EUR 100.00 For Business Accounts Only

IBERIAN DAILY 21 OCTOBER + 3Q’20 RESULTS PREVIEWS WEEK 19 TO 23 OCTOBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: APPLUS, IBERDROLA, TÉCNICAS REUNIDAS.

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

Europe ends flat
The gains seen in the morning eased throughout the session as value companies continue to gain ground vs. growth, which benefited peripheral (IBEX +1.4%) vs. core stock markets (DAX -0.6%). In the Euro STOXX, Banks (for the second consecutive session) and Travel&Leisure (airlines benefiting from the good news surrounding a vaccine and Heathrow’s decision to carry out rapid tests on international passengers) were the best performers, while Basic Resources and Technology (dragged down by the US, following the filing of a legal lawsuit against Google for monopoly) again saw the biggest losses. In the US, the surprise increase in building permits for September underpinned the better performance in materials and cyclical consumption. In US Results Travelers and Philip Morris were in line, Procter&Gamble and PACCAR beat expectations along with Netflix, which posted disappointing subscriber numbers.
What we expect for today
The European stock markets would open with gains of around +0.5% as Spain studies the possibility of declaring the state of emergency once again in order to impose curfews, and ahead of a possible agreement on the fiscal stimulus package in the US (Trump would be willing to accept the Democrats’ proposal of a US$ 2.2 Tn package). Currently, S&P futures are up +0.45% (the S&P 500 closed practically unchanged vs. its price at the closing bell in Europe, with the antitrust suit filed against Alphabet (Google) by the Dept. of Justice for abuse of power ended up dragging down tech stocks). Volatility in the US increased (VIX 29.35). Asian markets are rising (Hong Kong +0.66%, Japan +0.35%).
Today, in Spain, the Congress will hold a vote of no confidence against the Govt. Also we will learn in the US the Beige book. In US business results, Verizon, Nasdaq, Baker Hughes and Whirlpool, among others, will release their earnings. Debt auctions: Portugal (€ 1.55 Bn in 3, 6 & 12M T-bills).


COMPANY NEWS

APPLUS. Acquires Besikta from Volati AB for € 101 M. BUY.
One of the leading vehicle inspection companies in Sweden, with €~62 M of revenues (3.8% of APPS’s total sales’21e) and an adjusted EBITDA margin pre-IFRS16 of ~18% (above the group levels of 16.7% in 2019, although below those of the Automotive division, 23.9%). The implied multiple is 9.05x EV/EBITDA, above APPS’s trading level (5.7x EV/EBITDA’21e) and the last acquisition (Inversiones Finisterre in 2017, ~9x EV/EBIT). The deal does make strategic sense, as it strengthens the division and its operations in Nordic countries, and it has an impact of around +4.4% on EPS’21e and less than +1% on the valuation, leaving the gearing ratio at 3.1x in 2021e (vs. previous 2.8x). The acquisition is positive, although we do not expect much of an impact.

IBERDROLA, BUY
Avangrid (81.5% IBE) has announced it has signed a contract with the US listed company PNM Resources whereby Avangrid has pledged to acquire 100% of the share capital in PNM in exchange for a price, to be paid in cash to its shareholders, of US$ 50.30/sh. (+10% premium). The Board of Directors of PNM has recommended the transaction to its shareholders. As a result, Avangrid will pay € 3.66 Bn equity, which means, according to the consensus data, € 6.69 M EV and 11.8x EV/EBITDA. PNM is an US electricity company headquartered in New Mexico that is dedicated mainly to regulated businesses such as electricity transportation, distribution and generation in the states of New Mexico and Texas.
The deal’s finalisation is subject to: (i) its approval in PNM’s AGM; (ii) obtaining pertinent regulatory authorisations from US federal and state authorities; and (iii) other normal conditions placed on this kind of deal. Avangrid expects the deal to be completed in approx. 12 months.
Positive news in strategic terms, as it will allow IBE to continue growing in the US. PNM would represent 5.4% of IBE’s EV, and thus it is not a huge deal. And although the price may seem somewhat high at first glance (11.8x EV/EBITDA vs. 10.5x at which IBE is trading), we understand that post-synergies IBE will manage to lower it, and for this reason it has made the offer. In consolidated terms the acquisition would have an impact of +5% on EBITDA (€~564 M), and NFD would rise by +17% (€ 6.7 Bn). As a result, the post-deal debt without synergies would go from 3.4x in 2020e to 3.8x NFD/EBITDA.
Today in the results conference call IBE will give further details on the deal.

TÉCNICAS REUNIDAS, BUY
According to the press, TRE would have warned of potential risk to its operations, liquidity position or asset valuations as a result of the pandemic and the latest outbreaks. The company would have claimed that there is a risk of projects being suspended, and some of them could be even cancelled. As regard solvency, it warns that, despite the debt refinancing made in June, “this measure might not be sufficient to mitigate the risks stemming from the lack of liquidity caused or aggravated by the impact from Covid-19”.
Negative news that will not be well received by the market, but which should be partly priced in following a drop of -26% vs. the IBEX since Feb’20 highs. To justify the current share price, TRE would have to cancel more than half of its backlog (€ 10.1 Bn as of 1H’20), and for its current margin (2.6% EBITDA) not only not to improve but to worsen by up to -80bps, which we see as an extreme situation. It is true that despite trading very cheaply and pricing in much of the uncertainty, until messages on the future improve, the share price could stagnate. We place our T.P. Under Revision and will revise our estimates with the 9M’20 results.