JPM_Europe Year Ahead 2019_watermark

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Mislav Matejka, CFA (44-20) 7134-9741

[e-mail]

Overweight

€157.00

23 November 2018

Price Target: €196.00

End date: 30 Nov 19

Neil Green, CFAAC

(44-20) 7134-4478 [e-mail] JPMA GREEN <GO>

Europe Equity Research

03 December 2018

Top pick – Unibail-Rodamco-Westfield

We recently bit the bullet to cut estimates and bring our PT down by 20%, which still implies an upside from the current share price. This exercise has shown us that the market is being too bearish for us, with our assumptions including negative European shopping centre revaluations, flat US portfolio, €1.8bn announced disposals and €4bn new disposals, besides reduction in yield on cost for committed developments and an increase in exit yields.

An increasing focus on net debt:EBITDA puts URW between a rock and hard place when trying to balance leverage and earnings. We think URW will increase disposal guidance for FY18 (as selling less doesn’t help net debt:EBITDA), and could include flagship assets in France and the US. Total disposals of €6.5bn to Dec-20 at an aggressive 6.4% yield could reduce net debt:EBITDA to 9.4x (10.7x), LTV to 33% (40%) but also EPS growth to 4.8% p.a. (8%) leaving URW trading at ~12x 2020E EPS. To bring URW net debt:EBITDA down (by 2020) to the same level as Simon Property Group is today (~6xx) would require potentially €18.8bn of disposals (by 2020 @ 6.4% yield), which would lower EPS growth to -1.9% p.a., (vs. Simon FFO growth of 4.4% p.a.), leaving URW at ~15x 2020E EPS (vs. Simon ~14x 2020E FFO).

Underweight

€12.19

23 November 2018

Price Target: €13.00

End date: 31 Aug 19

Tim Leckie, CFAAC

(44-20) 7134-4477 [e-mail] JPMA LECKIE <GO>

Least preferred – Alstria Office AG

With our initiation on Aroundtown, we downgraded Alstria from Neutral to

Underweight, given we see limited upside to our price target, and to maintain our balance of recommendations. With dilution from both the equity raise and conversion of the convertible both expected to weigh in on adjusted EPS growth, we see little reason for the shares to rerate.

Following 2H18 results, we see growth in revenue and FFO numbers, moving up in line with guidance. However, the dilution from equity issuance in 2018 still results in key financial metric FFO per share going down and NAV basically flat y/y on our FY18 forecasts.

With 1H18 results, Alstria increased its FY18 FFO guidance to €113m, which was marginally below FY17 reported FFO of €113.8m. The slight increase in this guidance is unlikely to be a catalyst for the shares to move materially higher from current levels since they trade at a premium. The results, which were slightly ahead of JPMe, mirror the impact of the equity raise and conversion of the convertible, which we estimate will continue to weigh on adjusted EPS growth.

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Mislav Matejka, CFA (44-20) 7134-9741

[e-mail]

Overweight

€4.86

23 November 2018

Price Target: €6.50

End date: 31 Dec 19

Sandeep DeshpandeAC

(44-20) 7134-5276 [e-mail] JPMA DESHPANDE <GO>

Europe Equity Research

03 December 2018

Top pick – Nokia

As 5G spending starts in 2H18, we believe it will cyclically jump start the moribund

RAN market. The RAN market has dropped ~18% from 2014 level and 20% from the 4G peak in ‘11. As 5G spending accelerates, we believe that RAN spending should return to ‘14 level. Whether it will return to the ‘11 level of spending is not that clear at this point but would clearly represent additional upside. We expect telecom companies to shift their spending from fiber related spending, which has dominated spending over the past few years, to RAN spending. Over the next few years, we will also likely see a shift between opex and capex as more automation reduces opex, enabling telcos to deploy more capital to capex.

On the back of this rejuvenation, radio network revenue at Nokia could rise as much as 18% from current levels back to ‘14 levels though we do not assume they revert to ‘11 peak. If we are correct in our sales outlook, we believe Nokia EPS could rise to €0.49 in ‘20. We believe that Nokia stock will begin to re-rate as the company delivers on margin guidance and the market begins to look forward to 2020 where consensus has networks revenue up only 1.9% from 2017 despite the start of the 5G spending cycle and network EBIT is 9.9% which is at the lower end of company guidance of 9-12%.

