Markets live chat transcript for the chat ending at 11:55 on 5 Jul 2007. Participants in this chat were: Paul Murphy (PM) Robert Orr (RO)
PM: Welcome to Markets Live, FT Alphaville’s daily markets commentary
PM: Rob Orr is with me today – refreshingly.
PM: refreshing in the sense that Rob seems to have managed to log in to the new system a full 12 mins before neil was able to do yesterday
PM: But no! I spoke too soon
PM: System is asking him to install Microsoft Office…..
PM: Heaven Help US!
RO: I am here!
PM: Rob!
PM: Seems like ages since we’ve seen you here on Alphaville
RO: It does. And you’ve had all these new computers delivered since then.
PM: They are, but are still at temperamental stage, so don’t tempt fate.
RO: I won’t.
PM: Let jump straight in today — It’s my Day Six — I am still very jittery (without fags)
PM: So I need to keep moving….
RO: He does look healthier tho.
PM: That’s high blood pressure
PM: Right!
PM: One eye-catcher amongst the banks I notice.
RO: You are referring to Lloyds TSB
PM: Iam
RO: Price is up 11p at 564p currently – that’s a rise of 2 per cent
PM: Close to the top of the Foosie leaderboard
PM: Is that because of this Citi note published this morning.
RO: You’re on the button – Citi have up-graded this morning
RO: Basically they are saying that the market just hasn’t woken up to detailed behind the scenes restructuring work that has been underway at Lloyds over the past two/three years.
RO: Everyone likes to criticise Lloyds for supposedly being too conservative – paying out cash in dividends that could have been used to grow the business
RO: But Citi is saying that Lloyds has pulled off a switch to higher quality earning stream, such as in the UK, overhauling its investment business, etc etc.
RO: And they’ve upped their price target from 600p to 650p – and gone from “hold” to “buy”
PM: Hmmm…. Just pulling up the note.
RO: Probably worth pasting a few pars.
PM: That this process may now be complete, and the company on the verge of reaping the benefits of the changes – which have included a switch to higher quality earning streams in UK Retail Banking, a broadening of the product range in Wholesale & International Banking and a complete overhaul of the Investment business – may not yet be fully appreciated by the market.
PM: With the capital position strong and double digit earnings growth combined with measured balance sheet growth resulting in significant free cash flow generation, we expect dividend growth of 5% in 2007E to pick up to 8% per annum by 2008E. We believe the current valuation takes no account of this improving outlook and increase our target price from 600p to 650p and upgrade our recommendation from Hold/Medium Risk (2M) to Buy/Medium Risk (1M).
PM: Prudent strategy starting to deliver —Lloyds TSB is neither caught up in time consuming M&A activity nor suffering the fall out from pursuing an aggressive growth strategy in a period of rising interest rates. Instead, its strategy of modest asset growth, tight cost control, and an increased focus on liability driven business looks set to deliver double digit earnings growth 2006-2010E.
PM: Well diversified growth story — Stronger revenue growth, and a peak in the unsecured credit cycle, should boost profit growth in UK Retail Banking, whereas favourable demographics and management action have greatly improved the outlook for the Investment Business. Wholesale & International Banking continues to benefit from a broader product range and a benign credit environment.
RO: All very positive stuff.
PM: But you know what Citi don’t say is that there a bit of free insurance for those buying this stock on this “steady and reliable” growth story. Or indeed on the yield story.
RO: Which is?
PM: Well, I don’t think It is going to stop being classed as a potential bid stock anytime soon.
RO: Sure everybody in the sector is consumed by the ABN Amro fight. But that won’t be the last big bank M&A story this year, I suspect. Unless of course the market blows up generally.
