Markets live chat transcript for the chat ending at 11:43 on 19 Jun 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: We’re off!
PM: Finally
PM: Welcome to Markets Live, Alphaville’s daily discussion of what’s moving and why.
PM: Neil Hume is with me – raring to go.
NH: raring to go where exactly
PM: Actually we’ve been having to sweat this morning to find some decent features.
PM: And what have you found, Neil?
NH: whitbread
PM: Whitbread hasnt been a decent fixture since it left Chiswell st brewery
NH: found a decent line in today’s trading statement
PM: Really — go on
NH: well, the company is going to re-brand Premier Travel Inn as Premier Inn
PM: So what — Whitbread is messing about with its brands all the time
NH: here’s the punchline
NH: it is going to cost £13m
PM: Wot!
PM: £13m to rebrand from Premier Travel to Premier In !?!?!
NH: yep £13m to replace signs, stationary etc
PM: That’s mad
PM: Wot, to pay for blokes to go up ladders and change the signs
PM: And to change the letter head on their Word Doc templates
NH: at £13m I would not have bothered
PM: that’s comic
NH: lets hope they don’t change coasta coffee to coasta, that could be another £13m
PM: Or Whitbread to Whitless
NH: what about Beefeater
NH: could change that to Porkeater
PM: Brewers fayre to Brewers Farce
NH: we could go on
NH: suffice to say apart from this line. nothing much interesting in this morning’s statement
NH: stock off 24p at £17.98. bit of disappointment that the company did not give fuller details of when it expects to hand more cash back to shareholders
NH: co saying will announce news on that at time of half year results
PM: Right thanks for that.
PM: 
NH: right., I though Greenback would ask about Compass and Capita and fortunately we have done a bit of work on these two this morning
PM: Greenback’s was asking about compass other day — today just capita 9and publicis
NH: hang on Paul on the phone
PM: Sorry, off now. Just fixing lunch
NH: OK Greenback we will get right on to Capita for you
NH: Capita shares up 19.5p at 753.5p – biggest riser in the FTSE 100 at the moment
NH: it shares were strong yesterday after Morgan Stanley initiated coverage with an outperform rating and a target price in excess of 800p
NH: the broker reckoned the company had the capacity to return more cash to shareholders
NH: anyway this morning, Citigroup has turned positive
NH: upgraded to buy and set a target price of 805p in a note that looks at the success of its insurance division
PM: Hang on, I thought Capita was an outsourcing company.
PM: Does things like the London congestion charging systems and the criminal records bureau
NH: but it also does a lot of back office outsourcing for the insurance industry
PM: Ok
PM: So what’s the Citigroup line?
NH: margin improvement in the insurance business
NH: here’s some highlights from the note
NH: Capita (735p) has continued to make large strides into the Insurance
Outsourcing market, winning a number of big contracts in recent times, the
latest of which was with Resolution. The Resolution deal effectively doubles
Capita’s growth prospects in Insurance, as it has its own wins plus any life
books that Resolution may acquire.
NH: With the aid of further small wins and
increased offshore scale we believe Insurance margins can be driven from their
current levels of 12.3% to the 15-20% seen in other divisions with similar scale
benefits. While growth has been impressive, the cash flow and returns profile of
the group has continued to improve, underpinning a higher valuation (the stock
trades on an ’08E P/E of 24.9x).
NH: With the greater contract diversity and
improved underlying growth the potential for upgrades looks to be on the rise.
We upgrade our rating to Buy/Low Risk from Hold/Medium Risk and set a new
price target of 805p (up from 725p).
PM: Thanks. I get the idea
PM:
PM: note the comment on Madrid below — we’re just trying to check that out
PM: No headline wire news…
PM: Nothing on Spanish news services
NH: personally I am more interested in Greenback’s claim that h knows 
PM: Is your 10 the same as our 10, Greenback?
NH: if he is not scottish then it can’t be the same person
NH: in fact I think he would struggle to locate Spain on a map
PM: Strong explosion in central Bagdad, but that’s barely news these days. Sadly
PM: Anyway, lets get back to some stocks
NH: yeah, we were just going to update Greenback on Compass Group
PM: Ah yes
NH: stock up 1.25p at 370.25p
PM: Ticked up to 373p earllier
NH: follows a Merrill Lynch upgrade to buy with 410p target price
NH: says the company has the potential to deliver strong growth over the next couple of years
NH: here’s some of the note
NH: We are raising our 2007-2009E underlying EBIT forecasts by c.2.5% following
Compass’ strong H1 results but still believe that further upgrades are possible as
the operational turnaround continues. Given the known cuts being made at the
“above unit” overhead level, our current forecasts imply underlying margin erosion
at the unit level in 2008E and 2009E. Maintaining “in unit” margins at our 2007
forecast level would increase our 2008E EBIT and EPS forecasts by 4% and 7%
respectively, leaving the stock trading on 19x 2008E PE.
