Markets live chat transcript for the chat ending at 12:03 on 26 Apr 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 also connecting to markets live …..
PM: Neil Hume is not quite streaming ….
PM: I can tell you that he’s had little puffs of steam coming out of his ears this morning ….
NH: and its not beacause of our computers that I am steaming
PM: Not — its a certainly, recently listed company in the retailing sector …
NH: Sports Direct International
NH: shaping up to be the WORST IPO on the main market in the past decade
PM: That’s a big call!!
PM: How about PartyGaming??
NH: what that did blow up for a year or so
NH: Sports Direct is already a car crash and listed what two months ago
PM: Right –
PM: Stock has been as low as 215p this morning
NH: but currently off 11.5p at 224.75p
PM: Still off almost 5%
PM: What did this float at — eight/nine weeks ago??
NH: 300p at the end of February
NH: it came to market on the day of the wobble sparked by the big sell of in China
PM: When China met US subprime met Mike Ashley
NH: and it has never looked back
PM: Certainly never looked up toward the IPO price
NH: just looking at the order book. the all time high is 301p and I bet it wasn’t there for long
PM: 
PM: Probably at 301p for the first minute of trading
PM: Sports Directly — Brought you by the same investment bankers responsible for the car crash that has been the Debenhams re-listing.
NH: That’s right. Merrill Lynch and Citigroup helped Sports Direct founder Mike Ashley take out almost £1bn at the float
PM: what’s sparked this morning’s weakness?
NH: trading update
NH: probably fair to say it is not the most detailed statement we have ever seen
NH: Warns sales growth in its main UK business is slower than earlier in the year
PM: Amazing
PM: warning of slowing sales just two months after flotating
NH: and that’s not all
PM: Go on
NH: well, investors are hopping mad because the guidance is SO vague
NH: it says that pre-expceptional EBITDA for the year to 29th April will be BROADLY in line with the LATEST expectations
PM: What does BROADLY and LATEST mean??
NH: good question
PM: Why ?
NH: because the range of forecasts is so wide you could drive a bus through it
NH: In fact the lastest forecasts we have are from Citigroup
NH: they recently lowered their PBT estimate for 2007 to 144m from £150.2, and for the following year to £210 from £220m
PM: Hmm –
NH: anyway if you are thinking of calling Sports Direct to find out what consensus forecasts are, forget it
PM: Why’s that?
NH: because this morning’0s statement has no contact details
PM: What do you mean — no contact details
NH: No names, numbers. Nothing.
PM: Incredible
NH: It is. Particularly when you consider this is the company’s first statement post flotation
NH: still there is one bit of good news
PM: What’s that?
NH: Sports Direct expects to be able to announce the appointment of new IR and PR advisors in May
PM: 
in May
PM: Farcical
PM: There must be some pretty sheepish bankers round at Merrill and Citi this morning
NH: I’ll say
PM: Do we know any of the shareholders who have been sold this pup?
NH: I have been checking the regulatory announcements and nobody seems to have more than 3% of the company, apart from Deutsche Bank and its holding looks like a hedge for a CDF position
NH: under 3% we have the following
NH: data comes from Bloomberg
NH: FIDELITY MANAGEMENT & RESEARCH 19.95m 2.77%
ERAGE CLIENTS ACCOUNT 19.07m 2.65%
WESTLB EQUITY INVESTMENTS 13.15m 1.83%
BARCLAYS GLOBAL INVESTORS 10.00m 1.39%
ING INVESTMENT MANAGEMENT 8.36m 1.16%
STANDARD LIFE INVESTMENTS LTD. 8.33m 1.16%
AXA INVESTMENT MANAGERS UK LTD 7.23m 1.00%
GOVERNMENT OF SINGAPORE INVESTMENT 5.43m 0.75%
PM: Looks like the big institutions were smart enough to keep the punts small on this one
NH: indeed. exactly like Debenhams in fact, where most of the big fund management houses shunned the offer
NH: which was makes me suspect most of the Sports Direct issue was taken up by hedge funds
PM: So that’s why Sports Direct has been such a dog
NH: well it certainly has contributed. hedge funds tend to cut loss making positions very quickly
NH: but it has not been the only factor behind the poor performance
NH: pther factors have included: finance director not being available for analysts,Sports Direct sacking their PR company and the fact that Mr Ashley built a stake in Adidas – one of the company’s biggest suppliers
PM: Personally built stake in Addidas
PM: Any analyst comment?
NH: I have a very funny note from Oriel Securites
NH: It’s called Pinning the Tail on the Donkey
PM:
NH: a reference of course to the fact that nobody knows what forecasts for SPD are
NH: pasting
NH: Making estimates on Sports Direct has now become almost impossible. Today’s pre-close trading statement had no numbers whatsoever (not even a phone number to call the company) and whilst gross margins here appear to have stabilised, that total sales have only “remained positive” suggests that LFL has slowed dramatically. We will have to downgrade materially here, and with only 17-18p of EPS (at most) to work with, a share price target much nearer 200p is appropriate. It is impossible to be anything but negative given the total lack of visibility and we are moving from HOLD to SELL.
