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IBERIAN DAILY 02 JUNE (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BBVA, ELECTRICITY SECTOR, INDITEX, REPSOL.

MARKETS YESTERDAY AND TODAY

Gains continue
Rally on European stock markets, although the sideways opening in the US and the widening debt curves following the strong leading indicators for May slowed part of the gains. In the Euro STOXX, Autos and Energy stood out, whereas Pharma and Telecoms were the only sectors ending with drops. On the macro side, in the euro zone May’s preliminary inflation rose slightly more than expected to 2.0% YoY, whereas the core figure rose similarly to 0.9%. May’s final manufacturing PMI was raised unexpectedly (in Spain to 59.4 vs. the previous 57.7), suggesting growth of more than 1.0% QoQ. In Spain, vehicle registrations rose +21.4% MoM in May (178% YoY), whereas foreign tourist arrivals in April came in at 1.25 million vs. the usual 10 million for the month. In Germany May’s number of unemployed fell more than expected. In Turkey, PM Erdogan insisted on cutting interest rates, which led to a sharp depreciation of the lira to new lows. In the US, May’s manufacturing ISM rose in line with expectations, suggesting growth of 9.5% QoQ in 2Q’21. In Brazil, the 1Q’21 GDP rose slightly more than expected to 1.0% YoY vs. -1.1% previously. Lastly, OPEC+ held its position of increasing production through July. Separately, the International Energy Agency warned that a +10% increase in energy investments in 2021 is not enough to fix sustainability problems.
What we expect for today
The European stock markets would open with a slightly bearish slant. Currently, S&P futures are up +0.1% (the S&P 500 ended -0.17% lower vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 17.9). Asian markets are trading with mixed results (China’s CSI -0.8% and Japan’s Nikkei +0.4%).
Today in Spain we will learn May’s unemployment rate and in the US the Fed will release the Beige Book. In debt auctions: Germany (€ 4 Bn in bonds due 2026).

COMPANY NEWS

INDITEX. 1Q'21 Preview: we foresee strong growth thanks to the comparable basis but this is already priced in. SELL.
The company will release its 1Q’21 results on the 9th of June. We foresee a strong rise in revenues on a quarter that should show an increasing performance, with sales being marked by the impact from the restrictions linked to Covid-19 in terms of opening hours in the stores of the different countries where the company operates. In 2021, restrictions have been stricter in February but softer in March and April (as opposed to 2020). With this in mind, we expect the 1Q’21 sales to rise by +47% vs. 2020 although still -18% below 1Q’19 levels. Although visibility is low because the situation is exceptional, we believe that the share price is already factoring in a recovery scenario, and thus we do not see upside from these levels.

ELECTRICITY SECTOR
Yesterday the Spanish Cabinet approved the initiation of the process for the Draft Bill on the carbon “dividend”, which forecasts the collection of around € 1 Bn annually and which starting now will go through a public consultation process. The reduction will affect those plants prior to 2005, >10MW that do not fall under a regulated remuneration regime. The measure is expected to affect some 85 TWh annually, with 67% nuclear, 29% hydro and less than 5% wind, although the possible impact on renewables is not clear. The reduction will be only determined by the CO2 heading (90% of the cost) but not by other items such as raw materials. The manner of implementing the measure will be that utilities will see their production cost affected by the CO2 emission rights for nuclear and hydro, and they will be discounted from the wholesale market.
The Cabinet also initiated proceedings on the National Energy Efficiency Fund to finance older renewable energies and which receives contributions from oil, gas and electricity companies (€ 6.5-7.0 Bn/year), with the cost coming out of the tariff, and all this fits within the Government’s target of reducing the electricity bill by -17% over 5 years.
Negative news of limited impact. Awaiting the details of the draft bill and the approval by the Congress, where modifications could be take place and the support of 50% of the Chamber is necessary, a reduction worth € 1 Bn annually would mainly affect those companies with higher exposure to nuclear or hydroelectric power plants, such as Endesa or Iberdrola and would represent ~5% of the companies’ joint EBITDA. Applying a proxy of the hydro/nuclear production generated in 2020 would mean ~4% of EBITDA in Iberdrola and 10% of EBITDA’20 in Endesa, receiving 80% of the total impact, and the calculations appearing in the press are very much in line, pointing to €-300 M in Iberdrola and Endesa and € 100 M in Acciona, EDP and Naturgy.
Bearing in mind that this measure might not come into force until 2022 and that its permanent nature is not sure, we believe that with yesterday’s correction, Iberdrola already prices in these uncertainties (Endesa to a lesser extent), with the regulatory doubts having a higher weight than the real impact on figures.