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24 мая 2015, 19:20

The Weekender


Deflation vs. Inflation

While we are agnostic on the subject of Deflation vs. Inflation, what is clear is that the market has over-priced the risk of one outcome (deflation) at the expense of the other (how else can you explain the disproportionate exposure to bonds vs. equities in most pension funds). However, to provide a little context, we are happy to make observations - when required. This week was the first time the UK fell into deflation since 1960. The problem is, if history is any sort of guide, it won't stay like this for long. Back in 1960, it was less than 2 years before inflation was up at 6%. What is more, judging by comments out of the ECB this week, it looks like more money printing is coming in June/July than normally expected "don't fight (four) FEDs". This puts in question the seasonal pattern of "Sell in May", and suggests to us that buying more reflation assets is the thing to do. And so, we stay long the Aviate Reflation Recovery Basket, now up 26% YTD, and packed full cheap stocks about to see significant upgrades.

Got Banks?

We (Aviate) are bullish on banks, as you know. We believe the set-up today is not dissimilar to March 2009 in terms of money supply, valuation and liquidity support, a period when banks performed better than any other over the following 6 months. Despite this, bank stocks are still not well owned, at least not on a beta-adjusted basis. While the biggest overweights can be found in the well-capitalised Scandinavians, few though have exposure to the Southern Europeans, the Italians in particular. If our view should manifest and banks continue to rally, then we will see the higher beta names rally more, causing tracking errors to rise and forcing PMs to chase them. In anticipation of this, we remain buyers of Intesa Sanpaolo (OTCPK:ISNPY), Mediobanca (OTCPK:MDIBY), UniCredit (OTC:UNCFY), Pop. di Milano (OTCPK:BPMLY), UBI Banca (OTCPK:BPPUY), Credit Agricole (OTCPK:CRARY) (especially post weakness this week), UNI, ING (NYSE:ING), Lloyds (NYSE:LYG) and note Riccardo has added Erste (OTCPK:EBKDY) and Banco Popolare (OTCPK:BPSYF)to his list as well.

Cable

Cable assets are clearly in demand, offering investors the holy trinity of qualities, namely inflation beating-fixed returns, consistency and growth. It is rare for companies to exude all three of these qualities, and as such, is why companies that do will continue to attract at a premium rating. In Europe, our favoured play remains NOS in Portugal. While not optically cheap (8.5x EBITDA), the company is entering a golden phase with pricing now moving in the right direction and it is taking share. On our own numbers, which aren't far from consensus, if management keeps net debt/EBITDA at 2x, the stock is on an effective 17% FCF yield in 2017. So it could easily double over 1-2yrs. The market reaction to Vodafone's (NASDAQ:VOD) results on Tuesday reflected a typical focus on the ups and downs across its various markets. We urged investors to focus instead on the big picture: that Vodafone could and should explore a deal with Liberty Global (NASDAQ:LBTYA), and that event optionality is undervalued. Comments from John Malone in an interview that same day confirmed that view. The rationale for a deal is stronger than ever, the window of opportunity for first-mover advantage is closing, and the motivation of both parties is aligning. Yes, there are obstacles - but they are not insurmountable in our view, just in need of some bold decisions. There were several reports out this week that Patrick Drahi of Altice (OTC:ATCEY) has met with the CEO of TWC (NYSE:TWC) about a potential deal - what seemed like a remote possibility two days ago now seems increasingly likely, and we know how quickly Altice moves. A deal with TWC would a big step, but for now, the market appears to have bought into the Altice MO, and we remain buyers.

European Telcos remain one of our favoured sectors

For Sunrise (OTCPK:SRTI), the medium/long-term fundamental story - that lower capex, falling interest costs and improving operating trends, combined with management's commitment to hold net debt/EBITDA at 2.5x (at least) - means payout potential could grow significantly (FY15 at 3.8%). That should have strong appeal in Europe's lowest govt bond-yielding market. Numericable-SFR (OTC:NUMCF), Orange (NYSE:ORAN) and Bouygues (OTCPK:BOUYY) are all alluding to the end of price wars and the return of rational competition. Drivers are in place for a path to top-line growth from next year for Numericable. We think there's still upside from consensus forecasts catching up with management's new medium-term targets, which we suspect could be raised even further at some point (internally, Drahi is driving for margins to surpass 50%) and a generally improving outlook for French telcos. Beyond that, there is optionality from another round of significant value creation through a deal with BTel. Following its AGM this week, Telecom Italia (NYSE:TI) confirmed plans to IPO 40% of its towers business. While that is not unexpected in and of itself, it is one of several changes unfolding - big and small - which are positive for the stock, but are collectively undervalued we think. We remain buyers of the European Telcos and Telecom Italia in particular.

