TheChek News Flow

OHL Mexico, S.A.B. de C.V. (the “Company”) (BMV: OHLMEX), informs the investing public that today (23 September) a civil suit for moral damages was admited. The Company and its subsidiary Concesionaria Mexiquense, S.A. de C.V. (“Conmex”) filed the suit with the Mexico City Civil Courts against Tecnologia Aplicada Infraiber S.A. de C.V. (“Infraiber”) and others.

OHLMEX and Conmex have filed the suit for the unprecedented smear and defamation campaign that for more than two years has been carried out by Infraiber with the intent of causing, to the Company as well as Conmex, severe damage to their reputations.

The Company and Conmex will closely monitor the legal proceeding and will exhaust all legal resources available to exercise their rights to avoid more damages to them, as well as to their shareholders.

When the going got tough this summer, commodities traders Glencore and Olam raised equity capital. Despite its own tough times, Singapore-listed Noble Group hasn’t yet gotten going.

In the past three months, Noble’s share price has dropped 35% and one of its bonds has lost 20% of its value as concerns over the company’s aggressive accounting has grown. Its stock and bond prices steadied this month, but the bad news out of China now means the outlook for commodities, and those who supply them, won’t be improving.

Glencore sensibly issued $2.5 billion of new equity last week. Separately, Singapore-listed agricultural trader Olam sold a $1.1 billion stake to Japanese trader Mitsubishi.

Noble hasn’t followed, though it needs equity more urgently than Glencore. While the latter’s credit is still rated two notches above junk status, Noble’s is right on the edge. The outlook on the trader’s debt was recently cut to negative by both Standard & Poor’s and Moody’s, putting it close to a downgrade to junk, which could imperil Noble’s ability to access cheap capital.

If Noble bit the bullet, how much capital could it raise? Glencore issued 10% more shares. If Noble did the same, at a 5% discount to its current stock price, it would raise $200 million, not nearly enough to meet its coming obligations.

As of June, Noble reported $3.5 billion of debt due in 12 months. Since then, it says it redeemed bonds worth $735 million, including a $500 million note due August 2015, by using cash and loans. That means it now has $3 billion of borrowings due by June 2016. Noble didn’t specify, but let’s assume it used its cash on hand for a third of the $735 million redemption and raised the rest by tapping a three-year bank facility.

Noble may be able to roll over some of the $3 billion debt maturing soon. But if not, after counting the cash it can definitely access and the committed bank facilities it still hasn’t drawn on, it will be $925 million short of what it needs for repayment. To get that all from the stock market, Noble would have to issue equity equal to 46% of its existing shares.

Noble could place shares with a strategic investor—perhaps a Japanese conglomerate, as Olam did. Such an investor might be comforted by Noble’s announcement Wednesday that founder Richard Elman will step down from the audit committee, giving more voice to others during the company’s controversial accounting deliberations.

Yet having already sold 51% of its agricultural unit last year, Noble lacks Olam’s key attraction. Most Japanese traders already deal in the hard commodities that Noble specializes in. And even if it did find a willing investor, bringing in an outsider to snap up 46% of the existing shares—or 32% of the enlarged company—would painfully dilute current owners.

Alternatively, Noble’s management could double down, as Glencore’s did. If Noble has to raise $925 million, Mr. Elman would need to spend about $200 million to maintain his stake.

Noble could avoid having to raise equity if its operations began generating cash, something they haven’t managed in a while. Otherwise, Noble will have to follow its peers—if it can find someone willing to pony up the cash.

We update our estimates for Glencore following the completion of its equity

placement on September 16, in which it raised its target of $2.5bn. We also

update our estimates to incorporate our commodity analysts’ lower thermal

coal forecasts ($58/54/52/t for 2015/16/17E) and lower met coal forecasts

($91/85/90/t), which impacts Glencore’s 2016/17/18E EBITDA by c.15-18%.

Since announcing c.$10bn of debt reduction measures on September 7 and

completing a 9.9% equity placing, shares have retreated a further 14%. In our

view investors are not yet convinced that Glencore has gone far enough to

totally allay fears that the industrial assets can service the new lower debt level.

Our scenario analysis suggests that using GS estimates for commodities prices

and FX rates, Glencore’s IG rating would be secure in the medium term, but

our estimates for zinc, nickel and coal prices are higher than spot prices. When

we run the same analysis using spot commodity prices and spot FX rates, most

of Glencore’s credit metrics would be at the border of required ranges to

maintain its IG rating. Finally, a 5% drop in spot commodity and flat FX would

see most of Glencore’s credit rating metrics fall well outside the required range

to maintain its IG rating, suggesting concerns would quickly resurface.