PM: We’ll see
PM: 
PM: Let’s address Greenback’s point below — what does the float of KKR et al tell us
PM: Well, Greenback, my personal view is that it simply tells us we are in a period of market madness
PM: I think we will look back at these times and laugh– as we do now at the dot comedy times
PM: Not everyone agrees with me tho — Lex, for example, seems positively laid back of late
PM: It’s the structure of these floats which gets me — tiny freefloat (which invariably proves to be a BAD thing for outside investors)
PM: Not proper shares — no real ownership rights
PM: We call them “right-lite” issues
RO: I agree with Paul. The cost of borrowing is rising, industry is under attack and these private equity guys have given us a clear signal that the market has peaked.
PM: But hey ho — while the likes of Blackstone are ready to pay 40 times earnings for a seemingly mature biz like Hilton — I persnally would be an enthusiastic seller
PM: I repeat — 40 TIMES 2007 EARNINGS!
PM: According to Lex, that is … 
RO: These private equity guys are currently having a massive house party and someone else is going to have to clean up when it’s over
PM: Anyway…….
PM:
PM: Rob — over to you for fitzsimons….
RO: Yes, ITM still moving up nicely. I don’t havre much to add am afriad but i am seeing them for lunch in a few weeks so I hope to learn more.
PM: Tho the price is off 1.5p at 144p this morning
RO: Been very strong since recent trading update tho.
PM:
PM: Shall we crack on with the news. Tell us about O2 and the iPhone?
RO: Yes, great scoop on our front page this morning from Andrew Parker and team that Apple is set to chose O2 as its UK network partner for the much anticipated iPhone.
RO: There has been huge speculation about which network Apple would chose as a partner. According to our story, Vodafone and Orange (owned by France Telecom) were also in the running but would appear to have lost out.
RO: It is worth pointing out that Apple prefers to operate via these types of exclusive arrangements so as to help protect its brand and control distribution – it signed a deal with AT&T in the US.
PM: It has. That’s a great story. Any confirmation from O2?
RO: Quite the opposite. Their line is that they have not signed any contract.
PM: Actually — just got a mail from Andrew on this…
RO: Go on
PM: Couple of thoughts, he says….
PM: 1) O2 expect to get the Iphone deal for the UK market, but the deal has not been signed (sources say it is as good as signed, though company says on the reecord nothing has been signed)
This is clearly good news, at least in the short term, for Telefonica, 02′s parent, and 02 itself. The UK market is saturated with phones, and iPhone will be one way of knicking customers off rivals
PM: 2) In the short term, it looks bad for Voda. Sources are spinning it that Voda could not sign up to the commerical terms sought by Apple. They have a point: the AT&T deal in the US involves a revenue share ie Apple gets some of AT&T’s customer revenue, which is very unusual, possibly unprecedented in terms of a relationship between a network operator and a handset maker
PM: And also….
PM: Voda could also lose out on the other two iPhone deals in Europe ie France and Germany. Germany could well go to Deutsche Telekom, alhtough reliable sources familiar with DT say nothing finalised.
So in the short term, Voda looks bad. Longer term, teh question is whehter the iPhone sellers such as 02 have made bad commerical deals.
PM: That’s Parker take on the situation
RO: Vodafone down 2p at 164.1p this morning on the back of it. There had been plenty of rumours that Voda would win the iPhone contract.
RO: But great for Telefonica, the Spanish owner of O2.
RO: It is worth pointing out that this contract with O2 is just for the UK. Apple is free to choose other parters for France, Germany and other markets, and Deutsche Telekom and France Telecom could still win those. France Telecom’s Orange is tipped to secure the rights in France.
PM: Oi! Greenback — wotch it
PM: Times journos sit in their office at midnight, copying stories out of the FT…
RO: A blatant copy am afraid greenback
PM: Actually it was in the Guardian as well !
RO: Who also copied
PM: Oh, and the Telegraph
RO: Copiers
PM: And the Indie!
RO: Them too!
PM: So, er, maybe the story was around
PM: Right — got analyst coment on this?
RO: I have – from Cazenove. Here is a taste.
