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IBERIAN DAILY 19 OCTOBER + 3Q’20 RESULTS PREVIEWS WEEK 19 TO 23 OCTOBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, IAG, LAR ESPAÑA.

At the end of today’s report, and during the entire results season, we will include a presentation with results highlights and previews for the 3Q’20 results to be released this week in Spain.

MARKETS YESTERDAY AND TODAY

Cyclical stocks led gains in the Euro zone
Stock markets ignored the fact that the US registered the largest increase in newly-reported Covid-19 cases in the last two months as a new peak of infections was reached in Europe. However, the market focused on the better retail sales data for September in the US and on Pfizer’s announcement that, if everything goes according to plan, it would make use of the FDA’s emergency authorisation of its Covid-19 vaccine by the end of November. Meanwhile, within the Euro STOXX, except for Telecoms and Real Estate, which ended in the red, all sectors posted gains, led by Consumer Goods (LVMH fuelled the entire sector) and Autos (thanks to Daimler). As for Brexit, B. Johnson warned that an agreement is unlikely, but left the door open to resuming the negotiations. In China, the 3Q’20 GDP rose less than expected, but the industrial output September’s retail sales recovered more than expected. In US business results, State Street and Bank of NY Melon came in as expected, and Schlumberger better.
What we expect for today
The European stock markets would open with gains of around +0.5%, backed by expectations of an agreement for a fiscal stimulus package in the US being made in the next 48 hours and the good macro data in China. Currently, S&P futures are up +0.7% (the S&P 500 closed down -0.65% vs. its price at the closing bell in Europe). Volatility in the US increased (VIX 27.41). Asian markets are rising (Hong Kong +0.74%, Japan +1.14%).
Today several members of the Fed (Harker, Bostic, Clarida) and the ECB (Lagarde) will speak. In the US we will learn October’s NAHB construction confidence index. In US business results, Halliburton and PPG Industries, among others, will release their earnings. Debt auctions: Netherlands (€ 1.5 Bn in 6M t-bils), Germany (€ 3 Bn in 5M and 12M t-bills), France (€ 5.5 Bn in 3M, 6M and 12M t-bills) and Belgium (€ 2.5 Bn in bonds due 2030 and 2037).


COMPANY NEWS

IAG. A bet on normalisation. BUY
The lack of visibility forced IAG to carry out a rights issue (increasing shares by 1.5x), which along with the cash burned in 2020 (€~5.5 Bn BS(e)) and the revision of estimates (-54% in 2021-22 in EBIT), lead us to cut our T.P. by -49% to € 1.80/sh. The +69% upside means we maintain our BUY recommendation, with the results delivery and news on a possible vaccine being key in the short term. Following the rights issue the company’s financial situation is relatively comfortable (>€ 9.5 Bn of liquidity as of YE2020 BS(e)), but a rebound in business activity is essential if the company does not want to find itself needing more liquidity in 2H’21. Our base-case scenario assumes some normalisation (in 2023 IAG will be -15% smaller than in 2019), with cash being generated in 2021.

ACS, BUY
CIMIC (77% Hochtief; in turn 50.4% ACS) has announced that it has reached an agreement with Elliott whereby the latter will acquire 50% of the mining services subsidiary Thiess (we understand 100% CIMIC; ~25% of ACS’s EBITDA) at an EV valuation of A$~4.3 Bn (€~2.6 Bn; subject to some unmentioned adjustments), with CIMIC holding on to the remaining 50%. CIMIC will receive between A$ 1.7-1.9 Bn of cash (€~1.03-1.15 Bn vs. € 910 M BS(e); between 21-23% of net debt’20e of ACS including factoring and IFRS 16), in addition to deconsolidating A$~500 M of debt from leases (as it will be accounted by equity method; 10% of ACS’s net debt’20e) and reducing factoring by A$~700 M (14% of ACS’s net debt’20e). The agreement also includes the following points:
(i) CIMIC and Elliott will manage Thiess jointly in accordance with the shareholder agreement signed, which includes (among other things) clauses for group governance as well as on dividend policies (no details given).
(ii) Options to transfer Thiess shares, including the possibility of carrying out an IPO or selling to third parties, as well as an option for Elliott to sell its shares in Thiess to CIMIC between year 3-6 after the deal is finalised. The exercise price for the selling option would be the lower between the price of the deal and the market price at the time. Hochtief will provide guarantees for Elliott (the amount has not been given).
(iii) The deal is subject to certain conditions, among which are regulatory approvals.
Lastly, we highlight that the deal would generate some A$ 2.2 Bn of capital gains before taxes (A$ 1.4 Bn after taxes).
This news is not surprising but has a positive impact for ACS. Both CIMIC and ACS have mentioned on several occasions that they expected to close the transaction soon, although the fact that the valuation stands between +15% and +25% above our estimate could have a positive impact on ACS’ share price, as this would mean an increase of between +1.5% and +2.5% in our T.P., improving significantly ACS’ financial position. Given that Thiess will now be consolidated by equity method, the operation would mean ACS’ EBITDA would drop by around -20% BS(e)) whereas the company’s net debt’20e pro forma would stand at € 3.12 Bn (incl. factoring and IFRS16, assuming the mid point of the range guidance given for cash inflow), meaning that the NFD/EBITDA ratio’20e would now stand at 1.8x vs. 2.3x previously (0.3x vs. 0.8x previously excl. factoring and IFRS16). The impact from capital gains on ACS’ Net Profit in 2020 would be +70%. From a cash generation standpoint, CIMIC (and therefore ACS) would receive 50% of the dividends that the partners will pay out (no details have been given), but in any case we understand that this will depend on the level of CAPEX that will be used for growth. In the case of CIMIC, net debt pro forma as of the end of 9M’20 would stand at AUD 130 M of cash net (assuming the mid point of the range guidance given for cash inflow). CIMIC closed with a rise of + 8.2% in today's session.