Up until last Sunday’s events in Catalonia, Spain’s economic recovery was well discounted in market terms, Carax Alphavalue says.
But after the Catalan government’s “pretence poll” and the central government’s “heavy-handed” response, investors view Spanish stocks as a more risky bet and less of a buy opportunity for now, the experts add.
With the President of the Generalitat, Carles Puigdemont, saying on Wednesday on the BBC that Catalonia will declare independence in a matter of a few days, huge uncertainty is set to cloud the horizon.
Carax Alphavalue explains its current Spain valuation:
“Before the illegal referendum was held on 1 October, Spain was trading at 13.6x as computed through the AlphaValue coverage (36 issuers, €558bn market cap).
“That was at a distance already from market average (15.8x on 18-month rolling earnings) and presumably reflected the heavy weight of banks and Telefonica (Buy, Spain) (all below 13x) against which the 27x of Inditex (Add, Spain) can only play so much.”
Due to the diversity of sectors involved, Carax Alphavalue says it focused on Spanish financials to see where relative valuations stand. This group includes
the main banks, Mapfre, Colonial, BME and Corporacion Alba. Since last May
Spanish financials have undeperformed the European banking sector by around 8%.
Spreads may rise in the coming weeks as a result of the Catalan crisis, Carax Alphavalue says. But the share prices of the Spanish banks, “as a proxy of sovereign debt” already took a beating on Monday, with most pressure on the two Catalonian lenders, Banco Sabadell and CaixaBank. The analysts noted that other Spanish lenders were trading at a fairer risk premium, “leaving little room to absorb revived risk country concerns.”
So could this risk premium extend to other sectors? To a great extent, Spanish companies’ internationalisation will work in their favour in this situation.
Carax Alphavalue points out that in its coverage, “the average exposure of Iberian corporates’ top line to domestic Spain is a modest 22%…Only 10 stocks have a truly local focus.”
“Listed Spanish stocks are a bit like their British counterparts. They
can do without an institutional crisis but can also cope with it. The big difference obviously is that there is no FX factor to pretend in local currency that the foreign exposure is worth more.”
Looking at the 10 companies which have a more domestic market focus, Carax Alphavalue says that on Monday, 2 October, “one needed a serious magnifier to see any sort of worry showing up in Spanish 10-year sovereigns (see chart)
On the corporate side, Carax Alphavalue says its rating for Spanish non-financials is a BBB (average at BB due to a number of small corporates in
the coverage) and the median corporate spread stands at 160bp.
That being said the 27 non-financials (excluding Abengoa) have a combined
€144bn net debt with an average 3x net debt/EBITDA ratio, “which is rather high, even if perfectly acceptable.”
Leaving aside Ferrovial and Sacyr, the analysts note that companies like Iberdrola and Telefonica “do not have stainless steel balance sheets.”
“In effect, this may be the weak point of Spain as an equity investment proposition if the political turmoil gathers momentum: more demanding bondholders. Back of the envelope calculations would warrant a 6% drop in the equity value of these non-financials for a 150bp increase in spreads. Financials would react probably more significantly.”
So what is the experts’ conclusion? That it will be time to consider buying Spanish equities if and when prices drop by over 5% from current levels.