Neutral

CHF101.40

23 November 2018

Price Target: CHF85.00

End date: 31 Dec 19

Sandeep DeshpandeAC

(44-20) 7134-5276 [e-mail] JPMA DESHPANDE <GO>

Least preferred – VAT

If all incremental 3D NAND & OLED related spending from 2015 stopped due to substantial cuts in capex in those markets, VAT could see a sales decline of as much as 10.3% in ‘19 which is significantly above our current forecast. Though we are expecting NAND & OLED to decrease in terms of spending in ‘19, this calculated worst case in a non-recession environment does not factor any decline in DRAM or logic. Logic spending is not at risk unless the ongoing weakness results in a significant reduction of end demand for electronics products. DRAM spot prices have been declining from March-18. Based on current build plans indicated by the DRAM majors to suppliers such as ASML and Lam Research, ‘19 spending should be at a similar level to ‘18. However with the DRAM price action, it is possible that the manufacturers cut spending soon or at some point in ’19. Thus while NAND was the overhang on VAT through ‘18, DRAM is the forward looking risk.

VAT has previously indicated that they will pay 90% or more of its FCF as dividends. The stock currently trades on a 4% dividend yield. However given that VAT is paying such a high % of its FCF in dividend (they paid 122% of FCF as dividend in 2017), if FCF were to decline in the scenarios outlined above, dividend would have to be trimmed unless VAT intends to increase net debt. In our view, this would not be a wise move for an operationally geared company to add financial gearing in a downturn. Thus with end markets at risk from current end market conditions, we do not see the dividend yield protecting the stock price.

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Mislav Matejka, CFA (44-20) 7134-9741

[e-mail]

Overweight

€101.40

23 November 2018

Price Target: €145.00

End date: 31 Dec 19

Stacy PollardAC

(44-20) 7134-5420 [e-mail] JPMA POLLARD <GO>

Europe Equity Research

03 December 2018

Top pick – Dassault Systèmes

Dassault Systèmes is actively expanding its addressable market, and we expect to see accelerated revenue growth driven by: 3DEPXERIENCE product cycle, digital twin, industry diversification (deeper into verticals like Architecture Engineering Construction, High Tech, Life Sciences, Consumer Packaged Goods and Retail), cloud offerings and Marketplace, plus acquisitions. Dassault has a large addressable market of >$28 billion for software, and the company is expected to grow faster than the market via its 3DEEXPERIENCE platform and new industry verticals.

We model a 16% EPS CAGR 2018-2020e, which could be further supplemented by accretive acquisitions. Cash flow remains strong, and Dassault carries significant net cash on its balance sheet (~€1.7bn), with more than enough capacity in our view to make acquisitions, supplementing revenues and EPS.

Going into 2019, we should begin to see the ramp-up of Boeing – although mainly in the subscriptions line because they are license rentals. Other large deals announced this year that should positively impact 2019 include EDF Group and ExxonMobil. We remain Overweight and believe Dassault is one of the most forward-looking and future-relevant technology companies (especially around Digital Twin) in our European Software coverage.

Underweight

1,528p

23 November 2018

Price Target: 1,120p

End date: 31 Oct 19

Stacy PollardAC

(44-20) 7134-5420 [e-mail] JPMA POLLARD <GO>

Least preferred – Micro Focus

Micro Focus has a portfolio of infrastructure software assets, mostly mature products in gradual revenue decline. While some assets within the group are growing, the Group as a whole seems likely to see continued negative revenue growth trends through at least 2020.

Management moved quickly to lock in the sale of SUSE for $2.535bn, and we anticipate the company will return a large portion of the cash to shareholders by March 2019 minus the $300-350m paid in tax and any held to de-lever. The impact of losing SUSE from the mix is further negative drag on revenue growth, but slightly accretive for Group margins.

The company aims to increase Adjusted EBITDA margins (target is 37% in fiscal 2018 and ~40% by 2020); however, this is the largest merger in the company's history, and some of the execution risks we have highlighted in the past revealed themselves in 2018. The company historically generated consistent cash flows; however, the exceptionals associated with the merger, plus heightened DSOs and further exceptionals put FCF under pressure for this year. This also likely put pressure on the company’s M&A business model – which is the foundation for its long-term shareholder return thesis. That said, the sale of SUSE helps offset the lower FCF this year. In a European Software sector with plenty of growth and margin improvement stories, we prefer to own other more consistent names right now.

