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embedded and risks from further rate cuts overstated. Prefer BNP, SocGen attractions growing.

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Les retards de livraisons de sièges d’avion semblent quasi-résorbés. La situation reste tendue pour les équipements de cabine et de toilettes d’A350.

Un an après le lancement de son plan de transformation industrielle, Zodiac Aerospace n'a pas encore tourné la page de la plus grave crise industrielle de son histoire. Mais l'équipementier voit le bout du tunnel. Pour la première fois depuis le début de ses soucis, fin 2014, Zodiac a ouvert à la presse, les portes des principaux sites industriels de sa branche sièges et cabine. Une visite express de sept usines en deux jours, de Chihuahua au Mexique à Huntington Beach, en Californie, destinée à montrer les progrès accomplis, mais aussi les difficultés que doivent affronter ses équipes.

Pas encore de retour à la normale

Dans tous les ateliers, les tableaux de « reporting » pour suivre l'évolution de la production sont désormais omniprésents. De grands panneaux appellent à la mobilisation de tous. Cependant, même si celle-ci commence à porter ses fruits, le retour à la normale n'est pas pour demain, reconnaît le président du directoire, Olivier Zarrouati. « Les problèmes de livraison de sièges sont globalement derrière nous, même si quelques retards subsistent », estime-t-il.

« En revanche, le retour à la performance opérationnelle, qui consiste à livrer des produits bien conçus, sans défaut à reprendre, et dans les coûts prévus, n'est pas prévu avant fin 2017, souligne-t-il. Après quoi, nous devrons encore améliorer la performance financière, car ce retour à la performance opérationnelle se fera sur la base de coûts non optimisés, de début de courbe d'apprentissage ».

Pour parvenir à livrer ses clients dans des délais raisonnables, Zodiac a dû mettre en place des moyens exceptionnels. Ainsi à l'usine numéro 2 du site de Chihuahua, où sont fabriqués une grande partie des éléments de sièges destinés à être assemblés aux Etats-Unis ou en France, le niveau des stocks de pièces reste presque deux fois supérieurs à l'objectif affiché.

Nouveau point noir : les toilettes

Par ailleurs, si l'usine de Gainesville est déjà redevenue « opérationnelle », celle de Santa Marta reste saturée, avec un niveau de production encore trop élevé par rapport à ses capacités réelles. Un partie de sa production de coques de sièges affaires a été transférée vers d'autres sites comme celui d'Issoudun (Indre), en France. Pour reprendre le contrôle, Santa Marta devra encore réduire la voilure - et ses effectifs - d'ici la fin de l'année, reconnaît Olivier Zarrouati.

Le principal point noir n'est toutefois plus la production de sièges, mais les équipements de cabine, et plus particulièrement des toilettes de l'A350, dont les retards de livraisons et les problèmes de qualité avaient suscité une attaque en règle de la part du PDG d'Airbus, Fabrice Brégier, en début d'année. Une crise qui est venue s'ajouter à celle des sièges début 2016, et dont l'épicentre est l'usine de Cypress, près de Los Angeles, où sont fabriqués les toilettes du dernier-né d'Airbus.

Une centaine d'options en catalogue

« Dans les cabines, nous avons dû faire face à une conjonction de nouveaux programmes : E2 d'Embraer, C-Series de Bombardier, "retrofit" des A320 de Delta et A350 », explique Oliver Zarrouati. Mais l'A350 est un cas particulier, du fait de la très forte augmentation des cadences de production en 2016, passées de 15 appareils en 2015 à 50 en 2016, et d'une grande variété d'options laissées aux clients sur les toilettes - plus d'une centaines d'options en catalogue et 26 positionnements possibles à bord de l'A350. « Le fond du problème, c'est la défaillance du management du site de Cypress, qui n'avait pas assez anticipé les difficultés de la phase d'industrialisation et le niveau d'exigence des clients de l'A350 », reconnaît le patron de Zodiac.

