TheChek News Flow

--> CGG Already up 7.2%

*BREVAN HOWARD ASSETS SAID TO BE $24.8 BILLION AT END OF SEPT.

*BREVAN HOWARD ASSETS SAID TO DROP ON REDEMPTIONS AND CURRENCY

But like Canada and Russia, it is discovering how hard this is

SINCE the 1990s the global market for full-sized commercial airliners has been a duopoly. The market, which by some estimates will be worth $4.6 trillion over the next 20 years, is dominated by Airbus, a European firm, and Boeing, its American competitor.

In theory, at least, airlines will soon have a wider choice of planes. On November 2nd COMAC, a Chinese state-owned aircraft manufacturer, revealed its C919 plane (pictured), a competitor to Airbus’s A320 and Boeing’s 737, the two most popular planes in the skies. COMAC says the C919 will have its maiden flight next year—two years later than first scheduled—and will enter service around 2019. The Chinese are not the only ones who think they can break the duopoly. After several delays, Irkut, part of Russia’s state-owned United Aircraft Corporation (UAC), hopes to launch its MC-21 aircraft, another potential rival to the 737 and A320, into service in 2017.

Many aviation analysts remain sceptical about whether these rivals, even with generous state backing, will ever put a significant dent in the bulging order books of Airbus and Boeing. Although the Russians and the Chinese may well be good at designing aircraft, they have little experience in creating the hugely complex production systems and supply chains needed to build them to the extremely high standards of reliability and safety that airlines expect. The need to improve their safety record will ensure that they are “not a near-term risk” for the likes of Boeing, according to Jason Gurksy, an aerospace-industry analyst at Citigroup.

Even Canada’s Bombardier, which has a good record of safety and quality for the smaller aircraft that it makes, has struggled to break into this lucrative market. Fewer than 250 of its much-delayed CSeries planes have been ordered. By contrast, Boeing has already delivered almost 5,600 of the 737 and has orders for a further 4,200. It emerged recently that Bombardier had tried unsuccessfully to sell a stake in the project to Airbus. On October 29th Bombardier announced that the provincial government of Quebec, where the firm is based, would pay $1 billion for a stake of 49.5% in the CSeries, whose development has so far cost Bombardier $5.4 billion.

Incumbents are just as hard to dislodge in the market for smaller “regional” jets (ones with up to around 100 seats), which is dominated by Bombardier and Embraer of Brazil, but which COMAC, UAC’s Sukhoi subsidiary and Mitsubishi of Japan are all trying to break into. COMAC’s regional jet, the ARJ21, had its first test flight in 2008, but because of concerns about cracks in its wings and dodgy wiring it has still not been certified for commercial flights in America. Mitsubishi’s MRJ and Sukhoi’s Superjet were also delayed by technical problems. The Superjet is now in service with a handful of airlines, though orders have been sparse; and the MRJ is expected to make its maiden flight shortly, possibly this month.

Even the giants of the industry find that it is not easy to get an entirely new aircraft design off the ground. The research-and-development costs for Boeing’s newest aircraft project, the 787 Dreamliner, grew to $28 billion as a result of problems with its supply chain and its electronics. And revenues from Airbus’s newest aircraft, the giant A380, hardly cover its production costs, never mind the capital sunk into its development. If even the industry’s two dominant firms find it a long, expensive struggle to get a new aircraft design in the sky, no wonder their would-be rivals are having such a hard time.

Moving more price targets to Dec-16 basis; upgrade

Zodiac to Neutral from Underweight

We recently moved our price targets on Airbus, Meggitt and Senior to a Dec-

16 basis from Dec-15 basis. We now do the same for Safran (OW), MTU

(UW), and Zodiac (which we upgrade to Neutral from Underweight).

* Zodiac (upgrade to Neutral; raise PT to €27 from €23): ZOD reports its

FY15 results on November 24, having pre-announced a profit warning on

September 15. Ahead of the FY15 release we leave our estimates

unchanged. However, rolling our multiples-based price target forward to

Dec-16 from Dec-15 increases our price target by 17% to €27. We believe

that there is still a wide range of outcomes for ZOD’s earnings YE Aug 16-

18E, as the key unknown is the rate of improved execution after five profit

warnings since September 2014. We thus believe that the appropriate rating

is Neutral.

