EUR 100.00 For Business Accounts Only

IBERIAN DAILY 01 NOVEMBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: CATALANA OCCIDENTE, CIE AUTOMOTIVE, ELECTRICITY AND GAS SECTOR, FERROVIAL, GRIFOLS, MEDIASET ESPAÑA, MERLIN PROPERTIES, REPSOL, SANTANDER.

MARKETS YESTERDAY AND TODAY

All eyes on the trade deal
Stock markets fell once again after it was mentioned by the press that the Chinese authorities are doubtful that a trade deal can be struck with D. Trump. However, the US president once again was confident in reaching an agreement by mid November. Within the Euro STOXX, the best-performing sectors were Travel&Leisure and Utilities vs. Basic Resources and Autos, which ended with the biggest drops. On the macro side, in Spain, the 3Q’19 GDP remained flat at 2.0% thanks to the resilience of internal demand, which offset the slowdown of the external sector. In the Euro zone, the preliminary 3Q’19 GDP came in above expectations, which could mean production is stabilising in Germany. October’s preliminary inflation was in line with core inflation, climbing by a tenth of a percent unexpectedly. From the ECB, L. de Guindos suggested rates would remain in negative territory until real inflation is created. In the US, the cost of employment rose in line with expectations in 3Q’19 (0.7% vs. 0.6% previously). Meanwhile, on the political front, the impeachment inquiry against D. Trump kicked off (with virtually no chance of materialising). In China, October’s Caixin manufacturing PMI climbed unexpectedly. In US business results, Intercontinental and Kraft Heinz beat expectations, Estee Lauder and MSCI were in line and Gartner disappointed.
What we expect for today
We expect a slightly bullish opening ahead of the US employment data, which could be lower than expected given the consensus’ undemanding estimate and positive ADP data seen this week.
Currently, S&P futures are up +0.35% (the S&P 500 was up +0.3% vs. its price at the closing bell in Europe). Volatility in the US remained stable (VIX 13.27%). The Asian markets that are open are trading with mixed results (Hong Kong +0.6% and Japan -0.3%).
Today we will learn: in the US, October’s labour market data, non-farm employment creation, weekly wage returns and unemployment rate; also, October’s manufacturing ISM and September’s construction spending. In US business results, Chevron, Colgate and Exxon Mobil, among others, will release their earnings.

COMPANY NEWS

MERLIN PROPERTIES, BUY
MRL has purchased from San José part of its rights in Castellana Norte (14.4%; it keeps 10%) for €168.9 M (c.3% of MRL’ market capitalization) and the granting of an unquantified loan. BBVA, which controls 76% of the capital of Castellana Norte, would be entitled to match this offer.
With this purchase, MRL finally enters the project after its failed negotiations with BBVA where it was reported that the bank could take up to 2% of MRL (equivalent to €120 M at current prices) and 700 offices that would return to the property of BBVA. With today's agreement, Castellana Norte would be valued at €1.170 Bn, above those previous rumors.
Castellana Norte has 2 M of buildable m2 in the north of Madrid of which 80% will be dedicated to offices.
We believe that MRL would only be interested in the project offices and perhaps some retail (the project also includes residential and other segments). The acquisition is positive for MRL because entering the project ensures pipeline for the next 20 years, it gains control over the offer in the north of Madrid (where it already has numerous assets) and given its experience in managing real estate projects for third parties (Aedas Homes, Testa Resi) the success of the project is very likely. Having said that, it would raise MRL’s risk profile if it finally enters the area with its own equity. It should also be noted that the Castellana Norte operation is going for a long time, and it will still take decades to be completed (with stops and accelerations in development depending on the political and economic cycle) and the current agreement is simply the acquisition of an option at a price that seems reasonable.

ELECTRICITY AND GAS SECTOR
Yesterday the CNMC released the circular letters on the electricity sector submitted to the Council of State, which already include the changes made by the CNMC to its proposal from July 2019, based on the allegations made by the affected companies until August 2019. Although the letters provide extensive information and some passages are still pending interpretation (the companies are studying them), the main conclusions after reading them and talking to the companies are the following:
The circular letters on electricity distribution are largely the same, meaning that no changes would have been made. The press, however, is mentioning a softening to the cuts of -7% (to -6.5% vs. -7% initially).
The circular letters on transportation, which affect Red Eléctrica exclusively, as opposed to what was leaked yesterday by the press (El País), not only would not mitigate the cut affecting the company but would increase it by some € 20 M per year (1.2% of EBITDA), which means a rise of +12% to the cut vs. previously (€ 160 M per year), bringing it to €~180 M (11.6% of EBITDA). The press, however, is mentioning a softening of -11% to the cut (to -7.3% vs. -8.2% initially).
Logically, if it is confirmed that the cut is increased, this would be negative news, especiall to Red Eléctrica, although of limited impact, as the additional cut is not significant in relative terms (-1% in EBITDA and valuation), and was already priced in by the stock yesterday (the share price managed to climb by +2% due to rumours of smaller cuts, but ended down -3%). At the current trading levels, however, Red Eléctrica continues to factor in an optimistic scenario (only ~35% of the cuts), and in order to discount 100% of the cut, the share price could fall by -8% (which will be slightly mitigated if press rumours are confirmed). In the rest of the sector, we highlight Endesa, where, although there are no changes in the cuts proposed, assuming 100% of the cuts would lead the stock to fall a further -10%, as the current trading levels are pricing in zero cuts.
News with a smaller impact for Iberdrola and Naturgy, where the impact from the cuts on electricity distribution is so small (-1.5%) that it is difficult to assess what the stocks are pricing in at current levels.

Further details on the softening of cuts on the gas sector
Added to yesterday’s rumours published by El Economista regarding a substantial softening of the cuts proposed to remuneration in regulated gas assets (on which the Ministry and the CNMC would agree). El Confidencial adds that the cut might be reduced by up to 50%.
Positive news both to Enagás and, to a lesser extent, Naturgy, as both stocks soared yesterday by +6% and +2%, respectively., confirming our expectations of a delay and/or softening of the cuts. In this regard, following yesterday’s rallies, the current trading levels are already pricing in a scenario of cuts mitigated by 50%, as rumoured, which limits the upside potential.
Thus, with risk increasing following the rally, we continue to see an upside potential of +11% in Enagás and of +5% in Naturgy, based on the delay in the letters being approved due to the less urgency (the changes will come into force in January’21 vs. January’20 in the case of electricity assets). Against this backdrop, we bet on a calm revision of the gas proposals by a new CNMC (after the new government formation). Meanwhile, we believe that the market will converge towards a scenario of greater optimism, which in a scenario of zero cuts would justify the upside potential previously mentioned.