Relatório "Portugal - What's Next" Uma análise sobre a situação actual do país e o que se pode esperar nos próximos tempos......

1. Portugal – What’s Next?
September 25th, 2012
.
For important disclosures, refer to the Disclosure Section, located at the end of this report.

2. Executive Summary
• Program on track – Portugal has been “the good student” following the Troika’s
recommendations. The current account deficit is narrowing rapidly. The 5th quarterly
review has just finished;
Economics
• Weak economic outlook – A fiscal‐policy‐induced belt‐tightening points to cyclical
economic weakness. A lower growth rate complicates fiscal consolidation. Domestic
demand should continue weak;
• The reform agenda is continuing – in the areas of job market, healthcare, housing,
judiciary, regulation and competition. More needs to be done. Buy, any effect will only
by visible in the long term;
• Government indebtedness – The debt/GDP path is challenging. A period of growth
would help restore solvency;
• Market Access – Portugal is supposed to partially go back to the markets in Q3 2013.
Given a weak economic backdrop, we like companies with strong foreign exposure. With
interest rates at low levels, we think stocks with an attractive dividend policy should also be
preferred:
Equities
• Sonae – A company with quality assets;
• EDP Renováveis – Regulatory risk have been reduced. The next catalyst could be
approaching;
• Portucel – One of the leading Portuguese exporters. BEKP listed prices kept rising in 2Q
2012;
• Galp ‐ Exposed to what has been the best exploration play in the world, in the last six
years.

3. Economics

4. Economics
A debt problem
• Accounting for Government debt, Portugal is • Government debt has been increasing much
one of the most indebted economies in the faster than GDP towards unsustainable levels;
Eurozone; • The State‐owned companies, the co‐financing
• A period of deleveraging is needed; agreements (Private Public Partnerships) and
• A period of growth would help restore local governments remain important risks;
solvency; • Portugal Government´s debt trajectory looks
• Leverage among the private sector (higher than challenging.
Spain´s) is one important vulnerability.
Portugal: Government Budget Portugal: Government Debt
1990 1993 1996 1999 2002 2005 2008 2011 2014
0% 700
Gov. Debt and GDP evolution since 1990
Tota l Government Debt
-2% 600
-1.9% GDP nomina l va lues
-4% 500
-4.2%
% GDP
-6% 400
-8% 300
200
-10%
100
-12%
years 1991 1994 1997 2000 2003 2006 2009 2012 2015
Source: Eurostat ; INE; Ernst & Young
Source: Eurostat; Ernst & Young

5. Economics
New measures have recently been announced
• Over the years, the Government has been running budget deficits;
• In 2011, the Government was able to comply with the terms of the MoU thanks to the transfer to the
state of some banks‘ pension reserves, for 3.5% of GDP. Excluding this one off, the deficit would stood at
7.7% of GDP;
• New measures have been announced in order to comply with IMF/EU quarterly review. Full details are
yet to be known;
• The Government budget’s target defined for 2012 is now 5% of GDP.
Portugal: Government Budget
1990 1993 1996 1999 2002 2005 2008 2011 2014
0%
-2%
-1.9%
-4%
-4.2%
% GDP
-6%
-8%
-10%
-12%
years
Source: Eurostat; Ernst & Young

6. Economics
An economy that used to run a trade balance deficit
• External imbalance reflects an upward trend in • Imports have been reduced due to weak
unit labor cost relative to the other Eurozone domestic demand;
countries. The main problem is the non‐tradable • Spain’s economic slowdown and the European
sector; recession have weaken Portugal’s exports
• Wage moderation has begun and should growth rate;
continue; • Nonetheless, exports to Angola and China have
• A weaker euro would help… but will it happen? provided significant support.
Portugal: Monthly Trade Balance Portugal: Exports vs Imports
years 70%
2000 2002 2004 2006 2008 2010 2012 60% Exports
0 50% Imports
40%
YoY growth rate
-500
30%
€ million
-1000 20%
10%
-1500
0%
-2000 -10%
-20%
-2500
-30%
-3000 -40%
2000 2002 2004 2006 2008 2010 2012
Source: INE Source: INE

7. Economics
Labor market weakness is a problem
• During the early 1990s, Portugal’s low wages allowed the country to be a platform for low cost
manufacturing;
• The unemployment rise reflects a decade of low growth for the Portuguese economy, poor
competitiveness and a highly indebted private sector;
• Unlike in the housing market hotspots in Europe, Portugal’s house prices have risen more modestly.
Nonetheless, the fiscal‐policy‐induced belt‐tightening led to a decline in construction investment (civil
engineering).
Portugal: Unemployment Rate
18%
16% 14.9%
14%
14.0%
% workforce
12%
10%
8%
6%
4%
2%
0%
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: INE; Ernst & Young years