Stick with billionaires

Vincent Bollore has increased his holding in Mediobanca (OTCPK:MDIBY) to 7.97% from 7.5%, and is now its second-largest investor after UniCredit, which owns 8.63%. We would not be surprised to see similar headlines emerge with Telecom Italia or even Mediaset (OTCPK:MDIUY) over coming weeks. Remember, Bollore is allowed back onto Italian boards from July we believe (having been banned since Jan 2014). Investing alongside the likes of Drahi, Murdoch, Bollore, Malone, Slim, or Paulo Lemann has proven a successful strategy for many investors, and we see little reason to question it with respect to our views on Altice, Numericable, Sky (OTCQX:SKYAY), Mediaset, Vivendi (OTCPK:VIVHY), Telecom Italia, Liberty Global and Vodafone.

New highs in China

The SHCOMP made new highs today on what seems very little fanfare. This is not the anatomy of a market top, which normally coincides with rampant euphoria. Further endorsement comes from GaveKal's (MUTF:GAVAX) Louis-Vincent Gave. Gave puts forward many of the same arguments our own Asian Strategist Douglas Morton has long posited as reasons to buy China. The global investment community is under-exposed to Chinese stocks and bonds, but will be compelled to increase its exposure over the coming two or three years, as Chinese financial assets begin to be included more fully in the global benchmarks that passive - and many active - institutional investors track. Further evidence this week of improving property trends as it seems Floor Space of residential buildings seems to have bottomed: Floor Space of residential buildings seems to have bottomed: Good for Rio Tinto (NYSE:RIO), Volvo (OTCPK:VOLVY), Kone (OTCPK:KNYJY), Schindler (OTCPK:SHLAF) and ThyssenKrupp (OTCPK:TKAMY).

Aviate stocks in the news

You can expect plenty of upgrades from the Street post Peugeot's (OTCPK:PUGOY) China CMD, which highlighted the firm's ability to grow earnings despite a weaker market backdrop and improved FCF generation of the JV. Further negatives for Pearson (NYSE:PSO) this week. A Politico investigation last year into Pearson Education called into question Pearson's dominant position in education in the U.S. It appears this is now impacting purchasing decisions. Namely, many states were exposed as awarding Pearson business without offering contracts out for competitive tender and RFP. Meyer Burger (GET-Clean) won an important contract, the largest order MB has announced for some time. Delta Lloyd (OTCPK:DLLLY) numbers this week showed that solvency is now at 208% (FY14 was 183%). Embedded value went down and there are more shares post cap raise, but DL is still trading at a 15% discount to embedded value (value of business in run-off), well below insurance peers. ITV (OTCPK:ITVPF)made new highs this week. As discussed, we see upside risk to numbers given robust performance from current content (Britain's Got Talent, Ninja Warrior, Vera), which should result in improving SOV (share of viewership) - a strategic priority for 2015. Lloyds continues to gain more followers, and we note another bulge bracket has upgraded it this week and started to focus on the potential size of the payout, the crux of the reason why you want to own this stock; next year could see a dividend of 6%+. UK wages grew by a faster-than-expected 1.9% in the three months to March compared to the same-period last year, underlining the momentum of the consumer recovery. Stay long our UK Consumer Basket.

For all this and more, read on.

Have a great weekend.


1. Deflation vs. Inflation

We are agnostic, we don't have a strong view save to say the market has over-priced the risk of one outcome (deflation) at the expense of the other (how else can you explain the disproportionate exposure to bonds vs. equities in most pension funds). However, to provide a little context, we are happy to make observations - when required. To this, we refer to the chart below - sent to us by a "deflationist" in unequivocal "proof" of his argument deflation would take hold. This week was the first time the UK fell into deflation since 1960.

The problem is it didn't stay there.

In less than 2 years, inflation was at 6%…

2

Got banks?

2. More money printing = more "Reflation"

"COEURE SAYS ECB TO ACCELERATE QE NOW BEFORE SUMMER MARKET LULL". - (Bloomberg)

Ibiza waits for no man.

More money printing in June/July than normally expected, "don't fight (four) FEDs", David Tepper. This puts in question the seasonal pattern of "Sell in May", and suggests to us buying more reflation assets is the thing to do. And so, we stay long the Aviate Reflation Recovery Basket, now up 26% YTD, and packed full of cheap stocks about to see significant upgrades.

