IBERIA
EQUITY RESEARCH 28 March 2013
TOP STORIES Banking Sector - Cyprus has reached an agreement with troika to get a bailout. This agreement proves that all deposits in the EU below €100.000 are still safeguarded, which is a security for all EU depositors. However, this agreement opens a precedent, since it contemplates the conversion of deposits and senior debt into capital, which is a mechanism that until now had never been used. Despite being difficult to quantify, this measure is clearly negative for the sector, since this possibility will lead to a higher cost of funding, i.e. price for retail deposits should rise (page 3).
OUT THIS WEEK Snapshots/Company Reports – Sonae, Retail Sector Price Target / Recommendation Changes – Altri, Sonae Capital, Mota-Engil Other News – Banking Sector, Telefónica, EDP, Galp Energia WEEK AHEAD
Monday - Car sales in Portugal and Spain (March)
Tuesday – Ibersol’s 4Q12 Earnings
PORTFOLIOS
This week, Mib Aggressive Portfolio went down 4.09%, outperforming the PSI20 by 0.40pp. Excluding
Telefónica and Galp Energia, all stocks contributed for this outperformance (page 8).
This week, Mib Liquidity Portfolio went down 4.09%, outperforming the PSI20 by 0.40pp. Excluding
Telefónica and Galp Energia, all the stocks contributed for this outperformance (page 9).
WEEKLY
António Seladas, CFA
+351 21 003 7826
Av. José Malhoa, Lote 27
1099-010 Lisboa
Tel / Fax: +351 21 003 7800 / 09
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All prices are those of the end of the trading session unless otherwise indicated. For important Disclosure and Disclaimer go to the second last page.
Millennium investment banking Weekly 28 March 2013
CHANGES
EARNINGS
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Millennium investment banking Weekly 28 March 2013
DIVIDENDS
FINANCIALS Banking Sector Vanda Mesquita; Cyprus‘ bailout will lead to a higher cost of funding Equity Analyst Cyprus has reached an agreement with troika to get a bailout. According to the press, this agreement includes the closure of Cyprus’ second biggest bank (Laiki Bank). In addition, depositors with more than €100.000 in their bank accounts are expected to face losses of 30%. Deposits below €100.000 continue to be safeguarded. Cyprus should implement measures against money laundering and should also increase capital gains taxes and corporate taxes. Laiki Bank’s assets will be divided into a bad bank and into a good bank. While the former (bad bank) will receive Laiki Bank’s toxic assets, the latter (good bank) will receive the good quality assets that will be transferred to Bank of Cyprus. In turn, this bank will
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Millennium investment banking Weekly 28 March 2013
be recapitalized through the conversion of deposits above €100.000 into capital. Still regarding this topic, the Euro group leader said that this model could be applied to other banks in other countries. This agreement proves that all deposits in the EU below €100.000 are still safeguarded, which is a security for all EU depositors. However, this agreement opens a precedent, since it contemplates the conversion of deposits and senior debt into capital, which is a mechanism that until now had never been used. Despite being difficult to quantify, this measure is clearly negative for the sector, since this possibility will lead to a higher cost of funding, i.e. price for retail deposits should rise.
TELECOMS Telefónica Buy – Medium Risk (Target YE13: €17.20 Alexandra Delgado, CFA Telefónica sells treasury shares for €975 million Equity Analyst Telefónica announced Tuesday it sold all its treasury stock (90.1 million shares, 1.979% of share capital) for €975 million. Shares were sold at €10.80/ share, i.e. at a 4% discount vs. Monday’s closing price. According to Bloomberg , the offer was made at a range between €10.80 and €11.00, so the operation was closed in the lower limit of the interval. Telefónica said in the release that “The aim of this decision is to respond to the interest shown in the market in recent weeks, as a result of the good performance of operations in the second half of 2012”; stock has risen 15% since February 27th. The proceeds will be used to reduce the company’s debt. We remind that Telefónica’s net financial debt declined €5.0 bn in 2012 to €51.3 bn (2.36x of OIBDA) and that the company intends to end 2013 with €47 bn net financial debt. This week’s treasury shares placement is an important contribution to the company’s deleverage effort.
UTILITIES EDP Buy – Low Risk (Target YE13: €2.85) Vanda Mesquita, Standard & Poor's reviewed EDP’s outlook from negative to stable Equity Analyst Standard & Poor's reviewed EDP’s outlook from negative to stable. This review follows the review of the Portuguese Republic’s outlook by S&P (some weeks ago) that was also revised from negative to stable. Following this, EDP’s rating (BB+) continues to stand above the rating that was assigned to the Portuguese Republic by S&P (BB). We consider that this outlook revision is positive for the company, meaning that a rating downgrade is not expected in the short-term.
