EUR 100.00 For Business Accounts Only

IBERIAN DAILY 24 JUNE (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, AMADEUS, BANKINTER, CELLNEX, ELECTRICITY/RENEWABLES SECTOR, GRUPO CATALANA OCCIDENTE, NH HOTELES, SIEMENS GAMESA, TELEFÓNICA.

MARKETS YESTERDAY AND TODAY

Less tension, with gains on the markets
Sharp gains in Europe after uncertainties regarding international trade fell (the agreement between China and the US remains valid) and following the solid leading indicators for June. In the Euro STOXX, the best-performing sectors were financials like Banks and high-beta cyclicals such as Autos, whereas Travel & Leisure and Construction were the only sectors ending in the red. On the macro side, in the euro zone, June’s preliminary PMIs came in above expectations, with positive surprises in France (above 50) and Germany. Thus, the manufacturing and services PMIs suggest less deterioration in 2Q’20 than expected (-14.4% YoY consensus). In Spain, the governor of the BoS warned that the ECB’s instruments will be adjusted, calling for a nationwide structural reform plan. In the US, new home sales rose more than expected in May, and the Richmond Fed index recovered more than expected. The Secretary of the Treasury, S. Mnuchin, stated that the Govt. could approve a new round of stimuli in July, including new tax cuts and checks for families. From the Fed, J. Bullard admitted that there are some bubbles in financial assets, but far from the levels in 2000. In Japan, May’s leading indicators were slightly better than expected.
What we expect for today
After yesterday’s gains, European markets would open with slight losses. Currently, S&P futures are up +0.27% (the S&P 500 closed down -0.21% vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 31.37%). Asian markets are trading with mixed results (Japan -0.03% and Hong Kong +0.09%).
Today in Germany we will learn June’s IFO and the IMF will release an update on its 2020 growth forecasts (which should be cut). In debt actions: Germany (€ 2.5 Bn in bonds due 2035).


COMPANY NEWS

AMADEUS. The gradual recovery of air traffic will continue to fuel the stock. BUY.
AMS’ leading position in the market (we believe it will emerge stronger from this crisis) and robust financial position (NFD pro forma of 1.04x as of 31 March) after the rights issue made in April, should allow it to weather a 2020 that has been historically negative for the air sector, recovering gradually from the 2H’20 onwards. Thus, in our scenario of V-shaped recovery, which includes the IATA’s latest forecast (-55 drop in traffic in 2020 vs. -48% previously), we maintain our T.P. at € 54.00/sh., yielding +9% upside. We believe we might see an upside potential of between +5% and +10% if we assumed a pace of recovery more in line with the current growth rates (double digit growth in sales) for the new businesses (hotels, payments, etc.), which are not related to the air traffic sector, and on which we have taken a very prudent stance (+6% in sales from 2023 onwards).

ELECTRICITY/RENEWABLES SECTOR
The Government passed yesterday a Royal-Decree law with urgent measures to adopt in the electricity sector that includes from plans to promote renewable energies to programmes aiming to offset the deficit of the electricity system in 2019 and 2020 and to maintain investment levels in networks over the 2020-21 period, among others.
As for renewable energy assets, the new RD law simplifies and speeds up the procedure to install projects. Additionally, we highlight:
(i) It establishes milestones and time periods to avoid speculative moves with network access permits. The new RD law establishes a number of successive administrative milestones within specific time periods that, if not met, would imply the expiration of permits and the execution of the collateral required to request authorisations (maximum duration of 5 years). In this regard, we recall that currently, the number of network access requests exceed 430,000 MW vs. 60,000 MW forecast in the 2021-30 PNIEC. It was already known that the Government was working on these measures, although their inclusion in this RD law would speed up their implementation.
(ii) New Renewable Auction Mechanism. In the new regulatory framework, bids will be made on the price for energy (euro/MW), which would be different for each technology. This measure was expected, and there are press speculations that that a new auction will be launched before the end of the year, as, since they are included in this RD law it is not necessary to wait until the Law on Climate Change and Energetic Transition is passed by Parliament (in process). In any event, it the capacity that will be put on stream is not specified.
(iii) Support measures for cogeneration (including biomass). The RD sets a revision on the value of the operation (Ro) of these facilities during the state of alarm in order to recognise the lower market prices for electricity, thus mitigating the effects of the public health crisis on these facilities. Likewise, the number of minimum equivalent hours of operation applicable to 2020 is cut.
Separately, the RD allows the surplus accumulated in the system since 2014 (€~1 Bn) to be used to offset the deficit generated in 2019 (€~1.2 Bn preliminary, although we expect it to end up at €~800 M) and that to be generated in 2020 due to the drop in electricity demand brought about by Covid-19. Likewise, it increases the annual limits on investments in networks in relation to GDP (up to 0.075% for transport and 0.14% for distribution from 0.065% and 0.13% at present) in order to allow the investment pace forecast previously.
As regards renewables, the news would be positive, although of little impact, as we consider that it emphasises the current Government’s support of renewable energies, although most of the measures were expected. Nevertheless, still pending would be to put these measures into regulation, which we expect to come in the next few months. We would especially highlight the aim of resuming auctions as soon as possible, as this would be good news for renewable asset developers, as it increases visibility on cash flows vs. purely merchant assets. The companies in our coverage universe with the highest exposure would be Iberdrola, Acciona and Ence, where renewables have a total weight of 28%, 65% and 27% of EV, respectively. In the specific case of Acciona, 25% of its pipeline is located in Spain (3,250 MW of a total of 13,000 MW in different stages of development), with this percentage standing at 100% in the case of Ence (~400 MW vs. 316 in operation). For the rest of the utilities, the impact is quite small, as their medium-term projects in Spain are already awarded.
As for the use of the accumulated surplus in order to offset the deficit generated in 2019 and 2020, its impact would be small, as we already expected this to occur, and we do not yet know how big the deficit generated this year will be. As for the increase on annual investment limits in networks, we welcome the measure, which would especially affect Red Eléctrica, given that it would avoid having to reduce forecast investments in view of the sharp drop in GDP expected in Spain this year.