Will the Nasdaq whale be the elephant in the room that marks the bull market’s swan song? Possibly! Futures aren’t looking too great:

The midsession picture’s quite similar in the Europe while in its former colonies, another Brexit-induced puke for sterling isn’t enough to counter a pullback:

Some, all or fewer of those movers will be discussed in a moment. First, though, we probably need to talk about Softbank.

“This is just a big hedge fund, despite its public listing and retail investor base,” complains Lex, and fair enough. It can also be argued however that Softbank was only good when it was behaving like a big hedge fund. The same is probably true of Berkshire Hathaway, which is another big hedge fund that has a public listing, a retail investor base and a charismatic leader.

Between 1995 and 2006 Softbank made some very good directional bets, mostly via buying a whole bunch of minority stakes in fledgling tech. It was a hedge fund in the sense that its winners (Alibaba, Supercell) offset the losers (Cheezburger). For the next decade the bets became more ambitious with much longer payoff timelines (Vodafone Japan, Sprint, Arm, etc) but the portfolio strategy remained much the same. No single investment was allowed to become the story -- at least until Vodafone Japan outgrew its owner on the back of an iPhone exclusive.

After that came the Vision Fund, which was when Softbank lost its way. Egged on by the famously tech-savvy House of Saud, Softbank swapped portfolio hedging for The Singularity and overloaded with overhyped concept stocks like Uber and WeWork, where it could deliver no particular edge. “Had Vision Fund been focused on investing rather than financial engineering, with a balanced fund with the nice mix of technologies that make up the prelisted space today, it would have had a very different image, as well as performance,” says Pelham Smithers Associates.

In that context, Softbank’s over-analysed whale bet can be seen as a reversion to type after a five year dizzy spell. Vision was the aberration in the VC trading strategy and Masa’s now going back to his roots.

Softbank had already announced that it’d be using a bit of the money raised from the Sprint sale to set up a prop desk for equities and derivatives. That, when seen in combination with mobile stake selldowns, was a pretty clear signal of a desire to re-exert its trading edge at a time when regulatory constrictions and cowardice have driven nearly all the big banks out of the prop market. It’s not really a huge surprise that Softbank then bought a load of unknown-duration call options that are pro tech -- it’s Softbank! -- and it’ll almost certainly be hedged in ways that haven’t been discussed. This might all be intentional short-termist QQQ ramping, FAANGS spoofing, market manipulation via the technicalities of gamma hedging and whatnot (on which: ehhh . . . ). Or it might just be Softbank getting over its wonky Vision phase and behaving like Softbank again. Back to Pelham Smithers:

Although the options trade is something of a one-off, it has likely enabled SoftBank to build up a nice base in public equities which could prove to be the base of a more conventional tech fund; broadening the remit of the third-party asset management side. While prelisted investments may be sexier than public equity, it is easier to scale up in the latter.


Royal Mail of all things is leading the Stoxx 600 gainers, with the shares on course for their best day ever. Five-month trading is both terrible and better than expected, mostly on parcels volumes. There’s a quite long AGM statement where management sounds not completely dejected about pushing through restructuring, though of course Royal Mail’s big problem is delivery. UBS can summarise the headlines:

Q: How did the results compare vs expectations?

Royal Mail reported 5m letter revenues down 21.5% y/y. This suggests a deceleration of the decline over recent months (2m revenues were down 27%) and is aligned with the company’s Scenario 1 (1H letter revenues down 22% y/y). Parcel revenues reported 5m were up 34% y/y (vs. 2m revenues up 27%) and better vs. Scenario 1H target +20%. GLS 5m revenues were up 19% y/y (vs. 1H Scenario 1 +10%) with strong margins at 8.1%.

Q: What were the most noteworthy areas in the results?

In line with CWU update from last Friday, RM flags progress in the negotiations with the unions on short term productivity improvements, however an agreement has not yet been reached (initial expectations end July). On the regulatory side the company is exploring what a rebalanced USO might look like and awaits Ofcom conclusions on the User Needs (end Sept, early Oct) and the wider regulatory framework.