The Weekender

3. Banks (cont)

We (aviate) are bullish on banks, as you know. We believe the set-up is not dissimilar to March 2009 in terms of money supply, valuation and liquidity support, a period when banks performed better than any other over the following 6 months. We have been joined in this call by JPM who have similarly identified the point we made on market internals a week or two ago, namely, that Banks have been outperforming on the way down, a constructive set-up and one that normally portends to continued outperformance during the subsequent rebound. See Taper Tantrum for details.

4. Banks' beta adjustment

Bank stocks are still not well owned, at least, not on a beta-adjusted basis. Where the consensual overweight is in well-capitalised/bond-like dividend payers, the Scandinavians for example, few have significant exposure to the Italians. Should our view manifest, banks continue to rally, then logically higher beta may rally more, increasing tracking error and forcing FMs to chase them, the essence of the pain-trade. In anticipation of such we add to: Intesa Sanpaolo, Mediobanca, UniCredit, Pop. di Milano, UBI Banca, Credit Agricole (especially post weakness this week), UNI, ING, Lloyds and note Riccardo has added Erste and Banco Popolare to his list as well.

5. Recovery semantic

Now, your view as to the likelihood of this (above) will very much depend whether you believe we are in recovery mode, or not? Interestingly, we still find a lot of healthy scepticism about recovery potential in Europe. We agree with a lot of it; we are a long way from escape velocity, QE is no panacea and Europe badly needs reform to fix itself. Where we differ is that a normal recovery, at least in terms of aggregate demand, need not mimic previous ones or return to anywhere near its peak for operational gearing and upgrades to come through. Moreover, the level of provisions taken by banks in the face of the greatest economic crisis since WW2 means there is significant earnings potential under a more normalised provision cycle, like we seem to now be approaching.

6. Mediobanca (RRB) and Invest with Billionaires

Vincent Bollore has increased his holding in Mediobanca to 7.97% from 7.5%, and is now its second-largest investor after UniCredit, which owns 8.63%. We would not be surprised to see similar headlines emerge with Telecom Italia or even Mediaset over coming weeks. Remember, Bollore is allowed back onto Italian boards from July we believe (having been banned since Jan 2014).

7. Intesa Sanpaolo (RRB), new highs…

With the ECB pushing yields lower, its dividend is gaining even more attention. It will be 5.5% next year as a minimum.

Back with more

8. Lloyds: gaining followers

Interestingly, Nomura sees a 6% dividend yield in 2016 - not dissimilar to ourselves. This is really the crux of the story, what kind of payout is coming from LLOY in 2015, 2016 and beyond? Cons is 4.8% DY in 2016, but no one can say for sure at this stage, not even company has decided yet. But with the govt shareholding "going", should the good momentum seen in Q1 (NIMs rising not falling, loan growth to come…), the dividend attraction could be very strong. Interesting to see analysts starting to come out with punchier divvie forecasts now. We would be buying weakness should it come.

9. Anima, stay long

Anima sits in a healthy and profitable space within Italian Financial Services - acting in a capacity as an outsourced Asset Manager for the major banking institutions. These institutions having reached adequate capital ratios in recent quarters are happy to channel assets on to Anima and earn their trail and placement commissions in place of retaining customer deposits at the risk of NIM compression. With an adequately capitalised banking sector, AuM at Anima is growing at quite a pace of late. The potential for a tie-up with Poste Italiane adds to the short-term positive catalysts, leveraging the firm's distribution capabilities without the need to lay out more capital to do so. As for Azimut (OTC:AZIHY), the switch to higher-yielding assets and improving economic outlook within Italy are favourable trends, especially so from a starting base of the second-highest savings rate in Europe.

Stay long.

10. Vodafone/Liberty: it is heating up. Stay long

We said recently that forces driving Vodafone and Liberty to explore options for a tie-up should mean increased deal chatter - following on from John Malone's comments three days ago re interest in a deal, feedback from a Vodafone management road show is that it is "willing to consider both acquisitions and disposals where financial rationale makes sense". As we found when crunching the numbers, disposing a long tail-end of non-core assets is something Vodafone would have to do to facilitate a deal with Liberty (deal model flexer available on request). M&A spec should continue to lift both stocks we think - and, ideally, it ultimately results in a consolidation from which emerges a leading European converged telco operator. Stay long Vodafone.

