TheChek News Flow

We discuss the main conditions that we think any new Greek government will have to meet in order to avoid tail risks. We argue that there is room to improve Greece's adjustment program, but that this will depend to a large extent on the political will to implement key reforms. Our baseline is that the government that will follow the elections of Jan 25 and the Troika will have strong incentives to avoid extreme outcomes. However, we expect very difficult negotiations that could trigger more market volatility, while risks could remain high for most of the first half of the year.

• The elections of January 25 need to lead to a government, most likely a coalition. Failure to do so is expected to lead to a second election in early March, prolonging the uncertainty. Formation of a one-party government could also be a negative outcome, as its slim majority could be fragile.

• The new government will have to show very quickly a strong commitment to reach an agreement with the Troika. This is necessary for the rest of the Eurozone to extend the current program beyond February, to provide time for negotiations and allow the ECB to continue funding the Greek banks.

• Any agreement with the Troika will likely have to find common ground that will be politically acceptable both in Greece and in the rest of Europe. The new Greek parliament will have to approve a deal that will most likely differ from a

number of pre-election promises. The Eurozone parliaments will also need to approve a deal that will provide more help to Greece, but subject to credible conditions.

Greece has strong negotiating power within a program with the Troika, as more than 80% of its debt is with the official sector. However, Greece loses its negotiating power if the government is not willing to implement the key reforms in the program. In an ideal deal, Greece will likely continue with (hopefully less) fiscal consolidation and (hopefully more) reforms, in exchange for further support from the Troika (in the form of a conditional credit line if market conditions improve), ECB bank liquidity support and (hopefully) QE participation, and (hopefully soon) an OSI. We believe

that the primary surplus target will be the focus of the negotiations, which will then determine everything else—reforms and the size of the OSI.

We discuss the case of President Lula in Brazil, a former union leader from the left, who proved market concerns unfounded and was credited with impressive economic performance. Lula’s case suggests that Mr. Tsipras could similarly surprise markets positively by accelerating market-friendly, structural reforms.

The Swiss chemical group on Tuesday released partial results above the expectations of financial analysts. Revenues in 2014 increased by 13% in local currencies and 8.3% in Swiss francs to 5.57 billion francs.

Complete figures including the benefits will be published on February 27, Jan Jenisch, director of Sika already dangled an operating profit (EBIT) of more than 600 million francs. This figure, conservative judged by financial analysts, an increase of over 14%, while the previous forecast of the active chemical group in the construction were in the range of 8 to 12%.

Put in balance the conflict of objectives, and the calculation of synergies and business integration in terms of Sika Saint-Gobain, these results support the direction of the Swiss group in its intentions to get another business model as that proposed by the French group, ten times larger than him.

"We can not achieve our growth objectives with the map of Saint-Gobain," warned Tuesday, January Jenisch during a conference call. It recalls that it is in the business for eighteen years and that the current management team is no stranger to the results envied by Saint-Gobain. The average profit margin of the Swiss group between 2010 and 2013 is 10.2%, against 8.3% for Saint-Gobain.

Beyond the sense of inequality related to the fact that the French group can, through the opt out, take the Sika control by holding 16% stake sold by Burkard family, management does not understand how Sika can remain competitive with Saint-Gobain in the rapidly growing mortars. In fact, the management of Sika dream to manage this business sector of Saint-Gobain Weber embodied by the company. This is nearly five times greater than the mortars division of the Swiss Chemical Society. Absorption of a former competitor would create synergies of € 150 million instead of 70 million allocated to Sika in the plane of Saint-Gobain, says Jan Jenisch. The boss of the French group offers him a simple strategy of complementarity with Weber, whose annual turnover is 2.3 billion euros.

This form of differentiation mortar product ranges across markets is considered aberrant by the management of Sika. "The industrial logic is that we create global synergies based on reduced costs and more efficient network of plants," says Jan Jenisch. He reiterated Tuesday his intention to leave the company if the strategic position of Saint-Gobain does not infléchissait. "I can not run the map of Saint-Gobain. It is not realistic overall direction, "said the boss of Sika.

What is the atmosphere in the company's staff? "Everyone has questions. I do not make comments on the subject of any employee departures. All I can say is that I put every effort to maintain the successful course of business, "says Jan Jenisch.

It confirms that there is still no dialogue with Saint-Gobain on a change of strategic plan. "At the moment there are no discussions with officials of Saint-Gobain, but I think and I hope it will be. Even if only to remove uncertainty, "argues the director of Sika. Markets were somewhat reassured Tuesday by the results. The title was up 4.57%, to 3135 francs at the close of trading, when he bought at 3899 francs before the announcement of the Sika takeover by Saint-Gobain. The future remains unclear. "In the current situation, I can not issue any forecast on the possible growth in 2015," states Jan Jenisch.