Q: Has the company’s outlook/guidance changed?

The company does not provide specific guidance. RM has positively updated its Scenario 1. In UKPIL the company expects at mid-point revenue growth of £112.5m (vs. prior decline of £225m) while costs are expected to be £20m higher. We calculate this implies an UKPIL EBIT loss of ca. £200m (vs. cons -£465, UBS -£580m). In GLS revenue growth is now expected +12% at mid-point (prior +6% y/y) and cons +6.5% and EBIT margin at ~7% (prior 6%, cons 6.7%). We calculate this implies an EBIT of ~£260m. (cons £234m).

And SocGen can do the necessary caution:

RMG has released a 5-month trading update ahead of its AGM later today. At GLS, the top line benefited from strong growth in B2C while the company leveraged its position in B2B parcels, leading to 19% growth in revenues and a strong 8.1% margin ytd. This has helped ease the pain from its UK business (UKPIL), where earnings continue to suffer higher cost headwinds due to the mix shift from handling more parcels than letters. Given the strong ytd revenues from parcels both at UKPIL and GLS, RMG has revised the likely scenario for FY21. It expects higher revenues in both segments, but a higher cost burden at UKPIL offset by the now better margins at GLS. Together with the lower COVID-19 related costs, this translates into slightly lower losses for the RMG group, than implied earlier by the group’s indications.

Higher mix-driven cost burden at UKPIL The mix shift from handling more parcels than letters remains an earnings burden; with the ytd cost burden at £85m, the group’s FY21 scenario for the headwind is increased by c.£40m to £140-160m (old £110m). Ytd, parcel revenues have increased by 33% yoy on 34% volume growth while letter revenues have fallen -21.5% yoy on -28% volume decline. In summary, UKPIL revenues have increased by £139m yoy but the mix shift has resulted in a net £85m cost burden ytd, a trend worse than the £70m earlier guided to for 1H. As a positive, the group’s scenario for costs from COVID-19 measures (ytd £75m) is lowered by £20m to £120m for FY21.

GLS trading significantly stronger than expected The ytd result suggests GLS has eventually succeeded in keeping variable costs in check to increase the margins. The ytd margin is already a strong 8.1% on robust 19% revenue (and volume) growth. For FY20, the group now expects 10-14% revenue growth (old 5-7%) with a higher operating margin of 7% (old 6%). We estimate this equates to operating profit higher by £45m at the upper end versus the previous scenario. Stronger margins at GLS should be the main boost to investor sentiment.

Performance has also improved in France, Spain and the US – the problem areas for GLS. Outlook There is still no specific FY21 guidance but RMG reiterates it will make a “material loss” over the full year and “will not become profitable without substantial business change”. Today’s update to the likely scenario implies higher revenue growth led by parcels, both at GLS and UKPIL. On operating profit, we think the higher contribution from GLS will be offset by the stronger mix-related cost headwinds at UKPIL, but the overall group losses should now be marginally lower by c.£20-25m, driven by lower COVID-19 related costs at UKPIL.

Restructuring update This, in our view, is a positive update and reinforces management’s message that it now intends to take hard measures to contain costs. This is key for sentiment to improve on RMG. The previously announced management restructuring is set to deliver a £130m benefit from FY22 and the group is targeting flat non-people costs for FY22 (ex D&A) vs FY19, implying £200m savings, an objective worth noting in our view. Unlike its peers, Bpost (Hold), DP-DHL (Buy) and PostNL (not covered), RMG has not been able to take advantage of the robust parcels’ growth, by quickly implementing changes and adjusting its high personnel costs, due to the dispute with its unions.

Caution warranted While today’s update is positive overall for sentiment, management pointed to continuing uncertainty: 1) at GLS, over the remainder of the year, on the pace of recovery in B2B, the impact of lockdown easing on parcel volumes and the recessionary impact in most GLS countries; and 2) at UKPIL, on the impact of recession, the potential frictional impact on cross-border trade from Brexit and changes to international postal rates.

