IBERIA. Monday Retail sales in Poland (November) Best & Worse Performers -1 Week (%) Sonaecom Zon Optimus -2.

Transcription

1 EQUITY RESEARCH TOP STORIES IBERIA 20 December 2013 WEEKLY Sonae rose 6.1% this week. We believe Portuguese Prime Minister decision not to immediately increase VAT rates following constitutional court rejection of government plans to converge state and private sector pensions helped Sonae stock. Recall a VAT rate hike was widely expected to partially offset negative impact from constitutional court decision (government will have to find alternative spending cuts or tax increases worth 388mn next year), thus a no decision is a positive new to discretionary retail. However, we believe a VAT rate hike will keep on agenda as a Plan B. OUT THIS WEEK Snapshots / Company Reports Model Portfolio Price Target / Recommendation Changes Portugal Telecom, Telefónica, Jerónimo Martins, Portucel, Galp Energia, EDP, Zon Optimus, Inditex, Sonae Industria, Altri Other News Telefónica, PSI20, Galp Energia, Banking Sector, BES, EDP, EDP Renováveis WEEK AHEAD Monday Retail sales in Poland (November) PORTFOLIOS This week, Mib Aggressive Portfolio went up 2.15%, underperforming the PSI20 by 0.48pp. Novabase and EDPR were the main contributors for this underperformance (page 11). This week, Mib Liquidity Portfolio went up 3.83%, outperforming the PSI20 by 1.20pp. Excluding EDPR, all stocks contributed for this outperformance (page 12). Stock Market Last 1W YTD 2012 Daily Vol. ( mn) 1W 1M 6M 2012 PSI 20 6, % 15.22% 2.93% PSI IBEX 35 9, % 18.64% -4.66% IBEX 35 2,788 2,602 2,742 2,578 Euro Stoxx 50 3, % 15.68% 13.79% Euro Stoxx 50 7,914 7,012 7,527 7,867 Forex Rates Last 1W YTD 2012 Interest Rates Last 1W Chg YE12 EUR/USD % 3.49% 1.97% Euribor 6m 0.39% 0.38% 1bp 0.32% EUR/GBP % 2.29% -2.30% 10Y Bond PT 6.02% 6.05% -2bp 7.01% EUR/BRL % 20.36% % 10Y Bond SP 4.14% 4.10% 4bp 5.26% Best & Worse Performers -1 Week (%) Best & Worse Performers - YTD (%) BCP 13.4 Impresa Indra 9.1 Mota-Engil Sonae 6.1 Sonae Capital BPI 4.9 BCP Inditex 4.6 Zon Optimus 77.1 Sonaecom -2.5 Galp Energia 0.6 Zon Optimus -2.8 Jerónimo Martins -3.3 Sonae Capital -2.9 EDP Renováveis -4.2 António Seladas, CFA antonio.seladas@millenniumbcp.pt Sonae Industria -3.1 Cofina Portugal Telecom Cofina Page 1 of 15 All prices are those of the end of the trading session unless otherwise indicated. For important Disclosure and Disclaimer go to the second last page.

2 CHANGES New Previous Rating Target Rating Target Motive Telefónica Buy Buy Valuation Update Portugal Telecom Buy 3.80 Buy 4.00 Valuation Update Jerónimo Martins Buy Buy Valuation Update Portucel Reduce 2.75 Sell 2.50 Valuation Update Zon Optimus Neutral 5.30 Reduce 5.30 Price Performance EDP Buy 2.90 Neutral 2.90 Price Performance Inditex Reduce Neutral Price Performance Sonae Industria Buy 0.66 Neutral 0.66 Price Performance Altri Neutral 2.25 Reduce 2.25 Price Performance EARNINGS Company 4Q2013 1Q2014 2Q2014 3Q2014 Investor Day Jerónimo Martins * AM n.a. n.a. n.a. Galp Energia * BM BM BM BM BCP AM AM AM AM Novabase AM AM AM AM Galp Energia BM BM BM BM Jerónimo Martins BM BM BM BM EDP AM n.a. n.a. n.a. Telefónica BM BM BM BM Glintt Portucel n.a. n.a. n.a. n.a. Media Capital n.a. n.a. n.a. n.a. Iberdrola n.a. n.a. n.a. n.a. BES n.a. n.a. n.a. n.a. Impresa n.a. n.a. n.a. n.a. Altri n.a. n.a. n.a. n.a. BPI n.a. n.a. n.a. n.a. EDP Renováveis n.a. n.a. n.a. n.a. Cofina n.a. n.a. n.a. n.a. Indra n.a. n.a. n.a. n.a. Semapa n.a. n.a. n.a. n.a. REN n.a. n.a. n.a. n.a. Martifer n.a. n.a. n.a. n.a. Sonae Sierra n.a. n.a. n.a. n.a. Portugal Telecom n.a. n.a. n.a. n.a. Zon Optimus n.a. n.a. n.a. n.a. Sonae Indústria n.a. n.a. n.a. n.a. Sonaecom n.a. n.a. n.a. n.a. Sonae n.a. n.a. n.a. n.a. Ibersol n.a. n.a. n.a. n.a. Sonae Capital n.a. n.a. n.a. n.a. Mota-Engil n.a. n.a. n.a. n.a. Cimpor n.a. n.a. n.a. n.a. Reditus n.a. n.a. n.a. n.a. SAG n.a. n.a. n.a. n.a. Soares da Costa n.a. n.a. n.a. n.a. Inditex n.a. n.a. n.a. n.a. ESFG n.a. n.a. n.a. n.a. AM - After market; BM - Before market; n.a. - Not available; (e) Expected; *Trading Statement Page 2 of 15

