fair value

The recent range is a tough ceiling to break for euro rates Even if ECB hawks continue to talk up the odds of July and September hikes, with the former still flagged as a more than even probability even by centrist members, it will take a pick-up in activity data for markets to price a terminal rate above 4%, as they did before the Silicon Valley Bank failure in March.   We’re not expecting a huge change in communication in short, and markets will focus on changes in economic data instead to infer how many more hikes the ECB has under its belt. In that context, we think longer-dated rates struggle to break above the top of their recent range, which roughly sits at 2.54% for 10Y Bund and 3.16% for 10Y swaps against 6m Euribor.   In light of the current lack of direction in financial markets, these levels may seem difficult to achieve, but the pre-ECB and Federal Reserve meeting lull is proving a fruitful time for primary market activity. On the sovereign side, Spain and France announced deals yesterday which we think will add to other deals in pushing yields up today.   Taking a step back, May has seen issuance volumes above historical averages every single week as opportunistic borrowers used this window of calm to push deals. We don't think this week will be any different. This shouldn’t be mistaken for a conviction macro trade, but we think the benign market conditions should continue to result in higher bond yields and weaker safe havens as investors feel more comfortable with owning riskier alternatives.       Big debate on direction from the US. We look for upward pressure on yields for now In the US, there is a stark juxtaposition between strong ongoing payroll growth versus PMIs and ISMs entering recessionary territory (low 40s for some components of the manufacturing PMI). On the inflation front, there is evidence of more subdued pipeline pressure while core inflation remains elevated (in the area of 5%).   Our model for US "rates" pitches fair value at 6% when we take everything into account. That has drifted up from 5.75% in the past week or so. Relative to this, the funds rate (ceilling at 5.25%) is not too deviant from that. But longer tenor rates are quite low relative to the big figure of 6%, reflecting ongoing deep inversion of the curve.   While there are some good reasons to expect market rates to fall (weak PMIs for example), our preferred expectation from here is to see some further upward pressure on market rates first. The 4% area for the 10yr Treasury yield for example remains a generic target that could well be hit in the coming month or so.     Today's events and market view Today’s session should be relatively light on economic releases with only US trade standing out. Instead, we expect the focus to be on the Bank of Canada’s meeting in the afternoon. Consensus is for no change in policy rates but the surprise Reserve Bank of Australia hike yesterday, as well as a greater skew towards a hike in the most recent contributions to the Bloomberg survey, means markets are on high alert. Bond supply will be concentrated in the 3Y sector with sales from the UK and Germany (a green bond in the latter’s case). Spain and France mandated banks for the sale of 10Y and 15Y linker bonds via syndication. ECB speakers on the last day before the pre-meeting quiet period will be VP Luis de Guindos, Klass Knot, Fabio Panetta, and Boris Vujcic.

Strong performance of surgical robots continues In this report, we update our forecasts and valuation of Synektik after the publication of results for 2Q22/23. Based on the new upgraded forecasts and the current risk-free rate, we set our Fair Value at PLN 75.0ps, which implies 0% upside potential of the current share price. We downgrade our recommendation to HOLD. Synektik has an excellent business momentum in FY2022/23, the company has again increased its guidance for da Vinci system sales in Poland and Czechia.     We believe that the momentum will continue in the next years, as the device utilization in Poland building up. We now assume Synektik will deliver 18/14/12 da Vinci surgical robots in 2022/23E, 2023/24E and 2024/25E, respectively. After recent share price rally Synektik is trading at 8.9x EV/adj. EBITDA for 2022/23E and 8.9x for 2023/24E; we see that most of upside has materialized and further share price growth potential is limited, therefore we downgrade Synektik to HOLD. Da Vinci sales momentum continues.   In 1H22/23, the company booked a record ten deliveries of da Vinci surgical robots, and signed another eight contracts for deliveries in 2H22/23. We assume five robots to be sold in 3Q22/23 and three in 4Q22/23, in total 18 devices vs. our earlier assumption of 16. As the demand remains strong (also in Czechia and Slovakia), the geographic distribution of surgical robots in Poland is uneven and NFZ may expand the scope of reimbursement of surgical procedures using da Vinci, we have raised our sales forecasts for the following years: we assume 14 deliveries in FY2023/24 (previously 11) and 12 deliveries in FY2024/25 (previously 10).     In our opinion, the number of surgical robots in Poland can easily reach 50-60 in the next few years, which will support Synektik’s revenues on device sales, as well as increase recurring revenues from service and consumables. Adjusted EBITDA at PLN 65.4m in 2022/23E.   Since the current backlog for da Vinci systems exceeds our forecasts, we increase our sales forecasts to 18 devices from 16 previously. Consequently, we are raising our forecasts for FY22/23: we estimate PLN 359m in revenue (previously PLN 325m), PLN 65.4m in adjusted EBITDA (previously PLN 59.8m) and PLN 32.0m in net profit (previously PLN 28.2m). We assume that the DPS in the next financial year could almost double to PLN 1.1ps vs. the last payout of PLN 0.6ps. Recommendation and valuation.   We value Synektik using a 10-year DCF model. Taking into account the new financial and FX forecasts and the current risk-free rate, we are upgrading the company's Fair Value to PLN 75.0ps from PLN 56.7ps. The new valuation implies 0% upside potential relative to the current share price, and therefore we downgrade our recommendation to HOLD.       

