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IBERIAN DAILY 11 SEPTEMBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BANKING SECTOR, CELLNEX, SANTANDER, TELEFÓNICA

MARKETS YESTERDAY AND TODAY

Rotation of sectors
The strength of the defensive sectors and the profit taking ahead of the ECB meeting continued to bring some rotation on the Euro Stoxx. Thus, the highest gains once again came in cyclical sectors most linked to external trade, such as Basic Materials and Banks, whereas two of the best-performing sectors this year, Consumer Goods and Technology, ended with the biggest losses. On the macro side, in Spain the advocate general of the ECJ left the door open to the judges deciding on the transparency of IRPH-linked mortgages, although it did not question the index’s validity, which boosted the Spanish banking sector. The opinion in non-binding, and we will have to wait until the Court makes its ruling. Separately, the PSOE and Unidas Podemos broke off negotiations, leaving the door open to a repeat election on 10/11. In the UK, July’s ILO unemployment rate unexpectedly fell -0.1%. In the US, some reports suggested that China will increase its purchases of agricultural products ahead of the trade meeting next month. Separately, some senators warned M. Pompeo and W. Ross that China has strong access to technology through Hong Kong. In China, the press insists that the Govt. would be readying a significant stimulus package to offset the effects of the trade war, which suggests a tough position in the negotiations.
What we expect for today
European markets could open with gains of up to +0.5%. Currently, S&P futures are up +0.27% (the S&P 500 closed up +0.70% vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 15.20%). The Asian markets that are open are climbing (Hong Kong +1.76% and Japan +0.99%).
Today in Spain we will learn July’s industrial output and in the US August’s production prices and July’s final wholesale inventories. In debt auctions: Italy (€ 6.5 Bn in 12M t-bills), Greece (12M t-bills) and Portugal (€ 1.38 Bn in 10Y and 15Y bonds).


COMPANY NEWS

BANKING SECTOR: IRPH Clauses.
After analysing the information from the conclusions of the advocate general of the ECJ made public yesterday that we have discussed with the banks exposed to IRPH in our coverage universe, the risk initially expected is curbed to a great extent. In line with our view, the opinion of the advocate general opens a scenario of individual lawsuits where the criteria for the cancellation of the clause cannot be apparently based just on the non-detailed explanation of the index calculation, and thus the risk of a battery of lawsuits is lower. Our central-case scenario of provisions (that would only materialize with the ECJ’s final ruling and not now) would assume a lower percentage of lawsuits, reinforcing our idea that the worst would be already priced in (in the hardest hit companies both CABK and BKIA) provided that the ECJ rules (in 6 months maximum) in line with the opinion of the advocate general (that coincided in around 70% of previous cases with that of the Court).

TELEFÓNICA, BUY
Below we outline the measures announced after TEF’s Board meeting held yesterday:
(i) New “Plan of Individual Suspension”: The company will initiate talks with the unions for a new voluntary restructuring plan in Spain that would reach around 2,800 employees (11% of Spain’s workforce and 2.3% of the Group’s total personnel) under the same terms as the previous plan (2016-2019: > 53 years and with 68% of wage), for this purpose, the group will have to set up a €~1.6 Bn provision (~50% of Net Profit). The group expects € 220 M of savings (~3% of costs in Spain) that would have a positive impact on Spain’s EBITDA of around 4.5% (and +1.5% on the group’s EBITDA). We estimate an impact on cash of around € 70 M (~+2%).
(ii) Monetisation of the tower portfolio: TEF has a portfolio of 130,000 towers, out of which 68,000 could be monetised (18,000 within Telxius). As for the remaining 50,000 towers (those that can be monetised excluding Telxius), the company states this would generate €~830 M of sales (~1.8% of the group’s total sales) and € 360 M of EBITDA (~2.4% of the total EBITDA), with a maintenance CAPEX of € 25 M/year (3% sales). The monetisation of this tower portfolio calls for Telxius and for other options.
Positive news that could continue to underpin the share price reaction (+12.5% in absolute terms since the low hit on the 23rd of August) following the strong correction seen in August (-9% in absolute terms) and in 2019 of -6.4% and -15.8% vs. IBEX.
As for the of individual suspension plan, if talks with the unions go through, the impact on valuation would be ~+2%.
As regards the monetisation of the tower portfolio, we believe that a sale to a third party would generate higher value than a sale/transfer to Telxius, on the one hand, this would mark to market the towers (the trading multiples of which are ~18x EV/EBITDA vs. 6x for TEF) and, on the other hand, it would also enable a further reduction of its leverage (19x NFD/EBITDA as of 1H’19), one of the main concerns weighing on the stock. The sale of the portfolio of 50,000 towers to a third party or parties, and assuming the figures outlined by the company, could mean between € 4.9 Bn and € 6.1 Bn for TEF (with valuations of 13.5x and 17x EV/EBITDA), which would allow it to reduce its leverage by ~-14%, leaving its NFD/EBITDA below 2.3x (vs. 2.6x currently). This would also have a positive impact on valuation of ~+7%.