Cardboard box makers have also done quite well out of rising parcel volumes, meaning the DS Smith divi’s reinstated having been cancelled in early July. There were some questions asked at the time on whether DS Smith was acting over-cautiously so it’s quite reassuring to see a management U-turn. Jefferies summarises its rather brief trading update with a rather brief comment:

Improved Trading: LFL box volume performance improved over the period since the initial impact of COVID-19 (May: -4.7%, June: -4%) and into Aug with a return to positive growth in Aug (note: here). Regionally, N. Europe continued to perform well with pleasing recovery in S Europe & E Europe since May. In N. America, SMDS notes progress in attracting customers to their new box plant & confidence in improving the performance in FY21E.

Positively Dividend Resumed with 1H: “Given the performance over the last quarter, & our improved clarity on the outlook, combined with a strong financial position, the Board intends to declare an interim dividend.”

This is a positive for the stock, as it gives clarity over the divi and implies confidence outlook & cash generation of SMDS. We expect shares to open higher. Based on 2x cover we assume 12p DPS (c4% div yield) on our FY21E forecasts, with the dividend cash outflow in FY22E

Ditto Goodbody:

The key takeaway from the update is that the company intends to declare a dividend with the interim results due to performance in the last quarter and improved clarity on the outlook. Given that the pricing environment has deteriorated further over the last two months and a spike in COVID cases in Europe, it is not clear where the improved clarity has come from. Nonetheless this will be well received by investors albeit it remains to be seen at what level the dividend is reinstated.

We remain cautious on the stock as leverage remains elevated (3x net debt/EBITDA including factoring, 2.6x excluding factoring) which has seen the dividend suspended indefinitely and asset sales are not an ideal solution in our view. In addition, the group’s returns profile is deteriorating, and the pricing cycle remains uncertain given the surge in containerboard capacity growth in Europe in the next 6-18 months. Nonetheless the stock is likely to respond well to the clarity provided on the dividend, even if the outlook remains somewhat uncertain.

JD Sports, the extremely highly valued high-street reseller of a duopoly’s products to a relatively low income customer base, delivers bad interim numbers and heady full-year guidance. Stifel incoming:

What's the news? FY21 H1 sales were £2,544.9m, a 6.5% decline YoY; the decline was lower than feared, given the 3-month period of store closures. Underlying PBT was £41.5m, down c.68% YoY, due to additional costs associated with the online channel shift. The Group exhibited an impressive net cash position at £765m, thanks to several cash protection measures adopted during the COVID-19 outbreak (though there is a temporary £200m benefit from agreed extensions to supplier terms and rent deferrals).

FY21 guidance reinstated. The real surprise comes from the reinstatement of FY21 guidance: despite retail footfall remaining comparatively weak and the recent strengthening of measures in many countries and the subsequent temporary closure of some stores, the Group anticipates "delivering a headline profit before tax for the full year of at least £265 million" (consensus: £170m). Strong JD brand equity. While the first six months were affected by the COVID-19 outbreak (the majority of JD Sports stores closed by mid-March and gradually reopened from May onwards), the Group managed to retain 90% of sales, a testament to the strong JD brand equity. The performance in the US was also quite impressive, with Finish Line and JD capitalising fully on the enhanced consumer demand consequent to the US government fiscal stimulus (which expired on 31 July). Valuation.

The stock trades at 21x FY22E P/E. During the lockdown, we have seen major brands, i.e. Nike and Adidas, pushing the accelerator on their online and direct-to-consumer strategies, through their workout apps and digital credentials. Nonetheless, JD Sports has also leveraged online by pushing more casual styles, as consumers became accustomed to conducting their daily lives from their homes and shopped loungewear and sportswear. JD remains the wholesale partner of choice for key brands and the strength of the balance sheet makes us comfortable with the company’s capability to push through this period of uncertainties.

