EUR 100.00 For Business Accounts Only

IBERIAN DAILY 01 JUNE (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, ELECTRICITY SECTOR, FERROVIAL, INDRA, TELEFÓNICA.

MARKETS YESTERDAY AND TODAY

The European stock market pauses for a break
Without the US references, European stock markets closed the session with slight corrections, where the highlight was the OECD’s higher forecasts thanks to the progress made in vaccination and to the stimulus measures (the US improves by +0.4pp to 6.9% in 2021 and 3.6% in 2022 and the Euro zone by 4.3% in 2021 and 4.4% in 2022, with the global economy growing by 5.8% and returning to pre-pandemic levels in 2022). In the Euro STOXX, the best-performing sectors last week were Basic Resources and Automobiles, whereas Utilities and Pharma posted the biggest losses. On the macro side, in Spain and Germany, May’s preliminary inflation climbed above expectations, coming in at 2017 levels. In the euro zone, April’s M3 moderated more than expected. Separately, Merkel’s Govt. will put an end to the lockdown on 31 June. In China, families will be allowed to have three children to tackle population ageing. Separately, the Caixin manufacturing PMI increased slightly to 52 in May (51.9 in April) and in Japan, the manufacturing PMI climbed above expectations.
What we expect for today
The European stock markets would post slight gains after yesterday’s corrections. Currently, S&P futures are up +0.1% (the S&P 500 was closed for the holiday). Asian markets are falling (China’s CSI -0.1% and Japan’s Nikkei -0.1%).
Today in the euro zone we will learn May’s preliminary inflation, May’s final manufacturing and services PMI and April’s unemployment rate, in Germany May’s number of unemployed, in the US April’s construction expenses and May’s manufacturing ISM. The OPEC+ production follow-up meeting will be held. In debt auctions: Germany (€ 500 M in bonds linked to inflation due 2026).

COMPANY NEWS

ACS, BUY
Atlantia (>50% of Abertis) announced yesterday with the markets in session that its AGM voted in favour (87% of the share capital that attended) of the proposal made by its Board of Directors of selling its 88% stake in ASPI (toll roads concessionaire in Italy) to the consortium led by CDP. Although the result of the vote is not binding for the Board, we understand that it will be ratified by the latter in its upcoming meeting on 10 June, meaning that ACS’ options, in principle, are reduced significantly, although we believe that the company would still have the possibility of presenting a binding offer (in the last few weeks, the company has been analysing the information included in ASPI’s data room) at a higher price before the board’s meeting. However, this offer should have the approval from the Italian Govt., as ACS mentioned.
We recall that the increased offer presented by CDP, while maintaining a floor valuation of € 9.1 Bn (for 100% of ASPI), nears € 9.3 Bn, based on certain deferred payments, and includes an earn-out subject to the potential recovery of the losses caused by Covid-19, among other improvements.
In the past few weeks, the newsflow had considerably reduced ACS’ options to get hold of ASPI (or at least take part in CDP’s offer), meaning that this news, which is not definitive yet, is unsurprising. We understand that, following the sale of its Industrial services business to VINCI (the company will receive a first payment of € 5 Bn at the closing), if the closing of the sale of ASPI to CDP is confirmed, ACS will search for new organic and inorganic growth opportunities in the toll roads concessions segments, as the company has stated on several occasions. The uncertainty on how the funds raised with the sale of Cobra will be used has weighed on the stock, which has underperformed the IBEX by -19% YTD, yielding +23% upside. In our view, the optionality provided by the collection of the aforementioned € 5 Bn payment (70% market cap) in a post-Covid scenario should not mean in principle a loss of value for the company in the short-medium term and should limit the risk of an additional drop from current levels.

ELECTRICITY SECTOR
Today the Ministry for Ecological Transition will present at the Cabinet meeting a Draft to reduce windfall profits of nuclear and hydraulic power plants. According to Government sources, the proposal would respect the European legal framework (where no discrimination should exist by technology), being similar to that of 2006/2009, with the reduction of a percentage of the CO2 dividend to non-emitting plants prior to 2005 selling energy on the market. Speculations suggest that this reduction could be gradual depending on the price level set by CO2 as opposed to 2006/2009, when the Government enabled the free allocation of emission rights to these plants. Based on the current prices for CO2 emissions of around € 50.00/t, the government expects this reduction (if total) to have an impact of around € 800 M and € 1 Bn, and it could mean a -5% cut to the consumers bill.
The electricity companies, which did not consider this measure, would be fully against the decision, warning that the government is the main beneficiary of these extraordinary costs in terms of tax collection, and that the maximum € 1 Bn cut should be assumed by the General State Budget.
Negative news due to the unexpected regulatory uncertainty it generates. The details of the draft and the approval by the Congress are still pending, where modifications could be take place and the support of 50% of the Chamber is necessary.
A reduction of this percentage of CO2 would mainly affect those companies with higher exposure to nuclear or hydroelectric power plants, where Endesa would have a high weight of EBITDA in the production of both technologies (~15% of EBITDA’20 and 12% EV) vs. 8% for Iberdrola (and 4% EV), 4% Naturgy (and 3% EV) and 5% Acciona (and 4% EV).
However, we believe that the reduction of this heading should not be relevant, as the back-up technologies are necessary in the current pricing system that must comply with the European legal framework and that the Government will benefit from this measure, collecting much more with the emission auctions in view of the hike in CO2 prices. In any event, the levels of € 800 M and € 1 Bn outlined account for around 5% of the joint EBITDA of these companies. We also note that higher pool prices will always eventually benefit electricity companies.