EUR 100.00 For Business Accounts Only

IBERIAN DAILY 01 MARCH (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BANKING SECTOR EUROPE, EBRO FOODS, ELECTRICITY SECTOR, ENCE, IBERDROLA, INMOBILIARIA COLONIAL, MELIÁ HOTELS, SOLARIA, TÉCNICAS REUNIDAS.

Volatility increases
Harsh new sanctions against Russia and fears of a possible retaliation by the latter dragged down the European stock markets again. Within the Euro STOXX, Media and Utilities led gains, whereas Banks (after excluding Russian banks from the SWIFT mechanism) and Autos saw the biggest drops. On the macro side, the Ukraine-Russia ceasefire meeting left the door open for further negotiations, although Ukraine’s request to join the EU could hinder negotiations. In Spain, February’s inflation rose to 7.4%, above expectations, whereas core inflation came in at 3.0%. In the US, February’s Dallas index rose much more than expected, although the Chicago PMI fell above expectations. From the Fed, Bostic spoke once again in favour of rates being raised in March (+0.25/+0.50bps depending on inflation) despite the current geopolitical scenario. In China, February’s final Manufacturing and Services PMIs recovered slightly more than expected. In US business results, Viatris and Sirona disappointed, whereas Nielsen came in above expectations.
What we expect for today
European stock markets would recover ground with gains close to +1.0% despite the fact that Russia would intensify attacks to Ukraine in the coming hours after the negotiations held yesterday that will not mean any changes. Currently, S&P futures are up +0.2% (the S&P 500 was unchanged vs. the European closing bell). Volatility in the US rose (VIX 30.15). Asian markets are rising (China’s CSI 300 +0.8%, and Japan’s Nikkei +1.2%).
Today we will learn in the Euro zone February’s final manufacturing PMI, in Germany February’s preliminary inflation, and in the US February’s ISM and January’s construction spending. In US business results, Domino’s pizza, Autozone, Hewlett Packard and Salesforce.com, among others, will release their earnings. In debt auctions: Spain (€ 5.5 Bn in 6M & 12M T-bills).

COMPANY NEWS

ENCE. FY2021 results above expectations on the EBITDA and cash generation levels. BUY
The FY2021 results were above expectations on the EBITDA level (+12% vs. BS(e) and +5% vs. consensus) and better in cash generation (€ 102 M of NFD vs. € 114 M BS(e)), showing a large discrepancy between EBITDA and real cash generation (expected) due to the high pool prices in Spain. Awaiting the conference call (16:00 CET), the reception of these results should be at least moderately positive, although the key will lie in the comments on expected cash cost performance in 2022, which could absorb much of the current increase in pulp prices. The stock has outperformed the IBEX by +23% YtD (-7% since the announcement of the ruling on the Pontevedra factory).

EBRO FOODS, BUY
The FY2021 results came in slightly above the consensus’ expectations on the operating level (-2.9% vs. -3.1% BS(e) and -3.9% consensus). Key metrics fall vs. FY2020 as a result of: (i) stockpiling/compulsive purchases effect in 2020 on fears of stock-outs due to the pandemic; (ii) increased consumption by households due to lockdowns (where EBRO generates most of its sales); and (iii) rising raw material prices and other costs (durum wheat +93%, freight +700% or energy costs, which have tripled in the last few months), which EBRO puts at €+83 M (vs. FY2020; note that in 2020 the increase in costs meant €~+60 M).
Despite this context, EBRO was able to present virtually flat sales (-0.7% vs. FY2020) and a -2.9% drop in EBITDA vs. FY2020 thanks to: (i) change of mix (products with higher added value and higher margins); (ii) passing the higher prices onto final customers. All this allowed the company to mitigate cost inflation. The EBITDA margin fell -30bps vs. FY2020 to 12.3%. If we compare these figures with those from 2019, sales increased by +14.6% and EBITDA by +15.3%, with the margin improving by +10bps.
As for debt, it was reduced by €~-446 M vs. FY2020 thanks mainly to sales in the dry pasta business in North America and in Panzani (€ 753 M), in addition to the business’ operating performance (€ 163 M cash flow), which allowed the company to offset higher working capital levels (€+175 M vs. FY2020 for stockpiling in view of rising raw material prices), € 175 M in dividend payments or organic investments totalling € 120 M in 2021.
From the conference call we highlight:
(i) Inflation crisis: The company to continues to take measures to mitigate this impact via: (i) raising final prices (which vary significantly depending on the product or the region, but would range from +0% to 10%), which have already been implemented or will be implemented over the the coming months; no further price increases are expected; (ii) costs reduction plans; (iii) the Company highlights the performance of the rice and durum wheat market, which in 2021 allowed it to have stocks at a lower average price (vs. market and competitors). The company expects this good performance to continue.
(ii) Capex & M&A: The company does not plan to carry out new significant divestitures going forward, after having sold the dry pasta business in North America and Panzani. Likewise, the next acquisitions, if any, would be small in size (such as InHarvest, ~1% of EBRO’s EV) and the company expects to make organic investments higher than in 2021 (€~150 M in 2022 vs. € 120 M in 2021), with the most relevant project being the increase in microwave cup capacity for the Brillante brand and the US brands.
(iii) Advertising: For 2021, the company expects levels higher than € 80 M (vs. € 75 M in 2021 excl. the businesses sold).
In short, considering the current international context and the high comparable basis from 2020, we believe that the FY2021 results are solid. We believe that the deterioration in profit is not structural and margins should be back to normal over the coming years. EBRO’s positioning, both in the rice and in the pasta segments, with higher added-value products, allow the company to face this inflationary scenario from a better position vs. its competitors and vs. the private label (and this is being the case), thanks to a mixed approach: (i) price increases; (ii) cost efficiency plans.

