.4 UBI Banca (UBI IM) 33 68 90 171.5 3.8 4.4 1.3 0.38 0.37 0.36 19.8 9.6 7.3 Mediobanca (MB IM) 47 66 83 77.0 2.6 3.8 2.8 0.87 0.85 0.76 14.2 10.1 8.0 Italian banks index (5) 3.0 4.5 2.5 0.47 0.46 0.44 13.7 8.2 6.4 Nordic Banks Danske Bank (DANSKE DC) 717 1600 2016 181.2 0.5 2.6 9.7 0.94 0.86 0.78 20.0 8.9 7.1 Nordea (NDA SS) 566 654 729 28.9 3.4 3.7 2.3 1.37 1.28 1.18 12.9 11.2 10.0 SE Banken (SEBA SS) 321 472 507 57.8 2.1 3.6 2.7 1.23 1.15 1.10 17.5 11.9 11.1 DNB NOR ASA (DNBNOR NO) 734 804 908 23.7 4.3 4.6 2.1 1.24 1.16 1.09 11.2 10.2 9.0 Svenska Handelsbanken (SHBA SS) 1724 1887 2064 19.7 4.0 4.4 2.0 1.53 1.42 1.33 12.5 11.4 10.4 Swedbank (SWEDA SS) 605 844 960 58.8 2.0 3.7 3.2 1.15 1.07 1.01 15.5 11.1 9.8 Nordic banks index (6) 3.0 3.8 2.4 1.25 1.16 1.08 13.8 10.8 9.5 Portuguese Banks Banco Comercial P. (BCP PL) 5 6 8 56.6 3.4 4.8 2.5 0.55 0.53 0.50 11.6 9.3 7.4 Banco Espirito Santo (BES PL) 41 40 42 1.6 4.2 4.9 3.4 0.52 0.49 0.44 7.0 7.2 6.9 Banco BPI (BPIN PL) 22 22 23 6.2 5.6 5.8 2.8 0.73 0.77 0.72 6.4 6.4 6.0 Portuguese banks index (3) 4.1 5.0 3.0 0.56 0.54 0.50 8.1 7.7 6.9 Spanish Banks Banco Popular Espanol (POP SM) 43 45 53 24.6 5.7 5.2 1.9 0.63 0.63 0.59 9.0 8.6 7.2 BBVA (BBVA SM) 118 118 142 20.4 5.6 5.9 2.8 0.95 0.89 0.82 6.4 6.4 5.3 Banco Sabadell (SAB SM) 27 24 35 28.4 5.1 3.8 1.8 0.72 0.70 0.67 11.0 12.1 8.6 Banco Espanol Credito (BTO SM) 82 88 101 24.1 6.1 6.6 2.1 0.76 0.72 0.68 7.6 7.0 6.1 Banco Santander (SAN SM) 100 117 131 31.0 7.6 7.6 1.7 0.94 0.89 0.83 7.9 6.8 6.1 Spanish banks index (5) 6.7 6.8 2.0 0.91 0.86 0.80 7.5 6.8 5.9 Swiss Banks Credit Suisse (CSGN VX) 452 513 558 23.5 4.6 4.8 2.6 1.27 1.14 1.02 8.3 7.3 6.7 UBS AG (UBSN VX) 189 192 218 15.1 0.0 0.0 N/A 1.19 1.05 0.93 8.1 8.0 7.1 EFG International (EFGN SW) 36 110 151 317.1 0.8 1.6 3.6 1.54 1.18 1.44 35.3 11.6 8.5 Julius Baer Group (BAER VX) 247 294 324 31.3 0.9 1.1 6.1 2.00 1.82 1.65 17.8 14.9 13.5 Swiss banks index (4) 3.9 4.1 6.1 1.27 1.13 1.00 8.7 8.1 7.2 European banks index (43) 4.0 4.6 3.0 0.79 0.74 0.69 10.8 8.0 6.5

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Research Report: Davy on 2011 January 4, 2011 S H A R E P R I C E A N D P E R F O R M A N C E C O N T I N U E D Price 12 Month Mkt. Cap Change % (€) Rel to E300 sector % ROE % Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2011 2012

Eastern European Banks Bank Pekao (PEO PW) 17900 19650 14830 11887 -2.9 0.2 14.9 0.1 -3.3 27.2 12.8 14.9 16.3 BPH (BPH PW) 7100 8700 4856 1378 1.8 7.9 -12.3 4.9 4.2 -2.9 N/A 5.3 10.3 BZWBK (BZW PW) 21490 22090 16810 3975 1.2 3.9 17.4 4.4 0.3 29.9 14.1 15.4 16.3 BRE Bank (BRE PW) 30400 31250 22010 3238 -0.5 10.6 21.4 2.6 6.7 34.3 10.0 11.5 13.0 PKO Bank Polski (PKO PW) 4335 4681 3506 13716 -0.6 2.7 18.4 2.5 -0.9 31.1 14.8 17.2 18.5 ING Bank Slaski (BSK PW) 89400 92200 65000 11631 -0.1 6.4 14.6 3.0 2.8 26.9 13.2 14.0 14.8 Komercni Bank (KOMB CP) 443800 457500 325600 6764 0.6 8.4 18.4 3.7 4.7 31.1 16.4 17.2 16.9 OTP Bank (OTP HB) 502000 740000 450000 5083 -2.4 3.5 -10.6 0.6 -0.1 -1.0 9.2 11.8 13.4 Eastern Eur. banks index (8) 7172 7621 5774 57672 -0.8 4.2 13.0 2.3 0.6 25.1 Retail banks index (14) 312 403 303 328306 -3.7 3.1 -12.0 -0.7 -0.5 -2.6 Wholesale banks index (6) 656 799 601 212758 -2.7 6.5 -10.2 0.4 2.8 -0.6 US Banks Citigroup (C US) 473 497 315 102635 -1.0 9.2 52.9 2.1 5.5 69.2 7.0 7.3 8.4 Bank of America (BAC US) 1334 1948 1095 100490 0.1 18.2 -5.2 3.2 14.1 4.9 5.0 6.6 7.6 BB&T Corp (BBT US) 2629 3561 2187 13623 -2.2 9.9 10.9 0.8 6.1 22.7 4.7 7.1 9.7 Fifth Third Bancorp (FITB US) 1468 1536 1039 8731 -0.1 19.2 61.1 3.0 15.0 78.3 4.0 7.8 9.1 Goldman Sachs Group (GS US) 16816 18492 13108 67868 -1.7 4.5 6.6 1.3 0.9 17.9 10.3 12.2 12.2 JPMorgan Chase (JPM US) 4242 4781 3563 123863 -1.3 10.1 8.9 1.8 6.3 20.6 8.9 10.0 10.8 KeyCorp (KEY US) 885 919 613 5820 1.6 14.0 70.6 4.8 10.1 88.8 2.4 5.1 6.4 Morgan Stanley (MS US) 2721 3292 2283 30748 -2.8 7.9 -1.7 0.3 4.2 8.9 7.5 8.9 8.3 M&T Bank Corp (MTB US) 8705 9445 6821 7762 0.2 9.7 39.2 3.3 5.9 54.1 8.7 9.2 9.9 PNC (PNC US) 6072 6964 5036 23847 -1.1 9.4 23.1 2.0 5.6 36.2 9.6 9.3 9.4 Suntrust (STI US) 2951 3185 2072 11020 0.8 22.5 55.6 3.9 18.3 72.2 N/A 2.6 5.7 US Bancorp (USB US) 2697 2826 2071 38644 -2.2 10.0 28.2 0.8 6.2 41.9 11.5 13.1 14.5 Wells Fargo (WFC US) 3099 3388 2325 121496 -2.0 10.5 22.8 1.0 6.7 36.0 9.8 11.5 12.8 US banks index (13) 4365 4906 3556 656547 -1.3 10.8 16.4 1.8 6.9 28.9 Global aggregate (64) 565 670 526 1454553 -2.1 7.5 -1.0 0.9 3.7 9.6 FTSE E300 Banks (E3BANK) 530 624 489 -3.0 3.6 -9.7

V A L U A T I O N C O N T I N U E D EPS (c) EPS Gth % Div Yield % Div Cover Price/Book P/E 2010 2011 2012 10-12 2010 2011 2010 2010 2011 2012 2010 2011 2012

Eastern European Banks Bank Pekao (PEO PW) 980 1205 1395 42.3 4.0 4.7 1.4 2.34 2.23 2.13 18.3 14.9 12.8 BPH (BPH PW) -204 364 651 N/A 0.0 0.0 N/A 1.31 1.24 1.11 N/A 19.5 10.9 BZWBK (BZW PW) 1268 1559 1827 44.1 1.9 3.0 3.1 2.39 2.13 1.93 16.9 13.8 11.8 BRE Bank (BRE PW) 1440 1990 2520 75.0 0.0 1.1 N/A 1.91 1.69 1.55 21.1 15.3 12.1 PKO Bank Polski (PKO PW) 255 340 410 61.1 2.6 3.4 2.3 2.54 2.25 2.00 17.0 12.8 10.6 ING Bank Slaski (BSK PW) 5742 6772 7999 39.3 0.6 2.3 10.3 2.06 1.83 1.64 15.6 13.2 11.2 Komercni Bank (KOMB CP) 33223 36584 39552 19.0 4.5 5.0 1.7 2.20 2.11 1.91 13.4 12.1 11.2 OTP Bank (OTP HB) 45015 66895 87494 94.4 0.4 3.5 22.5 1.02 0.90 0.80 11.2 7.5 5.7 Eastern Eur. banks index (8) 2.5 3.5 2.7 2.02 1.83 1.66 15.8 12.6 10.5 Retail banks index (14) 3.3 4.4 3.0 0.70 0.66 0.62 14.7 8.4 6.3 Wholesale banks index (6) 3.8 4.4 4.3 0.91 0.83 0.76 8.1 7.1 6.1 US Banks Citigroup (C US) 40 45 56 41.8 0.0 0.0 N/A 0.83 0.77 0.70 12.0 10.5 8.4 Bank of America (BAC US) 108 150 190 75.5 0.3 0.3 27.0 0.62 0.58 0.53 12.4 8.9 7.0 BB&T Corp (BBT US) 281 264 350 24.8 2.3 2.6 4.7 1.08 1.04 0.98 9.4 10.0 7.5 Fifth Third Bancorp (FITB US) 53 110 143 170.6 0.3 0.3 13.2 1.12 1.04 0.94 27.9 13.3 10.3 Goldman Sachs Group (GS US) 1339 1776 1974 47.4 0.8 0.8 9.6 1.30 1.15 1.04 12.6 9.5 8.5 JPMorgan Chase (JPM US) 385 470 548 42.2 0.5 1.4 19.3 0.98 0.90 0.84 11.0 9.0 7.7 KeyCorp (KEY US) 23 51 68 195.7 0.5 0.5 5.8 0.92 0.89 0.84 38.5 17.4 13.0 Morgan Stanley (MS US) 237 297 310 31.1 0.7 0.7 11.8 0.86 0.81 0.73 11.5 9.2 8.8 M&T Bank Corp (MTB US) 554 612 705 27.3 3.2 3.2 2.0 1.37 1.30 1.22 15.7 14.2 12.3 PNC (PNC US) 548 575 640 16.8 0.7 0.7 13.7 1.06 0.98 0.89 11.1 10.6 9.5 Suntrust (STI US) -34 95 225 N/A 0.1 0.1 N/A 0.80 0.80 0.75 N/A 31.1 13.1 US Bancorp (USB US) 168 215 263 56.3 0.7 1.2 8.4 1.85 1.64 1.48 16.1 12.5 10.3 Wells Fargo (WFC US) 221 285 351 59.2 0.6 1.4 11.0 1.38 1.25 1.13 14.1 10.9 8.8 US banks index (13) 0.6 1.1 14.6 0.97 0.90 0.82 12.5 10.1 8.4 Global aggregate (64) 2.3 2.9 4.5 0.89 0.83 0.76 11.7 9.0 7.3

