IBERIA. Tuesday Oi s 2Q13 Earnings Wednesday Portugal Telecom s 2Q13 Earnings

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1 EQUITY RESEARCH TOP STORIES IBERIA 9 August 2013 Indra Both Bankia and Liberbank have sold their stakes in Indra, 20% and 5% respectively, in the last week. After these divestments, which were expected for some time, Indra is now finally free from the share overhang risk that has pressured stock performance. Indra s stock has gained 9.1% in the week. (page 6) WEEKLY OUT THIS WEEK Earnings Comment Sonae Sierra Other Snapshots/Company Reports Model Portfolio Price Target / Recommendation Changes Indra, Sonae Capital, Jerónimo Martins News Indra, Portugal Telecom & Telefónica, Telefónica, Galp Energia WEEK AHEAD Tuesday Oi s 2Q13 Earnings Wednesday Portugal Telecom s 2Q13 Earnings PORTFOLIOS This week, Mib Aggressive Portfolio went up 3.31%, outperforming the PSI20 by 0.03pp. BES and Portugal Telecom were the main contributors for this outperformance (page 9). This week, Mib Liquidity Portfolio went up 3.29%, outperforming the PSI20 by 0.01pp. BES and Portugal Telecom were the main contributors for this outperformance (page 10). António Seladas, CFA antonio.seladas@millenniumbcp.pt Av. José Malhoa, Lote Lisboa Tel / Fax: / 09 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. Page 1 of 13

2 CHANGES New Previous Motive Rating Target Rating Target Indra Neutral Buy Price Performance Sonae Capital Neutral 0.22 Buy 0.22 Price Performance Jerónimo Martins Neutral Buy Price Performance EARNINGS Page 2 of 13

3 DIVIDENDS Page 3 of 13

4 NEXT WEEK RESULTS Portugal Telecom Buy Medium Risk (Target YE13: 4.00) 2Q13 Earnings Preview Alexandra Delgado, CFA Sales YoY EBITDA YoY EBIT YoY Net Profit YoY 1, % % % 14-76% Portugal Telecom will release 2Q13 Earnings next Wednesday, August 14 th, before the market opening. A conference call will be held that day, at 3.30 pm (GMT). We estimate 1,523 mn revenues in the quarter and an EBITDA excluding PRBs of 524 mn. We forecast a net profit of 223 mn in the quarter, boosted by the capital gain on the sale of CTM. We forecast that revenues in Portugal will fall 6.6% YoY in the quarter, with a growing residential segment not offsetting the weakness in the personal, enterprise and wholesale segments. Nevertheless, we re forecasting a slight improvement in the YoY trend vs. the previous quarter (-6.8% YoY in 1Q13). In terms of EBITDA margin in Portugal, we forecast it to come down 2.5pp vs. 2Q12 reaching 42.8% (stable vs. 1Q13), leading EBITDA to drop 11.8%. Brazilian Oi will report its 2Q13 earnings the previous day (August 13 th ) after market closing. A conference call will be held the following day, at 2.00 pm (GMT). We estimate net revenues in the quarter will reach R$7,165 mn, growing 3.7% YoY (vs. +3.5% YoY in 1Q13). Growth acceleration should be achieved thanks to a stronger performance in residential and despite mobile being negatively impacted by mobile termination rates cut. We forecast EBITDA to reach R$2,185 mn, with margin stabilizing at 30.5% vs. 1Q13 (please note we re not including any impact of asset sales on EBITDA). EQUITY MARKETS Equity Markets António Seladas, CFA; Model Portfolio August Fundamentals 0 x 1 Momentum Main equity markets have been expanding multiples for the last few quarters without an apparent reason as upwards earnings revisions have been generally modest. So and unless earnings be upwards reviewed in the near future justifying current valuations, we believe that Momentum is the best explanation for the good performance year to date, namely the S&P500. The low volatility and the smooth positive performance is attracting new money keeping the positive trend alive. Equity Fundaments are clearly being relegated to a second place, while Momentum is growing. Multiples could continue to expand, as for instance the S&P500 is just trading close to the long term PE average, 15x and one standard deviation would place the PE multiple close to 20x (it was at 11x roughly 2 years ago). The major issue is obviously the lack of valuation references, so any adjustment could happen leading to strong corrections. (For further details, please refer to our report out today) TELECOMS Telefónica Buy Medium Risk (Target YE13: America Movil announces bid over KPN; consolidation in the German Alexandra Delgado, CFA market will now be more difficult/ more expensive for Telefónica Carlos Slim s America Movil announced it plans to launch a bid over Dutch operator KPN. It will offer 2.40/ share, which represents a premium of 20% over yesterday s closing price ( 2.00) and a 5.0x EV/EBITDA 2013E multiple. The bid is conditional upon America Movil reaching a stake over 50% on KPN. We remind that America Movil already holds c. 30% of KPN s capital. Page 4 of 13