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Mislav Matejka, CFA (44-20) 7134-9741

[e-mail]

Overweight

Skr40.49

23 November 2018

Price Target: Skr47.00

End date: 31 Dec 19

Roman Arbuzov, CFAAC

(44 20) 7134-3721 [e-mail] JPMA ARBUZOV <GO>

Underweight

$24.49

23 November 2018

Price Target: $21.00

End date: 31 Dec 19

Akhil DattaniAC

(44-20) 7134-4725 [e-mail] JPMA DATTANI <GO>

Europe Equity Research

03 December 2018

Top pick – Telia

We believe consensus underestimates Telia’s significant growth potential in cashflow and dividends. We forecast a 6% 2017-21 DPS CAGR vs. 2% consensus. We have been arguing for some time that Telia’s sustainable FCF generation is underestimated and is what underpins the growing dividend outlook.

(1)Organic free cashflow: We are 8%/ 9% above consensus on OpFCF for 2019 /2020. Most of the delta is driven by somewhat higher EBITDA and lower capex; however, we also believe Telia could surprise positively with non-operational cashflow such as pensions.

(2)Dividends: We expect DPS growth of 6% CAGR to 2021 to be driven by not only growing FCF but also ongoing generous buybacks (3% of outstanding shares p.a.), which we think are not yet taken into account by consensus. Consensus assumes flat dividend for the next two years and only 2% CAGR for the next four. We expect the DPS trajectory to be upgraded over the next six months.

(3)Cost cutting will carry on: Another key debate for Telia has been whether the strong pace of cost cutting from 2018 can carry on in 2019. We believe it can and we expect to see stronger execution in Sweden, driven partly by the new operating model to be introduced in January.

(4)Fixed line business to remain resilient: One of the key bear points for Telia has been the pressure on its DSL legacy business in Sweden. Our analysis points to DSL trends not deteriorating in 2019 and Telia Sweden business staying resilient.

Least preferred – Liberty Global

Liberty Global has underperformed the Euro Telco index by ~20% (MSCI US ~40%)

YTD. Nevertheless, with the company’s growth outlook under increasing pressure, selective competitive risks escalating (particularly UK overbuild), and the balance sheet headroom limited (risking disappointment around future buyback hopes), we believe the equity outlook remains weak, justifying naming Liberty as our least preferred European Telco name for 2019.

(1)Going ex growth: In 2018, Cable operators have seen a marked deceleration in growth. This is true in Liberty’s markets with Switzerland (~17% of SotP, Q3’18 - 6.3%), Telenet (~14%, -1.5%), Virgin Media (~52%, ex. Lightning/handset Q3 growth ~0.5%), and VodafoneZiggo (18%, -0.2%) all struggling to grow. We believe this is a new growth paradigm, and thus believe an ongoing derating is inevitable.

(2)Leverage & returns: Following completion of the deal with Vodafone and the recent Austria transaction, we expect Liberty to be ~3.9x levered (2019E). Given

limited cash generation on its remaining assets, and our belief management will look to keep leverage at the lower end of the guided 4-5x leverage range, Liberty’s ability to launch a meaningful buyback, or in-market M&A, is more constrained than we believe the market currently appreciates.

(3) UK fibre over-builders: We believe this presents a material risk for Liberty’s UK cable asset Virgin Media (~50% of our SotP). With the UK business already ex growth (ex Project Lightning), and Virgin’s differentiation currently based primarily on speed, we worry the company could see growth turn negative across these legacy operations over the next 12-18 months.

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Mislav Matejka, CFA (44-20) 7134-9741

[e-mail]

Overweight

€13.86

23 November 2018

Price Target: €20.00

End date: 31 Dec 19

Vincent AyralAC

(44-20) 7134-5716 [e-mail] JPMA AYRAL <GO>

Underweight

€24.48

27 November 2018

Price Target: €21.50

End date: 31 Dec 19

Javier GarridoAC

(34-91) 516-1557 [e-mail] JPMA GARRIDO <GO>

Europe Equity Research

03 December 2018

Top pick – EDF

By far the most leveraged generator on CO2 or power prices, EDF is perceived as a commodity play by the market.

Its share price may have doubled since April 2017, yet we believe that the 70% power price increase has been only partially reflected: our latest MtM adj.EPS21e is up 241% since Apr ‘17, and 21e our recurring net income is materially above consensus.

More importantly, we believe that the prevailing view does not fully reflect the wider story: one of political support.

In 2017, Macron successfully lobbied for reform of the ETS. In 2018, he confirmed the life extensions of the vast majority of the nuclear reactors (i.e. 50% nuclear by 2035) as part of the country’s multi-annual energy plan (PPE).

Furthermore Macron also announced a coming new regulation for the existing nuclear fleet: we believe this would be a game changer which our analysis suggests could result in a €20-30 price range for EDF depending on the terms.