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Research Report: Davy on 2011 January 4, 2011 Insurance S H A R E P R I C E A N D P E R F O R M A N C E Price 12 Month Mkt. Cap Change % (€) Rel to E300 sector % ROE % Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2011 2012

FBD Holdings (FBD ID) 620 780 557 206 -4.6 6.9 -10.1 -2.9 -1.7 -9.6 14.8 20.4 18.1 Irish Life & Permanent (IPM ID) 108 394 51 299 8.0 8.0 -67.3 10.0 -0.7 -67.1 N/A N/A 4.7 General Insurance Admiral Group (ADM LN) 1515 1693 1114 4741 -2.9 -3.6 31.5 -1.2 -11.3 32.4 54.9 56.2 54.9 Allianz (ALV GR) 8896 9560 7679 40432 -1.5 4.4 1.5 0.2 -4.0 2.2 11.3 11.3 11.5 Amlin (AML LN) 409 433 363 2364 0.5 5.9 17.7 2.3 -2.6 18.5 14.7 14.0 13.7 AXA (CS FP) 1245 1758 1106 28885 -3.0 12.6 -24.7 -1.2 3.6 -24.2 8.0 9.1 9.1 Brit Insurance (BRE LN) 1042 1045 728 961 -1.0 -1.8 36.4 0.8 -9.7 37.3 11.4 8.7 8.7 Catlin Group (CGL LN) 370 393 320 1548 -0.8 8.5 12.3 1.0 -0.2 13.1 10.2 9.5 9.1 Mapfre (MAP SM) 208 309 196 6259 -3.3 6.2 -29.0 -1.6 -2.3 -28.5 13.4 13.5 12.6 Generali (G IM) 1421 1919 1353 22123 -3.6 5.0 -24.5 -1.9 -3.4 -24.0 10.0 11.6 11.9 RSA Insurance (RSA LN) 125 137 115 5091 -3.0 1.4 7.2 -1.3 -6.8 7.9 13.8 14.1 13.9 General insurance (10) 550 653 507 112611 -2.5 6.1 -12.7 -0.7 -2.4 -12.1 Life Insurance Aegon (AGN NA) 458 541 404 7944 -0.7 8.1 0.8 1.1 -0.6 1.5 8.8 7.4 7.7 Aviva (AV/ LN) 393 424 294 12912 -2.5 7.8 2.0 -0.8 -0.9 2.6 14.9 13.4 13.8 ING Groep (INGA NA) 728 816 552 27894 -0.1 7.0 5.5 1.7 -1.5 6.2 9.1 11.2 11.3 Legal & General (LGEN LN) 97 106 70 6613 -3.9 2.9 23.9 -2.1 -5.3 24.7 17.0 14.8 13.8 Old Mutual (OML LN) 123 145 97 7825 -2.6 1.0 16.4 -0.9 -7.1 17.1 8.9 8.5 9.1 Prudential (PRU LN) 668 681 488 19813 -2.8 14.4 7.7 -1.0 5.2 8.5 16.2 16.7 18.4Life insurance (7) 748 789 606 83301 -1.7 8.0 6.3 0.1 -0.7 7.0 European insurance (17) 460 508 402 195911 -2.1 6.9 -5.5 -0.4 -1.7 -4.9 FTSE E300 Life Insurance (E3LIFE) 271 289 232 -1.8 8.7 -0.7

V A L U A T I O N EPS (c) EPS Gth % Div Yield % Div Cover Price/Book P/E 2010 2011 2012 10-12 2010 2011 2010 2010 2011 2012 2010 2011 2012

FBD Holdings (FBD ID) 88 136 138 55.8 5.3 5.3 2.7 1.00 0.87 0.77 7.0 4.5 4.5 Irish Life & Permanent (IPM ID) -34 -20 40 N/A 0.0 0.0 N/A 0.13 0.13 0.12 N/A N/A 2.7 General Insurance Admiral Group (ADM LN) 67 78 87 28.4 4.3 4.9 1.0 11.98 10.46 8.89 22.5 19.5 17.5 Allianz (ALV GR) 1118 1200 1285 15.0 5.1 5.6 2.5 0.90 0.84 0.79 8.0 7.4 6.9 Amlin (AML LN) 51 55 55 8.8 5.4 5.7 2.3 1.23 1.10 1.02 8.1 7.4 7.4 AXA (CS FP) 174 203 222 27.4 5.6 6.3 2.5 0.59 0.56 0.52 7.1 6.1 5.6 Brit Insurance (BRE LN) 128 105 122 -4.7 5.8 6.0 2.1 0.88 0.78 0.74 8.2 9.9 8.6 Catlin Group (CGL LN) 49 46 50 3.4 7.3 7.6 1.8 0.78 0.67 0.63 7.6 8.0 7.4 Mapfre (MAP SM) 31 32 33 7.1 7.2 7.7 2.1 0.92 0.88 0.80 6.7 6.4 6.3 Generali (G IM) 124 154 173 39.6 3.5 4.2 2.5 1.18 1.10 1.02 11.5 9.3 8.2 RSA Insurance (RSA LN) 13 15 16 21.7 7.0 7.4 1.5 1.28 1.22 1.15 9.6 8.5 7.9 General insurance (10) 5.1 5.7 2.3 0.87 0.82 0.76 8.4 7.5 6.9 Life Insurance Aegon (AGN NA) 84 72 80 -4.3 N/A 1.7 N/A 0.48 0.48 0.44 5.4 6.4 5.7 Aviva (AV/ LN) 64 70 76 19.1 6.5 6.9 2.5 0.98 0.88 0.84 6.2 5.6 5.2 ING Groep (INGA NA) 96 135 147 53.1 N/A N/A N/A 0.67 0.61 0.56 7.6 5.4 5.0 Legal & General (LGEN LN) 14 13 14 5.0 4.6 4.9 3.1 1.21 1.09 0.94 7.2 7.3 6.8 Old Mutual (OML LN) 16 18 18 14.9 2.7 3.2 4.8 0.72 0.66 0.62 7.7 6.8 6.7 Prudential (PRU LN) 51 94 101 97.1 3.1 3.3 2.5 2.30 2.07 1.84 13.1 7.1 6.6 Life insurance (7) 4.1 4.1 5.4 0.85 0.78 0.72 7.9 6.2 5.6 European insurance (17) 4.8 5.2 3.1 0.86 0.80 0.74 8.2 6.9 6.3

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Media and technology Sector performance in 2010

• On the back of a strong performance in 2009, media stocks found progress more challenging during 2010. The E300 media index performed well during the first four months of the year amid optimism regarding a global economic recovery. However, May was a difficult month with the sector losing almost 15%. Having rallied since, the sector finished up 12.3% in 2010, offsetting May's decline and returning to March 2010 levels. Overall, the sector marginally outperformed the broader E300 index in 2010.

• With the exception of companies that had exposure to the FIFA World Cup, top-line growth has been relatively benign with earnings growth driven by aggressive cost-cutting strategies.

• At the start of the year, we identified Independent News & Media (INM) as our top pick within the sector. Supported by a group restructuring completed at end-2009, we felt that the stock would outperform with the focus returning to its strong fundamentals.

• This theme played out during the first half as INM outperformed the sector, rising by 10.8% in the first four months. During May, the stock sold off along with the sector but has failed to recover since then. We attribute this underperformance directly to the source of the market's concerns relating to the national sovereignty of peripheral eurozone countries, one of which is Ireland (INM's key market).

• INM remains our top pick within the sector for 2011. While we acknowledge that the valuation is overly cheap, a catalyst may be required for value to be recognised.

Key themes for 2011

Impact of austerity measures largely unknown

• Most companies are entering 2011 on a cautious footing, as noted in the majority of recent trading updates.

• The key reason for management caution relates to the unknown economic impact of the austerity measures to be implemented by European governments. These policies are unlikely to have a positive impact on economic growth in the short run, and this will directly feed through to the cyclical media sector.

• We believe that the longer-term investment case for the sector remains valid; however, the first half of 2011 and possibly beyond is likely to be overshadowed by a delayed recovery due to adverse fiscal tightening.

Cost-cutting complete; focus now on top-line growth

• During 2010 the sector undertook a significant cost-reduction programme, most of which is now complete. Although cost bases are now leaner, this puts much greater emphasis on the need to drive earnings growth through the top line.

Simon McGrotty [email protected] • On the back of a strong

performance in 2009, media stocks found progress more challenging during 2010

• With the exception of companies that had exposure to the FIFA World Cup, top-line growth has been relatively benign with earnings growth driven by aggressive cost-cutting strategies

• INM remains our top pick within the sector for 2011

Key themes for 2011 • Impact of austerity measures largely

unknown

• Cost-cutting complete; focus now on top-line growth


60 Davy Research

• Should austerity measures adversely impact the top line, it is unlikely that management will be able to absorb further cost reductions.