5 Two weeks ago, KPN announced an agreement to sell its german unit, E-Plus, to Telefónica. This deal led America Movil to terminate its standstill agreement with KPN, which determined that America Movil s stake in KPN could not surpass 30%. America Movil has stated today it hasn t yet decided if it supports the deal with Telefónica in Germany. America Movil s bid is negative for Telefónica: it either means that it won t achieve the desired consolidation in the German market (and estimated 5 bn in synergies) or it means it will have to raise its offering price for E-Plus. On the other side, this bid is positive for the sector as a whole, which has seen its consolidation appeal significantly increase in the last months with the announcement of several M&A deals. Portugal Telecom Telefónica Buy Medium Risk (Target YE13: 4.00) Buy Medium Risk (Target YE13: 14.60) Pay TV in Brazil Low growth even considering Sky's client clean-up Alexandra Delgado, CFA The Brazilian regulator released yesterday June Pay TV subscribers numbers. The market grew 0.16% QoQ in June to 17.0 million subscribers, which stands for 27.8% penetration of households. Subscribers grew 16.7% vs. June June registered 27k net adds, impacted by Sky s minus 45k clients reported in the month. As depicted in the table below, market growth has slowed down significantly in the beginning of this year. Monthly net adds were quite weak in June, even considering Sky's client clean-up. Net/ Embratel (America Movil) continues to lead the market with a subscribers market share of 53.0% (gained 0.4% market share in the month). Sky now has 30.5% market share, with the restatement of clients leading to a 0.3pp share loss. Oi registered 4k net adds in June, maintaining its subscribers market share at 5.2%. Oi s performance in June was poor comparing to previous months; still, Oi s market share grew 1.9% in the last 12 months. Telefónica lost 19k clients in the month and saw its market share slide to 3.0% from 3.1%. It was surpassed by GVT in terms of subscribers and is now the 5 th player. May was a good month for Telefónica (lost only 0.7k clients in the month) but now we know it was not an inflexion point in the company s Pay TV performance, which remains disappointing. Page 5 of 13

6 TECHNOLOGY Indra Neutral High Risk (TargetYE13: 12.35) Bankia and Liberbank sell their stakes in Indra Alexandra Delgado, CFA Bankia disclosed on August 2 nd, after market closing, it has sold its 20.14% stake in Indra s capital to SEPI- Sociedad Estatal de Participaciones Industriales- Spanish holding for government stakes in companies. Bankia sold 33 million shares for / share (2.5% discount vs. August 2 nd closing price). We remind that Bankia has committed to selling its stakes on other companies as part of its bailout. SEPI has signalled that it wants, with this transaction, to preserve the stability of the shareholder structure of a company which is a pillar of Spain s technological base and international presence. SEPI was Indra s main shareholder (66%) until the company went public in Following Bankia s divestment, Liberbank placed on Monday (after market closing) in the market in an accelerated book building its 5% stake in Indra at a price of per share; this price implies a 4.5% discount vs. the closing share price of August 5th. After these operations, Indra s free float increases to approximately 63.5%. Main shareholders of Indra are now: SEPI (Sociedad Estatal de Participaciones Industriales) with 20.14%, Corporación financiera Alba with 11.32% and Casa Grande de Cartagena with 5%. After the divestment of both Bankia and Liberbank, which were expected for some time now, Indra is now finally free from the share overhang risk that has pressured stock performance. The stock gained 9.1% this week. Now the focus turns to fundamentals. We remind that we have a price target of 12.35/ share (YE13), with a Neutral, High Risk recommendation. 1H13 earnings were in line with guidance: Page 6 of 13