Au cours des trois derniers mois, sept des onze directeurs du site californien ont été remplacés, dont le directeur général et le directeur du programme A350. L'organisation de l'usine a été repensée. Il a également été décidé de créer deux nouvelles lignes de production de toilettes d'A350, sur des sites déjà existants de Zodiac, à Montréal et à Herborn, en Allemagne. De quoi permettre au nouveau directeur général de Cypress, Frank Dubey, de viser un respect des dates de livraisons prévues « dès fin 2016 ».

Zodiac fait profil bas

Cela suffira-t-il à rassurer Airbus ? Pour l'heure, l'avionneur semble avoir déjà mis ses critiques contre Zodiac en sourdine. De son côté, l'équipementier fait profil bas, même s'il n'est probablement pas le seul responsable des retards de livraison des A350.

Aucun des deux protagonistes n'a intérêt au conflit. Si Zodiac ne peut se passer de la clientèle d'Airbus, sa position de leader mondial des équipements de cabine le rend relativement incontournable. Ainsi Airbus a beau vouloir écarter Zodiac du nouveau programme A330 Neo tant que les problèmes ne seront pas réglés, l'équipementier n'en restera pas moins présent à bord, avec ses équipements de cabine ou par la volonté des compagnies aériennes, qui sont le véritable juge de paix.

- Equities: $1.8bn inflows (inflows in 3 of past 4 weeks) (note $5.0bn ETF inflows vs $3.2bn mutual fund outflows)

- Bonds: $4.3bn inflows (inflows in 20 of past 22 weeks)

- Precious metals: $0.6bn outflows (largest in 2016)

- Money-markets: $16.7bn outflows

- EM: 9 straight weeks of inflows (albeit modest $0.5bn inflows)…no sell-signal for EM equities this week; needs v large $7-8bn inflows next week to trigger ‘sell”

- Europe: $1.1bn outflows (record 30 straight weeks of outflows; but pace of outflows slowing)

- Japan: $0.7bn outflows (first outflows in 5 weeks)

- US: $2.7bn inflows

- By sector: largest inflows in 10 months to financials funds ($1.2bn); 9 straight weeks of REITs inflows ($0.4bn)

- 9 straight weeks of inflows to EM debt funds ($0.7bn) (but pace of inflows is weakest in 9 weeks)

- $2.3bn inflows to IG bond funds (inflows in 25 of past 26 weeks)

- $0.3bn inflows to HY bond funds (inflows in 8 of past 9 weeks)

- 50 straight weeks of inflows to Munis ($0.7bn)

- 12 straight weeks of inflows to TIPS ($0.5bn) (largest since May’16)

- 8 straight weeks of outflows from Govt/Tsy funds ($0.2bn)

- First outflows from MBS funds since Jan’16 ($0.2bn)

August payroll: consensus expects 180K; strong payroll (>220K) = banks breakout, US$ rally, value>growth & bonds/quality underperform = rotation to hawkish Fed / stronger macro environment (top-right – Chart 1); weak payroll (<140K) = bonds back in vogue as Jackson Hole seen as false start…note August payroll has undershot consensus for the past five years so very weak print required to derail view of stronger macro trend

The Hutchison and VimpelCom (VIP) JV in Italy has been cleared by the EC. The Commission has also

approved the agreement between Hutch-VIP on one side and Iliad on the other (signed in early July)

which set the competitive remedies for the entry of a 4th MNO (see our note Iliad to 'Free' Italy? – 6

July).

The Italian mobile market is challenging, but we see room for Iliad to succeed, leveraging its strong

execution capabilities and financial flexibility. We expect four main strategic pillars for Iliad's Italian

venture: 1) a capex-light approach, especially in the first 2-3 years (€450m for frequencies) given Iliad can

leverage the roaming and RAN sharing agreements in the initial phase; 2) investments to step-up subject

to subscriber take-up (network roll-out and bid for 700MHz); 3) a commercial proposition based on

simple and transparent mobile bundles for the low-end and young clusters, with aggressive pricing for

the entry-level (prevailing market price currently ~€10/month) and large data allowance for the high-end

(currently ~3GB/month); 4) a convergent strategy (ie, fixed+mobile) through commercial agreements, JV,

M&A.

