Markets live chat transcript for the chat ending at 11:50 on 2 Jul 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live, FT Alphaville’s daily markets chat.
PM: Neil Hume with me and he’s got lots he wants to discuss
PM: Well — usual story — Windows 1763 takes a while to load…….
PM: And I had forgotten to send him my note on what I want to discuss
PM: (He does the same for me.. but i didnt send mine
PM: But, much more important than that is news that today is DAY Three
NH: that’s only taken 9 mins to boot up this morning
PM: 59 hours and 6 minutes since I last had a cigarette.
NH: and don’t we all know it
PM: OH COME ON NEIL, DON’T BE SO BLEEDING UNSUPPORTIVE!
NH: Ok okay! Calm down. I know it’s tough
PM: 
NH: Anyway, I thought you were going on patches.
PM: I AM ON PATCHES — I was ok up until about an hour ago.
NH: Well, I’d just say I’m glad I’m not around you when your off cigs and off patches
PM: Went cold turkey Saturday. Stayed in bed till the afternoon.
PM: Then I broke two glasses within an hour of getting up. Then I went to get the papers, got fifty quid out of the machine and promptly dropped (and lost) forty quid of that while walking into the newsagent
NH: So it’s proving an expensive business – giving up.
PM: Actually I already feel I’ve gained a few pounds.
NH: Wot, not having to spend a tenner a day on cancer sticks
PM: No – pounds in weight – I already feel heavier.
NH: Boom! Boom!
NH: Get some exercise.
PM: You’re right. Let’s get on with it.
PM: 
PM: How’s Diageo doing this morning.
NH: It’s up a bit – which is against the overall trend.
NH: up 8 at £10.45
PM: You seen this story in the Sunday Business Post – Irish newspaper?
NH: Yes, saying it might sell off it’s Guinness Beer brand.
NH: Cites “market speculation” in London and names Heineken as a potential buyer
PM: Hmm. This brings us back to the Scottish & Newcastle takeover story.
NH: Yes, that SAB Miller and Diageo were looking at a break up bid for S&N
NH: Which hasn’t come true.
PM: It hasn’t – and I believe I am now on the hook for a lunch at the Wolseley with Dom Walsh at the Times.
NH: I might advise him to wait for a few days before he takes the lunch off you – don’t think you are a man to dine with at the moment
PM: No
PM: Anyway, when we were looking at that in detail it was clear – DESPITE DENIALS – that in assessing the bid for S&N a big pre-occupation for Diageo was what it might do with Guiness
NH: Seemed to be looking at a number of scenarios for Guinness – one of which was hiving the British Guinness business off from its worldwide ops – and merging this with S&N British beer business.
NH: Yes – going for consolidation in a declining market – which will obviously be exacerbated in the short term at least by the smoking ban.
PM: LOOK CAN YOU JUST SHUT THE F UP ABOUT SMOKING.
NH: I’d have to go back to my notes, but I seem to remember out little friend from Dublin telling us that in these discussions – called Project Spice – Guinness was known as Ginger.
PM: That’s right – range of alternatives being looking at, including at one point SAB discussing whether it might takeover Guinness in the US from Diageo.
NH: Hmm — all just dismissed of course as frothy market speculation
PM: Not a Liffey leak then.
NH: no
PM:
PM: Talking of leaks — the FSA have just put out one of their thoroughly readable consultation papers this morning
NH: and you can find it at http://www.fsa.gov.uk/pubs/newsletters/mw_newsletter21.pdf
PM: Don’t all crash the FSA’s servers tho
PM: Here’s a taster…
PM: Some firms emphasised their reliance on the use of code words as keeping information confidential.
Whilst accepting the possible benefits, we note that the use of code words in isolation could be largely
ineffective as most parties agreed that code names can be relatively easy to interpret and sometimes
were poorly chosen.
NH: how daft is that???
PM: Utterly bemusing, no!
PM:
NH: why not use a password that nobody would guess????
NH: any other gems in there???
PM: Well, its clearly that the PR industry is going to get it in the neck
PM: Lots of bits of talk about a Statement of Good Practice
NH: oh year that will fix things
PM: Looking at non-regulated bodies and people involved in deal preparation
PM: Anyway, sounds like another 2/3 years before the regulators get their act together properly on this one
PM: Main conclusion of today’s report seems to be that another report is in order, some time relatively soon
NH: a roundtable perhaps???
PM: Doubtless
PM: Enough of that
PM:
PM: Right, time to turn to the wider market
NH: Rather predictably the markets are on edge this morning given the weekend car bombs and the security level being raised to maximum
NH: FTSE 100 currently off 26.9 points at 6,580.8
NH: actually this morning’s weakness also reflects the fact that Wall Street sold off towards the close on Friday
NH: and they fact that no one is expecting a busy week
PM: Why?
NH: well, we have the July 4 holiday in the US, which will bring markets over there to a standstill
NH: while back in Blighty, Thursday brings the interest rate decision from the Bank of England
NH: Can’t see too many big bets being placed ahead of either of those events
PM: What’s volume like this morning?