7 topline is broadly stable with growth abroad offsetting weakness in the domestic market; but margins remain quite pressured by increased pricing pressure in Spain. Therefore, the recovery of profitability is tied to Spain s macro performance and the evolution of Indra s business in the domestic market will be key for the stock in the next quarters. Finally, we believe Indra s net debt remains a concern, so we would like to see more discipline on the debt front in order for Indra to strengthen its balance sheet. CONGLOMERATE Sonae Buy Medium Risk (Target YE13: 1.00) Sierra`s 2Q13 Earnings Highlights - Europe slightly recovered while Brazil cooled João Flores; Sonae Sierra, the shopping malls segment of Sonae, disclosed its 2Q13 figures. Recall Sonae will disclose its 2Q13 Earnings on Aug 22nd after market close. We keep confident with NAV embedded in Sonae`s valuation. Overall, numbers reflected yield expansion in Europe (only partially compensated by the yield compression in the prime assets in Brazil). However, company highlights the slowdown in yield expansion in Portugal and Spain, compared to late Sierra NAV declined by 7.3% YoY and 6.1% QoQ, reaching (below estimated 32.29). Recall Sierra valuation in Sonae`s SoTP is done using a 10% discount over NAV estimated YE13, thus estimated NAV in Sonae`s SoTP is Revenues rose 7.5% YoY to 55.9mn while EBITDA slightly increased 2.2% to 27.6Mn. Tenant sales in the European portfolio managed by Sonae Sierra decreased 3.5% compared to the same period of 2012 (-3.6% in 1Q13). In Brazil, on the contrary, sales increased by 4.2% (in local currency) compared to the same period of 2012 (+5.4% in 1Q13). Indirect results reached - 36mn (0mn in 1Q13). Since beginning of 2012 Sonae changed its valuation policy and moved from quarterly valuations to biannual valuations given high level of uncertainty in what regards property values (extremely low levels of transactions). Global Occupancy Rate was 93.6% (-2.4pp YoY, -1.7pp QoQ), penalized by Socorama`s insolvency, a situation that led to the closing of its cinemas in Sonae`s shopping centres' in Portugal. Sierra has two Shopping Centres under construction representing a total investment of 287mn: Germany (1) and Brazil (1). (For further details, please refer to our snapshot out today) OIL & GAS Galp Energia Buy High Risk (Target YE13: 16.20) Vanda Mesquita, Galp signed concession agreements for oil exploration in Brazil This week, Galp signed concession agreements for oil exploration in Brazil. These contracts are related to the acquisition of 9 blocks under the Brazil s 11th bidding round announced in May. We remind that last May, Galp had acquired nine blocks on the first day of bidding for blocks in Brazil. Four out of nine blocks are on-shore blocks and are located in the Parnaíba basin (the consortium composed by Galp and Petrobras, each one with a 50% stake). The other 4 blocks are off-shore blocks and are located in the Barreirinhas basin (the consortium composed by Petrobras, BG and Galp, in which this company participates with a 10% stake). Finally, the last block is also an off-shore block and is located in the Potiguar basin (the consortium which is composed by BG, Petrobras and Galp, in this company has a 20% stake). Galp paid about Page 7 of 13

8 14.5 million to acquire nine blocks. Given the fact that the amount paid is immaterial comparing to the company s enterprise value, the acquisition of these blocks has no impact on our valuation. These block acquisitions allow the company to perform drilling activities in the coming four years. SECTOR PERFORMANCE PSI20 Sector Performance -1 Week (%) 3.3 PSI20 Sector Performance - YTD (%) 5.5 Financials 5.2 Industrials & Other 23.5 Retail * 5.0 Electric Utilities 12.4 Telecoms & IT 4.8 Retail * 8.8 Media 2.7 Oil & Gas 7.3 Oil & Gas 1.4 Financials -1.1 Industrials & Other 1.0 Telecoms & IT -3.3 Electric Utilities 1.0 Media * includes Jeronimo Martins and Sonae This week, the PSI20 went up 3.3%. The best performing sector was Financials, plus 5.2% and the worst was Electric Utilities, plus 1.0%. On a Ytd basis, the PSI20 went up 5.5%. The best performing sector was Industrials & Other, plus 23.5% and the worst was Media, minus 22.2%. AGGRESSIVE PORTFOLIO This week, Mib Aggressive Portfolio went up 3.31%, outperforming the PSI20 by 0.03pp. BES and Portugal Telecom were the main contributors for this outperformance. 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 3.29%, outperforming the PSI20 by 0.01pp. BES and Portugal Telecom were the main contributors 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 8 of 13

9 Portfolio Return since inception (30th July 2004) PSI /Jul 24/Jan 28/Jul 28/Jan 01/Aug 02/Feb 05/Aug Mib AGGRESSIVE PORTFOLIO Portfolio weekly return Company Risk Market Price Upside Weekly Performance Rating Price ( ) Target ( ) Potential Return Contribution Deviation Sonae Industria High % 1.7% 0.33pp -0.32pp Novabase High % 0.8% 0.15pp -0.51pp BES High % 8.6% 1.73pp 1.07pp EDP Renováveis Low % -0.7% -0.14pp -0.62pp Portugal Telecom Medium % 6.2% 1.24pp 0.30pp Portfolio 3.31% PSI % Gain/loss 0.03pp Explained by the portfolio -0.08pp Explained by being underweight in the remaining PSI20 stocks 0.10pp Ytd Return Portfolio PSI20 31/Dec 14/Mar 26/May 07/Aug Next week Portfolio Changes in Portfolio Company Risk Market Price Upside Rating Price ( ) Target ( ) Potential In Out Novabase High % Telefónica PT Sonae Industria High % EDP Renováveis Low % Telefónica Medium % BES High % Return vs. PSI YTD 1 Month 1 Week Portfolio 71.9% -7.30% -36.6% 22.1% 21.8% 15.2% 3.3% PSI % % -27.6% 2.9% 5.5% 11.2% 3.3% Gain/loss 38.5pp 3.0pp -9.0pp 19.2pp 16.2pp 4.0pp 0.0pp 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 9 of 13