Higher competitive intensity in the mobile market could trigger two main consequences, in our view: 1)

TI to push on convergence. Offering a sizeable discount on a convergent product could be a good way

for TI to accept price dilution while reducing churn and seeking global ARPU expansion; 2) In-market

consolidation. We believe the market dislocation subsequent to the potential convergence take-up

would push players with sufficient financial fire power and a relatively higher exposure to the mobile

business (Vodafone, Iliad) to build a convergent asset base through M&A.

We anticipate: 1) downside risk on consensus top line expectations for all the players exposed to Italy

(group revenues from Italy: TI >75%; VOD ~10%; VIP ~25% (Italy not consolidated); Hutch >5%;

Swisscom ~15%); 2) a compelling risk-adjusted return for Iliad's Italian venture; 3) Significant cash-cost

synergies for VIP-Hutch JV (VIP guided for >€5bn when the JV was first announced).

YTD 2016, the MSCI EU Airlines index fell 36% with a c5% fall (Eurotop 300 –c6%) over the last 30

days with none of the airlines under our coverage in positive territory. We think that investors need to

see the earnings floor before they will become more positive on the sector. However, there is the

potential for further winter capacity moderation which may be viewed positively by the market. The next

catalyst for the sector we see is the UBS Travel and Leisure conference on the 12/13 September where

the six largest listed European airlines will present.

We have re-run the data for Q4 16 and Q3 16. The revised data suggests that Q4 16 long haul capacity

will grow by 6.1% (previous: 6.9%) while short-haul is expected to grow by 7.3% (Previous: 7.6%). Q3

16 data suggests long-haul capacity will grow by 4.8% (previous 5.1%) and short haul is expected to

grow by 5.3% (previous 5.5%). We expect that European airlines will continue to come under pressure

from investors to reduce capacity. N Atlantic yield pressure appears to be taking another step-down in

October and Q3 appears weak which is worrisome.

Airport seat capacity growth in Q3 looks solid at +6%. ADP should see lower but stable capacity increase

of about 3% while FRA struggles for growth at -0.4%. Q4 looks more promising for the sector as a

whole with indications at +8% on average, although Aena and Zurich Airport should lead the way with

growth of 14% and 9%, respectively. Capacity growth indications for Fraport buck the trend by showing

only marginal growth of 1.0% in Q4 (down from +1.4% last month) having been negative in Q2-Q3.

We continue to be positive on Ryanair (Buy, €16.25), Wizz (Buy, £23.5), and IAG (Buy, 475p) while we

have Lufthansa (PT €9.75) and easyJet (PT £11.5) on Neutral and Air France-KLM (PT €4.6) on Sell. In the

airport space we remain positive on Aena (Buy, €135) and Flughafen Zurich (Buy, CHF 200), while we

think the outlook for Fraport (Sell, €45) in 2016 warrants more caution given the worsening volume

growth outlook.

With Vodafone and Liberty Global (not rated) having received conditional clearance from the EC for the merger of their Dutch assets, investor focus is now switching back to the prospect of both companies revisiting a broader deal. Strategically a deal would create a leading converged fixed/mobile operator across Europe. We estimate cost synergies from a broader deal could have an NPV of €15.6- 23.4bn for 100% with a further €6.4bn of potential upside from tax synergies. Assuming a 50% share for Vodafone, we believe this would be worth up to 47p per share for Vodafone.

Amongst the various alternatives we think either a ‘merger of equals’ or an acquisition of Liberty Global by Vodafone could be >10% accretive to Vodafone EFCF longer-term. Looking at incentives for Liberty Global management, according to company filings they are incentivised to either accelerate EBITDA (OCF) growth to >6% pa over the next three years (H1-16 was +2%) or undertake a deal that would result in a change of control (either from an acquisition or merger). Vodafone management incentives are geared towards significantly growing EFCF over the coming years.

With Vodafone switching to EUR rather than GBP based reporting, we publish new EUR forecasts for the company. Outside of the change in reporting currency, our underlying estimates for Vodafone are broadly unchanged. UBSe assume +4% underlying EBITDA growth for FY-17 rising to 6-7% pa thereafter as the core European business (2/3 of Vodafone) benefits from growing mobile data usage and ‘more for more’ price changes. Combined with an easing working capital drag, this should drive a ramp in EFCF from €4.2bn in FY-17E to >€7.0bn for FY-19E onwards.