Glencore has a few levers left – further lowering capex, signing streaming

deals and releasing more working capital. Recent underperformance

suggests that the measures exercised are insufficient and more is needed.

We remain Neutral rated but expect continued volatility in the near term.

We value Glencore using a SOTP approach with three components: (1)

industrial assets at 5x 2016E EV/EBITDA; (2) the marketing division at 15x

2016E P/E; and (3) the listed entities using closing prices on September 22.

On lower estimates we reduce our 12-month price target to 130p (was 170p).

Commodity prices, streaming agreements and FX moves are key risks.

We think it makes sense in the current market environment – attractive valuations on

European equities, a constructive medium term outlook but near term uncertainty – to

seek out quality, good value names in the European market. High dividend yielding

stocks are the prime candidates in that regard – and we believe there are many across a

variety of sectors in Europe.

We see four top-down reasons to consider yield strategies. 1) Attractive valuations and

upside in Europe with the equity vs. credit yield spread looking very favorable. 2) Nearterm

volatility makes quality yield an attractive space to build positions, and choppy

markets tend to favour yield strategies e.g. they outperformed in the 2013 taper

tantrum and in 2014. 3) Deflationary growth environment – i.e. PMIs above 50 but

inflation expectations falling – tends to be particularly bullish for yield strategies. 4) ECB

QE extension and renewed falls in bond yields typically favour outperformance of DY

stocks.

Banks and Insurance screen very favorably – offering some of the best combinations of

yield, dividend cover and DPS growth, a high spread of DY versus credit yields (especially

Banks) and positive DPS revisions trends. Telecoms also ranks favorably on DY, spreads

versus credit markets and DPS growth & revisions. Resources sectors offer high DYs but

dividend cover looks weak and our analysts see downside risks to earnings and

dividends.

Our ‘quality yield’ screen provides a list of stocks offering a blend of above-market,

relatively secure and growing dividends. Financials are very well represented on our

screen (Table 3) – including ING, Soc Gen, Nordea, L&G, Swiss Re and Unibail.

Traditional yield sectors like Telecoms, Utilities and Tobacco are also present – including

Orange, Imperial Tobacco, Snam and ENEL. Expensive defensives i.e. other Staples and

Healthcare are notable by their absence. Several non-resources cyclicals qualify

including BAE Systems, ACS and Royal Mail among industrials, Pearson in Media,

Ericsson in tech and two UK housebuilders.

We believe online advertising is about to be

fundamentally restructured in a way that will

result in massive consolidation of both content

buyers and ad platforms. We expect the

infrastructure underpinning the ecosystem to

move from the fragmented oversupply of largely

recycled or undifferentiated sites supported by a

massive ad tech ecosystem toward consolidation

around platforms and content owners.

While the platform shift to mobile and the

application of big data to ad targeting and

measurement are in later stages, the widespread

adoption of ad blocking tools could compound their

impact, intensifying the challenges to the existing

ecosystem. Apple extended content blocking

functionality to iOS with its mid-September

release in response, in our view, to slower site

performance, higher data costs and battery usage

that have arisen from advertising technology.

We expect Apple’s user experience and privacy

initiatives and Google’s response to heavily

influence how this unfolds. Three potential

outcomes include 1) Low incremental ad blocking

adoption, ecosystem gradually shifts toward

higher quality ad formats, 2) Apple facilitates a

closed advertising ecosystem, major redistribution

of winners and losers, or most likely in our view 3)

Google becomes the mechanism of change,

leveraging its scale to re-architect the ecosystem.

This report, relevant for Internet and media

investors alike, explores the architecture as it

exists today and the strategic changes companies

need to make for the changing ecosystem.

In an environment where user experience matters,

consumption occurs seamlessly across multiple

devices, with motivated players like Apple driving

change, we think value accrues to scaled

platforms like Facebook, Google, and secondarily

Twitter and LinkedIn, that have logged-in users,

proprietary data, and engineering resources.

Volkswagen’s admission that it installed defeat devices in 11 mn engines worldwide corresponded with the loss of €25 bn of market capitalization and triggered CEO Dr. Winterkorn’s resignation. More broadly, the SXAP is down 10% over the past three days destroying a total €31 bn of market capitalization as the market is pricing uncertainty over the future of ‘clean diesel’.

We see numerous risks occupying investors’ attention and preventing an efficient assessment of the fundamental value of Volkswagen.

Regulation has pushed companies to focus on CO2 targets possibly at the expense of NOx emissions. Euro 6 requires a NOx reduction to 80 mg/km from 180 mg/km. An ICCT study revealed significant discrepancies between real-world emissions of engines and current Euro 6 requirements (“NEDC” test).

