Worst-case scenario – impact from November attacks more significant than from
January attacks
The targets involved in the terrorist attacks in Paris last January appear
to have been more specific than the targets attacked in November. We believe that the
random nature of the November events and the subsequent exercising of emergency
powers by the French government have had a significant impact on consumer sentiment
and demand. Moreover, comments by multiple industry players point to a Europe-wide
effect, reflecting the lock-down in Brussels, an attack in London, ongoing Geneva police
action, and the downing of a Russian plane. Thus, while our initial comments in the wake of
the November attacks focused on the risk to revenues in Paris (5% of sector sales), we
believe that sales across Europe are actually at risk (average 37% of sales covered by SG).
* Estimate cuts We do not have access to luxury companies’ data points apart from the 4%
sales decline registered by Hugo Boss in Europe the week following the attacks, including -
12% in France. But the latter is a worrying trend as it: a) implies a c.3% decline in the rest
of Europe as well; b) affects a player with only c.15% of European sales to tourists vs about
half for the sector. The other data we have is that high-end hotel occupancy fell at a
double-digit pace in Paris for over two weeks after the attacks, and it is still down,
representing a longer and deeper impact than in January, despite the COP 21 meeting.
Overall, we have cut our sales and EBIT estimates by 2-3% for soft luxury players and by
5-10% for hard luxury players (after the double-digit drop in Swiss watch exports), leading
us to cut our target prices. We also downgrade our Swatch recommendation to Hold from
Buy given the uncertainty surrounding Swiss watch demand.
* Sector recommendation & catalysts We maintain our Neutral stance on the Luxury Goods
sector given: a) the ongoing erosion of KPIs (cc sales growth, EBIT margin, ROCE) since
the FY 2013 post-recession peak; b) a low 1.2-1.3x relative P/E vs the market, compared
with the 1.4x LT average; c) company feedback pointing to higher estimated risk in the
context of erratic, though mostly negative, newsflow. Against this backdrop, we believe
that the best investors can do is take advantage of the high sector beta (LT 1.2-1.3) to
benefit from trading opportunities.
* Main stock picks We avoid: a) high valuations, at risk given the current sector trends
(Hermès, Tod’s, Cucinelli); b) monobrands when the company’s segment/geographic
specialisation put it at risk of missing out on the sector’s elusive and unpredictable growth
(Ferragamo, Burberry, Hugo Boss); c) firms whose business models are unfavourable when
sector growth is slow (Hugo Boss, Burberry). We prefer: a) sufficient TP upside; b)
diversified groups with dominant/resilient brands in tough sector conditions and stronger
share volatility than asset value volatility (LVMH, Kering). Richemont and Swatch fit into this
category, but the short-term earnings downgrades are too steep for now, leading us to
downgrade Swatch to Hold.
Burberry Group - 12m target downgrade
* Following the recent Paris events, we cut our estimates and consequently lower our target
price from £1,400p to £1,300p, a 7.0% cut vs a decline of 4-5% on average for the soft luxury
companies we cover (see detailed sector note for more information).
* Burberry’s exposure to France represents 6-7% of sales, in line with the sector average,
and it generates c.24% of its sales in Europe, well below the peer average.
* Our TP is an average of an SOP (Retail/Wholesale 87% and Other 13%) and a DCF (10.0%
WACC; 4% terminal growth).
* Risks to TP: upside – better sales growth sustainability in the US and APAC than in SGe;
downside – less successful Japan relaunch than we expect in a crowded market with a lot of
competition.
Co. stated 55.5% of common stock shareholders had deposited shares to attend the shareholders meeting on Dec 15. Article adds it is uncertain if Vivendi proposal to increase the number of board members to 17 from 13 will pass (so that they can have 4 board members). In addition Bloomberg reports that Tim Brazil is working with some investment banks (BoFA and Citigroup) as it considers a combination with Oi SA (reportedly no formal talks underway, any deal unlikely before year end).
* Staying selectively cautious
For 2016, we are remaining selectively cautious on EU Autos. Valuation is not stretched
but we do see some earnings risk. The one bright spot to us remains French OEMs and
we remain Buyers of Renault / Peugeot but we stay cautious on German OEMs (no Buy
ratings) still seeing China over supply and margins as a meaningful tail risk. We now take
a more cautious stance on the suppliers / tyres (U/P on four of seven names). We also
deepen our Trucks caution moving Volvo to Underperform.
