Markets live chat transcript for the chat ending at 11:47 on 29 Mar 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to a Markets Live here on Alphaville
PM: Neil Hume is with me
PM: Busy morning — lots of statements, earnings and the like
PM: So what shall we start off with
PM: Shall we have a chat about Bridgewell, the mid market broker?
NH: morning. yes that wouold be a good place to start
PM: Just thought a number of your mid-market mates would have some thoughts on this.
NH: You callin me mid-market!
PM: No no no.
PM: Woudnt dare
PM: Just I know some of your shrewdies reside in the mid-market space
NH: Hmm. Well, the story this morning is that Bridgewell has come out with a statement confirming that it has received a number of takeover approaches.
PM: Yes, responding to the 10 per cent hike in its shares over the past week or so.
NH: Yes, well it is no particularly surprise to most people. Jim Renwick, the ex UBS equity capital markets guy who took over as chief executive in January, seems to have been touting the business around
PM: Touting around?
NH: Well, may be that’s over stating it. But he took over a business with some issues. Floated last june at 140 – then watched the market in AIM flotations collapse.
NH: We had a string of controversies – not related to B’Well i hasted to add – and then a buyers strike amongst institutions meant Bridgewell missed out on lots of fees it was expecting.
PM: Yes, so he took up the ceo position and identified the obvious – namely that a firm like Bridgewell needs scale
NH: Yes it needs more corporate clients – got something like 80/90 at the moment. It needs more institutional business – and it needs to get its revenue per head up.
PM: Pretty sharply I guess.
PM: So who are they talking to?
NH: Well, anyone and everyone, you’d guess.
NH: people in the know reckon the first serious approach comes from someone who wants to grow the business.
PM: And that points to maybe someone from the US using Bridgewell to build their British biz.
NH: Yes – or Canadian – Cannacord is one name that has been mentioned.
NH: Jefferies is another
PM: Yes, but you’d expect someone like Numis or Collins Stewart to put their own offer on the table now.
PM: So we are talking about sharp – and potentially painful – consolidation in this sector.
NH: very much so. all the senior people in the sector are expecting consolidation and this could kick start it
NH: hearing rumours on a regular basis that some of the smaller brokers like Altium, Arbuthnot are keen on doing deals
PM: interesting
NH: and then there is Evolution with all that cash and some interesting shareholders
PM: 
Somehting has got to happen with Evolution
NH: in recent weeks RIT Capital has apepared with a 4% holding in Evo
PM: that’s the Jacob rothschild fund, no?
PM: Lord Jacob
NH: it is. you sort of wonder whether Evo’s might sell their securities biz and focus on their asset mangement operations
PM: Ok — seems sensbile
PM: We should just mention Bridgewell’s porice. How has that responded?
NH: up 2.5p at 123p
PM: Right let’s turn to the wider market
NH: well, we were expecting something of a rocky opening after last night’s fall on Wall Street
NH: but it never materialised
PM: This is after Bernanke’s comments, yeah?
NH: indeed, the Dow was down almost 100 points overnight
PM: Fed chairman indicating that he is not minded to cut US rates any time soon
NH: which you would have thought is bearish
NH: but it did help the dollar edge up against the yen which in turn eased lingering concerns about the carry trade
PM: So that’s why Asian markets were up overnight?
NH: yep and that fed through into Europe markets
NH: FTSE 100 currently up 38.4 popints at 6,305.6
PM: So what else is moving this morning?
NH: Tate & Lyle and Compass and the big risers in the FTSE 100
NH: both issued trading updates and both have gone down well
PM: Very well it seems
NH: Tate is up 31.5p at 576p
PM: Extraordinary
PM: I flicked through the statement this morning and didn’t see that much in it. Certainly not enough to justify a 5% move
NH: Looks like a bit of a relief rally to me
PM: Relief that it did not contain another profits warning?
NH: yep
NH:
NH: Also the statement hints that Tate is making good progress on the sale of its Food & Industrial Ingredients ops. In fact they say a further update is planned within the next few weeks
PM: How much is this business worth
NH: well if they flog the lot £350m, according to Citigroup
PM: More than i expected
NH: yes
NH: and the word in the market this morning is that the sale proceeds could be returned to shareholders via a buyback
PM: Do you think that will really happen?
NH: i think tate has got no option
PM: Why?
