(JPM) French Telco - Summer is around the corner

After a tough promotional Q1, Q2 is already bringing some relief post the collapse of M&A talks, and H2 should show a brighter earnings picture across the board. In this note, we wrap up on Q1 main trends, and update our numbers post Q1. We reduce our Bouygues TP to €34, while we keep our TPs unchanged elsewhere.

* A snapshot of the quarter: We show key trends in the body of this note. On Mobile, MNP volume improved after nearing record highs in Q4 (2m) but is still relatively high at 1.5m, up 10% y/y. Market postpaid churn in Q1 was at 16.4% vs 17.2% in Q1 15. Orange remains best in class at 13%, SFR still lagging behind (>20% on our estimates). Iliad led market net adds but showed a marked slowdown (+215k vs +370k in Q4). Interestingly, Bouygues posted a strong quarter in mobile despite M&A distraction (postpaid net adds of +151k vs ORA +41k, SFR-78k). On Fixed, ORA led
again in broadband with 52% share of net adds (Q4 42%), BOUY resisted well at 39% (Q4 32%), ILD did better 43% (Q4 19%) helped by a weak SFR -33% (impacted by set-top box shortage).

* Q2 setting the tone for pricing prospects. Fixed has firmly entered a virtuous pricing circle with consecutive and material price increases at three out of the four operators only weeks after the collapse of the M&A talks
(SFR +5%, Bouy +15%, Orange +5-20%). In particular, Orange’s pricing move is significant (€2 to €10), and is introducing a long awaited €5 FTTH premium on 3-play offers (vs only 4-play previously). After a tough Q1, mobile started normalizing in Q2, but is still fragile. SFR’s stated intention to reduce the level of promotions is welcome, but we flag that any deterioration of the company’s churn (in particular post the May price rise) might well lead to a renewed promotional activity.

* Is consolidation dead? Operators’ reported attempt to revive the talks post the official deal failure (JDD, May 8), as well as management teams’ rhetoric not ruling out a future attempt both show, in our view, that all
options are open. Now, does consolidation really matter if prices are going up? Whilst we stick with our upbeat view on fixed pricing prospects (with or without consolidation), and remind that mobile pricing prospects are not any
better in a consolidation scenario (with an empowered Iliad), we believe that consolidation does matter from a cost perspective (we value opex/capex synergies at €15bn). That all said, M&A visibility is non-existent, making it
less relevant to our investment cases at this stage.

* Things to watch: i) ILD's signals on both fixed and mobile pricing, ii) Mobile churn developments at SFR with implications on promotional dynamics, iii) Fixed KPIs across the board post recent pricing revision, we

>>> Street Pre-Market Indications (ML / Shore / CS)

