Page 1 of 14 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. António Seladas, CFA +351 21 003 7826 [email protected]Av. José Malhoa, Lote 27 1099-010 Lisboa Tel / Fax: +351 21 003 7800 / 09 TOP STORY Amazing week but… - The PSI20 went up 5.08% on the week and banks leaded the market. Despite the negative Supreme Court decision announced last Friday night, exactly one week ago, where it considered unconstitutional four budget measures valuing roughly €1.3Bn gross or between 0.8Bn and 0.9Bn net, the PSI20 reacted quite positively. However we believe that the political tensions will continue as the new measures will be strongly criticized by the social partners (page 4). OUT THIS WEEK Earnings Comment - Iberdrola Price Target / Recommendation Changes – Zon Multimedia, Sonaecom, Portucel News – BES, Telefónica, Portugal Telecom, Construction Sector, Equity Markets WEEK AHEAD Monday – Galp’s 1Q13 trading update; REN new gas regulation (expected) Thursday – Cofina’s AGM; Altri’s AGM; F.Ramada’s AGM Friday – Portugal Telecom’s AGM During the week - Brazilian mobile subscribers by the end of March (Anatel) PORTFOLIOS This week, Mib Aggressive Portfolio went up 7.41%, outperforming the PSI20 by 2.33pp. Excluding Telefónica, all stocks contributed for this outperformance (page 10). This week, Mib Liquidity Portfolio went up 6.72%, outperforming the PSI20 by 1.64pp. Excluding Telefónica and EDP Renováveis, all stocks contributed for this outperformance (page 11). IBERIA 12 April 2013 WEEKLY EQUITY RESEARCH
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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.
Amazing week but… - The PSI20 went up 5.08% on the week and banks leaded the market. Despite the negative Supreme Court decision announced last Friday night, exactly one week ago, where it considered unconstitutional four budget measures valuing roughly €1.3Bn gross or between 0.8Bn and 0.9Bn net, the PSI20 reacted quite positively. However we believe that the political tensions will continue as the new measures will be strongly criticized by the social partners (page 4).
During the week - Brazilian mobile subscribers by the end of March (Anatel)
PORTFOLIOS This week, Mib Aggressive Portfolio went up 7.41%, outperforming the PSI20 by 2.33pp. Excluding Telefónica, all stocks contributed for this outperformance (page 10).
This week, Mib Liquidity Portfolio went up 6.72%, outperforming the PSI20 by 1.64pp. Excluding Telefónica and EDP Renováveis, all stocks contributed for this outperformance (page 11).
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EQUITY RESEARCH
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CHANGES
EARNINGS
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DIVIDENDS
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EQUITY MARKETS Equity Markets
Amazing week but… António Seladas, CFA;
Equity AnalystThe PSI20 went up 5.08% on the week and banks leaded the market. Despite the negative Supreme Court decision announced last Friday night, exactly one week ago, where it considered unconstitutional four budget measures valuing roughly €1.3Bn gross or between 0.8Bn and 0.9Bn net, the PSI20 reacted quite positively. Sunday night the prime minister announced that the new measures will be spending cuts and not tax increases, this decision coupled with the idea that European authorities will prolong loans maturities, were the two main reasons for the strong performance on the week.
However we believe that the political tensions will continue as the new measures will be strongly criticized by the social partners and opposition parties and the extension of loans maturities is subject to its reliability, while a final decision should be only known by mid May. Meanwhile the prime minister did a mini government remodeling naming a new minister that in the past was legal consultant on the “Icesave” process. So we are particularly bearish regarding the ability of the Portuguese government to manage the next two months.
FINANCIALS BES Buy – High Risk (Target YE13: €1.25)
BES submitted a binding offer for Banco Gallego Vanda Mesquita
Equity AnalystLast week, Banco Espirito Santo (BES) announced that it submitted a binding offer for Banco Galeggo. According to the press, Banco Sabadell and Banesco (a Venezuelan bank) had already presented their binding offers. This bank is controlled by Nova Galicia and is currently under FROB intervention.
As previously mentioned, BES already has a presence in Spain, through 25 subsidiaries. BES’s president, (Ricardo Salgado) had already revealed its willingness to strengthen the bank's presence in Spain, taking advantage of the restructuring process of the financial sector in the country. Banco Gallego operates mainly in the area of Galicia and has a total of 183 branches. In terms of its balance sheet, we highlight the fact Banco Gallego has a relatively low loan-to-deposit ratio 113% (YE11) with €3.1bn in deposits, which may be a point of interest from the standpoint of potential buyers. However, the fact that the NPL ratio is above 8% and has an exposure to real estate loans of €815mn (23% of total loans) reduces the attractiveness of the business. This acquisition should not have a meaningful impact in terms of BES’ CT1 ratio, given the small size of Banco Gallego.
