EUR 100.00 For Business Accounts Only

IBERIAN DAILY 20 MAY (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, ENAGÁS, OHL, PRISA, RED ELÉCTRICA, REPSOL.

MARKETS YESTERDAY AND TODAY

Strong profit-taking following the return of short positions
The stock exchanges erased the previous day’s gains, with the Italian and Spanish markets being the worst performers. In the latter, the losses coincided with the end of the ban on short positions in Europe. Within the Euro STÖXX, the best-performing sectors were Technology and Insurance, which kept the increases from the previous day, whereas Telecoms and Banks posted the biggest drops. On the macro side, in the United Kingdom, the ILO unemployment rate contracted unexpectedly in March, but the number of unemployed increased much more than expected in April. In Germany, May’s ZEW index recovered more than expected, although the current situation component once again worsened unexpectedly. In Spain, public debt levels climbed to 101% of GDP, 5% above YE2019 levels and might stand at 115% in 2020. Today, Parliament will vote on a 15-day extension to the alert state, vs. the 30 days planned by the government initially, thus obtaining the support of C’s. In the US, we saw poor data in the real estate segment, with housing starts contracting by more than -30% in April and construction permits falling by -20%. Separately, Trump and the Republican party were sceptical on the new fiscal stimulus package and in favour of making an effort to reactivate the economy. In Japan, machinery orders fell much less than expected in March. In China, the PBoC kept the 1Y interest rate unchanged at 3.85%, as expected.
What we expect for today
The European stock markets would open with slight drops amid doubts on the results of Moderna’s vaccine. Currently, S&P futures are up +0.39% (the S&P 500 ended down -1.16% vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 20.53%). Asian markets are trading with mixed results (Japan +1.0% and Hong Kong -0.13%).
Today in Germany we will learn March’s trade balance, in Spain March’s industrial output, in the UK April’s inflation, and in the US the Fed minutes from the last meeting. Debt auctions: Portugal (€ 1.75 Bn in 6 & 12M t-bills), France (€ 11.25 Bn in bonds due 2023, 2025 and 2026 & I/L 2025, 2030 and 2036) and Germany (€ 4 Bn in bonds due 2030).

COMPANY NEWS


ACS, BUY
According to the press, ACS would be analysing the possibility of selling part or 100% of CIMIC (73% Hochtief (50.4% ACS) and ~40% ACS’ EBITDA), while speculations suggest the possibility that other businesses such as Cobra (~24% of EBITDA; 31% of the T.P.) or Clece (~2% EBITDA; 2% of the T.P.) could be also sold.
Note that some months ago, ACS commissioned JP Morgan to sell Thiess y Sedgman (mining subsidiary; ~55% of CIMIC’s EBITDA and 25% of ACS’ EBITDA). The equity valuation released by the press article would be around € 1.9 Bn (vs. € 2.3 Bn BS(e), in line with the information made public in the last few months.
News of little impact, as this would only be a rumour and the group’s intention of divesting from CIMIC’s mining activities was already known. Logically, if the divestments materialise in the end, the key will be the price.
We recall that ACS’ NFD/EBITDA’20e would total ~2.2x (including factoring and IFRS), with a liquidity position in 1Q’20 of € 12 Bn (€~9 Bn of cash and €~3 Bn of available credit facilities), with debt maturities’20 totalling €~5 Bn (€~2 Bn including factoring). Apparently, the financial situation is not the problem, but CIMIC’s assets have generated doubts lately.


ENAGÁS, BUY
According to the press, the draft for climate change and energy transition stipulates that any acquisition/alliances on the part of ENAG and REE abroad or outside of their sector will be monitored. A clause in the law will force these companies to notify the government of any move made by any of their subsidiaries, and not from those operating with regulated activities, as is the case now. We recall that the latest moves made by the two companies materialised through subsidiaries operating with non-regulated activities. This measure would also affect Naturgy, but only in Medgaz, the gas pipeline that connects Spain and Algeria. The objective of this clause is to prevent a wrong strategy from affecting the security of the supply on the national level.
News with a negative slant but without impact at present. We recall that the two companies have just made substantial investments outside of their sector (Hispasat in REE/~9% EV) and abroad (Tallgrass/US in ENAG/~7% of EV), and neither the market nor the companies themselves (given their high debt levels; above ~3.5x NFD/EBITDA) were planning to make any diversification investments. REE considered this as an option in the future, but neither the market nor we included it in our estimates.
Long-term, this might limit growth in both companies if the ban is maintained, which in our view should not be permanent.


REPSOL, BUY
According to the press, the US government has threatened to impose “devastating sanctions” on REP and other companies that pump crude oil in Venezuela and then sell it on the international markets, among which are ENI and the Indian company Reliance. This comes from a statement made yesterday by the Amercias Director of the US National Security Council, Mauricio Claver-Carona, who claimed that the White House is notifying all the companies that operate in the country that they must cease operations. As an example, he used Rosneft Trading, the properties and interests of which were frozen by the US Treasury in mid February.
News of little impact for REP. In this regard, the company has always claimed to be in touch with the US government to comply with current regulations. In any event, at the current crude oil prices, its Upstream business in the country represents less than 3% of our valuation, meaning that if the asset was to be shut down, the impact would be marginal.