3 EQUITY MARKETS Equity Markets António Seladas, CFA; Model Portfolio December Schizophrenia in the markets The S&P500 performance in 2013 surprised on the upside, as, in terms of earnings, we were expecting a low growth environment, which was true (earnings should grow by roughly 6% in 2013). So one year ago we admitted that market would perform high single digit. However and despite the low growth environment enough to prevent monetary authorities of ending the bond buying programme, strong multiples expansion, from levels close to 13x one year ago to 15x now and the reduction of the equity risk premium leaded to a strong performance of the S&P500 (ytd 24%) and generally other indices. This performance is now triggering peculiar reactions from investors if not schizophrenics, as strong data has been perceived as negative because it will lead to the end of FED s bonds buying programme and consequently higher interest rates. However markets are now trading at 15x; not far away from long term averages, but PEG is at 1.53x, clearly above the long term average; 1.19x and despite the volatility of this measure, earning would have to grow to justify current valuations. The consensus growth rate 2014 is 9.3%, and the CAGR 2009/2014 is 18% the highest 5 year period on our data base (30 years), so without growth, FED will probably be on hold but earnings quite probably will disappoint, and unless multiples expansion occur, as in 2013, markets will correct. On the other hand a better growth environment will make easy earnings reach consensus but FED s policy will probably change and higher interest rates should be expected. So it seems that markets are facing a catch 22 situation that justifies the recent schizophrenia on markets behaviour. (For further details, please refer to our report out this week) PSI20 PSI20 Index João Flores, Rule change PSI20 index universe NYSE Euronext disclosed yesterday (December 20 th ) after market close that the requirement for companies to be headquartered in Portugal will be removed from the PI20 Index rulebook. This means that the following phrase will be removed from rule 5.2.1: The issuer s effective and main head-office must be in Portugal or, alternatively, the company must have its main listing Euronext Lisbon, assessed, for this purpose, by the share of the volume traded on Euronext Lisbon compared to the volume traded on all regulated markets on which the company is listed, which cannot be less than 66.7%. Recall the rule change will be applied from Saturday 1 March 2014 (when will happen the changes in the selection rules of the Portuguese PSI20 Index in the March annual review). Following this removal, the Universe of the PSI20 index will consist of all companies that have been admitted to listing on Euronext Lisbon s regulated market, thus CorpCo (Portugal Telecom merger with its Brazilian affiliate Oi), Mota Engil Africa or companies not headquartered in Portugal will be eligible to PSI20 index universe (subject to being listed on Euronext Lisbon). FINANCIALS Banking Sector Vanda Mesquita; Banks disclosed the 2013 EBA s transparency exercise Last Monday, 64 European banks disclosed the 2013 EBA s transparency exercise. This is an exercise in which banks disclosed information about the composition of capital, the composition of risk weighted assets, the exposures to sovereign in European economic area countries, credit risk exposures, loan to Page 3 of 15

4 value per portfolio, value adjustments and provisions and market risk and securitisation exposures. Banks reported the aforesaid information as of December 31, 2012 and as of June 30, Part of this information was already reported, but now is disclosed in a more complete way. This exercise raises the confidence in the European banking system and allows participants in the market to compare several banks. The single resolution mechanism will enter in force in 2026 According to the press, the single resolution mechanism will enter into force in This mechanism will be supported by a fund amounting to 55bn that will be financed by banks over the next 10 years beginning 2016, meaning annual contributions of 5.5bn. This fund will be divided by countries and in the case of a bank needing help, the fund related to the specific country will be used. Until 2026, countries will be responsible to recapitalize their own banks and/or deal with insolvent banks. Should this happen, the European Stability mechanism will lend to the country, which in turn will lend to banks. This situation seems to be very similar to the 100bn facility that was granted to Spain to help their banks. Although we do not know the criteria by which the annual contributions will be made, we perceive that those contributions will represent additional charges for banks, pressuring their earnings. Based on the weight of the Portuguese population in the European Union population (about 2%), the annual contribution of Portuguese banks should be around 110 million per year. BES Buy High Risk (Target YE14: 1.20) Vanda Mesquita The capital increase in BESA has been concluded BES announced that BES Angola (BESA) has concluded a $500 million capital increase. Following the completion of this operation, BES holds a 55.71% stake in BESA, Portmill Investimentos e Telecomunicações a 24% stake and Geni Novas Tecnologias a 18.99% stake. This capital increase allows BES to improve its CT1 by 25 bps, considering the amount of RWA as of September, 30, This capital increase was expected to be concluded until the end of the year. TELECOMS Telefónica Buy Medium Risk (Target YE14: 14.40) Valuation update Fundamental value is there, in the short term is all about Tel. Italia/ Brazil Alexandra Delgado, CFA We have fine-tuned our estimates for Telefónica. We value Telefónica at per share (YE14), meaning a 0.3% upward revision from our previous calculation of (YE13). Given the 26% upside on the stock we rate it as Buy (Medium Risk). The depreciation of the majority of currencies impacting TEF s business resulted in a 0.90 downward revision of our price target. The easing pressure on Spain s topline (wireline) and higher margin estimates up to 2015 increased it by 0.20/ share. On our Europe (exc. Spain) estimates, a stronger topline in the UK was the main driver behind an increase of 0.35/ share. The decrease of margin estimates generated by most Latin America countries lowered out price target by 0.90/ share. Finally, moving our valuation to the end of 2014 has revised upwards our valuation by Operational performance is slowly improving: topline is recovering faster than we anticipated while margins in Europe are offsetting depressed profitability in Latin America. Turnover in Spain is slowly heading toward stabilization. In Latin America, growth continues to pick up, profitability is heavily depressed on the back of intense commercial activity and wage inflation. The main strategic challenge that Telefónica now faces is how it can solve the Telecom Italia/ Brazil embroil. Cade s decision puts TEF under more pressure (deadline remains uncertain) and will precipitate the definition of Telefónica s investment in Telecom Italia. TEF has two options: it may either convince Telecom Italia to sell TIM or abandon the Italian operator altogether, at a steep loss. Page 4 of 15