* Consensus looks too high for 2016. Sector re-rated in 2015
Autos 2016 consensus EPS growth (ex-VW), stands at 9.3% vs BofAML of 3.6% ( inc VW,
cons 11% vs BofAML -0.6%) and slightly above the 7% EU market consensus growth. EPS
growth for Autos in 2015 was 13.6%, a very healthy premium to the market’s 0% however
the SXAP re-rated sharply into higher earnings which is not entirely logical to us. As the
demand cycle slows and cost pressures grow we see downside to cons EPS on German
OEMs, Suppliers (in line Conti) and also Trucks. Only for the French OEMs do we see EPS
upside. The SXAP relative valuation is undemanding (P/E rel of 67% vs L-T 70%), but at
the same time our EU Auto Fund Manager Survey sits at its highs on 21% overweight.
* Cutting Autoliv and Volvo to Underperform
RATING CHANGES: Volvo to U/perform from Neutral (Global Truck markets to fall),
Autoliv to U/perform from Neutral (Takata over estimated, valuation). KEY REITERATED
VIEWS: Renault (Buy) (model cycle), Peugeot (Buy) (cost savings), VW (U/perform) (vol
and price risk), Daimler (Neutral) (risks to S Class and Trucks), BMW (Neutral) (too early
for model cycle). Conti (Buy) (cash gen) Michelin (U/perform) (commodity risks), Valeo
(U/perform) (valuation, growth), Nokian (Underperform) (non-Russia growth, valuation).
* China OEM margins have not troughed in our view
Consensus appears relaxed regarding China exposure but recent growth is coming at the
wrong end of the market for the European OEMs in our view. We expect a continuation
of the ‘decline’ of China margins. BofAML sees a potential RMB depreciation of 10% in
2016 which we don’t model but see as a sector tail risk. We see no upside to W.EU and
US consensus unit growth. We also cut our view on Truck growth, with EU carrying risk.
* Suppliers less attractive. Michelin EPS risks. Volvo to UP
Suppliers trade on near record high 0.88x EV/Sales on 1 year forward consensus
estimates, a significant 57% or nearly 3 standard deviations above the long run average
of 0.56x. Production outperformance (higher content /vehicle) has driven this but we see
the pace of growth slowing as key markets move into later stages in the cycle.
* Tyres: Deflation risks for Michelin. Trucks: Volvo at risk
We are sceptical that Michelin will realise its targeted 3% price growth in a deflationary
environment - we prefer Conti over Michelin (mining also a risk). In Trucks, key markets (EU,
US, LATAM) likely. -8% in 2016 with EU flat. Consensus Volvo EPS looks too optimistic.
* Target to stabilise Domestic EBITDA in 2016
We hosted a roadshow with Telecom Italia CFO, Mr Piergiorgio Peluso, in Zurich. The
company confirmed the objective to stabilise the y-o-y trend of Domestic EBITDA in
2016 (UBSe -2% yoy). This should result from the combination of the progressive
improvement of the Domestic top line trend (both fixed and mobile services) coupled
with further opex efficiencies. The trend of fixed lines losses is expected to remain
challenging, however the company expects some improvements to become visible
during 2016E.
* Brazil: focus on operations – Open to assess all opportunities
Macro and competitive dynamics remain tough in Brazil. Operational turn around will
require a few more quarters before paying off as company commercial positioning
(prepaid, mid/low-end of the market) leaves it more exposed to the weak private
consumption environment. TI is focused on stabilising the revenues (new commercial
offer) and on reducing the pressure on EBITDA (structural efficiency actions). As for
M&A scenarios, TI confirmed to be in no rush and remains open to assess all options
should the right conditions recur.
* Capital allocation: de-leverage actions for €3-4bn in 2016
Company reiterated its medium term target to de-lever in order to regain the
investment grade credit rating and re-establish a dividend policy. Over 2016 TI will
execute some extraordinary actions (on top of organic CF generation) that are expected
to provide some additional balance sheet flexibility (UBSe 2016 ND/EBITDA
proportionate to stay at ~3.4x). In details: i) conversion of the mandatory convertible
bond (€1.3bn); ii) proposed conversion of the saving shares (up to €0.6bn); iii) potential
disposal of large part of TI's 60% controlling stake in Inwit (€1.0-1.5bn range); iv)
potential closing of the disposal of TI's controlling stake in Telecom Argentina (€0.5bn).
