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IBERIAN DAILY 20 MAY + 1Q’21 RESULTS. PREVIEWS (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BANKING SECTOR, CAF, MELIÁ HOTELS.

At the end of today’s report, and during the entire results season, we will include a presentation with positive and negative results highlights and previews for the 1Q’21 results to be released over the coming days in Spain.

MARKETS YESTERDAY AND TODAY

Sharp drops on European markets
The European indices broke through their support levels of the past few days (with the ES50 going past the psychological reference of 4,000), closing with falls of around -2.0% after China announced that it will curb speculation to stabilise the raw materials markets. Thus, sell-offs prevailed within the Euro STOXX, with Consumer Goods and defensive sectors such as Food being the best relative performers vs. Basic Resources and Energy, which saw the biggest drops. On the macro side, in the United Kingdom, April’s inflation came in a tenth higher than expected, whereas core inflation climbed in line with expectations. In the Euro zone, from the ECB, L. de Guindos warned about market exuberance, hinting at a certain disconnect between the rises of the past few months and the weak fundamentals. In the US, the Fed minutes showed that some members were in favour of beginning to discuss withdrawing stimuli in upcoming meetings if the economy continues to recover quickly, although on the whole they insist that the economy is far from reaching employment and inflation targets. Separately, the EU will allow free movement for vaccinated people in Europe and will raise the limit of accumulated incidence to 75 from 25 cases per 100,000 inhabitants to consider a country safe from Covid-19.
What we expect for today
European stock markets would rise +0.5% following yesterday’s drops, but with a certain defensive profile. Currently, S&P futures are up +0.1% (the S&P 500 ended +0.63% higher vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 22.18). Asian markets are rising (China’s CSI +0.1% and Japan’s Nikkei +0.4%).
Today we will learn in the US the weekly jobless claims and the Philadelphia Fed Index for May. In debt auctions: Spain (€ 6 Bn in bonds due 2024, 2028 and 2031) and France (€ 14.5 Bn in bonds due 2024, 2027, 2028 and I/L due 2032 and 2036).

COMPANY NEWS

CAF, BUY
According to the press, CAF would be taking part in the sale process of Thales’ signalling business (already known). According to the information released, the deal could be valued at around € 1.6 Bn. In this regard, CAF would have apparently passed the indicative bid selection, hiring PwC to seek a financial partner to carry out the transaction. Tower Brook is mentioned as one of the best positioned candidates.
Based on the information made public, Thales’ signalling business has a turnover of around € 1.7 Bn with € 125 M of EBITDA (48% of CAF’s EBITDA’21e), and thus assuming that the € 1.6 Bn released are EV, the implicit multiple would be 13x (vs. CAF’s ~7x for 2021).
The sale of Thales’s signalling business or CAF’s possible interest are not new, although the fact that the company hired an advisor to seek a financial partner for the potential deal is new (not confirmed by the group). Thus, and despite the apparently good strategic fit, in our view, the key will lie in the price to be paid for the company and in the deal’s structure from a financial point of view, as if even assuming the incorporation of a financial partner with a 49% stake, the deal (assuming €1.6 Bn) would mean 43% of CAF’s EV (60% of its market cap) and considering the consolidation of the business, its NFD/EBITDA’21 would rise to around 3.5x from 2.3x currently, a high level.