First impressions can be deceiving. US non-agricultural employment rose by 209,000 in June fell short of the Bloomberg expert consensus forecast and was the weakest since December 2020. Moreover, the data for April and May were revised down by 110,000. Initially, the market perceived the report as weak, which led to a drop in Treasury bond yields and a rise in EUR/USD above 1.092. However, the devil is always in the details. In the lead-up to the report, investors were counting on strong numbers as private sector employment from ADP rose by nearly half a million people.   However, the actual non-farm payrolls turned out to be worse than that report by the largest amount since the beginning of 2022. This fact can be seen as a sign of a cooling labor market. Nevertheless, unemployment in June dropped from 3.7% to 3.6%. As long as it does not increase, we can forget about a recession in the US economy. In addition, the average wage increased faster than expected, so it's still too early for the Federal Reserve to relax.     The employment report for the US private sector turned out to be mixed. It reduced the probability of a rate hike to 5.75% in 2023 from 41% to 36%, which worsened the position of the US dollar against the main world currencies. However, Deutsche Bank noted that only a figure of +100,000 or less for non-farm payrolls could change the worldview of FOMC officials and make them abandon their plans for two acts of monetary restriction this year. June employment data gave food for thought to both the "hawks" and "centrists" of the Fed, as well as the "bulls" and "bears" for EUR/USD.   Now, investors' attention is shifting to US inflation data and Fed Chair Jerome Powell's speech in Jackson Hole. Bloomberg experts expect consumer prices to slow in June from 4% to 3.1%, and core inflation from 5.3% to 5% year-on-year. CPI is moving so quickly towards the 2% target that it's as if Fed officials have not changed their minds. Could it be that this time the financial market will be right? And those who went against the Fed will make money? We'll see.     Not everyone agrees with this. ING notes that the minutes of the FOMC's June meeting set a very high bar for incoming data for the Bank to abandon its plans. The US labor market report is unlikely to have surpassed this bar. Core inflation continues to remain high, and the economy is firmly on its feet.   All this allows ING to predict the EUR/USD pair's fall towards 1.08 within the next week. Technically, on the daily chart, there is a battle for the fair value at 1.092. Closing above this level will allow you to buy on a breakout of resistance at 1.0935. This is where the upper band of the consolidation range within the "Spike and Ledge" pattern is located. On the contrary, if the 1.092 mark persists for the bears, we will sell the euro from $1.089.      

CAD: Jobs prints are volatile, but BoC should be done anyway Canadian jobs figures for the month of August will be released today. The headline employment number has been quite volatile, with the past four months having seen two very strong prints (April and June) and two sub-zero ones (May and July). However, the unemployment rate has ticked up in each of the past four months, from 5.0 in April to the current 5.5%. The consensus numbers are 17.5k and 5.6% for today. Outside of the initial reaction for CAD, the implications of today’s figures beyond the very near term should not be very significant, barring a very strong read. As discussed in our Bank of Canada meeting review note, we think rates have peaked in Canada, in particular following the dismal 2Q GDP reading (-0.2% quarterly, annualised). USD/CAD is expensive, trading around 2.3% above its near-term fair value, according to our calculations, but any decisive turn lower remains tied to a turn in US activity data rather than domestic inputs on the Canadian side. 