NH: because if it does re-leverage then a private equity house is going to come in and do it for them
PM: So how does that balance sheet look right now
NH: very strong
NH: brokers I have been talking to reckon interest cover its at 15 time and that net debt is the lowest for 10 year and that’s before a disposal
PM: The ceo out to be keen to get the price up as well …
PM: He bought in at 609p in January folowing the profits warning
PM: Anyway, : interesting stuff on the gearing levels.
NH: It is. I get the feeling that the market is looking at Tate and saying if the company does not gear up or make a big acquisition then a private equity group will come along and take a shot at them
PM: So a good each-way bet
NH: yep
PM: Any analyst comment?
NH: this is from Panmure, which has removed the stock from its sell list this morning
NH: Tate has little to add on current trading, apart from to reconfirm the slow rate
of progress in Sucralose. Of most interest is the comment that there will be an
update in a .few weeks. on the disposal of Amylum. We have not adjusted our
forecasts for the dilutive impact of the deal and we believe Tate would need to
be aggressive with buybacks in order to mitigate the worst of the effect. As the
shares are now below our target price, we upgrade our recommendation from
Sell to Hold.
PM: Now, what about Compass — which also had a trading statement today
PM: Youve had your eye on them
NH: shares up 20p at 340p
NH: and I seem to remember you laughing at me when I tipped these as a buy a while back
PM: 
PM: Hmm — blinking catering company
NH: well, the new CEO Richard Cousins continued to do the business I am pleased to say
NH: he really is getting to grips with what looks increasingly to have been a poorly run ship for a number of years
NH: Trading statement reads very well
NH: company guiding for organic growth of around 5%, where as most analysts were going for 3%
NH: news on margins is also good – up 60 basis points vs expectations of 50
PM: Okay, okay. Any analysts agree with you on this?
NH: this is from ABN Amro
NH:
NH: Adding it all together this suggests 1H EBIT around £265m
versus our £254m after currency (excl Selecta to be disposed), ie, a 1H
upgrade of c4%. Upgrades are also likely in 2H. This is the first evidence in
the numbers that Compass is on the turn, highly significant in our view.
NH: and this is from Investec
NH: Today’s update is very encouraging with trading in the first six months of the
year ahead of expectations. Good organic growth is being achieved across
most of the group’s operations, whilst margin growth has been impressive.
The shares have performed well over the last year and look up with events in
the very short term, but we believe that, on a medium term view, they still have
substantial upside potential.
NH: The shares have risen strongly over the last year
and in the very short term look up with events, but we believe that with clear
evidence that the management is already having a substantial impact on trading
results, the shares still offer good value on a medium term view.
PM: What rating are Compass on?
NH: around 21 times 07 earnings, but that drops to 18 in 08
PM: Sorry — we’ve been distracted by Bandit 11 comes on with a comment!
NH: he wants to know if there is anymore on the middle east bid rumours
PM: So does Anon
NH: heard nothing more this morning. but yesterday afternoon there was some really good buying by bandits i would rate in the 
category
PM: New readers should know we only have bandits one thru ten plugged into the system
NH: 11 is a new one on us
PM: But he/she is welcome to get in touch
PM: paul.murphy@ft.com
NH: but should probably remember that
is a taxi driver from Glasgow
PM:
PM: Anyway — get back to that rating 21 times for 2007???
PM: Not exactly cheap, is it?
NH: recovery play and we have got the middle eastern angle. compass is a good steady biz that should appeal to a financial buyer
PM: Ok — let’s move on
PM: What about Dixons?
NH: DSG International you mean
PM: oh yeah, sorry
PM: Curries.com
NH: yes the INternational bit is important because it has been causing the company a bit of greef at the moment
PM: Currys even
NH: on top of the problems in Italy, this morning brings news of a fraud in one of its French warehouses
PM: just looking at the shares — they are UP 0.3p at 171p
NH: don’t you just love these new tick sizes
PM: Yeah ……
NH: we need to do some research on this tick change to see if it is actually benefiting liquidity, punters, market makers
PM: Or simply benefitting the LSE …
NH: lower ticks sizes must mean more fills on SETS, which means more fees for the LSE
PM: Certainly tightened spreads — DSG is 170.7-170.8
PM: But whey UP when they’ve discovered fraud at their french warehouse operation??????
