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IBERIAN DAILY 31 MAY (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ELECTRICITY SECTOR.

MARKETS YESTERDAY AND TODAY

Stock markets continue to benefit from recovery
European stock markets closed with moderate gains on Friday, ending the week (and the month) with slight gains, with the EuroSTOXX 50 above 4,200 and S&P 500 at 4,000, benefiting from the promise of stronger stimuli in the US. In the Euro STOXX, the best-performing sectors last week were Real Estate and Personal Consumer Goods, whereas defensive sectors like Utilities and Pharma posted the biggest losses. On the macro side, in the euro zone the economic sentiment index for May improved more than expected thanks to the solid outlook in the services sector. In Spain April’s retail sales were much better than expected (41.0% YoY due to the base effect), suggesting strong consumption levels during 2Q’21. In the US, real personal outlays contracted slightly in April, whereas the underlying personal consumption deflator rose more than expected. Separately, the Senate delayed until 8 June the vote on the Innovation and Competition Act, which would prioritise US technology companies over Chinese ones (US$ 52 Bn to subsidise semiconductor production). In Japan, April’s industrial output and retail sales recovered less than expected. In China, May’s manufacturing PMI contracted slightly, whereas the services PMI climbed above expectations.
What we expect for today
European stock markets would open with losses of less than -0.5%, with the energy sector resisting thanks to Brent crude near US$ 70, but with growth performing better than value. Currently, S&P futures are up +0.1% (the S&P 500 ended -0.26% lower vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 16.76). Asian markets are falling (China’s CSI -0.6% and Japan’s Nikkei -1.15%).
Today in Spain and Germany we will learn May’s preliminary inflation figure, in the euro zone April’s M3 and the OECD will revise its forecasts. In debt auctions: France (€ 6.5 Bn in 3M, 6M and 12M t-bills).

COMPANY NEWS

ELECTRICITY SECTOR
According to the press, on Tuesday the Ministry for Ecological Transition will put before the Cabinet a bill to end windfall profits for nuclear and hydraulic companies in order to reduce consumers’ electricity bills, which has risen substantially after higher CO2 prices, among other things.
According to Govt. sources, the proposal would respect the European regulatory framework and would be similar to the one from 2006-09, with a reduction to part of the CO2 “dividend” on plants with no emissions prior to 2005 that sell energy on the market. The Govt. believes, depending on the current Co2 emission prices of some € 50/t, that this reduction (in the case it were to be total) would have an impact of between € 800 M and € 1 Bn and could mean a -5% reduction to consumers’ electricity bills.
The utilities would be completely against this decision and warn that the Govt. benefits most from these surcharges due to tax collecting, and that the maximum € 1 Bn cut should be assumed in the General State Budgets.
Negative news of little impact. In the absence of the details and the amount from the reduction of this part of CO2, the measure would affect companies with more exposure to nuclear and hydroelectric plants, where Endesa would have a large weight of EBITDA from the production of both technologies (~15% of EBITDA’20) vs. 8% in Iberdrola, 5% Acciona and 4% Naturgy (on the valuation both technologies account for ~12% of EV in Endesa, 4% in Iberdrola, 4% Acciona and 3% Naturgy). However, we believe that the reduction in this headline should be insignificant, given that backup technologies are necessary in the current marginalised price setting scheme and the Govt. will already benefit and raise much more with emission auctions given the rising CO2 prices. In any event, the aforementioned amount of between € 800 M and € 1 Bn represents ~5% of the companies’ joint EBITDA.