* Safran (remain Overweight; raise PT to €82.5 from €75.5): We now

value Safran on a Dec-16 basis, from Dec-15 previously, increasing our

multiples-based PT by 9%. We are not changing our EPS estimates with this

note. In our results note of October 22 we outlined two major investment

positives for Safran (best-in-class aftermarket growth; a very big FX

tailwind from 2018) and two emerging concerns (execution problems on two

new engines; the potential for a full EU investigation into the civil aero

aftermarket.

* MTU Aero Engines (remain Underweight; raise PT to €85.5 from

€78.5): We now value MTU on a Dec-16 basis, from Dec-15 previously,

increasing our multiples-based PT by 9%. We increase our MTU defined

EPS for 2015-18E by 2% pa, following the Q3 15 results last week. MTU is

going through a major transition period whereby a lot of its older engines are

being retired from service, and are being replaced by new engines which are

sold at a loss in the expectation of future high margin spares sales. This

transition is challenging but will leave MTU well positioned for the future; it

is not the reason for our UW rating. Our main concerns (flagged in several

previous notes) are MTU’s accounting practices whereby it is boosting

2015-17E EPS by c20-30% pa from capitalising R&D and the interest

payments on new investments, and significantly boosting reported FCF by

omitting entry fees paid to join new programmes and also omitting vendor

financing commitments on those programmes. As a result of these issues,

MTU is the most expensive civil aero stock in our coverage on a 2016E

clean EV/EBITA of 16.1x, a 24% premium to the European Civil Aero

average.

VW has made a new admission of ‘irregularities’ on c.800k vehicles that give misleading CO2 results under test conditions. VW has put the cost at EUR2bn, but notes this is an ‘initial’ estimate. This comes on top of the existing EUR6.7bn provision for the 11m vehicles with NOx defeat devices, and is separate to the new EPA violation notice on 10k diesel vehicles issued on Monday (which VW denies). VW has given little detail on the incremental 800k CO2 affected cars, but we believe most (but not all) to be diesels in Europe.

Assessing the impact of this latest shock is not straight forward. We have added a further EUR4bn in recall / customer compensation cost to the EUR12bn we had already modelled on the NOx issue. Versus VW’s own EUR2bn and EUR6.7bn estimates, this allows material leeway to cater for compensating customers for ‘lost’ fuel economy and/or residual value impact. We note that the 800k number could yet go higher. We also model an increased commercial impact in 2016, with customer behaviour more likely to be affected in our view over uncertainty on fuel economy than it has been on NOx. The net result is a 10% downgrade to ’16 EPS, with our TP falling to EUR116.

VW’s latest admission on CO2 will have ramifications across the sector. As with NOx, attention will likely quickly focus on the incremental compliance costs of a shift to a ‘real world’ test cycle – which we put at c.€3bn. We caution against knee-jerk over reactions, but have previously noted greatest ‘real-world’ CO2 risk at Daimler (=) & VW, and least at Renault (+). Tyre makers may be the safest place in the sector short term given their insulation from OE market disruption.

* ASML Holding NV (Francois Meunier) – ASML is a prerequisite for the continuation of Moore’s Law and the path towards smaller transistor structures. ASML should benefit from the development of EUV technology that we believe will start to ramp in 2017-2018 which will lead to a monopoly position in lithography. We forecast 20% EPS CAGR over F2014-F2017e. 

* Big Yellow Group (Bianca Riemer) – Big Yellow is a dominant player in the London self-storage market, which has structural demand growth from a tight housing market, rising disposable incomes and rising product awareness, falling self-storage capacity, and high barriers to entry. Big Yellow’s occupancy rate is in the mid-70s, and we expect it to hit 80% within the next 18 months, from where we expect to see a significant acceleration in rental growth. 

