Executives acquitted of VW share manipulation in Stuttgart trial; Doesn't have to pay fine - financial press
ML
* BAML GLOBAL INDUSTRIALS CONFERENCE DAY 4 - Siemens in focus................
* GOLD FIELDS - Raises 2.5bn Rand, places 38.9m shrs; BAML sole bookrunner...
* GRANGES - Orkla selling 11.9m shrs @ SEK 69/shr; Carnegie/SEB on deal......
* CAPIO - Apex EU/France selling 18m shrs @ SEK 42/shr; JPM/SEB on deal......
DNO - Net 2P reserves at YE15 were 392 MMboe, a 13% decrease v BAML -20%..+2%
BT - Simon Lowth to replace Tony Chanmugam as New Finance Chief; Sky......+2%
GRANDCITY - Good. FFO1/shr EUR 0.89 is inline, NAV strong at EUR 14.95..+1-2%
FERRAGAMO - EBITDA 4% beat but guide on call was cautious start of yr.....+1%
AIR FRANCE - Receives 4 offers for Servair, spec worth c.EUR 480m; Echos..+1%
VOLVO - Industrivärlden (with Cevian) putting pressure on chairman........+1%
D. WOHNEN - FY15 inline, NAV/shr EUR 23.0. FY16 guidance is stable......+0.5%
RICHEMONT - Bernard Fornas to retire as Co-CEO as of end of March.......+0.5%
HANNOVER RE - We UPGRADE to Neutral, PO €109 (now rated same as MUV2)...+0.5%
MUNICH RE - We DOWNGRADE to Neutral, PO €198 (now rated same as HNR1)...-0.5%
DUNELM - We DOWNGRADE to Neutral, PO 980p. Slower pace of store rollout...-1%
SUNRISE - Freenet AG buys 23.83% stake in co from CVC for CHF 72.95/shr...-1%
GENERALI - Op profit 3% miss, div inline & solvency II better at 202%...-1-2%
BKG - FY to be top end. 4% drop in reservations the main negative.........-2%
CS
Assa Abloy +1% Garthwaite flags in strategy note, broker u/g away
Berkeley Grp -2% FY #s top of range, but broader commentary cautious
BT +1% Simon Lowth to Succeed Chanmugam as Finance Director
Deutsche W M/P NAV at EU23.01 vs 17.86 last year, broadly inline
Freenet -3% Freenet Buys 10.7m Shrs of Sunrise Comms at Chf72.95
Generali -2% Solvency better, however net is an 8% miss
Grand City +2-3% NAV climbs to EU13.46 per share ahead of CS 13.10
JC Dec -1-2% Exterion Wins GBP2bn Tube Ad Contract, Beating JCDecaux
Santander +1% Santander to Improve 2016 Div/Shr by 5%
SAP +0.5% ADBE: Reports Q1 $0.66 v $0.60e, R$1.38B v $1.33Be
Savaltore +1-2% 3% EBITDA beat and >30% SI should see the stock better
Sunrise com +8-10% Freenet Buys 10.7m Shrs of Sunrise Comms at Chf72.95
U-Blox -2-3% Sales light, EBIT light, divi ahead, guidance light
MainFirst Pre Mkt Indications
*AIR FRANCE-Examining offers for Servair Catering Unit - Echos......+1%
*RICHEMONT-Cutting jobs & Co-CEO Fornas to retire...................-0.5%
*BSCH-To improve 2016 Divi/Share by 5% says Expansion...............+0.5%
*FREENET-Buys 23.8% stake in Sunrise Comms,Sees Ebitda up €10m......-1.5%
*THYSSEN-Revamps Inds Solutions Unit says Handelsblatt..............U/C
*FERRAGAMO-FY Ebitda 324m(313),Ebit 265m(255),NI 173m(164.4)........+2%
*BILFINGER-Building unit sale said to draw EQT,Triton & JLL.........+0.25%
*D/WOHNEN-FFO 303m(310),Ebit 2.19b(2.19),NI 1.16b(1.5)..............-0.5%
*GENERALI-FY OP 4.79b(4.97),NI 2.03b(2.25),Divi 72c(70).............-1%
*GRAND CITY PROPS-Ebitda 177m(170),FFO 127.9m(126.12),FFO 89c(82)...+0.5%
*MAX AUTO-Sales 383.8m(368.75),Ebit 24.8m(19),FY16 looks ok.........+1.5%