11. Altice: and now Time Warner Cable?

There were several reports out this week that Patrick Drahi has met with the CEO of TWC about a potential deal - what seemed like a remote possibility two days ago now seems increasingly likely, and we know how quickly Altice moves. As we saw from the reaction to the Suddenlink announcement on Wednesday, the market now recognises the huge value Altice can create from acquisitions though cost cutting and synergies. On the Suddenlink call, Dexter Goei (Altice CEO) also indicated the scope for EBITDA growth in U.S. cable businesses - and that guidance (1,000bps margin expansion!), in typical Altice style, was conservative. So the market seemed to have no problem with his comment that further U.S. acquisitions were on the cards. What remains to be seen is whether an approach for TWC triggers a bidding war - should that happen, and escalate, some may begin to question Altice's appetite for such a large deal with two other large transactions yet to close (PT and Suddenlink). For now though, the market appears to have bought into the Altice MO - so we don't think investors with a long-term view should be selling.

12. Numericable (buy): invest with billionaires (cont.)

Numericable-SFR, Orange and Bouygues are all alluding to the end of price wars and the return of rational competition. Drivers are in place for a path to top-line growth from next year for Numericable. For NUM, we think there's still upside from consensus forecasts catching up with management's new medium-term targets, which we suspect could be raised even further at some point (internally, Drahi is driving for margins to surpass 50%) and a generally improving outlook for French telcos. Beyond that, there is optionality from another round of significant value creation through a deal with BTel.

Synergy execution in Numericable-SFR has been a showcase for how successfully Altice management's core skills translate on the bigger stage. And that's why even after ATC's rally this week, we recommend longer-term investors don't sell. The nearer term upside in NUM is probably higher, but the opportunity there is confined to the French telco space. For ATC, nearer term upside may be more limited - some of the PT-related upside now feels priced in - but the longer-term and wider roll-up potential is considerable and has yet to unfold. The CEO said it is doing all to maintain "balance sheet optionality".

Regarding a BTel acquisition, we think a part equity financed purchase at an attractive valuation from Bouygues' perspective could satisfy both sides. And note that Bouygues' own rhetoric may have shifted to a more pro-deal stance this week. The upcoming French spectrum process kicks off with a call for applications from operators in July; that could prove pivotal for deal talks - either as a catalyst to negotiate something in advance, or even using it as a tactic in a post-auction deal game plan. Either way, the potential for value creation through a merger is huge - and that alone should force both owners' hands at some point. Stay long.

13. Telecom Italia: events unfolding - stay long

Following its AGM this week, Telecom Italia confirmed plans to IPO 40% of its towers business. While that is not unexpected in and of itself, it is one of several changes unfolding - big and small - which are positive for the stock, but are collectively undervalued we think. (NB: TIT is said to be lifting the valuation for its towers IPO - now looking to raise EUR960m for its 40% stake, c.30% more than previously discussed).

One of the most significant is potential consolidation in Italian mobile (Wind +3), a long-awaited event which may be approaching reality, yet is still not fully reflected. Even before any consolidation, data growth is driving TIT's domestic mobile revenues towards stabilisation, and we think the market structurally underestimates growth once it turns positive (cf. Swisscom (OTCPK:SCMWY) and Telenor (OTCPK:TELNY) beating expectations for Q1/guidance).

This week's AGM alluded to other potential changes and sources of optionality we see, including:

Consolidation in Brazilian telcos. Recent comments from Oi and Tef remind us the forces are in play, and TIT's CEO said this week that the "study of options in Brazil is not over". In the meantime, monetisation of strong data growth remains a key driver.

Value creation from a fibre roll out. A scattering of comments this week suggests some uncertainty re government subsidy plans and Enel's (OTCPK:ENLAY) involvement - but that should not detract from the LT potential and it remains a core focus.

TIT seems the target of increasing private buyer/strategic attention (Vincent Bollore via Vivendi, Sol Trujillo) and, very interestingly, the Chairman said this week that "Telecom Italia is open to foreign investors".

Finally, the CEO commented that strategy is now going to be "investments not debt lead". The low-rate environment offers an opportunity to boost FCFs through cheap re-financing. TIT has >EUR3.5bn of debt maturing over the next year or so on which it is paying up to 8.3% coupons - the most expensive of this is trading on a yield of 55bps.

Taken individually, some of these may even be partly price in - but we think they are collectively mispriced. TIT's FY15E EV/EBITDA of 5.9x is still second cheapest among European incumbents and a >10% discount to the average.