PM: Ouch
NH: there’s more
NH: A vague pre-close statement: it is hard to argue that a forecasting range has ever gathered here, so saying that forecasts will be “broadly in line with latest forecasts” (usually company French for “quite a bit below”) is less helpful than it could be. The use of the word latest is also significant in the light of recent broker downgrades of the forecast. There is a degree of commentary on how the company has arrived at its year end number but again detail is lacking. Total sales have slowed but remain in positive territory. Given that there is double digit growth in floor space in H2, we would have been stunned if it had been anything else, and it is easy to read between the lines and conclude that LFL sales growth is well into negative territory. Gross margins are in good shape, it would appear, and the prescribed cost savings are being found. No numbers on this though of course. We are taking 10-15% off our PBT forecasts today, but have no idea if we are even on the right page with our numbers.
NH: 17p to work with: Our new numbers suggest that in year two there is 17p of EPS to work with. It is very much a case of trying to catch a falling knife here, and all hopes that this share would trade on something approaching a sector multiple are now from Fantasy Island. A 25% discount to the sector feels more reasonable, and that implies a price target of 205p. Thus a HOLD recommendation is inappropriate and we are using this note to take our rating back to a SELL.
PM: That’s excellent. Any more notes???
NH: Just got this from Panmure. Nothing from either Merrill Lynch or Citigroup yet.
PM: Now there’s a surprise
NH: pasting Panmure
NH: The trading statement raises more questions than it answers. The sales growth
slowdown, the implied lower gross margin uplift and the total absence of
numbers leads us to downgrade our estimates by 9% for the current year and
by 20% for next year. We are also reducing our target price to 200p from 300p
and changing our recommendation to Sell from Buy.
NH: So, what to do with our forecasts? We have no .new. numbers, but this statement sets the alarm bells ringing. We think that the best thing to do is to take all the positives out of our forecasts
and assume much lower sales growth going forward and flat gross margins. This results in
a further downgrade to estimates. We are downgrading from £141m to £129m for the
current year (9%) and from £194m to £155m for next year (20%).
NH: Such substantial downgrades in such a short space of time leave the growth story in tatters
and we are no longer prepared to assume strong EBITDA margin growth. We are
therefore downgrading our recommendation from Buy to Sell and our target price from
300p to 200p. At this level, the shares trade at 14x 2008E earnings, arguably too high.
PM: What a disaster — but we should move on
PM: What’s happening in the wider market
NH: the FTSE 100 is up again
NH: gained a further 28.7 points to 6,489.7. That is in the wake of Wall Street’s strong overnight performance, which saw the Dow Jones Industrial average closed above 13,000 for the first time
NH: in fact last night’s close was a record high as well
PM: Chart watchers will love that
NH: they will
PM: So what’s moving specifically in London this morning?
NH: Standard Chartered has been strong
PM: So I see. Shares up 18p to £15.61
NH: rumours around that a Chinese bank or investment group is plotting a bid
PM: Goodness — that a bit of a flyer
NH: it is
NH: Kingfisher is up 1.25p to 267.25p on rumours that French private equity group PAI Partners is considering a bid
PM: That;s abit more like it
NH: it is. Kingfisher has a big operation in France so there could be something in it
NH: also we have the smell of burnt fingers wafting around chip designer Arm Holdings
PM: Yes, i smelt 
NH: bit of background. A couple of weeks ago there was aggressive short selling of ARM on speculation Q1 figures would fall short of expectations
NH: the figures have come out this morning and while they are weak – ARM has been hit by the strength of the pound against the dollar – they have been offset by news of a dividend increase and a big step-up in its share buyback programme
PM: What are the details??
NH: dividend being upped from 1p to 2p and £100m to be spent on buybacks in FY 2007
PM: So, the bears have been well and truly caught
PM: 
squeeze — what has the pushed the price up to ??
NH: up 6.5p to 138p – biggest riser in the FTSE 250 at the moment
NH: Scottish & Newcastle flying again.
PM: But how can that be?
PM: The putative bidding consortium – SAB Miller to buy the group and then sell Diageo the UK drinks business – has been going around all week saying….
PM: Oh, but this daft report in the Financial Times was just graduate trainees at some second tier investment bank cooking up some ever so vague blue sky fantasy M&A idea
PM: It was never escalated to senior management.
PM: And it was AGES ago.