• Despite this, a higher allocation of fixed to variable costs in this sector will see it outperform during a more sustainable economic recovery.


Independent News & Media – focus returns to core and value-enhancing markets

• Independent News & Media offers more than just a play on an Irish economic recovery. It is one of the cheapest stocks in its sector with the core group trading on 4.7x 2010 EBITDA (this includes the group's attractive South African operations). Deconsolidating APN from its accounts (from January 1st) will help clean up the group, returning focus to its core and value-enhancing markets.

UTV – growing UK exposure should mitigate any Irish weakness

• UTV enters 2011 on a much firmer footing than it entered 2010, particularly in relation to its balance sheet and debt covenants. While comparisons will be tough (no FIFA World Cup), this will be offset by new Premiership broadcast rights along with the IRB rugby World Cup in September. The group's growing UK exposure should mitigate any lingering weakness in its Irish market.

Norkom – key focus continues to be possible offer for company

• In relation to Norkom, the market's key focus is and will continue to be the recent discussions that may lead to a possible offer for the company. This could see Norkom being sold for a multiple of between 2x and 3x revenue. In the absence of a sale, we would expect operational concerns to resurface and the stock price to fall back.

TVC Holdings – discount to book value continues

• TVC continues to trade at a significant discount to its book value and its book value excluding cash. Near-term performance is likely to be driven by variations in the value of its underlying assets. With greater than €31m in cash on the balance sheet, this presents TVC with the flexibility to acquire assets at attractive prices, which should assist in closing the discount between the stock price and its book value.

Datalex – airline sector recovery should have positive impact

• Datalex's business centres on its software-based travel distribution platform. Its transaction-based revenue model means that the recovery in the airline sector should have a positive impact on Datalex. It appears on track to add cash to the balance sheet this financial year. It is trading at c.2x the stock's cash per share value. We are cautious on this stock due to the litigation with Flight Centre, which is expected to be ruled on in the middle of 2011. A ruling against Datalex would be detrimental to the company.

• Deconsolidating APN from IPM's accounts will help clean up the group, returning focus to its core and value-enhancing markets

• In the absence of a sale of Norkom, we would expect operational concerns to resurface and the stock price to fall back

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Independent News & Media (INM ID) 50 101 48 277 1.8 2.7 -44.7 4.2 -2.8 -50.4 16.09 3.5 2.9 UK Sector Daily Mail (DMGT LN) 574 574 423 2559 0.5 7.6 41.7 2.8 1.9 27.2 N/A 2.3 1.8 Johnston Press (JPR LN) 12 34 9 89 -1.0 16.7 -44.3 1.3 10.5 -50.0 0.21 4.0 3.6 Trinity Mirror (TNI LN) 70 172 65 209 -1.7 -3.1 -52.4 0.5 -8.2 -57.2 0.34 1.7 1.3 UK newspapers (5) 316 330 261 12659 -2.6 6.0 18.0 -0.4 0.4 5.9 1.88 1.3 0.9 European Sector Schibsted (SCH NO) 17200 17280 11870 2385 0.0 17.3 40.8 2.3 11.1 26.4 2.69 0.9 0.4 Springer (Axel) AG (SPR GY) 12225 12225 7229 4032 1.0 13.7 61.9 3.3 7.7 45.4 2.59 -0.2 -0.4 European newspapers (11) 492 499 390 26020 -1.3 10.3 25.5 1.0 4.5 12.7 2.04 1.0 0.6 Global Sector APN News & Media (APN AU) 194 250 183 896 -0.3 7.7 1.5 2.0 2.0 -8.9 1.16 2.7 2.2 Gannett Company (GCI US) 1509 1867 1176 2693 -4.2 11.7 8.7 -2.0 5.7 -2.4 1.80 1.6 1.2 Naspers (NPN SJ) 38401 39398 25266 17635 -2.4 7.1 52.7 -0.2 1.4 37.1 3.78 0.3 -0.1 West Australian Newspapers (WAN AU) 643 844 640 1079 -1.3 1.3 -3.0 0.9 -4.0 -12.9 10.64 1.5 1.2 Global newspapers (23) 702 715 535 57303 -1.7 8.6 26.0 0.6 2.9 13.1 2.09 0.9 0.6

T E L E V I S I O N UTV Media (Stg) (UTV LN) 137 151 91 153 -1.0 0.2 44.0 1.3 -5.1 29.3 0.93 2.7 2.2 ITV (ITV LN) 70 74 48 3174 -3.8 2.2 38.1 -1.6 -3.2 24.0 5.53 0.7 0.3 Media (4) 379 391 265 18414 -2.6 -0.1 35.9 -0.4 -5.4 22.0 13.41 1.1 0.7

F I N A N C I A L C R I M E A N D C O M P L I A N C E Norkom (NORK ID) 150 173 75 135 6.4 15.4 2.7 8.8 9.3 -7.8 2.10 -10.8 -7.8 ACI Worldwide (ACIW US) 2687 2815 1532 666 -3.8 2.6 67.6 -1.6 -2.9 50.5 3.97 -0.0 N/A Fair Isaac (FICO US) 2337 2657 1995 696 -2.3 -2.9 17.3 0.0 -8.1 5.3 2.05 2.0 1.8 Nice Systems (NICE US) 3490 3499 2546 1641 -1.2 10.5 20.3 1.1 4.6 8.0 1.95 -3.6 -3.9 Online Resources (ORCC US) 465 527 367 109 -1.6 4.2 -5.4 0.6 -1.3 -15.1 1.02 0.6 N/A Financial Crime and Compliance (6) 1095 1115 783 5221 0.6 11.1 39.3 3.0 5.2 25.0 2.92 -0.4 -0.7 FTSE E300 Media & Ent. (E3MEDA) 663 678 556 -2.2 5.6 11.4


Independent News & Media (INM ID) 9 12 15 64.3 0.0 0.0 N/A 6.6 5.6 5.2 5.6 4.1 3.4 UK Sector Daily Mail (DMGT LN) 46 52 56 20.9 2.8 3.0 2.9 8.3 7.5 6.6 12.4 11.0 10.3 Johnston Press (JPR LN) 4 5 6 48.6 0.0 0.0 N/A 4.8 4.4 3.9 2.9 2.2 1.9 Trinity Mirror (TNI LN) 26 27 26 0.3 0.0 0.0 N/A 2.9 2.5 2.1 2.6 2.6 2.6 UK newspapers (5) 3.6 3.8 2.4 7.6 7.1 6.3 12.2 11.4 10.6 European Sector Schibsted (SCH NO) 974 1131 1329 36.5 2.0 2.4 2.8 9.2 7.7 6.5 17.7 15.2 12.9 Springer (Axel) AG (SPR GY) 926 974 1022 10.4 3.7 3.8 2.1 7.6 6.6 6.0 13.2 12.6 12.0 European newspapers (11) 2.9 3.2 2.4 8.2 7.3 6.4 14.6 13.3 12.2 Global Sector APN News & Media (APN AU) 18 20 22 22.2 5.5 7.0 1.7 7.3 6.5 5.9 10.9 9.6 8.9 Gannett Company (GCI US) 242 227 255 5.4 1.1 1.1 15.1 4.4 4.1 3.3 6.2 6.7 5.9 Naspers (NPN SJ) 1804 2304 2864 58.8 0.8 1.0 6.0 20.3 16.5 13.8 21.3 16.7 13.4 West Australian Newspapers (WAN AU) 45 50 55 21.8 7.0 7.3 1.0 9.9 8.9 8.0 14.3 12.9 11.7 Global newspapers (23) 2.2 2.5 3.4 8.3 7.7 7.0 14.9 13.5 11.9

T E L E V I S I O N UTV Media (Stg) (UTV LN) 16 17 18 14.9 0.0 0.0 N/A 7.7 7.0 6.0 8.8 8.3 7.6 ITV (ITV LN) 5 6 7 24.3 0.0 1.5 N/A 7.1 6.2 5.5 13.1 11.4 10.5 Media (4) 2.6 2.6 2.3 10.6 9.0 7.8 20.4 16.6 14.1

F I N A N C I A L C R I M E A N D C O M P L I A N C E Norkom (NORK ID) 2 3 4 78.8 0.0 0.0 N/A 30.7 19.1 14.9 65.4 51.1 36.6 ACI Worldwide (ACIW US) 109 140 174 59.6 0.0 0.0 N/A 10.5 9.3 8.0 24.7 19.2 15.4 Fair Isaac (FICO US) 169 205 177 4.4 0.3 0.2 21.1 8.0 7.2 7.3 13.8 11.4 13.2 Nice Systems (NICE US) 172 200 220 28.3 0.0 0.0 N/A 9.2 7.4 6.1 20.3 17.5 15.9 Online Resources (ORCC US) 21 31 33 54.8 0.0 0.0 N/A 5.1 4.2 3.8 22.1 15.0 14.3 Financial Crime and Compliance (6) 0.3 0.2 N/A 11.9 9.6 8.3 21.9 18.4 16.9


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Support services Sector performance in 2010 and outlook for 2011

• Support services' companies exposed to under-pressure government budgets (for example Serco and Capita) were hit by the outlook for subdued public spending. We expect this theme will continue to carry weight in 2011.

• While government spending is a significant theme for the support services' group, it should be contextualised when looking at the year ahead for DCC. Support services activities account for only 14% of group profits. Furthermore, while DCC has some exposure to government budgets, its crucial markets are commercial and industrial users. As such, business confidence surveys and Purchasing Managers Indices are important indicators of demand for DCC's services and products.

• A key theme in 2011 will be how much industry takes up the baton from government in spurring economic growth.

DCC – Performance in 2010

• For much of 2010, DCC has struggled to outperform the sector despite delivering better-than-expected earnings growth. On an absolute basis, the stock is up 21% year-to-date but slightly underperformed the FTSE 250 benchmark and the E300 services sector.

• While acquisitions and working capital management have driven returns against a very difficult economic backdrop, organic growth also contributed.

DCC – Key themes for 2011

Acquisitions still a strong catalyst in 2011; consolidation rather than market entry primary objective in near-term

• Acquisitions will continue to play a role in DCC's pursuit of market-leading positions. In the short term, we believe management will favour synergistic acquisitions over entry into new regional markets in continental Europe.