Stay long.

(NB: Riccardo has reiterated a buy on Telecom Italia as well.)

14. Sunrise: use weakness to add

Let's put this week's number down to a relatively "new" management team (in the context of equity capital markets, managing expectations) and some miscommunication. At worst, the hit to EBITDA for FY15 could be c.-2%, but there are also potential offsets. This is a buying opportunity.

There are two factors driving FY15 guidance for revenue (slight decline) and EBITDA (comparable to FY14). First, handset sales are coming down YoY as the increase seen last year post launch and uptake of the new Freedom product will fade. That handset revenue is virtually zero-margin business and so has little to no impact on EBITDA or cash flows - so who cares? The second effect is from the launch of new roaming tariffs (as of May) impacting revenues by CHF20m and EBITDA by CHF10m - previously, management had said the impact of that would be around CHF5m on EBITDA, but that was before it had finalised the tariff structure and related assumptions. So, at worst, based on BBG consensus, this week's "new" guidance means a c.1% downgrade to FY15 revenues (of which, some has zero impact on EBITDA) and a c.2% downgrade to EBITDA (or less if the original guidance re roaming impact has not already been accounted for). Separately, it's possible that some items could well be more favourable than expected for the balance of the year/H2 (mobile SARCs, fixed line subs base). And the general tone of the call sounded as if Q1 and outlook is totally in line with internal expectations and budget.

Hardly enough to justify the stock being down 4% at the time of writing we think, though perhaps that's just a hangover from an ugly open. Who knows - little point in further dissecting an intraday reaction to one quarter's announcement. There seems to be nothing in the statement to detract from the medium/long-term fundamental story - that lower capex, falling interest costs and improving operating trends, combined with management's commitment to hold net debt/EBITDA at 2.5x (at least) - means payout potential could grow significantly (FY15 at 3.8%). That should have strong appeal in Europe's lowest govt bond yielding market.

If this week reflects an exit of casual post-IPO owners, we see an opportunity for longer-term investors to add.

15. NOS: buy more, it could double by 2017

Cable assets are clearly in demand, offering investors the holy trinity of qualities, namely inflation beating-fixed returns, consistency and growth. It is rare for companies to exude all three of these qualities, and as such, is why companies that do will continue to attract at a premium rating.

In Europe, our favoured play remains NOS in Portugal. While not optically cheap 8.5x EBITDA), the company is entering a golden phase with pricing now moving in the right direction and it is taking share. As such, with a 20% tax rate, these price rises alone have an 80% drop-through to EPS. But on top of this, there should be subscriber adds. What is more, the interest rate on the debt is already below the FY16 target of 320bps, and capex intensity is falling from this year on. All this means that the FCF generation is going to accelerate, probably more than we or consensus expects, and this is really the crux of the story. Payouts to shareholders should are set to go one way, higher, much higher. On our own numbers, which aren't far from consensus, if management keeps net debt/EBITDA at 2x, the stock is on an effective 17% FCF yield in 2017. So it could double over 1-2y. Buy more NOS.

16. Sky has hired Mediobanca to advise on Mediaset Pay-TV

So Murdoch hires Bollore's Investment Bank (Mediobanca) to advise on a deal they both have interest in. How convenient. Clearly, there is something going on here, which simply enforces our view to stay long both Mediaset and Mediobanca shares, but also the other names in the fray, Telecom Italia and EI Towers.

What the last 24 hours has reminded everyone of, investing with billionaires is a successful strategy ref Altice. We stay long Altice, Numericable, NOS and Vodafone for that reason as well. Returning to Mediaset a pay-TV alliance with Sky would de-risk pay-TV and produce significant synergies.

17. ITV (buy): keep adding

Our analyst Neil Campling called this superbly after its numbers, citing the fact that on five of the last six trading statements, the stock had fallen on the day in immediate reaction. Each time it was prudent to buy the stock, and this time is proving to be no different: it made new highs this week. As discussed, we see upside risk to numbers given robust performance from current content (Britain's Got Talent, Ninja Warrior, Vera), which should result in improving SOV (share of viewership) - a strategic priority for 2015. In Q3, it will benefit from exclusive access to the Rugby World Cup and also easier comps. Online, Pay & Interactive continue to grow strongly, ITV Studios remains on track to increase revenue by around £100m in constant FX (with Talpa to come) and the UK advertising market is growing at the fastest rate since 2010. Q2 guidance is conservative, stay long. Note also Riccardo reiterated a Technical buy on ITV this week as well, suggesting a confluence of Technicals and Fundamentals.