NH: Hmm. Fact is it was just over three weeks ago. – just at the end of March. SAB were busy evaluating the break-up plan, which had been tabled by Diageo, when suddenly S&N’s price rocketed – above 600p
NH: The talks went on ice the very same day, we assume.
PM: So that’s why people can put their hands on their hearts and say “We haven’t spoken”
NH: Cos the meeting was cancelled.
PM: Well, the Takeover Panel believed them.
PM: But why’s the price flying again today? We think the bid has been iced, no?
NH: We KNOW the bid’s been iced.
PM: So the shares?
NH: Well, they ran as high as 599p at one stage, currently up 6.5p at 589.5p.
NH: The story is that Carlsberg might bid – but that’s daft.
PM: Hmm. Controlled by a foundation and doesn’t have the financial firepower.
NH: There are others that could come in, of course.
NH: Yes, Two scenarios:
NH: 1. Heineken takes the place of SAB in Diageo’s little break up plan.
NH: 2. Anheuser Busch steps in, shows SAB how to do it, and just buys S&N outright.
PM: Well, of those No 2 sounds the more plausible – but we don’t have any hard info on that.
NH: No – so, all things considered, we reckon S&N at 590p is too high.
PM: We do
NH: So we can slap a trading Sell on that one
PM: Yes, short term sell – this sector is going to see some heavy, heavy M&A, but it aint gonna happen this week.
NH: Well that’s what we believe
NH: should also point out that S&N has a trading update to tomorrow
PM: Forgot that — maybe punters should wait for that
PM: Another thing Id forgotten
NH: what’s that???
PM: I was going to tell a certain if an d when we were writing on S&N again
NH: a bit jittery are they??
PM:
PM: Just going to a comment below — KK — have Partygaming gone too high….
NH: not sure we can answer that but if you have shares it may be worth sitting on them
NH: this afternoon Barney Frank is supposed to introduce a bill to lift the ban on online gambling.t press conf due 3pm according to Reuters.
news but will likely help the pos+ momentum in sector
PM: This is senator Barney Frank — head of hte senate banking committee — introducing legislation in the US
PM: Where that leads we just dont know yet
NH: we know Frank hates the bill – called the online gamining prohibition bill one of the worst pieces of legislation in living memory.
NH: however, we don;t know if he has the clout to push a new bill through congress
PM: Lots of interests lined up against him
NH: right, Paul wants to talk about Slough Estates
PM: Yes, this sounds very,very interesting – but it’s something we cannot quite crack.
NH: ummmmmmmmm
PM: Back story on Slough Estates is that we suddenly noticed that it wasn’t going down when ever other sizeable property stock was under pressure earlier in the week.
NH: Yes, sector hit on the back of the big Spanish prop sell off – but Slough stood up there
PM: People immediately started talk of a bid, but then you started working last night on who the bidder might actually be.
NH: Yes, we printed the name Economic Zones World this morning in the paper.
PM: Hmm – this is part of the sprawling DP World conglomerate in Dubai.
PM: Well, you know what Neil, I got a call – from u know who –
PM: Who simply said:
PM: Neil’s bang on there
NH: Did he? That’s kind of him, but is it? Other people saying Slough has not had any sort of approach – and there is no way that the Dubai brigade would launch a hostile on something like Slough.
PM: Of course it would have to be friendly.
PM: You know, I suspect you just a little ahead of the curve on this one.
PM: All the right calls to are not being returned this morning
PM: I think there really is something in this – just that Economic Zones World haven’t made their approach yet.
NH: Indeed, they may have stalled it — look at the graph – this price has moved from 747p to 772 in the space of a week.
PM: I think you’re just too early.
PM: Just picking up Greenback — dunno why Cairn is up 2.4% — we will put some feelers out
PM: Oh, and Daine below — Neil not getting on with FT computers???
PM: What are talking about??
PM: He loves them
NH: i don’t. I get on fine with Macs its just Dell I have an issue with, especially Dell kit loaded with Microsoft packages that are 7 years old.
NH: think my PC was last tinkered with during the year 2000 handover
PM: Right — pack it in
NH: yes. lets turn to the small caps
PM: Anything caught your eye this morning
NH: 121Media
PM: 121 Media — waht’s that??
NH: bit like DoubleClick. quite small,listed on Aim
PM: As in Double Click the big US online advertising brokers/ services group being bought by Google
NH: had figures the other day – a sea of red ink.
PM: Little AIm version
NH: but the interesting thing is an AGM they had today
PM: Right??
NH: i haven’t been through all of the resolution but I am told the plan is to relist this company in the US, where valuations are much higher
PM: Hmm — AIM company being exported to the US markets
NH: apparently they have all of the boxes ticked now
NH: this stock has been very volatile in London because it is a Reg S company
NH: what that means is US investors, who love this sector, have to deal almost by appointment and there is loads of paperwork
PM: Price is currently unchanged at 15.57
PM: Neil’s jsut pulling up a bit of background stuff on this one
NH: I am. Back in Feb, Morgan Stanley Principal Investments took a 1.5% stake in the company
NH: they paid £15 a share
NH: at that time 121 was trading at £10
PM: So they paid a 50% premium to buy into this thing??