10 Return since inception (31th December 2011) Portfolio PSI /Dec 25/Apr 20/Aug 15/Dec 11/Apr 06/Aug Mib LIQUIDITY PORTFOLIO Portfolio weekly return Company Risk Price Upside Weekly Performance Market Price ( ) Rating Target ( ) Potential Return Contribution Deviation BES High % 8.6% 1.73pp 1.07pp EDP Renováveis Low % -0.7% -0.14pp -0.62pp Portugal Telecom Medium % 6.2% 1.24pp 0.30pp Telefónica Medium % 0.9% 0.17pp -0.48pp Galp Energia High % 1.4% 0.29pp -0.08pp Portfolio 3.29% PSI % Gain/loss 0.01pp Explained by the portfolio -0.08pp Explained by being underweight in the remaining PSI20 stocks 0.08pp Ytd Return Next week Portfolio Changes in Portfolio Risk Price Upside Company Market Price ( ) In Out Rating Target ( ) Potential EDP Renováveis Low % - - Telefónica Medium % BES High % Portugal Telecom Medium % Galp Energia High % Portfolio PSI20 31/Dec 12/Feb 27/Mar 09/May 21/Jun 03/Aug Return vs. PSI YTD 1 Month 1 Week Portfolio % 18.0% 15.2% 3.3% PSI % 2.9% 5.5% 11.2% 3.3% Gain/loss pp 12.5pp 4.0pp 0.0pp 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 10 of 13

11 2013/08/09 Latest Target Risk Trnvr ( mn) M Cap Change (%) EPS P / E EV / Sales EV / EBITDA Div Yield P/BV Upsd Rating Pr ( ) YE13 Rating 3m 6m ( mn)o Week 1M 3M 12M YTD E 2014E E 2014E E 2014E E 2014E E 2013E PSI 20 5, , Financials , BCP (1) , BES % Buy High , loss % 0.0% 0.4 BPI % Buy High , % 0.0% 0.7 Telecoms , % 6.7% 1.9 Telefónica % Buy Medium , % 6.8% 2.2 Portugal Telecom % Buy Medium , % 6.4% 1.0 Zon Multimedia (3) % Reduce Medium , % 2.7% 1.1 Sonaecom % Buy High % 4.9% 0.6 Media % - - Impresa (2) % - - Media Capital (2) % - - Cofina (2) % - - Technology Indra % Neutral High , % 3.0% 1.6 Novabase % Buy High % 3.0% 0.8 Utilities , % 4.3% 0.7 Iberdrola % Buy Low , % 7.8% 0.6 EDP % Neutral Low , % 6.8% 1.1 EDP Renováveis % Buy Low , % 1.2% 0.6 REN % Buy Low , % 7.8% 1.1 Conglomerates , Sonae % Buy Medium , % 3.8% 1.3 Semapa % Reduce High % 3.6% 1.0 Sonae Capital % Neutral High loss loss loss loss % 0.0% 0.2 Retail , % 2.1% 6.7 Inditex % Neutral Medium , % 2.1% 6.7 Jerónimo Martins % Neutral Medium , % 2.0% 6.8 Industrials , % - - Sonae Industria % Buy High loss loss loss % 27.9% 0.5 Altri % Sell High % 1.5% 1.7 Portucel % Reduce Medium , % 8.0% 1.4 Cimpor (2) , Construction Mota-Engil % Sell High % 4.0% 1.2 Oil & Gas Galp Energia % Buy High , % 2.3% 1.9 (1) We do not have a recommendation on BCP, as Mib is a registered trademark of BCP; (2) Not Covered; (3) Zon Multimedia figures assume merger with Optimus Page 11 of 13

12 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 Jul-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 68% 77% 76% 77% 78% 68% 79% 63% 54% 41% 37% 30% 63% Neutral 9% 9% 10% 12% 4% 11% 7% 15% 4% 27% 11% 40% 6% Reduce 18% 14% 14% 4% 0% 0% 0% 7% 0% 0% 21% 5% 6% Sell 5% 0% 0% 4% 7% 7% 4% 4% 0% 14% 16% 5% 0% Unrated/Under Revision 0% 0% 0% 4% 11% 14% 11% 11% 42% 18% 16% 20% 25% Performance 3.0% -4.6% 3.0% 20.4% -14% -28% -10% 33% -51% 16% 30% 13% na PSI 20 5,721 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 12 of 13

13 OFFICE LOCATIONS Millennium investment banking Av. José Malhoa, Lote Lisboa 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 Jorge Pina - Head Ana Lagarelhos Diogo Justino Marco Barata Maria Cardoso Baptista, CFA