TheChek News Flow

UBS on tomtom

We hosted a call with TomTom's VP of Automotive with the following key takeaways: 

1) the company is confident on market share gain vs Nokia HERE going forward and believes it has c25% share in mapping and sees the market as a duopoly. 

2) TomTom expects the take-rates of embedded navigation systems (currently 30%) to significantly increase (towards 100%) as we move to advanced driver assistance systems (ADAS) and highly automated driving (HAD). 

3) ADAS/HAD components that we believe could bring incremental value to the maps longer term. 

4) The company expects to provide a key component to these systems in the form of mapping/navigation but that it will be down to OEMs/Tier 1 suppliers to build the overall systems. The call supported our view that TomTom is well placed to benefit from the move to ADAS but is full valued.

One of the key focus areas of the call was on differentiation vs competition. While the market is a duopoly, TomTom is building what it sees as three differentiators: 1) Its new mapping platform with continuous instead of batch updates of the maps. 2) High quality maps which incorporate much more detail of the road environment for highly automated driving. 3) A modular product strategy that can enable customers to take selected pieces of the TomTom offer to work within their overall solution.

Press speculation on Saturday (Sueddeutsche Zeitung reported by Bloomberg) said that management from autos OEMs (Daimler, BMW, Audi) had met for due diligence talks with TomTom representatives. The same autos OEMs had previously been speculated as working towards a bid for Nokia's HERE maps business and we maintain our view that it would make sense for a consortium of OEMs to acquire a mapping asset.

We maintain our Neutral rating at a price target of €10.30. TomTom trades on c24x PE 2016E vs peers on 14.4x and 1.8x EV/Sales vs peers 1.5x. We believe TomTom is well positioned with current focus on Automotive/ licensing and Telematics but valuation looks full at this point

…until the Fed hikes rates on Sept 17th for the first time since 2006. Government bonds on course for 2nd worst annual performance in past 30 years, another symbol of 2015’s Twilight Zone as the era of excess liquidity comes to an end.

Volatility in credit & equity markets should be owned: credit & equity bull markets have been ZIRP-led; U-turns have followed other central banks “exit from zero”; Fed rarely hikes from zero…last time they did in 1937 a recession and a 49% plunge in the Dow Jones quickly ensued.

…on June 17th traders go long EM and US stocks, short gold, Euro & Yen. On Sept 17th traders go long commodities, and short US stocks, defensives sectors, EM bonds; as tightening progresses, investors allocate more to EAFE & EM equities, US tech & commodities, reduce exposure to Investment Grade bonds.

…but we remain tactically cautious until Greece resolved, buy SPX calls, remain structurally bullish the US dollar, bullish stocks, bearish rates & opportunistic in EM, buy developed market banks, sell corporate bonds & reduce MBS exposure.

To the upside: concerns over Greece prove misplaced, investors over-hedge Fed risks, passage of TPP boost investor & corporate confidence, tech’s creative disruption = higher PE, lower CPI. To the downside: inflation surprises to upside.

Telecom operators in the region have been on a deals blitz over the past 18 months

BRUSSELS—Europe’s antitrust chief Margrethe Vestager fired a warning shot at the region’s telecom industry, arguing that a wave of mergers between national telecom operators could harm consumers and probably won’t lead to greater investment.

Telecom operators in the region have been on a deals blitz over the past 18 months, with companies in the U.K., France, Spain and elsewhere looking to share the burden of rising costs as revenues slide.

Speaking at an event in Paris on Monday, Ms. Vestager said she didn’t buy the arguments of incumbent telecom operators that they needed to merge with rivals in the same country to increase their investment in networks.

“I’ve heard this claim quite often, but I have not seen evidence that this is the case,” Ms. Vestager said.

Instead, she said there was “ample evidence” that “excessive” consolidation may lead to higher bills for consumers, and that it “reduces the incentives in national markets to innovate.”

The comments are the clearest sign yet that Ms. Vestager may take a tougher approach toward telecom mergers than her predecessor, Joaquin Almunia, who waved through a series of deals that reduced the number of mobile operators in several EU countries from four to three, including in Germany and Ireland.

Telecom operators hit back swiftly at Ms. Vestager’s remarks. The EU’s telecom industry “should be built upon companies [that] operate at an efficient scale to deliver better broadband for consumers and that are better suited to compete globally,” said Steven Tas, Chairman of the European Telecommunications Network Operators’ Association, whose members include Germany’s Deutsche Telekom AG and Orange SA of France.

Operators argue that their deals are necessary in order to finance network upgrades and invest in new technology at a time when they’ve seen revenues sputter.

So far this year, telecom firms have announced deals worth nearly $67 billion, the highest level for that period since 2000, according to Dealogic. In the U.K., broadband operator BT Group PLC has agreed to pay $19 billion for EE, which would combine the country’s biggest fixed and wireless operators respectively, while Hutchison Whampoa Ltd. plans to merge its U.K. unit with Telefonica’s O2. In Italy, Hutchison is in talks with Amsterdam-based telecom company VimpelCom Ltd. about forming a joint venture between their mobile-phone subsidiaries in the country.