ML
** Day 1 of BAML BUSINESS SERVICES, LEISURE & TRANSPORT conference...........
* BRAVIDA - Bain Capital selling 20m shrs @ ; MS/Nordea joint bookrunners....
KUKA - Midea to offer EU 115 per Kuka share in cash, already own 10%.....+30%
FIAT - Chinese partner, GAC might consider buying majority stake of Fiat..+5%
DELTA LLOYD - Solvency ratio 154% should be enough to reassure the market.+5%
BURBERRY - FY16 PBT -10% is inline. Cost savings higher than expected...+2-3%
SSP - Good. Margin ahead +50bps v BAML +30bps, momentum & outlook strong+2-3%
ORIFLAME - Q1 EBITDA 5% beat at EUR 27.7m v 26.4m cons. Positive into Q2..+2%
G4S - Local media suggests making progress with sale of its Israel bus....+2%
DASSAULT AVIATION - We INITIATE with a Buy rating, PO €1,225 (20% upside).+1%
NOVARTIS - Phase 3 trial of LEE011 in breast cancer meets endpoint......+0.5%
MARSTONS - Inline, trading solid. 1H16 EBIT £70.5mn. Outlook in inline..+0.5%
GALLIFORD TRY - Building division wins 2 new contracts worth GBP 102m.....u/c
RATHBONE BROS - FUM reach £29.3b and fee income £37.7m, +8.3% YoY.........u/c
PERNOD - Confirms sale of the Paddy Irish Whiskey brand to Sazerac. No #s.u/c
SSE - PTP £1513m v £1512m. EPS 119.5p at top end of guidance. DPS 89.4p...u/c
UBM - Performing inline with f/c's. No detail apart from warranty claim.-0.5%
PHILIPS - Small +ive. Lighting IPO said to be covered on full deal size.-0.5%
SAFRAN - Said accepting bids for Morpho Unit according to Le Figaro.....-0.5%
CARLSBERG - Chairman says that brewer will remain independent; FT.......-0.5%
UK MINERS - Copper -1%, Iron Ore -1.8% with BHP OZ +1.5%, RIO OZ unch.....-1%
ARM - Announces the acquisition of Apical (computer vision) for $350m.....-1%
FRAPORT - CEO Schulte says EasyJet seeking slots. Maintains FY EBITDA f/c.-1%
SONOVA - FY EBITDA 430.6 v 437.6 cons. Expects EBITDA to rise 3-7% in LC-2-3%
WINDELN - Warning. Cut FY16 outlook implying c.14% cut to cons rev ests..-15%

shore
MARSHALLS - UK revs +1%,well placed to deliver on targets,+tive outlook....UNCH
PATISSERIE - Strong H1,revs +14.4% £50m,PBT +20.6% £8.4m,sees FY inline.....+1%
PLAYTECH - daily avg revs inline,healthy M&A pipeline,confident outlook....UNCH
JOHNSTON PRESS - grp revs -13.7%,ad revs -16.9%,saw improvement in April...UNCH
SSP - LfL sales +3.3%,oper.pft +28% £30.9m,margins +50bps,H2 starts inline..+2%
SABMILLER - Fy ptp $4.07b(Est$4.58B).Fy divi 122c.Strong underlying growth..-1%
BURBERRY - Fy pbt 416m.Revs 2.5b.Divi 26.8p.Environment remained challenging+2%
COUNTRYSIDE - H1 revs 312.8m.Firmly on track to deliver 2016 expectations...+1%
MARSTONS - H1 ptp +11.8%.Int divi 2.6p.Says fy plans on track...............+1%
SAFECHARGE - AGM,Says Q1 rev and gross profit ahead of budget...............+1%
RATHBONE - FuM +0.3% £29.2bn,acquired inflows of £134m,fee income +8.3%....UNCH

CS
Airbus M/P QATAR ceo saying walked away from 1st A320 neo delivery
AsraZeneca -1-2% Co says Lynparza didn't meet goal in Gastric Cancer
Burberry -2-3% £100m cost savings, £150m buyback, outlook cautious
Flug Wien M/P Q1 revenues, EBIT and EBITDA inline
Galliford Try M/P 2 contract wins totalling £102m
Genmab +0.5% Arzerra Expanded Use Gets Priority Review by FDA
Kuka +30%+ Midea offers to buy remaining shares at EU115, 36% premium
Leasinvest RE M/P Q1 net rental income and EPRA NAV inline, confirms FY
Marshalls UNCH No's inline, remians well palced to deliver initiatives
Marstons +1-2% PBT 33.1m vs cons 32.53m, revs 428.7m vs cons 418.5m
Miners -1% Copper -1.20%, Brent +0.05%, Iron Ore -1.55%, China -1.43%
Novartis +0.5% Says LEE011 in Breast Cancer meets primary endpoint
Oriflame M/P 1Q sales 305.8m cons 294.714m
Playtech M/P AGM statement and outlook inline with expectations
SAB Miller R Company reports numbers today
Sonova R Sales Chf2071.9 cons Chf2098, Proposed divi of CHF 2.10
Skyepharma M/P No's inline, expect strong growth in revenues for FY
SSP Group M/P LFL sales +3.3% maybe slightly light, outlook inline
SSE +2-3% Numbers inline but guidance very strong
UBM M/P AGM, Outlook for FY unchanged. Performed inline