RO: In reality, the impact of the iPhone is difficult to judge at this stage. Whilst no operator will wish to lose out on securing exclusive rights over an iconic brand, the cost of securing such a deal is likely to be high; the “winner’s curse” springs to mind. Apple’s objectives of controlling distribution and requiring an ongoing share of service revenue are against the typical objectives of a mobile operator.
RO: In addition, the distribution model being adopted in the US represents a significant structural change if, as appears likely, it will be used in Europe. Instead of subsidising a phone, both Apple and the mobile operator will look to earn a margin from selling the phone whilst also requiring the customers commit to a certain level of monthly spend, which is then shared between Apple and the mobile operator. This might result in a big increase in the total cost of ownership of an iPhone contract compared with a typical mobile contract.
RO: Whilst the iPhone will provide an enhanced user interface and flat rate data pricing, initially at least the phone is only 2.5G as opposed to 3G and hence data speeds will be somewhat lower.
RO: That said, sentiment towards Vodafone has clearly benefited as a result of the speculation, which may now partially reverse. We still view Vodafone’s valuation as attractive with a prospective EV/EBITDA multiple of 6.0x comparing with BT and the sector on 6.0x (2007/08E), a PE (ex amortisation) of 11.7x vs the sector on 12.9x and BT 14.1x and a dividend yield of 4.2% (sector and BT on 4.7%). Our DCF based fair value remains 189p. However, given the scale of the recent outperformance (15-16% against both the sector and the market in the last 3 months), some profit-taking looks likely.
PM: Ok, thanks for that
PM:
PM: Right, shall we move onto the wider markets.
RO: We can – FTSE is down 5.1 points at 6,668 ahead of the interest rate decision at mid-day.
PM: The much debated rate decision. To put it bluntly, is there any chance that rates won’t rise to 5.75 per cent?
RO: To answer bluntly – no. There is a 95 per cent probability of a rise and it would seem a nailed on certainty that we’ll be sitting a quarter of a percentage point shy of 6 per cent by this afternoon.
PM: Lucky Ive given up smoking — with my lulu of a mortgage
RO: Cutting out the fags will save you about £2000 a year
PM: Correction: approx £3,650 in my case — if i am honest
RO: Oh, I forgot, £2000 for a normal smoker
PM: But then you’ve got to deduct the price of patches — and general grief visited on those around me — at home and at work
RO: Damage to kicked doors etc
PM: Thanks James
RO: Paul is skinnier than Mick Jagger and Amy Winehouse combined
PM: oh yeah — the two of them together would actually be fat!
PM: Anyway — back to the rate decision…
PM: I suppose the economy is still growing strongly and inflation is still a threat.
RO: True. And of course Mervyn King, the governor of the Bank of England, was narrowly outvoted over an increase last month when the nine-member monetary policy committee left its main rate unchanged at 5.5 per cent after a five-four split.
RO: We also had a story on the front page of our paper last week quoting Sir John Gieve, the Bank’s deputy governor for financial stability, warning that current rates were too low to curb credit and demand growth and that the danger of a loss of economic growth was preferable to taking a risk with inflation and the Bank’s credibility.
PM: So are we heading for 6 per cent by the end of the year?
RO: Futures market is suggesting so. We were taking this morning with Graham Secker, chief UK economist at Morgan Stanley, and he was reiterating his worries about the UK consumer and how Joe Mortgage is going to get hit hard by all this.
RO: Don’t forget this is a lag effect with how rates rises affect consumers. bertween 55 and 70 per cent of UK mortgages are fixed at a certain rate, usually for two or five years. So it is only when people come to remortgage that they find that their payments have risen sharply, possibly by several hundred pounds a month.
PM: Ouch. Doesn’t bear thinking about.
RO: With this in mind, it puzzles me that the Bank of England is pressing ahead with such a rapid series of rate rises.
PM: You think they should give the rate rises already in the system time to bed in?
RO: I do. And if you look at the latest housing market data, there is good evidence that house prices have already slowed, outside London of course.
PM: True. But, on the other hand, if they don’t raise rates today, everyone will want to know why, and the conspiracy theorists will think the BoE knows something that is not in the market – like some massive blow up in the subprime sector.
