EUR 100.00 For Business Accounts Only

IBERIAN DAILY 25 MARCH (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: AENA, ALMIRALL, ARCELOR MITTAL, BANKING SECTOR, COLONIAL, CONSTRUCTION SECTOR, IAG, NH HOTELES, TALGO, TELEFÓNICA, VOCENTO.

MARKETS YESTERDAY AND TODAY

Stock markets react to stimuli
Stock markets are beginning to react to stimulus measures, first Europe, and then the US after the US Senate reached an agreement to implement a stimulus package worth US$ 2 Tn. The Eurogroup meeting, however, has put off until today the decision to make available a package equivalent to 2% of the EU’s GDP through the ESM. On the sanitary front, today China will lift the restrictions on the Hubei province (as we said yesterday, restrictions on Wuhan will be lifted on 8 April), although in Italy, the number of deaths increased once again after falling for two consecutive days. Within the Euro STOXX, all sectors posted gains, led by Insurance and Motors, vs. Food and Media, which were the worst relative performers. On the macro side, in Spain, the government enabled a guarantee line worth € 20 Bn (which can be extended to € 100 Bn) for businesses and the self-employed. In the US, Democrats and Republicans are beginning to agree on a spending programme worth US$ 2.5 Tn. The Democrats’ counter-offer to Trump’s proposal focuses on renewable energy investments. In the Euro zone, March’s preliminary PMIs were a mixed bag, with the manufacturing PMI contracting less than expected and the services PMI falling more than expected and hitting series lows (39.2 in Feb’09). The reduction (28.4 vs. 52.6 previously) is similar to that seen in China in February (29.6 vs. 54.1 previously). In the US, February’s new home sales contracted more than expected and the Richmond Fed index returned to positive territory unexpectedly in March.
What we expect for today
We expect stock markets to continue rallying. Currently, S&P futures are up +0.4% (the S&P 500 was up +1.69% vs. its price at the closing bell in Europe). Volatility in the US remained stable (VIX 61.67%). The Asian markets are rising (Japan +8.04% and Hong Kong +3.09%).
Today we will learn in Germany March’s IFO, in the UK, February’s inflation, and in the US, February’s preliminary durable goods orders.


COMPANY NEWS

COLONIAL, SELL.
The company believes that the impact from COVID-19, which is difficult to estimate, could affect small businesses from the retail and leisure segments, which account for less than 2% of its rental income. Moreover, the company has decided to put off its Capex programme by € 60 M, specifically in Méndez Álvaro, with only € 90 M pending for the year 2020. However, no relevant penalisations or liabilities linked to these delays are expected. The impact on the year’s cash flow should be irrelevant, given that almost 100% of COL’s portfolio is made up of prime offices and this segment remains unaffected, for the time being, by the measures taken by Spain and France to contain the pandemic.
Something different could occur with asset valuations if, as is already happening, the risk premium increases and the outlook for rental growth worsens. COL’s stock price has fallen -43% in the last month (in line with the sector) and is now trading at a discount of -40% to NAV’19. In view of the latest events, we place our T.P. Under Revision (€ 12.35/sh. previously).


TALGO, BUY.
At yesterday’s closing bell, the company announced the impact from Covid-19 on its activity and some of the measures being adopted to offset it: Working from home: 83% of the personnel in Spain in engineering, projects and central services are working from home (50% in the foreign subsidiaries). Rolling stock manufacturing (65% sales’20e): Its facilities are currently operational although the company does not rule out the temporary stoppage in the event of a state of exception or shortage of supply. We believe that even if the facilities are not shut down, some delay in the manufacturing calendar is likely, which would not entail a loss of business (it has an order backlog equivalent to 6 years of sales’20e) and it would be protected by force majeure clauses in its contracts. Maintenance activit (35% sales’20e): At the request of its clients, the activity has been currently reduced by 60% in Spain (Renfe) and partially in Russia and the US, while in Saudi Arabia, Kazakhstan or Uzbekistan the activities have been temporarily cancelled. In Germany, the maintenance services are being provided under normal conditions. With this in mind, we calculate that it would only maintain ~20% of its activity. In this regard, TALGO announced a temporary redundancy plan affecting 280 employees in this activity in Spain (~65% of the maintenance workforce in Spain BS(e); ~10% of the company’s total). Wage of the chairman and CEO: Their wage has been cut by -50% between March and December’20. With this in mind, the company reiterates the 2020 guidance announced with its FY2019 Results: (i) 2020-21 revenues would stand at around 35% of the order backlog (-5% vs. BS(e) and in line with the consensus), (ii) reaching an average BtB of 1.2x between 2020-21(vs. 0.9x BS(e)), and (iii) obtaining and adjusted EBITDA margin of 16.5% (in line with our estimate and that of the consensus). Negative news although partially expected given the environment generated worldwide (and especially in Spain) by the Covid-19 pandemic. The most relevant impact would stem from the maintenance activity, as all of the activity lost during the Covid pandemic are revenues that will not be recovered (while costs largely remain unchanged). In this regard, we calculate that every month of this situation would mean ~–9% en EBITDA’20e for the company and less than -1% in valuation (vs. the –34% share price correction since the 19th of February; -1% vs. IBEX). As for the manufacturing activity, and as long as the facilities continue operating, we believe that the impact would be more limited, as in principle any delay will not entail a loss in the order backlog, and we would not foresee significant penalisations in this regard.
Lastly, we stress the fact that the company had a € 390 M liquidity position at the end of 2019 (€ 320 M cash and 70 in available credit lines) vs. € 59 M debt maturities in 2020 and € 52 M in 2021. As of Dec.’19 TLGO presented a net cash position of €59 mill.

BANKING SECTOR.
In the Cabinet meeting held yesterday (24/03) the main details were given on the € 100 Bn of Govt. guarantees to back financing linked to “coronavirus bailout” for SMEs, self-employed workers and large Corporates. We learned that the Govt. will put the measures into place gradually, meaning that initially € 20 Bn of guarantees will be given, of which € 10 Bn would bea earmarked for SMEs and the self-employed, and they will have an 80% guarantee on both new loans and refinancing. The remaining € 10 Bn would go towards large Corporates, and new loans will have a 70% guarantee, whereas refinancing will have 60%.
Although the price of the new loans to be granted by banks has not been specified, the banks have been urged to put prices in line with rates for current loans (i.e. SMEs between 2.0-2.5% and Corporates around 1%). The guarantees will be in force for 5 years (the same as in Germany) and will have a cost of between 20bps and 120bps for the financial institutions, which will have to honor (through 30 September’20) this commitment on working capital credit lines granted to all clients, and especially those that receive the Govt. backing. For subsequent packages there is mention that the conditions of the guarantees could be reviewed, although from our conversations with the banks we have learned that they understand that conditions would not be lowered, and that in any event the amount to be granted would be monitored (more than € 20 Bn now being injected). Positive news, as in the end the guarantees are in line with the banks’ comfort levels and are higher than the 65%-70% being considered. That said, we still need to learn whether the amount each bank can grant would be based on their market shares in SMEs/self-employed/Corporates, or if a First In, First Out system will be used.
Like the banks, we welcome this level of guarantees, which would ease some of the pressure the banks have felt on their share prices. The negative (and pending) aspect is the question of whether the 20% that is not Government-backed, if it were to default, would lead NPL ratios in the corporate segment to rise from the current 6.5% to 10% (although below the 15% reached in the 2008-09 crisis). The banks are in talks with the regulator for a framework agreement for all countries to be drawn up.