TheChek News Flow

German 10yr bond yields have turned negative and some European corporates are effectively "being paid to borrow". What are the implications for European equities? Although there has been a deepening of Global growth fears in recent weeks, economic surprise indicators and PMIs have not collapsed. Instead, risk aversion has risen sharply given event risk in June and in particular, the UK referendum. Bullish sentiment (US AAII) hit a 20 year low in the last few weeks

Lower sovereign bond yields have driven the gap between equity and credit yields to new extremes. Credit spreads have widened somewhat, but this has not offset the fall in sovereign bond yields: in the last three weeks Eurozone corporate credit yields have fallen from 1.37% to 1.21% and at the same time the equity dividend yield has risen from 3.4% to 3.7%

We run a Heatmap looking at where the yield is by sector and by country: Energy, Financials and Utilities have the highest yields. Mapping the dividend yield against the pay-out ratio helps indicate potential stress in dividends. Energy appears the most extended on this measure, but we would highlight cash earnings have fallen far less than EPS, suggesting dividends may be under less pressure than first appears.

The change in Bond yields has been a driver for the relative performance of Cyclicals vs Defensives. This is now back below the March 2009 levels (even ex-Banks). Despite the bounce since mid-February on sector rotation, when observed from a long-term perspective, even this has hardly moved the needle.

Chinese takeover battles are rare, so the defensive playbook companies can turn to isn’t well developed. For one of China’s leading corporations, that has left nothing but a mess for investors.

China Vanke, the country’s second largest property developer by sales, announced over the weekend a long-awaited restructuring plan engineered to block its largest shareholder from getting a controlling grip. Vanke will buy $6.9 billion worth of property projects from Shenzhen Metro, a subway operator in southern China’s boomtown adjacent to Hong Kong. Vanke will pay for the deal by issuing a big chunk of new shares.

The properties are beside the point. What is driving the share issuance is that it will dilute Baoneng Group, a separate property developer and financial services firm that became Vanke’s biggest shareholder last year after aggressively buying Vanke shares in the open market.

The deal would give Shenzhen Metro a 20.65% stake, making it Vanke’s largest shareholder instead. But that has upset China Resources, which until last summer was Vanke’s biggest shareholder for more than a decade. China Resources’ three Vanke directors voted against the transaction.

The projects Vanke would acquire from Shenzhen Metro won’t generate revenue for two to three years, so the new share issuance means an instant 20% earnings dilution. China Resources wants Vanke to finance the transaction with debt, given Vanke’s low gearing. But business success isn’t the motivation here. If it used debt instead of shares, Baoneng would remain Vanke’s top shareholder.

It isn’t clear Vanke can muscle the deal through. Two-thirds shareholder approval is required separately from both its Shenzhen shareholders and Hong Kong shareholders. If Baoneng and China Resources both vote against, their combined 40% stake would guarantee the transaction fails.

Baoneng has ample reason to oppose. The new shares will be issued at a 35% discount to Vanke’s mainland shares, lower than some of Baoneng’s purchases, which could wipe out a big part of its paper profits. Citi estimates Baoneng’s average cost at 15 yuan to 16 yuan a share, around the price of the new share issuance.

Baoneng’s Vanke purchases were financed by heavy borrowing and it may accept if it can exit its positions at profit. China Resources, eager to maintain its influence over the developer, could pick up shares from Baoneng. Of course, the parties have had since December to accomplish such a meeting of the minds and haven’t.

Vanke’s Shenzhen-listed shares may finally resume trading in early July. The company halted trading six months ago, a move whose sole purpose seemed to be to block Baoneng from amassing more shares. Meanwhile, Vanke’s Hong Kong shares continue to trade and have gotten reamed by the corporate drama. It is hard to find the winners in this corporate fight.