And Shore Capital:

 In terms of valuation JD’s shares trade on a PER multiple of 57x in FY2021, falling to 21x in FY2022. On an EV/EBITDA basis the shares trade on 12.7x FY21, falling to 9.3x in FY22. In our view, JD Sports remains a well-managed company with tight stock and cash controls and good cash generation reflected in its strong balance sheet. We continue to highlight the international opportunity, particularly in the US with Finish Line, where there remains a significant opportunity to grow the gross margin with the introduction of fashion clothing line. JD will be a retail survivor given the strength of its balance sheet, its customer proposition and multi-channel approach and we reiterate our BUY rating.

Over in non-results sellside, BT goes to “overweight” at Barclays. While there’s no discussion in the note of the recent fantastical PE bid stuff, there’s a little bit of work on how much Openreach could be worth in a world without regulators, competitors and pension fund trustees:

We take a more constructive view on BT and upgrade the stock to Overweight with a 160p PT (was Equal Weight, 130p). The key reasons for taking a more positive view are: 1) a rapidly improving outlook for Openreach and FTTH, supported by recent meeting with management; 2) derisked consensus estimates with attractive valuation.

Openreach outlook – plenty of reasons to be optimistic (even if overbuild risk remains). We believe the pace of FTTP rollout will accelerate to c3m/yr from 2m currently). Although our previous research has indicated material overbuild risk, we believe all key communications providers (TalkTalk, Sky, Vodafone) are keen to actively promote the product, implying wholesale pricing is in broadly the right place (we had seen this as a major risk). With favourable regulation, Openreach can look forward to inflationary pricing and copper switchover efficiency gains. We now model c£100m/yr Openreach EBITDA growth, which should help offset declines elsewhere in the group.

Consensus forecasts (finally) look derisked; flattish EBITDA for the coming years. BT has seen negative earnings revisions (revenues, EBITDA, capex and dividend) over recent periods. We believe much is priced in now, although BT will likely face continued structural Enterprise revenue pressure, and will lose the Virgin MVNO late next year (c£150m/yr EBITDA, some in FY22e, most in FY23e). However, this should result in broadly stable group EBITDA, which appears largely reflected (if not completely) in company consensus forecasts. Consensus for FY21e/22e EBITDA is £7.40/£7.57bn, capex is £4.20/£4.35bn, FCF (BT definition) is £1.36/£1.42bn. The rebound in consensus FY22e EBITDA is Consumer/Openreach, with other divisions flattish. Our forecasts are broadly in line with consensus.

Price target increased to 160p (from 130p) on higher medium-term forecasts. We increase our medium-term Openreach FCF assumptions, which drives the valuation of the asset to £26bn, well above the £20bn values. We estimate BT trades on "only" 5.8x Mar 21e EV/EBITDA, 13.4x EV/OpFCF and a 5.9% unlevered FCF yield. EU incumbent peers trade on 6.8x, 12.2x and 5.9%, respectively. Key risks to our Overweight thesis include pension volatility and Brexit uncertainty.

For Openreach Barclays has gone for a thought-bubble chart, presumably to emphasise the theoretical nature of its £30bn valuation:

Yep, £30bn, which is versus a £7.3bn post tax pension liability. Barclays assumes “no loss of market share to AltNets, a mid-term FTTP penetration rate of c50-60% [and] a c£5/mth ARPU premium to VDSL” which delivers . . . .

... EBITDA/line of £138/year vs £80 currently (71% margin vs 56% currently). With a terminal capex/sales of c16%, this leads to an NPV/home of c£1,000, or c2x invested capital. Note this implies an IRR of c12%, at the higher end of Openreach’s targeted 10-12%, even if management did hint at upside potential to this. currently (71% margin vs 56% currently).

