Wednesday, 31 July 2013

UniCredit SpA (UCG IM) ... A European recovery story?

Wednesday 31st July 2013

I read this morning that Goldman Sachs Asset Management (GSAM) has significantly increased its exposure to European equities (Goldman bets on Eurozone recovery). Their belief is that the European recession is about to end. They may have a point. Having been in the doldrums for over two years, the German, French and Italian manufacturing purchasing managers indices (PMIs) are on the cusp of signalling expansion. As far as economic surveys go, there is no better indicator than the PMIs. The German and French service PMIs are also on the up. Germany, France and Italy is c. 75% of the Euro Area, which is all that counts. Two years in contraction is a long time. 

Improving economies means less insolvencies, which should equate to less impairments for the banking sector. Just look at how that has benefited the UK and Irish banks this past year. The share prices of Lloyds, Barclays, RBS and Bank of Ireland have each more or less doubled over twelve months.

Price to book ratios have improved. According to Bloomberg, Lloyds is now priced at 1.1x book, as compared to less than 0.5x in early 2012. Bank of Ireland, would still appear cheap at 0.5x. I have already bought some Bank of Ireland.

With Europe possibly on the mend, and clear evidence of how an improving economy has impacted the UK and Irish banking sectors, I've taken a speculative position in UniCredit (UCG IM, mkt cap €23.7bn) at €4.10/shr. However, cognisant of the fact that Europe has a history of presenting false dawns and that the representations of all these banks’ capital adequacy may be complete hokum, via ETX I've hedged with €4 September puts at a cost of 17 €cents/shr. My instinct is that UCG will move higher relatively quickly on improving economics; I'm targeting €5.5/shr. With the puts, I reckon I've risked €1 to win €4. I think the odds should be better than that. Bloomberg suggests that UCG trades on 0.38x book value. A 0.5x multiple would roughly sit with my expectation of €5.5/shr. 

Germany, France, Italy - manufacturing Purchasing Managers Indices
Source: Markit, Bloomberg
Germany, France, Italy - service Purchasing Managers Indices
Source: Markit, Bloomberg
LLOY, BARC, RBS, BKIR - 12 month share price performance
Source: Bloomberg
Price to book ratios - UCG, LLOY, BARC, RBS, BKIR
Source: Bloomberg
UniCredit - share price
Source: Bloomberg
Disclaimer: The information, discussions or topics referred to on this blog should in no way be considered “advice” to buy or sell anything. The information which may be referred to is freely available in the public domain and where required the source of information is referenced to for verification. While every effort has been made to ensure the veracity of any information contained within this blog, the author accepts no responsibility for the accuracy of any information contained within this blog or for the sources of information which may be referred to. Readers are responsible for their own actions and interpretation of the information contained within this blog. 

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