*JC DECAUX-Loses out on London Underground contract worth £2bln.....-1%
*TIT-FY Net Loss worse than Feb guidance,no comment on Inwit........-1%
BERKELEY GRP - fwd sales in excess of £3bn,current year at top-end.........+5%
ROBINSON - revs +4% £29.1m,Madrox bix outperforms,debt lower,divi raised...+2%
CAPITAL & REG - acquires third property in Hemel Hempstead for £7.8m......UNCH
CERILLION - first day of dealings,ticker CER,Shore Cap broker and Nomad....MKT
VOLUTION - revs +9%,PBT +14.9% £14.6m,strong cash flow,inline..............+1%
CONCURRENT TECH - sales +33.6% £17m,PBT +58.8% £2.7m,sees strong H1 in 2016+2%
M&C SAATCHI - record results,rev +6% £179m,PBT +17%,divi +15%,gd outlook.+1.5%
IDEAGEN - strong momentum continues,EBITDA significantly ahead of prev yr..+2%
AB FOODS - talks continuing on pot. acquisition for Illovo Sugar..........UNCH
HOME RETAIL - PUSU deadline 5pmm today..............................
We remain Buy rated on Altice and NUM post 4Q15 results
4Q15 highlighted a strong improvement in operational performance across
Altice’s markets, France in particular. We remain confident of
management’s ability to stabilise group revenue over the medium term
and to deliver significant EBITDA growth through efficiency savings. We
now forecast revenue/EBITDA CAGR of 1%/4% over 2016-20 across the
group. Most importantly, we believe the pending announcement on
shifting French asset ownership due to the potential Orange-Bouygues
merger could be a material positive catalyst for both stocks.
We see significant value creation from French consolidation
The companies’ self-imposed deadline is March 31 for the Orange-
Bouygues merger discussions (Les Echos, March 13, 2016). We continue to
expect Altice/NUM to take network assets, spectrum and subscribers as
part of any deal. Our analysis suggests the merger could create significant
value for the overall French market, driven primarily by EBITDA margin
expansion of 1.5-2 pp across all operators as a result of lower churn and
competition in a three-player market (as per the experience of other inmarket
deals).
Altice (Buy): Focus on integration and efficiencies, lower M&A risk
We remain confident of ATC’s ability to deliver 8 pp of margin expansion at
the group level over the next three years (supported by Portugal as well as
France). Management’s focus on integrating existing assets over the near
term likely limits the uncertainty of further M&A. 2016 marks a peak year
for capex, and higher promotional activity/delayed STB upgrade cycle are
also likely to weigh on growth in 1H16. But we argue the capex supports
the medium-term growth opportunity and model capex falling from 2018.
At our ROIC-based 12-month price target rises to €19 (from €17)implying
16% upside and a 10% 2018E FCF yield.
Numericable (Buy): Operational improvements justify investment
4Q15 saw a material improvement in fixed/mobile KPIs but questions remain
on the sustainability of profitable top-line trends. We remain confident of
underlying cost efficiencies that boost French margins 9 pp (to 44%) by 2018
driving 8% 4 year EBITDA CAGR. Our ROIC-based 12-month price target rises
to €49 (from €46.2), implying 31% upside and a 10% 2018E FCF yield.
