Repsol financial position stabilising on company initiatives and better oil prices
Repsol rarely presents a straight-forward investment case. Since Argentina re-nationalised YPF in 2012,
a combination of large scale transactions and wildly fluctuating macro has presented a complex suite
of moving parts. 1H16 has been no different but with signs of success in delivering the post-Talisman
strategy and oil price recovery seemingly underway, we have taken the opportunity to revisit.
Raising earnings estimates in aftermath of 2Q16 and forecasts re-work
We are raising our 2016 and 2017 EPS estimates by an average of 4.9%. This is largely driven by
higher Downstream resulting from our re-working of Chemicals. The continued robustness of the
Downstream is critical in supporting the integrity of the earnings and cashflows of the business and
has been a standout feature. Our forecasts confirm the free cashflow generation capability of the
Downstream.
Not completely out of the woods yet
Management correctly identifies that credit investment grade is an important input into the equity
investment case. Retaining it is dependent upon an improving oil price and also continued delivery of
the plan. The limited room for manoeuvre clearly creates risk. Strategically, while the tight rein on
capex has had an impressive impact on free casflow resilience, it risks creating some stagnation in
evolving the underlying high-grading element of the post-Talisman investment case as does the weak
Upstream M&A market. Finally, the details of the financial performance continue to be quite difficult to
fully interpret absent a full year of consolidated financials and some significant post-deal and full year
accounting adjustments – especially given the volatile environment.
Valuation: Price target raised to €12.25 from €11.5
Target price is set at 5.5x 2017E EV/DACF in line with European major peers. This is below Repsol's
historic relative rating but reflects the changed nature of the business mix. With the sector carrying
relatively high intrinsic risk around the macro anyway, the additional concerns around gearing and the
settling in of the post-Talisman financial performance don't argue for Repsol being obviously cheap, in
relative terms. As a result we remain Neutral rated on the shares.
We review our weightings within different investment styles. We reduce US small caps to benchmark from overweight (in line with the view of Lori Calvasina, Credit Suisse's US equity strategist). Furthermore:
I. We remain overweight growth as a style with a particular focus on quality growth.
II. Beta has rarely looked so cheap and we recommend high quality beta plays that are Outperform-rated by CS analysts.
III. We remain overweight dividend aristocrats, especially in Europe (though we reduce slightly our overweight of US dividend aristocrats).
IV. We remain benchmark European small caps and underweight UK small caps.
Moody's: UK economy economy will slow down but should not go anywhere near recession
- Lower GBP currency (Pound) should support economic growth in the UK
- Growth seen stabilizing in the rest of the world as Brexit shock passes
Dow +0.12% S&P +0.19% Nasdaq +0.03% Russell -0.28%
US Market closed higher by 0.2% recovering from -0.5% loss. The future path of interest rate normalization remained in focus as investors looked to substantiate yesterday's somewhat hawkish remarks from New York Fed President Dudley (an FOMC voter) and Atlanta Fed President Lockhart (not an FOMC voter). The two fed officials pushed forward rate hike expectations, signaling that at least one rate hike remains possible before the end of the year. The market shifted gears shortly after midday as reports indicated that German Chancellor Merkel signaled that there would be some scope for tax cuts in the Germany's next legislative session. That headline seemed to stoke some risk appetite as investors eyed potential fiscal stimulus measures, which have been lacking in the midst of very aggressive monetary policy accommodations. The Fed minutes for July also helped to brush away lingering rate hike angst indicating that the Federal Open Market Committee was split on whether or not an interest rate hike would be appropriate in the coming months. Seven sectors ended in the green with industrials (+0.3%), financials (+0.4%), and utilities (+1.4%) leading the advance. The heavily-weighted health care sector (+0.2%) performed in-line with the market, but got a boost from M&A speculation. Volume were in line with average at 765 mil shares. US After Hours NTAP +6%, LB +3%, SNPS +2% on earnings/guidance, CIE +12% following insider buy disclosure... BGG -14%, ARAY -11%, A -5% following earnings/guidance. Another day of mixed trade in Asia with strong data out of the Philippines and Australia. USD continued a generally weaker trend, being mostly attributed to FOMC minutes, which failed to give a signal as to when the next rate hike could be. An article in the Nikkei explored the fact the yen has strengthened in August from the previous month in five out of the past nine years. The article attributes monetary policy developments in Japan and the US as part of the fuel for the speculative moves. Japan trade data showed a sharp decline in imports (-24.7%) and exports (-14.0%, 10 consecutive decline and largest decline since Oct 200). Japan PM Abe advisor Honda said the BoJ will likely take bold action next month; No need for BoJ to further lower negative deposit rate . Hong Kong and China markets generally trending higher with stronger earnings coming out of names like Lenovo.
