*ECB SAYS GERMAN BILL WOULD MAKE BONDS INELIGIBLE AS COLLATERAL
Glencore Has Hedge Funds in Mind in Equity Sale
Why is Glencore raising $2.5 billion in equity? One reason: it should allow the miner and commodities trader to avoid offering shares to its existing investors, usually required by pre-emption rights under U.K. rules.
Glencore, thanks to a special resolution at its annual shareholder meeting, can issue up to 10% of its equity without needing to offer shares to all investors. At the current market value of about $27 billion, that means it should be able to raise $2.5 billion, even after any offering discount, without tripping pre-emption rights.
That is why Glencore didn’t commit to a rights issue Monday. The company said it was keeping all options open for raising the money. That could mean placing the equity with a large strategic shareholder, like a sovereign wealth fund, or a select group of investors. It could also mean an offering of mandatory convertible debt.
Glencore’s management team has committed to underwriting 22% of the equity issuance. But, under some scenarios, public shareholders could find themselves forcibly diluted.
That would be an odd, and likely unpopular, move. But Glencore may be eyeing another option. It could do what is known as an “open offer” where all shareholders get the chance to buy shares but can’t sell their entitlement on, as in a right issue.
Glencore could then place any stock not taken up with hand-picked investors. This may have another advantage for Glencore’s management, who evidently feel under siege: it would mean hedge funds that have been shorting Glencore’s stock can’t buy newly-issued shares at a discount to close their positions.
New analysis into VIE/SEV waste supports upside potential - SEV to OW
The correlation between waste volumes and IP is still working. Analysis of SEV’s best practice through the cycle implies upside for VIE in terms of FCF / ROCE, and adds credibility to the scope for more cost cutting. We stay OW VIE, upgrade SEV to OW.
We provide an in-depth, through-the-cycle analysis of waste management, which constitutes half of the 2 companies' business. Contrary to concerns around recent headline datapoints, we find evidence that the
historical correlation between industrial production and waste volumes still holds (Exhibits 18-21). Our work shows VIE and SEV still stand to benefit from a rebound in economic growth, in line with our European economists'
expectation of 1.9% GDP growth 2016e in Europe. We stay OW VIE and move SEV to OW.
Valuation multiples: VIE and SEV trade on PE multiples of c15.2 and 16.5x PE17e. Based on a 2-year forward multiple, this means c11-10% further upside to the historical premium to the broader market, and an additional 20% on 3-year forward multiples. Higher growth potential, strength of franchises and scarcity value in Water and Waste justifies a premium, we think.
Spread SEV vs VIE
Amlin plc
Highly attractive offer for Amlin
Our view: The recommended cash offer for Amlin by Mitsui Sumitomo
represents strong value for shareholders, in our view, at the highest
takeout multiple seen in the sector in recent times. We see no obstacles
to the deal going through. Increase PT to 675p and upgrade to Sector
Perform.
Key points:
Yet more interest in the Lloyd's space
Amlin has become the latest of the Lloyd's insurers to become subject to
bid interest, following deals for Catlin and Brit that were both concluded
earlier this year.
Recommended cash offer of 670p
This morning, Mitsui Sumitomo and Amlin announced that they have
reached agreement on a cash offer for the entire issued share capital of
Amlin. The offer values Amlin at £3,468m and represents a 36% premium
to the closing price of Amlin on 7th September 2015.
The deal is backed by some of Amlin’s largest shareholders
Mitsui Sumitomo has received irrevocable undertakings to vote or procure
votes in favour of the deal representing 15.2% of Amlin’s issued share
capital. As a result, we do not foresee any obstacle to the deal going
through at the offer price.
We believe the deal represents strong value for shareholders
The deal based on the offer multiple is 2.4x Amlin’s 1H15 net tangible
assets, and 2.3x our 2015E net tangible assets. At this multiple, based on
our analysis of other comparable deals, the deal represents the highest
multiple that we have seen for a Lloyd’s and London market business in
recent years.
Increasing price target to 675p, and upgrading to Sector Perform
Following 1H15 results, we update our estimate to take into account yearto-
date performance. We increase our 2015E EPS by 7.6%. We upgrade
to Sector Perform as we no longer see any reason for the stock to
underperform. We base our valuation on the recommended
Equity markets trying to digest China shock
Global equity markets were hit hard following the Chinese devaluation and, despite some
bounce off the lows, the major markets are still down between 7-11% over the past
month. The sell-off has impacted investor confidence and, although many BofAML
strategy indicators are now indicating oversold conditions, we suspect any recovery will
take time and be choppy in nature. Risks remain - notably the Fed next week, where our
economists still expect a hike, and in China where our FX strategists see the CNY policy
as unsustainable, even if the authorities did reaffirm it at G20 over the weekend.