Valuation We value Medicalgorithmics using a sum-of-the-parts valuation. We value the Kardiolytics using the rNPV method (risk-adjusted net present value) probability weighing its subsequent phases. We value the ECG business using a DCF model. Based on our forecasts, we arrive at fair value of PLN 45.2 per share, i.e. 26% above the current market price, which implies a BUY recommendation.      

We initiate coverage of Sunex with a HOLD recommendation and a Fair Value of PLN 12.00, which implies 8.1% downside. The company is a Polish producer of heat pumps, solar collectors and many other types of products sold in the renewables sphere. Sunex predominantly designs and manufactures most of the products in its portfolio itself. It sells either under own brand or O&M brands, primarily in Germany, Austria and Poland. Its heat pumps are eligible for state subsidies in those countries. It also owns an on-line shop, where various products of primarily global brands are on offer. The e-commerce channel allows the company to not only place their own product but also provides an insight into the current demand of customers for various products.   Sunex is heavily dependent on macroeconomic and construction growth in Germany, Austria and Poland, as well as the subsidies scheme for improving energy efficiency on the particular markets. Last year’s record-high results were driven by i) the boom sparked by the war in Ukraine and ii) the desire to abandon fossil fuels in heating systems rapidly and lower the dependence on gas prices. The current year is a period of growth through M&A on the Austrian market, although the next three to four quarters are likely to be tainted by the economic slowdown that is already visible in Europe.     Overall, we expect the firm to post EBITDA of PLN 38.2m (-31.1% y/y) in 2023E, PLN 33.5m (-12.5% y/y) in 2024E and PLN 39.9m (+19.2% y/y) in 2025E, with the upward trajectory stemming from rising macroeconomic growth, higher spending for heat pumps across the region, lower sales under O&M and rising sales under own brands. The quarters ahead: Sunex has already reported its 3Q23 sales, namely PLN 81.7m (down 3% y/y and down 7.3% q/q at the consolidated level). We expect gross profit at PLN 17.9m (down 20% y/y and 24.3% q/q) in 3Q23.   The company’s operating leverage is relatively high, hence we expect EBITDA at PLN 7.7m (down 57.5% y/y) and the bottom line at PLN 4.6m (down 64.7% y/y and 52.9% q/q) in 3Q23. The level of G&A costs rose by PLN 5m in 2Q23, which we believe was triggered primarily by the full consolidation of Krobath Heizung, the Austrian subsidiary acquired in 1Q23. We expect sales to deteriorate a further 24% q/q to PLN 62m in 4Q23. This would lead to EBITDA at a mere PLN 3.5m (down 54.4% q/q) in 4Q23

Analysis of GBP/USD 5M   The GBP/USD pair continued to decline on Tuesday, primarily based on technical factors, as this was in the absence of influential economic releases. The only noteworthy event was the moderately hawkish statement by Neel Kashkari, which we have already discussed. Nonetheless, this is just the opinion of one of the eighteen members of the Federal Reserve's monetary committee. At the CME, its own FedWatch tool showed a low probability of a hike for the December meeting. Therefore, the market currently does not expect a new rate hike in the US. However, this information should not be crucial for the US dollar. It should resume its trend and, consequently, continue to strengthen. It is almost guaranteed that the pair will return to the level of 1.2109, which is roughly 200 pips down from its current position. The decline may be gradual. There were only two trading signals for the pound yesterday. The price bounced off the 1.2269 level twice, but in both cases, it managed to rise by a maximum of 20 pips. This was enough to place a stop-loss to breakeven for both long positions. Therefore, both trades were certainly not losing ones. You could manually close the second trade in profit.   COT report:   COT reports on the British pound also align perfectly with what's happening in the market. According to the latest report on GBP/USD, the non-commercial group closed 3,400 long positions and 1,700 short ones. Thus, the net position of non-commercial traders decreased by another 1,700 contracts in a week. The net position indicator has been steadily rising over the past 12 months, but it has been firmly decreasing over the past three months. The British pound is also losing ground. We have been waiting for many months for the sterling to reverse downwards. Perhaps GBP/USD is at the very beginning of a prolonged downtrend. At least in the coming months, we do not see significant prospects for the pound to rise, and even if we're currently witnessing a corrective phase, it could persist for several months.   The British pound has surged by a total of 2,800 pips from its absolute lows reached last year, which is an enormous increase. Without a strong downward correction, a further upward trend would be entirely illogical (if it is even planned). We don't rule out an extension of an uptrend. We simply believe that a substantial correction is needed first, and then we should assess the factors supporting the US dollar and the British pound. A correction to the level of 1.1844 would be enough to establish a fair balance between the two currencies. The non-commercial group currently holds a total of 63,700 longs and 85,800 shorts. The bears have been holding the upper hand in recent months, and we believe this trend will continue in the near future.  

