EUR 100.00 For Business Accounts Only

IBERIAN DAILY 14 MAY (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: COLONIAL, IAG, INDRA, MERLIN PROPERTIES, SANTANDER, TELEFÓNICA, TOURISM SECTOR.

MARKETS YESTERDAY AND TODAY

Fears of a trade war and Powell sink the markets
Widespread losses in European and US stock markets following the comments of slow recovery by the Fed members and the warnings of the Head of the US National Institute of Allergy and Infectious Diseases (A. Fauci) on the possibility of outbreaks in view of a premature deconfinement. In the Euro Stoxx, all the sectors closed in the red, with Autos and Banks leading the drops and Utilities and Technology being the best relative performers. On the macro side, in the euro zone, March’s industrial output plummeted to -12.9% YoY. The European Commission proposed 3 phases to recover economic activity, announcing that airlines will be able to sell all their seats without needing to leave middle seats open. In the UK, the 1Q’20 GDP contracted less than expected to -1.6% YoY, whereas March’s industrial output fell to -8.2% YoY. In the US, April’s production prices fell more than expected. J. Powell, Chairman of the Fed, requested more stimuli from the US Congress in view of the intensity and long-lasting effects of the crisis but he ruled out negative rates. In Brazil, March’s retail sales contracted less than expected. In US business results, Cisco Systems came in better than expected and Schrodinger released disappointing earnings.
What we expect for today
The main European markets would open with losses of around -1.0% in view of the lack of clear drivers. Currently, S&P futures are down -0.47% (the S&P 500 ended practically unchanged vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 35.28%). Asian markets are falling (Japan -1.48% and Hong Kong -1.32%).
Today in Germany and Spain we will learn April’s final inflation and in the US weekly jobless claims. In US business results, Macy’s, Norwegian Cruise and Api Group, among others, will release their earnings. Debt auctions: Ireland (€ 1.5 Bn in bonds due 2029 and 2050).

COMPANY NEWS

SANTANDER. Willing to overcome the CoR-onavirus. New T.P. of € 3.00/sh. (upside around +50%). BUY
Against a completely uncertain backdrop regarding the increase in the banking system’s NPL ratio (due to the extreme uncertainty on how big the recession will be), we try to analyse the increase in the bank’s provisions. According to our numbers, the deficit would reach some € -15 Bn (meaning Net Profit’20-21 of around 50%), which it could absorb with its PPP over the period, and it would still have a capital buffer for another ~250bps over MDA (which would give it leeway for another € +15 Bn of provisions). We expect phase-in CET1’20 to reach 12.02% BS(e), and we do not consider the possibility of a dividend being paid out in 2020. The bank is currently trading at an implied CoR of more than 400bps vs. ~150bps BS(e), which would be way too high. If there were to be a decoupling in recovery, SAN could perform better.

TOURISM SECTOR
Yesterday the European Union presented a package of measures on air transport that includes plans for reopening the borders between countries in a similar containment phase via sanitary corridors. Although a date has not been given, there are press speculations that this option would not occur before the 15th of June, when the EU would establish a 3-phase plan for the return to normal. Only when all of the EU countries are in the same sanitary conditions (no details given), the Schengen area would reopen, allowing travel between member states. Additionally, the press is echoing that the EU advices social distancing in public transportation whenever possible, although it has not established specific conditions (this will be analysed by the European Union Aviation Safety Agency). Lastly, the EU has reiterated that flights cancelled may be refunded at the client’s request, although airlines may offer coupons, with certain guarantee conditions.
These measures do not contribute to reducing the uncertainties weighing on the sector, although they leave the door open to fewer restrictions on airlines (with an impact on hotels) in the return to normal. Although the possibility of establishing quarantines unilaterally is removed, all indications suggest that the timeline for the reopening of the Schengen area (with the same conditions as previously) is unclear, and this might occur after the month of July. Also, it has not been clarified whether there will be limitations on the seating capacity of aircrafts, which would be key to ensure the industry’s profit, although in principle it is not recommended to leave a row unoccupied in planes. The obligation to refund cancelled tickets adds pressure on the airline sector.
In short, we believe that the visibility will continue to be low over the coming weeks and we will have to wait until June to assess the situation. Only clear statements on the seating capacity of aircrafts and a specific timetable that guarantees the high season might help the sector, and this has not occurred for the time being.

COLONIAL, SELL
The company has released 1Q’20 results slightly below our estimates but this would be due mainly to seasonal factors linked to operating costs that we play down. Rental revenues: € 86 M (-1.1% vs. +1.1% BS(e)); EBITDA: € 64 M (+1% vs. +5% BS(e)); Net Profit: € 32 M (+14.3% vs. +21.4% BS(e)). The drop in rental revenues would be due to the effect from the scope of consolidation and, in fact, performance in comparable rents was positive, with growth in all cities (+6% on average, with Madrid and Barcelona being particularly strong). No asset appraisals are made in 1Q.
The company considers that the effect from Covid-19, which is difficult to estimate, might have a