8. Economics
Confidence on the banking system has not been shaken
• Since the end of last year, the pace of • Since the crisis began, Portugal escaped the
deleveraging in Portugal seems to have decline in the deposit base which has affected
accelerated markedly; the other peripheral countries:
• Given the deepening recession, the Banks’ • A higher risk aversion led to a stronger
credit portfolio should continue to demand for less risky assets;
deteriorate; • Banks offered more attractive rates in order
• A lower credit origination by the banking to meet their funding needs.
sector dampens domestic demand. • The Government used €5bn out of the €12bn
earmarked in the program to recapitalize private
banks.
Portugal: Loans Portugal: Deposits
150 170 12%
Total Deposits
140
160 10%
130
150 YoY Growth Rate 8%
€ Billion
120 € Billion (right scale)
110 140 6%
100 130 4%
Loans Non Financial
90
Corporations 120 2%
80
Loans Households
70 110 0%
60 100 -2%
2002 2004 2006 2008 2010 2012 2002 2004 2006 2008 2010 2012
Source: European Central Bank Source: European Cental Bank

9. Economics
The 5th review mission to Portugal is concluded
• Real GDP remains in line with projections. It should decline 3% in 2012 and
1% in 2013;
Economy • Exports are performing better than expected;
• Reduction in the external deficit allows to decrease the external financial
needs of the economy.
• Revenues are lagging;
• The deficit targets were revised to 5% of GDP (2012), 4.5% of GDP (2013) and
Gov. Budget 2.5% of GDP (2014), in order to ease the economic and social cost of the
fiscal adjustment;
• Additional consolidation efforts are required.
• The recapitalization of the banking sector and its strengthening are well
advanced;
Banking Sector • The deleveraging of the banking sector will continue;
• Access to credit at reasonable conditions is difficult for several sectors of the
economy.

10. Economics
New measures to meet the 2012/13 budget targets.
• Last Friday´s meeting of the Council of State called for some changes in the previous
Government’s proposals;
• The planned increase of the employees’ social contribution (from 11% to 18%) in
combination with a reduction of employers’ contribution rate (from 23.75% to 18%)
caused swide‐spread protests and forced the Portuguese Government to a U‐turn.
• The new measures will be designed to overcome the unconstitutionality of previously
planned cuts in the civil‐service Christmas and Summer payments;
• Full details of the alternative measures are yet to be known;
• The Government intends to share the overall burden of austerity more evenly between
the public and private sectors. Some previous cuts in public sector pay will probably be
restored.
• What measures should we expect?
• The level of income tax levied on all workers should increase;
• Higher consumption taxes (alcohol and tobacco) are also possible;
• Tax rates on capital and property earnings could also increase;
• According to press reports, a financial transactions tax could be announced;
• Some parts of the Social Security proposal could however be kept. The
Government wants to boost the external competitiveness of Portuguese
companies.

11. Economics
What should we expect from the new measures ?
• Disposable income should contract more than expected in 2013, as a result of higher
income taxes. Domestic demand and private consumption should remain weak. The slight
improvement in household confidence since the end of last year is now probably at risk;
• Clearly negative for those companies that are more dependent on domestic consumption.
• Increased capital gains taxes and a financial transactions tax could be negative news to
Portuguese markets.
• All measures are important to increase Portugal’s credibility and reduce the risk premium
that investors demand when they invest in Portuguese assets.
• At the moment of writing, we don´t know if some parts of the early Social Security
proposal (mainly those related to employers) will be kept. This would lead to a reduction
in the companies’ domestic staff costs.
• The new measures have created some instability inside the centre‐right coalition that
governs Portugal. Popular support for the parliamentary majority continues to erode
since the elections of June 2011;
• After the ill‐fated Social Security plan, more confidence have probably been lost.