Mixed outlook in ECG In this report, we update our forecasts and valuation of Medicalgorithmics. Based on the new forecasts and the current risk-free rate, we cut our Fair Value to PLN 41.2ps. As the new FV implies 50% upside potential of the current share price, we maintain our recommendation to BUY. Medicalgorithmics continues to rebuild its business model in line with its strategic goals, and we see progress in terms of the number of IDTF contracts as well as work on the implementation of VCAST. There is still a tremendous amount of work ahead for MDG to continue to recover the company. The 2024 results, burdened by the termination of the React deal, will show if and to what extent the company can rebuild revenue and profitability in the key US market. Moreover, VCAST is entering a decisive period with important newsflow ahead, it started the EU registration and should soon start clinical trials and registration in the US. Mixed newsflow in the ECG business Over the past few months, MDG has begun to implement its new diversification strategy in the US market. The company has communicated several agreements to integrate MDG software with other devices, and the first agreements with IDTFs other than React have emerged. We assume contributions from these, initially on a small scale as early as 1Q24E. On the other hand, React (formerly Medi-Lynx) just terminated the contract with MDG. The deal ends in 4Q23. In our model, however, we assumed that the deal would break even six quarters later, in mid-2025. Consequently, we are cutting forecasts for 2024E, assuming an EBITDA loss, as React generated approximately half of MDG revenues, USD 1.1m quarterly. However, with business growth from the new contracts, we assume break-even EBITDA in 2025E and EBIT in 2026E.  

Kardiolytics In contrast to the ECG business, the Kardiolytics area has generated positive newsflow recently. The company, in line with our assumptions, started the CE certification process for VCAST technology in October, which will enable the introduction of VCAST to markets in EU countries, the UK, Switzerland and also Australia in 2024E. Kardiolytics has signed a letter of intent with Polish diagnostics provider Grupa Diagnostyka to use VCAST technology for coronary artery disease testing. This will enable the project to generate its first revenues after registration. In 2024E, the company should also conduct clinical trials and submit a registration application to the FDA. A commercial launch is projected for 2025. We assume 56% cumulative probability of success. Our valuation of Kardiolytics is PLN 247m, or PLN 24.8 per share.   Recommendation and valuation We decrease our FV to PLN 41.2ps from PLN 45.2ps following the earlier-than-expected termination of contract with React and since the new FV implies 50% upside vs. the current price, we maintain our BUY rating.