(GS) Asset Locator : Equities to Neutral over 12months

Conviction themes for a ‘fat and flat’ market; equities to N over 12m

Sticking with ‘fat and flat’; downgrade equities to N for 12m
We downgrade equities to Neutral over 12 months on growth and valuation concerns. Until we see sustained earnings growth, equities do not look attractive, especially on a risk-adjusted basis. We expect particularly poor returns in dollar terms, with our forecast of a stronger dollar and the prospect of less negative equity/FX correlations.

Remain OW cash, but upgrade commodities to N over 3m
We remain Overweight cash on a 3-month basis, as we see potential for higher cross-asset volatility. Key risks include less China growth, a general pick-up of European political risk, a repricing of the Fed rate hike cycle, and
commodity price declines (in particular for metals). But we now expect less downside to oil over 3 months, given supply disruptions, and upgrade commodities to Neutral. Our key Overweight remains credit, where valuations and fundamentals appear supportive. We remain Underweight bonds and would hedge duration more actively, in particular in the US.

Conviction cross-asset themes in a trendless market
We highlight five conviction cross-asset themes for a volatile but trendless market: (1) prefer credit to equity, (2) focus on cross-asset carry opportunities, in particular EM, (3) position for pick-up in US inflation, which should drive rotation within equities, (4) oil to outperform metals and drive divergence in equities and credit, and (5) resurgence of divergence, with a focus on FX, which seems best positioned to benefit.

(BarCap) French Telco : rays of light

The French consumer fixed market is beginning to show signs of price rationality, with accelerating fibre investments supportive for ARPUs. Mobile trends were unsurprisingly weighed down in 1Q by heightened competitive intensity, but nevertheless delivered a +30bp q/q improvement in the MSR trend. Following the EU competition’s decision to block the UK O2/Hutch merger, we view the French telecom market in an increasingly positive (relative) light, given fading prospects of four to three mobile consolidation across Europe. France should benefit from fixed price repair, mobile bottoming out and a French competition authority that may yet take a supportive view on future M&A. We are OW ORA/ILD, EW NUM-SFR/EN.

French pricing – further signs of rationality. French fixed pricing is increasing, per our Orange – Prospects for price inflation research; Bouygues increased frontbook pricing €1-4/mth, NUM-SFR prices will increase €2-3/mth from mid-year, and ORA's newly announced 4k Livebox comes with €2-5/mth increases. With fixed capex set to rise, per Iliad - Capex in a co-financing world, continued fixed price rationality appears likely.

ORA (OW) – Prospects for price inflation: As ORA continues to take share with FTTH, competitors are raising prices to balance capex spending. Higher prices should offer a powerful value driver; we estimate each c.€1/mth ARPU increase is worth c.1% on group adj. EBITDA, per Bridge to higher profitability. Mobile conversely remains competitive, but ORA's mobile service revenues are tracking towards stabilization with 1Q16s -1% y/y a c.1pp sequential improvement. Trading on 5.7x 2016E EV/EBITDA, 12x OpFCF and 5.3% EFCF, we are OW with our €20 PT implying 32% upside potential.

NUM-SFR (EW): 1Q results were below expectations, but management commentary on the call was supportive of a material 2H16 inflection given: (1) tax unwinds; (2) further cost savings; (3) fixed and mobile price increases. We trim forecasts, leaving NUM-SFR trading on 7.7x 2016 E EV/EBITDA, 20x OpFCF and 3.4% EFCF. We are EW with our €33 PT (from €35 prior) implying 19% upside potential.