Lloyds remains our top pick in UK and Europe; c50% upside by 2018
We expect Lloyds (LLOY) to make a 14.2% ROTE in 2018 on required capital using a 14% CET1 threshold. A target multiple of c1.61x P/TB or c11.3x P/E suggests rerating potential of c20%. We see TBV growth of 6% by 2018 after taking a conservative incremental charge of GBP 1.5bn for PPI and GBP 0.6bn for other litigation. We now expect cumulative DPS of 18p by 2018 (including 4Q15 DPS of 2p) or a yield of 26%. Thus, we see total upside of just over 50% by 2018; this is despite building CET1 capital to 14.2% and lowering NIMs to 2.65% by 2018, suggesting further upside if one wants to be more bullish.
Downgrading Barclays to Neutral (from Buy)
Our bull case on Barclays (BARC) was built on recovery of a smaller Core Investment Bank (IB). With management more willing to ride out the depressed earnings environment for IB, business mix reduces medium-term profitability to below cost of equity (COE). While we move to Neutral, we do see upside, especially if IB revenues recover cyclically. That said, cost and structural reform headwinds will remain material. We therefore recommend that investors use any material rallies from current levels to reconsider their positions in the stock.
Downgrading STAN to Reduce (from Neutral)
Nomura expects China GDP of 5.8% in 2016, falling to 5.6% in 2017 (consensus is at 6.5% for 2016 and 6.2% for 2017). We expect further RMB devaluation, which will likely be accompanied by broader emerging market (EM) forex weakness. We also expect asset-quality trends to continue to deteriorate in Asia. STAN’s business model faces structural and cyclical headwinds in wholesale banking and sub-scale operations in retail banking. In the face of increasing asset-quality risks, we see the group facing a difficult restructuring. With the stock price c23% off its lows, we take the opportunity to downgrade the stock to Neutral. STAN’s capital position is not as bullet proof as it looks as it faces risks from further negative credit risk migration (c6% pa since 2012), RWA inflation and IFRS 9, which could hit CET1 by c250bp before any further asset-quality shocks. We are c25% below on 2017E EPS.
Downgrading HSBC to Reduce (from Neutral)
We turn cautious on HSBC because we expect revenue headwinds in a challenging macroeconomic environment. While we believe it has strong underwriting standards relative to peers in Asia, the macroeconomic headwinds will still mean elevated loan losses. We expect HSBC to underperform European banks, even though it could become defensive in an Asian context. We are c6% below consensus on 2017E revenues and c11% below on 2017E EPS. While risks to dividends are increasing, we do not yet expect a dividend cut.
Retain RBS on Neutral
While restructuring the group is taking longer than the market expected, RBS is slowly but surely reaching end-state profitability of >12% ROTE. However, litigation remains a key uncertainty, so we retain our Neutral rating. We move to Neutral on domestic UK banks and Underweight on Asia-exposed UK banks relative to European banks.
Progress but Big Oil has much to do
The 2017 financial framework for the supermajors has been reset towards a USD 50/bbl outlook. The strategic model though is still wanting. We outline: 1) to compete for capital, Big Oil needs to move further down the cost curve towards the US shale producers. The concern is that the industry is more structurally impaired if OPEC is more aggressive on increasing market share. 2) Financial risk is rising. A path to deleverage balance sheets is not obvious, absent a material rise in oil prices. Big Oil becomes a more risky asset class that operates in a more challenging operational, geopolitical and regulatory environment. 3) A rethink on dividends is required, given the cyclicality of oil prices and we argue for a fixed and variable component to payouts.
A scorecard for the supermajors
We review: 1) operational and financial resilience; 2) cash generation from growth projects; 3) cost reductions and disposals; and 4) cash burn and dividend coverage. We then review these results against valuation metrics.