• In recent months there has been an acceleration of divestment programmes by oil majors still participating in the fuels' marketing sector. Some of the key assets up-for-sale from a DCC perspective are still on the market. They include Total Butler, the second-largest oil distributor in the UK, and Shell's UK LPG business. The cost synergies are potentially huge if either or both of these assets were acquired by DCC Energy.

• Following on from the 2010 acquisitions of Comtrade and Codework, we feel that further complementary and synergistic acquisitions in the

Caren Crowley [email protected] Joshua Goldman [email protected]

Key themes for DCC for 2011 • Acquisitions still a strong catalyst in

2011; consolidation rather than market entry primary objective in near-term

• New markets and full service offering to spur organic growth

• Managing exposure to Ireland

• Acquisitions will continue to play a role in DCC's pursuit of market-leading positions

• Further complementary and synergistic acquisitions in the technology distribution sector are likely in 2011


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technology distribution sector are likely in 2011. DCC's net debt to EBITDA of 0.3x is well below a comfortable maximum of 2x.

New markets and full service offering to spur organic growth

• Although underlying trading conditions remain weak, we expect DCC to outperform by targeting those players growing in individual market segments and through product expansion or a full service offering.

• At DCC Sercom, we expect management to further develop its audio-visual and communications offerings to capitalise on the convergence of the mobile phone and IT channels.

• New product development will continue to help operating leverage in DCC Healthcare and DCC Food and Beverage. Product or service offering is also delivering organic growth in DCC Energy, as evidenced by the division's recent push into the aviation and marine fuel markets.

Managing exposure to Ireland

• The trading environment in Ireland remains challenging. • We expect DCC to manage its exposure to Ireland through tight

control of costs. Disposals are also possible, although this could be optimistic.

• Ireland accounted for some 18% of group adjusted EBITA in FY 2010, down from 24.5% in FY 2009. Poor trading conditions, combined with significant investment in ex-Irish operations, should accelerate the decline in the group's exposure to the Irish economy.

CPL – Performance in 2010

• As the global economy has started to recover, the recruitment sector has also begun to perform. The Davy recruitment sector index is up 24% year-to-date (ytd) and CPL is up 24% ytd.

• The stock still trades at a deep discount to peers, most likely due to its association with the Irish economy.

CPL – Key themes for 2011

Labour market stabilising

• Data released by the Central Statistics Office (CSO) indicate that the labour market appears to be improving. It peaked with an unemployment rate of 13.7% in July 2010 and has slowly but steadily declined since then.

• We estimate that the average unemployment rate in 2011 will remain high as weak domestic demand limits the creation of new jobs. Robust external demand will provide some support, but the export sector is dominated by technology-intensive industries with relatively low labour input.

• As the global economy recovers and with the corporation tax rate in Ireland remaining unchanged, we expect Ireland's multinational sector to continue to add jobs.

• DCC's exposure to Ireland is diminishing

Key themes for CPL for 2011 • Labour market stabilising

• Poised for growth

• Significant upside potential, but trickle-down effects of government austerity measures will have to be closely watched

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Poised for growth

• CPL has demonstrated its ability to react decisively to stark changes in the revenue environment. CPL's net fee income (NFI), the industry-specific term for gross profit, was down 53% from peak (H1 financial year 2008) to trough (H1 financial year 2010). The company reacted by reducing SG&A by c.30% from financial year 2009 to financial year 2010, allowing it to maintain its cash on balance sheet.

• We are encouraged by the company's prospects – it has not only survived the downturn but has also positioned itself for growth. Statistics from the National Recruitment Federation show a c.40% reduction in the number of registered recruitment firms in Ireland from 2007 to 2010. Furthermore, Robert Half closed its Irish office this summer. CPL has strong brand recognition in Ireland and has been recognised as 'Recruitment agency of the year (large)' by the National Recruitment Federation. The company has also increased staff from 194 to 222 to handle the increased business.

• We have seen NFI income grow sequentially in H2 financial year 2010 compared with H1 and believe that the positive momentum will continue. In its IMS, the company guided that PBT should exceed €3.8m in H1, which would imply greater than 30% sequential growth. Even if sequential growth slows in H2 due to the austerity measures, the company will still, by our forecasts, grow PBT on a full-year basis.

• CPL has accelerated its footprint in the healthcare sector by acquiring PCH Care Management. With CPL's strong balance sheet and PHC's client list and operational knowhow, we view this as a good fit and a great sector for growth.

Significant upside potential, but trickle-down effects from government's austerity measures will have to be closely watched

• Although we see significant upside potential for the company, the trickle-down effects from the government's austerity measures will have to be closely monitored.

• CPL offers investors a fantastic growth opportunity over the longer term, with the bonus of a strong balance sheet.

• Despite the unprecedented decline in the Irish economy over the past two years, CPL has continued to generate both profits and cash

• Even if sequential growth slows in H2, CPL will still grow PBT on a full-year basis

• CPL offers investors a fantastic growth opportunity over the longer term

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S H A R E P R I C E A N D P E R F O R M A N C E Price 12 Month Mkt. Cap Change % (€) Rel to E300 sector % Pr/Bk Debt/EBITDA Local High Low €m Wk 1 Mth YTD Wk 1 Mth YTD 2010 2010 2011

DCC (DCC ID) 2360 2360 1766 1965 2.6 17.3 21.0 4.5 9.9 1.9 2.15 0.3 0.0 Energy Brenntag AG (BNR GY) 7630 7630 4890 3929 1.0 12.4 N/A 2.9 5.3 N/A 2.57 2.4 2.0 Buckeye Partners (BPL US) 6683 6980 5233 2573 -1.7 -4.8 31.3 0.1 -10.8 10.5 2.97 4.2 3.5 Rubis (RUI FP) 8715 8892 5710 1225 2.0 -0.2 41.3 3.9 -6.5 18.9 1.83 1.7 1.6 Healthcare United Drug (UDG ID) 210 277 197 504 0.0 1.5 -1.4 1.9 -5.0 -17.0 1.36 1.3 0.9 Invacare (IVC US) 3016 3072 2000 730 -2.4 8.4 29.4 -0.6 1.5 8.9 1.59 N/A N/A Euromedis (EMG FP) 446 606 360 11 8.3 14.1 -7.9 10.3 6.9 -22.4 0.56 3.5 3.2 Computer Distribution Ingram Micro Inc. (IM US) 1909 1925 1487 2236 0.2 3.7 17.0 2.1 -2.8 -1.5 1.09 -0.5 -0.1 Northamber (NAR LN) 57 58 38 19 -1.0 -1.0 69.0 0.9 -7.3 42.3 N/A N/A N/A Tech Data Inc (TECD US) 4402 4838 3526 1533 -0.7 -3.1 0.9 1.2 -9.2 -15.1 1.10 -1.0 -1.2 Support Services Bunzl (BNZL LN) 719 777 617 2758 -3.4 -0.3 10.0 -1.6 -6.6 -7.5 3.13 2.2 1.8

S E C U R I T Y Securitas (SECUB SS) 7865 7940 6735 3202 1.5 7.2 28.3 3.4 0.4 8.0 2.94 1.8 1.5 Group 4 Securicor (GFS LN) 255 284 238 4184 -1.9 4.1 0.8 0.0 -2.5 -15.1 2.34 2.1 1.7 Security (2) 933 968 845 7387 -0.4 5.4 11.0 1.4 -1.3 -6.6 2.56 2.0 1.6 Unite Group (UTG LN) 194 308 163 362 -1.5 0.8 -33.1 0.3 -5.6 -43.7 0.66 14.8 16.3

R E C R U I T M E N T CPL Resources (CPL ID) 253 278 210 94 0.0 5.4 24.0 1.9 -1.3 4.4 1.39 -6.0 -6.0 Adecco (ADEN VX) 6125 6615 4622 9273 -2.5 11.7 27.2 -0.7 4.7 7.1 2.77 1.0 0.4 Brunel Int. (BRNL NA) 2949 2963 1946 684 2.4 19.4 25.8 4.3 11.8 5.9 3.54 -1.9 -1.5 Harvey Nash (HVN LN) 56 56 32 47 -1.9 0.9 66.1 -0.1 -5.5 39.8 1.08 -0.1 -0.6 Hays (HAS LN) 129 132 88 2079 -1.6 15.8 27.8 0.2 8.5 7.6 13.40 0.8 1.0 Kelly Services (KELYA US) 1880 1998 1032 515 -6.0 2.1 68.6 -4.3 -4.4 41.9 1.23 N/A N/A Manpower (MAN US) 6276 6514 4058 3824 -4.3 8.1 23.0 -2.5 1.3 3.5 1.92 0.1 -0.1 Michael Page (MPI LN) 555 566 346 1982 -0.5 13.2 51.2 1.4 6.1 27.3 10.43 -0.9 -1.0 Randstad (RAND NA) 3950 4141 2801 6717 2.3 12.0 13.2 4.3 4.9 -4.7 2.48 1.5 0.9 Robert Half (RHI US) 3060 3216 2157 3363 -3.0 7.1 22.5 -1.2 0.3 3.1 5.18 -2.0 -2.0 Recruitment (10) 707 723 513 28578 -1.5 11.1 24.4 0.4 4.0 4.7 2.92 0.6 0.2

F A C I L I T I E S M G M T / P R O P E R T Y M G M T ABM Industries (ABM US) 2630 2679 1881 1026 -3.0 10.8 36.2 -1.2 3.8 14.6 N/A N/A N/A AMEC plc (AMEC LN) 1150 1168 734 4436 -1.8 3.5 49.9 0.1 -3.1 26.2 3.37 -2.7 -2.7 DTZ Holdings (DTZ LN) 45 84 36 140 12.9 3.7 -30.1 15.1 -2.9 -41.2 N/A 2.9 1.8 Hochtief (HOT GY) 6354 6572 4564 4893 -2.3 11.4 18.7 -0.5 4.3 -0.1 1.65 0.3 0.1 Interserve (IRV LN) 231 242 184 339 6.0 16.4 23.4 8.0 9.0 3.8 1.25 0.8 0.8 Johnson Controls (JCI US) 3820 3950 2590 19242 -2.4 1.7 50.0 -0.6 -4.8 26.3 2.55 1.2 0.7 Mears Group (MER LN) 303 316 226 299 1.0 6.0 12.1 2.9 -0.7 -5.7 1.86 0.4 0.1 Mitie Group (MTO LN) 234 241 189 975 -0.5 10.0 5.2 1.4 3.0 -11.5 2.12 0.7 0.5 Rentokil Initial (RTO LN) 97 139 88 2049 -3.3 7.4 -13.5 -1.5 0.6 -27.2 N/A 2.2 1.8 Savills (SVS LN) 386 399 273 593 2.0 10.2 24.6 3.9 3.2 4.9 2.44 -1.2 -1.4 Serco Group (SRP LN) 556 651 494 3192 -6.5 -0.4 8.2 -4.7 -6.7 -8.9 3.36 0.9 0.5 Facilities/property mgmt (11) 81596 84570 63439 37184 -2.5 3.9 29.8 -0.7 -2.7 9.2 2.45 0.7 0.4