ILD (OW) – Broadband inflection: 1Q results delivered a further acceleration to +3.7% y/y in broadband service revenues, benefiting from ‘vente privee’ unwind and continued strong adds momentum. With capex a key cashflow driver for ILD, our published bottom up capex forecasts capture: (1) the ongoing mobile build-out, and; (2) accelerating fibre deployments. Our forecasts imply capex/sales falls steadily from c.27% in 2016E, and <€1.3bn peak capex in 2017E, per Iliad - Capex in a co-financing world. We are OW ILD, viewing the 8x 2016E EV/EBITDA multiple as attractive for a c.10% EBITDA CAGR stock. Our €230/shr PT implies 19% upside potential.

EN (EW): Bouygues 1Q results delivered positive telecom trends and rays of light in construction. Trading on 4.6x 2016 E EV/EBITDA, 11x OpFCF and 1.1% EFCF. We are EW with our €33 PT (from €36 prior) implying 11% upside potential.

(CS) Ind. Gases : Linde Prefered stock over Air Liquide - full note att.

* Our preference is Linde (O/P, €151.5) over Air Liquide (U/P, €85.5).  This is a function of: 
1) Valuation: Linde trades at a 16% discount (12% discount historically), despite having a similar proportion of tonnage (take or pay) earnings (post Airgas); 
2) Financial Leverage – we forecast (post equity raise) Air Liquide's ND/EBITDA of 3.4x, Linde of 1.9x; 
3) We forecast Air Liquide's ROCE at a 50bps premium to Linde (historically 350bps).


* We believe industrial gases contract bidding discipline will be maintained in a low growth environment. As a result, the industry's defensive revenue stream, FCF yield, and return premium over WACC are sustainable. We review a decade of gas contract awards to ascertain end market demand, contract risk profiles, and changes in return metrics across the sector. Our preferred European Industrial Gas exposure is Linde (O/P, €151.5/share).

* Why are Industrial Gas returns lower? 1) Gas suppliers are passing through lower cost of financing to customers. However, ROCE/WACC spreads are holding; 2) Longer average project ramp up/larger projects: We estimate the average project size is +15% over the last eight years, average project construction time +20%. This weighs on the capital employed (ie: larger construction in progress on balance sheets); and 3) Underwhelming merchant activity – average utilization rates in the low 70's.

*

(Exane) Carrefour / Casino : Liberté, Egalité, Grocery

Hardly friendly
For all their qualities, in this market analysis we show the French grocers are hardly fraternal. Whilst regional, it is a franchised, locally priced, competitive, low margin French grocery industry.

Tell me something new…Carrefour is regionally #1 as well as nationally…
We’re not unlocking any ‘trade secrets’ with the above summary. What we do show in our detailed regional analysis – courtesy of store-level Nielsen data – is that Carrefour is the clear #1 operator, on average, by region, not just at a national scale. That results in scale where it matters. Carrefour may have its faults but, structurally, it should be competitively advantaged.

…Pricing is more nuanced than the national data suggest
Carrefour may be numerically the biggest, but Leclerc is the best…in brand and price perception, and in reality. However, that price advantage is somewhat distorted. We show pricing is heavily influenced by wealth, or rather the regional costs relating thereto. Leclerc’s geographic exposure to less affluent regions helps its pricing, though isn’t the defining factor in its success.

…Casino’s Parisian jewel looks secure for now
With the bulk of Casino’s profit coming from the Ile de France, focus understandably is on on-line’s advance and Carrefour’s acquisition of DIA. Whilst some impact is expected, we show that <25% of Casino’s Franprix stores likely will be impacted by Carrefour’s DIA conversions.

A picture paints a thousand words…buying groups have a geographic logic
Given its regional nature there’s a surprising degree of overlap for most operators. That said, the buying group of 2014 made a degree of geographic sense, most notably Auchan and Systeme U.

Leclerc and Carrefour should win-out
With further consolidation (beyond the buying collaborations) unlikely, we think the French market will remain highly competitive, but with structural reasons for Leclerc and Carrefour to win-out.

