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Expectation Managed

17 May 2019 by jbchevrel

Suedzuecker AG (noted SZUGR) 5y CDS has tightened c30bp over the past month, now back below 150bp. I last commented the name in this blog last March 28, as it performed very poorly following the roll. Indeed, the company had announced a profit warning ahead of its 2018-19 FY results. Back then, the German sugar maker expected revenues €6.75b & EBITDA €350m, mainly because of the sugar segment. And today, SZUGR reported its results in line with its previous warning. Revenues €6.75b EBITDA €353m. The EBITDA is thus down -53% YoY. The earning drop was driven by the sugar segment. Cashflow-wise, FCF -€290m left Net Debt €1.1b (from €0.8b a year before) and leverage 6.7x (from 2.4x). Guidance was little changed also: revenues €6.7-7.0b EBIT €0-€100m. Rating-wise, SZUGR is still IG (Baa3n/BBB-n) with negative outlooks, and a recovery in sugar prices looks like the only way SZUGR doesn’t get downgraded from here. Beyond that, its 6.7x leverage is unlikely to fall below the agencies thresholds until 2020-21, which is when the improvement in sugar prices could have taken effect. That makes management’s commitment to IG rating debatable.

Widen Your World

16 May 2019 by jbchevrel

Thomas Cook Group PLC (TCGLN) credit swap jumped to 52% intra day before reverting to high-40s on the 5y. In cash, the €750m 2022s fell -17c before retracing +3c, after the company results as of end of March19. H1 adjusted EBIT came at -£245m. Net debt jumped +40%y @ £1.3b from £0.9b. TCG effectively tapped £0.6b from its existing revolver. They made a £1.1b goodwill impairment on their UK business relating to 2007 m&a. Liquidity-wise, they said they will get a £0.3b rescue loan – contingent to making progress on selling their airline (9 months: Oct19-Jun20, secured so potentially less assets for other creditors if insolvency). So basically, there will be no sure new funding by then… There were reportedly multiple bids for airline. LHA, Virgin, Ryanair were mentioned as potential bidders. The share of TCGLN is at the lowest since 2012, so market cap is now just £0.3b... Contrasting with peer TUI, H2 profit outlook looks dull. Bookings for coming summer are -12%y. Airline bookings -6%y. Recent uncertainty bolstered promotional activity, higher fuel prices still weigh on margins and Brexit process can make some UKs delay their holidays. Plus, TCGLN noted weakness in key North Europe market due to a ‘backlash against air travel’ (which I find surprising given the relative proportion of sea/bridges in that part of the world...). US-Turkey tensions could also weigh on sentiment, given that Turkey is a big package holiday destination. Today an official said the delivery of Russian missile system S-400 is going on according to the planned timeline. No change there. Nevertheless, noise around M&A talks (for the airliner arm) is probably going to dominate price action in the coming weeks, as it was the case on last April 23rd, when I last commented on TCGLN, in DataGrapple.


15 May 2019 by jbchevrel

Autos have outperformed the broader market lately. Today F -9 GM -3 in the US, FRFP DAIGR BMW VW are -1/-3. In stocks space, Faurecia +5% BMW +3% DAI +3% are also amongst best performers. This contrasts with 2018, where trade tensions were most often coupled with Autos/Auto parts underperformance. Indeed, finished vehicles were not in the list of the goods China will add tariffs on. They are currently at 15% and won’t get to 40%, as of now. Within the auto sector, US tire companies (CTBUS, GT) underperformed as they will see Chinese tariffs hiked from 5% to 10%. On May 9, Reuters had reported automakers expect Trump to delay 18 May by up to 6m. 90-day deadline was indeed reported to be a soft one. Today’s headlines echoed that, adding a little bit of outperformance. That comes after a mixed earning season for German autos. Earlier this month, BMW had reported a surprisingly resilient q1, excl. the impact of bigger than expected provision (€1.4b vs €1.1b cons). Auto EBIT came €1,090m ~ cons. But Group EBIT came €1,989m vs cons €1,753m with Motos/FS beating. In Apr, DAIGR had had a weaker q1, EBIT €2,084m (excl. €718m one-off) vs cons €2,246m. Big vehicles drove the miss @ DAIGR. Van (-€98m EBIT vs cons +€110m) along with Bus (-€21m EBIT vs consensus -€5m) divisions. FCF -€2b vs +€2b in 18 also - same as BMW - due to inventory build. On the other side of the Atlantic, as I commented previously in this blog, Ford (F) enjoyed a nice q1 beat. CDS -41bp intraday, after EPS came 44c vs cons 26c with Auto rev in line ($37.2b vs cons $37.0b) and Auto EBIT $300m higher. Those + news being mentioned, it is worth noting that headlines today reported a delay (up to 6m), not an outright cancellation of auto tariffs. PEUGOT clearly the underperformer over the past month, as reports of M&A talks with JLR picked up. Although those have been denied by Tata and PSA. No smoke without fire (?)

Round 3. Ting Ting.

14 May 2019 by jbchevrel

Bayer AG (BAYNGR) has lost the 3rd Glyphosate trial with a jury in California unanimously awarding damages of $2B (punitive damages of $1B each - married couple, both with cancer after using the sadly famous weedkiller Roundup for about 30 years). While the stock was hit up to -5% (close -2% after reaching its lowest level in 7 years) the 5y CDS was just wider by +2bp (vs Main tighter by -2.8bp). In cash space, 3% 21s dipped 25c. In March, the outcome of the 2nd trial had caused +25bp on the 5y CDS, so it is notable that the outcome of this 3rd trial was not in appearance surprising for markets. But the amount of damages awarded is significantly higher than witnessed in the previous cases ($80M for both). It is worth noting that BAYNGR has previously seen a Californian court award $289M against them, although this figure was later reduced to $78M on appeal, so there is potential for downside on this $2B. BAYNGR’s approach is now to contest and appeal all cases, they probably hope that appeals can give a different verdict/compensation amount as they are decided by a judge and not by a jury. There are 4 more cases pending this year and the appeal decision will be towards the end of the year, in particular the upcoming Hall vs. Monsanto trial (June 3rd – will be the first one out of California). On the stock, a DCF & SOTP valuation range implies more than €30B legal risk. On the CDS, at 100bp, the spread is reflecting downgrades, from the current BBB s /Baa1 n, as the German name is now wider than some IG names rated BBB-/Baa3, on the brink of junk. Separately, BAYNGR has announced the sale of Coppertone to Beiersdorf for a purchase price of $550M, which is expected to close in Q3-2019. Coppertone brand’s sales last year were about $213M, so that’s on a 2.6x multiple, quite close to the expectation. So this arguably didn’t move the price much. The other consumer brand Dr Scholl’s could also be divested for 2.6x sales. Other potential catalysts include US/China trade tensions and French dossier revelations, the former having been the main macro price action driver over the past sessions. Elsewhere, the market reverted from yesterday’s risk-off session, with iTraxx Main tighter -2.8bp, Xover -9.3bp.