EUR 100.00 For Business Accounts Only

IBERIAN DAILY 23 OCTOBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BANKIA, BANKING SECTOR, DIA, ENCE, MÁSMÓVIL, OHL, 3Q’19 RESULTS SPAIN.

MARKETS YESTERDAY AND TODAY

Stability amid the lack of definition
With no clear direction, European markets were content to consolidate the current resistance zone. In the Euro Stoxx, Energy (with crude rallying) and Media were the best-performing sectors, whereas Travel & Leisure and Pharma had the biggest losses. On the macro side, in Europe the EC requested Spain draw up a new, updated budget plan due to the risks of slippage (mainly in public spending required 0.9% vs. 3.8% government), stressing the structural deficit. The political stalemate and the economic downturn have jeopardised the deficit target of 2.5% forecast by the BoS. In the UK, the Parliamentary finally approved the exit draft of Boris Johnson but the accelerated procedure in 3 days was rejected, which opens the door to an extension to at least 31/01/20 and early elections in the UK. In the US, October’s Richmond Fed index unexpectedly returned to positive ground, while second-hand home sales (September) contracted more than expected, which continues to suggest weakness in the sector. In US business results, PACCAR, Texas Instruments and Procter&Gamble beat expectations, Hasbro and McDonald’s released disappointing earnings, Harley-Davidson and Whirlpool in line.
What we expect for today
Stock markets would open with corrections of as much as -0.5%, dragged down by financial groups. Currently, S&P futures are down -0.32% (the S&P 500 was down -0.40% vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 14.46%). The Asian markets that are open are trading with mixed results (Hong Kong -0.75% and Japan +0.23%).
Today in the euro zone we will learn October’s preliminary consumer confidence data and in France October’s business confidence. In US Results, Caterpillar, Boeing, Ford Motor, eBay, PayPal and Microsoft, among others, will release their earnings. Debt auctions: Germany (up to € 3 Bn in 10Y bonds).


COMPANY NEWS

ENCE. Expecting recovery in pulp prices. BUY.
Following the poor performance of hardwood pulp prices in Europe over the past few months (-31% in 2019 and -27% since our last update on 17/05), we cut our estimates (-49% in EBITDA’19e and -14% in 2023e) and our T.P. to € 4.42/sh. (-13% vs. previous; 6.9x EV/EBITDA’21e / 13.2x P/E’21e), meaning +21% upside, and thus we maintain our BUY recommendation (although we do not rule out short-term volatility). This is based on the expected recovery of pulp prices in Europe in 2020 and in the long term thanks to demand growing more than supply, although the regularisation of stocks will slow recovery. ENC has fallen -45% vs. the IBEX 35 YTD.

BANKING SECTOR. 3Q'19 Estimates (results to be released from 25/10 to 31/10): Tick-Tock, Tick-Tock
We expect results to evidence the weakness in revenues and not so much in capital. In addition to the seasonality, the new mortgage law and the negative trend of the Euribor should harm the NII (-1% on average vs. 2Q’19), with greater weakness in SAN Spain and BKIA. In fee revenues, we would see a turning point in BBVA (due to Turkey) and CABK. The key will lie in the funding/ALCO strategies: this would not represent a driver’20 but it will curb uncertainties on the NII. With tighter valuations (0.7x P/TE for 8% RoTEs), the performance of the share prices would depend on the rational progress in RoTE (more complicated in BKIA and UNI) with potential M&A moves going forward in sight. We expect a positive reaction in CABK and BBVA and negative in BKIA.

3Q’19 Results Highlights in Spain next week.
Of the companies releasing 3Q’19 results in Spain next week, we expect to see a positive impact in: (i) Catalana Occidente: we expect to see very positive results (with accelerating premium growth) that should back the share price somewhat after its poor performance in 2019 (due to low liquidity levels); (ii) Dominion: we expect positive results, with organic growth in sales and margin expansion, which, in addition to the better working capital levels we expect to see in the 2H’19, should offset the stock’s poor performance. On the negative side we would highlight: (i) Bankia, the results of which would evidence the bank’s increasing difficulty in generating core revenues; and (ii) Naturgy, due to the weak results in liberalised electricity and gas businesses.

BANKIA, SELL
According to the press, Artisan Partners, a Californian fund manager with US$ 105 Bn of AuM, would be seeking backing for BKIA (in which it has a 3.07% stake) and ING (in which it holds 5.04%) to carry out a merger. The arguments in favour of the move would be the market share to be gained by ING and the optimisation of the Dutch bank’s technological platform for BKIA. However, the company would admit that no significant cost synergies would be generated, and the technological execution would be quite complex.
News without impact, as we do not think the deal could be considered, with Artisan even admitting the difficulties for the Dutch bank to implement its technology in Spain. Furthermore, BKIA’s business (72% of its lending portfolio is mortgages) is precisely what ING is reducing in all the regions in which it is present, and thus it would not even make strategic sense. We also think that for the ECB, even though it supports cross-border mergers, the deal weould be very difficult to consider, given the pressure both banks have in generating RoTE: BKIA due to the pressure on its income and ING due to the high costs associated with the slowdown in its business. All this against a backdrop in which there is no European deposit guarantee fund, which would make the deal even more difficult.
At first glance, and without significant synergies in cost structures, it would mean a dilution on EPS that would end up translating into a negative impact for shareholders. Given the difference in both banks’ sizes (BKIA € 5.6 Bn vs. ING’s € 40.3 Bn), we understand that ING would be the buyer.

MÁSMÓVIL, BUY
According to El Confidencial, MAS would have held talks with Vodafone to get hold of its Spanish subsidiary for € 6 Bn. However, the same news underscores that MAS would have outlined it is not currently facing any acquisition process, merger or joint venture with Vodafone, and the British group would have strongly denied the existence of talks with MAS, adding that it would not be interested in the deal.
We believe that this deal would face many burdens in the short-term.
Competition: With this transaction, the number of players on the market would fall from 4 to 3 (assuming that Euskaltel’s size in Spain is currently low), and thus, the regulatory approval would most likely need remedies to curb the appeal. Vodafone has a market share of around 20.9% in fixed broadband and around 22.9% in mobile, while MAS has ~8.6% in fixed broadband and 13.2% in mobile
Valuation: The valuation outlined for Vodafone Spain stands at € 6 Bn, which would mean 3.7x EV/EBITDA, far below the sector average (around 6x), which is very complicated to accept for Vodafone, in our view, bearing in mind that: (i) in 2014 Vodafone acquired ONO for € 7.2 Bn, and (ii) the synergies of the deal would be very high, and thus we believe that it could be used for the British group to demand a higher price.
MAS’ financial position/size: MAS is currently facing a “stressed” financial situation, with 4.0x NFD/EBITDA 1H’19 (3.7x expected in 2019) and a € 2.94 Bn market cap, and thus the deal would call for a significant capital increase (or the proposal of a formula incorporating minority partners). Furthermore, we do not know whether the recent agreement signed with Orange would have clauses limiting the appeal of the transaction.
Therefore, and awaiting the company’s confirmation of this news, we believe that this type of deal is complicated in the short-term.