5 Recently announced resignation of the two representatives on Telecom Italia s Board shows what will be TEF s strategy: buy time to find the best solution. In summary, Telefónica is now in a better shape. It has sold non-core assets and has now a higher financial flexibility. Net financial debt declined 5.0 bn in FY12 & 5.2 bn in 9M13. We forecast an adj. net financial debt YE13 of 45.9 bn, 2.4x OIBDA13. More importantly, FCF now covers dividend, allowing TEF to continue to deleverage without any further asset sales. Adjustment in the domestic market has been harsh, but KPIs are slowly improving. TEF has resumed dividend payment last November, which should provide some support. An improved performance in the quarters ahead should unlock the value we see in the stock on a fundamental basis. In the short term however, questions surrounding investment in Telecom Italia and consequently regulatory issues in Brazil are bound to be more relevant than operational execution. (For further details, please refer to our company update out this week) Telefónica s Alierta and Linares resign from Telecom Italia Board Telefónica issued a statement last Friday saying it considers the remedies imposed by Cade (Brazilian antitrust watchdog) unreasonable and that is therefore analysing the possibility of initiating the appropriate legal actions against this decision. In addition, and in order to reinforce Telefónica s commitment to remaining separated from Telecom Italia s Brazilian businesses, Telefónica s representatives (Mr. Alierta and Mr. Linares) have resigned from their positions as Directors of Telecom Italia. Telefónica has decided for the time being not to exercise its right to appoint or propose two Directors in Telecom Italia s Board, under Telco shareholders agreement. We remind that Cade ruled early this month that Telefónica s acquisition of PT s stake in Vivo (back in 2010) will only be approved if: 1) Telefónica has no direct or indirect stake in Tim Brasil, 2) Telefónica gets a new partner in Vivo (other than America Movil, Oi, or other players that already operate in the Brazilian market), 3) or if Telefónica convinces Telecom Italia to sell its Brazilian unit TIM. Cade also imposed a R$15 mn fine on Telefónica for increasing its stake in Telco (holding that controls 22% of Telecom Italia capital) back in September. Alierta and Linares resignation from Telecom Italia Board shows that Telefónica is trying to buy time in order to solve the Telecom Italia/ Brazil issue. The Spanish operator needs time in order to convince other Telecom Italia shareholders to sell TIM or to plan exit from Telecom Italia capital. Cade gives Telefónica 18 months to lower presence in the country; Telefónica s Alierta and Linares resign from Telecom Italia Board Reuters reported Wednesday that Cade, Brazilian antitrust watchdog, allegedly has given Telefónica 18 months to comply with its decision. We remind that Cade ruled early this month that Telefónica s acquisition of PT s stake in Vivo (back in 2010) will only be approved if: 1) Telefónica has no direct or indirect stake in Tim Brasil, 2) Telefónica gets a new partner in Vivo (other than America Movil, Oi, or other players that already operate in the Brazilian market), 3) or if Telefónica convinces Telecom Italia to sell its Brazilian unit TIM. Cade also imposed a R$15 mn fine on Telefónica for increasing its stake in Telco (holding that controls 22% of Telecom Italia capital) back in September. Telefónica issued a statement last Friday saying it considers the remedies imposed by Cade (Brazilian antitrust watchdog) unreasonable and that is therefore analysing the possibility of initiating the appropriate legal actions against this decision. In addition, and in order to reinforce Telefónica s commitment to remaining separated from Telecom Italia s Brazilian businesses, Telefónica s representatives (Mr. Alierta and Mr. Linares) have resigned from their positions as Directors of Telecom Italia. Telefónica has decided for the time being not to exercise its right to appoint or propose two Directors in Telecom Italia s Board, under Telco shareholders agreement. Alierta and Linares resignation from Telecom Italia Board shows that Telefónica is trying to buy time in order to solve the Telecom Italia/ Brazil issue. If indeed the 18 months are confirmed, and given the complexity of the issue in hands, then we don t expect a resolution already in The Spanish operator Page 5 of 15