12. Economics
Portugal’s financing costs are falling
• The Outright Monetary Transactions program, announced by the ECB, allowed Portuguese government
bond yields to fall;
• Lower CDS spreads for Portugal’s government debt. Investors should require a lower country risk
premium to invest in Portuguese assets;
• The current account deficit is shrinking. This reduces the risk of a further financing crisis.
Portugal: Government Bond Yields Portugal: 5Y Credit Default Swaps
25% 1600
1400
20% Yield 10Y
1200
Yield to Maturity
Yield 2Y
basis points
15% 1000
800
10%
600
5% 400
200
0%
2006 2008 2010 2012 0
2003 2006 2009 2012
Source: Bloomberg Source: Bloomberg

13. Economics
Will Portugal be able to return to the markets?
• Portugal is supposed to partially go back to the markets in Q3 2013 and regain full access to funding by
mid‐2014;
• Progress has been made in structural reforms. Privatizations so far have been successful;
• Portugal seems to need more time. Nonetheless, the Government announced new austerity measures
on top of what is already a severe fiscal consolidation. It is important that the pace of structural reform
doesn't slow down. For that to happen, political and popular support could be decisive.
Portugal: Redemptions Calendar of Tradable Debt
(€ million)
171,615
78,527
19,124 16,143
4,626 11,408 10,189 7,035 7,004 8,276 9,283
2012 2013 2014 2015 2016 2017 2018 2019 2020 >2021 Total
Source: Bloomberg

14. Top Picks

15. Top Picks
Sonae (last price: €0.536)
Investment Case: Key Risks:
• H1 2012 revenues decreased 3% yoy to • Tougher macro conditions (Portugal/Spain),
€2,531m. Net profit was down 44% yoy to higher peripheral risk, higher competitive
€20m. Net Debt decreased €50m to €2,182m; intensity;
• Despite its exposure to the Portuguese • Overhang Risk: France Telecom intends to sell
consumer, Sonae has had a resilient operating its 20% stake in Sonaecom.
performance. An improvement in its cost Valuation:
efficiency has been decisive; • We used Bloomberg consensus (average since
• Sonae MC: effective promotional activity July) to arrive to a €0.66 price target;
through Continente loyalty card. Increased • Main drivers: macro (unemployment, interest
penetration of private labels; rates, saving rates, inflation), consumer
• Sonae SR: Portugal ‐ Worten is the market confidence, company sales indicators (lfL
leader in the electronic segment. Some sales) and availability of debt financing.
restructuing is happening in the fashion Company Data
business. Spain ‐ Sonae decided to halt its P/E 2013 DY 2013 EPS CAGR Net Debt/EBITDA
expansion for 2012 in Spain. Some of its non‐ Est. Est. 2011/13 Est. 2012 Est.
performing stores could be closed in 2013; 8.81 6.85 5.61% 3.68
Source: Bloomberg
• Sonae has refinanced all debt maturities up to
Major Shareholders (% of capital)
the beginning of 2014; Azevedo´s Family (53.1%), BPI Bank (8.9%),
• A Sonaecom‐Zon merger could be a positive Bestinver (7.5%), Foundation Berardo (2.5%),
trigger for the stock. Recently, there’s been Norges Bank (2.0%)
increased news flow regarding a possible deal. Source: Sonae’s Web Site

16. Top Picks
Portucel (last price: €2.066)
Investment Case: Key Risks:
• Q2 2012 Sales growth was 10.4% qoq, taking • Increased tensions in the sovereign debt
the H1 outturn to 0.4% yoy. H1 2012 EBIT market, a decrease in BEKP and UWF paper
increased 12.7% yoy to €141.2m. H1 2012 Net prices and a worse economic outlook for
earnings edged up 8.3% yoy to € 105.7m; Europe (69% of total sales in 2011);
• After the turnaround in Dec. 2011, BEKP listed • The UWF paper industry´s demand/supply
prices kept rising in Q2 2012. This should environment in Europe.
pressure non‐integrated players. UWF paper Valuation
prices have been holding quite well; • We used Bloomberg consensus (average since
• Portucel is the largest UWF paper producer in July) to arrive to a € 2.368 price target;
Europe, vertically integrated and with a • Main drivers: economic growth, BEKP and UWF
diversified revenues stream (Portugal paper prices and USD to Euro exchange rate
accounted for only 5% in 2011). It has one of Company Data
the highest EBIT margin in the sector; P/E 2013 DY 2013 EPS CAGR Net Debt/EBITDA
• Increased exposure to developing economies. Est. Est. 2011/13 Est. 2012 Est.
In the developed world, demand is trapped in a 8.52 7.73 ‐1.97% 0.96
structural decline due to increasing usage of Source: Bloomberg
devices such as smartphones and tablets;
• Portucel has been cutting debt. Together with Major Shareholders (% of non‐suspended voting rights)
Semapa´s cash requirements, this has triggered Semapa SGPS (80.84%)
a generous dividend policy. Source: Portucel’s Web Site