RO: Fair point.
PM:
PM: Pinko — we owned up to that above!
PM: Scroll back — honest!
RO: My fault – I believed the hype.
RO:
RO: Paul is frozen.
RO: We’re working on this.
PM: I’m messaging blind …. apols
RO: I’ll tell you all what this rate decision means for the pound shall I?
RO: Pound has been trading above $2 against the dollar for more than a week now, posting a series of fresh 26-year highs. Above $2, the pound has tended to get a nosebleed pretty quickly in the past, but it seems to be forming a base up there at the moment.
RO: Currently sitting around $2.0160, just shy of yesterday’s 26-high at $2.0207
RO: The question is: can we expect it to break through that level if the BoE raises rates?
PM: no im not — msg- ing blind again
RO: Poor Paul is still having problems – sorry
RO: Anyway, FX markets are never quite that simple. What you can guarantee is that it will sell-off sharply if rates are kept on hold.
PM: But the market is expecting a rate rise….
RO: Exactly and that is the point. A rate rise is fully priced in, so you could see a bit of a sell-off even if they raise rates. That said, most analysts are saying that any retracement would be a good buying opportunity. Strong resistance around $2.0220 I’m told, if it breaks through that we could be on our way to $2.0400 pretty quickly.
RO: Should also point out here that we’ve also got a Eurozone interest rate decision today. Eurozone rates should remain unchanged at 4 per cent but the crucial thing to look out for will be the hint on future policy.
PM: And the UK rate decision is at 12.
RO: it is.
PM:
PM: What else you looking at?
RO: Capita Group is moving today on the back of a hefty price target upgrade from Deutsche Bank.
PM: Go on….
RO: This is a “buy” note from analyst Nicholas Ward.
RO: A compelling combination of strong, defensive growth. While we believe that
Capita’s current earnings multiple looks full, we believe that the growth and margin
outlook remains compelling and we continue to see the risk to our forecasts as on the
upside. We believe that strong growth will deliver further share price upside and lift
our target to 800p (was 700p). This growth has the added attraction of being highly
defensive in nature, making Capita one of the most compelling stories in the Business Service sector.
RO: We believe our growth and margin assumptions are still conservative. While we have
made some modest margin adjustments in this report, we feel our earnings forecasts
continue to err on the side of caution. Our analysis suggests that Capita should be
capable of delivering growth and margin improvement that are at least in line, if not better than our latest estimates
RO: Current earnings multiple looks full but we still see useful share price upside. In the
past 7 months, Capita’s valuation multiple has spiked and now sits ahead of the upper
end of the company’s 5-year range. While we believe this multiple may ease in the
coming months, our view is that earnings growth looks sufficiently strong to drive further share price upside
RO: Latest DCF (which we have rolled 1-year forward) drives new 800p target. We use
explicit forecasts in years 1-5 before assuming revenue growth of 7.5% and 110bps of
margin fade in years 6-10. We use a 2.0% terminal growth rate and an 8.0% discount
rate (beta of 0.9, risk-free rate of 4.9% and an equity risk premium of 4.0%). We see
the greatest downside risks coming from a potential lull in contract news flow and any
damage to the company’s outstanding reputation.
PM: “Outstanding reputation”. Hmmm.
RO: Yes, that might be a bit strong. But the shares have reacted well – up 14.5p to 746p.
PM:
PM: just a quick look at the property sector
PM: Gt Portland estates have just come out with a v upbeat AGM statement
PM: Brokers immediately saying this might offer some respite
PM: Prop stocks had the stuffing knocked out of them recently
RO: Great Portland still down 8.5p at 651p. Respite not immedidate it would seem.
PM:
PM: What’s going on down in the FTSE 250?
RO: Strong annual meeting statement from Game Group, the computer game retailer, helped by the launch of the Nintendo Wii.
PM: Game Group – which bought rival Game Station earlier this year.