TELECOMS Telefónica Buy – Medium Risk (Target YE13: €17.20
Telefónica said to plan Colombian unit IPO and the sale of its stake in Telecom Italia
Alexandra Delgado, CFAEquity Analyst
According to Bloomberg, Telefónica is planning an IPO of a minority holding of its Colombian unit. Telefónica holds 70% of the Colombian unit capital and the Colombian government the remaining 30%, so the operation needs the latter’s approval. We estimate this unit might generate an EBITDA of c. €600 mn in 2013. Given that this unit has a high debt level, Telefónica should not raise a very significant amount of cash by selling 19% of capital (and retaining control with 51% of capital), when compared to target net debt reduction in 2013.
Early this week, Bloomberg said that Telefónica was willing to sell its stake in Telecom Italia, as the Italian telco considers a combination with 3 (4th mobile Italian operator) held by Hutchison Whampoa. Telefónica holds an indirect stake of 10.5% through a 46% stake in Telco. Telco is the holding that holds 22.4% of Telecom Italia; other shareholders besides Telefónica are Intesa Sanpaolo, Assicurazioni Generali and
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Mediobanca. Telecom Italia has confirmed it is in preliminary discussions with Hutchison Whampoa. We believe Telefónica exiting Telecom Italia makes sense since the synergies generated by the two were never significant and given the regulatory issues it creates in Brazil and Argentina. In February, Telco wrote down the investment in Telecom Italia to €1.20/ share, which is still double of the current stock price (€0.60). It should be quite difficult to get a buyer at this value, so price might be a hurdle for the success of this deal.
We remind that Telefónica sold some assets last year (Atento, Telefónica Deutschland IPO, etc) and has stated that it will continue to analyse asset sales’ possibilities this year. Telefónica’s net financial debt declined €5.0 bn in 2012 to €51.3 bn (2.36x of OIBDA) and the company intends to end 2013 with €47 bn net financial debt. Last month’s treasury shares placement raised €975 million, which is an important contribution to the company’s deleverage effort. The IPO of its Latin America unit was suspended in the meantime, so other alternatives have to be considered in order to achieve the target announced.
Fitch confirms Telefónica’s rating, but keeps negative outlook Fitch confirmed this week Telefónica’s long-term rating (BBB+), recognizing Telefónica’s good execution of its debt reduction plan: the company has reached its target to end 2012 with a net debt of 2.35x EBITDA after a €5 bn reduction of its net debt. Telefónica has announced it intends to end 2013 with €47 bn net financial debt, meaning it targets a net debt reduction of over €4 bn. Fitch highlighted that Telefónica is one of the most diversified telcos among incumbent European operators and that despite tough market conditions, the Spanish operator has been able to refinance €15 bn debt in 2012. Telefónica’s rating is one notch over rating for Spain.
Fitch has nevertheless kept the negative outlook on Telefónica’s rating, justified by the uncertainty that surrounds the evolution of the Spanish economy and the Spanish sovereign rating that can impact Telefónica’s domestic business and the telco’s ability to finance.
Portugal Telecom Buy – Medium Risk (Target YE13: €5.40)
PT Analyst meeting – PT wants to gain market share with quadruple play offer
Alexandra Delgado, CFA Equity Analyst
PT’s management held an analyst meeting last Friday. Main topics covered include: M4O (quadruple play offer) and domestic competition environment, PT’s cloud services, PT’s multiplatform payments solution and Brazilian Oi.
M4O is doing quite well. First, net impact on revenue is positive which is a good surprise (meaning subscribers captured from competition offset lower revenues generated by PT subscribers). And second, M40 subscriber acquisition cost is lower than PT expected, because online and inbound subscriptions have been quite strong (door-to-door is a more expensive channel).
PT explained that the M4O targets c. 1 million homes (households that spend more than €100/ month in telecom). The company might consider having alternative offerings in the future to cater for the rest of the households.
What differentiates PT’s quadruple play offer from other European incumbents’ is that PT is not targeting retention, rather acquisition. The company wants to gain market.
PT is pondering alternatives regarding the development of its fibre network: (1) the possibility of covering an additional 1 mn homes with fibre (currently has 1.6 million) in order to match cable network coverage for an investment that should be c. €150 million (2) it is evaluating the option to have a fibre wholesale offer.
PT’s CEO says that Zon/ Optimus merger will bring more competition on the mobile side, since the new company has share to gain on this segment. Zon Optimus will eventually replicate PT’s quadruple play offer; if the market heads towards quadruple play then both PT and Zon Optimus will be better positioned to gain market share. Zon Optimus will also be stronger in the business segment and the fact that the new company can be more aggressive on price is a concern.