NH: bout 500m shares
NH: actually the market would be even lower had it not been for a strong performance from the heavyweight oil sector
NH: Brent crude is holding about $71 a barrel this morning
NH: on Friday, US crude settled above $70 a barrel for the first time since last September
NH: also the sector rotation I referred to on Friday continues.
NH: out of the insurers, property stocks into oil and also telecos
PM: OK so what the main movers?
NH: As you can imagine airline stocks and travel operators are under a bit of pressure this morning
NH: BA is the seventh biggest fallers in the FTSE 100 – down 9p at 410p
NH: among the mid caps, First Choice has lost 11p to 308p, while Thomas Cooks is down 12.75p at 311.5
PM:
NH: anyway the big story for me this morning has been Carter & Carter
NH: its shares got crushed late on Friday after the company issued a shock profits warning
PM: They ended 39% lower on Friday
NH: and this morning, the investors have been queuing up to get out
PM: I see what you mean, shares currently down 259p at — err, 258p
NH: hang on stock gone into backwardation
PM: Price all over the place –
PM: Down 250 at 229p
NH: that’s a fall of over 50%
NH: and the shares are now trading below their 235p flotation price
PM: Feb 2002 float — that is
NH: what’s more amazing is the C&C share prices almost hit £13 as recently as April
PM: Ok, let’s remind people what this company actually does…
NH: vocational training
NH: started out in the auto industry
PM: Big punt on the growth of training and education
NH: then went into other industries, construction
NH: and more recently college partnerships
PM: so why the panic selling?
NH: seems to be fears that the company has breached its banking covenants
NH: some analysts are saying it has and needs a rights issue
NH: others, including house broker ABN, say it hasn’t but things are tight
PM: This company has been in a state of disarray since founder Philip Carter died in a helicopter crash, along with his son and the pilot, on the way back from a champions league semi at Anfield
NH: Carter was a vice president at Chelsea
NH: his interest in the club goes back to the days of Matthew Harding. the two were friends
PM: This is all quite alarming
NH: it is. things seemt to be unravelling quite quickly
PM: Right, can you give us more of the back story
NH: as we said earlier, company specialises in vocational training courses
NH: floated in Feb 2002 at 235p
PM: Over the past couple of years C&C has been one of the biggest small cap success stories
NH: made a string of acquisitions
NH: which left it quite highly geared
PM: Philip Carter was crowned entrepreneur of the year for 2006
NH: shares above £12 in April and Mr Carter made it into the Sunday Times rich list
NH: then things started to go downhill
NH: first, the company made an unsuccessful bid for BPP, a company which specialises in training lawyers and City folk
NH: this moved surprised many people because BPP was in a different industry
NH: Anyway, Philip Carter then died
NH: obviously that hit the share price
NH: then a couple of weeks ago Peter Marples, business development director and the man tipped to take over from Philip left
NH: again this knocked the share price, which has also been hit from concerns about the revenue from college partnership deals
NH: and then of course we come to Friday’s profits warning
NH: which was a surprise on a number of fronts
PM: Go on — this chronology is v interesting
NH: Well, chairman Rodney Westhead appeared at a smaller companies conference organised by Kaupthing last week
NH: apparently he said that while earnings forecasts were a stretch, he was confident the company would get there
NH: And you know what happened next
PM: OK, thanks for that
PM: What is the detail of the profits warning
NH: well, the downgrades are pretty big as you can imagine
NH: in fact they are huge
PM: Got to remember — this stock is now sitting in the tiddler list, but back in april it was worth half a billion — quid
NH: C&C is blaming the significant shortfall in profits in its Employability & Skills division, as the government’s new Train to Gain programme has proved much slower to build up than anticipated
NH: basically the company has spent money getting ready for the programme, but student numbers have been lower than anticipated, as employers have been slow to put forward staff.
NH: anyway, as a result C&C now expects 2007 pbt to come in at £15.5m (EPS 25.6p)
NH: to put that figure in context, house broker ABN Amro was looking for £23.3m (EPS 33.5p).
PM: That’s quite a miss — bout 30%
NH: it is
NH: but it gets worse
PM: Go on
NH: C&C also warned of sharply lower profits in 2008
NH: and this time because of margin pressure in its core Apprenticeship learning division, with funding levels from the government coming down and increased competition within the industry
NH: so C&C expects profits to grow by 15% to 20% in FY08
NH: Now this is well below forecasts
NH: again to put the figure in perspective, ABN will probably reduce its forecasts from from £32.7m (EPS 53.2p) to around £18.0m (EPS 29.3p).
PM: Ouch — just to repeat — ABN are house broker
NH: Now here is the really concerning bit for shareholders
NH: Net debt is expected to £110m by the year
NH: this leaves interest cover tight
NH: However, ABN does not think the company has breached their banking covenants
PM: But things are “tight”
PM: Not everyone agrees…
NH: no, looks at this from Kaupthing
NH: We believe Carter & Carter will breach its banking covenants and an equity issue will be required to de-risk the balance sheet. A 1 for 4 issue at 250p would dilute EPS by 18% and restore the net debt:EBITDA ratio to 3.5x. The resultant 11x CY’08E P/E is very modest for a business with 15-20% trend growth but there is a short-term risk that solvency fears impact new business wins.