Nikkei -1.57% Hang Seng +1.24% CSI -0.13% Shanghai -0.14%
EU$ 1.1320 CNH 6.6316 CNY 6.6259 JPY 99.84 GBP 1.3064 CHF 0.9598 RUB 63.6797 WTI$46.84 (-0.21%)
S&P +0.07% EuroStoxx +0.61% Dax +0.68% SMI +0.28%
Macro :
- Bullard Still Sees 1 Hike Through ’18, Need for New Approach
- Fed Officials Split in July on Whether Rate-Hike Needed Soon
Keep an eye on :
- ANA SM : Acciona Awarded 506 GWh/Year Contract in Chilean Auction
- T US : AT&T Follows Rivals, Ends Fees on Wireless Users Topping Limits
- BAMNB NA : BAM 1H Net Rises, Rev. in Line; Sees 2016 Adj. Result Above 2015
- BOKA NA : Boskalis 1H Net, Ebitda Beat Ests.; Sees 2H Net Approaching 1H
- CSCO US : Cisco Will Cut Up to 5,500 Positions; 4Q Adj. EPS Beats
- HEI GY : HeidelbergCement to Sell Some U.S. Assets for $660m
- SDF GY : K+S Expects First First Pre-Tax Loss of Millennium: FAZ
- KUD SW : Kudelski Raises 2016 Rev., Operating Income Outlook
- LSG NO : Leroy Seafood 2Q Revenue Beats Estimates; Net Income Misses
- MDLZ US : Mondelez to Invest >$100m in China Over 3 Yrs: China Daily
- MHG NO : Marine Harvest 2Q Net Misses on Financial Items; Div NOK3.20/Shr
- NESN VX : Nestle 1H Organic Sales Growth 3.5% vs Est. 3.7%, Keeps Outlook, Says Pricing to ‘Recover Somewhat’ in Coming Months
- NN NA : NN Group 2Q Operating Result Drops 34%, Interim Div. EU0.6/Share
- RBI AV : Raiffeisen 2Q Net Income Below Est.; Outlook Remains Unchanged
- SEM AV : Semperit 1H Rev. Dips, Margins Rise, Market Challenging in 2H
- SIX2 GY : Sixt 1H Revenue, Pretax Earnings Rise, Confirms FY Outlook
- STRA AV : Strabag CEO Sees 2016 Ebit EU390m-EU400m, WirtschaftsBlatt Says
- SREN VX : Swiss Re Cut to Sell at Citi, Hannover Re Upgraded to Buy
- TLW LN : Tullow Says TEN Delivers First Oil on Time and on Budget
- YHOO US : Hohn’s TCI Adding $2.4 Billion of Yahoo Tops Hedge Fund Buys
- VIV FP : Vivendi Seen Studying New Offer for Mediaset’s Premium: Sole
- VOW3 GY : Volkswagen Wolfsburg Plant Faces Shortened Work Shifts: Bild
- ZO1 GY : Zooplus Raises 2016 Sales Outlook, Keeps Pretax Forecast
>>> Up
*CYRUSONE RAISED TO OVERWEIGHT AT BARCLAYS
*GEA GROUP RAISED TO OUTPERFORM AT RBC CAPITAL
*HANNOVER RE RAISED TO BUY VS NEUTRAL AT CITI
*IMI RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
*UNIPRO RAISED TO BUY AT HSBC
*WILLIAM DEMANT RAISED TO BUY AT KEPLER CHEUVREUX
>>> Down
*AURORA LPG CUT TO HOLD VS BUY AT DNB MARKETS
*CAIRN ENERGY CUT TO NEUTRAL VS OUTPERFORM AT MACQUARIE
*CLOSE BROTHERS CUT TO HOLD VS BUY AT LIBERUM
*GLENCORE CUT TO NEUTRAL VS OUTPERFORM AT MACQUARIE
*HSBC CUT TO HOLD VS BUY AT BANKHAUS LAMPE
*HUFVUDSTADEN CUT TO SELL VS HOLD AT DNB
*SMA SOLAR CUT TO NEUTRAL VS BUY AT ODDO SEYDLER
*SWISS RE CUT TO SELL AT CITI
*TITAN CEMENT CUT TO HOLD VS BUY AT BERENBERG
>>> PT Change
>>> Initiation
*EDF RATED NEW OVERWEIGHT AT BARCLAYS, PT EU13.90
>>> Call
*US SMALL CAP CUT TO BENCHMARK AT CREDIT SUISSE
Dow +0.12% S&P +0.19% Nasdaq +0.03% Russell -0.28%