Uncertainty over the impact of weaker EM growth
Investors appear uncertain about the how big an impact the deflationary shock emanating
out of China and the rest of the Emerging Market world will have. This is not surprising
since we have never been here before. Emerging Market economies now account for 40%
of global GDP, with China alone representing 13%. Any significant slowdown in those
economies will undoubtedly hit global growth. The question for developed market
investors is how big an impact will it have on developed world growth and profits?
Our economists think the effect is likely to be modest
Extensive work by our economists suggests that even if the Chinese GDP growth halves
they would only expect euro area GDP to fall by around 0.4%. If the boost from lower
commodity prices is spent by consumers it could be less than that. Recent data out of
the euro area would seem to support the view of a limited impact, with German survey
data actually improving despite being the most exposed economy to EM weakness.
Profits could be hit more but it seems to be in the price
For an equity investor it is the effect on profits that is key. We put European sales
exposure to China at a little over 5%, Asia as a whole at around 15% and EM at 27%. If
we assume the profit share is the same and that there is a 30% hit then Pan-European
profits would be 8% lower. Given that European equity markets are 11% lower over the
last month much would seem to be in the price.
We remain positive into 2016 with 20% upside expected
Despite the near term risks we are constructive further out with the ECB firmly committed
to maintaining a euro area recovery and our economists confident on developed world
growth in 2016. European equities are attractive on sub-14x consensus earnings and a
3.9% dividend yield in 2016. Even allowing for cuts to those earnings numbers we have a
Stoxx 600 target of 425 in 12 months, implying 20% upside potential from here.
Sector strategy – domestic growth over EM exposure
We cut the China plays at the start of July and see no need to change that just yet. Yes
those sectors are vulnerable to squeezes but until the situation turns around in China we
think investors will be reluctant to buy them back. Accordingly we remain underweight
Basic Resources and Autos. We prefer a focus on domestic growth. Banks remain our
preferred overweight, but we add Telecoms and Media to Technology today.
Sanofi - Underweight PT upgrade to €87 from €85
Risks to Consensus Diabetes and EPS forecasts remain
Outside the upcoming strategy update (Nov 6, ‘15) and dupilumab Phase III data (1Q’16), we continue to see risk to Consensus Business EPS forecasts in 2016/17. This risk comes from pressure on the diabetes business which we
expect to intensify due to Novo’s Tresiba US approval and Sanofi’s LixiLan data showing an inferior profile to Novo's Xultophy. As a result we expect Sanofi to achieve a Business EPS 2015-20 CAGR of only 5% (sector 8%) and
hence we expect the shares to remain at a discount and set a Jun ‘16 PT of €87 based on 15x 2016E EPS (15% discount).
* Diabetes franchise still expected to be below expectations: For Toujeo and
Lantus we continue to believe consensus is too high. Our FY’15 forecast for
Toujeo of €83m is 37% below BBG Cons. at €131m (FY’16 JPMe €222m vs.
Cons €360m) and for Lantus we forecast €6,694m vs. Cons. at €6,736m
(FY’16 JPMe €6,228m vs. Cons €6,282m). In addition, we believe the early
stages of the Praulent launch may be slower than expected. For Praulent
we forecast FY’15 at €64m, c. €30m lower than Cons. with €95m (FY’16
JPMe €328m vs. Cons €356m). Overall this suggests to us limited potential
for upgrades to the key products in the next 6-12 months.
* Next catalysts in 2H’15/early 2016: We expect the strategy update to be a
positive, but LixiLan data and Tresiba approval could increase pressure
on Diabetes: (1) Nov 6, 2015 Strategy update: we do not expect significant
changes to the group structure; (2) LixiLan-L Phase III data in 3Q’15 – we
expect the profile to be inferior to Xultophy (Novo); (3) Potential approval of
Toujeo competitor Tresiba in the US on Oct 1. In early 2016 positive
dupilumab data could be tempered by the impact of 2016 guidance: (4)
Dupilumab Phase III data in Atopic Dermatitis – positive data expected and
seemingly largely reflected by the market with Consensus 2020 forecasts of
€1.2bn (JPMe €906m after 70% risk adjustment); (5) FY’15 results: potential
for modest Cons. cuts around 2016 guidance.
* Minor changes to forecasts; we remain 1% to 6% below Vara Cons. We
have made minor changes to our Business EPS forecasts by 1-3% for 2015-
20. Our forecasts remain 1.5% below Vara Cons in 2016 and 5% below in
2017 likely driven by greater pressure on the diabetes business, requirement
for continued SG&A investments and more limited profitability of the
Regeneron pipeline assets.