CONGLOMERATE Sonae Buy – Medium Risk (Target YE13: €1.00) João Flores; Sierra increases stake in CascaiShopping – Potentially positive Equity Analyst . Sonae Sierra, through a majority-owned subsidiary, has reached an agreement with a fund managed by Rockspring Property Investment Managers, for the acquisition of its 50% stake in CascaiShopping, located in Cascais, Portugal. . Currently CascaiShopping is owned 50% by Sierra Fund and 50% by a Fund managed by Rockspring Property Investment Managers. . Recall Sonae has a 50% stake in Sonae Sierra, which has 50.1% stake in Sierra Fund (50% CascaiShopping), thus Sonae will increase stake in CascaiShopping to 25% from 12.5% (and Sierra to 50% from 25%).
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. The Centre (inaugurated in 1991 and one of the main shopping centres in the Greater Lisbon), has a GLA of c73.000 sqm with more than 200 shops, seven cinemas, 36 restaurants and around 4.000 parking spaces. In 2012 the centre welcomed more than 10 million visitors and has an occupancy rate of almost 100%. . Recall the completion of the transaction still depends on the conclusion of some legal proceedings, namely confirmation of non-opposition by the Portuguese Competition Authority. . Overall, we consider deal potentially positive to Sonae. The amount was not disclosed but we believe Rockspring sold stake at discount (probably wanted to reduce exposition to Portugal) while at same time deal shows Sierra can raise cash although increasing exposition to Portugal (which is not the right strategy). . Recall Cushman & Wakefield latest 100% Cascais Shopping valuation (Sonae Sierra 1H10 Report) was €314mn (yield 6.45%; yield min 6.2% - yield average 6.8%). Based on 2012 numbers (yield min 6.9%; yield average 7.6%) which suggest CascaisShopping 2012 valuation was based on a yield 7.25%. Using this yield and a 20% discount to tenant’s rents we could reach 100% CascaiShopping valuation c€220mn. . Since we believe the deal was at discount, 50% stake in CascaiShopping probably reached €90mn- €110mn. (For further details, please refer to our snapshot out this week)
RETAIL Retail Sector Retail Sales Feb13 - Numbers deteriorated in February, Food recovered in João Flores, Portugal / Poland Equity Analyst . Overall, retail numbers deteriorated in February (increased pace of decline) while Food retail sales recovered in Portugal and Poland. Numbers are potentially positive to Jerónimo Martins (Rating: Neutral; Target YE13: €16.50, Medium Risk) while neutral/negative to Sonae (Rating Buy; Target YE13: €1.00; Medium Risk) valuations. . Portuguese retail sales (disclosed on Mar 28th) increased pace of decline in February to minus 5.1% YoY from minus 4.2% YoY in January. On a monthly basis, sales were up 1.3% (+3.6% MoM in January). Food Retail sales slightly declined 0.1% YoY in February from minus 1.3% YoY in January. Non-food Retail sales fell 9.8% YoY in February (-7.1% YoY in January), not benefiting from car sales recover in February (+9% YoY, following 1% YoY in January). We highlight March car sales in Iberia will be disclosed next Monday (Apr 01st), after market close. . Spanish retail sales (disclosed on Mar 27th) increased pace of decline in February to 10.6% YoY, following a 8.8% YoY decline in January. Retail sales in Spain have now contracted for 32 months straight in annual terms as the nation continues to suffer from a deep recession and high unemployment. Sales of non-food products declined annually by 12.4% in February, while household goods fell by 12.7% on an annual basis and sales of personal goods were down by 8.0% in the period. Recall Spanish new car market kept unchanged pace of decline at 10% YoY in February, benefiting from PIVE Plan 2 (Incentive Program Efficient Vehicle) which started in the second fortnight of February. . Polish retail-sales (disclosed on Mar 22nd) declined in February while Food recovered to positive territory. Overall, Retail sales decline shows economy is still contracting and consumers prefer to