ML:
UNICREDIT - Set to name Passera as new CEO says II Fatto Quotidiano.....+5-6%

MAJESTIC WINE - Beat. On target to deliver £500m of sales in '19 is ahead.+5%

UBISOFT - Vivendi exceeds 20% threshold by raising stake to 20.1%.......+4-5%

HAMMERSON - Completes sale of Thurrock shopping centre park for £93m......+4%

COBHAM - We UPGRADE to Buy, PO 165p. BS repaired after the rights issue...+4%

VOLKSWAGEN - Set to reduce variety by cutting 40+ models. U/G away......+3-4%

GAMESA - We REIT Buy post-merger announcement with Siemens Wind Power.....+2%

DUERR - We initiate with Buy, PO EUR80 giving 31% upside & div yield 3.3%.+2%

WIRECARD - Senti +ve. Integrates payments for TeamViewer. No financials.+1-2%

UK MINERS - +0.6%, Gold -0.6%, Iron ore -1% with BHP/RIO OZ +3.7%/+2.6%.+1-2%

VIVENDI - Ubisoft stake rose to 20.1%, co to cancel 6.35% outstanding shrs+1%

AIRBUS - Spec Iran Airbus contract to be finalized within 30 days ($17b)..+1%

ASCENTIAL - Trading inline. Stock closed up 14p on FTSE 250 inclusion.....u/c

JPM:
ADIDAS To pay E50m/yr to sponsor German soccer team (prev E25m/yr) +3%

BAYER exploring the sale of its radiology supplies unit

CEMENT Heidelberg receives FT clearance for its 45% acqn of Italcementi

CIRCASSIA CAT allergy p3 fails -50%

UBISOFT/VIVE Viv Says It Isn't Planning Public Offer, though may buy more shs+3%

UNICREDIT likely to name former govt minister Corrado Passera as CEO +5%

VOLKSWAGEN JPM upgrade to OW +4%

CS:
BBVA +3-4% Few papers suggesting bbva will announce further cost cuts

Bechtle M/P Likely to Hit EU3b in Sales This Year

Miners +2% GBP strength holding back Aussie names on translation

Oils +2.5% Weaker USD helping oil, WTI +2.5% from EU close

Safran M/P Advent Oberthur Techn is seeking to purchase Morpho unit

Unicredit +3-4% likely to name Corrado Passera as its next CEO

VW +3-4% VW said to be ready with $10bn diesel accord

Wirecard M/P Wirecard Integrates Payments for TeamViewer

Investec

UK
* AMEC wins BP Iraq contract at Rumaila......................................m/p
* CENTRICA/SSE - CMA to drop claims that big 6 overcharged - FT...........+2%/3%
* CIRCASSIA Cat allergy results primary endpoint not achieved...............-50%
* ENQUEST stmt in response to press spec - not involved in any discussions...m/p
* GLAXO +ve results from phase III Fulfil study, meets primary endpoints.....m/p
* MAJESTIC WINE FY '16 ahead and an ecouraging start.........................+2%
* SPECTRIS purchase of Capstone tech for $22.5m..............................m/p
* UBM - CMA says PR purchase may lessen competition - no issue for UBM.......m/p

EUROPE
* BAYER-exploring sale of $3bn radiology business(Reuters)...................+3%
* BECHTLE-CEO sees €3bn sales(in line), had pretty good start to Q2..........+4%
* CARLSBERG-new CEO sees drop in mkt share as seeks to alter balance.........+2%
* CS-places 5 employees on leave amid US tax investigation(SaS).............+2%
* EDF,EON,IBERDROLA,RWE-UK to drop claims energy co’s overcharged (FT).......+3%
* ERICSSON-says employees summoned in Greek probe............................+2%
* SAFRAN-has found immediate solution for A400m problem(Figaro)..............+4%
* UNICREDIT-set to name fmr Govt minister Passera as new CEO.................+4%
* VW-said ready with $10bn diesel accord; upgrade away.......................+4%

Other news
* VIVENDI raises UBISOFT stake to 20.1%,will buy more,no intention make offer.
* ALCATEL-LUCENT- NOKIA confirms stake rises to 95.5%
* US regulator clears HEIDELBERG CEMENT(+3%)/ITALCEMENTI deal.
* STEEL-China to re-investigate anti-dumping duty.