* B&M European Value Retail SA (Audrey Borius) – In our view, B&M’s relatively limited geographic coverage of the UK leaves the retailer significant room to grow its store network supporting a double-digit topline growth over the next 5 years. We also expect B&M to be one of the main beneficiaries of the expansion of the UK value channel thanks to its multi-price-point strategy and its large assortment providing a significant competitive advantage. 

* Dassault Systemes (Adam Wood) – Given the breadth of the company’s product offering, we believe Dassault is well-positioned as a market leader to take advantage of the expanding TAM for PLM design software, which is expected to reach $32Bn by 2019. We believe this supports the company’s 2019 EPS target and should drive a ~15% CAGR over the 2014-19 period. 

* EDP Renovaveis (Carolina Dores) – EDPR is the 4th largest wind developer globally. The group has a strong track record on delivering high availability ratios and load factors and outperforming peers in regions it operates. EDPR's business model has been successful in delivering growth (through new capacity and scale gains) and crystallizing valuation by recycling capital. We believe the continuing execution of EDPR business plan (the group has given full visibility on new projects up to 2017) will result in further growth (18% EBIT CAGR 2014-2017). Considering its large project pipeline (of c16GW) and strong balance sheet to leverage asset rotation, we believe EDPR is well-positioned for this further growth scenario. 

* Flow Traders NV (Bruce Hamilton) – We see Flow Traders (electronic market maker active in ETP globally) as a geared play on growth in the ETF/ETP asset class, one end of our oft argued asset management barbell and where AuM CAGR over the coming years should average ~20%. We also see revenue margins supported by increased volatility, which typically leads to wider spreads on business. Additional opportunities for growth exist via increasing market share in the US/Asian markets. Overall this drives ~30% CAGR in earnings 2014-17e.

* Just Eat (Andrea Ferraz) – A strong leader in the UK, Denmark, and Australia positioning itself as the clear winner in Canada and France. It has delivered order growth of c.50% in the last 6 quarters. We forecast 46% revenue growth in 2015, 40% in 2016, and 24% in 2017. It operates in an attractive winner-takes-most industry, with EBITDA margins at maturity exceeding 40% with no capital required. We estimate Just Eat could generate £870m revenues, £390m EBITDA, and 43p EPS at maturity, and could benefit from industry consolidation. We forecast a year-end net cash balance of £165m.

* KUKA (Lucie Carrier) – A global leader in both Robotics and designs and installations of robotics-based automation Systems. The robotics industry is expected to grow c. 12% (industrial robots units) between 2014 and 2017e as penetration increases in a broad range of industries, supported by strong macro drivers such as ageing population, wage inflation, and an increasing focus on products quality and workers safety. As a top 3 player in this industry with meaningful R&D capabilities, we think Kuka is well-positioned to benefit from the secular growth in that market and maintain leadership. We forecast 26.5% EPS CAGR 14-17e (high teens percentage on an organic basis).

* London Stock Exchange (Anil Sharma) – Attractive structural topline growth via index and post-trade businesses, combined with intriguing optionality around asset disposals (recently announced Russell Investment Management) and potential for further acquisitions or capital returns. Although we view 2015/16 as a period of re-investment in the business to leverage the post-trade assets (across areas such as clearing, trade compression, collateral management), we see topline pick-up and further cost efficiency driving appealing acceleration in earnings 2017 with CAGR ~17% 14-17e.

* Luxottica (Elena Mariani) – A vertically integrated industry captain with unrivalled leadership within the structurally-growing premium eyewear sector (7x sales of the #2 player). The eyewear sub-sector is less cyclical than the brands and consumer industries and is supported by solid long-term structural growth drivers (both in emerging and developed economies) thanks to favourable demographics, lifestyle evolution, and premiumisation.

* Merlin Entertainments (Jamie Rollo) – In a growing, fragmented industry, with high barriers to entry, Merlin has strong brands and a strong track record. Targets are 6-7 Midways and 200 hotel rooms each year, a LEGOLAND Park every 2-3 years, and mid-single-digit like-for-like profit growth, which should drive annual growth of 8-9% in EBITDA and 14-15% in EPS.

