EUR 100.00 For Business Accounts Only

IBERIAN DAILY 02 MARCH (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BANKING SECTOR, CIE AUTOMOTIVE, IBERDROLA, MÁSMÓVIL, TELEFÓNICA.

MARKETS YESTERDAY AND TODAY

Volatility at 2011 highs
Losses accelerated on European and US stock markets on Friday, although the US managed to reel them in somewhat at the closing bell. Within the Euro STOXX, all sectors ended in the red, with Utilities and Telecoms posting the biggest drops and Autos and Retail the smallest ones. On the macro side, in Germany, the number of unemployed fell more than expected and inflation remained unchanged at the 1.7% YoY from the previous month. From the ECB, J. Weidmann clarified that the coronavirus will affect economic growth in Germany, but that action from the ECB will not be necessary for the time being. In the US, January’s personal outlays grew less than expected. Separately, J. Bullard recognised the possibility that the FED will cut rates if the virus becomes pandemic. In China, the Manufacturing PMIs fell in February to 35.7 from the previous 50, and the non-manufacturing index to 29.6 from 54.1 in January, whereas the Caixin manufacturing PMI fell to 40.3 from 51.1. In US business results, AES Corp released better results than expected.
What we expect for today
The markets would open with gains of +1.5%, with Brent rising more than +3.0% and the euro appreciating due to the political expectations of fiscal and/or monetary stimuli on both sides of the Atlantic. Currently, S&P futures are up +0.36% (the S&P 500 closed +1.89% above its price at the closing bell in Europe). Volatility in the US fell (VIX 40.11%). The Asian markets that are open are rising (Japan +0.95% and Hong Kong +0.85%).
Today we will learn February’s Manufacturing PMIs in Spain, Brazil and Mexico, and in the US the ISM manufacturing for February. In US business results, Dentsply Sirona and Evergy, among others, will release their earnings. In debt auctions: Netherlands (€ 2 Bn in 6M T-bills), Germany (€ 3 Bn in 6M T-bills) and France (€ 4 Bn in 3M, 6M and 12M T-bills).


COMPANY NEWS

BANKING SECTOR. The ECJ will make public its decision on the IRPH clause issue next 03/03 at 09:00.
Tomorrow, the ECJ will make public its decision on the IRPH clause issue at 09:00. It should be recalled that the general advocate of the Court, whose opinion was favourable to banks (10/09/2019), did not question the validity of the index (worst-case scenario that we had never considered), but he did open a scenario of individual lawsuits in which the criteria for annulment of the clause do not seem to be based solely on the detailed non-explanation of the calculation of the index, and thus the risk of an avalanche of these is reduced, in our opinion. There is still a tail risk, as the ECJ could rule against the index (contradicting the opinion of the Advocate general, quite unlikely) and cancel the IRPH index with retroactive effects. This would be the worst possible scenario (100% of lawsuits + total retroactivity + replacement of IRPH by Euribor) and the claims figures would range between € 9.5 Bn and € 11.4 Bn BS(e) for the entire sector. The impact would be relevant in CABK (c.-5% in Net Profit meaning c. -80 bps. in CET1 BS (e) and additional -10% cut in our TP) and BKIA (-4% in Net Profit and -35 bps BS (e), and additional -9% in T.P.). For the rest of the banks the impact would be less than -1% in Net Profit and -10 bps in CET1.

IBERDROLA, BUY
According to the press, IBE would have set a target of € 2.4 Bn of Net Profit’22 vs. the current target of € 3.7-3.9 Bn, that is +10% vs. the range average, which compares with our estimate of € 3.87 Bn/-7.5% below and € 3.9/-7% below consensus. This information could be inferred from the strategic bond proposal made to the AGM, on which we expect further details to be unveiled in the CMD to be held on 13 May.
MARKET IMPACT
Positive news but in our view expected to some extent: IBE is trading at 15.5x P/E’22 if we assume its target will be met and ~17x according to our estimates/consensus, which compares with 19-20x P/E’20e for our estimates/consensus. We believe that this upgrade would be due to sustained CAPEX growth on an annual basis, and we expect it to have a positive impact of up to +8% on our T.P. once we have more details on the revision. It is a different issue altogether that part of this upgrade should already be priced in at the current trading levels and should not surprise the market.
Despite the stock’s excellent performance (+47% vs. IBEX in the past 12 months/+19% vs. sector and +25%/+9% in the last 3 months) and fair trading multiples, we believe that against the current backdrop of risks, the positive momentum in the stock will continue.

MASMOVIL, BUY
According to Expansión, MAS would be finalising the acquisition of the VMO Lycamobile for some € 370 M (22% NFD and 16% market cap). Lycamobile is a VMO based on Telefónica’s network, which according to the news has ~1.5 million prepaid clients (vs. 1.8 million for MAS and ~8.9 M total clients for MAS) and with €~130 M of revenues (7.7% of MAS’s sales) and €~40 M of EBITDA (8.5% of MAS’s EBITDA).
MARKET IMPACT
From our point of view this would not be a very appealing purchase, as the prepaid market is less profitable and less interesting. However, this acquisition would only be justified by the synergies to be announced (changing from Telefónica’s network to MAS’s wholesale contract with Orange) and by the reduction to competition in the prepaid segment the acquisition would mean (given that the reasonably significant weight of MAS’s prepaid business). According to the terms announced in the press, the EV/EBITDA ratio for the deal would be ~9.2x (vs. 8.5x for MAS in 2019 and 6.8x in 2020 BS(e)), although we think the synergies from the host change (from Telefónica to MAS’s current wholesale contract with Orange) would be very relevant, and could lower the multiple to around 6.7x. MAS’s NFD (we understand the deal would be financed with debt) would rise by ~22%, leaving the gearing ratio at 3.2x in 2020 vs. 2.92x BS(e), which we believe would not pose any financial problems (given the cash generated by the company). Furthermore, thanks to the synergies and the low interest rates, the acquisition would be +12% accretive in FCF/sh. (as we have stated, if financed in debt) in 2021, leaving FCF/sh. at € 2.15 vs. the current € 1.92 BS(e) and >€ 2.00 guidance.