COMMERZ Indications:

ADS +1.3% And DFB signed a new contract over 4 years for €50m pa BAYN +2.4% Said to explore sale of radiology business (worth $3bn)

BC8 +2.4% CEO sees 2016 sales growth closer to 10% than 5% HEI +2.1% Italcementi takeover approval from US regulator

DB1 +1.7% Brexit may derail LSE, Deutsche Boerse merger, WSJ says DUE +2.5% ML starts with BUY and a PT of €80 FRA +1.4% Bulgaria has put on hold a tender to operate Sofia airport LHA +2.9% Air France unions called on cabin crew to strike on June 24-27th PFV +1.9% Raised to Buy (Hold) at KeplerChev - PT €104

VOW3 +3.7% Said ready with $10b diesel plan, to devise fix later WDI +2.2% Integrates payments for teamview

* Reiterating targets: Dassault recently held a capital markets day in which management reiterated the 2014-19 target that was set in 2014 to double EPS to c€3.5. In delivering on this target, we believe investors are undervaluing the balance sheet, either to fund M&A to help the achievement of targets, or in accumulated net cash on the balance sheet that should have a tangible value. We reiterate our €85 TP and believe that c30% upside in one of the best quality European software stocks is an attractive opportunity. We reiterate our Outperform.

* Growth needs to accelerate: Doubling EPS in 5 years was always based on c9% organic growth, consistent with the track record from 2009-15. Following just 7% growth in FY15 and guidance for 6-7% growth in FY16, Dassault is currently trending below the required run rate and needs growth to accelerate. We continue to believe digital manufacturing represents a sizeable opportunity that supports faster growth, and management remains confident that growth will accelerate into 2H16 and FY17. As growth accelerates, we expect the shares to re-rate.

* Valuation is attractive: Assuming Dassault continues down an organic path, then doubling EPS can be achieved through c9% organic growth and 80- 100bps pa of margin expansion. Importantly, in this scenario net cash will continue to accumulate on the balance sheet and we estimate 2019 net cash could be close to €4bn or c€15/ share. If we take account of this cash and value the core earnings stream on 25x earnings, we justify a target of €85. Alternatively, at the current share price, the core business is trading on just 18.2x target earnings. This looks far too low for one of the best quality sustainable growth assets in the sector. We reiterate our Outperform rating

Macro :

- ECB Ready to Act on Brexit, Italy’s Visco Says in Repubblica

- UK Phone Poll on EU Shows About 7 Pt Lead for Remain: BMG/Herald

- IMF Says Brexit Could Push U.K. Economy Into a Recession - http://bit.ly/28MvbSM

- Egypt May Refrain From Devaluing After Rate Increase: EFG-Hermes

- China to Re-investigate Anti-Dumping Duty on EU Steel Tubes

Keep an eye on :

- ADS GY : Mentioned +vely in Barrons :

- ADS GY : Adidas Said to Pay EU50m/yr in German Soccer Sponsor Deal: FAZ

- BAYN GY : Bayer Said to Explore Sale of Radiology Business: Reuters

- BBVA SM : BBVA Launches Plan With Excess Staff in Focus: El Confidencial

- BLOH GY : Blohm & Voss Shipyard Close to Winning Luxury Yacht Deal: WamS

- BT/A LN : BT Pension Deficit Widened to GBP9.9b in June 2015: FT

- CALT IM : Caltagirone May Consider M&A Opportunities: La Repubblica

- CSGN VX : Credit Suisse Puts Five on Leave Amid Internal Investigation

- DENERG DC : Dong Energy Overallotment Boosts Total Offering Size to DK19.7b

- EDF FP : EDF Managers Tell U.K. Panel Plant Should Be Delayed: Guardian

- ENEL IM : Enel Green Power and F2i bid for First Reserve Italian solar energy assets - Il Sole 24 Ore

- ENST LN : Essentra shares gain on talk of takeover interest - Daily Mail

- ERICB SS : Ericsson Workers Summoned in Greek Probe Into Contract From 1999

- GAM SM : Siemens/Gamesa Wind Merger Synergies Questioned at Barclays

- IT IM : FTC Requires HeidelbergCement, Italcementi to Sell U.S. Assets

- LSE LN : Brexit May Derail LSE, Deutsche Boerse Merger, WSJ Says - http://on.wsj.com/1Y2pYTy

- NMG US : Neiman Marcus is looking for a buyer (Chinese) - NY Post - http://nyp.st/1UFX6JQ

