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IBERIAN DAILY 02 SEPTEMBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ELECTRICITY SECTOR, SIEMENS GAMESA.

September kicks off with drops
The downward spiral initiated on 16 August (when the month’s high was hit) continued on the first day of September. The new lockdowns in China and the fears of future rate hikes that could even bring a recession led to pessimism on the markets, with drops on both sides of the Atlantic. In the Euro STOXX, Utilities and Telecoms were the best performers (although with losses), whereas Basic Materials and Travel & Leisure were the worst performers. In the euro zone, the final PMI was cut slightly to a 2-year low and July’s unemployment rate stabilised at 6.6%, as expected. In Germany, July’s retail sales were a positive surprise, recovering more than expected. In the US, August’s manufacturing ISM remained at the same level as July (above forecasts), whereas weekly jobless claims and construction spending fell more than expected. From the Fed, R. Bostic stated that there is still work to do in order to reach 2% inflation. In Russia, the NS1 gas pipeline will resume operations tomorrow at 20% of capacity, and the German Govt. expects another interruption in deliveries in mid-October. Putin calls Ukraine an enclave and threatened new cuts to oil and gas supply.
What we expect for today
European stock markets would open with slight gains after the drops from the past 2 weeks. Currently, S&P futures are down -0.1% (the S&P 500 ended up an additional +1.35% after the European closing bell). Volatility in the US fell (VIX 25.56). Asian markets are falling (China’s CSI 300 -0.35% and Japan’s Nikkei -0.1%).
Today in the US we will learn July’s durable goods and factory orders, the unemployment rate and August’s non-farm payrolls.


COMPANY NEWS

CHANGES IBEX 35. Technical Advisory Committee meeting on 08/09. We do not expect any changes.
The IBEX Technical Advisory Committee will meet on the 8th of September for its second annual follow-up meeting (the next one will be in March’23). After the changes made in the June meeting, on this occasion we do not expect any changes on the index, apart from some small weight adjustments.

ELECTRICITY SECTOR
According to a document from experts in Brussels, the EC is mulling the possibility of limiting what companies charge for cheap, submarginal energies in order to control electricity prices (with little impact on budgets) and does not advise extending the “Iberian exception” (cap on gas prices) to the entire EU because it would subsidise generation with fossil fuels. Added to this would be a “coordinated reduction of demand” for electricity in companies and private consumers.
The experts warn that limiting electricity prices on submarginal energies should mean eliminating taxes on windfall profits that have been implemented or announced in some countries such as Spain. Moreover, in order for clean generation sources not to lose appeal, “incentives” on investment are being mulled.
In any event, everything is still up in the air for the Energy Ministers meeting on 9 September, and we cannot rule out the possibility that this will come about, as it is a risk for energy transition. The option of decoupling gas from electricity prices remains on the table, and this would also reduce profitability for submarginal energies and would surely lead to a tariff deficit in order to compensate gas companies.
Separately, Spain will reduce VAT on gas from 21% to 5% starting in the autumn (at a cost of € 190 M for the Govt.).
Negative news in the absence of more details. A limit on electricity prices would reduce revenue generation for submarginal energies (such as renewables and nuclear), although this will depend on what the price is set at, the duration of the measure and the type of incentives to be given on investment in renewable energies. In any event, the most affected companies would be renewable energy companies with the most exposure to the market: Acciona Energía 26% of production’22e and 100% EV, Solaria 100% EV, Ecoener 37% of production’22e and 100% EV and ENCE 42% of production’22e, where the renewable division would account for ~40% of EV. In the integrated segment this would affect companies with the highest proportion of nuclear and hydro energy. Thus, in our coverage universe, the highest exposure to nuclear and hydro would be in Endesa and Iberdrola (~15% of EBITDA’21e in Endesa, 8% in Iberdrola and 4% in Naturgy). In the valuation, the weight of both technologies accounts for ~12% of Endesa’s EV, 4% of Iberdrola’s and 3% of Naturgy’s.