Le groupe chimique suisse a publié mardi des résultats partiels au-dessus des attentes des analystes financiers. Le chiffre d’affaires 2014 progresse de 13% en monnaies locales, et de 8,3% en francs suisses, à 5,57 milliards de francs.

Les chiffres complets comprenant les bénéfices seront publiés le 27 février, mais Jan Jenisch, directeur de Sika, fait déjà miroiter un bénéfice d’exploitation (EBIT) supérieur à 600 millions de francs. Ce chiffre, jugé conservateur par les analystes financiers, représente une hausse de plus de 14%, alors que les prévisions antérieures du groupe chimique actif dans la construction se situaient dans la fourchette de 8 à 12%.

Mis dans la balance du conflit d’objectifs, et du calcul des synergies et des modalités d’intégration des affaires de Sika dans Saint-Gobain, ces résultats confortent la direction du groupe suisse dans ses intentions d’obtenir un autre modèle d’affaires que celui proposé par le groupe français, dix fois plus grand que lui.

«Nous ne pourrons pas atteindre nos objectifs de croissance avec le plan de Saint-Gobain», a averti mardi Jan Jenisch lors d’une conférence téléphonique. Il rappelle qu’il est dans l’entreprise depuis dix-huit ans et que l’équipe dirigeante actuelle n’est pas étrangère aux résultats enviés par Saint-Gobain. La marge bénéficiaire moyenne du groupe suisse entre 2010 et 2013 se situe à 10,2%, contre 8,3% pour Saint-Gobain.

Au-delà du sentiment d’inégalité lié au fait que le groupe français peut, grâce à la clause d’opting out, prendre le contrôle de Sika en détenant 16% du capital cédé par la famille Burkard, la direction ne comprend pas comment Sika pourra rester en concurrence avec Saint-Gobain dans le secteur en forte croissance des mortiers. En fait, la direction de Sika rêve de pouvoir gérer ce secteur d’affaires de Saint-Gobain, incarné par l’entreprise Weber. Celle-ci est près de cinq fois plus importante que la division mortiers de la société chimique suisse. Absorber ainsi un ancien concurrent créerait des synergies de 150 millions d’euros, au lieu de 70 millions attribués à Sika dans le plan de Saint-Gobain, affirme Jan Jenisch. Le patron du groupe français propose, lui, une stratégie de simple complémentarité avec Weber, dont le chiffre d’affaires annuel représente 2,3 milliards d’euros.

Cette forme de différenciation des gammes de produits de mortier selon les marchés est jugée aberrante par la direction de Sika. «La logique industrielle veut qu’on crée des synergies globales basées sur une réduction des coûts et un réseau d’usines plus efficace», explique Jan Jenisch. Il a réitéré mardi son intention de quitter l’entreprise si la position stratégique de Saint-Gobain ne s’infléchissait pas. «Je ne peux pas exécuter le plan de Saint-Gobain. Il n’est pas réaliste selon l’ensemble de la direction», estime le patron de Sika.

Quelle est l’ambiance au sein du personnel de l’entreprise? «Tout le monde se pose des questions. Je ne fais pas de commentaires sur le thème de départs éventuels d’employés. Tout ce que je peux dire, c’est que je mets tout en œuvre pour préserver le parcours fructueux de l’entreprise», affirme Jan Jenisch.

Il confirme qu’il n’y a toujours aucun dialogue avec Saint-Gobain sur un changement de plan stratégique. «Pour l’instant il n’y a aucune discussion avec les responsables de Saint-Gobain, mais je pense et j’espère qu’il y en aura. Ne serait-ce que pour lever les incertitudes», plaide le directeur de Sika. Les marchés ont été un peu rassurés, mardi, par les résultats. Le titre était en hausse de 4,57%, à 3135 francs, à la clôture de la bourse, alors qu’il s’achetait à 3899 francs avant l’annonce de la prise de contrôle de Sika par Saint-Gobain. L’avenir reste flou. «Dans la situation actuelle, je ne peux émettre aucune prévision sur la croissance possible en 2015», constate Jan Jenisch.