6 needs time in order to convince other Telecom Italia shareholders to sell TIM or to plan exit from Telecom Italia capital. Portugal Telecom Buy Medium Risk (Target YE14: 3.80) Valuation update All-in on Oi s turnaround Alexandra Delgado, CFA We have fine-tuned our estimates for Portugal Telecom. We value Portugal Telecom at 3.80 per share (YE13), revised from our previous calculation of 4.00, meaning a 5% downward revision. Given the 18% upside on the stock we rate it as Buy (Medium Risk). Lower revenue estimates in Portugal were the main driver behind the decrease of 0.30/ share in our price target. Weaker topline generated by Oi, a lower margin (EBITDA margin in perpetuity has been lowered to 33.5% from previous 35%), and higher capex in 2015 & 2016 decreased a further 0.45/ share. The increase in holding costs cut our price target by a 0.25/ share. Moving our valuation to the end of 2014 increased price target by Incorporating merger impact has revised upwards our valuation by 0.60, to 3.80/ share. We highlight that our price target for PT YE14 is a function of our CorpCo valuation, i.e. of the CorpCo shares a PT shareholder is expected to receive. Please note our CorpCo valuation includes R$3.3 bn operational synergies announced by the companies, a reasonable figure in our opinion (c. 1% of combined opex & capex). We are not including announced financial synergies of R$2.2 bn, as we do not have yet sufficient information on how these will be obtained. We value CorpCo s Enterprise Value at R$64,719 million, 5.6x EV/EBITDA 2014E, which translates into an equity value of R$27,195 million. We value Oi at 4.7x EV/EBITDA 2014E and PT Portugal at 7.2x EV/EBITDA 2014E. Portugal Telecom is now in the process of merging with Brazilian Oi. Merger turns operational synergies easier to obtain and potentially to get hold of significant financial synergies. The simplification of the shareholder structure is a very positive outcome. Balance sheet will be strengthened, but with only R$2.5 R$3.5 bn of fresh cash, net debt-on-ebitda 2013E will still be too high (3.7x 2013E) and require deleverage ahead; this should trigger further divestment from Africa (Unitel or Africatel). Bottom line, the merger is positive but there s no turning back. This is an all in bet on Oi s turnaround. The merger has effectively established a direct link between PT and Oi stocks, but PT still trades at a significant premium vs. Oi. As we become closer to the huge capital increase (up to R$8 bn vs. current R$6.5 bn mkt cap), that is not reserved at shareholders, PT s premium should decrease or even disappear given the obvious arbitrage possibility. This means that PT stock price is pressured until the operation is completed. (For further details, please refer to our company update out this week) UTILITIES EDP Buy Low Risk (Target YE14: 2.90) Vanda Mesquita, A new concession in Brazil EDP announced that the consortium formed by EDP Energias do Brasil and Companhia das Furnas Centrais Eléctricas obtained the concession for the São Manoel hydro plant under the last auction in Brazil. The hydro plant with an installed capacity of 700 MW will be built between the Mato Grosso state and the Pará state. The conditions of the contracted PPA include the sale of average MW for a 30-year term starting in May The price was set at R$83.49/MWh (prices at December 2013, being updated in line with the Brazilian inflation). The investment will amount to R$2.7 bn. Page 6 of 15