18. Rocket: no fuel without fire. Short/Sell

This week, the primary issuance lock up expired for Rocket Internet (Pending:ROKT). In other words, the company (as opposed to existing holders) can issue shares at any time to help fund/invest in further companies/start-ups/partnerships. This seems highly likely given cash burn of several hundred million p.a. and rapidly shrinking cash balance. (UBS happened to upgrade on Monday. Having been involved as joint bookrunner in the IPO UBS followed up with a subsequent neutral rating on the stock. The bank was then, coincidently, missing from the secondary offering earlier this year. In this world of Chinese walls and strict independence, this is clearly unrelated, as of course the upgrade this week will be. Nonetheless, if there is another issuance, it will be interesting to see who the bookrunners will be).

Concerns are growing on Rocket's LPV (Last Portfolio) calculations. There is a forensic accounting specialist research firm which has raised concerns on profitability, growth, valuations and disproportionate exposure to valuation losses. The analysis suggests there have been numerous related-party transactions mainly involving enrichment of the founders at the expense of other holders and also that some of their co-investors value stakes in Portfolio Companies at levels DRASTICALLY below where the company has marked their holdings in the annual report. We have already made most of these points, but the different accounting treatment is a very alarming point given that the LPV of the Portfolio Companies is substantially all of the "value" of the company.

Sell if you can. Avoid otherwise.

19. GaveKal follows Aviate's Morton. Stay long China

"You are all part of one of the most crowded trades there is - nobody owns China". - GaveKal's Louis-Vincent Gave

Gave finds himself enthusiastically describing himself as a "massive China bull". His argument mimics many of the ideas Doug Morton has been discussing for many months, namely the global investment community is under-exposed to Chinese stocks and bonds, but will be compelled to increase its exposure over the coming two or three years, as Chinese financial assets begin to be included more fully in the global benchmarks that passive - and many active - institutional investors track. Taking, it seems, directly from Douglas' mouth: "So far it has been a liquidity-driven bull market. Money has come out of Chinese retail investors and into shares," he says. "But the tidal wave that is about to hit - and it is a tidal wave - is foreign investor money." Gave's advice for Australian investors is blunt: "Either you get in front of it or you are going to be left chasing your tail. I believe we are at the beginning of a massive bull market."

We agree.

See these charts from Doug's note some weeks ago that we repeated in the FT last week, comparing this rally with that in 2007. Clearly, there is a lot more to go for.

SHCOMP current rally (yellow) vs. 2005-2007 when reform had been instigated.

(click to enlarge)The Weekender

Bottom charts show P/E levels

(click to enlarge)The Weekender

For our own reasons why we see further upside please call.

20. Look East: more evidence of improving property trends

While the market will no doubt react to the weaker Euro/$ and sell Miners, the underlying dynamics of this sector are improving.

Consider:

Floor Space of residential buildings seems to have bottomed:

2

Good for Rio Tinto, Volvo, Kone, Schindler and ThyssenKrupp.

China First Tier Cities newly built residential prices YoY rebounding…see correlation with Ore.

3

Stay long Rio Tinto.

21. SAP (sell) vs. Cap Gemini (buy)

Salesforce.com's (NYSE:CRM) priority is to overtake SAP (NYSE:SAP). Calling out its lack of innovation, lacklustre growth and poor execution, CRM's CEO Benioff last this week proclaimed SAP as "an easy target". Certainly momentum is clearly on CRM's side.

CRM's Service Cloud displaced SAP (Cloud CRM) with 300bps market share gains in the quarter and is now the market share leader in customer service and support. CRM's ExactTarget has become the fastest growing marketing cloud leader and SAP (Customer Engagement & Commerce suite) is losing market share.

SAP's storage management partner, NetApp (NASDAQ:NTAP), fell -10% after hours after missing numbers, slashing guidance, announcing restructuring on poor migration of customers to its new ONTAP (storage operating system). NetApp has often touted SAPA HANA integration as a growth driver for its storage OS solutions so while this may be simply execution mis-steps by NetApp it may also signal a more broader issue with SAP.

