Report
Research Department
EUR 100.00 For Business Accounts Only

IBERIAN DAILY 11 MARCH (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ENCE, EUSKALTEL, GRUPO C. OCCIDENTE, LIBERBANK, SANTANDER, TELEFÓNICA.

MARKETS YESTERDAY AND TODAY

Unsuccessful attempt at a rally
Europe opened with strong gains that dissipated throughout the day, with most indices closing with losses, although the US ended with gains of more than +4.0%. Within the Euro Stoxx, Energy was the only sector to close in positive numbers, followed by Technology, which fell the least. By contrast, Utilities and Telecoms were the sectors that fell the most. On the macro side, in the euro zone, the final 4Q’19 GDP confirmed the 1.0% YoY growth. In Spain, INE housing prices for 4Q’19 grew less than expected to 3.6% YoY. Industrial output in France fell more than expected, whereas in Italy and Brazil the drop was less than expected. From the ECB, C. Lagarde will announce a financing line for SMEs to be able to face the effects of the coronavirus. In China, the Govt. would be considering an increase to crude reserves, taking advantage of the collapse in prices.
What we expect for today
Today’s session will be volatile again despite the new gains of crude oil but where the US debt yield tightened to a great extent once more awaiting the clarification of the fiscal stimulus by the governments at both sides of the Atlantic.
Today in the UK we will learn industrial output and trade balance for January, in Spain January’s retail sales, in the US and Brazil February’s inflation. In debt auctions: Italy (€ 6.5 Bn in 12M t-bills), Greece (€ 375 M in 12M t-bills), Germany (€ 4 Bn in bonds due 2030) and Portugal (bonds due 2025 and 2030).


COMPANY NEWS

GRUPO C. OCCIDENTE, BUY
As we outlined yesterday, Goldman Sachs has completed the accelerated bookbuild of 1.8 M shares (1.5% of the total) within a range of € 21.30/sh. and € 22.00/sh. In principle, we believe that given the percentage of the stake placed, the shareholders could be the institutional investors Invesco Ltd. (2.10%) and Schroders Plc (1.97%). The main uncertainty is the name of the seller and whether it would have sold its 100% stake. The reason behind the transaction could lie in the liquidity need of any of the two investors, along with the reduction of the exposure to the financial sector, not linked to the company’s intrinsic factors, and thus, we maintain our positive stance.
Until yesterday’s close and since the aggravation of the contagion in Italy, the share price has slid around -22%, in line with the sector, in view of fears about the potential deterioration of accounts in credit insurance due to the increase in commercial bad debt. At this point, could we expect a deterioration in this regard? As for the rest of companies, the uncertain risk from the coronavirus is the key factor. In this case, the impact could stem from two factors: lower growth in credit insurance premiums given the economic slowdown and an increase in claims.
As for premiums, the higher risk perception by companies would be backing the subscription of this type of insurance products, benefiting from a positive momentum. Credit insurance premiums account for around 50% of the group’s total and the current cruising speed of +7% could continue vs. +2% in the Traditional business. The risk would thus stem from the associated claims.
In this regard, the combined ratio in Credit Insurance has been at record lows of 73.4% for more than 5 years and due to the potential commercial bad debt we could expect it to leave these levels. However, since the crisis of the coronavirus worsened (more pessimistic news from Italy) and until yesterday’s close, the share price has shed around -22%, meaning ~€ 700 M of market cap. In terms of claims, this would mean that the ratio would rapidly climb from 43.4% currently to around 90%, which is unlikely, in our view. This would mean a nil Net Profit in Credit Insurance (vs. € 240 M of recurring Net Profit’19). The company has monitored the risk of clients from its customers and as they are short-term coverages in case of identifying a default the “contagion” mechanisms are automatically activated. This would mean that in the event of a hypothetical deterioration of the situation (higher default), the company could normalise the situation in the short-term. Note that GCO also has a wide risk diversification by regions and limited concentration by sectors, which would complicate the sudden increase.
As for S-II and based on the SFCR of Atradius-Crédito y Caución, the stress scenario of increasing the claims ratio to 104% would entail a -44pp drop to 164% (vs. 208% in the base-case scenario), above the comfort market levels of 150%.
We believe that even though the combined ratio could worsen over the next few months, it would be a one-off situation and easy to manage by the company. A sustained increase in claims, and consequently in CR of up to 85% (unlikely, in our view), would mean a cut to our T.P. to € 30.00/sh. (-30% vs. current levels), which would still yield +36% upside vs. current levels. Furthermore, we must recall that at maximum stress levels of the CR in Credit Insurance over the 2008-09 period of 106% and 92%, respectively, the shareholder remuneration remained unchanged. GCO has excess S-II, a cautious investment policy and the management team has significant margin for manoeuvre in the event of worsened economic conditions. With this in mind, our investment case remains unchanged as we do not see signs of sustained deterioration in the company, and thus we reiterate our BUY recommendation.

