Banking on a Spanish Recovery




European equity markets started the week well with the STOXX50 closing 1.46% higher at 3,492. The banking sector rallied along with basic resources that also performed well following the strong manufacturing data from China. The Eurozone unemployment rate was unchanged in May at 9.3% but this still represents the lowest level since 2009. The unemployment rate in the Eurozone had been 10.2% just one year ago in May 2016, so the rate of improvement has accelerated.

The IHS Markit Eurozone manufacturing PMI improved to 57.4 in June from 57 in May. The manufacturing PMI in Germany hit a 74-month high at 59.6 while France and Italy both saw two-month highs at 54.8 and 55.2 respectively.

Spanish manufacturing remained strong in June with the IHS Markit PMI survey at 54.7 versus 55.4 in May. Job creation in the sector remained close to a 19-month high last month. Spain’s Ibex35 is set to breakout to the topside in my opinion. We hold two Spanish companies in our Fat Prophets Global Contrarian Fund high conviction portfolio, in the form of Bolsas Y Mercados Espanoles, the Spanish stock exchange, along with regional bank, Bankia, which rallied just under 5% on Monday. We also hold Bankia in our European and Global Opportunities Managed Account portfolios.

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I wrote about Fairfax yesterday, and the shares were under pressure again on Monday, falling 10%. Traders who had been holding out for a bidding war exited, but the shares finished well above intraday lows. As I suggested the company did come out with an announcement to confirm the ‘distraction’ of private equity interest had ended, and management are pushing ahead with plans to spin off Domain by the end of the year.

Whilst tough to swallow near term, shareholders will probably be better off in the end, with Domain likely worth much more than the bids that had been put on the table. It was always going to be a “hard deal” for any private equity firm to secure, given the promise highlighted in a trading update from the company yesterday.

Domain revenues were up 10%, underpinned by 22% growth in the digital business. The changes to the media laws are prospectively imminent in August and this could result in a generational change in the landscape.

Fairfax is forecasting full year earnings before interest, tax, depreciation and amortisation to come in between $262 million and $266 million. The traditional print assets are clearly still under pressure, with total group revenues down 6%, and possibly this has scared the suitors off. I think ironically though this will become yesterday’s news, as digital turnover accelerates, with management leveraging a loyal subscriber base while also taking further costs out on the print side.

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We are banking on a Spanish recovery. The consolidation of the Spanish banking sector continues apace, after state-controlled Bankia agreed to take over BMN, another nationalised lender, in a deal that values the smaller entity at €825m. Both Bankia and BMN were created through mergers between regional savings banks, or cajas, but fell victim to Spain’s 2012 banking crisis. We hold Bankia as a significant position in the Fat Prophets Global Contrarian Fund and the European Managed Account portfolio.

The two groups had to be recapitalised and nationalised after loading up on toxic real-estate assets and loans in the run-up to the country’s housing bust. Bankia absorbed more than €22bn in state funds — the most of any Spanish lender during the crisis — while BMN required €1.65bn in public aid.

Bankia has since been partially re-privatised and is profitable once again. José Ignacio Goirigolzarri, the chairman of Bankia, said in a recent statement: “After successfully completing its restructuring process, Bankia is now ready to embark on a new stage of growth, in which the integration of BMN is tremendously positive because it allows us to build out our franchise in some areas of strong growth in which we had a very limited presence.” The deal comes just weeks after market leader Banco Santander bought Banco Popular, the country’s sixth-largest lender, for the nominal sum of €1.

The two deals mean that Spain’s banking market, five years after the crisis, is dominated by four large-scale banks: Santander, BBVA, Caixabank and Bankia. If anything this is going to reduce competition, and provide a similar landscape to Australia. Bankia said the deal would be earnings accretive from day one and lift earnings per share by 16% in the first year.

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Disclosure: The Fat Prophets Global Contrarian Fund declares a holding in Bolsas Y Mercados Espanoles, Bankia, Fairfax Media.

Carpe Diem!

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