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In terms of cloud services, PT wants to scale their B2B & B2C (16 Gb cloud storage & sync; still on invite-only mode) solutions into strategic markets, namely Brazil. Inauguration of Covilhã data centre is expected in 1H.
PT will launch a live pilot of its multiplatform payment solution in April. It will allow payment through PC, TV and mobile. PT’s wallet service will be available for everyone, not only for PT clients.
Regarding Oi, PT’s CEO thinks Oi can do a lot better on mobile 3G and data; he also admitted that service continues to be a challenge. In terms of Pay TV, DTH is a priority. Capex won’t come down next year because growth opportunities are huge; but, the company will maintain cost discipline. Finally, Zeinal Bava confirmed he is not going to be the new Oi CEO; speculation on this topic had emerged since Oi’s former CEO was fired last January.
In conclusion, PT has a strong competitive position in the domestic market. It continues to innovate, stretching into ICT and cloud services in order to move away from connectivity. And remains fully committed to Oi’s turnaround. We remain comfortable with the company’s strategy and with our figures.
Zon Multimedia Sonaecom
Buy – Medium Risk (Target YE13: €4.30)
Buy – High Risk (Target YE13: €2.20)
Zon & Sonaecom – Stronger united Alexandra Delgado, CFA
Equity Analyst
The main goal of this report is to provide insight into what future Zon Optimus will be. We value Zon Optimus at €4.30 per share (YE13) and our valuation includes €375 mn in merger synergies (NPV). This figure derives from our previous synergies’ calculation adjusted by new WACC and lower integration costs; it corresponds to the midpoint of the interval provided by both companies.
Our valuation entails: revenue CAGR 12-16E of 0.6%, EBITDA (inc. synergies) CAGR 12-16E of 3.1% and FCF CAGR 12-16E of 6.6%. Our Price Target implies a 6.1x post-merger EV/ EBITDA 2013E (adjusting for run rate opex synergies).
With run rate savings reaching c. €48 mn from FY16, we calculate Zon Optimus free cash flow may reach c. €235 mn in FY16, which compares to pro-forma €180 mn in FY12.
We’re assuming merger will occur, so our price target for Zon Multimédia is now €4.30 per share (YE13). Given the 35% upside on the stock we rate it as Buy (Medium Risk). At current Zon Multimédia share price, the company trades at a 4.8x post-merger EV/EBITDA 2013E multiple (adjusting for run rate opex synergies).
We now value Sonaecom at €2.20 per share (YE13). Given the 32% upside on the stock we rate it as Buy (High Risk). We changed our valuation of Sonaecom from a stand-alone DCF to a SoP based on the value of Zon Optimus. We consider Sonaecom will hold a stake of 32.2% in Zon Optimus, after receiving €113 mn from Isabel dos Santos. Despite the upside, we highlight that the uncertainties that surround Sonaecom future after the merger should limit the stock’s upside in the short term.
The merger between Zon Multimédia and Optimus makes sense and is a positive move for both companies. First, because it allows the creation of significant cost synergies in the saturated and pressured domestic market. And second, because it brings an improved competitive position for both players by creating an integrated telecom player. This will allow the launch of quadruple play services and a more effective approach to the business segment.
We believe neither the CMVM takeover exemption nor the Competition Authority clearance pose significant risk for the successful completion of the merger. However, the longer the Competition Authority takes to issue a decision, the more it hurts Zon Optimus ambitious (remember PT and now Vodafone launched 4-Play offers). We believe the Competition Authority will probably demand an in-depth investigation, given the size and visibility of the deal, and in that case, the approval could be issued by early September (results from applying Competition Authority decision timeline on
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Sonaecom’ bid for PT in 2006 to Zon/ Optimus merger).
(For further details, please refer to our company update out this week)
1Q13 Operational data - Energy production still falling, demand almost flat Vanda Mesquita,
Equity Analyst
IBE disclosed its 1Q13 operational data yesterday. These quarterly figures showed the same trend as the one seen in the previous quarters, with energy produced still falling (-5.6% YoY at the group level) and demand staying almost flat (-0.4% YoY at the group level). Following the sales of wind parks in non-core countries, renewable energy installed capacity stood almost flat YoY (+0.25% YoY at the group level). Given the disclosed figures, we do not anticipate significant changes in IBE's valuation. IBE will disclose its 1Q13 results on April, 24th before market opens.