NH: well its not that big a problem. i think analysts have knocked around £8m off forecasts
PM: Come to think of it, why hasn’t DSG been affected by that awful profits warning from Jessops yesterday?
PM: Bascially electrical kit is falling in price so quickly margins have been destroyed
NH: that’s true. But DSGI run a pretty tight ship as far as costs are concerned
NH: well, anyway another view is that this latest mishap in France makes DSG more vulnerable to a private equity bid
NH: This is how Nick Bubb at Pali International delicately put it this morning
NH: Either management will deliver a significant profit recovery or someone else will do it for them and break up the group
PM: Sensible view i’d say
PM: But then Bubb has had a buy recommendation on Dixons since Stanley Kalms was a lad
NH: very true
NH: also DSG has a very healthy dividend yield – over 5% – which is providing support.
PM: In fact, how is Jessops doing today?
PM: Any sign of a DEAD CAT bounce this morning?
PM: Neil’s been distracted by a phone call
NH: hi i’m back
PM: i was saying — any sign of a dead cat in Jessops?
NH: yes. stock rallied to 17.5p earlier, now up a penny at 16
PM: 
PM: There’s the cat
PM: dead
NH: OK a quick bit of background. Shares plummeted 68% yesterday after its third profits warning in four months
PM: that must be something of a record?
NH: yeah it might be, although the guys at Inter Link Foods might challenge that
NH: actually Inter Link shares are down 6.5p at 69.5p this morning
PM: Let’s get back to Jessops. Presumably analysts are sticking the boot in this morning
NH: well, you would have thought that, but actually their views are mixed
PM: Really?
NH: here’s the view from Panmure
NH: We don.t see an easy way out for Jessops, but the current .March Madness.
doesn.t just apply to its marketing campaign. At 15p the stock is trading on a
market cap of less than 5% of sales, an EV/Sales of 19%. It.s either going bust
or worth substantially more. While we can see the difficult trading outlook
continuing and a probable refinancing we believe there.s upside to the current
share price and we upgrade to Buy from Hold with a target price of 20p, down
from 70p.
NH: Time after time in this sector retailers are written off on
valuations of 10-15% market cap to sales (on an EV basis Jessops is on 19% of sales). Yet
ultimately the basket cases more often than not recover from these levels.
NH: The stock looks desperately oversold. On our current forecasts, EBITDAR is around £21m, Interest and
Rents around £17.1m, giving fixed charge cover of 1.2x and net debt (around £155m
capitalising leases at 7x) to EBITDAR of 7.5x. These may be in line with private equity
levels of gearing, but they are too high for stock market tolerance for a company with
Jessops operational gearing, in our view.
NH: Clearly there are structural issues in its market place. Product price deflation is rampant
(compact cameras down 16.3% in value in January), mobile phone camera specifications
have substantially improved, Jessops. reliance on a very narrow product market leaves its
sales volatile and it has added capacity rapidly over the past few years. Nevertheless we
believe that value will be salvaged from the wreckage and that buying when there.s blood
in the street is a better option than heading for the hills. Our target price represents a
market capitalisation of just over £20m, around 6% of sales. On an EV/Sales basis this
rises to 21%. For investors with a high risk tolerance this is a Buy, which may indicate the
company will go private once again.
PM: Well that is a brave call — tho i didnt realise they had fallen to a market cap of just 5% of sales
NH: amaziing isn’t it.
PM: not sitting on the fence
NH: you have got to applaud Panmure for taking a view
NH: OK. Here is the view from our old friend VC Ratty of Seymour Pierce
PM: The Hon. VC Ratty
NH: After a third profit warning, one could forgive management for ‘kitchensinking’
at this point. However, we do not believe this to be the case, with
the £5m forecast loss for the current year based on (at least at present)
realistic assumptions. With the bank breathing down its neck, we see the
logic for Jessops to rein itself in. Interestingly though, the £5m loss figure
excludes any ‘exceptional costs’ and ‘related restructuring’.
NH: We understand that this would mean any ongoing additional interest, banking
fees and professional fees would increase this £5m loss.
• The only opportunity we see here is for investors looking for a pure punt,
as any forecasting at this time is simply guesswork. Regardless of the
potential upside, of which we are fundamentally sceptical, given the
shrinking market in which Jessops operates, on the grounds of risk alone,
we move our recommendation from underperform (moved from
‘outperform’ to ‘underperform’ on 28 February 2007) to SELL.