PM: Excellent
PM:
PM: Of course one piece of big corp news this morning is from Tesco
PM: Looking at Tesco – shares are down 14p at 442p.
PM: that’s a huge fall for tesco
PM: This is not a volatile stock. It’s highly liquid. Everybody’s got some. It’s analysed to the n-th degree.
PM: It’s provides very clear market guidance. It does not shock – it just keeps going on and on and on and on about how it puts the customer first.
NH: Well, that’s the problem, shareholders are feeling a little as though they’ve been put second this morning.
NH: Actually, should be clearer on this. We’ve had first quarter figs this morning and they haven’t gone down well.
PM: Wots up. The Tesco juggernaut stalled – the Tesconaut mis-fired??
NH: Well, sort of. Core Uk sales growth has slowed and it’s talking about a “tougher year” – basically cos of rising interest rates.
NH: UK like-for-likes, excluding fuel, were up 4.7% in the 13 weeks to May 26. That compares with 5.8% in the previous quarter.
PM: Have they said anything about Dobbies?
PM: Which Tesco are bidding for
NH: Not really – just saying that they are the only ones with a proper bid on the table and that if and when Sir Tom Hunter puts in his own bid then Tesco will “react accordingly.”
PM: How feeble
PM: How about tesco internationally?
NH: All seems fine on that front. You might be interested to know that Tesco has consolidated its Chinese operations for the first time with these figures.
PM: Yeah, well possibly one of the few companies where you’d say fine – they’re Chinese numbers probably do add up.
PM: But look, this is a big big fall – more than 3%.
PM: Got any analyst comment?
NH: I have
NH: Here’s some stuff from Merrill which shows how the market were mis-footed – well, certainly how far Merrill were out with their forecasts…
NH: Tesco announced weaker than expected Q1 trading in the UK, in-store LFL sales
increasing 4.7% compared to our expectation of 5.6% and a Q4 run-rate of 5.8%.
To be fair, it seems that food sales have remained strong and that the recent
slowdown relates to more subdued non-food markets as seen in the broader BRC
data.
PM: Hmm – expecting 5.6, got 4.7 In analyst land that equals OUCH!
NH: Here’s some more
NH: However, the result is that Tesco now sits ‘in the pack’ of UK grocers, Morrison
reporting 4.5% in-store LFL and JS likely to report a slightly higher number at its
trading update tomorrow. It is premature to get too nervous about Tesco’s easing
UK trading. However, it is increasingly clear that an improving competition is
making it harder for Tesco and, for all non-food has been a growth driver for the
business, as it assumes greater % importance in the UK P/L, evidently even its
low-price model is subject to the consumer cycle.
PM: They like their “howevers” at Merrill, don’t they?
NH: Internationally, things look far more robust with the first time consolidation of
China and acquisitions in Poland and Malaysia of Leader Price and Makro,
respectively, meaning international sales grew 32%, well above our expectation.
We look for more country-specific detail on the conference call.
NH: Overall, we’d expect the market to focus on the slightly disappointing UK trading.
It is just the first quarter and, hence, its premature to get too concerned as to FY
forecasts, but with UK LFL and new space contribution below expectation some
buffer in our model will have been absorbed. We remain supportive of Tesco’s
evidently strong fundamentals and remain buyers of the stock, though expect it to
be weaker, ahead of the conference call, today.
NH: Our price objective of 495p is based on notionally distributing £17.5bn (borrowed
against the c£25bn of current property worth) to investors and valuing the geared
business on 15x FY2008/09E adjusted earnings.
The risks to this PO are a systemic collapse in the UK food retail property market,
operational error, or intrusive regulatory intervention.
PM: Anything more upbeat?
NH: Well Oriel are saying
NH: Shares have had a brilliant 12 months but won’t be galvanised by this from 18x Feb 08
PE. However medium term they are the best bet in the UK sector (consolidation plays
straight in to their hands) and we would use any weakness as a buying opportunity
NH: And Numis
NH: Valuation. Our target price remains unchanged at 570p, putting the stock on a BUY
recommendation. We value the group on a propco/opco basis. We have assigned a market
value for Tesco’s properties of £26.4bn. According to our forecasts, Tesco’s opco would be
generating an EBITDA (after adjusting for the higher rent) calendarised to December 2007 of
£2.5bn. We then put this on a 10x multiple to get us to a value for the opco of £24.6bn. This
would imply a total EV of £50.9bn,
equivalent to 570 per share.