In contrast, iGATE's (NASDAQ:IGTE) SEC filing earlier this week reveals higher internal targets (both revenue and profit) through 2017 relative to those issued at the time of the Cap Gemini (OTCPK:CGEMY) acquisition announcement. With solid organic growth, currency tailwinds, increased scale and enhanced competitive offering in key verticals (financial services, healthcare, retail) and geographies (30% in North America) post the iGATE deal means risk/reward for Cap Gemini remains favourable in our view. As such, we remain buyers of Cap Gemini.

22. Aberdeen Asset Management: good long-term potential with free option on EM

Whilst the UK public's reaction to the Conservative win has yet to prove favourable for asset flows into the industry, the potential for improved investor sentiment and risk appetite on the back of this has reminded us of the large UK-based Asset Managers. One of the laggards in this space has been Aberdeen (OTCPK:ABDNY), with its structural exposure to Emerging Markets, which are in the doldrums from a strong U.S. dollar at present. This has led to what can only be described as a leading UK consumer brand with "sticky" recurring revenues being available at a cheap price. Consensus FCF for 2016 (September y/e) is £582m, which is a 10.1% yield against a market cap of £5,782m at present. The firm is shareholder friendly and deploys earnings into dividends and acquisitions - the latter should have a lower hurdle to be accretive as the asset base and marketing and distribution functions increase in scale. Not all consumer brands sell via the major supermarkets. We view Aberdeen (and Schroders (OTCPK:SHNWY) and M&G, etc.) as consumer brands in structural growth markets. Stay long.

23. Peugeot (buy): stay long post China CMD

You can expect plenty of upgrades from the Street post PSA's China CMD, which highlighted the firm's ability to grow earnings despite a weaker market backdrop and improved FCF generation of the JV. We can see upside beyond €20/share.

Remain a buyer.

24. Aviate LBO screen and Weir Group

As discussed, the BG bid should really light a torch under the likes of Weir, Amec Foster Wheeler (NYSE:AMFW) and Hunting (OTCPK:HNTIY) now M&A in oil is back on. When we ranked the SXXP back in February, BG was number 7 on the list, with a 29% IRR. The list as at February 2nd prices has a lot of resource names on it. In order of IRR, the list is Fresnillo (OTCPK:FNLPF), Vallourec (OTCPK:VLOWY), Genel (OTC:GEGYY), Outokumpu (OTCPK:OUTKD), BG, Glencore (OTCPK:GLNCY), Hunting, Saipem (OTCPK:SAPMY), FLSmidth (OTCPK:FLIDY), Antofagasta (OTCPK:ANFGY), Galp (OTCPK:GLPEY), Petrofac (OTCPK:POFCY), Amec Foster Wheeler, Rio Tinto, Weir, Sandvik (OTCPK:SDVKY), OMV (OTC:OMVJF), Anglo American (OTCPK:AAUKY) and BHP (NYSE:BHP). These all had IRRs above 15%. As a reminder, the criteria for the screen were: 30% bid premium (at February 2nd prices), 60% debt-funded deal, 6% cost of debt and 30% tax. Of the resources names, it is the oil service names Weir Group and Amec Foster Wheeler that interests us the most.

25. Pearson (sell): new negative

A Politico investigation last year into Pearson Education called into question Pearson's dominant position in education in the U.S. It appears this is now impacting purchasing decisions. Namely, many states were exposed as awarding Pearson business without offering contracts out for competitive tender and RFP. This is now changing.

Pearson has been the SOLE student testing contractor for Texas since 1980. Since the turn of the century, Texas has paid $1.2bn to Pearson, and the 2010-2015 testing contract saw the State pay Pearson some $468m. This week, Texas Education Authority has announced the tentative awarding of a new four-year student testing contract. Within the detail are two significant negatives for Pearson.

First, Pearson gets just $60m of the new four-year contract, losing the bulk of standardized testing.

Second, ETS (Education Testing Services) is now the primary vendor for TES winning >80% of the contract and displacing Pearson.

The rate of the change in revenues equates to a loss of about 2.5% of Pearson's annual schools revenue from this one contract alone. Texas state auditor found inadequate monitoring of Pearson's contract last year. Is it a mere coincidence that at time of renewal Pearson has lost sole provider status and the bulk of the contract? We think not.

Other states' contracts and deals with Pearson which have come under scrutiny from the Politico investigation include Alabama, Arizona, New Jersey, New Mexico and Florida. Pearson holds testing contracts with 21 states, together with Washington and New York City. New York's testing contract, for example, expires at the end of 2015. The State fined Pearson for using its non-profit foundation arm to steer business to the firm.