* Ocado Group (Francois Halconruy) – We believe Ocado is a disruptive long-term winner in online grocery, which comes with a unique customer proposition and the lowest cost-to-serve business model. Ocado’s ability to leverage its UK proprietary technology and platform (via ‘plug-and-play’ agreements with multiple partners worldwide) should make Ocado an attractive play on this structural (and global) shift towards online.

* Rightmove Plc (Andrea Ferraz) – Rightmove is the leading online classifieds portal in the UK. It benefits from a strong network effect and structural growth as advertising moves online (45% still print). Cash flow generation is exceptional with 75% EBITDA margins and 1% capex / sales. Unique combination of 11% 15-18 revenue CAGR and 4% FCF yield with all cash returned to shareholders through dividends / buybacks.

* Sophos Group (Adam Wood) – As a global provider of security software, Sophos is in one of the fastest-growing areas of IT spend. We believe the group’s mid-market focus and play on converging technologies position it well to take share. We forecast revenues to grow 12% CAGR ex FX from F2015 to F2018 and expect adjusted EBITDA to grow above this (14% ex FX), given the operating leverage.

* St. James’s Place (Jon Hocking) – The changing pension regulatory landscape and ever-increasing complexity of the personal tax system in the UK are likely to generate more demand for advice, where SJP’s strength lies. The challenges of establishing and maintaining a productive advisory team create a relatively high entry barrier for its peer and enable SJP to maintain margins. The company has a clear strategy to expand its capacity of tapping higher-end market into the fast-growing EMs which should support its growth in the longer term.

* Stroer SE (Eliska Mallickova) – Stroer is the leading outdoor advertising player in Germany complemented by a fast-growing digital business. Through cross-selling opportunities between outdoor and digital, share of outdoor rising in the German media mix, and significant margin upside, we look for c.30% eps CAGR 2014-18 (following the t-online and OMS acquisitions). The strong FCF profile also provides potential for enhanced cash returns.

* Symrise (Erik Sjogren) – Symrise should sustain an attractive growth profile in line with management’s targets to 2020 of 5-7% gradual margin progression. Sales growth is driven by growth in the underlying F&F market, Symrise’s exposure to local and regional FMCG companies which are taking share, and gradual market share gains with global FMCG companies. Margins should come up on continued improved mix and efficiency gains. Finally, we think that Symrise will continue to employ its cash flow for acquisitions in line with the Diana and Pinova deals in 2014-15.

* Telit Communications (Francois Meunier) – Telit is positioned to benefit from the adoption of the Internet of Things and the ramp of connected devices such as automotive, telematics, fleet management, and connected industrial applications. Telit is one of the few companies we cover with 100% exposure to the Internet of Things. We forecast 26% EPS CAGR and 19% revenue CAGR over F2014-F2017e.

* United Internet (Laura Ashforth) – United Internet’s Access business should continue to benefit from a growing mobile and fixed market share in Germany as a result of its strong brand and value-for-money tariffs. In the Applications business, UTDI is exposed to a high-growth web presence market and already has a strong market position in Europe.

* Whitbread (Jamie Rollo) – Rapid expansion to 2020 targets of 85,000 hotel rooms (+45% on 2015) and £2.5bn Costa Coffee system sales (+80% on 2015) should drive mid-teens EPS growth even assuming only modest like-for-like sales growth.

* Zalando (Anisha Singhal) – With a strong brand portfolio and more than 100m visits a month to its sites, we believe Zalando has built a credible proposition which will allow it to continue to take share of the Europe apparel and footwear market.

Nikkei +1.30% Hang Seng +2.42% Shanghai +4.12%

Eur$1.0952 CNY 6.3356 JPY 121.05 GBP 1.5425 EurCHF 1.0860 RUB$62.39 WTI $47.90

S&P +0.02% EuroStoxx+0.41% Dax+0.29% SMI+0.38%

Macro :

- France to Push Self-Employment Brought By Digital Economy: Valls

- Draghi: ECB Willing to Act to Maintain Monetary Accommodation

- Greek Bank Recap Must Be Done by Year End, Nouy Tells Ta Nea

- Nikkei India Oct. Composite PMI 52.6 vs 51.5 in Sept.