PM: Ok, thanks for that
PM:
PM: Right time to take a look at the wider market
NH: but first we should answer Ralph below on Voda
NH: can’t see Voda saying much new. only just had figures
NH: although they will probably mount a robust defence of their position in Verizon
NH: we think the weakness in the Voda share price is down to our excellent i’view with the boss of AT&T this morning
PM: yes, that’s right new boss of AT&T effectiely ruling out a big European acqusition
PM: Talking about heavy investment into corporate market internationally
NH: which is bad news for BT and its Global Services division
PM: Hmm — true
PM: So on the Vodafone front, think we’re seeing a little bit of hot money coming out of the stock
NH: i think so
NH: voda shares currently off 2.7p at 159.4p
PM: had an extraordinary run
PM: The wider market…..
NH: FTSE 100 down 14.9 points at 6,688.5
NH: and that’s because of weak performances from Tesco and Vodafone
NH: and the geo-political stuff Greenback has mentioned below
NH: actually most of the retail sector is on offer following the results from tesco
PM: ok
PM:
PM: Let’s go to Cadbury Schweppes…
PM: Trading update and review this morning
PM: Whats been the reaction?
NH: er. There has not been one
NH: bit of a damp squib to be honest with you
NH: stock down 4p at 702p
PM: So what’s the view out there?
NH: well the Cadbury is saying a sale of its drinks business is more likely than a demerger is frankly no surprise
NH: also the cost cutting news looks underwhelming
NH: Cadbury is talking of 15% cut in headcount & sites.
NH: Restructuring costs will be £450m, with capex up £200m a year for 3 years. Looking for accelerated dividend growth, i.e. in line with EPS & with 40-50% payout.
NH: got a note from Oriel Securities which sums things up quite nicely
NH: Overall, no surprises here. Cadbury should do better, but mid-teens margins would still
be light of peer group. Don’t see much cause for great excitement. Trading news is
encouraging, but key will really be how likely investors think a bid for Cadbury itself is. In
the absence of serious bid interest, HOLD still seems sensible.
PM:
PM: Right, anything more speculative out there this morning
NH: bit of a buzz around in Lloyds TSB
NH: don’t know what the story is but probably takeover rumour
NH: shares ran up to 584p but come back over last 30mins
NH: now unchanged at 578p
NH: you will hate me for saying this but there really isn’t much going on this morning
PM: There’s always a story out there!
NH: actually there was something vague doing the rounds in Sports Direct earlier
PM: Ah 
NH: don’t you mean
PM: Er, yeah, sorry
PM: Why would anyone go near that dog?
NH: fair point
NH: and it must be said that traders are very cautious about this stock
NH: shares up 1p to 207p
NH: rumours that Baugur have been building a stake
PM: Hit 210 earlier
PM: I suppose that could be possible
PM: I mean they just took a stake in Debenhams and that is a big a dog as Sports Direct
PM: But is there any evidence for this rumour
PM: What have the recent volume figures been like?
NH: hang on, will just pull them up
NH: avg daily vol is around 8.3m shares
NH: on Friday 27.5m Sports Direct shares were traded
NH: and on Thursday 13.6m were traded
PM: So there could be something in this rumour
NH: yep
NH: but even if it is true I would not read too much into it
PM: Nor would I
PM: Bauger have made some bad investments as well as good ones in quoted companies
NH: woolworths springs to mind
PM: And just because they buy a stake does not mean they are going to bid
NH: anyway in this case they can’t – Mike Ashley still owns over 50% of Sports Direct and calls the shots
PM: Perhaps Baugur are building a position in case Mr Ashley tried to take Sports Direct private
NH: or perhaps they are waiting for Mr Ashley to buy back the company
PM:
NH: another quick couple of rumours for you
PM: Go on
NH: Carluccio
NH: that’s the Italian café/deli chain in which Richard Caring, the new owner of Annabels, has a 6.7% stake
PM: Interesting — any price?
NH: rumour of a 255p bid
PM: Price is up 1.5p at 221.5p currently
PM: And the second rumour?
NH: enodis
NH: this makes deep fat fryers and cookers for the likes of McDonalds
PM: Well, Enodis has been in the frame for the best part of a year
NH: held talks with two US suitors last year
NH: both walked away but some very shrewd people think one of them could be coming back
PM: Interest. V interesting.
PM: Can you put a rating on this story?
NH: 
PM: Ooooh
PM: havent seen out for a little while….
NH: the talks is that Manitowoc, which bid 220p last year, are preparing to come back
NH: obviously there has not been an approach yet because the company is still buying back shares
PM: As Jummy points out below
PM: But, i think we should take this seriously
PM: — that’s Bandit No 2 — has form on this front
NH: anyway the shares are up 4.25p at 205.25p
PM: One to watch — v closely!
PM:
PM: Right — we’re going to call a halt to proceedings today. Thanks for joining us
PM: Do come back tomorrow at 11 am for the next session of Markets Live
NH: see you tomorrow