US Market closed higher by 0.2% recovering from -0.5% loss. The future path of interest rate normalization remained in focus as investors looked to substantiate yesterday's somewhat hawkish remarks from New York Fed President Dudley (an FOMC voter) and Atlanta Fed President Lockhart (not an FOMC voter). The two fed officials pushed forward rate hike expectations, signaling that at least one rate hike remains possible before the end of the year. The market shifted gears shortly after midday as reports indicated that German Chancellor Merkel signaled that there would be some scope for tax cuts in the Germany's next legislative session. That headline seemed to stoke some risk appetite as investors eyed potential fiscal stimulus measures, which have been lacking in the midst of very aggressive monetary policy accommodations. The Fed minutes for July also helped to brush away lingering rate hike angst indicating that the Federal Open Market Committee was split on whether or not an interest rate hike would be appropriate in the coming months. Seven sectors ended in the green with industrials (+0.3%), financials (+0.4%), and utilities (+1.4%) leading the advance. The heavily-weighted health care sector (+0.2%) performed in-line with the market, but got a boost from M&A speculation. Volume were in line with average at 765 mil shares. US After Hours NTAP +6%, LB +3%, SNPS +2% on earnings/guidance, CIE +12% following insider buy disclosure... BGG -14%, ARAY -11%, A -5% following earnings/guidance.
Macro :
- Bullard Still Sees 1 Hike Through ’18, Need for New Approach
- Fed Officials Split in July on Whether Rate-Hike Needed Soon
Keep an eye on :
- ANA SM : Acciona Awarded 506 GWh/Year Contract in Chilean Auction
- T US : AT&T Follows Rivals, Ends Fees on Wireless Users Topping Limits
- BAMNB NA : BAM 1H Net Rises, Rev. in Line; Sees 2016 Adj. Result Above 2015
- BOKA NA : Boskalis 1H Net, Ebitda Beat Ests.; Sees 2H Net Approaching 1H
- CSCO US : Cisco Will Cut Up to 5,500 Positions; 4Q Adj. EPS Beats
- SDF GY : K+S Expects First First Pre-Tax Loss of Millennium: FAZ
- KUD SW : Kudelski Raises 2016 Rev., Operating Income Outlook
- LSG NO : Leroy Seafood 2Q Revenue Beats Estimates; Net Income Misses
- MDLZ US : Mondelez to Invest >$100m in China Over 3 Yrs: China Daily
- MHG NO : Marine Harvest 2Q Net Misses on Financial Items; Div NOK3.20/Shr
- NESN VX : Nestle 1H Organic Sales Growth 3.5% vs Est. 3.7%, Keeps Outlook, Says Pricing to ‘Recover Somewhat’ in Coming Months
- NN NA : NN Group 2Q Operating Result Drops 34%, Interim Div. EU0.6/Share
- RBI AV : Raiffeisen 2Q Net Income Below Est.; Outlook Remains Unchanged
- SEM AV : Semperit 1H Rev. Dips, Margins Rise, Market Challenging in 2H
- SIX2 GY : Sixt 1H Revenue, Pretax Earnings Rise, Confirms FY Outlook
- STRA AV : Strabag CEO Sees 2016 Ebit EU390m-EU400m, WirtschaftsBlatt Says
- YHOO US : Hohn’s TCI Adding $2.4 Billion of Yahoo Tops Hedge Fund Buys
- VOW3 GY : Volkswagen Wolfsburg Plant Faces Shortened Work Shifts: Bild
- ZO1 GY : Zooplus Raises 2016 Sales Outlook, Keeps Pretax Forecast
After Hours Summary: NTAP +6%, LB +3%, SNPS +2% on earnings/guidance, CIE +12% following insider buy disclosure... BGG -14%, ARAY -11%, A -5% following earnings/guidanceAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: NTAP +5.7%, YY +3.2% (also announces Chairman resignation / promotion of Zhou Chen as new CEO), LB +3%, SNPS +1.6%, CACI +0.3% (light volume)
Companies trading higher in after hours in reaction to news: CIE +12.4% (CFO and CEO each disclosed purchase of 100000 shares)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: BGG -14.1%, ARAY -11%, KEYS -8.2%, A -4.8%, CSCO -1.4% (also discloses restructuring plan, will eliminate up to 5,500 positions, representing ~7 percent of its global workforce)
