EUR 100.00 For Business Accounts Only

IBERIAN DAILY 16 MARCH (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACERINOX, BANKING SECTOR, CAF, CHANGES IBEX, ELECTRICITY/GAS SECTOR, FERROVIAL, IAG, INDITEX, MAPFRE, SIEMENS GAMESA.

MARKETS YESTERDAY AND TODAY

Coordinated action from central banks unable to stop losses for the time being
Market continued to fall on Friday. In the Euro Stoxx, only the Real Estate sector ended with losses, whereas Utilities (+3.5%) and Banks (+3.3%) led the rally. New support measures from central banks were announced at the week-end. Thus, in the US, the Fed cut rates by -100bps to 0-0.25% (2008 levels) and announced bond purchases totalling US$ 700 Bn, unlimited access to liquidity for the financial system and a reduction to 0% in the banks’ liquidity reserves. The BoJ also expanded its ETF purchase programme, announcing that it will take additional measures if necessary, the Central Bank of New Zealand cut rates and that of Australia expanded its liquidity programmes. On Friday, in China, the PBoC cut the banking reserves rate, freeing up some US$ 80 Bn. Now the key will lie in what fiscal measures will be taken. The EU unveiled on Friday a € 37 Bn investment that will be made in the next few weeks. On the macro side, in the US, March’s consumer confidence from the U. of Michigan fell less than expected, as did February’s import prices. In China, retail sales, the industrial output and investment plummeted between -15% and -25% in February.
What we expect for today
European markets will once again open with sharp drops, although the losses could abate over the course of the day. Currently, S&P futures are down -4.37% (the S&P 500 ended +6.32% higher vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 57.83%). Asian markets are falling (Japan -2.46% and Hong Kong -3.41%).
Today in the US we will learn March’s Empire manufacturing index. Debt auctions: Netherlands (€ 2 Bn in 3M and 6M t-bills) and France (€ 4 Bn in 3M, 6M and 12M t-bills).


COMPANY NEWS

CHANGES IBEX. Friday’s meeting of Technical Advisory Committee brought no changes, as expected.
The IBEX 35 Technical Advisory Committee met on Friday in its follow-up meeting (held in early March and September). Note that in these meetings, apart from weighting changes, there are normally no compsition changes made, which normally come in the meetings held in June and December. As expected, no changes were made.

IAG, BUY
According to the press, the company will announce lay-offs in the coming days as a result of the sharp reduction in capacity that we expect to see over the next few months. Specifically, the CEO of British Airways, like the CEOs of other European airlines, has mentioned that this crisis has an impact that has never seen before. Separately, some media have mentioned that the EU authorities will put forward a number of measures to support the air industry. These measures would include a moratorium on taxes, the exemption of airport taxes or interest-free loans. Specifically, the press mentions that the UK airlines would have asked the government for a bail-out totalling £ 7.5 Bn to ensure the survival of the sector.
Airlines will be severely affected by the flight restrictions imposed by several countries. In this regard, we believe that a series of measures of different nature will be adopted to reduce cost and maintain cash levels. In this regard, we highlight that IAG maintains a relatively comfortable financial position, with €~6.7 Bn of cash as of YE2019 and has credit lines totalling €~2 Bn. The measures we expect the company to take, which would be in line with those announced by other airlines, would include not only downsizing plans (~24% of total costs), but also a reduction in commercial costs (~5% of total) and CAPEX, delaying payments to the pension deficit or the cancellation of the dividend payment. The measures to be taken by the authorities will also be relevant. Specifically, the tax exemptions (~10% of total). We would like to stress that the current situation will cause the bankruptcy of other airlines in a less comfortable financial position, which would accelerate the sector concentration in Europe after the crisis is over, thus benefiting the strongest airlines, among which is IAG.

INDITEX, BUY
In view of the COVID-19 crisis, the company will temporarily close stores in several countries in which it operates, such as Spain, Italy and Portugal (among others).
Logically, the news is negative, although we understand that it should be no surprise in view of the scope of the crisis and the measures taken in other countries (like China). The impact is difficult to estimate, as it will depend on the time the crisis lasts (which is uncertain at present). We calculate that Spain, Italy and Portugal account for ~20% of sales, China ~10%. In total, more than 30% of sales would be affected, but there are also other European countries that could take the same steps (the total of Europe excl. Spain is 44% of sales). The company has lost close to a third of its market cap over the past month.

SIEMENS GAMESA, SELL
According to the press, the reason SGRE rose by up to +17% during Friday’s session (in the end it closed up +6.8% vs. +3.7% IBEX) could be due to the possibility that there could be an M&A move on the company. Specifically mentioned is that some investment funds, among which would be KKR, would have shown interest in the 67% stake Siemens holds in SGRE. The news does not rule out the possibility of the deal being carried out jointly by more than one fund and of this being only the first step towards a subsequent separation of the wind turbine maintenance and manufacturing businesses. The possible deal would mean a TOB on 100% of the company, and it would probably mean the delisting of the stock.
For now this is only a market rumour (although we cannot rule it out), although in the short term it could generate momentum in the stock. SGRE has around +10% upside to our T.P., which does not yet include the negative impact stemming from the COVID-19 crisis (difficult to estimate, as the duration it still uncertain), and thus for the time being we maintain our SELL recommendation. As reference prices, we highlight the one at which Siemens acquired the package from Iberdrola (8% at € 20/sh.; +60% premium) and the one implied if we apply the same premium at that time (+27%) to Fridays closing price, which results in €15 /sh., which on the day of the acquisition meant a +27% premium (€ 15/sh.). At present we assign a probability of no more than 25% to a TOB, which would mean we do not have enough upside.