- PA8 GY : Reports positive remimazolam headline data in pivotal U.S. phase III study in procedural sedation for colonoscopy

- POP SM : Popular Chairman Says Bank Isn’t Seeking a Merger: Economista

- PUB FP : Zenith Cuts 2016 Global Ad Spend Forecast on Latin America Slump

- RCS IM : Cairo Communications improves public offer for RCS by 33%, from 0.12 to 0.16

- RCS IM : Cairo Could Partner With Sovereign Fund in RCS Bid: Sole

- ROG VX : Roche to Sell LightMix Zika Virus Test in European Markets

- SGL GY : SGL Carbon's graphite electrodes business draws Vekselberg interest

- GLE FP : Socgen ‘Surprised’ by Prosecutors’ Position at Kerviel Trial

- FP FP : CFDT Union Says Vessel Loadings Resume at Fos-Lavera Terminal

- TTS NO : Palfinger Offer 65% Premium in TTS Group Takeover

- UBI FP : Ubisoft Stake Held by Vivendi at 20.1%: AMF

- VALE US : Vale Said in Talks With Asia Buyers for Stake in Brazil Iron Ore

- VIV FP : Vivendi Says It Isn’t Planning Public Offer for Ubisoft, holding 20.1% of Capital

- VOW3 GY : Volkswagen to Cut More Than 40 Model Variants: Handelsblatt

- VOW3 GY : VW Started Negotiations With Ex-CEO Winterkorn: Handelsblatt

- WDI GY : Wirecard Integrates Payments for TeamViewer

- WPP LN : Zenith Cuts 2016 Global Ad Spend Forecast on Latin America Slump

*ABERTIS RAISED TO HOLD AT KEPLER CHEUVREUX

*CENTENE RAISED TO 'OVERWEIGHT' AT BARCLAYS

*DASSAULT SYSTEME REITERATE OUTPERFORM AT CREDIT SUISSE

*ENEL RAISED TO NEUTRAL VS UNDERPERFORM AT EXANE

*INMARSAT RAISED TO BUY VS NEUTRAL AT CITI

*TAURON RAISED TO OVERWEIGHT AT JPMORGAN

*VW RAISED TO OVERWEIGHT AT JPMORGAN

>>> Down

*COMMERCIAL INTL CUT TO NEUTRAL VS BUY AT GOLDMAN

*EFG-HERMES CUT TO NEUTRAL VS BUY AT GOLDMAN

*ENABLE MIDSTREAM CUT TO 'UNDERWEIGHT' AT BARCLAYS

*ENDESA CUT TO UNDERPERFORM VS NEUTRAL AT EXANE

*ENLINK MIDSTREAM LLC CUT TO 'EQUALWEIGHT' AT BARCLAYS

*EUROPRIS CUT TO SELL VS HOLD AT DNB

*PENNTEX MIDSTREAM CUT TO EQUALWEIGHT AT BARCLAYS

*TC PIPELINES LP CUT TO UNDERWEIGHT AT BARCLAYS

*UGI CORP. CUT TO UNDERWEIGHT AT BARCLAYS

>>> PT change

>>> Initiation

*COBHAM RESUMED AT BUY AT BOFAML; PT 165P

*COMTECH TELECOM RATED NEW OUTPERFORM AT BMO CAPITAL MARKETS

*COTIVITI HOLDINGS RATED NEW OUTPERFORM AT ROBERT BAIRD

*CREDIT AGRICOLE RATED NEW BUY AT JEFFERIES

*DUERR RATED NEW BUY AT BOFAML; PT EU80

*GMS RATED NEW NEUTRAL AT ROBERT BAIRD

*GRUPO BIMBO RATED NEW BUY AT HSBC

*MTS RATED NEW OUTPERFORM AT CREDIT SUISSE; PT $10

*ONTEX RATED NEW BUY AT KEPLER CHEUVREUX

*PROQR THERAPEUTICS RATED NEW NEUTRAL AT CHARDAN CAPITAL MARKETS

>>> Call

>> Stock

*ALLIANZ REMOVED FROM CITI FOCUS LIST

*EUSKALTEL, SEB REMOVED FROM SMALL & MIDCAP KEY CALLS AT UBS