P L A N T / E Q U I P M E N T H I R E Siteserv plc (SSV ID) 5 10 4 6 0.0 -16.7 -23.1 1.9 -21.9 -35.3 0.97 9.0 7.5 Ashtead (AHT LN) 173 177 77 1014 1.7 28.4 119.8 3.6 20.3 85.0 1.76 2.9 2.7 Cape (CIU LN) 415 415 191 564 2.5 12.5 88.5 4.4 5.4 58.6 1.58 0.7 0.3 H&E Equip. Services (HEES US) 1157 1251 678 303 -4.8 12.8 17.9 -3.0 5.7 -0.8 1.65 3.1 1.7 Lavendon Group (LVD LN) 116 120 44 222 -1.7 42.5 70.7 0.2 33.5 43.7 1.07 2.0 1.4 Ramirent (RMR1V FH) 985 996 624 1071 1.7 12.4 44.0 3.6 5.3 21.2 3.49 1.4 0.9 Speedy Hire (SDY LN) 28 36 19 170 -2.7 -2.8 7.0 -0.9 -8.9 -9.9 0.61 1.9 1.6 Plant/equipment hire (7) 1361 1374 812 3350 0.7 17.6 63.0 2.6 10.1 37.2 1.75 2.3 1.9 FTSE E300 Support Services (E3SUPP) 485 494 393 -1.9 6.8 18.8

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DCC (DCC ID) 192 201 207 8.1 3.0 3.2 2.7 7.7 7.1 6.6 12.3 11.7 11.4 Energy Brenntag AG (BNR GY) 408 540 597 46.3 2.0 2.6 2.7 9.1 8.1 7.5 18.7 14.1 12.8 Buckeye Partners (BPL US) 339 362 400 17.9 5.8 6.1 0.9 13.3 10.8 9.9 19.7 18.5 16.7 Rubis (RUI FP) 479 556 629 31.1 3.5 3.7 1.6 10.9 8.6 7.4 18.2 15.7 13.9 Healthcare United Drug (UDG ID) 23 23 24 7.3 0.3 0.3 0.3 6.8 6.2 5.7 9.2 9.1 8.6 Invacare (IVC US) 181 200 212 16.9 0.2 0.0 36.2 N/A N/A N/A 16.7 15.1 14.3 Euromedis (EMG FP) 47 55 63 34.0 1.1 1.4 9.2 6.1 5.6 5.3 9.5 8.1 7.1 Computer Distribution Ingram Micro Inc. (IM US) 198 233 291 47.0 0.0 0.0 N/A 4.9 4.7 4.0 9.6 8.2 6.6 Northamber (NAR LN) N/A N/A N/A N/A 0.0 0.0 N/A N/A N/A N/A N/A N/A N/A Tech Data Inc (TECD US) 416 469 530 27.4 0.0 0.0 N/A 4.5 3.7 2.8 10.6 9.4 8.3 Support Services Bunzl (BNZL LN) 59 63 68 15.4 3.2 3.4 2.6 9.2 8.5 7.6 12.2 11.4 10.6

S E C U R I T Y Securitas (SECUB SS) 610 649 707 15.8 3.9 4.2 2.0 8.0 7.4 6.8 12.9 12.1 11.1 Group 4 Securicor (GFS LN) 21 23 25 18.4 3.0 3.2 2.8 7.5 6.9 6.4 12.1 11.2 10.2 Security (2) 3.4 3.6 2.4 7.7 7.1 6.5 12.4 11.6 10.6 Unite Group (UTG LN) -2 1 3 N/A 0.0 0.0 N/A 25.5 26.3 31.0 N/A N/A 55.9

R E C R U I T M E N T CPL Resources (CPL ID) 19 21 26 36.8 1.6 1.7 4.8 6.3 4.9 3.4 13.2 11.8 9.6 Adecco (ADEN VX) 286 371 465 62.6 1.4 2.0 3.4 12.4 9.4 7.2 21.4 16.5 13.2 Brunel Int. (BRNL NA) 111 161 231 107.7 2.6 2.9 1.5 14.6 10.3 7.6 26.6 18.3 12.8 Harvey Nash (HVN LN) 5 7 8 59.1 4.4 4.9 2.1 5.7 3.7 N/A 10.9 7.6 6.9 Hays (HAS LN) 3 5 7 126.2 4.5 4.5 0.6 19.6 14.4 10.4 40.2 26.7 17.8 Kelly Services (KELYA US) 73 128 187 157.9 0.0 0.0 N/A 8.1 6.1 N/A 25.9 14.7 10.1 Manpower (MAN US) 167 275 396 137.7 1.2 1.2 2.3 11.8 8.9 7.3 37.7 22.8 15.8 Michael Page (MPI LN) 15 23 33 120.7 1.4 1.5 1.9 19.1 12.8 8.9 37.0 24.3 16.8 Randstad (RAND NA) 195 259 323 65.3 3.0 3.2 1.7 12.7 9.5 7.4 20.2 15.3 12.2 Robert Half (RHI US) 44 44 44 246.6 1.7 1.7 0.8 24.4 24.4 24.4 69.5 69.5 69.5 Recruitment (10) 2.0 2.3 1.9 13.6 10.0 7.7 26.5 18.8 14.2

F A C I L I T I E S M G M T / P R O P E R T Y M G M T ABM Industries (ABM US) 134 150 173 28.7 2.1 2.1 2.4 8.9 6.8 6.2 19.6 17.5 15.2 AMEC plc (AMEC LN) 57 68 76 34.5 1.7 2.0 2.8 11.4 9.9 8.3 20.2 17.0 15.1 DTZ Holdings (DTZ LN) 3 5 5 116.0 0.0 0.0 N/A 9.0 6.3 5.4 17.8 9.9 8.2 Hochtief (HOT GY) 318 371 448 41.2 2.5 2.9 2.0 4.4 3.9 3.5 20.0 17.1 14.2 Interserve (IRV LN) 39 40 42 9.1 7.7 7.8 2.2 3.7 3.8 3.7 5.9 5.8 5.4 Johnson Controls (JCI US) 200 249 295 47.5 1.4 1.5 3.8 11.9 9.3 7.7 19.1 15.3 12.9 Mears Group (MER LN) 23 28 30 30.0 2.1 2.5 3.6 7.7 6.5 5.8 13.0 11.0 10.0 Mitie Group (MTO LN) 21 22 24 18.1 3.6 3.9 2.4 7.5 6.8 6.0 11.4 10.6 9.7 Rentokil Initial (RTO LN) 8 9 10 29.2 1.5 3.1 5.3 6.0 5.4 4.7 12.3 10.8 9.5 Savills (SVS LN) 24 22 29 20.4 3.0 3.2 2.1 8.4 8.8 7.2 15.9 17.6 13.2 Serco Group (SRP LN) 34 38 42 25.8 1.3 1.5 4.6 9.5 8.4 7.1 16.5 14.7 13.1 Facilities/property mgmt (11) 1.7 2.0 3.3 8.6 7.3 6.2 17.7 14.9 12.8

P L A N T / E Q U I P M E N T H I R E Siteserv plc (SSV ID) 1 2 4 N/A 0.0 0.0 N/A 9.4 7.8 7.0 9.4 2.2 1.4 Ashtead (AHT LN) 3 5 10 252.7 1.7 1.8 0.9 6.0 5.5 4.9 62.9 33.1 17.8 Cape (CIU LN) 40 44 47 16.4 2.9 3.2 3.4 5.8 5.2 4.9 10.2 9.5 8.8 H&E Equip. Services (HEES US) -83 7 76 N/A 0.0 0.0 N/A 8.6 4.8 3.9 N/A N/A 15.3 Lavendon Group (LVD LN) 6 9 11 89.8 0.9 1.0 5.9 4.7 4.0 3.6 19.6 12.7 10.3 Ramirent (RMR1V FH) 13 37 58 351.4 2.0 2.5 0.6 9.9 7.6 6.3 76.3 26.5 16.9 Speedy Hire (SDY LN) 0 1 3 N/A 1.4 1.4 0.5 4.0 3.5 3.1 N/A 21.4 9.2 Plant/equipment hire (7) 2.0 2.2 1.6 6.5 5.5 4.8 31.0 20.9 13.5

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67 Davy Research

Resources Sector performance in 2010

• One of the key themes of the past year has been the strength of prices for most hard commodities. This robustness is surprising given the challenging macroeconomic climate. Some of this strength relates to inflows from investment funds and currency movements, but demand from emerging economies and supply-side problems also helped to underpin prices.

• Against the broad strength of commodity prices, there were contrasting performances among related indices. The FTSE E300 Oil and Gas Producers Index underperformed the market and was down 7.9% by end-November. The FTSE E300 Mining Index, on the other hand, outperformed and was up 21% over the same period.

• Clean-up costs from BP's Macondo well in the Gulf of Mexico were probably the key drag on the performance of oil and gas indices, of which BP is a key constituent. However, it could also be that the market has decided that the long-term repercussions of this incident are negative for the sector. Long-term implications include higher insurance costs, stronger regulation, slower and perhaps curtailed permitting, etc.

• In the mining sector, an interesting development is the increased concern regarding the availability of rare earth metals and other strategic industrial metals. This reflects the 'politicisation' of some sources of supply by dominant suppliers such as China, which is following a policy of restricting output in order to preserve scarce resources.

Key themes for 2011

Commodity cycle is in robust health

• We believe the bull story for hard (industrial) commodities is firmly intact. For the most part, this is based on fundamental supply and demand factors (albeit individual commodities will have different characteristics specific to their own set of circumstances). Interestingly, supply-side effects may be more than a physical feature and can have a strong political element.