Clearly AltNet FTTP remains a key uncertainty. If we assume Openreach loses 10pp market share to AltNets, this would reduce the value of the Fixed line business by c25%. If we split the country into Urban/Suburban/Rural, with 90%/65%/35% FTTP coverage (20m homes total, £12bn capex) and apply a multiple of c2x, this gives a c£24bn valuation. Then add the “value” of the non-FTTP base (most urban/suburban lost to AltNets/FWA), this gives a valuation of c£26bn. Adding the Narrowband/BCMR/WBA (c£3bn invested capital) at c1.2-1.4x invested capital could add a further c£4bn, giving a total of £30bn. Reflecting some AltNet risk/impact is largely why our DCF valuation is c£26bn. Clearly offsetting this is the potential for share gains from Cable, as we highlight above, where the Openreach market share is c55%, vs 100% in non-Virgin areas.


Elsewhere in sellside, Berenberg has a big note on the asset managers that turns positive on Hargreaves Lansdown, Standard Life Aberdeen and St James’s Place:

• Looking afresh at investment and savings companies: Three years on from our first initiation, and with a very different economic backdrop in prospect, we believe it is a good time to take another look at the underlying drivers of growth and returns for the European investment and savings stocks. What we find is encouraging.

• Mid-single-digit growth: Investment and savings companies manage wealth, not income, meaning they are well placed to sustain earnings growth even in a "Japanese-style" low GDP growth scenario. The companies are equally well placed to cope with an inflationary environment - should one materialise - since company pricing models automatically adjust to rising asset prices.

• Highly cash generative: Unlike most financial companies, the earnings reported by investment and savings companies are a close reflection of their underlying cash generation. The sector's "capital-light" nature means growth does not impair cash generation or strain capital positions. As a result, most of the companies we cover pay an attractive dividend (a 4.4% yield, on average) while also supplementing earnings growth with share buybacks or bolt-on acquisitions. With a couple of exceptions, there is no political/regulatory risk to dividends either.

• Strong, simple balance sheets: Generally speaking, balance sheets in the sector are strong (typically holding significant net cash) and free of the accounting complexities used by banks and insurers. We believe this lowers the risks of investing in the sector.

• We upgrade three stocks to Buy (from Hold): We conducted a survey of 1,000 users of UK platforms, and this leads us to become more confident in the long-term growth of Hargreaves Lansdown, which we upgrade to Buy (from Hold). We also upgrade St. James's Place to Buy (from Hold), in the belief that the post COVID-19 landscape is becoming clearer, allowing investors to again focus on the structural growth and attractive valuation offered by the stock. We raise Standard Life Aberdeen to a Buy rating for the first time since the 2017 merger. We view the stock as a special situation, and are hopeful that the new management team will overhaul the current strategy by cutting the dividend and re-focusing on growth.

• We reiterate two Buy ratings: We continue to view Amundi as both a structural winner in the European investment and savings sector, and also a beneficiary of the pressure on European banks to increase sales of fee-based products. We expect Italian asset manager Anima to benefit from similar industry dynamics, and reiterate our Buy rating here as well.

• We reiterate two Sell ratings: The medium-term outlook for Partners Group has proven to be highly sensitive to conditions in corporate loan markets. We believe this raises questions as to the right valuation for such a volatile earnings stream. We also maintain our Sell rating on Ashmore, in anticipation of weaker sales following the poor performance of the group's funds.

• We raise Jupiter to Hold (from Sell): Although Jupiter remains overly dependent on just two fund strategies, these are performing strongly currently. This leads us to tactically upgrade the shares to Hold (from Sell). We continue to view the longer-term outlook for the group as challenging.

• We remain Hold-rated on three stocks: We believe Schroders is fairly valued and maintain our Hold rating. While we believe Man Group deserves to trade on a higher valuation multiple, we struggle to identify a catalyst for a re-rating and maintain our neutral stance. We remain cautious on Azimut's overseas expansion strategy, and retain our Hold rating here as a result.

