EUR 100.00 For Business Accounts Only

IBERIAN DAILY 13 MAY (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, APPLUS, METROVACESA, SIEMENS GAMESA, TELEFÓNICA, TOURISM SECTOR.

MARKETS YESTERDAY AND TODAY

IBEX 35 leads Europe
There was a tentative rally on European stock markets, with the IBEX’s +1.3% rise standing out. In the Euro Stoxx, Telecoms and Pharma were the best performers, with Basic Materials and Insurance falling the most. On the macro side, in Spain the Govt. announced a 14-day quarantine period for anyone arriving from abroad starting on 15 May and until the state of alarm is lifted, and the temporary resumption of EU internal controls on air and sea from 15-24 May. From the ECB, P. Lane stated that the asset purchase programme is proportional and will end when the inflation target has been met. In the US, April’s general and core inflation fell more than expected to 0.3% and 1.4% YoY, respectively. From the Fed, J. Bullard highlighted that the prolonged lockdown runs the risk of leading to a depression, whereas Mester pushed a QE before negative rates, and along with Kaplan, Barkin and Kashkari, called for more fiscal stimulus measures. In China, total social financing rose more than expected in April. In US business results, Ideaya Biosciences was in line, Novanta beat expectations and Duke Energy released worse earnings than expected.
What we expect for today
The markets would open with drops of up to -1.0% that could be reeled in during the morning. Currently, S&P futures are up +0.15% (the S&P 500 ended down -2.0% vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 33.04%). Asian markets are trading with mixed results (Japan -0.46% and Hong Kong +0.23%).
Today in the euro zone we will learn March’s industrial output, in the UK 1Q’20 GDP and March’s industrial output, in the US April’s production prices and in Brazil March’s retail sales. In US business results, Petrogress, Oragenics and Avinger, among others, will release their earnings. Debt auctions: Italy (€ 9 Bn in bonds due 2023, 2027, 2035 and 2040) and Germany (€ 1 Bn in bonds due 2049).

COMPANY NEWS

TOURISM SECTOR. Possible common measures in EU to resume air activity.
Today the EU is expected to announce the safety measures airlines should follow in order to resume their operations, which will also indirectly affect the hotel sector. The key to this is for there to be a common strategy within the EU, but also that measures be considered that combine health safety with economic viability. If quarantines or capacity limits on high season are considered, the news would be very negative for the sector, although the press has stated that Brussels does not support either of these measures, rather betting on a return to normality in 3 phases. IAG specifically has already mentioned that in these conditions it will not meet its plan of going from 10% of operating capacity in 2Q’20 to 50% in 3Q’20. This will have significant implications on hotels, as tourists account for ~70% of overnight stays in Spain.

APPLUS, BUY
We highlight the main messages conveyed at the conference call held today with Joan Amigó (CFO):
(i) Impact from Covid-19 in the 2Q’10 and expected recovery: it foresees a -35% sales drop and slightly negative EBIT (without giving accurate figures, with greater impact on MoT activities and Oil& Gas) in the 2Q’20 and the beginning of the recovery in the 2H’20 and significant as the MoT stations are reopened (41% of the group’s EBIT; where stations are already being reopened)
(ii) Automotive: the reopening of stations in Spain is already materializing, and the company expects to recover the business lost between 2020 and 2021 (most of it in 2020), stating that it will lose part of the productivity due to the safety measures will be forced to implement in the stations.
(iii) Oil & Gas: as for the business linked to Opex (~25% of the group’s sales), the company does not expect a loss of volume, although it forecasts delays and some pressure on prices (which the company will try to offset with costs and an increased share). In this regard, it will be more restrictive about accepting price reductions. As for the business linked to Capex (9% of total sales), the company expects to see some deterioration due to low crude oil prices and their impact on the cancellation of new projects. However, the business’ fragmented nature makes it somewhat more resilient.
(iv) Financial position: the company is satisfied with the measures that were adopted recently in order not to meet the debt covenants. The company’s current liquidity position is € 622 M (after obtaining a new loan facility of € 150 M in April), with € 390 M of cash. With these measures and with its sizeable debt maturities falling due from 2024 onwards, the company would have much leeway to absorb the current situation. Moreover, it expects the impact on cash to be insignificant in April, as the drop in the P&L statement would be offset with lower working capital investment.
(v) M&A: the company considers this is key to its strategy and value-enhancement. However, it believes that deals will not emerge in the short-term given the current uncertain situation.
These comments reinforce those unveiled at the conference call on 1Q’20 Results and offer visibility on the impact from Covid-19 and on its measures to tackle it, although they also underscore the uncertainties in the short-term, with the company being unable to update its targets’20. As we outlined last week, we will cut our estimates and T.P. (from € 14.60/sh. to Under Revision). With the impact expected in the 2Q’20 (where EBIT accounts for around 30% of the total), our cut would reach -45% in EBIT’20e and a lower level in T.P. (around -35% vs. the current € 14.60/sh.) based on a rapid recovery of the hardest hit business (Mot), and thus the upside would continue to be appealing. We maintain our BUY recommendation as we see value in the long-term.