17. Top Picks
GALP (last price: €12.85)
Investment Case: Key Risks:
• H1 2012 turnover rose 14.7% yoy to €9,351m. • Lower oil prices or refining margins;
EBITDA and EBIT increased 30.9% yoy and 52.6% • Disappointing exploration results;
yoy respectively. Net profit reached €178m, a • Development problems in Brazil;
56.7% increase yoy; • Redenomination risk in Portugal;
• In H1 2012, Brazil accounted for 52% of total • Overhang risk (ENI).
production of crude oil and natural gas; Valuation
• Brazil keeps growing. Petrobras and Galp (a 9.8% • We used Bloomberg consensus (average since
share) have announced an update on their July) to arrive to a € 15.87 price target;
Carcara well in the Santos Basin. The Portuguese • Main drivers: oil price, natural gas price,
company expects to have a reserve estimate in refining margins, capital expenditures and USD
the next couple of months; to Euro exchange rate.
• Galp is exposed to what has been the best
Company Data
exploration play in the world, in the last six years;
• Mozambique continues to have a positive P/E 2013 DY 2013 EPS CAGR Net Debt/EBITDA
evolution. Galp is drilling a few more wells; Est. Est. 2011/13 Est. 2012 Est.
• The conclusion of Galp´s refining project should 24.56 2.04 32.66% 1.01
start to have progressively an impact in Source: Bloomberg
production; Major Shareholders (% of capital)
• Overhang risk is still a concern. ENI should Amorim Energia (38.34%), ENI 28.34%), Parpública
continue reducing its stake in the Portuguese (7%), Caixa Geral de Depósitos (1%)
company. Source: Galp’s Web Site

18. Top Picks
EDP Renováveis (last price: €3.68)
Investment Case: • EDPR targets the addition of 2.3GW, putting
• H1 2012 EBITDA +23% yoy to €504m. Output was YE15 capacity at 9.8GW. Capex is targeted at
up 13% yoy. Average prices increased 10% yoy €3.2bn in 2012‐15. 5% CAGR in selling prices.
(higher prices in Europe, Brazil and US). Net EBITDA of €1.35‐1.5bn.
income was up 12% yoy to €100m; Key Risks:
• Positive news flow on the regulatory front. In • Redenomination risk;
Portugal, the wind industry reached an • higher peripheral risk.
agreement involving an option they can choose Valuation
to take or leave. In Spain, the government • We used Bloomberg consensus (average since
announced a package of energy taxes that (i) July) to arrive to a €4.39 price target;
involves a lower than expected hit to wind and • Main drivers: operational and financial
(ii) could be passed‐through by wind farms. efficiencies, capital expenditures and selling
These two events removed uncertainty from prices.
EDPR’s equity story; Company Data
• The first minority disposal to China Three Gorges P/E 2013 DY 2013 EPS CAGR Net Debt/EBITDA
could be an important trigger. Management has Est. Est. 2011/13 Est. 2012 Est.
said that none stakes will be sold below book 19.27 1.08 29.21% 4.79
value. This will be the first tranche out of the Source: Bloomberg
total €2bn of investment in EDPR assets by 2015
Major Shareholders (% of capital)
that was agreed. This should provide EDPR with
EDP (77.5%)
valuable funding; Source: Galp’s Web Site

19. Disclosure Section
This research report is based on information obtained from sources which we believe to be credible and reliable, but is
not guaranteed as to accuracy or completeness. All the information contained herein is based upon information
available to the public.
The recipient of this report must make its own independent assessment and decisions regarding any securities or
financial instruments mentioned herein.
This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related
financial instruments. The investment discussed or recommended in this report may be unsuitable for investors
depending on their specific investment objectives and financial position.
The material in this research report is general information intended for recipients who understand the risks associated
with investment. It does not take account of whether an investment, course of action, or associated risks are suitable
for the recipient.
Investors should seek financial advice regarding the appropriateness of investing in any securities or investment
strategies discussed or recommended in this research report and should understand that the statements regarding
future prospects may not be realized. Investors may receive back less than initially invested. Past performance is not a
guarantee for future performance.
Fincor – Sociedade Corretora, S.A. accepts no liability of any type for any indirect or direct loss arising from the use of
this research report.
Recommendations and opinions expressed are our current opinions as of the date referred on this research report.
Current recommendations or opinions are subject to change as they depend on the evolution of the company or may
become outdated as a consequence of changes in the environment.
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