Business models more robust in the US but Europe 'cheaper'
With the sector discounting USD 55-60/bbl, we do not regard the fundamental risk-reward for the equities as attractive. Global Big Oil is trading at a 2017E EV/DACF of 9.3x, a 35% premium to the 10-year historical multiple, with a 5.3% dividend yield that compares with a free cash flow yield of 4.5%. The US supermajors have lower oil price break-evens in terms of 2017 cash cycles alongside superior balance sheets. The European supermajors are 'cheaper' on EV/DACF (7.1x versus 10.8x for the US) and dividend yields (6.2% versus c4%), but have a more indifferent record in terms of investment decisions and greater risks to dividends if low oil prices persist into 2017. However, given the implied 35% discount on cash flow multiples versus a 10-year historical average discount of 15%, we think these factors are somewhat discounted.
Total upgraded, Shell (Buy), Exxon (Reduce), Chevron and BP (Neutral)
We upgrade Total to a Buy reflecting: 1) less near-term exposure to the US, complemented by PSCs and Middle East ‘fixed’ margin contracts; and 2) increased capital flexibility beyond 2017. RD/Shell (Buy) is on a watching brief given the level of cash burn in the absence of disposals, while a cut in 2016 capex guidance is now partly priced in (NMRe: USD 27bn). If these tools are not executed, Shell is most at risk of a review of its dividend payout in 2017. We see a weak set of 1Qs before a positive 7 June strategy update. BP (Neutral) sees 2016 cash burn exacerbated by Macondo cash outflows of USD 3bn-4bn. There is E&P growth with c850kboe/d of potential start-ups/ramp-ups to 2020 but the profile is back-end loaded. We initiate coverage of Exxon with a Reduce on valuation grounds. XOM’s downstream integration/resilience is well understood, but the 40% EV DACF premium is stretched given a narrowing in forward-looking ROACE and cash returns. Our Neutral rating on Chevron reflects the balance between providing the highest rate of FCF growth (2015-17E) against aggressive 2016 cash burn and project execution risks.
Less upside now, but our 2016 forecasts still 14% ahead of consensus
We update our model following the FY results on 9 Mar. The stock has performed since our upgrade on 16 Feb (+21% vs SXXP +6%), leaving us with less upside to our unchanged EUR 53 target price; but we still think consensus is in for big surprises this year as French margin rebuild, LatAm merger synergies, and faster-than-expected drop out of one-offs and business-development costs at Cnova all conspire to drive decent EBIT growth at Casino. We add 3% to our EBIT today (chiefly on FX mark-to-market as the BRL and COP are up 8-9% from the lows), but consensus appears little changed.
Property profits could actually be a BULL story
One area that could fuel Casino valuation beyond what we include in our SOP already is, paradoxically, the ‘French property profits’ that have been such a clarion call for bears in recent weeks. New disclosure with the FY results revealed that portfolio ‘rotation’ in France, and the real property development of adjacent commercial floorspace that Casino carries out in conjunction with Mercialys, has brought in a net >EUR200m of cash per year in 2014-15 without simply depleting the asset base to do so. We assume a contribution a little below this run rate on average over 2016-18, but view this as possibly conservative (in both size and duration). Meanwhile, the P&L contribution of these gains, which admittedly has been masking some poor performance of stores, makes no real difference to our view that the French ‘recovery’ (underway and guided to deliver c130bp profit improvement y-o-y in 2016) will extend ultimately to a 2-2.5% run-rate margin for the ex-Monoprix estate by 2018. We already knew ex-property profits of those stores today was ‘low’.
We call out Cnova as another key area where our valuation could ultimately prove conservative, at just 0.25x sales (Merchandise Value).
There could be newsflow from Casino in the coming days around disposal of Vietnam (positive), and possible negative conclusion of the S&P rating review (negative). Neither event is likely to affect our fair value, we think (we already value Vietnam at EUR 800m, and whilst a downgrade to sub-IG would slightly increase Casino’s annual cash interest, it may also increase the opportunities for Casino to accretively buy back bonds with its now-large cash pile, as it has already started to do).
EDF - Govt is now aware…but will it act fast enough and strongly enough?
Risk/reward still to the downside
Govt now aware of problems, but will action be timely and sufficient?