• Crude oil is a good case in point. On the face of it, the demand side story for crude oil is very strong. Far East growth keeps ticking up: Chinese demand is now 9m b/d, making it responsible for 10.5% of daily global consumption. However, there are also very important supply-side characteristics. For a start, OPEC – which controls one-third of the supply and acts as a cartel – plays a key role in maintaining pricing. Given that it effectively controls the output of the cheapest one-third of global oil, including spare capacity of up to 6m barrels, prices will tend to be set by higher-cost producers than might otherwise be the case. This is especially so for deepwater exploration

Job Langbroek [email protected] Caren Crowley [email protected]

• One of the key themes of the past year has been the strength of prices for most hard commodities

• Clean-up costs from BP's Macondo well in the Gulf of Mexico were probably the key drag on the performance of oil and gas indices

Key themes for 2011 • Commodity cycle is in robust health

• Exploration remains a key driver

• Demand pays up for new supply

• M&A to continue to pick cherries

• China is a key driver


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and production, where costs can be comfortably in excess of US$60 per barrel. The Macondo incident has particular resonance in any review of future costs in offshore drilling. The problem for non-state oil and gas companies is that one of the few areas left with material resource opportunity is in deepwater offshore.

• This combination of supportive demand and supply characteristics is why we believe in a long-term oil price of $85 per barrel. While current prices are in excess of our long-term forecast, we are not inclined to change this view – believing that OPEC indiscipline will act as a moderating influence should oil prices increase too rapidly.

Exploration remains a key driver

• The other oil and gas theme is the growing importance of exploration in the industry. Twin factors are at work here: on the one hand, opportunity is constrained; on the other hand, technology (used and understood correctly) is making a real difference in reducing exploration risk.

• Exploration will become ever more important but also increasingly expensive. Savvy industry participants will use technology to beat the pack and improve returns.

Demand pays up for new supply

• While the rapid increase in LME metals reflects the demand profile from the Far East, some of the less well-known metals have a more interesting story to tell. The rapid expansion of industrial demand in China means that it is reviewing its policy towards the minor or strategic metals that also play a vital role in modern Western economies.

• During 2010 the EU listed a number of these metals that it believed were of strategic importance. This creates an opportunity for market participants in that the reliance of the West on material sourced from China, which has shown a propensity to protect its own resources, has led to a scramble to ensure supply. One of the by-products of this scenario is that the shortage of supply will assert upward momentum on pricing, justified through the rate of return required to source new material.

M&A to continue to pick cherries

• The drivers identified above, especially the mix of strong demand in the context of a number of supply difficulties, creates a good environment for M&A. This is normally understood as a signal to become involved with potential targets. In the current market, however, identification of good growth opportunities and/or purchase opportunities will also be well rewarded by markets.

• Market liquidity will have been helped by the Dana acquisition in late 2010 and should be aided by Cairn Energy's sale of its Indian operations to Vedanta in H1 2011.

• Exploration will become ever more important but also increasingly expensive

• Good environment for M&A

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• We think M&A will continue to be a theme throughout 2011. Oil and gas companies in general are hungry to acquire oil and gas reserves and resources. This could be by way of a direct purchase of reserves or through a purchase of exploration ground or portfolio. Mining stocks are likely to ride the demand surge in general, but extra performance will come through specific situations such as shortages of strategic metals.

China is a key driver

• All of this comes with the warning that the China story has an enormous weighting on the demand side. If China slows, the commodity story slows.

• However, this will not be terminal – partly due to the fact that the Far East drive to industrialisation will continue regardless but also because the cost base of producing commodities is growing as scarcer resources are consumed.


Oil price strength: Dragon Oil, Premier Oil

• Dragon Oil will see out 2010 with the commissioning of new pipeline capacity and processing capacity, which will facilitate 10-15% annual production growth in the coming years.

• Production rates from very recent wells are trending up again, and results from two year-end wells will win credibility for guided production growth.

• Besides its production growth, we like Dragon for its controlling position in material reserves and resources strategically located close to key energy markets. The prospect of a dividend is also enticing.

• Premier Oil is in the process of developing a range of new fields that will see a near-doubling of production (boe) to 75,000 b/d by the end of 2012 and growing thereafter to 100,000 b/d. Such exposure to near-term cash flow makes it a good oil price proxy.

Exploration: Tullow Oil, Cairn Energy

• We see the exploration theme played out very well in the case of Tullow Oil, with significant and material exploration activity underway in its portfolio next year.

• High-impact wells should re-focus investor attention on this potential. Although the Uganda tax dispute weighs heavily for now, its resolution will shift attention to the exploration upside.

• Should Cairn Energy’s deal with Vedanta Resources eventuate, Cairn Energy will represent a purer play on exploration than Tullow. Furthermore, it will lack the diversity of Tullow with the stock becoming extremely leveraged to underexplored Greenland.

• While there is huge risk attached to Cairn Energy’s growth strategy, management believes the opportunity is enormous and compares offshore Greenland to the North Sea. A resumption of Cairn’s multi-

• If China slows, the commodity story slows

• Dragon Oil will see out 2010 with the commissioning of new pipeline capacity and processing capacity, which will facilitate 10-15% annual production growth in the coming years

• We see the exploration theme played out very well in the case of Tullow Oil, with significant and material exploration activity underway in its portfolio next year

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year offshore Greenland in 2011 will help qualify the risk or opportunity.

Paying up for materials: Kenmare Resources and Ormonde Mining

• In the case of Kenmare Resources, a miner of titanium feedstocks and zircon, the post-financial crisis growth spurt in demand has exposed the high cost of new mining projects as well as historic mining underinvestment. The natural course of events is that titanium feedstock prices should rise and returns to miners will increase; this is exactly what is happening. Not surprisingly, Kenmare intends to expand production by some 50%.

• Ormonde Mining has a 90% stake in an undeveloped tungsten project in Spain. Tungsten is one of a number of minerals that have seen their use expand rapidly by China while Western supply is simultaneously curtailed. In response, tungsten pricing is up 50% in 2010.

M&A (buyers & sellers): Petroceltic and Petroneft

• The M&A angle is best played out by Petroneft and Petroceltic. • Petroneft has the capacity to build a portfolio of low-cost oil and gas

assets in Siberia with good progress expected in 2011. Ultimately, we see this leading to interest from larger Russian companies.

• Petroceltic has also set out its stall to build through acquisition and has put in place a team to identify opportunity in the Mediterranean region. Both have considerable further upside.

Smaller resource stocks – some very interesting ideas

• Small pure exploration plays are available with Aminex and its exploration programmes onshore and offshore East Africa (Tanzania). In addition, Providence intends to put in place a multi-well drilling programme offshore Ireland.

• The M&A angle is best played out by Petroneft and Petroceltic

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C O M P A N Y P E R F O R M A N C E S Price 52 Week No of Market Avg Daily Price performance % (local) Quote Sector High Low Shares(m) Cap (€m)Volume(m) 1 wk 1 mth 3 mth YTD 12 mth

Tullow Oil (USc) (TLW LN) 1967.0 2239 1453 888.0 13046.1 1.890 -0.1 9.5 -2.4 -6.8 -6.8 ISE/LSE Oil and Gas Cairn Energy (CNE LN) 420.0 493 318 1399.5 6848.2 5.323 0.2 8.7 -7.4 26.3 26.3 London SE Oil and gas Dragon Oil (USc) (DGO ID) 838.1 838 553 511.5 3201.5 0.607 5.5 23.1 20.5 34.2 34.2 ISE/LSE Oil and Gas Premier Oil (PMO LN) 1950.0 1980 1017 116.4 2644.4 0.313 0.1 6.2 17.9 76.5 76.5 London SE Oil and Gas Heritage Oil (HOIL LN) 448.7 455 288 284.9 1489.2 0.967 -1.3 20.9 51.2 32.3 32.3 London SE Oil and Gas Soco Int'l (SIA LN) 369.6 484 292 340.3 1465.4 0.918 3.4 10.8 -14.1 10.3 10.3 London SE Oil and Gas Bowleven (BLVN LN) 379.0 390 90 215.5 951.4 2.232 1.1 17.1 111.1 319.9 319.9 AIM Oil and Gas Kenmare (USc) (KMR ID) 48.2 51 14 2403.6 865.3 5.157 16.7 27.7 49.3 74.0 74.0 ISE/LSE Mining Cove Energy (COV LN) 96.5 110 22 490.8 551.8 2.171 -1.5 -4.5 35.0 348.8 348.8 IEX/AIM Mining Petroneft (USc) (PTR LN) 110.0 112 31 411.6 338.0 1.915 6.6 7.8 53.6 244.4 244.4 IEX/AIM Oil and Gas Petroceltic (PCI LN) 13.0 17 8 2001.7 303.2 5.740 6.1 2.0 18.2 -13.3 -13.3 IEX/AIM Oil and Gas Circle Oil (COP LN) 34.8 40 30 563.4 228.1 1.469 -0.7 0.0 -2.1 16.8 16.8 AIM Oil and Gas Providence Resources (PRP ID) 300.0 470 180 33.7 101.1 0.046 5.3 7.1 50.0 -28.6 -28.6 IEX/AIM Oil and Gas Regal Petroleum (RPT LN) 25.8 92 12 318.4 95.5 8.081 -1.9 63.5 39.2 -67.8 -67.8 AIM Oil and Gas Mwana Africa (MWA LN) 10.5 15 7 532.5 65.1 1.199 2.4 14.8 -23.6 -16.0 -16.0 AIM Mining Titanium Resources Group (TXR LN) 10.3 14 6 385.9 46.1 0.797 6.5 -8.9 36.7 18.8 18.8 AIM Mining Aminex (AEX ID) 10.0 19 8 454.0 45.4 2.245 0.0 -4.8 11.1 -4.8 -4.8 ISE/LSE Oil and Gas Ovoca Gold (OVG ID) 45.0 48 16 88.5 39.8 0.175 -2.2 9.8 60.7 125.0 125.0 IEX/AIM Mining Ormonde Mining (ORM ID) 11.0 11 4 294.8 32.4 0.862 57.1 57.1 56.5 83.3 83.3 IEX/AIM Mining Petrel (PET LN) 28.0 34 18 76.7 25.0 0.114 24.4 41.8 16.7 3.7 3.7 AIM Oil and Gas Minco (MIO LN) 6.3 6 2 315.4 23.0 1.436 35.1 35.1 72.4 163.2 163.2 AIM Mining Conroy Diamonds & Gold Plc (CDG LN) 6.0 12 4 230.5 16.1 0.764 2.1 -5.9 -41.5 41.2 41.2 IEX/AIM Mining Seaenergy (SEA LN) 23.5 71 17 53.0 14.5 0.497 9.3 -3.1 4.4 -55.2 -55.2 AIM Oil and Gas Lansdowne Oil & Gas (LOGP LN) 13.8 15 4 53.7 8.6 0.098 0.0 44.7 66.7 168.3 168.3 AIM Oil and Gas Karelian Diamond Resources (KDR LN) 4.3 4 1 60.5 3.0 0.196 0.0 6.3 79.0 30.8 30.8 IEX/AIM Mining

