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IBERIAN DAILY 20 JANUARY + 4Q’20 RESULTS. HIGHLIGHTS AND REST OF PREVIEWS (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, FLUIDRA, IAG, REPSOL.

At the end of today’s report, and during the entire results season, we will include a presentation with positive and negative results highlights and previews for the 4Q’20 results to be released over the coming days in Spain.

MARKETS YESTERDAY AND TODAY

Markets fall throughout the session
The slight gains from early morning were erased after the bullish US opening, and the European stock markets ended the session with small losses despite Germany’s Zew confidence index rising above expectations in January. Thus, within the Euro STOXX, Pharma and Technology were the best-performing sectors vs. Basic Resources and Retail, which were the worst relative performers. On the macro side, in Italy, the vote of confidence in PM G. Conte at the Senate was saved for the minimum range although he will rule in minority. In the euro zone, the ECB warned it plans to manage sovereign spreads. In Spain, the government agreed to extend the temporary personnel restructuring plans through May’21. As for Covid-19, Germany will extend restrictions through the 14th of February and China announced new restrictions in Beijing. In the US, J. Yellen was very much in favour of fiscal stimulus, as expected, arguing that the fight against Covid-19 is more important than any debt concerns. In US business results, Halliburton, Bank of America and Goldman Sachs came in better than expected, Netflix released disappointing figures (although with a strong increase in subscriptions).
What we expect for today
European stock markets would open with gains of less than +0.5% following Yellen’s message of support for more fiscal stimuli. Currently, S&P futures are up +0.2% (the S&P 500 closed practically flat vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 23.24%). Asian markets are trading with mixed results (CSI 300 +0.7%, Japan -0.3%).
Today we will learn in the Euro zone December’s final inflation data, in the UK, December’s inflation data, in the US, the NAHB real estate market index, and in Brazil, the Selic rates meeting. In debt auctions: Portugal (€ 1.25 Bn in 6M & 12M T-bills) and Germany (€ 1.5 Bn in bonds due 2050). In US business results, US Bancorp, Bank of NY, Procter&Gamble and Morgan Stanley, among others, will release their earnings.


COMPANY NEWS

REPSOL. 4Q’20 Trading statement without surprises. Full results to be released on 18/02. BUY.
The trading statement shows operating trends in line with the guidance and expectations, with +2% in production levels to 628x kboe and a refining margin of US$ 1.00 (vs. U$ -0.10 as of 3Q’20) negating the risk of surprises in 4Q’20 results (18/02). We expect € 329 M of Net Profit (vs. € 300 M guidance and € 317 consensus). The key will be debt, where we expect € 4.19 Bn (€ 4.21 Bn consensus) vs. REP’s target of €~3.3 Bn. Here, we would demand from the company a sustainable debt performance that is not exclusively due to a temporary improvement in working capital levels in 1Q’21. After outperforming the IBEX by +4%/+30% in the last month/past three months (in line with the sector), we continue to see upside (+10%), with the stock pricing in long-term crude oil prices below US$~50.00 vs. our estimate of US$ 55.00.

FLUIDRA. Accelerated bookbuild of 10.7% of share capital by Rhône Capital (still holding 21.5%). SELL.
At yesterday’s closing bell Rhône Capital carried out an accelerated bookbuild of 10.7% of FDR’s capital (it initially aimed to place 9.5%) at a price of € 20.20/sh., meaning a -4.3% discount vs. yesterday’s closing price. FDR has acquired 0.75% for treasury stock in order to meet management incentives. Following this move Rhône Capital would hold 21.5%, leaving it with a clear minority stake compared to the total amount held by the founding families (~34% of capital), and free float would reach 44%. Note that Rhône Capital’s previous placement (6.2% in Nov’20) was done with a similar discount (-4.2%) but at € 16.50/sh., as since then the stock has risen +28%. The rise in free float is positive, and we expect more placements once the 90-day lockup has expired.

IAG, BUY
IAG has confirmed the purchase of Air Europa, after changing the initial conditions of the agreement announced in Nov’19. The key points are:
(i) Acquisition price: IAG pays € 500 M (~5.5% if IAG’s EV) in cash for 100% of Air Europa’s capital. This figure is in line with the latest comments made in the press and compares to the € 1 Bn announced in October. The amount would be paid over 6 years from the definitive closing of the deal. As for debt associated to Air Europa, there has been confirmation that net financial debt totaled €~500 M at YE2020, and furthermore there are operating leasing liabilities totaling €~1.6 Bn. In total, the EV of Air Europa would total €~2.6 Bn, with ~1.2x EV/sales’19 being paid (pre synergies and vs. 0.75x IAG).
(ii) Approval from authorities: The deal is still subject to a satisfactory negotiation between Iberia and SEPI regarding the non-financial conditions. Moreover, EU approval is still needed. If everything goes according to plan, the deal could be sealed in 2H’21.
(iii) Synergies: The company estimates the deal will be positive on Net Profit from the first full year, and it reaches a similar ROIC to IAG’s historical level starting in 2026. This would be possible thanks to the “significant” synergies in revenues and costs, with no additional details being given, although the company expects them to have fully materialised by 2026. Looking at previous moves, we think we could see €~200 M of synergies (assuming 3% of joint sales for Iberia and Air Europa).
We still believe the deal makes sound strategic sense and delves into the sector concentration in Europe, which as we have stated we believe will continue and will have a positive effect on the larger airlines like IAG (raising their pricing power). In any event, it initially appears that the price paid is worse than forecast in November, as despite Covid-19 the EV assumed is similar to the expected amount at that time (with the € 500 M of lower equity passing on to an assumed NFD of € 500 M accumulated since then when the reference given is that Air Europa had hardly any debt). The positive part is that there will be no significant cash outflows until 2026, and during that time IAG will benefit from positive cash flows, according to its estimates. With all this in mind, the impact we see at present on the valuation is small, especially considering that the acquisition means only ~12% of IAG’s EV.