Recent statements by the Energy Minister Royal ("ready to green light nuclear life extension") and by the
Economy Minister Macron – "state ready to provide financing to EDF", and "transmission business
(c€13bn RAB) may be opened to partners" – suggest that the government is now aware of the
company's risks, and appears open to help. Having said that, we would flag that (i) most proposals "buy
some time", but don't address the problem at its core: at the forward curves, nuclear is FCF negative by
>€4bn pa; and (ii) most of the structural suggestions debated (carbon floor, capacity payment) may
either harm consumers (via higher bills) or not comply with EU legislation, and could therefore not be
implemented (at least not in a timely manner).
Scrip to 2020 would dilute EPS by c60% and up govt stake to almost 90%
As reported by http://www.challenges.fr/, EDF may extend its scrip dividend to 2020. Although at first
sight EDF's yield appears attractive (c11.5%), we believe extending a scrip-program would be negative
for two reasons. (1) Such plan would dilute EPS by c60% (Dec-2020). (2) It could increase the
government stake to 89%, which might appear as a partial re-nationalization, as suggested by our
report from late February.
Nuclear FCF negative, EPS negative by 2018E and B/S soon at breaking point
We believe the street hasn’t quite worked through the financial implications of: (i) the 2016 marketliberalization,
which has exposed a much larger share of nuclear volumes to the fluctuations of power
prices and (ii) the 35% decline in power prices over 1y. On the status quo (ie current forward curves and
no government intervention), 2015-18E EBITDA would drop by c30%, 2018E EPS would fall below zero,
and EDF would be FCF negative throughout 2020E, before disposals and dividends. This would bring net
debt to EBITDA above the 2.5x company-target by 2017E.
Valuation: Risk/reward still skewed to the downside
Our Sell rating is predicated upon the view that the street underappreciates the extent to which lower
power prices will impact earnings and B/S. Our base-case scenario assumes the current power forward
curves, the self-help measures already announced by the company and no government intervention. Our
€8ps PT is based on averaging our base/upside/downside scenarios, as detailed on page 3.
Spin off of Italgas could create value to shareholders according to Snam
As we mentioned in our 2016 outlook, we believe the European utilities sector could be marked by
portfolio makeovers in 2016. Today was Snam's turn. According to the company, Italgas – Snam's gas
distribution business in Italy – could be demerged in whole or in part from the Group. Although no
major details have been provided the management suggested that this: 1) could improve the financial
flexibility of both companies; 2) makes sense given the differences of both businesses, and 3) that it
could create value to shareholders. Further details should be provided during the 2016-19 strategic
presentation in July.
What is on the table for Snam and for shareholders?
Given that the gas distribution sector in Italy is currently under a consolidation process, in our view a
demerge would mostly provide funding flexibility to Italgas to consolidate in this market and some
flexibility at Snam to continue pursuing its international expansion strategy. Although nothing has been
said regarding a potential tie up between Italgas and its largest competitor 2i Rete gas, as reported
recently by the Italian media (La Repubblica), we believe that this could be supportive.
Potential spin-off mechanics
In practical terms, Snam is considering a potential spin-off of Italgas, or in other words distribute Italgas
share through its shareholders. Assuming an EV for Italgas equivalent to 1.2x RAB (€6.8bn) and a ND-to-
RAB of ~40% (~$2.0bn), it means that the company is worth roughly €1.0 per Snam's share, or roughly
>20% of its current mkt cap. At the end of 2015 the company reported an EBITDA of over €700m,
which could be up to over €800m if the company sticks to its target to increase market share in the
Italian distribution market by 12% to 45%.
Valuation: reiterate our Buy rating and €5.3 PT
Our Buy rating on Snam is based on 3 key reasons: 1) solid long term growth potential; 2) attractive div.
yield of ~5%, one of the highest in the sector; and 3) DPS sustainability with upside potential despite
expected regulatory headwinds in 2018. Our €5.3 PT is the average of a target PE (16.5x) and DY (5%),
cross checked by our DDM model.