PM: Now that’s more like it
NH: you’ll like this. It is from ABN amro the house broker
NH: Securing autumn funding requirements becomes a key priority to clear and the
implementation of a successful recovery plan will then be necessary to rebuild
profitability. That may perhaps include cost initiatives, store closures and
increased emphasis on developing and printing, but unless things change,
camera markets will be working against group efforts. With the group facing an
uncertain future, risks appear high. We decrease our target price to 15p from
55p, maintaining our Hold recommendation.
NH: With so much uncertainty surrounding it (future development of its product
markets, outcome of the strategic review etc), we believe Jessops. shares are likely
to remain volatile.
NH: If the group can amicably resolve its funding requirements and
ultimately restore a rating of 10x PE, the group would need to generate PBT of just
over £2m to justify the current 15p share price. The loss of £5m this year includes a
£2m stock provision that shouldn.t repeat, and perhaps £5m of cost savings (to
reach £2m of PBT) from an operating cost base of over £100m this year is not a
high expectation to achieve such a profit outlook (albeit such a scenario is
dependent on stabilising product markets).
NH: Once things settle, we expect the
market to look at the group.s share price through such scenario considerations and
we reset our price target to 15p accordingly (from 55p). But with binary outcomes
on offer, Jessops clearly attracts a high risk warning.
PM: So its a zero or a one then
PM: Binary outcomes
NH: either it recovers or it goes under. no half measures here
PM: One thing I’d say — Jessops DOES have a respectable brand
NH: it does but clearly the business model needs radical surgery
PM: Yep, bumped into a 
this morning
PM: Simply talked about extensive shop closures adn then a big move online …..
NH: sounds like the things DSGI have been doing for years
PM: Hmm. true
PM: Talking about Bridgewell earlier — and AIM’s problems
PM: You seen this LSE trading statement this morning.?
NH: Glanced at it.
PM: Well, they are talking about AIM as “The World’s most successful market for smaller companies.”
NH: Hmm. Not sure what that means. Its had lots of floats, sure, but its also had lots of flops.
PM: Just silly PR I think.. worlds most successful market.
NH: You could say China was the world’s most successful stock market – for investors
PM: All those Shanghai suckers who are about to discover what a market crash feels like.
NH: Oh, you selling China again?
PM: Too right!!! I’m putting a four-star SELL on Shanghai right now.
PM: 
PM:
PM:
PM:
NH: Why now?
PM: Well, Shanghai was only up another 2.4% last night – fourth straight day of gains. New intraday high etcetc.
PM: Oh, and ICBC – industrial and commercial bank of china – was up 6.4 per cent. It’s now bigger than Bank of America.
NH: No! it was bust a couple of years ago – on paper at least.
PM: Hmm, and I think if the outside world could look at its loan book now some people might decide that it is still bust.
PM: Anyway, if AIM is the worlds most successful market for little chancer companies and China is the worlds most successful market for chancer investors, I think we should have our own new market message.
NH: How so?
PM: Well we are clearly the most successful on-line market report utilising instant message technology.
NH: I guess we are, since we are the only ones doing it for now
NH: Bit of a mouthful tho.
PM: Hmm. Maybe get the marketeers upstairs to work on the message.
PM: Anyway, at least nothings blown up on Aim today. So far.
NH: Hm, not sure about that.
NH: Seen SMC Group?
PM: What, architectural group?
NH: Yes. Come out with a “Statement re results” today
PM: Go on
NH: Well, don’t even need to read it – just need to look at the price…
NH: Down 35p at 68.5p. – that’s a 34% loss
PM: Oh dear me — jsut looking at the statement
PM: Reviewing accounting treatment of work in progress …..
PM: …. contract by contract by contract …..
NH: the company initially expected to take a £5m hit
PM: And now it is going to be something substantially north of that
NH: and the figures for the year ending 31st Dec are going to be delayed
PM: What a mess. Maybe one of our glorious accounting regulators can explain to investors why this sort of things still happens on the London market
NH: have you read the last line of the statement, though?
PM: er, no
NH: the board continues to view the year to 31 Dec with confidence
PM:
NH: says its all really
PM: Couldnt make it up
PM: That’s it for today. Thanks for joining us. Back tomorrow at 11am.
NH: see you