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IBERIAN DAILY 03 DECEMBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ATRESMEDIA, REPSOL.

MARKETS YESTERDAY AND TODAY

Trump imposes tariffs once again
Yesterday, stock markets found the perfect excuse (reinstatement of tariffs by the US on steel and aluminium from Brazil and Argentina, a sharp increase in the IRR that punished stocks with a defensive-growth profile and a disappointing ISM) for strong profit-taking. In the Euro Stoxx, all the sectors ended in the red, led by Utilities and Technology, compared to Basic Resources and Banks, which ended with the best relative performance. On the macro side, in the euro zone the final manufacturing PMI for November was raised unexpectedly thanks to the better performance in Germany and Spain. From the ECB, Lagarde appeared before the European Parliament with a message that signalled continuation of the current policy, leaving the door open to the use of other tools if need be, but claiming that the monetary policy strategy will be revised. In the UK, November’s final manufacturing PMI improved slightly upon the preliminary data. In the US, November’s final manufacturing ISM was disappointing, once again falling (48.1 vs. the previous 48.3), suggesting growth in 4Q’19 below the expected 1.6% QoQ. In politics, Trump accused Brazil and Argentina of currency manipulation, and thus he will immediately reinstate the tariffs on steel (25%) and aluminium (10%). Separately, he will impose tariffs of up to 100% on French products (cheese, wines and portfolios, among others) in retaliation for the tax on technology companies by the French government.
What we expect for today
Stock markets would open with slight gains following yesterday’s big drops. Currently, S&P futures are up +0.04% (the S&P 500 was down -0.11% vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 14.91%). The Asian markets that are open are falling (Hong Kong -0.64% and Japan -0.21%).
Today in the euro zone we will learn November’s final services PMI. In Spain, November’s unemployment rate. In the US ADP private employment and non-manufacturing ISM. Debt auctions: Spain (€ 4.89 Bn in 6M and 12M t-bills) and Belgium (€ 802 M in 3M t-bills).

COMPANY NEWS

ATRESMEDIA. Imagina places its 3.118% stake at a discount of -8.1%. SELL.
Imagina Media/Audiovisual has made a private placement of its package of 7.04 M shares (3.118% of the share capital) at a price of € 3.60/sh. (-8.1% discount to yesterday’s closing price). Although according to the CNMV’s registries Imagina holds a stake of 4.225%, the press mentions that Imagina has sold it entirely, as it would have sold a 1% in the past few days. We expect a negative market reception due to the large discount and after the stock’s good performance in the last two weeks (+6.8% in absolute terms and +7.8% vs. IBEX). Other main shareholders are Planeta 41.7%, Bertelsmann 20%, Brandes IP 3%.

REPSOL, BUY
At yesterday’s closing bell the company announced that its Board of Directors has decided to focus its strategy on achieving net zero emissions in 2050, applying the best technologies to capture, utilise and store CO2, and if this were not enough, it will offset its emissions through reforestation and other natural climatic solutions.
These targets will serve as a base for its Strategic Plan’21-25, which will be presented to the market in 1H’20. Along this line of assuming a progressive decarbonisation of the economy, REP has reduced its expectations for future crude oil and gas prices and increased its expected cost for future CO2 emissions (it will give full details in the 4Q’19 results when the impairment is accounted). Specifically: (i) In Upstream (42% EV) it will prioritise value and cash generation over increasing production;(ii) In Refining and Industrial Businesses (56% EV) it will assume more demanding decarbonisation targets, along with an increase in biofuel production and in low-carbon-footprint chemical products; (iii) In the new businesses (2% EV) it will assume a more ambitious low-carbon electricity generation target for 2025.The application of this new scenario will have a negative impact (impairment) on asset accounting that will mean provisions of €~4.8 Bn after taxes (~12% of net fixed assets / capital employed) that the company will provision in 4Q’19 and that will especially affect Upstream in the US and Canada (the adjustment represents 21% of capital employed in the division). This adjustment will not have an impact on cash (provisions for an impairment, not decommissioning), and therefore not on the dividend or share buyback plans.
News of little impact at first glance, as it is an accounting adjustment that does not affect the valuation. It is clear that REP is betting on Upstream becoming less important in the business, which is no surprise, as the company had already downplayed the division in its previous plan (it did not expect more production increases in the medium term, but it did forecast investments in reducing the carbon footprint).
Although we still have to see the specifics of this strategic guideline, we would expect lower CAPEX in exploration, but this will not be imminent. REP is beginning to define its strategy for the next 30 years, meaning that, despite the fact that the 1H’20 strategic plan will include changes, we are convinced that they will be gradually applied, and that none of them will have a negative impact on cash in the medium term. The fact of being able to limit investments in exploration (€ 500-700 M annually, -14% vs. the current annual plan) gives the company a potential NAV for CAPEX savings of more than € 8 Bn (36% market cap) that it will reconcile by gradually reducing crude oil production (neither we nor the consensus expected an increase in long-term production). According to the press, REP will go from putting 16% of its total investments into low-emission businesses to 25%, which proves that this move will be gradual.
Our valuation is pricing in an EV in Upstream that is € 5.79 M lower than its book value: € 16.74 Bn EV vs. € 22.53 Bn of the total equity as of 1H’19. In Downstream and other businesses, however, the EV would be higher: € 23.37 Bn vs. book value of € 14.57 Bn.