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save rather than spend amid uncertainty and raising unemployment (the highest since March 2007). There was a 1.8% YoY increase in Food retail sales (from -0.4% in January). Recall we estimate Biedronka`s LfL sales will reach 7% in 2013. Retail sales declined 0.8% on an annual basis in February (+0.7% consensus), lower than the 3.1% increase seen in January. On a monthly basis, retail sales declined 2.6% during the month (-1.3% consensus), following a 20.6% decline in January. Recall Car sales in Poland showed lackluster numbers in February which suggested Polish retail numbers cooled down in February. New car sales in Poland slightly declined -1% YoY in February to 26.881 registrations, following a 10% YoY increase in January 2013 (+4.6% YTD in February). We highlight Unemployment rate rose to 14.4% in February from 14.2% in January (14.5% estimated), hitting six-years high. . Retail sales in Colombia (disclosed on Mar 22nd) rose 1.3% percent in January (below estimated 2.9%), following a 3.6% increase in December. Recall Colombia’s central bank cut on Mar 22nd its benchmark intervention rate (to 3.25% from 3.75%) for the seventh time since last July, citing weak growth, below-target inflation and the slow transmission of previous stimulus. Colombia’s economy expanded by 4.0% last year, down from 2011′s revised 6.6%, with the slowdown hitting hard in the second half of the year due to a sharp drop in investments. (For further details, please refer to our snapshot out today)
INDUSTRIALS Altri Reduce – High Risk (Target YE13: €1.75 João Mateus, Update Valuation – A Premium stock! Equity Analyst . We updated Altri, changing the price target from €1.65YE13 to €1.75YE13, keeping the sell recommendation, high risk. Our valuation assumes that Cogeneration benefits will be removed completely once the current benefits expired, however if we assume that 1/3 of the current benefits will stay forever, as we need to reindustrialize the country, which we think reasonable the valuation increases by roughly €20cents; . We changed slightly the model increasing the focus in Gross Margin, Utilized Capacity and Pulp Prices. We assumed that both prices, inputs (mainly wood) and output (pulp) will evolve smoothly, stabilizing Gross Margin between 61% and 62%, below the average of the last 6years, 65% and Utilized Capacity should stay on average at 94%. The removal of the cogeneration benefits will reduce Gross margin by roughly 200bp and Ebitda Margin by roughly 400bp; . The management did an extraordinary job for the last seven years multiplying by 8x the installed capacity from 115 000Tons to 910 000Tons by the end of 2012 and more 125 000Tons should be added in the next 3 years. The current formal target is to reduce debt so according to our estimates by 2015, net Debt to Ebitda should be below 3x (5x by the end of 2012) and dividend should keep growing from €5.1Mn this year to €10Mn in 2014 and 2015. However new projects should start to be internally discussed, the obvious option is to increase the current capacity installed provided that wood is available; . All in all a premium company, very well managed, in a balanced environment between the Chinese demand and the Brazilian supply. (For further details, please refer to our snapshot out this week)
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OIL & GAS Galp Energia Buy – High Risk (Target YE13: €16.85) Vanda Mesquita, Galp announced a further bond issue Equity Analyst Galp announced that it completed the issue of notes amounting to €600mn. This is a bond with a four year maturity (bonds will be issued on May 20, 2013) with a 50% reimbursement in the third anniversary date and with a spread of 3.5% over 6-month euribor. In its press release, Galp said that this bond issue is part of the company’s strategy to enlarge its average debt maturity. Galp has been announcing other bond issues over the recent months. The bond issue recently announced has the lowest spread, which can demonstrate an improvement of financing conditions. If we were to compare the cost of this bond issue with the YE12 average cost of debt (4.5%), the cost of this bond issue stands below.
SECTOR PERFORMANCE
. This week, the PSI20 went down 4.5%. The best performing sector was Oil & Gas with a 0.4% growth and the worst was Financials with a 10.8% fall. . On a Ytd basis, the PSI20 went up 3.0%. The best performing sector was Industrials & Other with a 20% growth and the worst was Media with a 7.0% fall.
AGGRESSIVE PORTFOLIO . This week, Mib Aggressive Portfolio went down 4.09%, outperforming the PSI20 by 0.40pp. Excluding Telefónica and Galp Energia, all stocks contributed for this outperformance. . We highlight that the portfolio is composed by the five stocks with the highest upside potential of our coverage universe. It is equal weighted and rebalanced on a weekly basis.
LIQUIDITY PORTFOLIO . This week, Mib Liquidity Portfolio went down 4.09%, outperforming the PSI20 by 0.40pp. Excluding Telefónica and Galp Energia, all the stocks contributed for this outperformance. . We highlight that the portfolio is composed by the five stocks with the highest upside potential of our coverage universe, excluding the less liquid stocks. It is equal weighted and rebalanced on a weekly basis.