Natwest Group, the bank whose name’s nearly an anagram of waterspout, gets an upgrade to “buy” from Investec:

We have limited enthusiasm for NWG, but at this level, we think valuation provides a floor. The UK has been transformed into what we regard as a dystopian nightmare, duly reflected in a bleak performance for NWG; lossmaking in H1 2020, with “more of the same” expected in H2 2020e. On 0.4x 2020e tNAV the shares trade close to all-time lows, yet (in contrast to the GFC), the group’s capital/liquidity are rock solid and the outlook, whilst hardly compelling, looks secure and even profitable from 2021e. Upgrade to BUY. 

To be clear, we see NWG as the poster child for all that is wrong with UK Government policy, severely impacted by “lower forever” interest rates and disproportionately exposed to corporate fall-out from the UK’s “lockdown recession”. Commercial Banking recorded an underlying loss before tax of £921m in Q2 2020 (Fig 1) taking 66% of the group impairment charge.  We forecast a 10% year-on-year decline in revenues in 2020e (broadly in line with guidance) and a 505% YoY increase in the impairment charge to £4.2bn in 2020e (marginally worse than guidance), with ongoing cost take-out offering only partial relief (Fig 2). 

However, several things appear fundamentally “different this time”. Although Investec Economics continues to expect the lockdown to drive a sharp rise in unemployment and widespread devastation across the business landscape, the absence of the extreme risk concentrations (in particular CRE exposures in the UK and Republic of Ireland) should lead to far lower levels of impairment. NWG suffered nine years of losses through 2008-2016; this time we forecast a return to (moderate) profitability as soon as 2021e

tNAV per share fell to 264p in Q2 2020; the shares, on 0.4x tNAV, are again trading close to all-time lows. Admittedly we only forecast ROTEs of 1.7%/4.5% in 2021/22e

However, the CET1 capital ratio, which reached a record 17.2% in Q2 2020, underscores our expectation of material capital return to shareholders in due course. We do not expect a dividend for 2020e, but our forecasts of 4p/11p for 2021/22e imply yields of 3.8%/10.3%. We also model share buybacks from 2022e. 

Our 120p TP is unchanged, but we upgrade to Buy (from Hold).

Hikma, the generic drugmaker that’s tried in recent years to distance itself from the whole price gouging shortages thing, goes onto Goldman’s “buy” list post its recent successful patent challenge on an Amarin heart drug:

Shares of Hikma have outperformed SXDP by c.500bps, following the favourable Federal Court decision on generic Vascepa (September 3). Despite this, we believe that Hikma shares can continue to outperform, as we expect the potential launches of Advair (expected in 2020, pending FDA approval) and Vascepa (we expect 2021 launch) to provide upside risk to consensus estimates. While we are only modestly above consensus on top line, our analysis shows that consensus is underappreciating the bottom line contribution from these two launches, especially for Advair. We are 6% above consensus for 2021 Group Core EBIT, driven entirely by our view on the Generics division’s profitability. Beyond upside risk to consensus estimates, we see optionality from the company’s complex Generics portfolio, in the near to medium term. We raise our 2021/2022 core EBIT estimates by c.10%, as we incorporate gVascepa and revisit our Advair profitability assumptions. This along with our increased multiple for the Generics division drives the increase in our SOTP-based 12-month price target to 3,115p (from 2,600p). Upgrade to Buy.

Barclays upgrades Flutter, a bookmaker, and downgrades GVC, also a bookmaker. There’s a survey of ~1,000 punters attached:

Sector valuations have largely recovered after a disruptive past six months. We think risk-reward is favourable with upside from the US opportunity outweighing regulation risk. We have potential upside to all PTs but alter ratings: FLTR (u/gto OW from EW,PT £130, 15% upside) –leading betting brands (Sky Bet#1 in our survey), high valuation at 17x 12m fwd EBITDA butattractive ‘core’ (9x EBITDA) ex US losses for a quality compounder; GVC (d/g to EW, PT 900p) –strong Online trading, US JV offer supside but HMRC investigation an overhang; WMH (OW, PT 240p, 34% upside) –reiterate OW, ranks #5 in our survey, trading has inflected, US upside trumps regulation risk. We return to SOTPs (2021E) from EV/NOPAT vs. NOPAT growth regression of the Internet marketplace sector with discount factors.