Bottom-up S&P 500 4Q EPS fell 7% over the last three months, double the average

cut seen recently heading into earnings season (Chart 2). The stronger dollar hurt,

with the average level of the DXY up 9% YoY. But the 40%+ slide in oil prices was

the real culprit, and Energy's EPS expectations have been slashed by 25% since the

end of September. Ex-Energy, downward revisions were in-line with the typical 3-4%

pre-EPS season cut. Analysts now expect $29.59, with full-year EPS expectations

just under our forecast of $118. This implies 4Q YoY earnings growth of 3% (8% ex.

Fins. & Energy), and sales growth is slated to be 1% (4% ex. Fins. & Energy).

A modest beat is still likely

Consensus estimates have fallen to just below our 4Q EPS forecast of $29.75,

implying a more modest beat than the 3-4% beats we have seen during the past few

quarters. Early reporters' results are a good harbinger: 71% beat on EPS, 62% on

sales, and 52% on both. Growth has remained healthy—the GLOBALcycle indicates

that global growth ticked up in 4Q (~3.5%), with improvement across many EMs and

Europe, and stable conditions in other DMs. We also estimate that buybacks

contributed 1-2ppt to the S&P’s expected 4% YoY EPS growth in 4Q.

macro backdrop in H2 2014, particularly in Europe and Latin America,

has been exacerbated by the collapse in the oil price. This has led volume

growth to evaporate and prices have turned negative again. The weakness

of the EUR and GBP against the USD should be positive. In our thematic

report Survival Guide, 5 December 2014 we highlighted the drag on profit

growth from prolonged low growth and oversupply for the coming years.

Therefore, we believe the risk to earnings remains to the downside while

valuations are still above historic levels.

Q4 outlook: Destocking as a result of the fall in the oil price should result in

volumes flatlining in Q4. This compares to 4.5% volume growth in Q4 2013

and 3.5% in the first nine months of 2014. We expect prices to fall by

approximately 2% in Q4 for the Classics given the 7% decline in the value

of the product basket we follow due to the fall in the oil price. On the bright

side, FX tailwinds should add about 3.5% for EUR-based companies. We

expect Q4 operating profit to be up 3% y-o-y, in line with consensus. We are

above consensus for BASF and Solvay and below for Arkema.

We have OW/UW ratings on the following shares in the context of these themes:

* BASF (BASFn.DE, EUR88, OW): Dividend yield to support shares; only c25% of the Oil&Gas division is oil; ethylene and downstream segments to benefit from lower oil price.

* Croda (CRDA.L, 2,800p, OW): Growth recovering; consensus too cautious on 2015 margin, suggesting earnings cycle is turning positive.

* Johnson Matthey (JMAT LN, 3,800p, OW): Legislation will continue to drive growth and margins; strong cash generation to support dividend growth.

* Linde (LING.DE, EUR176, OW): Higher industry discipline; expectations have been re-set; potential to create incrementally more value than peers.

* Solvay (SOLB BB, EUR132, OW): On track to upgrade portfolio; earnings supported by cost savings; shares are the cheapest in the sector.

* Umicore (UMI.BR, EUR33, UW): Earnings risk in recycling; expensive.

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Nigeria-focused Afren dropped a further 5.2 per cent to 25.9p following its write-off of Kurdistan assets on Monday, and in spite of rumours about a possible counterbid for the explorer.

Bert Cooper, the Liberian mining entrepreneur who co-founded Afren, was rumoured to be leading a group examining taking the explorer private. Mr Cooper’s potential buyout of Afren was said to have won backing from companies including Vitol, the commodity trader, and China’s ZhenHua Oil.

Afren said in December it had received a “highly preliminary” approach from Nigerian peer Seplat over a possible merger. The shares have since halved....

Ryanair has for some time been prepared to dispose of its Aer Lingus stake and is willing to entertain offers, the Irish Examiner reported. Kenny Jacobs, chief marketing manager at Ryanair, said the Irish airline has not received any approach for its 29.8% holding from the Anglo-Spanish carrier IAG, which has recently made two rejected offers for Aer Lingus.

Quoted in an Irish Independent piece, Jacobs said Ryanair would have no concerns about Aer Lingus being acquired by IAG, adding that it would be an opportunity for Ryanair to secure a greater share of the European market.

IAG is expected to make a revised approach this week with an offer priced within the range EUR 2.50-EUR 2.70 per share, the Examiner report said. Jacobs predicted that other buyers are likely to emerge in future if IAG’s attempt fails, the item reported.

He added that the higher and lower ends of the European airline market are likely to consolidate in the next few years; when asked if Ryanair would participate in the consolidation, Jacobs replied that the business would look at any viable potential targets as it pursues growth.

Source Irish Examiner