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DISCLOSURES . This report has been prepared on behalf of Millennium investment banking (Mib), a registered trademark of Banco Comercial Português, S.A. (Millennium bcp). . Millennium bcp is regulated by Comissão de Mercado de Valores Mobiliários. . Recommendations: Buy means more than 10% absolute return; Neutral means between 0% and +10% absolute return; Reduce means between -10% and 0% absolute return; Sell means less than -10% absolute return. . Unless otherwise specified, the time frame for price targets included in this report is current year-end or next year-end. . Risk is defined by the analyst’s view in a qualitative way (High, Medium, Low). . Usually we update our models and price targets in between 3 and 9 months. . Millennium bcp prohibits its analysts and members of their households to own any shares of the companies covered by them. . BCP group may have business relationships with the companies mentioned in this report. . Millennium bcp, expects to receive or intends to seek compensations for investment banking services from the companies mentioned in this report. . The views expressed above, accurately reflect personal views of the authors. They have not and will not receive any compensation for providing a specific recommendation or view in this report. There were not any agreements between the companies covered and the analysts regarding the recommendation. . Analysts are paid in part based on the profitability of BCP group, which includes investment banking revenues. . BCP group has more than 2% of EDP. . BCP group has more than 2% of Sonaecom. . BCP group was chosen to evaluate EDP regarding the 8th stage of the privatization process. . BCP group was chosen to evaluate REN regarding the 2nd stage of the privatization process. . A member of the Executive Board of Directors of Millennium bcp is member of the General and Supervisory Board of EDP - Energias de Portugal, SA. . Banco Millennium bcp Investimento, S.A. (merged into Millennium bcp) was chosen as a joint global coordinator of the Initial Public Offering of EDP Renováveis. . Banco Millennium bcp Investimento, S.A. (merged into Millennium bcp) was part of the consortium, as a Co-Leader, of BES rights issue, done in April 2009. . Millennium bcp was part of the consortium, as Co-Manager, of BES rights issue completed in May 2012. . Millenniumbcp through its investment banking department is providing investment banking services to Tagus Holdings S.a.r.l. (“Offeror” in the launch of a tender offer over Brisa - Autoestradas de Portugal, S.A. shares). . Recommendations on Millennium bcp covered companies (%) Recommendation Mar-13 Dec-12 Sep-12 Jun-12 Mar-12 Dec-11 Jun-11 Dec-10 Dec-09 Dec-08 Dec-07 Dec-06 Dec-05 Dec-04 Buy 76% 77% 65% 78% 72% 68% 76% 79% 63% 54% 41% 37% 30% 63% Neutral 10% 12% 19% 4% 7% 11% 14% 7% 15% 4% 27% 11% 40% 6% Reduce 14% 4% 4% 0% 3% 0% 0% 0% 7% 0% 0% 21% 5% 6% Sell 0% 4% 8% 7% 3% 7% 0% 4% 4% 0% 14% 16% 5% 0% Unrated/Under Revision 0% 4% 4% 11% 14% 14% 10% 11% 11% 42% 18% 16% 20% 25% Performance 3.0% 8.7% 10.7% -15% 1% -25% -3% -10% 33% -51% 16% 30% 13% na PSI 20 5,822 5,655 5,203 4,698 5,557 5,494 7,324 7,588 8,464 6,341 13,019 11,198 8,619 7,600 DISCLAIMER This information is not an offer to sell or a solicitation to enter into any particular deal or contract. It consists of data compiled by or of opinions or estimates from Banco Comercial Português, S.A. and no representation or warranty is made as to its accuracy or completeness. This information is merely an auxiliary means of analysis to be used by its recipients, who will be solely responsible for its use, including for any losses or damages that may, directly or indirectly, derive from it. Its reproduction is not allowed without permission from the BCP group. The data herein disclosed are merely indicative and reflect the market conditions prevailing on the date they have been collected. Thus, its accuracy and timing must absolutely be confirmed before its usage. Any alteration in the market conditions shall imply the introduction of changes in this report. This information / these opinions may be altered without prior notice and may differ or be contrary to opinions expressed by other business areas of BCP group as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results.
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OFFICE LOCATIONS
Millennium investment banking Av. José Malhoa, Lote 27 - 5 1099-010 Lisboa Portugal Telephone +351 21 003 7811 Fax +351 21 003 7819 / 39
Equity Team Luis Feria - Head of Equities
Equity Research +351 21 003 7820 António Seladas, CFA - Head (Industrials and Small Caps) Alexandra Delgado, CFA (Telecoms and IT) João Flores (Media and Retail) Vanda Mesquita (Banks, Utilities and Oil&Gas) Ramiro Loureiro (Market Analysis) Sónia Martins (Market Analysis) Sónia Primo (Publishing)
Prime Brokerage +351 21 003 7855 Vitor Almeida
Equity Sales/Trading +351 21 003 7850 Paulo Cruz - Head Gonçalo Lima Jorge Caldeira Nuno Sousa Paulo Santos Pedro Ferreira Cruz Pedro Gonçalves Pedro Lalanda Rodrigo Roque Pinho
Equity Derivatives +351 21 003 7890 Jorge Pina - Head Ana Lagarelhos Diogo Justino Marco Barata Maria Cardoso Baptista, CFA