Investment grade credit rating reinforced for now; upgrade to Neutral
concerns over the sustainability of the investment grade credit rating and we
therefore upgrade our recommendation to Neutral (from UW). We now
estimate a more modest ~$3bn shortfall against BBB metrics which would be
eliminated with a ~2.5% increase in commodity prices, although any
downward move in spot prices would see pressure re-emerge. Given an
estimated EV/EBITDA multiple of 7.2x on the Industrial business trades in
line with peers, we do not see compelling value and therefore resist turning
more positive at this juncture, although we expect a reduction in short interest
near-term. We increase our Dec'16 price target to £1.50/sh (from £1.30/sh).
Lacking visibility in China but valuation getting easier to swallow
- Source of opportunity
Remy’s share price has fallen 20% in the last month amid rising concerns over
the macro outlook in China and overall health of the EM consumer. While we
too have become more bearish on the near-term outlook in China, we believe
recent share price underperformance vs. the market is overdone. We expect
strength in the US (30% of sales) to offset weakness in China (20% of sales)
and see FX tailwinds from €:$ weakness benefiting FY16 earnings. Valuation
looks increasingly attractive on a P/E and inventory value basis. Furthermore,
we continue to view Remy as a potential M&A target given its strong brands
and access to cognac inventory.
- Catalyst
Remy Cointreau will report 1H FY16 sales (March-September) on October
16, 2015, where the company will provide an update on current trading,
with focus likely to continue to be on China. Remy will announce 1H FY16
results on November 26, 2015, where we expect better visibility on the
profitability outlook for the FY. The company has guided for positive growth
in operating profit for the FY (our estimates indicate flat growth).
- Valuation
We value Remy on a 26x June 2017E P/E (based on a three-year average P/E
and EV/stock value implied multiple) and include a 30% weighting for an
M&A-based valuation, as we view Remy as an attractive acquisition target
(Remy ranks 1 in our M&A framework). Our new 12-month price target of
€69 (vs. €75 previously) reflects 4%/10% cuts to our FY16/17 EPS estimates
for latest FX movements and our more negative outlook for China in the
near term.
- Key risks
(1) Further deterioration in the Chinese cognac market; (2) adverse FX
movements (notably, the strengthening of the € and/or weakening of the
CNY); (3) value-destructive M&A; and (4) adverse regulation.
Answering investors’ key questions amid turbulent markets
Questions that investors globally are asking…
1. What’s the ‘true’ economic growth now? What’s market pricing in?
Our alternative growth indicators say around 6%. Offshore equities
pricing in 4-5% macro growth and 2% 10Y EPS CAGR ex banks.
2. Will Rmb further depreciate? Good or bad for equities? We expect the
CNY fixing to gradually weaken vs. the USD. Modest impact on EPS,
but risk premium has gone up, pressuring valuations.
3. How big are the capital outflows? Impact on markets? Official
statistics suggest Rmb150bn/80bn in 1Q/2Q, and could be high in Aug.
Correlations btw capital flows and equities have recently risen.
4. Should we expect more monetary easing? How does it change val’n?
We expect more rates cuts as China’ real/policy rates are still high.
Every 0.5% cost of equity reduction should improve valuations by 10%.
5. Reforms, interrupted? Yes, and no. Capital markets reforms may be
delayed, but progress has been made on rates/FX, and SOE blueprint
to be announced soon.
6. What fiscal stimulus measures will the government take? Another big
stimulus package is unlikely but supporting policies are in place, and
projects approval and fiscal spending have accelerated.
7. How has the market selloff impacted aggregate consumption? Mixed
discretionary spending trends, property sales have rebounded. More
nuanced wealth effects than headline numbers would suggest.
8. Where are we in the A-share deleveraging cycle? Flows vs. P/E?
Official leverage has fallen to Rmb1tn (peak: 2.3tn), 2% of total market
cap, in-line with the US. Most OTC leverage positions are cleared. We
estimate every Rmb100bn of inflows would raise P/E points by 0.3.
9. How much has the government bought in the A-share market? We
estimate the “national team” has spent Rmb1.5tn since June, based on
our top-down model.
10. Are 1H results in-line with consensus? What are the noticeable trends?
In-line 1H15 results for H-shares, major divergence between new/old
China. Investment income accounted for 26% of A-share earnings.
11. Are valuations cheap for H and A shares? We believe H-shares are
trading cheap relative to our fundamental expectations, and select
value opportunities are emerging in A shares.
12. ADRs inclusion to MSCI still on? If so, when? And what’s the impact?
The inclusion of 14 ADRs to MSCI is confirmed, and the process will
begin Nov 15. In total, these stocks may see 23 days of net buying.