EUR 100.00 For Business Accounts Only

IBERIAN DAILY 12 MAY (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, AMADEUS, ARCELOR MITTAL, DIA, FERROVIAL, INDRA.

MARKETS YESTERDAY AND TODAY

Back in the red
Widespread losses in most European stock markets, with the IBEX 35 performing the worst. In the Euro Stoxx, only 3 sectors closed in positive numbers, with Retail and Pharma leading the gains vs. Basic Materials and Travel & Leisure the worst performers. On the macro side, in Italy March’s industrial output fell more than expected to -29.3% YoY, its lowest level on record. In Spain, the Govt. announced it will make layoffs more flexible after the conclusion of temporary layoff plans. From the ECB, I. Schnabel confirmed that the organisation will continue to purchase public debt, despite the German constitutional court’s ruling, further announcing a +54% increase in purchases last week. In China, inflation saw its YoY rate fall more than expected in April to 3.3%, and production prices fell more than expected (-3.1%). In US business results, Under Armour and Marriott released worse earnings than expected, whereas BlueBird and Entergy Corp. beat expectations.
What we expect for today
The markets would continue to fall, but to a lesser extent, with risks of a new wave of Covid-19 cases setting the pace for the next few days following the new cases in Wuhan (China) and South Korea. The air and tourism sector will remain under scrutiny, whereas Europe will debate Italy’s proposal of creating a quarantine-free travel “corridor”, seeking an agreement with Spain, France and Germany. Currently, S&P futures are down -0.48% (the S&P 500 ended up +0.22% vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 27.57%). Asian markets are trading with mixed results (Japan +0.14% and Hong Kong -1.62%).
Today in the US we will learn April’s inflation. In US business results, Rexnord, IsoRay and Cancer Genetics, among others, will release their earnings. Debt auctions: Spain (€ 7.5 Bn in 3M and 9M t-bills), Italy (€ 6.5 Bn in 12M t-bills) and Germany (€ 4 Bn in bonds due 2027).

COMPANY NEWS

INDRA. Results below expectations due to delays in Eurofighter and to Covid-19. Guidance cancelled. We will cut estimates and T.P. BUY.
Given the lack of visibility, the company has cancelled its guidance’20 and postponed the decision to propose a dividend (expected to be charged against 2020 results). The backlog performed well (+12%), reaching a record level. The 1Q’20 EBIT came in at € 19 M (-50.3%) with a 2.6% margin (vs. 5.2% in 1Q’19) due to higher restructuring costs (€ 1 M, 5% EBIT) and the falling profitability of T&D (Eurofighter and Covid-19). IDR expects 2Q’20 to be challenging, and worse than Q1, although it also expects “substantial” recovery in delays in 2H’20 (no numbers given). We will cut our estimates, and thus our T.P. (which we place Under Revision from the previous € 11.50/sh.). Although in the short term there could still be an impact from the uncertainty and the lack of visibility, we understand that most of this is due to delays that will eventually recover, and thus we maintain our BUY recommendation. The current share price would be factoring in a drop of around -35% in EBIT’21, with margins falling around -310bps to below 6% (below 2016 levels), the lowest in the past 15 years (except in 2014-15, which were hit by heavy provisions). We believe this is an overreaction, as most of the impact seen to date is from delays expected to recover (mostly in 2020).

AMADEUS. Better 1Q’20 results in EBITDA. BUY.
The company’s 1Q’20 results came in as expected in sales, but better in EBITDA (-42% vs. -48% BS(e) and 48% consensus). By divisions, revenues in Distribution (57% of sales) fell more than expected (-46% vs. -37% BS(e)) due to a -48% drop in air bookings through agencies. This was offset with better revenues in IT Solutions, which fell very slightly (-1.1% vs. -11% BS(e)). The EBITDA margin came in at 34.2% (vs. 32% BS(e) and 30.7% consensus). We expect a positive market reaction as EBITDA came in above expectations, and considering the stock’s recent poor performance, which has fallen -13% vs. Ibex 35 since market highs on 19 Feb, when the impact from Covid-19 began to be felt.

DIA, SELL
DIA has released better 1Q’20 results in EBIT (€ -55 M vs. € -131 M BS(e) and € -120 M in 1Q’19) due to the lack of restructuring costs (vs. around € -67 M in 1Q’19). The company has announced specific targets for the next few years, with sales of €~7.25 Bn in 2021 up to €~9 Bn in 2023, and with the EBITDA margin improving from 2.5%-3.0% in 2021 to 5%-6% in 2023.
Beyond the results, we welcome the slightly more accurate targets of the Transformation Plan, the guidelines of which were already made public in FY2019 Results. In any event, in addition to the apparently evident improvement capacity in the short-term, these are ambitious targets mainly in the current environment of tough competition and this would be already priced in after having almost soared by 3x since March’s lows.

ARCELOR MITTAL, BUY
The company has announced the conditions of both the rights issue and the mandatory convertible bond issue, which was announced yesterday. The company will execute a US$ 750 M rights issue at a conversion price of US$ 9.27/sh. (€ 8.57/sh.), which will mean issuing 80.9 M shares (7.9% of the shares outstanding). The issue of mandatory convertible bonds (with a maximum duration of 3Y and a 5.5% coupon) will total US$ 1.25 Bn. The conversion price will range between US$ 9.27/sh. and US$ 10.90/sh., which would mean issuing between 134.8 M and 114.7 M shares (between 13.2% and 11.2% of the shares outstanding).
In short, we considering the bond issuance as a delayed rights issue, the number of MTS shares will be increased between 19.1% and 21.1%.
According to the company, the objective of these issuances is to reduce debt to levels close to its medium-term target (US$ 7 Bn; vs. US$ 9.5 Bn as of the end of 1Q’20) to have a more comfortable position against the current backdrop.
Negative and surprising news, bearing in mind the company’s comfortable liquidity situation (with US$ 10 Bn vs. US$ ~4 Bn of maturities in 2020-21) and the reduced cash break-even point to US$ 3.5 Bn (US$ -1 Bn vs. prior guidance) confirmed by the company only a few days ago. We understand that the decision could thus be motivated by expectations of a prolonged weak macro outlook and the recent rating downgrade to non-investment grade by Moody’s and Fitch (S&P would have kept the stock at IG following this announcement). Our T.P. is now Under Revision, but based on our previous T.P. (€ 18.50/sh.), assuming the issuance of convertible bonds as a deferred capital increase and under the known terms, the dilutive effect on our T.P. would be between 8.6% and 10.3%. Yesterday the stock fell -15.85% after the news was released.