- Nikkei Japan Oct. Composite PMI 52.3 vs 51.2 in Sept.

Keep an eye on :

- ABI BB : AB InBev Said to Agree Bud Light NFL Sponsorship Extension: WSJ

- AIR FP : Russia Jet’s Black Box Said to Show No Talk of a Problem: WSJ

- ALPHA GA : Alpha Bank to Seek Nov.14 Holder Approval for Capital Increase

- ATC NA : Cablevision 3Q Rev. Misses Lowest Est.; HSD Net Adds +3k -->

- ATO FP : Atos 3Q Revenue Matches Estimates; Maintains 2015 Outlook

- SPR GY : Axel Springer 3Q Rev. in Line W/Est.; Raises FY Revenue Forecast

- BARN SW : Barry Callebaut Sees 4%-6% Avg. Vol. Growth Through FY18

- BSL GY : Basler 9m Pretax Profit Declines; Margin Drops to 13% vs 16%

- BMW GY : BMW Group U.S. Brand Oct. ’15 Sales Fell 3.8%

- BMSA GY : Braas Monier 3Q Sales Rise 3%, Sees 2015 Rev. Growth of 3%-4%

- BRBY LN : Burberry to Build New 50 Million-Pound Weaving Facility in U.K.

- DBK GY : DB Said to Plan for Thomas Patrick to Head Stock Trading: WSJ

- DRI GY : Drillisch Has Substantial Increase in Profit, Confirms Forecasts

- DSM MA : DSM Sets Ebitda, ROCE Growth Goals Through 2018, Plans Cost Cuts

- EVK GY : Evonik 3Q Adj. Ebitda Beats, Sales Miss; 2015 Outlook Confirmed

- FNC IM : Finmeccanica 3Q Rev Matches Est; Confirms FY Forecast

- GEN DC : Genmab Raises 2015 Rev., Oper. Income Views

- GBB FP : Bourbon Says Market Conditions Difficult as Clients Cut Spending

- HPG GY : Hapag-Lloyd Sets Price for IPO at EU20/Shr

- INGA NA : ING Group 3Q Net Income Beats Estimate; Group CET1 Ratio 12.3%

- LUN DC : Lundbeck 3Q Rev., Net Loss Meets Estimates; Keeps Rev. Forecast

- LUPE SS : Lundin Petroleum 3Q Ebitda Beats Estimate

- MC FP : Bulgari to Keep Focus on Luxury Watches and Jewelry, CEO Says

- MOR GY : MorphoSys 9-Month Revenues, Ebit Rises; Confirms Guidance

- MMT FP : M6 3Q Mixed; Beat Ests on Ad Growth, Weak Elsewhere, Nomura Says

- MPI FP : Ledbury Seeks to Block MPI-Maurel Merger Unless Bid Is Improved

- NOEJ GR : Norma Group 3Q Adj. Ebita Rises, Confirms 2015 Forecast

- ORP FP : Orpea 3Q Rev. Beats Estimates; FY Revenue Target Reiterated

- TPEIR GA : Piraeus Bank Targets as Much as EU4.9b From Share Cap Increase

- PAH3 GY : Porsche Says VW Shareholding in Co. Could Impact Earnings

- REC NO : Rec Silicon 3Q EBITDA Loss $14.1m on Higher Costs, Lower Prices

- SAB LN : SABMiller/AB InBev Said to Need Another Week Extension: FT

- SGL GY : SGL Carbon Outlook on 2016 ‘Significantly’ Impacted by Pricing

- SOP FP : Sopra Steria 3Q Organic Growth Up 3.2%; Confirms 2015 Forecast

- TEF SM : Telefonica to Announce Spain Revenue Increase: Confidencial

- THULE SS : Thule 3Q Adj. Operating Profit Beats Estimates

- VOS GY : Vossloh Sells Rail Vehicles Unit to Stadler Rail for Cash, Debt

- VOW3 GY : Volkswagen Sees Economic Risk at ~EU2b on CO2 Irregularities