EUSKALTEL, SELL
Main guidelines from EKT’s 2020-2025 Strategic Plan:
(i) The company will base its growth strategy on the domestic market through the Virgin brand with a value-based offer (a value for money strategy but not disruptive; with a similar price range to MasMovil, O2, Yoigo and Jazztel, although suggesting a higher value component), benefiting from EKT’s current TV offer and with a multichannel sale strategy. The company intends to benefit from the current market growth in addition to the Churners growth, which offers a potential market 8 times larger than its current market. The company basically foresees acquisition costs of between € 300 M and € 350 M, margins of around 40% and pay-back
Underlyings
Banco Santander S.A.

Banco Santander is a holding company, providing a range of financial products. Co.'s products and services include: retail banking business that covers all customer banking businesses; wholesale banking business; as well as asset management and insurance business. Co.'s principal operations are in Spain, the U.K., Portugal, Germany, Italy and Latin America. As of Dec 31 2014, Co.'s total assets amounted to Euro1,266,296,000,000 and total customer deposits amounted to Euro647,627,000,000.

ENCE Energia y Celulosa SA

Ence Energia Y Celulosa is engaged in the manufacture and commercialization of wood pulp and derivatives. Co. divides its activities into the following two business lines: Forest Division: Co. manages timberlands in South America and the Iberian Peninsula. Co. is involved in trading of wood, and supplies solid wood products including: plywood, sawn timber, parquet flooring and glued-edge paneling. Co. is involved in forest and environmental consulting. Pulp Division and Energy Production: Co. is engaged in the production of Eucalyptus globulus-based TCF and ECF paper pulp. Co. is also involved in the generation of electricity through biomass power producing plants.

Euskaltel SA

Euskaltel SA is a Spain-based company engaged in the provision of integrated telecommunication services. The Company's activities are divided into three segments: Residential, Business, as well as Wholesale and Other. The Residential segment provides fixed and mobile telecommunication services, broadband and wireless Internet, as well as digital television (TV) as a single service and in packages. The Business division primarily offers fixed and mobile telephony, as well as Internet access for enterprises. The Wholesale and Other area serves wholesale customers and is responsible for the delivery of communication services, such as infrastructure leasing, information technology (IT) outsourcing, as well as sell of installation material and electronics. The Company operates in the Basque Country, Spain.

Grupo Catalana Occidente S.A.

Grupo Catalana Occidente is an insurance group based in Spain. Co. is engaged in insurance and reinsurance activities, including commercial, life, disability, and automobile insurance. Co. is also engaged in the sale of annuities and pension funds. Co.'s operations are organized along two businesses: Traditional business (insurance) and Credit Insurance business. Co.'s main markets are located in Spain, Germany, United Kingdom, France and the Netherlands. Co. maintains a presence in more than 40 countries.

Telefonica SA

Telefonica is engaged in the provision of public or private telecommunications services, including ancillary or complementary telecommunications services or related services. Co.'s fixed business includes: traditional fixed telecommunication services, Internet and broadband multimedia services, data and business-aplications services, and wholesale services for telecommunication operators. Co. also provides a range of mobile and related services and products to consumer and business customers, including mobile voice services, value added services, mobile data and Internet services, wholesale services, corporate services, roaming, fixed wireless, and, trunking and paging.

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Analysts
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