Vodafone offers a 7% EFCF yield and >5% dividend yield on a calendarised basis for 2017E. We think recovery and operational gearing in Europe have been underestimated and that the current share price factors in little for M&A upside potential. Note that our PT of 310p does not include any M&A upside, and our base case assumes nothing incremental (either in our SOTP or our estimates) for the Dutch JV.

Dow +0.10% S&P +0.00% Nasdaq +0.27% Russell +0.02%

Macro :

- Emerging-Market Capital Inflows Dip to $24.6b in August: IIF

- Bank Groups Said to Weigh Legal Challenge to Stress Tests: WSJ

- U.S. Steel Falls to Lowest Since July as Automakers Miss Ests.

Keep an eye on :

- AIR FP : U.S. Said Set to Approve $7b Boeing Jets to Qatar, Kuwait: Rtrs

- AAPL US : Apple to Let Users Make Payments Using Siri, Square Cash

- BIIB US : Biogen Gets FDA Fast Track Status for Aducanumab in Alzheimer’s

- BOL FP : Bollore 1H Net, Ebitda Decline on Transport, Logistics Business

- CBK GY : Commerzbank Director Roach Against Deutsche Bank Merger: FAZ

- COTY US : Coty Drops to Lowest in More Than 2 Mos. Amid PG Exchange Terms

- DBK GY : Deutsche Bank’s Henning Gebhardt to Leave, FAZ Reports

- DTE GY : Deutsche Telekom to Start Mobile Streaming Service: Handelsblatt

- ETL FP : Eutelsat Says Satellite Loss to Cost About EU45-50m on Revenues

- FCA IM : U.S. Feds Probing Messages to Fiat Chrysler Dealers: WSJ

- FCA IM : Italy Stands by Tests Clearing Fiat on Emissions: Official

- ING FP : Ingenico May Move After VeriFone Cuts EPS, Rev. Forecasts --> PAY -15% in After Hours

- EGP PL : Mota-Engil Group Signs Accord to Build, Operate Rwanda Airport

- LLOY LN : Lloyds Is Best Bank to Short Among U.K. Lenders, Bernstein Says

- LULU US : Lululemon Falls 7%; 3Q Adj. EPS May Miss, 2Q Comps W/ DTC Trails

- MMT FP : M6 CEO De Tavernost Says Ad Market Outlook Uncertain: Figaro

- NKE FP : Nike’s Move to Drop Golf Gives Callaway Big Opening, CEO Says

- NOVOB DC : Novo Nordisk Downgraded at Morgan Stanley, Sees Risk to L-T View

- PBR US : Petrobras Could Lose BRL1b If SBM Accord Not Approved: Ministry

- ROG VX : Roche to Cut Up to 190 Jobs in Basel Over Next Two Years

- RKET GY : Rocket Internet 1H Loss EU617M Influenced by Special Effects

- SBMO NA : SBM Says Brazilian Prosecutor Hasn’t Approved Leniency Pact, Petrobras Says SBM Contracts May Continue After Accord Decision

- TERB BB : Ter Beke 1H EPS EU4.16 vs EU2.53 Y/y; Reiterates 2016 Guidance

- PAY US : Verifone Seeing ‘Significant’ EMV Slowdown at U.S. Businesses -->- 15% in after Hours

- UCG IM : UniCredit Mandates JPMorgan to Explore Pioneer Options: Stampa

- VOW3 GY : Volkswagen Likely to Roll Out Recall in India This Mo: CNBC-TV18

*ABB RAISED TO OUTPERFORM VS UNDERPEFORM AT EXANE

*ACCORHOTELS RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS

*AMEC FOSTER WHEELER RAISED TO BUY VS NEUTRAL AT BOFAML

Vestager Lights a Fire Under Corporate Tax Avoidance

EU competition chief’s tax ruling in Apple-Ireland case is expected to reverberate more quickly than international talks under way

Like Alexander the Great whose sword cut the Gordian knot, Margrethe Vestager has sliced through what until now has appeared to be an intractable problem: multinational companies earning billions of dollars in Europe and paying tiny sums in taxes to European governments.