We see three risks put into the spotlight by the VW emissions episode: (1) comprehensive scrutiny of the world diesel fleet especially in regard to defeat devices and emissions performance; (2) regulatory risk in relation to tighter NOx rules and controls; and (3) risk of diesel stigmatism from consumers.

The VW episode also impacted the DAX (-3.1% this week). VW is a bellwether industrial company and as such we believe had a negative impact on the brand “Made in Germany”. Industrial manufacturing is 16% of German GDP and exports are 48%.

European OEMs are likely to continue to be marked down for their diesel exposure given the investigations, scrutiny, regulatory and political debates. We see selective opportunities within suppliers as beneficiaries from increased focus on emissions. In this regard, we highlight Buy-rated Conti and Valeo.

Dow-0.31% S&P-0.20% Nasdaq-0.08% Russell-0.26% VIX 22.13 (-1.38%)

Macro :

- Economists See China Cutting 2016 Growth Target to 6.5%-7% Range

- Draghi Says Time Needed to Judge If More Stimulus Necessary

- Brazil Real Tumbles to New Record Low as Investors Rush to Sell : BRL 4.1783 10y : 16.83%

- Citi Cuts Global Growth Forecast on Downside Risks From China

Keep an eye on :

- ABE/P SM : Abengoa Chairman Benjumea Leaves Board, Dominguez to Join

- ABI BB : Anheuser-Busch InBev to Buy L.A.’s Golden Road Brewing; No Terms

- ATC NA : Altice CEO Says Cable Buying Spree Paused After Cablevision Deal

- BLT LN :

- DB1 GY : Deutsche Boerse to Change Status to SE 2H 2016: Boersen-Zeitung

- HAV FP : Havas to Buy Digital Communications Group FullSIX

- LHA GY : EU May Challenge German Air Safety Oversight After Crash:Reuters

- MOURY BB : Moury Construct 1H EPS Climbs 15% to EU4.23; Backlog at EU124.5m

- NOVN VX : Novartis Starts Affordable Drug Program in Low-Income Countries

- SPM IM : Saipem Extends Losses After Reuters Report on Capital Plan

- VOW3 GY : VW Board to Postpone Restructuring Plan: Handelsblatt

- VOW3 GY : VW Cars Involved in Scandal Said to Be Fewer Than 10M: ITV

- VOW3 GY : Volkswagen Scandal ’Real Cost’ Cost Still ’Many Months’ Away: MS

- VOW3 GY : Lower Saxony’s Weil Sees Swift Results in VW Probe: ARD

- VOW3 GY : VW recall letters in April warned of an emissions glitch : Reuters: http://reut.rs/1YCDU50

In April of 2015, Volkswagen of America, Inc.(VOWG_p.DE) sent letters to California owners of diesel-powered Audis and Volkswagens informing them of an “emissions service action” affecting the vehicles.

Owners were told they would need to take their cars to a dealer for new software to ensure tailpipe emissions were "optimised and operating efficiently."

The company didn’t explain that it was taking the action in hopes of satisfying government regulators, who were growing increasingly sceptical about the reason for discrepancies between laboratory emissions test results and real world pollution from Volkswagen’s diesel cars.

Officials at the California Air Resources Board and the EPA agreed in December of 2014 to allow a voluntary recall of the company’s diesel cars to fix what Volkswagen insisted was a technical – and easily solved - glitch. The recall was rolled out nationally over a period of months.

On Wednesday, California Air Resources Board spokesman Dave Clegern confirmed that the letters were part of that recall. “This is one of the fixes they presented to us as a potential solution. It didn’t work,” he said.

Volkswagen, which had no obligation at the time it initiated the recall to disclose the discussions that had led to it, declined to comment on the letter.

The controversy came to public attention last week after Volkswagen acknowledged it had deliberately deceived officials about how much its diesel cars polluted.

The recall letter instructed owners of certain 2010-2014 Volkswagen vehicles with 2-liter diesel engines to contact dealers for a software update in order to fix an issue with the malfunction indicator light illuminating.

“If the [light] illuminates for any reason, your vehicle will not pass an IM emissions inspection in some regions,” the letter warned, noting that California required the update before it would renew vehicle registrations.

"The vehicle's engine management software has been improved to assure your vehicle's tailpipe emissions are optimised and operating efficiently," read the letter, which said an earlier software update increased the likelihood of the light illuminating.

It is customary for carmakers to perform updates to their cars through dealerships to fix or update software.

Volkswagen has said that 11 million of its cars around the world could be affected in the scandal that broke last week. The German company has set aside 6.5 billion euros ($7.3 billion) in its third-quarter accounts to help cover the costs of any fallout.

The U.S. Justice Department has launched a criminal probe and at least 25 proposed class actions on behalf of consumers have already been filed in seven states.