This quarter, energy produced dropped by 5.6% YoY, mainly due to a 15.4% decrease in the UK production and a 14.1% fall in the Latin America production. In Spain energy production rose by 5.3% YoY on the back of a higher hydro production (+87.7% YoY) and wind production (+52.5% YoY). Because of a higher availability of hydro and wind resources, other technologies were less used (combined cycle technologies production fell by 63.4% YoY and coal production dropped by 78% YoY). This generation mix should lead to lower generation costs. Still in Spain, 1Q13 Spanish wholesale power price stood at €45.77, 22.6% YoY. We remind that new generation levies will be applied from this quarter onwards. We expect that lower generation costs and lower prices in the pool (that should allow arbitrage opportunities) will help to offset the negative impact of the new levies.
Production in the US went down by 6.6% YoY and in the rest of the world decreased by 15.5% YoY.
Volumes of energy distributed by the group stood almost flat (-0.4% YoY). Growth of volumes of energy distributed in some countries (+1.9% YoY in the UK, +4.9% YoY in the US and +5.4% YoY in Latin America) was offset by the decrease of volumes of energy distributed in Spain (-5.7% YoY).
Installed capacity stood dropped by 296MW due to lower coal installed capacity. Following the sale of wind parks in Germany, Poland and France, renewable capacity stood almost flat.
(For further details, please refer to our snapshot out today)
CONSTRUCTION
Construction Sector
Portuguese Construction April – The negative trend intensifies… António Seladas, CFA
Equity Analyst The INE (The Portuguese Statistic Institute) released on the 10 of April, the Production in the
Construction index regarding the month of February. The absolute level (3M moving average) was below 50 for the first time on our data base (since Jan2005), 48.7 and the YoY change recorded the worst fall, 20.5%. Concerning the Confidence Indicator is still moving upwards;
The current environment, measured by the Production, after showing timid signs of stabilization at low levels (YoY average change of minus 18.4% between July and December 2012) began a new negative trend, January data was -19.6% and February was minus 20.5% and taking in consideration the political instability in Portugal, March should show the same negative trend. The Confidence Indicator continues to show better prospects than the current environment, even that
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probably not for long;
Our estimates, regarding Mota Engil Construction revenues in Portugal are -12% and -5%; 2013 and 2014 respectively. For the time being we feel comfortable with our estimates, however the risk of being optimistic regarding 2013 is increasing. The company will release 1Q13 earnings on 20 of May.
Source: INE
Source: European Commission
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SECTOR PERFORMANCE
This week, the PSI20 went up 5.1%. The best performing sector was Financials with a 9.7%
growth and the worst was Media with a 3.7% fall.
On a Ytd basis, the PSI20 went up 4.7%. The best performing sector was Industrials & Other with a 18.2% growth and the worst was Media with a 11.7% fall.
AGGRESSIVE PORTFOLIO This week, Mib Aggressive Portfolio went up 7.41%, outperforming the PSI20 by 2.33pp.
Excluding Telefónica, 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 up 6.72%, outperforming the PSI20 by 1.64pp. Excluding
Telefónica and EDP Renováveis, 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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8 3 4 13 8Portfolio weekly return
PerformanceContribution Deviation
BES High 0.81 1.25 55% 9.5% 1.90pp 0.89ppTelefónica Medium 10.75 17.20 60% 3.6% 0.72pp -0.29ppNovabase High 2.76 4.10 49% 6.1% 1.22pp 0.20pp
BPI High 1.04 1.45 39% 12.6% 2.51pp 1.49ppSonae Industria High 0.54 0.77 43% 5.3% 1.06pp 0.04ppPortfolio 7.41%PSI 20 5.08%Gain/loss 2.33pp Explained by the portfolio 2.33pp Explained by being underweight in the remaining PSI20 stocks 0.00pp
Source: Bloomberg; Millennium investment banking"Mib Aggressive Portfolio" is composed by the five stocks with a higher upside po tentia l of our coverage un iverse."Mib Aggressive Portfolio" is equal-weighted and its composition changes at the end of the last trading day of each week.The portfo lio YTD return was recalculated on the week o f March 15.
Upside Potential
Weekly Return
Company Risk Rating
Market Price (€)
Price Target (€)
Mib AGGRESSIVE PORTFOLIO
95.0
100.0
105.0
110.0
115.0
120.0
125.0
31/Dec 17/Jan 03/Feb 20/Feb 09/Mar 26/Mar 12/Apr
Ytd Return
Portfolio PSI20
50.0
100.0
150.0
200.0
250.0
300.0
23/Jul 04/Jan 18/Jun 29/Nov 13/May 25/Oct 07/Apr
Return since inception (30th July 2004)
Portfolio PSI20
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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 (%)
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.
