Portugal’s Comeback: Recovering Economy Attracts Investors

Portugal's economy comebackLisbon-Portugal

The market’s renewed confidence in the Portuguese economy, with bonds and shares alike making the silent transition, has led to Alphavalue’s small coverage of Portugal to the third highest.

We can only repeat what we wrote 4 months ago. Portugal’s amazing economic recovery (contrary to the general consensus two years ago that it would be the next country to fail amid the sovereign debt crisis) is now reflected in a renewed nobility which has been projected in its investment grade (an investment grade rating except from Moody’s). Investors in Portuguese sovereign bonds and shares didn’t wait until this laggard signal was more visible. 10-year rates are more or less at 1.9%, having rapidly converged with the Spanish 10-year (1.4%).

AlphaValue’s coverage in Portugal is limited to five stocks. Jeronimo Martins (reduce, price target 16,5 euros/share) is more a Polish proposal (the success story of Biedronka) than a Portuguese one. But the 2017 figures it published on January 12 showed a better trend in its domestic business (20% of total revenues), up 3% yoy in Q4’17, undoubtedly partly thanks to tourism. Sonae (reduce, price target 1,28 euros/share). This is a holding focused on Portuguese assets and has a lot to gain from a domestic recovery and cheaper capital. The share price has risen 15% so far this year. And investors could expect some sort of corporate move on the stock.

Galp (sell, price target 14,5 euros/share) could fall into this category for potential corporate action, given that it is partly and indirectly owned by Dos Santos via Amorim Energia. It’s not such a clear case, with increasingly more risk in Brazil. BCP (sell, price target 0,26 euros/share) also gains a lot from having access to cheaper capital, but there are still suspicions over the the extent of its provisioning for non-recoverable loans and its exposure to Mozambique. EDP (add, price target 3,2 euros/share) is also a perfect call against a backdrop of a convincing Portuguese recovery, as 44% of its revenues are domestic. The sad news last October was that the new regulatory terms for its RAB were a milestone. This is now completely discounted and EDP is working hard to be less exposed to the RAB while performing outstandingly well in green energies. Its share price has stabilised of late. This universe of five stocks is fairly balanced and representative.

Unfortunately, the potential of this small universe has already been exhausted to a large extent. In any event, it’s likely their revenues will be updated, so we will have to be on the lookout.