7 This new plant will allow EDP to reinforce its presence in the generation market, the most profitable business in Brazil. As we value EDP - Energias do Brasil through its market value, there is no impact valuation wise. We recall the EDP owns a 51% stake in EDP - Energias do Brasil. Erse unveiled the final document regarding the tariffs and prices for the year 2014 The Portuguese Energy Services Regulatory Authority published the final proposal for tariffs and prices for energy for the year 2014 (the draft proposal was made public on October, 15). Regulated tariff will increase by 2.8% in EDP s 2014 allowed revenues for the electricity distribution grid were set at 1,260mn and for the last resource supply were set at 78mn. The document also unveils the components that allow the calculation of the increase in regulatory receivables in According to our understanding, the company s regulatory receivables will increase by approximately 660mn. Overall, the final version of the document does not differ very much from the draft. As far as the company s allowed revenues are concerned, there is no relevant differences vis-à-vis what we consider in our valuation, since we were expecting 2014 distribution allowed revenues to stand at 1,274 million and for 2014 the last resort supply allowed revenues to stand at 66 million. In terms of regulatory receivables, we assume that they will drop by 600mn in 2014, since we expect that EDP will continue to securitize this kind of assets. In its last earnings CC (October 2013), the company stated that there were several tariff tranches amounting to 1,585mn that were ready for securitization. If these securitizations were to happen and also taking into consideration the aforesaid increase of regulatory receivables in ERSE s document in mind, the company s regulatory receivables could drop by 925 millions in EDP sold million of tariff deficit in Portugal EDP announced that it sold million of tariff deficit in Portugal. The company did not disclose the amount that will be received. This operation will allow EDP to receive in advance an amount that was included in the caption regulatory receivables. Due to the fact that we consider this value in our valuation in regulatory receivables and given the weak weight (regardless of the value of the discount applied on this operation) over EDP s total assets, we consider that the impact is neutral valuation wise. On the other hand, this sale could mean that the market is showing some interest over this kind of operations. If this interest continues EDP could sell more regulatory receivables (at the 9M13 regulatory receivables amounted to 2.9bn, 2.5bn of which were related to Portugal) and, consequently, EDP s debt may drop. Finally, we would like to remind that EDP s debt has been under pressure due to the evolution of regulatory receivables. EDP Renováveis Buy Low Risk (Target YE14: 5.40) Vanda Mesquita, EDPR executed two project finances in Poland At the beginning of the week, EDPR announced that it has executed project finance with the European Bank for Reconstruction and Development (EBRD) to finance 80MW located in Poland. The loan amounting to 72mn (301 million zlotys) is expected to be received at the beginning of Later on, the company announced project finance also in Poland. The second one was to finance 50MW related to two wind parks that were commissioned during this year. In this case, the loan amounting to 40mn (168 million zlotys) is expected to be received until the end of the year. The funding through Project finance is one of the main sources used by EDPR to finance its projects. The use of project finance helps EDPR to diversify its sources of funding and at the same time to reduce its dependency from loans from parent company. EDPR executes project finance for 80 MW in Poland EDPR has executed project finance with the European Bank for Reconstruction and Development (EBRD) to finance 80MW located in Poland The loan amounting to 72mn (301 million zlotys) is Page 7 of 15

8 expected to be received at the beginning of The funding through Project finance is one of the main sources used by EDPR to finance its projects. The use of project finance helps EDPR to diversify its sources of funding and at the same time to reduce its dependency from loans from parent company. RETAIL Jerónimo Martins Buy Medium Risk (Target YE14: 17.10) Strong strategy while expects a new governance model João Flores, Based on JM`s Investor Day 13, 3Q13 Earnings and changes in Fx (Euro/Zloty; /Cop) we decided to update our JM`s valuation. Our price target was slightly revised downwards to YE14 from YE14 (Buy recommendation, Medium Risk), meaning a 22% upside vs current price. We believe increase market share both in Poland and Portugal it s the biggest challenge to JM. Updated estimates in Poland had a 0.40 positive effect on JM`s price target: Biedronka benefited from higher sales estimates from 2014: Stores openings kept unchanged while LfL was revised upwards in order to reach c 12Bn sales in 2016 at constant exchange rate (JM`s guidance). EBITDA margins were downwards revised to reflect more promotional campaigns. Overall, polish numbers at short/medium term were penalized by an increasing competition while at longer term numbers were upwards revised to reflect a strong strategy and a winning strategy in the polish food retail market. Updated estimates in Portugal ( 0.05 negative effect): Portugal valuation was slightly revised downwards. Estimated sales were upwards revised (stores openings in were revised to 10 stores openings per year from 4 stores per year) however EBITDA margins from 2016 were downwards revise and Capex was upwards revised. Updated estimates in Colombia ( 0.40 negative effect): Based on JM`s guidelines (sales YE13 c.. 20mn; stores number YE13 36 stores; start-up losses YE13 c. 25mn) we fine-tuned Colombia estimates. We highlight it`s currently a (very) low scale business, thus minor changes in estimated early numbers will led to big differences in valuations. We believe new organizational structure (CEO will accumulate Chairman) is an emergency remedy following unexpected resignation of Mr. Soares dos Santos, thus a new governance model is expected to be proposed early next year. Recall company has a tacit rule not to accumulate Chairman and CEO in Soares dos Santos family, thus new structure is a double surprise: i) Soares dos Santos family accumulates Chairman and CEO; ii) Chairman and CEO are the same person. At medium term (up to 5 yrs) JM`s strategy will keep focused on stores opening in Poland while finetune its business model / growth plan in Colombia (organic; via M&A?). (For further details, please refer to our company update out this week) INDUSTRIALS Portucel Reduce Medium Risk (Target YE14: 2.75) Update Valuation Watch out for clouds on the horizon António Seladas, CFA; We updated Portucel s valuation changing the price target from 2.5YE13 to 2.75YE14, Reduce recommendation medium risk. The yearend rollover justifies 18cents, while the estimates update justifies 7cents. Basically we increased capacity installed and volumes sold however we revised slightly downward pulp prices. Energy estimates were also reviewed downwards. Concerning Mozambique the project is still in its infancy, so isn t yet included on our valuation, however wood Page 8 of 15

