EUR 100.00 For Business Accounts Only

IBERIAN DAILY 07 NOVEMBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: AENA, ARCELOR MITTAL, ELECTRICITY AND GAS SECTOR, ENCE, ROVI, UNICAJA.

MARKETS YESTERDAY AND TODAY

Little movement on the markets
European markets closed with slight gains in a session marked by a calendar full of macro data releases. In the Euro Stoxx we highlight the rises in Retail and Food (offsetting the poor performance over the past few days) compared to the worst performance in Basic Materials and Media. On the macro side, in Germany September’s factory orders rose slightly more than expected. In Spain, September’s industrial output slowed more than expected. Separately, the EU will cut GDP’19-20 growth forecasts by -0.4% to 1.9% and 1.5%, respectively, expecting the fiscal slippage to reach -2.3% and -2.2% vs. -2.0% and -1.7% expected by the Govt. In the euro zone, October’s final services PMI improved upon the preliminary data thanks to the solid performance in Germany. September’s retail sales sped up unexpectedly. In the US, non-farm productivity contracted, with unit labour costs accelerating unexpectedly during 3Q’19. From the Fed, J. Williams and C. Evans were in agreement with the current rate levels, adopting a moderately accommodative policy. Separately, the signing of phase I of the US-China trade agreement could be delayed until December while China continues to request that tariffs be lifted. In Mexico, October’s consumer confidence worsened. In US business results, Perrigo beat expectations, Qualcomm, Expedia and TripAdvisor released worse earnings than expected.
What we expect for today
European markets will open with slight gains, backed by the business results. Currently, S&P futures are down -0.12% (the S&P 500 was up +0.14% vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 12.62%). The Asian markets that are open are trading with mixed results (Hong Kong -0.39% and Japan +0.11%).
Today, in Germany we will learn September’s industrial output, in the euro zone the monthly ECB meeting, in the UK the BoE interest rates meeting, in the US weekly jobless claims and in Mexico October’s inflation. In US business results, Dish Network and Discovery, among others, will release their earnings. Debt auctions: Spain (€ 4.25 Bn in I/L bonds due 2023, 2024, 2029 and 2035) and France (€ 10 Bn in bonds due 2029, 2034, 2050 and 2066).


COMPANY NEWS

ARCELOR MITTAL: Better than expected 3Q’19 results. We maintain our BUY recommendation
The 3Q'19 results came in above our forecast and consensus in terms of EBITDA ($ 1.06 Bn vs. $ 853 M BS(e) and $ 930 M consensus). Only the mining business (25% EBITDA) performed worse than expected, while the steel business (75% EBITDA) is better in all geographical areas. As for debt, MTS expects working capital to be freed up in 4Q’19, bringing net debt to below the $ 10.13 Bn seen in 2018 (vs. $ 10.66 Bn in 9M’19). We will cut our estimates for a 2019 that is somewhat worse on the whole, but we continue to see significant upside (>25%) and maintain our BUY recommendation.

ROVI, SELL
The 3Q’19 results were better on the operating level (EBITDA +66.7% vs. +35.0% BS(e) and +17.5% consensus) due to higher margins and sales in line with our estimate, but slightly above the consensus (+29.6% vs. +29.3% BS(e) and +24.5% consensus). The company has given guidance on operating revenues’20 in mid-single-digits, which is in line with the consensus (+5%) and slightly below our estimates.
In short, the 3Q’19 results beat expectations on the operating level, with a 2020 revenues guidance in line with the consensus (+5% and +8% BS(e)), and thus we expect a slightly positive reaction following the solid recent performance (+9% over the past month; +5% vs. IBEX).

ELECTRICITY & GAS SECTOR, ENAGÁS BUY, NATURGY SELL
According to the press, last week’s rumours have been confirmed and the CNMC has submitted a proposal to the Council of State in which it cuts by half the cuts to the gas sector for the 2021-2026 period. Thus, with respect to the initial remuneration proposal, the drop went from -22% to -10.5% currently. The remuneration levels expected for 2026 would fall by -18%, vs. -31% previously.
The smaller cut came from an improved remuneration formula for the operation and maintenance of the assets, offsetting the elimination of the RCS component (remuneration for continued supply).
That said, after being analysed by the Council of State, the proposal will return to the CNMC. In the meantime, the management of this institution will change, meaning that we cannot rule out further delays, renegotiations and adjustments (for the better) on the gas sector.
Positive news both to Enagás (BUY) and, to a lesser extent, Naturgy (SELL), as both stocks soared last week, pricing in this scenario. Thus, the stocks’ current trading levels are already pricing in a scenario of cuts being reduced by 50%, which curbs the upside potential in the short-term.
Thus, with risk increasing following the rally, we continue to see an upside potential of +10% in Enagás based on the delay in the letters being approved due to the less urgency (the changes will come into force in January’21 vs. January’20 in the case of electricity assets). Against this backdrop, we bet on further by a new CNMC (after the new government formation). Meanwhile, we believe that the market will converge towards a scenario of greater optimism, which in a scenario of zero cuts would justify the upside potential previously mentioned (standing in line with the electricity sector’s trading levels, that is a scenario of zero cuts).