* Valuation: PT, SOP based, at €1.18 for ordinaries and €1.08 for savings - Neutral
Pending the EGM (15th December) and low visibility on corporate governance, we
confirm our Neutral rating. The stock is trading at 14.7x on our 2015 EV/OpCF
estimate, broadly in line with sector average.
>>> Asset Class Flows
- Equities: $6.4bn outflows (note divergence between $14bn mutual fund outflows and $8bn ETF inflows)
- Bonds: $6.1bn outflows (outflows in 4 of past 5 weeks)
- Money-markets: $13.4bn inflows (10 straight weeks) (longest inflow streak since Mar’08)
- Commodities: $0.6bn inflows (first inflows in 3 weeks)
>>> Equity Flows
- Europe: $3.5bn inflows (largest in 14 weeks) (inflows in 28 of past 30 weeks)
- EM: 6 straight weeks of outflows ($1.7bn)
- Japan: $0.6bn inflows (largest in 6 weeks)
- US: $9.2bn outflows (largest in 13 weeks) (all via mutual funds)
>>> Fixed Income Flows
- Big $3.8bn outflows from HY bond funds (largest in 15 weeks)
- $1.0bn outflows from EM debt funds (outflows in 19 of 20 weeks)
- $0.5bn outflows from Bank loan funds (outflows in 18 of past 19 weeks)
- Modest $0.7bn outflows from IG bond funds (outflows in 3 of past 4 weeks)
- $1.0bn outflows from Govt/Tsy funds (outflows in 8 of past 9 weeks)
- 12 straight weeks of inflows to Munis ($0.6bn)
- 4 straight weeks of inflows to TIPS ($0.3bn)
Focusing on Quality: Macro conditions favor strong franchises; 12 changes to Focus List
2016 themes favor GS SUSTAIN strategy
In recent weeks our US & European equity strategists have shared their 2016 outlook, and two themes support GS SUSTAIN-like firms: (1) a more extended US rate hike cycle than what the market expects will favor companies with high returns on capital/stronger balance sheets; (2) challenging macro conditions and full valuations lead us to prefer companies that can create shareholder value through access to faster growing end markets (or market niches through pie shifts).
Highly competitive environment to continue
We believe returns on capital will continue to be pressured for the average company due to: (1) more competition funded by a low cost of capital; (2) competition that benefits from production in lower cost markets or from falling currencies; and (3) new, tech-enabled business models that are targeting attractive profit pools. With this macro
backdrop and highly competitive operating environment set to continue, we expect companies that have strong franchises and differentiated products will outperform.
7 additions, 5 removals to the Focus List
With this report we make 12 changes to the GS SUSTAIN Focus List: in Banks we add Svenska Handelsbanken, Signature Bank, US Bancorp, and remove BBVA and HSBC; in Industrials we add Safran, Ryanair and remove Boeing, Cummins, and Rotork; in Internet we add Alphabet and LinkedIn. We made these changes as we integrate
new Competitive Positioning frameworks into GS SUSTAIN for Aerospace & Defense, Refiners, and Regional Banks, and as we refresh our industry positioning data for Internet companies.
Focus List value screen performing well
The performance of the Focus List has been flat relative to the MSCI AC World Index over the past four years, but during this period our valuation screen for “near term value” within Focus List firms has generated 7.3% p.a. outperformance. We believe that this shows that while equity market dynamics do not always favor a valuation agnostic GS SUSTAIN strategy, the combination of quality and value can continue to do well.
Dow+0.47% S&P+0.23% Nasdaq+0.44% Russell+0.28%
US Market closed higher after 3 consecutive negative days. S&P didn't managed to closed above the 50d MA (2054). Energy closed better even with Crude lower by 1% ($36.80/bbl)...down this morning @ $36.55/bbl-->CVX & COP cut their capex budgets for 2016 by 25%. IBB +1.3%. materials (-0.8%) and utilities (-1.7%) spent the day in negative territory with the materials space pulling back after yesterday's 3.1% surge. Volume were lighter in this up move that on the last few days @ 850mil shares. US After Hours FNSR +16%, VNCE -9.6%, RH +7.2%, ADBE +4.6% on earnings, SUNE +3.9% capacity sell to Terra Nova, JBLU-2.5% on nov. Traffic Numbers, TSLA-0.3% on Ford inv. program in Electric Vehicle. Asia stocks were mixed once again in the final trading session of the week before the focus turns to next week's FOMC decision. China markets are underperforming despite the rally on Wall St as investors look ahead to the weekend release of November retail sales, industrial output, and urban investment. Fosun Group is weighing on sentiment, with speculation of another high-profile graft case.