9 production seems almost certain while the pulp mill could be postponed if pulp prices in 5 or 6 years time were not attractive enough; All in all no major issues in the short term, however the structural weak UWF paper s demand and the several plans announced in the recent past to increase pulp s capacity worldwide could trigger major corrections in paper and pulp prices. The end of energy cogeneration benefits is also negative, however is already included on our valuation. So the strong financial structure, a first class management team and an interesting dividend yield (roughly 7.5%) should work as a buffer against small negative changes on pulp and paper prices, however not enough if the price adjustments were harsh. (For further details, please refer to our company update out this week) OIL & GAS Galp Energia Buy High Risk (Target YE14: 15.95) Valuation Update Losing steam, but still an attractive stock Vanda Mesquita, We have fine-tuned our estimates. We value Galp at (YE14) per share, revised downwards from our previous calculations of (YE13), keeping our buy recommendation (High risk) unchanged. Adjustments wise, the roll over to 2014 added 90 cents to our price target, while the update of EUR/USD and operational estimates trimmed 70 cents and 45 cents, respectively. Estimates update was mainly driven by the downward revision of the company s production profile over the long run. Galp s equity story seems to be losing steam. Nevertheless, we still deem that Galp is an attractive stock, with high growth ahead. Exploration & Production division area will be the key driver for earnings growth, while Marketing and Gas businesses divisions will be crucial contributing with steady earnings. The Refining business is benefiting from the investment that was made, however the risk of low refining margins continues to pose a threat. We see the risk of overhang on Galp s shares (ENI may sell 8.34% of Galp s outstanding shares if Amorim does not exercise its rights until December, 31 st 2013) and the pace of project execution in Brazil (exogenous causes may cause delays in the ongoing projects) as the main risks for Galp s shares. Our estimates point to a consolidated negative free cash flow in the coming years. We expect it to turn almost positive in 2019, two years later than Galp s guidance. Free cash flow will become positive on the back of a strong evolution of EBITDA mostly driven by higher E&P production (we estimate EBITDA to post a 21.8% CAGR from 2012 to 2020). Capex should stay at high level in the coming years (we estimate an average capex of 1.6bn from 2013 to 2020). We expect Net Debt to EBITDA to peak in 2015 reaching 2.5x and then to drop to 2.0x in (For further details, please refer to our company update out this week) News from Pitu Galp announced that the results obtained during the drilling of the third well known as Pitu located in Potiguar basin (offshore Brazil) revealed the first oil accumulation discovery in the area. The company also informed that the well will continue to be drilled until the target depth in order to verify the extent of discovery and also to better understand the characteristics of the reservoir. In this field, Petrogal Brazil owns a 20% stake, while Petrobras has an 80% stake. We remind that Petrogal Brasil is 70% held by Galp and 30% by Sinopec, meaning that Galp has a 14% stake in this field. This is a piece of good news from a new area in Brazil different than the Santos basin. The company did not quantify the size of the area, mentioning that it needs to continue the drilling activity. Potiguar basin is included in our prospective resources for Brazil (the valuation for these prospects only accounts for 1% Page 9 of 15

10 our enterprise valuation). We do not value Potiguar apart, since the company does not give this breakdown by field. Since prospective resources are resources that were not discovered, its value is not significant. When resources are discovered its value naturally increases. We believe that the coming announcements related to Potiguar will be crucial and help us to increase our insight over this field. SECTOR PERFORMANCE PSI20 Financials Oil & Gas Retail * Industrials & Other Telecoms & IT Electric Utilities Sector Performance -1 Week (%) Media Sector Performance - YTD (%) PSI Industrials & Other 49.6 Financials Electric Utilities Telecoms & IT 7.5 Retail * 7.0 Oil & Gas Media * includes Jeronimo Martins and Sonae This week, the PSI20 went up 2.6%. The best performing sector was Financials, plus 7.8% and the worst was Media, minus 4.4%. On a Ytd basis, the PSI20 went up 15.2%. The best performing sector was Industrials & Other, plus 49.6% and the worst was Media, minus 14.8%. AGGRESSIVE PORTFOLIO This week, Mib Aggressive Portfolio went up 2.15%, underperforming the PSI20 by 0.48pp. Novabase and EDPR were the main contributors for this underperformance. We highlight that the portfolio is composed by the five stocks with the highest upside potential of our coverage universe. It is equal weighted and rebalanced on a weekly basis. LIQUIDITY PORTFOLIO This week, Mib Liquidity Portfolio went up 3.83%, outperforming the PSI20 by 1.20pp. Excluding EDPR, all stocks contributed for this outperformance. We highlight that the portfolio is composed by the five stocks with the highest upside potential of our coverage universe, excluding the less liquid stocks. It is equal weighted and rebalanced on a weekly basis. Page 10 of 15