>>> Konecranes offer for Terex MHPS seen as high; Zoomlion unlikely to be able t

Konecranes offer for Terex MHPS seen as high; Zoomlion unlikely to be able to outbid 


The Finnish crane equipment supplier Konecranes’ [HEL:KCR1V] price for the Connecticut-based Terex’s [NYSE:TEX] material handling and port business (MHPS) is seen as high and the Chinese Zoomlion [SHE:000157] is unlikely to outbid, according to Kauppalehti Online.

Juha Kinnunen, an analyst from Inderes, noted it is likely Konecranes would succeed in acquiring Terex’s MHPS business for EUR 1.1bn given the offer price is quite high, the Finnish language article noted.

He said it is unlikely Zoomlion, which has also been reported to have made a bid for all of Terex, would be able to make a higher offer. He added part of the deal means operating in the ports of US that can be strategically sensitive.

A logical outcome would be that Konecranes acquires the MHPS and Zoomlion the construction machinery business. This way each business gets what they require from Terex, he noted, the report said.

Kauppalehti Online

>>> Safran's sale of Morpho attracts numerous interests; bids submitted in June

Safran's sale of Morpho attracts numerous interests; bids submitted in June


Listed French aerospace and defence group Safran [EPA:SAF] has decided to launch the sale of its identity and security subsidiary Morpho, French daily Le Figaro reported. The deadline for submitting bids has been set in June next month, after which the company will open the due diligence process, advised by Societe Generale and Lazard, the report cited a person in the know as saying. Safran is hoping to get EUR 2bn at least, or ten times EBITDA, for the unit.

The list of potential buyers include bidders include French smartcards maker Oberthur Technologies, Netherlands-based digital security provider Gemalto [AMS:GTO] and French IT services corporation Atos [EPA:ATO], as well as Japanese group NEC [TYO:6701], Germany’s G&D, and Sweden’s HID.
Financial players such as Astorg, Wendel, CVC, Apollo and KKR [NYSE:KKR], PAI, Eurazeo, Bain Capital, and Carlyle are also interested, the report added.

The report noted that the French Interior Ministry was raising questions about the sale, in particular because of the strategic assets of Morpho such as its biometric identification operations. Safran however claims that French revenues account for 10% of Morpho’s total sales, and 1% if the revenues with government-owned agencies only are accounted for.
The French government holds 15.4% of the share capital of Safran, the report noted.

The original article appeared in print, page 17.

Source Le Figaro

>>> What to look at today - 18th of May 2016

Dow-1.02% S&P-0.94% Nasdaq-1.25% Russell-1.66% VIX 15.57 +6.06%
US Market closed lower, erasing yesterday gains. the market maintained a negative bias after disclosures that George Soros placed bearish bets on the broader market by doubling his put position on the SPY and boosting his holdings in gold. S&P was not able to maintain its 50d MA. Consumer Staple -1.9%, KHC -4.3%, HRL-3.6%, Healthcare -1.1%, ABBV-3.5%, VRX+7.5%. Volume were above recent average with 1.02bil shares. US After Hours ANDE Philip Falcone's HC2 said to have offered a $37/shr cash bid, $1bil valuation, AGIO +3.4% on collaboration with Celgene, PETX+7.9% on FDA aprov., MACK -4.8% on Phase 2. Asia lower tracking US Markets where improved building permits and in-line CPI added to worries the FOMC rate hikes are back on the radar. Remarks from Fed's Kaplan, Lockhart, and Williams in the US session also went on to signal that the upcoming meetings are live for another rate hike. Japan's Q1 preliminary GDP was a positive surprise after last quarter's contraction, helping the economy avoid a technical recession thanks to improved consumption segment.

