JPM_Europe Year Ahead 2019_watermark

vk.com/id446425943

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

CEEMEA Strategy: Investment Rationale

Table 2: CEEMEA Strategy Top 10

Company		Why is this in the CEEMEA Strategy Top 10 list?	Risks to our Strategy
1.	Standard Bank	Best-in-class bank in terms of ex-SA growth. Undervalued v peers; Sector	Weak ZAR and SA macro risks as with any SA domestic. Frontier
	SBK SJ	undervalued v market.	exposure to oil-exporting countries.
2.	Anglo American	Strong global growth should keep commodity prices relatively firm. Capital	SA risks and commodity price risks are ever-present. Will China
	AGL SJ	returns coming soon. China stimulus hopes.	stimulus be more consumer-focused this time?
3.	Sappi	Multi-year low PE with company adding capacity in ’19 and higher graphic	Capacity growth in the sector. Global growth/demand.
	SAP SJ	paper prices. Strong 2QFY19 numbers were a rare beat in the Top40.
4.	Foschini	Good exposure to the potential pickup in the consumer.	Will consumers accelerate quickly enough to drive growth and
	TFG SJ		justify multiples? Growth risks in Australia and UK consumers.
5.	Sberbank	10%+ consensus fwd dividend yield for one of the world’s best consumer	Oil price, weak RUB, macro risks, further sanctions.
	SBER RX	bank franchises.
6.	Novatek	Track record of delivering Artic LNG on time/on budget. Progress on Arctic	Oil & gas prices. Sanctions risks. Energy taxes can always change.
	NVTK LI	LNG-2 would be key positive catalyst.
7.	Norilsk Nickel	Good product mix (i.e. palladium). High dividend yield. Weak RUB helps.	Sanctions risks and commodity price risks.
	MNOD LI
8.	Garanti	Most liquid, high-beta exposure to Turkey with a solid domestic franchise.	Turkey macro risks, especially around NPLs.
	GARAN TI
9.	OTP	Best-in-class pre-provision profit growth, with further upside from the	Hungarian and SE Europe macro and political risks. Close to the top
	OTP HB	deployment of excess capital in to subscale business.	of the economic / bottom of the NPL cycle.
10. FAB		Good macro exposure to rising Fed rates and high oil prices. Sector	Geopolitical risks in the region are high. UAE looks better with $85
	FAB UH	consolidation should help medium term.	Brent than $65.

Source: J.P. Morgan

Table 3: CEEMEA Country Views

	Country	JPM View	Bull case	Bear Case
	Russia	OW	Best dividend yield and lowest PE of any major EM.	Sanctions risks remain. Biggest OW in GEM portfolios. Recent
				drop in oil threatens earnings.
	MENA: Qatar &	N	Good dividend yield. Index inclusion for Kuwait and Saudi could spill	Big gains have been index-flow driven, not fundamental.
	UAE		over.	Geopolitical risks high. Recent drop in oil threatens macro.
	Saudi Arabia	-	Low foreign ownership in the run-up to MSCI & FTSE EM status.	Geopolitical risks likely to stay very high. Recent drop in oil
			Higher rates should boost bank NIMs	threatens nascent recovery and government spending.
	Central Europe	N

Poland
Czech Republic
Hungary
Greece	N
Turkey	N
South Africa	UW

Still strong growth across CE3 helps. Low risks relative to other, weaker EMs.

New Democracy wins ’19 elections. New bad bank could be a longterm benefit.

Rate hike has helped stabilise FX. Market down already >40% in USD YTD.

Relative to EM, SA is back to pre-Elective Conference levels. Valuations near five-year lows

Rising wage growth may hit earnings via costs. Polish bank NIMs would love a rate hike. Sunday trading dragging consumer stocks.

Hard to see growth path for banks, other big caps. Higher Italian spreads spill over into GGBs.

Growth slowing sharply. Bank capital and asset quality look weak. Government consumption tax cut raises policy issues. Recession and land reform debate make it hard to be bullish. Recent results have been painfully more miss than hit.

Source: J.P. Morgan

81

vk.com/id446425943

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

82

vk.com/id446425943

vk.com/id446425943

vk.com/id446425943

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

[e-mail]

Overweight

€93.41

23 November 2018

Price Target: €125.00

End date: 31 Dec 19

David H Perry, CFAAC

(44-20) 7742-5606 [e-mail] JPMA PERRY <GO>

Europe Equity Research

03 December 2018

Top pick – Airbus SE

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 (2014-18), 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.

Neutral

€8.40

23 November 2018

Price Target: €10.50

End date: 31 Dec 19

David H Perry, CFAAC

(44-20) 7742-5606 [e-mail] JPMA PERRY <GO>

Least preferred – Leonardo

We rate Leonardo as Neutral.

Positives:

(1)From 2018-22, LDO targets a sales CAGR of 5-6% and EBITA CAGR of 8-10%.

(2)c.70% of sales from defence. We estimate about half of these defence sales comes from markets where defence spending is rising (US, Asia, some M. East markets) and about half from markets where defence spending is under pressure (e.g. UK, Italy).

(3)Net debt has dropped from c€4bn in 2014 to c€2.4bn in 2018E.

Concerns:

(1) We expect 2019 EBITA and FCF to be relatively weak, in line with the guidance LDO gave at the start of 2018. (2) Accounting is “less conservative” than most defence peers: the LDO defined Adjusted EBITA excludes restructuring charges and non-recurring items every year and benefits from capitalised R&D. (3) Italian political backdrop presents ongoing uncertainty for LDO.