11 Return since inception (30th July 2004) Portfolio PSI Jul 15-Feb 10-Sep 04-Apr 28-Oct 22-May 15-Dec Mib AGGRESSIVE PORTFOLIO Portfolio weekly return Company Risk Market Price Upside Weekly Performance Rating Price ( ) Target ( ) Potential Return Contribution Deviation Galp Energia High % 2.6% 0.53pp 0.00pp Novabase High % 0.7% 0.14pp -0.39pp EDP Renováveis Low % -0.6% -0.13pp -0.52pp BPI High % 4.9% 0.99pp 0.46pp Telefónica Medium % 3.1% 0.62pp 0.09pp Portfolio 2.15% PSI % Gain/loss -0.48pp Explained by the portfolio -0.35pp Explained by being underweight in the remaining PSI20 stocks -0.13pp Ytd Return Portfolio PSI Dec 28-Feb 28-Apr 26-Jun 24-Aug 22-Oct 20-Dec Next week Portfolio Changes in Portfolio Company Risk Market Price Upside Rating Price ( ) Target ( ) Potential In Out EDP Renováveis Low % - - Novabase High % Galp Energia High % Telefónica Medium % BPI High % Return vs. PSI YTD 1 Month 1 Week Portfolio 71.9% -7.30% -36.6% 22.1% 48.4% 1.0% 2.2% PSI % % -27.6% 2.9% 15.2% 2.6% 2.6% Gain/loss 38.5pp 3.0pp -9.0pp 19.2pp 33.2pp -1.6pp -0.5pp Source: Bloomberg; Millennium investment banking "Mib Aggressive Portfolio" is composed by the five stocks with a higher upside potential of our coverage universe. "Mib Aggressive Portfolio" is equal-weighted and its composition changes at the end of the last trading day of each week. The portfolio YTD return was recalculated on the week of March 15. Page 11 of 15

12 Return since inception (31th December 2011) Portfolio PSI Dec 22-May 13-Oct 06-Mar 28-Jul 19-Dec Mib LIQUIDITY PORTFOLIO Portfolio weekly return Company Risk Upside Weekly Performance Rating Market Price ( ) Price Target ( ) Potential Return Contribution Deviation Galp Energia High % 2.6% 0.53pp 0.00pp EDP Renováveis Low % -0.6% -0.13pp -0.52pp BPI High % 4.9% 0.99pp 0.46pp Telefónica Medium % 3.1% 0.62pp 0.09pp Indra High % 9.1% 1.82pp 1.29pp Portfolio 3.83% PSI % Gain/loss 1.20pp Explained by the portfolio -0.35pp Explained by being underweight in the remaining PSI20 stocks 1.55pp Ytd Return Portfolio PSI Dec 28-Feb 28-Apr 26-Jun 24-Aug 22-Oct 20-Dec Next week Portfolio Changes in Portfolio Company Risk Rating Market Price ( ) Price Upside Target ( ) Potential In Out EDP Renováveis Low % Jerónimo Martins Indra Galp Energia High % Telefónica Medium % BPI High % Jerónimo Martins Medium % Return vs. PSI YTD 1 Month 1 Week Portfolio % 40.3% 1.7% 3.8% PSI % 2.9% 15.2% 2.6% 2.6% Gain/loss pp 25.1pp -0.9pp 1.2pp Source: Bloomberg; Millennium investment banking "Mib Liquidity Portfolio" is composed by the five stocks with a higher upside potential, excluding less liquid stocks. "Mib Liquidity Portfolio" is equal-weighted and its composition changes at the end of the last trading day of each week. The portfolio YTD return was recalculated on the week of March 15. Page 12 of 15

13 Latest Pr ( ) Target YE14 Upsd Rating Risk Trnvr ( mn) M Cap Change (%) EPS P / E EV / Sales EV / EBITDA Div Yield P/BV Rating 3m 6m ( mn)o Week 1M 3M 12M YTD E 2014E E 2014E E 2014E E 2014E E 2013E PSI 20 6, , IBEX 9, , Financials , BCP (1) , BES % Buy High , loss % 0.0% 0.5 BPI % Buy High , % 0.0% 0.9 Telecoms , % 6.1% 2.0 Telefónica % Buy Medium , % 6.5% 2.1 Portugal Telecom % Buy Medium , % 3.0% 0.9 Zon Optimus % Neutral Medium , % 3.6% 2.1 Sonaecom (3) % Reduce High % 3.5% 2.6 Media % - - Impresa (2) % - - Media Capital (2) % - - Cofina (2) % - - Technology Indra % Buy High , % 2.8% 1.7 Novabase % Buy High % 2.6% 1.0 Utilities , % 4.1% 0.8 Iberdrola % Neutral Low , % 6.6% 0.8 EDP % Buy Low , % 7.1% 1.1 EDP Renováveis % Buy Low , % 1.0% 0.6 REN % Neutral Low , % 7.6% 1.1 Conglomerates , Sonae (3) % Buy Medium , % 3.1% 1.4 Semapa (3) % Sell High % 2.9% 1.3 Sonae Capital (3) % Sell High loss loss loss loss % 0.0% 0.3 Retail , % 1.9% 7.4 Inditex % Reduce Medium , % 1.9% 7.6 Jerónimo Martins % Buy Medium , % 2.1% 6.3 Industrials , % - - Sonae Industria % Buy High loss loss loss % loss 1.2 Altri % Neutral High % 1.1% 2.0 Portucel % Reduce Medium , % 8.9% 1.5 Construction Mota-Engil % Sell High % 2.5% 1.8 Oil & Gas Galp Energia % Buy High , % 2.4% 1.8 (1) We do not have a recommendation on BCP, as Mib is a registered trademark of BCP; (2) Not Covered; (3) Price Target YE13 Page 13 of 15