Nikkei -0.20% Hang Seng -1.47% CSI -0.89% Shanghai -1.33%

Eur$1.1285 CNH 6.5501 CNY 6.5340 JPY 109.23 GBP 1.4437 CHF 0.98312 RUB$ 64.8495 WTI$ 48.53 (+0.46%)

S&P -0.01% EuroStoxx-0.45% Dax -0.45% SMI -0.20%

Macro :
- Portugal May Sell More 10-Year Bonds This Year, Casalinho Says
- Portugal Doesn’t Plan to Accelerate Early IMF Repayments: Felix
- Juncker Supports Delaying Fine for Spain Over Deficit: El Pais

Keep an eye on :
- ADP FP : Groupe ADP Says April Paris Airport Traffic Rose 4.1%
- AV/ LN : Aviva to Invest in Hoberman Incubator Founders Factory: Sky
- BANI BB : Banimmo 1Q Net Rental Inc. EU2m Vs EU2.2m Yr Earlier
- BP/ LN : BP Head of Exploration Richard Herbert to Step Down: Reuters
- CARLB DC : Carlsberg Chairman Says Brewer Will Remain Independent: FT
- DL NA : Delta Lloyd 1Q Solvency 2 Ratio Drops; GI Premiums Written Rise
- DEXB BB : Dexia Posts EU55m Loss; CET1 Ratio Drops to 14.6% on AFS Reserve
- ELI BB : Elia Says Expanded Maintenance in Germany to Impact 2016 Net
- LEY FP : Faiveley Gets Contracts Worth More Than EU60m From Bombardier
- FRA GY : Fraport CEO Schulte Says EasyJet Seeking Slots, BZ Reports
- FRA GY : Ferrovial, Fraport, Vinci Eye Sofia Airport Concession: Capital
- FER SM : Ferrovial, Fraport, Vinci Eye Sofia Airport Concession: Capital
- IAG LN : Qatar Airways Increases Stake in IAG to 15.01% (from 10%)
- INDUC SS : Industrivaerden Prepared to Make New Investments, DI Reports
- INH GY : Indus 1Q Rev. Rises, Optimistic Will Reach Targets
- KU2 GY : Midea Says Kuka Offer Confirms Intention to Boost Stake --> €4.55bil deal {KU2 GY Equity DES <GO>}
- LLOY LN : Lloyds to Cut Hundreds of Jobs, Focus on Corporate Bank: Sky
- MAERSKB DC : Maersk Is Ready to Expand in Areas to Support Core Business: JP
- NOVN VX : Novartis Says David Epstein to Leave; Splits Pharma Unit in Two
- NOVN VX : Novartis Says LEE011 in Breast Cancer Meets Primary Endpoint
- ORI SS : Oriflame 1Q Result Beat Ests.; Positive Sales Momentum Continues
- P US : Citron’s Left Long Pandora; Says FB, GOOG Should Buy: BTV
- RI FP : Pernod Ricard, Irish Distillers Complete Sale of Paddy Whiskey
- PHARMA NA : Pharming 1Q Net Loss Widens to EU3.39m From EU1.33m
- RCS IM : RCS MediaGroup Agreement With Lending Banks Expected by June 7
- SAF FP : Safran Said Accepting Bids for Morpho Unit: Le Figaro
- SOON VX : Sonova FY Ebita Misses Ests., Div. In Line With BDVD Forecast
- SUNE US : More SunEdison Creditors Object to Bankruptcy Loan
- TESB BB : Tessenderlo Chemie CEO Tack Buys Additional EU0.43m of Stock
- TNTE NA : Fedex Declares Offer for TNT Express Unconditional
- UBI IM : UBI Weighing Options for Stake in Veneto Banca: Repubblica
- UCG IM : UniCredit Progress Undervalued, Market Pricing Capital Gap: RBC
- VALE US : Vale Shareholders Not Government Decide on Executives: Minister
- VRX US : Valeant Said to Weigh Sale of Skin, Cancer Drugs to Reduce Debt
- DG FP : Ferrovial, Fraport, Vinci Eye Sofia Airport Concession: Capital
- VOW3 GY : Lowers prices in Japan to help increase vehicle sales - Nikkei
- WPP LN : Sharesoc Advises Investors to Vote Against WPP Remuneration