NH: We believe Carter & Carter will breach its banking covenants and, although its lending syndicate remains supportive, we suspect an equity issue might be required to de-risk its capital structure. On revised forecasts, the group will report a 4.8x net debt/EBITDA ratio at July 2007 falling to 4.3x in July 2008. Historically management has suggested a 3.5x covenant.
NH: There are two possible scenarios which would restore the 3.5x ratio:
A recovery in FY’08E EBITA to £33m (vs c£26m guidance)
A 1 for 4 rights issue at 250p per share, raising £30m
Banks will normally relax lending covenants for a finite period to enable a company to trade out of its difficulties but typically raise the credit spread in the meantime. Consequently, Carter & Carter’s FY’08E net interest is likely to be c£8m vs our current £7m forecast.
PM: Er, a rights issue a 400p looks wishful thing — obviously note was written before the price tanked again this morning
PM:
PM:
PM: Sorry to correct that — i was reading earlier note — Kaupthing revised their refinancing level down from 400p to 250p
NH: and even that looks optimistic now. shares trading at 217p in the middle, down 263p
PM:
PM: Any good news out there? Ralph look sas tho he needs cheering up
PM: Are Tesco cheap — well they have certainly come back a long way sicne the recent cautious statement on profits this year
PM: Come back from 473 to 410 — which for such a stable , well analysed biz is quite extraordinary
NH: Tesco is not as cheap as BP and Royal Dutch Shell
NH: and that’s where the smart money is heading at the moment
PM: Hmm — ok
PM: Used to be the case that grocers did well when inflation was heading higher — price inflation helped their margins
NH: yeah, but things weren’t as competitive back in the 70′s.
PM: 
PM:
NH: well, its looks like Wolfson and CSR have both got their chips into the apple iPhone
PM: And how do we know that?
NH: because people have spent all weekend dismantling them and putting the results up on the web
PM:
PM: So what do we know
NH: according to those who have looked at the pictures – and I am not one – CSR will be shipping Bluetooth chips into the iPhone and Wolfson will be shipping a mixed signal chip
PM: Right…
PM: That’s not a big surprise then?
NH: no, but it will be a relief to shareholders in CSR and Wolfson
NH: Can you imagine the share price reaction if they had been left out
PM: Fair point
PM: Share prices?
NH: Wolfson down 5p at 298p, CSR off 6.5p at 777p
PM:
PM: anything more speculative?
NH: hearing rumours that one of the biggest shareholders in Quintain Estates & Development……………
PM: that’s the property company developing the sites around wembley stadium and the Dome
NH: will you let me finish?
NH: has been bid £10 for its stake
PM: Hmmm
PM: Quintain had some good figures out the other week did it not?
NH: very good
PM: Any idea who the shareholder is?
NH: think so but the story needs more checking as it is slightly vague at the moment
PM: ok
NH: It does come from a good man however, so I will be pursuing
PM:
PM: I see Northern Foods are taking a bit of hammering this morning
NH: yep, shares down 6p at 113p. that’s a fall of 5%
PM: What is that all about?
NH: bearish note from Citigroup
NH: they have got hold of some market share data, which suggests that against easy comparatives biscuit sales have decline 6% over the last 12 weeks
NH: Citi are saying that an aggressive pricing strategy to recover an estimated £4-£5m in higher raw material costs has backfired
NH: the upshot of it all is that Citi reckons 08 PBT forecasts of £48.8m are way too high
NH: it has pared back its numbers to by 8%, so that they are now 7% below consensus
PM: OK thanks for that
PM:
PM: Any reaction to these Debnehams stories over the weekend?
NH: share price wise absolutely nothing
NH: in fact the shares are actually off 0.25p at 129.5p
NH: no body seems that surprised Debs are trying to find an exit
PM: Another exist — escape onto the continent
NH: equally no body thinks they are going to find a buyer
NH: Here’s a quick bit of comment from Panmure Gordon, which seems to sum the mood up quite nicely
NH: We remain buyers because we believe that the company.s cashflow should grow
substantially over the next five years. That said, we found weekend press gossip
pretty unsubstantial, although it does indicate a desire by management to find a
way to realise value.
NH: Although, as the anniversary passes of Debenhams. return to the stock exchange, it has to be
said that value remains well hidden. Money needs to be spent on the stores (and is planned to
be) and the ranges need to show considerable improvement in the Autumn before the shares
will move ahead more positively. We also have the little matter of the dreadful weather, which
has prompted early sales on the high street.
NH: That said, we would be buying the shares now, because we believe that the downside is limited
and most retail recovery stories begin to motor just after the analysts become most gloomy.
PM:
PM: Right — that’s it for today from us. Thanks for joining. Do come back tomorrow at 11am for the next session
NH: bye