EUR 100.00 For Business Accounts Only

IBERIAN DAILY 17 OCTOBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACCIONA, COLONIAL, ELECTRICITY & GAS SECTOR, FCC, FERROVIAL, FLUIDRA, MÁSMÓVIL, MERLIN PROPERTIES, SANTANDER, TÉCNICAS REUNIDAS


MARKETS YESTERDAY AND TODAY


Awaiting clarification
The lack of progress on Brexit did not allow the European stock markets to break through one-year highs. Thus, within the Euro STOXX we saw a mixed performance, with Autos and Banks leading gains and Financial Services and Technology ending with the biggest drops. On the macro side, in the Euro zone, vehicle registrations climbed in September (favourable comparison), returning to positive territory, whereas final inflation was lowered by a tenth of a percent vs. the preliminary data. In the United Kingdom, general inflation remained at 1.7% in September, in line with core inflation. As for Brexit, the negotiations came to a standstill after the DUP, confirmed it will not back B. Johnson’s plan, as it would leave Northern Ireland separated from the rest of the United Kingdom. In the US, retail sales contracted in September for the first time since February, which could be showing a contagion effect spreading from the manufacturing sector to the rest of the economy. On another note, the NAHB construction sector confidence for October increased above expectations. As for the trade war, D. Trump announced that a trade deal with China is unlikely until he meets Xi Jinping at the Chilean summit in mid November. From the Fed, C. Evans spoke in favour of further cut rates in view of the current risks, although he expects inflation to return to levels of 2% in the medium term. In US business results, Bank of America and Netflix (which released disappointing subscriptions data) came in better than expected, Abbot Laboratories worse and IBM in line.
What we expect for today
The markets would open with profit-taking, dragged down by financials and the GBP depreciating in view of the 11th hour Brexit complications. Currently, S&P futures are unchanged (the S&P 500 was down -0.09% vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 13.68%). Asian markets are rising (Japan +0.10% and Hong Kong +0.63%).
Today the EU Council begins. Also we will learn: in the US, housing starts and building permits for September, the Philadelphia Fed index for October and September’s weekly jobless claims and industrial output. In US business results, Morgan Stanley, Philip Morris, Honeywell Int and Union Pacific, among others, will release their earnings. In debt auctions: Spain (€ 3.5 Bn in bonds due 2021, 2024 and 2029) and France (€ 1.5 Bn in I/L bonds due 2024, 2025 and 2029).


COMPANY NEWS

MÁSMÓVIL, BUY
Gala Capital has carried out an accelerated bookbuild for 3.91% of the company at a price of € 22.09/sh. (-6% discount), and thus it would now hold ~0.4% of the share capital. Other main shareholders: Providence 27.7%, Indumenta Pueri 8%, Jose Eulalio Poza 5.4%, Carmen Ybarra 13.3%, FMR 8.4%.
Negative news. Beyond the discount, and until we know the specific reason behind the sale, the message being sent to the market is negative. We reiterate our positive view, strengthened after the recent agreement with Orange and the raised guidance.

MERLIN PROPERTIES, BUY
Yesterday the company held a meeting with analysts and investors in which it explained its position on some of the current issues in the sector (such as flex working in offices, proptech, etc.) and others specific to the company (innovative projects in logistics and solar energy). Of course, it also spoke of the future of retail. We highlight the following:
Offices: The company’s strategy in flexible space is to dedicate around 20% of the space in some of its assets to this concept. MRL believes that the idea makes sense (beyond temporary trends), as many of its traditional clients are requesting the format in order to adapt to peak space demands. They also spent a good deal of time explaining MRL-Hub, a project to offer additional services (mobility, F&B, etc.) to employees of its tenants in areas in which it owns several buildings (such as the north of Madrid).
Logistics: The meeting included a visit to two logistics centres on the A2 highway in Madrid, which concentrates most of the logistics space in Spain. MRL’s assets are state-of-the-art, meaning that they are larger and more modern that the rest, which should translate into higher rents than the area average in the short and medium term, as well. Among the new projects under way, our attention was drawn to the use of parking space in its office buildings in Madrid and Barcelona for “last mile” logistics uses during late-night hours (still in project phase) and the installation of solar panels in logistics assets (which could potentially increase rents in the buildings by +15%/+20%).
Retail: The company has worked hard on improving the mix of its tenants and increasing “experience” and F&B. The development portfolio has pre-rent levels >90%, which is good news. MRL has responded to the inevitable question of the outlook for retail by stating that the fact is that at present the segment is doing well, with growth in traffic and sales/m2, although it admits that long-term visibility is quite low and that it would currently be difficult to sell the portfolio at close to its appraisal value.
Development portfolio: Milestones are being met according to plan.
Capital allocation: The priority is to finance the development portfolio, and thus it would not be necessary to raise debt or equity, but it would be necessary to sell some € 390 M of assets (~3% of the portfolio) over a total of around € 700 M of assets identified as non-strategic that could be sold. With the excess funds the company seeks to reduce debt over buying back shares in order to bring its NFD/EBITDA ratio to around 10x in the medium term (vs. 11.9x currently).
Portfolio reclassification by type: Most of what to date was known as “High Street Retail” (mainly the BBVA offices) will now be called “Net Leases”. We understand that this is to downplay the word “retail” in product mix graphs, which makes some sense given that the contract with BBVA still has 20 years left (it is a quasi-bond for BBVA) and the word “retail” does not have a good reputation recently.
We like MRL’s positioning and how it is facing the challenges in the sector. Really we do not see a short-term impact from this meeting, which as we have stated was more conceptual than quantitative.

SANTANDER, BUY
According to the press, SAN Spain would be considering a new sale amounting up to € 6 Bn of impaired assets (c.25% of the total, with NPL coverage of 43%) consisting of two portfolios called Atlas Project and split on € 2.7 Bn of NPLs mortgages and € 3 Bn in lands. The price of the transaction is by this time unknown and it would be expected to close in 1Q20. If done, the entity would reduce its NPLs portfolio to c. 5% from 7.02% in 1H’19.
If confirmed, it would be positive news, but with limited impact. Given the appetite of real estate funds, we see that SAN is very likely to succeed in the sale. It would allow the bank to advance in the chapter on impaired assets, since it would be left with a little relevant figure, although the impact on capital would be reduced, since we estimate that the portfolio for sale accounts for less than 1% of the bank's RWAs.