NH: and Morgan Stanley aren’t know as dummies
PM: Hmm — one to watch
PM: Daire — asking about Landore below
PM: No further word im afraid. But we know a man to ask ….
PM: Think it is one to be patient on…
NH: also been looking at a company called Pixology
NH: It makes software for the digital photo labs you might have seen in Tesco, Jessops and Boots
NH: chaired by Lord Young of Graffham
PM: that’s the former Tory minister
NH: it is
PM: do you remember the famous quote
NH: I do
NH: “Other people bring me problems. David brings me solutions”
PM: Davis being Lord Young
NH: well, I think shareholders of Pixology will want some answers because this stock has been a real disaster
NH: albeit one with a happish ending
PM: Hang on a minute the shares are up 50% this morning!
NH: they are. The company has agreed to be acquired by Photochannel Networks for 40p-a-share in cash
NH: the offer values Pixology at £8.1m
NH: But this all needs to be put into perspective
PM: Go on
NH: Pixology floated in December 2003 at 140p
NH: it raised £8m of cash
PM: Gulp
NH: and some people are puzzled that it has decided to sell out
NH: Alongside the offer, Pixology had announced results and an upbeat outlook statement
PM: Can you paste?
NH: We have entered the current year with a strong balance sheet, encouraging sales
prospects and an excellent reputation in the marketplace.
PM: If things are looking up why are they selling?
NH: good question and given the company has cash of £5.3m it all sounds even stranger
PM: Cash of 5.3m — and now bbeing taken out for 8m???
NH: being acquired on less that half its forecast sales
PM: Wot
NH: Mind you takeover talks have been dragging on since September so shareholders are probably relieved there is finally an offer on the table
PM: What are Pixology shares doing now??
NH: up 12.75p at 38.5p
NH: Before we sign off I have lots of people are asking me about Invensys this morning
NH: stock spiked late yesterday on rumours of a bid from Siemens
NH: and is up a further 7.25p at 323.75p
PM: Something in the rumours then?
NH: I doubt it, Siemens booted out there CEO last night.
NH: I reckon the rise has more to do with recent results from some of its peers
NH: this it explains it nicely
NH: from evolution securities
NH: The pop in the Invensys share price of the last 24 hours has seen the usual bid rumours dragged out but the reality, in our view, is more simple. There is a growing realisation that the strong performances from stocks such as Honeywell, Siemens, Whirlpool, American standard, Schneider and today ABB and Electrolux all have significant pluses for Invensys. Not only this but its combination of self help and clear top line growth prospects has yet to be full factored into valuation. We stand by our 400p price target which is still only a stepping stone to a higher level when we start to introduce some leverage back into the balance sheet post a possible disposal of controls.
NH: Will Invensys be bid for? Certainly a possibility in the medium term – our own feeling that such a move would come before the refinancing next March – and would suggest that Siemens right now with the Chairman and CEO going is unlikely. Invensys is still cheap. 11x 3/09 against a sector on 12x and Tomkins on 14x. In our view, the end market profile and state of balance sheet should command a decent premium along similar lines to Weir for example. Another scenario, a second stage type, is to work through a releveraging of the balance after assuming the disposal of Controls. Run off our 3/09 numbers with controls fetching sales of £775m and then gearing the balance sheet up to 5x interest cover, Invensys can buy back in £1.625bn of stock and eps would rise to 49.2p – somewhat higher than our current 29.2p. This scenario is unlikely but it does demonstrate the potential within the balance sheet.
PM: Right — thanks for that. We’ve got to sign off now. Thanks for joining us on Markets LIve — do come back tomorrow at 11am
NH: bye
PM: Ah — just for we go — UK Trader points out that Two Delta have said they are the Sainsbury buyer
PM: Thanks for that UK T
NH: bought 302m shares yesterday
NH: that is more than we thought
NH: its equates to a 17% interest
PM: Hmm — if there is a concert between Paul Taylor and Tchenguiz — then they’ve got about 22%
NH: hang on the way they have acquired the shares looks interesting
NH: as we suspected yesterday this is not a straight forward share purchase
NH: looks to have been structured as a CFD
NH: they are calling it a total return equity swap, under Delta can take delivery of the physical shares
PM: That means it has economic interest in the stock immediately, but can only vote once it exercises its option to take delivery of the stock
NH: yes. and it will be at that point the Two Delta will have to pay stamp duty.
PM: UK -trader — not a bid yet of course — but yes RNS statement is out
PM: Right — we’re off — see ya