85

vk.com/id446425943

vk.com/id446425943

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

[e-mail]

Overweight

€19.30

23 November 2018

Price Target: €33.00

End date: 31 Dec 19

Jose M AsumendiAC

(44-20) 7742-5315 [e-mail] JPMA ASUMENDI <GO>

Europe Equity Research

03 December 2018

Top pick – Peugeot

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 labor costs and synergies from cooperation with OV. In addition, now that Opel has been consolidated in the PSA Group, the turnaround 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.

Underweight

€7.66

23 November 2018

Price Target: €6.00

End date: 31 Dec 19

Jose M AsumendiAC

(44-20) 7742-5315 [e-mail] JPMA ASUMENDI <GO>

Least preferred – ElringKlinger

Investment thesis: top-line growth has not been a problem for Elringklinger. It has grown in-line with our supplier coverage growing 5% above auto production. However, the company has structurally seen pressure on gross margins over the last few years (a function of the high exposure to traditional gaskets business); hasn’t been able to pass-on cost increases; had a history of bad cost planning with Swiss production issues and cost relocation delays and also faced high ramp-up costs in other geographies. Medium term targets have been pushed ahead (from ~10% margins by 2020 to slight improvement y/y from <7% in FY18, we think). Further, on the last reporting (3Q18), we questioned the quality of the P&L, where we think the company capitalized R&D much higher than previous quarters (20% vs. 2.5% in 1H18) and also depreciated slower than we expected (this has been a trend for some quarters). The margin pressure obviously has oneoffs from high ramp-up expenses (freight costs, extra labour, etc.) but we need to be cautious that Elringklinger is still lagging peers in its e-mobility offering and we think it needs to step up R&D spend as well. The B/S looks weak with an adjusted leverage ratio of ~4.5x in 9M2018 and the company has not generated FCF in the last 9 years to cover its dividend payment.

Valuation: A continuously deteriorating profitability profile, limited visibility on cash generation in the future, high risk in a transition to EVs, and very high leverage ratios. We value Elringklinger on 0.7x 1-year fwd EV/Sales vs. our supplier coverage at 0.9x EV/Sales and 9x EV/Ebit. This gets us to our net Dec19 ending TP of €6.

87

vk.com/id446425943

vk.com/id446425943

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

[e-mail]

Overweight

€4.85

23 November 2018

Price Target: €6.50

End date: 31 Dec 19

Delphine LeeAC

(44-20) 7134-3971 [e-mail] JPMA DLEE <GO>

Underweight

Skr95.62

23 November 2018

Price Target: Skr105.00

End date: 31 Dec 19

Sofie PeterzensAC

(44-20) 7134-4716 [e-mail] JPMA PETERZENS <GO>

Europe Equity Research

03 December 2018

Top pick – Natixis

We view Natixis as one of the most attractive dividend stories, with 18% yield for

FY18e, ~70% ordinary dividend payout (~8.6% av. yield pa) and disciplined capital management, trading at 8.4x PE, 1.2x NAV for RoNAV 15% in 2020e.

M&A discipline under-estimated: We expect Natixis to confirm a €1.5bn exceptional dividend with FY results release on 12 Feb, as there is no large acquisition in the pipeline for the next three months in our view. Natixis made €1.5bn of bolt-on acquisitions in 2014-17, whilst distributing av. ~84% of earnings in dividends (cumulative €4.4bn).

Dividend yield of 18% in 2018e: We forecast ordinary dividend payout of av. ~70% in ’18-20e vs. a company target of ≥ 60%, implying av. dividend yield of 8.6% vs. a 5.6% sector average. Including the €1.5bn exceptional dividend paid in 2019, total dividend yield would be 18.4% for FY18e. Despite our cumulative €5.4bn dividends for FY18-20e and +2.8% RWA growth p.a., we expect Basel 3 CET1 to stand at 11.4% end 2020e vs. 11% target.

High gearing to Asset Gathering, accounting for 55% of group PBT: Natixis is one of the most geared banks to Asset Management with ~40% of group PBT in ‘19e, and its insurance business (~15% of group) growth is high with 20% of the French market expected to be serviced by Natixis by 2020. Despite difficult markets, Natixis AM has shown resilient net inflows thanks to its strong distribution capabilities, and margins are still improving.

Least preferred – Handelsbanken

At 10.1x P/E 2020E, which is a 20% premium to the sector, we see risk-reward as unattractive for Handelsbanken. We believe that the group’s defensive attractions are unlikely to warrant a valuation premium in a stable asset quality environment and see risks from Basel 4 given low corporate risk weights and limited Pillar 2 offset for corporate RWA inflation.

Basel 4 remains a headwind: Given the group’s low corporate risk weights and limited pillar 2 offset for corporate RWA inflation, we see Handelsbanken as one of the most impacted banks within our coverage. While we believe that a long transition in Europe will allow the bank to build up the capital buffer over time, it also likely limits any potential upside scenario in the medium term.

Asset quality risks outside Nordic region undiscounted: We admire the group’s risk management in the Nordic region historically; however, we believe that there are expectations of similar risk management in the UK and Netherlands where loan growth rates have been significantly higher (15%+ CAGR over last seven to ten years) and where we believe that downside risks are undiscounted. We also note that the group had a large single-name impairment a year ago in the UK.

Valuation unattractive: Handelsbanken trades at 10.1x PE 2020E, which is a 20% premium to the European banks sector. In addition, its dividend yield of 6.8% in 2019E is lowest amongst the Nordic banks, which average 7.7% (JPMe).

89

vk.com/id446425943