Companies trading lower in after hours in reaction to news: CERU -64.2% (announces top-line results from its Phase 2 trial of its lead candidate, CRLX101, in combination with Avastin; demonstrated no statistically significant difference in median PFS), OMED -10.3% (announces proposed public offering of common stock), PTLA -4.1% (following afternoon sell-off / halt), UIHC -1.4% (ticking lower following resumption - entered into all-stock merger agreement with RDX Holding), SCTY -0.8% (ticking lower - adopts and begins implementing initiatives to realign operating expenses to match the reduced guidance for Megawatts Installed)
Asia Mid-session Market Update: Yen tests ¥99.65, officials warn on excessive moves; Aussie rises to 0.7718 on better employment data
***Economic Data***
- (AU) AUSTRALIA JULY EMPLOYMENT CHANGE: +26.2K V +10.0KE; UNEMPLOYMENT RATE: 5.7% V 5.8%E
- (CN) CHINA JULY PROPERTY PRICES M/M: FALL IN 16 OUT OF 70 CITIES VS FALL IN 10 PRIOR; Y/Y: FALL IN 11 OUT OF 70 CITIES V FALL IN 12 PRIOR
- (NZ) NEW ZEALAND JULY ANZ JOB ADVERTISEMENTS M/M: 1.4% V 0.5% PRIOR
- (JP) JAPAN JULY TRADE BALANCE: ¥513.5B V ¥273.2BE; ADJ TRADE BALANCE: ¥317.6B V ¥167.7BE
- (NZ) NEW ZEALAND AUG ANZ CONSUMER CONFIDENCE INDEX: 117.7 V 118.2 PRIOR; M/M:-0.4% V -0.6% PRIOR
- (PH) PHILIPPINES Q2 INDUSTRIAL PRODUCTION 6.9% Y/Y; CONSUMER SPENDING 7.3% Y/Y
- (PH) PHILIPPINES Q2 GDP Q/Q: 1.8% V 1.8%E; Y/Y: 7.0% V 6.6%E
- (AU) Australia July RBA Gross FX Transactions (A$): -0.5B v -1.7B prior
- (JP) Japan investors bought net ¥1.30T in foreign bonds v bought ¥892B in prior week; Foreign investors bought net ¥94.7B in Japan stocks v sold ¥492B in Japan stocks in prior week
***Index Snapshot (as of 03:30 GMT)***
- Nikkei225 -0.2%, S&P/ASX -0.6%, Kospi +0.5%, Shanghai Composite +0.1%, Hang Seng +1.7%, Sep S&P500 +0.1% at 2,182
***Commodities/Fixed Income***
- Dec gold +0.7% at $1,358/oz, Sep crude oil -0.1% at $46.72/brl,; Sep copper +0.2% at $2.17/lb; Sept Silver +1.05% at $19.85/oz
- (CN) PBOC SETS YUAN MID POINT AT 6.6273 V 6.6056 PRIOR
- (CN) PBOC to inject CNY50B in 7-day reverse repos
- (NZ) New Zealand sells NZ$150M v NZ$150M indicated in 2.75% 2025 Bonds; avg yield 2.0408%
- (JP) Japan MoF sells ¥385.7B in 3-month bills; avg yield -0.2341%; bid-to-cover 3.85x
- (JP) Japan MoF sells ¥221B in 5-yr bonds; avg yield -0.1650%; bid-to-cover 3.5x
***Market Focal Points/FX***
- Another day of mixed trade in Asia with strong data out of the Philippines and Australia. USD continued a generally weaker trend, being mostly attributed to FOMC minutes, which failed to give a signal as to when the next rate hike could be. USD/JPY tested ¥99.65, MoF's Asawaka for the second consecutive session warned on excessive fx moves. An article in the Nikkei explored the fact the yen has strengthened in August from the previous month in five out of the past nine years. The article attributes monetary policy developments in Japan and the US as part of the fuel for the speculative moves. Japan trade data showed a sharp decline in imports (-24.7%) and exports (-14.0%, 10 consecutive decline and largest decline since Oct 200). Japan PM Abe advisor Honda said the BoJ will likely take bold action next month; No need for BoJ to further lower negative deposit rate .