K E Y S E C T O R I N D I C E S Index 52 Week Price performance % (local) level High Low 1 wk 1 mth 3 mth 6 mth YTD 12 mth 2 yr 3 yr 2007 2008 2009

FTSE AIM Index 933.6 934 649 2.0 9.6 19.4 41.0 42.7 42.7 136.8 -11.0 -0.5 -62.4 65.9 FTSE AIM Oil & Gas 5290.3 5290 3357 0.8 7.7 17.4 50.1 55.9 55.9 219.8 -0.5 10.4 -68.9 105.1 FTSE 350 Oil & Gas Producers 8246.7 8802 6127 -0.9 10.3 11.0 32.3 0.6 0.6 13.9 -4.3 19.3 -16.0 13.2 FTSE ASX Mining 26838.3 27337 17685 -0.6 13.1 22.8 46.1 27.7 27.7 165.8 17.7 50.4 -55.7 108.1 FTSE 350 Mining 27840.4 28359 18335 -0.6 13.1 22.8 46.2 27.8 27.8 166.3 18.1 50.4 -55.7 108.5 Baltic Dry Index 1773.0 4209 1700 0.0 -15.5 -27.5 -26.3 -41.0 -41.0 129.1 -80.6 107.9 -91.5 288.2 CRB Commodity Index 468.6 519 407 -8.8 -3.2 -3.9 11.9 11.3 11.3 48.7 13.4 14.1 -23.8 33.7 Philadelphia Gold Index 226.6 229 146 2.4 6.3 15.0 27.6 34.7 34.7 83.0 30.7 21.8 -28.5 35.9 VIX Index 17.8 46 16 7.8 -24.6 -25.1 -48.6 -18.1 -18.1 -55.6 -21.1 94.6 77.8 -45.8

C O M M O D I T Y / P R O D U C T P R I C E S Brent Oil $/bbl 94.3 94 70 1.4 11.1 15.8 27.7 22.2 22.2 125.8 0.4 56.2 -55.5 84.9 Gasoline USc/gal 243.0 244 185 -0.5 11.1 19.4 18.0 18.4 18.4 128.8 4.8 N/A -54.2 93.3 Heating Oil USc/gal 254.2 254 187 0.1 9.4 12.1 26.2 20.2 20.2 76.3 -1.3 N/A -44.0 46.7 Jet Kerosene $/mt 831.0 852 630 -2.3 5.9 12.3 19.2 18.0 18.0 79.9 -7.4 51.4 -48.5 52.4 Natural Gas GBp/therm 62.3 66 28 5.6 8.6 34.9 42.6 75.0 75.0 5.2 22.4 97.7 16.4 -39.9 WTI Crude $/bbl 91.4 92 69 -0.1 8.6 14.3 20.8 15.2 15.2 104.9 0.5 34.8 -51.0 77.9 Aluminum $/mt 2460.8 2461 1835 2.4 9.1 6.0 26.1 12.0 12.0 63.2 4.4 -16.7 -36.1 45.7 Copper USc/lb 444.7 445 277 4.4 16.3 21.8 50.7 32.9 32.9 215.4 45.7 13.2 -53.8 137.3 Gold $/t oz 1418.8 1424 1053 2.5 2.4 8.4 14.3 29.1 29.1 61.3 70.1 31.0 5.5 24.9 Nickel $/mt 24708.0 27227 16976 2.6 7.4 5.6 25.6 33.9 33.9 112.8 -5.0 -23.6 -55.4 59.0 Cheddar Cheese Barrel $/lb 1.3 2 1 -1.1 -9.2 -22.8 -4.1 -6.3 -6.3 18.6 -32.3 53.5 -42.9 26.6 Coffee "C" USc/lb 240.5 241 129 2.0 19.5 31.4 45.0 76.9 76.9 114.6 63.7 N/A -23.8 21.3 Corn $/bu 629.0 629 336 2.4 15.6 26.9 68.4 51.8 51.8 54.6 32.8 31.4 -14.0 1.8 Soybean USc/bu 1403.0 1403 895 3.2 12.9 26.8 55.5 33.8 33.8 43.2 24.4 N/A -13.1 7.0 Wheat USc/bu 794.3 815 428 1.4 15.0 17.8 65.4 46.7 46.7 30.1 0.8 59.5 -22.5 -11.3 EU ETS €/mt 13.9 16 12 0.0 -6.1 -10.4 -10.4 3.3 3.3 -12.3 -37.9 23.2 -29.2 -15.1


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Energy and environment Sector performance in 2010

• It was a very tough year for companies operating in the renewable energy space. This is best demonstrated by the poor reception given to the initial public offering (IPO) of Enel Green Power, the renewable energy subsidiary of Italian utility Enel. A lack of investor appetite for the sector is further reflected in the performance of the Wilderhill New Energy Global Innovation Index, or NEX, which fell 14.6% in 2010. The NEX tracks the performance of 87 clean energy stocks worldwide.

• Reasons behind the sector's poor performance include a tough market for project finance; low prices for competing sources of energy, particularly gas; and unstable or slow regulation, specifically in Spain and the US.

• Within the waste management sector, a recovery in recyclate prices provided some relief but critically decent volume growth remained difficult to come by.

• There was M&A around the edges of the waste management sector in 2010. Private equity was the biggest spender and valuations were roughly 8x current year EBITDA. Transactions tended to be for companies that have long-term contracts with municipalities or local authorities. These contracts provide a high degree of revenue protection.


NTR – financing remains the key catalyst for stock in 2011

• NTR has been quiet but very busy in 2010. During the course of the year, it sold its Greenstar UK waste management business and the majority of its toll road assets for combined cash proceeds of €125m.

• These disposals are part of the group's initiative to ensure project finance for its solar and wind power projects. Progress on raising capital from other sources (industry partner, debt market and government) has been slower than expected and curtailed NTR's operational ambitions. The fall in US energy consumption has also reduced appetite for new wind power projects.

• Looking ahead to 2011, the introduction of a new partner in SES Tessera Solar, the solar power subsidiary of NTR, will be vital in reassuring investors that construction on NTR's large-scale solar power projects in California can commence in the next 12-18 months.

• Economic recovery in the US will be a requirement for renewed interest in renewable sources of energy. Recent evidence of a pick-up in the pace of recovery in the US is encouraging. Stable government support for the sector will also be critical.

Caren Crowley [email protected] Aiden O'Donnell [email protected]

• 2010 was a very tough year for companies operating in the renewable energy space

• A tough market for project finance; low prices for competing sources of energy; and unstable or slow regulation contributed to the sector's poor performance

• The introduction of a new partner in SES Tessera Solar will be vital in reassuring investors that construction on NTR's large-scale solar power projects in California can start in the next 12-18 months


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One51 – plenty of scope to drive investment-led growth over the medium term

• One51 enters 2011 as the largest player in the Irish environmental services sector and a key player in the UK market. Its environmental division has been rebranded ClearCircle with the view to bringing the division to IPO (or a trade sale) over the next two years.

• Profits in the first half of 2010 grew strongly year-on-year as recyclate prices increased. Disciplined cost management was also evident.

• One51 will also continue to actively manage its investment portfolio across the renewable energy, infrastructure and food sectors. Strict control of group net debt during 2010 provides plenty of scope to drive investment-led growth over the medium term for anticipated value upside.