With this renewed focus on fair competitive tendering with our oft-mentioned headwinds in the U.S. higher education sector and gainful employment regulations, on July 1st, and the pressure on Pearson will likely increase from here. Yet, Pearson currently forecasts greater stability in the North American education market.

We disagree. Sell.

26. Buy a dog, it could save your life

If you get the chance to watch this week's Panorama episode, "Antibiotic-apocalypse", it's well worth doing so, if you don't remember this:

Every gram of soil contains 10billion cells of bacteria, only 1% have been cultivated / studied in labs. A few grains of soil have revealed 25 new antibiotics from 50,000 cells. In other words, your back-garden provides us with more new antibiotics than ever thought possible.

Buy a dog…

27. Meyer Burger (GET-Clean): receives important contract

This deal helps explain what stock +23% in the last 5 days. This is the largest order MB has announced for some time. Orders mean cash deposits in the bank, which helps the working cap situation. Meyer Burger is clearly a leader here, this is a very large PERC upgrade, for a 2.5GW Asian customer, i.e. a leading player. However, this is not capacity expansion per se, the market is still waiting for these announcements from EM (Asia still in the upgrade phase). As a word of caution, although worth MORE than CHF 38mn, this is a relatively low price for 2.5GW; in the past, has been CHF 30mn for 1GW.

28. Delta Lloyd: good numbers

Including the Belgian/German asset sales, solvency came in at 208% (FY14 was 183%). The capital raise added c.15%, leaving roughly 10% from capital generation and earnings vs. guidance of 1-2pp per month. The market will be anxious to learn why capital generation is so good even though bond yields tracked lower to the end of March. For DL, it's not just simple yields, it's about yields across the curve. Embedded value went down and there are more shares post cap raise, but DL is still trading at a 15% discount to embedded value (value of business in run-off), well below insurance peers. Overall underwriting was stable with gross written premiums +4% and cost of risk fell again in the GI business to 96.6%.

29. Laggards: GlaxoSmithKline/Rio Tinto

Not everything is working the way we want it to.

GlaxoSmithKline (NYSE:GSK) has been frustrating, and our patience has been severely tested - again. However, we maintain our view that over the long term, there remains a good investment opportunity. And while the European investment community may struggle with a management vision that targets 2020 as a year of judgment, U.S. investors may not. Indeed there was further speculation this week that Pfizer (NYSE:PFE) may be circling GSK, something we believe has merit especially at a time of vulnerability.

As discussed the last time, these issues were raised:

  • GSK is certainly vulnerable. A deal has been speculated before.
  • Many believe it will warn again - management credibility in issue.
  • Pfizer has JVs with GSK already, notably the ViiV business (soon to be IPO-ed).
  • They have the will (see AstraZeneca (NYSE:AZN)) and the firepower, Strong $/cheap finance.
  • Pfizer has learnt its lessons of the past… "beware Tax deals".
  • This one justified by pipeline opportunities/not by inversion.
  • Does a Consumer Healthcare business fit with a Vaccines and Pharma business?
  • Could Private Equity be involved? 3G/Buffett bid for Heinz/Kraft (NASDAQ:KRFT) etc.

Rio Tinto is the other disappointment although still slightly in the money since we put a Trading Buy on it. The $ bounce has hurt recently although our hope remains that for the first time, this cycle we can point to second derivative improvements on the demand side (see charts on Chinese property), which may transcend the real/perceived impact of a stronger $, if that is what transpires. Trading Buy remains.

30. DSM (RB): stay long

We (Aviate) have discussed the restructuring potential of this name for some time, but with mixed success. The idea is quite simple: it's a transformation from a commodity company most found hard to analyse to a more streamlined Nutrition business, generating high returns, with loads of cash and on a material discount to peers such as Symrise (OTCPK:SYIEY) and Givaudan (OTCPK:GVDNY). Recently, we have become more excited by the Animal Biome and DSM's (OTCQX:RDSMY) involvement in what could be a huge growth market in prebiotics, and so were pleased to see good volume growth in animal nutrition, helping offset lower vitamin E prices and by weakness in human nutrition. Sales increased by 15% compared to Q1 2014. Organic sales growth was 4% compared to Q1 2014 as a result of 3% higher volumes and 1% higher prices. Our hope remains that in time DSM could look more and more like a Givaudan or Symrise than a commodity chemicals business. In the meantime, you get to clip a 3% dividend yield, which will grow high-single digits. Stay long.

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Source: http://seekingalpha.com/article/3207726-the-weekender?source=feed_articles_sectors_technology