This may well be combined with a restructuring of the company: whilst Energy Minister De Rugy said that EDF would remain an integrated group, he also added that the government is working on scenarios involving separate subsidiaries. We believe that the nuclear business could well be separated within the group and enable a higher valuation of both nuclear and non-nuclear activities.

Least preferred – Enagas

We see Enagas as the stock facing the biggest regulatory risk in the Continent in the next 12 months. Enagas has consistently enjoyed allowed returns well above those of its peers in the electricity sector; however, we think this spread should narrow now.

First, the Spanish gas sector cannot claim any longer that it is a growth sector, with new client connections running at very low single digit growth rates and capital employed in the business shrinking throughout the last regulatory period. Premium returns to foster growth investments are no longer justified, we believe. Second, the electricity networks should see in 2019 the confirmation of a new allowed return that, based on draft proposals, should be 100-150bp below the current allowed return. With gas transport running at an RoIC which is 150bp+ above those of its electricity peers, the downside risk is very sizeable, in our view. Third, the current government is less enthusiastic about the role of gas as a transition fuel and the Secretary of State of Energy has already stated that the gas sector “needs to re-invent itself”. This suggests to us less support than with previous governments.

And last, but not least, in this regulatory review there should be a bigger role for the independent regulator, the CNMC, which has favored in the past a homogeneous approach to gas transport and electricity networks allowed returns. We believe that the regulator is likely to follow a gradual convergence path and factor in a moderate drop in 2021 revenues vs a worst case scenario. With a 2020E DPS that we see just 1.15x covered and a shrinking RAB, we would avoid Enagas into 2019.

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Mislav Matejka, CFA	Europe Equity Research
(44-20) 7134-9741	03 December 2018
[e-mail]

Investment Thesis, Valuation and Risks

Airbus SE (Overweight; Price Target: €125.00)

Investment Thesis

We have an Overweight recommendation on Airbus.

(1)We expect Airbus commercial aircraft deliveries to increase by a c7% CAGR from end 2017 to end 2021, underpinned by a large order backlog. We think further growth post 2021 is possible.

(2)Airbus is emerging from a major period of product transition (2014-17/18), which has required high R&D and led to an adverse mix (less profitable older models, more loss-making / lower margin new products).

(3)Strong EBITA growth is likely from 2018-21 inclusive, driven by higher aircraft deliveries, lower losses on the new A350, significant FX benefits, and better execution. We think further EBITA growth post 2021 is likely, driven by the maturity of the A350 programme.

(4)By 2019 AIR expects to convert c100% of net income into FCF.

Valuation

Our GR2ADE framework (analysing Growth, Risk, Returns for Aerospace & Defence companies) suggests Airbus deserves a 45% premium to the European Civil Aero long-term average valuation multiples. This means we apply a target 2020E P/E of 19x to both the AIR definition of underlying EPS and the JPM defined clean EPS, and a target 2020E EV/EBITA multiple of 13.5x to our JPM-defined Economic EBITA forecast. The average of these three methodologies gives us a Dec19 target price of €125.

Risks to Rating and Price Target

(1) Weaker global economic growth / global air traffic could lead to lower aircraft deliveries than we expect. (2) The current forward $/€ FX rates are a headwind to EBITA post 2020. (3) Execution on new programmes could be worse than we expect.

Peugeot (Overweight; Price Target: €33.00)

Investment Thesis

We rate Peugeot Overweight. We believe that PSA’s earnings will be driven by three pillars: 1) pricing power improving on the discontinuation of non-profitable models and a gradual recovery in the European car market; 2) higher European capacity utilization, which has risen from 72% in FY13, to 79% in FY14, ~90% in FY15 and over 90% in FY17; and 3) strong incremental cost savings, driven by purchasing bill reductions, lower labour costs and synergies from cooperation with OV. In addition, now that Opel has been consolidated in the PSA Group, the turn around of Opel will be key for investors. We expect Opel to close the margin gap to PSA over the coming years and generate cash.

Valuation

We use an SOTP-based approach to value PSA. However, as the company’s Chinese entity is currently going through some restructuring and despite the dividend payments from the Chinese JV, we apply no value to that operation.

We further account for PSA’s stake in Faurecia at market value, with a 20% holding discount, and take into account PSA’s minorities, net debt and pension liabilities at an ex-Faurecia level. We add Banque PSA at book value to reach our Dec-19 €33 PT.

Risks to Rating and Price Target

Downside risks come from any inability to meet working capital reduction targets, lower production than expected, continued market share loss in Europe and Brazil, as well as any further decline in the European car market. In addition, the

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