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Table 12: Stock ratings

Stock Current rating Date of issue Previous rating Date of issue

Abbey Outperform 30-Jun-09

Aer Lingus Outperform 23-Apr-10 Neutral 30-Jun-09

AGI Therapeutics Neutral 14-Apr-10 Under Review 30-Jun-09

Air France KLM Outperform 18-Jan-10 Neutral 20-Nov-09

Allied Irish Banks Under review 04-Jan-11 Neutral 07-Sep-10

Amarin Neutral 04-Nov-09 Under Review 30-Jun-09

Aminex Outperform 30-Jun-09

ARYZTA Outperform 14-Jun-10 Neutral 30-Jun-09

Associated British Foods Neutral 03-Nov-10 Outperform 02-Jul-09

Bank of Ireland Under review 04-Jan-11 Neutral 07-Sep-10

Barratt Developments Outperform 30-Jun-09

Bellway Outperform 30-Jun-09

Berkeley Neutral 30-Jun-09

Balmoral Intl. Land Neutral 08-Mar-10 Outperform 30-Jun-09

Bovis Homes Outperform 30-Jun-09

British Airways Outperform 05-Feb-10 Neutral 10-Nov-09

Britvic Outperform 27-Sep-10

Buzzi Unicem Neutral 18-Oct-10 Underperform 27-Jul-10

bwin Underperform 02-Nov-10 Outperform 07-May-10

Cairn Energy Neutral 27-Oct-10 Outperform 17-Aug-10

C&C Outperform 30-Jun-09

Carlsberg Neutral 06-Jan-10 Outperform 30-Jun-09

CPL Resources Outperform 30-Jun-09

CRH Outperform 30-Jun-09

CSM Outperform 01-Sep-10 Outperform

Dana Petroleum Neutral 14-Jul-10

Datalex Neutral 30-Jun-09

Diageo Outperform 11-Jan-10

DCC Outperform 30-Jun-09

Donegal Creameries Outperform 17-Sep-10 Underperform 30-Jun-09

Dragon Oil Neutral 14-Dec-09 Restricted 30-Jun-09

easyjet Outperform 07-Sep-10 Neutral 23-Apr-10

Elan Corp Outperform 30-Jun-09

FBD Holdings Outperform 08-Mar-10 Neutral 30-Jun-09

Fyffes Neutral 18-Feb-10 Outperform 30-Jun-09

Geberit Neutral 13-Aug-10 Outperform 06-Jan-10

Glanbia Outperform 11-May-10 Restricted 10-Mar-10

Glencar Mining Restricted 24-Jul-09 Outperform 30-Jun-09

Grafton Group Outperform 07-Jan-10 Neutral 30-Jun-09

Greencore Group Neutral 11-Feb-10 Underperform 30-Jun-09

HeidelbergCement Outperform 04-Sep-09 Underperform 30-Jun-09

Heineken Underperform 08-Jun-10 Neutral 14-Aug-09

Holcim Outperform 19-Mar-10 Underperform 30-Jun-09

Iberia Outperform 19-Mar-10 Neutral 14-Sep-09

ICON Outperform 22-Jul-09 Neutral 30-Jun-09

IFG Group Outperform 04-Mar-10 Restricted 10-Dec-09

Independent News & Media

Outperform 29-Mar-10 Under Review 09-Mar-10

Irish Continental Group Outperform 30-Jun-09

Irish Life & Permanent Neutral 04-Jan-11 Outperform 30-Jun-09

Italcementi Underperform 05-Feb-10 Neutral 04-Sep-09

Kenmare Outperform 06-Apr-10 Restricted 12-Mar-10

Kerry Group Outperform 30-Jun-09

Kingspan Group Neutral 30-Jun-09

Ladbrokes Outperform 14-Aug-09 Underperform 30-Jun-09

Lafarge Underperform 19-Mar-10 Outperform 04-Sep-09


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Ratings table continued

Lufthansa Outperform 14-Sep-09 Underperform 30-Jun-09

Norkom Neutral 19-Nov-10 Outperform 04-Dec-09

NTR Under Review 12-Nov-10 Outperform 16-Oct-09

Origin Enterprises Outperform 30-Jun-09

Ormonde Neutral 30-Jun-09

Paddy Power Outperform 30-Jun-09

PartyGaming Underperform 02-Nov-10 Outperform 31-Jul-09

Pernod Ricard Neutral 27/04/2010 Underperform 11-Jan-10

Persimmon Outperform 30-Jun-09

Petroceltic Outperform 30-Jun-09

Petroneft Outperform 18-Dec-09 Neutral 30-Jun-09

Premier Oil Outperform 14-Jul-10

Readymix Restricted 13-Oct-10 Outperform 06-Apr-10

Redrow Neutral 10-Sep-10 Underperform 15-Sep-09

Ryanair Holdings Outperform 07-Dec-09 Neutral 02-Nov-09

Saint-Gobain Outperform 23-Apr-10 Neutral 13-Oct-09

SIG Neutral 12-Jul-10 Outperform 30-Jun-09

Siteserv Neutral 30-Jun-09

Smurfit Kappa Group

Outperform 30-Jun-09

Südzucker Outperform 12-Feb-10

Tate & Lyle Underperform 13-Aug-10 Neutral 25-Nov-09

Taylor Wimpey Outperform 30-Jun-09

Total Produce Outperform 14-May-10 Neutral 30-Jun-09

Travis Perkins Outperform 30-Jun-09

Trinity Biotech Neutral 30-Jun-09

Trintech Outperform 21-Apr-10 Neutral 30-Jun-09

Tullow Oil Outperform 30-Jun-09

TVC Holdings Outperform 30-Jun-09

United Drug Outperform 30-Jun-09

UTV Media Neutral 30-Jun-09

Wienerberger Underperform 27-Jul-10 Neutral 31-Jul-09

William Hill Neutral 03-Sep-10 Outperform 05-May-10

Wolseley Neutral 14-May-10 Underperform 30-Jun-09

Source: Davy

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Important disclosures

Analyst certification Each research analyst primarily responsible for the content of this research report certifies that: (1) the views expressed in this research report accurately reflect his or her personal views about any or all of the subject securities or issuers referred to in this report and (2) no part of his or her compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this report.

Investment ratings definitions Davy ratings are indicators of the expected performance of the stock relative to its sector index (FTSE E300) over the next 12 months. At times, the performance might fall outside the general ranges stated below due to near-term events, market conditions, stock volatility or – in some cases – company-specific issues. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor's decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Our ratings are based on the following parameters: Outperform: Outperforms the relevant E300 sector by 10% or more over the next 12 months. Neutral: Performs in-line with the relevant E300 sector (+/-10%) over the next 12 months. Underperform: Underperforms the relevant E300 sector by 10% or more over the next 12 months.

Under Review: Rating is actively under review. Suspended: Rating is suspended until further notice. Restricted: The rating has been removed in accordance with Davy policy and/or applicable law and regulations where Davy is engaged in an investment banking transaction and in certain other circumstances.

Distribution of ratings/investment banking relationships Investment banking services/Past 12 months

Rating Count Percent Count Percent

Outperform 51 58 25 67

Neutral 27 31 10 27

Underperform 7 8 0 0

Under Review 1 1 1 2

Suspended 0 0 0 0

Restricted 1 1 1 2

This is a summary of Davy ratings for all companies under research coverage, including those companies under coverage to which Davy has provided material investment banking services in the previous 12 months. This summary is updated on a quarterly basis. The term 'material investment banking services' includes Davy acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer.

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77 Davy Research

Share ownership policy Davy allows analysts to own shares in companies they issue recommendations on, subject to strict compliance with our internal rules regarding own-account trading by staff members. Readers should be aware that analysts writing in this publication may own shares in the stocks covered. If you require further details, please contact [email protected]. We are satisfied that our internal policy on share ownership does not compromise the objectivity of analysts in issuing recommendations.

Conflicts of interest Our conflicts of interest management policy is available at www.davy.ie/ConflictsOfInterest. Davy acts as stockbroker to Abbey; AGI Therapeutics; Aminex; ARYZTA; Bank of Ireland; Blackrock International Land; Boundary Capital; C&C; China Real Estate Opportunities; PL; CRH; DCC; Dragon Oil; Elan Corporation; Fyffes; Glanbia; ICON; IFG Group; Independent News & Media; Irish Life & Permanent; Kenmare Resources; Kerry Group; Minco; Norish; NTR; Ormonde Mining; Ovoca Resources; Petroceltic; Petroneft; Prime Active Capital; Providence; Readymix; Ryanair; Siteserv; Smurfit Kappa Group; Total Produce; Tullow Oil; TVC Holdings and United Drug. The remuneration of the analyst(s) who prepared this report is based on various factors including company profitability, which may be affected to some extent by revenues derived from investment banking. Davy is registered to act as market-maker in the securities of certain companies by the Irish Stock Exchange and London Stock Exchange. Details are available at www.davy.ie/RegulatoryDisclosures. Davy may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in certain companies included in this report. Investors should be aware that Davy may have provided investment banking services to, and received compensation from certain companies included in this report in the past 12 months or may provide such services in the future. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer. Davy may have a shareholding in certain companies included in this report which exceeds 5% of their total issued share capital. Details are available at www.davy.ie/RegulatoryDisclosures. These shareholdings include proprietary positions and discretionary holdings. This disclosure represents the position of Davy as of close of business on the Friday preceding issue of this report.

Other important disclosures A description of this company is available at www.davy.ie/RegulatoryDisclosures. A summary of our standard valuation methods is available at www.davy.ie/ValuationMethodologies. All prices used in this report are as of close of business December 31st 2010 unless otherwise indicated. A summary of existing and previous ratings for each company under coverage, together with an indication of which of these companies Davy has provided investment banking services to, is available at www.davy.ie/ratings. The data contained in this research note have been compiled by our independent analysts, based on a combination of publicly-available information and the analysts’ assumptions and modelling. Further information is available upon request. This document does not constitute or form part of any offer, solicitation or invitation to subscribe or purchase any securities, nor shall it or any part of it form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. Any decision to purchase or subscribe for securities in any offering must be made solely on the basis of the information contained in the prospectus or other offering circular issued by the company concerned in connection with such an offering. This document has been prepared by its authors independently of the company or companies covered. Davy has no authority whatsoever to give any information, or make any representation or warranty on behalf of the company or companies. In particular, the opinions, estimates and projections expressed in it are entirely those of the analysts and are not given as an agent or financial adviser of the company or companies. Please note that in accordance with the Central Bank of Ireland's Market Abuse Rules, no person, other than a market-maker, may enter into any transaction or arrangement which would have the effect of generating a net economic benefit arising from a fall in the price of the following shares: the Governor and Company of Bank of Ireland, Allied Irish Banks plc, Irish Life & Permanent plc and Anglo Irish Bank Corporation plc. Please refer to the Market Abuse Rules for full details.

US Securities Exchange Act, 1934 This report is only distributed in the US to major institutional investors as defined by S15a-6 of the Securities Exchange Act, 1934 as amended. By accepting this report, a US recipient warrants that it is a major institutional investor as defined and shall not distribute or provide this report or any part thereof, to any other person.

Distribution of research to clients of Davy Securities in the US Davy Securities distributes third-party research produced by its affiliate, J & E Davy. Davy Securities is a member of FINRA and SIPC and is regulated by the Central Bank of Ireland. Davy Securities does not act as market maker. Davy or an affiliate holds a proprietary position and/or controls on a discretionary basis more than 1% of the total issued share capital of Blackrock Intl. Land; CRH; Independent News & Media; NTR; Ormonde Mining; Siteserv and TVC Holdings. This information was current as at the last business day of the month preceding the date of the report. An affiliate of Davy Securities may have acted, in the past 12 months, as lead manager/co-lead manager of a publicly disclosed offer of the securities in certain companies included in this report. Investors should be aware that an affiliate of Davy Securities may have provided investment banking or non-investment-banking services to, and received compensation from, certain companies included in this report in the past 12 months or may provide such services in the next three months. The term investment banking services includes acting as broker as well as the provision of corporate finance services, such as underwriting and managing or advising on a public offer.

FTSE licence Davy is licensed by FTSE International Limited to publish the FTSE Indices on a delayed basis. FTSE International shall not be responsible for any error or omission in the FTSE Indices. All copyright and database rights in the FTSE Indices belong to FTSE International or its licensors. Redistribution of the data comprising the FTSE Indices is not permitted. You agree to comply with any restrictions or conditions imposed upon the use, access, or storage of the data as may be notified to you by FTSE or Davy and you may be required to enter into a separate agreement with FTSE or Davy.

Confidentiality and copyright statement Davy, Research Department, Davy House, 49 Dawson St., Dublin 2, Ireland. Confidential © Davy 2011.

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