BT said on Monday that its U.K. deal wouldn’t reduce the number of fixed or mobile operators in the country, and would “benefit customers as well as support investment and innovation.”

“The combined company would invest heavily to ensure the U.K. is a leader when it comes to ultrafast broadband and [fifth generation wireless infrastructure],” a BT spokesman said.

In her speech, Ms. Vestager highlighted the beneficial effects of new competitors in the telecom market, including Free Mobile, which entered France in 2009.

“Following that entry, the overall level of telecoms investment in France grew, and remains at higher levels than at the moment of Free’s entry,” she said.

Still, Ms. Vestager’s stance appears to be at odds with recent remarks from other top officials at the European Commission, the EU’s executive arm.

Jean-Claude Juncker, the commission’s new president and Günther Oettinger, digital commissioner, have both called for relaxing restrictions on mergers in the industry as a way to encourage investment, especially amid global competition.

In a recent interview, Europe’s top digital chief Andrus Ansip said: “It’s not up to the European Commission to say how many players there have to be in this European marketplace, it’s up to the market to say how many players they will accept.”

*Global Autos & Auto Parts: May China auto sales deteriorate

BRITISH AMERICAN TOBACCO (OP, TP GBp3800): We reinstate our rating on BAT that has arguably the most consistent track record in consumer staples (constant FX EPS growth). Where the model may differ in the coming years is the use of cash flow. With net debt/EBITDA over 2.5x following recent M&A the short-term emphasis will be on debt reduction instead of buybacks. Imperial Tobacco may well receive plaudits for its new-found US exposure, but BAT also now also earns c20% of its net profit in the US (2016 estimate) - and arguably through a better business in its 42% stake in Reynolds. Associates now play a key role in BAT's valuation with Reynolds being 22% of the group's market cap, with the 30% stake in ITC representing a further 12%. Both these businesses trade at a higher 2016E P/E multiple than BAT (21x and 17x respectively) - strip these out and BAT's multiple would drop from 14.8x to 13.5x, in line with Imperial Tobacco.

IMPERIAL TOBACCO (OP, TP GBp3600): We reinstate coverage with an Outperform rating and a price target of £36. We raise our 2015/16 EPS by 15%. The $7.1bn acquisition of some US brands from Reynolds has the potential to be a game changer for Imperial since it transforms the US business. We believe the deal ticks both the strategic and financial logic boxes, with a starting return on investment target of 10%+. Elsewhere the group's core European market (65% of profits pre the U.S. deal) looks to be stabilising after 3-4 pretty torrid years.The 13.6x 2015/16E earnings is a significant 35% discount to staples versus long term average 30%.

Dow -0.60% S&P -0.46% Nasdaq -0.42% Russell -0.31% VIX 15.39 (+11.68%)

Nikkei -0.53% Hang Seng -0.59% Shanghai -2.09%

Eur$ 1.1278 JPY 123.57 GBP 1.5610 EURCHF 1.0484 RUB $54.5175 WTI $60.17 (+1.09%)

S&P -0.14% EuroStoxx-0.23% Dax-0.16% SMI-0.35%

Macro :

- Greece Won’t Present New Proposal to Eurogroup to Unlock Aid

Keep an eye on :

- AIR FP : Airbus Contract With OneWeb Worth About $1.4B, Les Echos Says

- AIR FP : JetBlue Eyes Long-Range Airbus for Growth Overseas: Reuters

- AF FP : Air France Files Claim Against Pilots Over Costs Plan: Figaro

- COTY US : Coty Said to Win Auction to Buy 3 P&G Units: NY Post --> +7.5% in after Hours

- DELB BB : Delhaize Prepares for Potential Greek Euro Exit, De Tijd Reports

- DB1 GY : Deutsche Boerse considering bid for 360T - Boersen-Zeitung http://bit.ly/1IGz4Lo

- DTE GY : German Mobile Spectrum Auction Reaches EU3.98b After 144th Round

- FDR FP : Credit Agricole, SocGen, CDC Buy FDM Stake From FDR

- GSK LN : GSK rumoured to be in line for GBP 92bn approach from Johnson & Johnson or Roche - Daily Mail

- HSBA LN : HSBC, JPM in Talks on Moving Some Business to Luxembourg: Times

- LG FP : Lafarge to Buy Out Stake in Lafarge India Pending Holcim Merger

- LHA GY : Lufthansa to Miss Score Targets, Handelsblatt Reports

- EGL PL : Mota-Engil to Sell as Much as EU95m of Bonds Due Feb. 2020

- NUM FP : French Antitrust Approves Hiridjee to Buy Outremer Amid SFR Deal

- SSE LN : SSE Urges U.K. Govt to Move to ‘National Pricing’ in Energy Mkt

- UCG IM : UniCredit’s Vita Says No Interest in Postbank: Handelsblatt

*LADBROKES RAISED TO OVERWEIGHT VS EQUALWEIGHT: MORGAN STANLEY