The European Union’s competition chief ordered Ireland to recoup $14.5 billion in taxes from Apple Inc., a sum that is so large that it will light a fire under multinationals’ tax planning. The effects will reverberate far more quickly than the slow-moving international talks under way to reduce aggressive corporate tax avoidance.

For many in the U.S., Ms. Vestager’s decision looks like a mugging. But let’s look at it from her point of view. Big multinational companies like Apple shift profits, perfectly legally, to low-tax or no-tax jurisdictions then spirit the money out of the EU, helped by sophisticated arbitrage between differing national tax regimes.

These companies thus operate in the EU’s common market, while enjoying advantages local competitors don’t—and don’t pay much into public coffers.

The low tax rates are politically sensitive in hard times like the present. If aggressive tax avoidance isn’t tackled as multinationals take over a bigger share of economic activity, other taxpayers will face bigger tax bills or public services will need to be cut.

But Apple Chief Executive Tim Cook and the U.S. Treasury have protested the ruling, and they have a point too. For a quarter-century, Apple relied on agreements from Irish authorities that all of a sudden are adjudged to have provided it with billions of dollars in what the EU has now ruled to be illegal state aid.

Retroactivity is part and parcel of all state-aid cases—which traditionally focus on illegal government subsidies. But this time, Apple and the U.S. Treasury say, retroactivity has been accompanied by novel technical definitions—for example, relating to what constitute “arm’s length” transactions between subsidiaries of the same company—from Ms. Vestager’s department that the company couldn’t have known about ahead of time.

The EU ruling has also unloaded a political dilemma on the Irish government. After emerging from a painful debt crisis, Dublin now faces a decision of whether to recoup the money, equivalent to about 7% of its national debt, or join Apple in appealing against the decision.

The Irish calculation has been to facilitate corporate tax planning in return for jobs. Apple says it employs nearly 6,000 people across Ireland. Now, the European Commission is adding to the pressure it had already put on Ireland to alter its tax system—which has resulted in changes now being phased in.

It has also invited other EU governments to examine whether they, rather than the Irish, should have received tax payments from Apple, ensuring further government scrutiny that may make aggressive tax planning in Europe more difficult to sustain.

Mr. Cook condemned the ruling in an interview with the Irish Independent newspaper as “total political crap.” The Apple CEO told Irish public broadcaster RTÉ that the ruling was “coming from a political place” and was based on “no fact or law.”

Ms. Vestager retorted Thursday that she wasn’t being political, and that she’s just doing her job as outlined by the EU treaties. She said those treaties empower her to ensure companies aren’t getting an unfair handout from governments.

Mr. Cook isn’t the only one to claim Ms. Vestager has gone too far. One of her predecessors, Neelie Kroes, said Thursday in an opinion article for the Guardian that, “You cannot change the rules of the game through ad hoc state aid enforcement, and then seek retroactive recovery for unpaid taxes.” Ms. Kroes said it would harm competition, growth and tax-income in Europe and raise serious questions about legal certainty and the rule of law.

It’s better to shape a fair tax system for the future, Ms. Kroes said.

So far it has proved impossible to get 28 governments to agree to do that, which is why, in the face of a policy vacuum, Ms. Vestager seems to have decided to act. Even if the European Court of Justice eventually finds that she has overreached, her decision may well have the desired effect on corporate tax planning.

Ulrich Soltész, Brussels-based partner at law firm Gleiss Lutz, says competition policy and state-aid rules are sometimes used to implement political objectives.

In the EU, there is no tax harmonization and there is no direct means of dealing with unhealthy tax competition that leads to a race to the bottom. “But these political objectives, what are they? They are a fair, equal, level playing-field. I wouldn’t say this is completely illegitimate,” he said.

For all of Mr. Cook’s protests, the world’s largest company by market capitalization is never going to be able to avoid politics.