Rates Spark: Pressure at the extremities The fair value number for the US 10yr yield is 4%, but we really need to see Friday's payrolls number first. The bond market is screaming at us that it'll be weak. But unless validated, the rally seen of late is vulnerable. Also be aware of front end pressure, although this was calmer yesterday.   Resumed inversion points to overshoot risk in the 10yr yield An interesting aspect of the price action in the past couple of days has been the resumed inversion of the US curve. The front end is participating in the falling yields trend, but the 10yr benchmark is leading it. That can reflect an overshoot tendency in the 10yr. It is true that the JOLTS data showed a surprise drop in job openings, but that should have been just as capable of sparking a larger front end move, helping to dis-invert the curve. At the same time, such price action is consistent with a 2yr yield that does not yet see a rate cut as a front and centre event. Typically, the 2yr really gaps lower about three months before an actual cut. But in the meantime, it should be capable of keeping better pace with the falls in yield being seen in the 10yr. While we are of the opinion that 4% is the structural fair value number for the 10yr (on the assumption that the funds rate targets 3% as the next low), we also feel that this market needs a weak payrolls number on Friday to validate the move seen in the 10yr yield from 5% all to way down to sub-4.2% in a matter of weeks. The fact remains that we have not seen either a labour market recession or a sub-trend jobs growth experience. At least not yet. The market is trading as if the 190k consensus expectation is wrong for Friday and that we’re going to get something considerably weaker. The JOLTS data supports this – as does the latest Fed Beige book. But we do need to see that report before we could even consider hitting 4% on the 10yr.   Repo pressures ease, but still some cross-winds to monitor on money markets At the other extreme of the curve, the elevation in repo rates seen at the end of November that had extended into Monday of this week had begun to ease back through Tuesday. The issue here is ultra front end market rates had come under upward pressure. Extra bills issuance has been a factor, as this has both taken liquidity from the system and placed upward pressure on bills rates generally. Repo is a function of the relatives between available collateral and available liquidity and at month-end, liquidity was tied up, and that pressured repo higher. The resumed build in volumes going back to the Fed on the reverse repo facility on Tuesday proves a reversion towards more normal conditions. That said, SOFR remains elevated, and that will contribute to balances falling in the Fed’s reverse repo facility as we progress through the coming weeks. If the market is showing a better rate than the 5.3% overnight at the Fed, that should take cash from the reverse repo facility. Interestingly there was a surprise jump in usage of the standing repo facility. Not large, but it shows that in some quarters there is at least some demand for liquidity. A bit early for this to become the dominant issue, but worth monitoring all the same.   Today's events and market view The JOLTS data highlighted the markets' sensitivity to any indications of a cooling US labour market. Ahead of Friday's payrolls report, markets will eye the ADP estimate. Given its poor track record of forecasting the official data, it is likely to take a larger surprise to move valuations – the consensus is looking for a 130k reading today after 113k last month. Other data and events to watch are the US trade data and, up north, the rate decision by the Bank of Canada. On this side of the Atlantic, we will get eurozone retail sales and, in the UK, the Bank of England financial stability report. In government bond primary markets, Italy is conducting an exchange auction. The UK sells £3bn in 10Y green gilts. The main focus over the coming days and weeks will be on governments’ announcements regarding their issuance plans for next year.

Rates Spark: Enough to hold rates down The US 10yr yield remains below 4%. However that's not been validated by the data as of yet. Friday's payrolls report can be pivotal here, but based off consensus expectations the market will remain without validation from the labour market. Also, the Fed's FOMC minutes due on Wednesday are unlikely to be as racy as Chair Powell was at the press conference.   Sub 4% on the US 10yr to hold at least till we see Friday's payrolls outcome The 13 December FOMC meeting outcome remains a dominating impulse for the rates market. The US 10yr yield shot to below 4% on that day, and has broadly remained below 4% since. It was briefly below 3.8% over the holiday period, but now at closer to 4% it is looking for next big levels. The thing is, validation of the move of the 10yr Treasury yield from 5% down to 4% came from the Fed, but not so much from the macro data. We can reverse engineer this and suspect that the Fed has either seen something, or fears that it will see something that will require lower official rates. In consequence, data watching ahead remains key. In that respect, we are days away from a key reading on the labour market as December’s payrolls report is due on Friday. A consensus outcome showing a 170k increase in jobs, unemployment at 3.8% and wage growth at 3.9% would leave us still lacking validation for lower market rates from the labour market data. We have it from survey evidence, and from scare stories on credit card debt and commercial real estate woes. But it's the labour market that is really pivotal. Risk assets struggled a tad yesterday, and that makes a degree of sense given the complicated back story, and the remarkable rally seen into year end. While a one-day move cannot be simply extrapolated, there are reasons to be a tad concerned on the risk front at this early phase of 2024. Geo-political concerns have not abated, and in fact if anything are elevating. Europe is closest to many of these risks, and the economy has been faltering for at least a half year now. Yes the market is expecting rescue rate cuts, but the European Central Bank is yet to endorse those expectations. An elevation of stress without the prospect of near term delivery of rate cuts can be an issue for risk assets. For market rates, this combination maintains downward pressure. The only issue is how far we’ve come so fast. We remain of the view that the US 10yr fair value level is around 4%, but that we will likely overshoot to the downside to 3.5% in the coming months. Our fair value comes of a forward 3% floor for the funds rate plus a 100bp curve. See more on that here.   Today's events and market views It's quiet in Europe for data through Wednesday. The bigger focus for Europe will be on regional inflation readings for December due on Thursday, along with a series of December PMI readings. The likelihood is for some stalling on inflation reduction alongside confirmation of ongoing manufacturing and business weakness. In the US on Wednesday we get ISM readings that will also show a degree of pessimism in US manufacturing. The job openings data will also be gleaned, but the bigger market impulse can come from the FOMC minutes, ones that will refer back to the pivotal 13 December meeting. The odds are they won’t be nearly as dovish as Chair Powell was at the press conference.