14 DISCLOSURES This report has been prepared on behalf of Millennium investment banking (Mib), a registered trademark of Banco Comercial Português, S.A. (Millennium bcp). Millennium bcp is regulated by Comissão de Mercado de Valores Mobiliários. Recommendations: Buy means more than 10% absolute return; Neutral means between 0% and +10% absolute return; Reduce means between -10% and 0% absolute return; Sell means less than -10% absolute return. Unless otherwise specified, the time frame for price targets included in this report is current year-end or next year-end. Risk is defined by the analyst s view in a qualitative way (High, Medium, Low). Usually we update our models and price targets in between 3 and 9 months. Millennium bcp prohibits its analysts and members of their households to own any shares of the companies covered by them. BCP group may have business relationships with the companies mentioned in this report. Millennium bcp, expects to receive or intends to seek compensations for investment banking services from the companies mentioned in this report. The views expressed above, accurately reflect personal views of the authors. They have not and will not receive any compensation for providing a specific recommendation or view in this report. There were not any agreements between the companies covered and the analysts regarding the recommendation. Analysts are paid in part based on the profitability of BCP group, which includes investment banking revenues. BCP group has more than 2% of EDP. BCP group was chosen to evaluate EDP regarding the 8th stage of the privatization process. BCP group was chosen to evaluate REN regarding the 2nd stage of the privatization process. A member of the Executive Board of Directors of Millennium bcp is member of the General and Supervisory Board of EDP - Energias de Portugal, SA. Banco Millennium bcp Investimento, S.A. (merged into Millennium bcp) was chosen as a joint global coordinator of the Initial Public Offering of EDP Renováveis. Banco Millennium bcp Investimento, S.A. (merged into Millennium bcp) was part of the consortium, as a Co-Leader, of BES rights issue, done in April Millennium bcp was part of the consortium, as Co-Manager, of BES rights issue completed in May Millenniumbcp through its investment banking department is providing investment banking services to Tagus Holdings S.a.r.l. ( Offeror in the launch of a tender offer over Brisa - Autoestradas de Portugal, S.A. shares). Recommendations on Millennium bcp covered companies (%) Recommendation Nov-13 Oct-13 Sep-13 Jun-13 Mar-13 Dec-12 Jun-12 Dec-11 Dec-10 Dec-09 Dec-08 Dec-07 Dec-06 Dec-05 Dec-04 Buy 41% 41% 59% 77% 76% 77% 78% 68% 79% 63% 54% 41% 37% 30% 63% Neutral 23% 23% 9% 9% 10% 12% 4% 11% 7% 15% 4% 27% 11% 40% 6% Reduce 14% 14% 18% 14% 14% 4% 0% 0% 0% 7% 0% 0% 21% 5% 6% Sell 23% 23% 14% 0% 0% 4% 7% 7% 4% 4% 0% 14% 16% 5% 0% Unrated/Under Revision 0% 0% 0% 0% 0% 4% 11% 14% 11% 11% 42% 18% 16% 20% 25% Performance 4.7% 4.9% 7.1% -4.6% 3.0% 20.4% -14% -28% -10% 33% -51% 16% 30% 13% na PSI 20 6,538 6,246 5,954 5,557 5,822 5,655 4,698 5,494 7,588 8,464 6,341 13,019 11,198 8,619 7,600 DISCLAIMER This information is not an offer to sell or a solicitation to enter into any particular deal or contract. It consists of data compiled by or of opinions or estimates from Banco Comercial Português, S.A. and no representation or warranty is made as to its accuracy or completeness. This information is merely an auxiliary means of analysis to be used by its recipients, who will be solely responsible for its use, including for any losses or damages that may, directly or indirectly, derive from it. Its reproduction is not allowed without permission from the BCP group. The data herein disclosed are merely indicative and reflect the market conditions prevailing on the date they have been collected. Thus, its accuracy and timing must absolutely be confirmed before its usage. Any alteration in the market conditions shall imply the introduction of changes in this report. This information / these opinions may be altered without prior notice and may differ or be contrary to opinions expressed by other business areas of BCP group as a result of using different assumptions and criteria. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Page 14 of 15

15 OFFICE LOCATIONS Millennium investment banking Av. Prof. Dr. Cavaco Silva (Tagus Park) Edif 2 - Piso 2 B Porto Salvo Porto Salvo Portugal Telephone Fax / 39 Equity Team Luis Feria - Head of Equities Equity Research António Seladas, CFA - Head (Industrials and Small Caps) Alexandra Delgado, CFA (Telecoms and IT) João Flores (Media and Retail) Vanda Mesquita (Banks, Utilities and Oil&Gas) Ramiro Loureiro (Market Analysis) Sónia Martins (Market Analysis) Sónia Primo (Publishing) Prime Brokerage Vitor Almeida Equity Sales/Trading Paulo Cruz - Head Gonçalo Lima Jorge Caldeira Nuno Sousa Paulo Santos Pedro Ferreira Cruz Pedro Gonçalves Pedro Lalanda Equity Derivatives Maria Cardoso Baptista, CFA Head Ana Lagarelhos Diogo Justino Marco Barata