EUR 100.00 For Business Accounts Only

IBERIAN DAILY 15 DECEMBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BANKING SECTOR, BBVA, INDITEX, PROSEGUR, PROSEGUR CASH, TELEFÓNICA.


MARKETS YESTERDAY AND TODAY

Pressure of virus spread increases
It was a positive session on European markets, although the tightened restrictions in the US and Germany cooled gains at the end of the session. The IBEX posted the biggest gains among the main European indices (nearly +1.0%). In the Euro STOXX, with all the sectors in positive numbers except Energy and Industrials, whereas Banks and Autos led the gains. On the macro side, October’s industrial output in the euro zone rose more than expected. In the US vaccinations have begun after the FDA approved Pfizer’s vaccine, while talks on the fiscal package continue (joint proposal of US$ 908 Bn). In China, industrial output and retail sales sped up recovery in November, in line with expectations.
What we expect for today
The drop in the US, which saw its biggest losses since November, and the lack of advance in Brexit talks (still at loggerheads over the equality of business conditions and fishing rights) suggest a bearish opening. Currently, S&P futures are up +0.1% (the S&P 500 closed -0.84% lower vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 24.72). Asian markets are trading with mixed results (CSI 300 +0.3%, Japan -0.2%).
Today in the UK we will learn October’s ILO unemployment rate and in the US Empire manufacturing index and industrial output for November. In debt auctions: Spain (€ 1.5 Bn in 3M and 9M t-bills) and France (€ 5 Bn in 3M, 6M and 12M t-bills).



COMPANY NEWS

PROSEGUR/PROSEGUR CASH. Upside with risks. BUY/BUY
We resume coverage of PSG and CASH (74% held by PSG) with a BUY recommendation for both companies (previously SELL for PSG) although with higher upside in PSG, in our view (66% of the T.P. stems from CASH), as assuming CASH (and Telefónica) current levels, the rest of the business would show +100% upside vs. our valuation. Furthermore, we believe PSG is a more defensive option vs. CASH, as it offers higher geographical and business diversification, lower exposure to Argentina (24% of EBIT vs. 31% CASH BS(e)) and higher upside (+29% vs. +20% CASH), in addition to a share buyback programme of 10% of capital (vs. 3 CASH) until Nov’23 that could underpin the share price. We set our T.P. for PSG at € 3.13/sh. (+29.4% upside/ EV/EBIT’22e 11.2x and P/E’22e 14.2x / +3%/+12% vs. peers) and that of CASH at € 1.00/sh. (+20.2% upside / EBIT’22e 9.1x and P/E’22e 11.0x /-13%/-3% vs. peers). In our view, the deteriorated situation Argentina is facing (9% of PSG’s T.P.; 10% of CASH) would be already priced in. Since the IBEX’s highs in February (pre Covid-19), PSG has slid -37% and CASH -45% (vs. -15% IBEX).

TELEFÓNICA, BUY
According to the press, TEF, América Móvil and Telecom Italia have closed the acquisition of Oi’s mobile telephony assets (#4 mobile player in Brazil) for BRL 16.5 Bn (around € 2.66 Bn) after wining the virtual tender (in the absence of the official result of the bid). Of the investment, around € 125 M would be earmarked to transitory services that will be provided by the Group Oi to the bidders for a period of up to 12 months and have committed to establishing long-term contracts for the provision of transmission capacity services and adjustments through their infrastructures. The acquisition process will still last for several months, as it should be approved by the different competition authorities.
This news was partially expected given the profile of “stalking horse (“first bidder), whereby the bidders will be entitled to cover the highest bid that could be submitted in this process (“right to top”) and positive news given the absence of price rises. Furthermore, these companies will benefit from the consolidation of the Brazilian market one of the drivers for TEF, as it would bring a drop in competition and a need for lower investment levels (frequencies, etc.). The price offered would imply an EV/EBITDA ratio of ~8.5x BS(e) vs. ~5x TEF and vs. ~7x for our implied valuation of TEF Brazil. If the investment was shared out with TIM and Claro at 33% (in the absence of the announcement of the distribution of Oi’s clients/frequencies/regions), this would mean TEF’s NFD would increase by around +2.3%, with a very positive impact on valuation (thanks to the synergies that would allow for a significant reduction in the acquisition ratio). We recall that TEF’s Brazilian business represents 21% of EBITDA and 19.8% of EV.
Separately, according to Bloomberg, Liberty Latin America would be considering the possibility of making a bid on TEF’s subsidiaries in Colombia (TEF controls 67.5%) and Ecuador, and thus it would have initiated talks, although for the time being no agreement has been reached.
The sale of the LatAm assets is expected, as it is part of TEF’s strategy (reducing debt and its risk profile by reducing exposure to LatAm, excluding Brazil), and it will be positive depending on the valuations obtained, as the assets (specifically in LatAm) have been hit hard by Covid-19, with valuations currently quite low. According to our current estimates, both assets (which account for ~4% of EBITDA’20e) would have an EV of €~1.7 Bn (2% of TEF’s total EV), and thus selling them would allow debt to be reduced by around -4.6%.