FLTR(PT £130): u/g to OW, high valuation but high-quality compounder. When reinstating our rating in Right combination, steep valuation (11/5/20), we felt Flutter was priced for perfection at 16x 12m fwd EV/EBITDA. Trading on 17x today, the valuation is high again but stripping out US losses, the ‘core’ trades on c.9x, attractive for a group with leading brands (see our survey). We expect some channel shift online (>6% of retail staking) and think Flutter is best-placed to grow market share. On top, after the savvy timing of the equity raise, leverage is lower at 2.5xin 2020E vs. 3.7x before, a concern previously.

WMH (PT 240p): reiterate OW, risk-reward favourable, undervalued US. Online trading has inflected inweeks 24-26 after various product improvements. WMH ranks #5 in our survey but #3 as most used betting account. At 8.5x 2021 EBITDA, we consider the risk-reward favourable with the upside from the US valuation (+5% market share,+1x 2023E sales multiple vs. current forecasts = +80% to the price) outweighing regulation risk (assuming-50%UK gaming revenues, Online de-rates to 6x = -40%).

GVC(PT 900p): d/g to EW, momentum but HMRC investigation an overhang on shares.Online momentum is excellent (+22% Q2) driven by gaming. Lad-Coral screen worst of the Big 7 betting brands in our survey (but UK only 30% of online). The unproven US JV offers upside but the HMRC investigation is likely to be an overhang. Our PT implies8% upside,but we have a relative preference for WMH and Flutter.

The survey results look like this:

And Goodbody has a big note out on the airlines that sells most things for the obvious reason. Reader, please feel free to head to the comment box if you want to point out the misinterpretation in the first paragraph:

Europe is seeing a significant resurgence in COVID-19 infection rates, with the 14-day cases/100,000 for Western Europe now 64.9 as against only 19.4 on July 31st. Spain’s infection rate is now higher than that seen at the height of the first wave.

At the same time, the European Airline Index is up 14% since the end of July. COVID risk-weighted network exposure sees new highs for some airlines. We have constructed a series for each airline that multiplies the % of each country in their 2019 networks (the benchmark year as it is now seen for recovery) by the daily rates of infection in that country. AF-KLM and IAG risk weighted scores are at new highs, while Ryanair’s score is a premium to its LCC peers.

Winter season question will be flu or flew?

The WHO puts potential symptomatic flu cases at up to 20% of the European population, with an average mortality of ~40,000pa. The pending flu season will add a strain on medical resources and will increase levels of required self-isolation.

Airport Testing is no panacea

While airline and airport management call for an airport-based testing system across Europe, a multitude of issues from whether 1 test or 2 is needed, whether tracking capacity is adequate or the risks around the 14-day incubation period of COVID all make this a complex issue and not a simple solution to the crisis.

What is the appropriate discount rate to use?

Given the issues above, we stay with our 3x WACC as the appropriate discount rate to the fair values seen in the designated years of recovery for each airline (broadly 2yrs out). On this basis, no airline remains a buy given recent price rises.

LCCs – RYA and Wizz from Buy to Hold

Universally seen as the best placed airlines to leverage the return of demand given expansionary fleet plans, solid liquidity positions and the lowest costs in the sector. As risks decline, we see long-term value but not at current levels.

easyJet from Hold to Sell

We are concerned that cost plans are not aggressive enough, that its Gatwick ‘fortress’ will see increased competition and that investors were asked to fund the shrinkage of the business over the next two years.

IAG from Buy to Hold, AF remains a Hold, LHA remains a Sell

Given exposure to high risk long-haul markets (esp. Nth and Sth America), debt and equity funding solutions that dilutes value and the recent rally’s in share prices, network carriers offer no attraction as they further adjust capacity down.

• Updates might follow, influenced or otherwise by requests and complaints in the comment box.

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