INMOBILIARIA COLONIAL, BUY
The company has released better FY2021 results than expected thank to higher rental revenues and also lower financial costs. The company has also beaten its own guidance for recurring EPS of € 0.23/sh., announced last November, reaching € 0.246/sh. (vs. € 0.23 BS(e)).
LfL growth in rents was +2%. As for renewals (release spreads), the numbers remain solid: +7% in total with Barcelona +24%, Madrid +4% and Paris +2%. Looking at the current inflation, with rents indexed to this variable, and the fact that market prices are above average prices signed on the portfolio (+11% in Paris, +7% Barcelona and +1% Madrid), we can expect to continue to see healthy growth in rents on the LfL level.
The total value of the portfolio grew +3%, even despite the fact that assets were sold on the year. LfL GAV grew +6% on the year, and NTA per share rose +7% on the year (+9% including the dividend paid) to € 12.04, in line with forecasts.
The company has also announced € 500 M of acquisitions (4% of GAV), among them the Amundi headquarters in Paris, which has a 12-year contract.
Outlook: The company has raised the low end of its recurring EPS’22 guidance by one cent to € 0.28-0.29/sh. (€ 0.27 BS(e)), although this is not comparable following the asset rotation on the portfolio), and in the AGM it will propose a dividend of € 0.24/sh. (+10% vs. 2020, 3.2% yield, above our estimate of € 0.22).
We think that the tone of the results is positive, that the stock is cheap, trading at a -37% discount to NAV (and with a 3% dividend yield), and we reiterate our BUY recommendation.

MELIÁ HOTELS, SELL
The 4Q’21 results were impacted by the one-off inflow of €~17 M of direct aid received from the German Govt. Excluding this impact, the 4Q’21 results are slightly below expectations on the operating level (EBITDA excl. capital gains of € 43.1 M reported vs. € 39.0 M BS(e) and € 44.8 M consensus). However, sales came in above expectations (€ 290 M reported vs. € 260 M BS(e) and € 278 M consensus).
On the cash generation side, on the standalone quarter the figure is negative, although very close to breaking even (€~25 M), and net debt (pre-IFRS 16) reached € 1.29 Bn, with € 404 M of total liquidity (vs. € 439.5 M in 3Q’21).
Visibility remains low, with last-minute bookings still predominating and at different speeds according to the segment and region, but the company expects strong recovery starting in March. Over the past few weeks daily bookings have sped up to 2019 levels, especially in the resort segment and in cities with a leisure component. For the summer season, bookings in Spanish resorts are above 2019 levels, especially in ADR (driven by pent-up demand).
In short, the 4Q’21 results were robust, bearing in mind the current situation and outlook, which is key. With all this in mind, the market’s reception of the results will be more linked to how the Ukraine-Russia conflict pans out, which should not have a significant impact on the P&L statement.

TÉCNICAS REUNIDAS, SELL
The company released at yesterday’s closing bell FY2021 results below expectations in sales’21, which came in at € 2.8 Bn (vs. updated guidance of € 3 Bn, and vs. € 3.07 Bn BS(e) and € 3.03 Bn consensus). This sales figure stands -20% vs. FY2020 due to the Covid-19 restrictions implemented through 2021, which has led to project delays. EBIT’21 came in €-157 M below the consensus estimate (€-151 M) and ours (€-149 M). TRE excludes one-offs to show € 48 M of adjusted EBIT’21, with a 1.7% margin (vs. adjusted guidance’21 of 3% and vs. 1.8% BS(e)).
In summary, the FY2021 results came in below expectations and do not show a turning point. Looking to 2022, we believe that doubts will continue to be on margins, which we expect to continue to be under pressure not only due to the current strong competition scenario but also to the increase in production costs derived from rising raw material prices (we expect EBIT’22e margins of 2.25%, in line with TRE’s guidance’22 of >2% and the consensus’ estimate of 2.2%. There will be a conference call at 16:00 (CET).