- Hong Kong and China markets generally trending higher with stronger earnings coming out of names like Lenovo. China July property prices showed fewer cities recording m/m gains, major cities showed more frequent increases on existing homes than new. Chinese Academy of Social Sciences (CASS) issued a report saying industrial growth may slow to 5% in June 2017 v 5% in H1 2016. Also said, China should stabilize property market while keeping its proactive fiscal policy and prudent monetary policy.
- AUD/USD tipped 0.7718 (2-day high) after Australia employment data beat expectations. Part time employment saw a huge jump to +71.6K from -33.2K prior and full time was -45.4K from +44.0K prior.
***Equities***
US equities / ADRs:
- NTAP: Reports Q1 $0.46 v $0.36e, R$1.29B v $1.26Be; +7.5% afterhours
- LB: Reports Q2 $0.70 v $0.59e, R$2.89B v $2.87Be; +3.0% afterhours
- NTES: Reports Q2 $3.70 (unclear if comp) v $2.56e, R$1.35B v $1.27Be; Raises dividend 6.8% from $0.73 to $0.78 (implied yield 1.5%); +2.7% afterhours
- CACI: Reports Q4 $2.35 adj v $2.19 y/y, R$1.11B v $1.10Be; +0.3% afterhours
- CSCO: Reports Q4 $0.63 v $0.60e, R$12.6B v $12.5Be; to eliminate up to 5.5K positions (7% of global workforce); -1.4% afterhours
- A: Reports Q3 $0.49 v $0.47e, R$1.04B v $1.04Be; -4.2% afterhours
- CERU: Phase 2 clinical trial of CRLX101 and Avastin combination in Relapsed Renal Cell Carcinoma demonstrated no statistically significant difference; -61.0% afterhours
Notable movers by sector:
- Consumer discretionary: Treasury Wine Estates TWE.AU +11.6%(FY16 result); Nexteer Automotive Group 1316.HK +23% (H1 result); Tatts Group TTS.AU -0.4% (FY16 result); Sydney Airport SYD.AU +0.1% (H1 result)
- Consumer staples: Don Quijote Co 7532.JP +0.8% (annual result)
- Financials: Ping An Insurance 2318.HK +4.0% (H1 result); Everbright Securities Co 6178.HK flat at open (H-share debut)
- Industrials: China Railway Signal & Communication Corporation 3969.HK +2.3% (H1 result); Doshisha Co 7483.JP +3.2% (share buyback)
- Technology: Tencent Holdings 700.HK +5.9% (Q2 result); Kingdee International Software Group Co 268.HK 12.9% (H1 result); Lenovo Group 992.HK +3.4% (Q1 result); IRESS IRE.AU +8.8%(H1 result); Brambles BXB.AU 0.7% (FY16 result)
- Materials: Evolution Mining EVN.AU +5.2%; Saracen Mineral SAR.AU +3.2% (gold rises); Whitehaven Coal WHC.AU +3.9% (FY16 result)
- Energy: China Coal Energy 1898.HK -0.3% (July result); Origin Energy ORG.AU -2.2% (FY16 result)
- Healthcare: Shandong Weigao Group Medical Polymer 1066.HK -3.5% (H1 result); Guangzhou Baiyunshan Pharmaceutical Holdings Co 874.HK -4.1% (H1 result)
- Telecom: China Unicom 762.HK +7.0% (H1 result)
- Utilities: Yokogawa Electric Corp 6841.JP -2.4% (Credit Suisse cuts to Neutral); Softbank 9984.JP -4.5% (said still hold out hope for deal with T-mobile)