Nikkei +0.97% Hang Seng -0.82% Shanghai -0.52%
Eur$1.0945 CNY6.4507 JPY121.98 GBP1.5139 CHF0.9878 RUB $69.2233 WTI $36.55 (-0.57%)
S&P +0.18% EuroStoxx-0.24% Dax-0.16% SMI -0.22%
Macro :
- Fed Rate Hike May Cut New-Vehicle Demand by 150k: J.D. Power
- Google Said to Abandon its $125m European Venture Fund: FT
Keep an eye on :
- ABG SM : Abengoa Banks Assure EU100M Liquidity Injection: El Pais, Abengoa Asks Spain’s ICO for Short-Term Aid: Cinco Dias
- AF FP : Air France’s Transavia to Open 10 New Lines, La Tribune Says (Still a Buy for me!!!!)
- AAL LN : Anglo American Cut to Baa3: Moody’s, May Be Cut Further to Junk
- ABG SM : Abengoa Bondholders Said to Request Bank Short-Term Funds: Rtrs
- NDA GY : Aurubis 4Q Sales Fall 14%, Op Pretax Up 32%; Sees FY16 Lower
- BAYN GY : Bayer Accelerates Investment in Cancer Drug Development
- EN FP : France Eco Minister Macron Eases Telecom Merger Stance: Reuters http://reut.rs/1Q4HliK
- ELIOR FP : Elior Div. Up 60% to EU0.32; 2016 Outlook in Line W/ LT Targets
- CLN VX : Clariant Says Luetgendorf to Step Down at End of 2015
- ENGI FP : Engie Seeks $3B-$5B Selling US Thermal Plants in Revamp: Echos
- ENGI FP : Engie Considers Splitting Chairman, CEO Roles: Echos
- DL NA : Delta Lloyd Says Investor Loss Liability Allegations Unfounded
- MHG NO : Marine Harvest to Build New Greenfield Feed Factory in Scotland
- PUB FP : Publicis Loses L’Oreal Ad Account in North America to WPP: FT
- RNO FP : Renault Board Said to Meet Friday on Feud With French Govt: WSJ
- RNO FP : Renault-Nissan, French State Near Agreement, Le Figaro Says http://bit.ly/1OWx44S (Still a Short for me but Risky!!!!)
- 7201 JP / RNO : Nissan Seeks Promise From France to Keep Out of Management: NHK
- 7201 JP : Nissan May Spend 350b Yen to Increase Renault Stake, Asahi Says
- SAN FP : Sanofi Pasteur in Talks to Bring Dengue Vaccine to India: BS
- SAN SM : Santander CEO Says Regulatory Outlook Complicates Bank Mergers
- SESG FP : SES Orders Satellites From Thales for $460M, Le Figaro Says
- SKAB SS : Skanska Divests Majority of Seattle Office Property for SEK2b
>>> Up
*FRESNILLO RAISED TO BUY AT GOLDMAN
*GEORG FISCHER RAISED TO OUTPERFORM AT RBC CAPITAL
*IBERDROLA RAISED TO OUTPERFORM AT RBC CAPITAL
*KERING RAISED TO OUTPERFORM AT BERNSTEIN
*UBI RAISED TO HOLD VS REDUCE AT HSBC
>>> Down
*AIXTRON CUT TO HOLD FROM BUY AT BANKHAUS LAMPE
*AUTOLIV CUT TO UNDERPERFORM AT BOFA, PT $110
*TERNA CUT TO UNDERWEIGHT VS EQUALWEIGHT AT MORGAN STANLEY
*VOLVO CUT TO UNDERPERFORM VS NEUTRAL AT BOFA
>>> Initiation
*OPERA SOFTWARE RATED NEW BUY AT JEFFERIES
>>> PT Change
>>> Call