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Sonae (SON PL, €0.81, Buy, FV €1.25): The same company but (much) cheaper

Following a period of restriction, we reinstate coverage of Sonae with a BUY rating and a Eur1.25 FV. We think the shares have been unfairly penalised by: i) the uncertainty around the valuation readacross from the cancelled IPO of Sonae MC and potential reinvestment risk; ii) the unexpected CEO change; and iii) the acquisition of a further 20% stake in Sonae Sierra at a time when shopping centres seem out of favour and rental yields in Europe are close to historical lows. On the first issue, we note that even if we were to value the assets within the IPO perimeter at the low end of the book-building range (Eur1.4bn-Eur1.65bn equity value), the implied Eur1.1 FV for Sonae would still offer 36% potential upside from current depressed levels. On the mgmt change, we would not expect it to drive any major strategic disruption as the controlling shareholder of Sonae remains Efanor, where Mrs Claudia Azevedo has long been involved in the major decisions. Finally, on the acquisition of Sierra, we would tend to agree that the deal was ill timed and the c.10% discount to NAV seems low when looking at European listed peers. The deal has actually impacted negatively our FV by Eur0.04 despite being earnings accretive from day one, on our estimates. All in all, we think the equity story of Sonae has not changed materially but after the 25% YTD correction (vs. -6% for PSI20) the shares look quite inexpensive on 2019e multiples - 8.4x adj P/E, 3.9x EV/EBITDA and a well backed 5.8% DY – namely after taking into account that direct earnings should post an 18% CAGR 17-20e.