Morning Expresso -Europe

European Luxury - UBS Evidence Lab: Swiss Watches First Hand (#14).

    We have seen clear signs from the Macau gaming data, Global Blue tourism spendingand Q4 reporting that consumer spending is recovering at retail led by the Chineseconsumer. A key question we are getting from investors is when this will start to beseen in the Swiss watch export data. Our analysis of the correlations suggests that thisoccurs with at least a 3 month lag to retail meaning we should start to see this by Q217. We continue to see this recovery in demand as being largely driven by the middleclass Chinese consumer. We stay Neutral on Richemont and Swatch as they are alreadypricing in a strong recovery in our view given they are trading on 25.1x and 20.0x2018E PE respectively. We think industry growth will have to be led by volume ratherthan price/mix which should benefit Swatch given its broad price positioning.

    BHP Billiton Plc (Neutral, PT ￡14 from ￡13.5) - Rebuilding confidence.

    We have a Neutral rating on BHP as the risk/reward is balanced: BHP is generatingsignificant FCF (~$14bn at spot) however prices of some key commodities are set to fallnear term. We are concerned there are few positive stock-specific catalysts near termwith productivity gains waning, restructuring complete, oil range-bound, and Samarcostill an overhang. Mgmt reassured with H1 results there are more potential savings togo for and highlighted again the significant growth optionality in the portfolio and realfocus on disciplined capital allocation. We trim FY17 earnings by 4%, reflecting highercosts & increased exploration spend; our NPV lifts 6% due to lower net debt.

    Covestro AG (Buy, PT ?76 from ?73) - Further earnings upside in 2017.

    Post FY16 results we reiterate our Buy rating on Covestro with our confidence in a tightsupply-demand environment in polyurethanes driving a FCF yield among the top in thesector. We expect EBITDA growth of 14% in 2017, and 2018 EBITDA to remain at~?2.3bn, which implies a FCF yield of ~8.5% over the next three years vs the sectoraverage of 3.6%. Our polyurethane supply-demand and PUR EBITDA vs PUR spreadsanalysis puts us 13% ahead of consensus EBITDA in 2017E. While the shares haverallied by over 80% in the last 12 months, they are among the cheapest in the sector,trading on 2017E EV/EBITDA 7.3x, a ~28% discount to the EU diversified peers (8.3x).