RO: It did indeed. Anyway, statement makes very good reading. In the UK and Ireland, total sales were up by 71.1 per cent and like-for-like sales were up by 46.6 per cent
RO: The PC and video games market has grown strongly in this period and I am
pleased to report that GAME is performing in line with our expectations for the
first half of the year. Consumer demand remains strong for all formats, particularly for the Nintendo
Wii. However, the UK trading environment in particular continues to be very
competitive with retailers
PM: Got any anlyst comment?
RO: Yes, this is from Oiel Securities.
RO: Strong trading update, BUY up to 250p
• Game reported exceptional acceleration in sales growth in the 10 weeks since their last
trading update. Underlying LfL sales +34.9% excluding the PS3.
• Strong supply and demand for the PS3 will ensure that the excitement remains in this
market for the all important H2 selling period.
• The broad appeal for the Nintendo Wii and the DS Lite has succeeded in transforming
the video games market into a mass market pursuit.
• A cautionary statement warns of gross margin dilution of 250 bps a head of the last
guidance of 150bps but in our view this is driven by an extraordinary increase for
hardware sales in the mix.
• Our initial estimates of an upgrade for pre tax profits 08 of £45m to £50m are now raised
to £52.5m meaning EPS at 10.7p and 17XP/E.
• Following the acquisition of Gamestation, Game group is the undisputed leader in video
games. BUY 250p.
PM: how are game group shares?
RO: Up 7.5p to 189.5p.
PM:
PM: Moving on, what was that you were saying about Ladbrokes earlier?
RO: Yes, very odd statement from them this morning. Seems that profits from telephone betting will be £45m more than in the same period last year because of what it calls “significantly increased levels of High Rollers’ Telephone betting activity”.
PM: Really. I presume the high rollers must have lost out then?
RO: You would have to assume so?
PM: So are the shares flying?
RO: Oddly, they are down. I don’t understand it I admit. Currently off 1.5p to 440.5p.
RO: Have a note here – again from Oriel Securities. They are not paying us – honestly.
RO: An amazing statement Ladbrokes announces a bonanza in its high roller telephone
business
• As a result telephone betting profits will be £45m higher than the first half of last year
(2006 H1 – £ 16m)
• In recent years telephone betting profits have varied between nil and £18m. Old hands
will know that peak profits for the channel were in 1994 when it made £26m
• Otherwise profits will be in line with expectations with challenging conditions in UK retail
betting
• We are likely to increase our forecast by £45m to £245m for the full year, giving EPS of
31.2p (upgraded from 25.5p)
Clearly positive but should be treated as a one-off, which is equivalent to 5p per share.
Shares have been supported by bid speculation and William Hill looks more attractive on
fundamentals. HOLD
PM:
PM: Couple of things to finish up on….
PM: Do you know a thing called Dicom?
RO: A bit – does some supposedly cutting edge systems for business process automation and the like – all about shifting business information around an organisation.
RO: Some people say it’s a big growth story, while also throwing off plenty of cash – had a trading statement out yesterday.
PM: What are the shares doing?
RO: Unchanged at 177p.
RO: Why do you ask?
PM: Well one of the blogs I follow – Capital Chronicle – the scribe, RJH Adams, is a holder of Dicom and he’s done quite a funny post on the company.
PM: http://alzahr.blogspot.com/2007/07/dicom-plc-spin-meisters-paradise.html
PM: He thinks it will have to do something with its cash pile – put at £35m or 40p a shares – and speculates on a special divi.
PM: But he’s worried that the firm’s PR’s – Financial Dynamics – are getting in the way of the investing public knowing much about the company.
PM: (He’s specifically worried cos FD were PRs to ISoft, a subject the Capital Chronicle has had a lot to say about over the past year).
PM: 
RO: Just reading it now. He’s re-written part of the press release.
RO: Chief executive Rob Klatell says:
RO: I am pleased to announce that fourth quarter trading has been broadly in line with expectations. At the same time, the traditional batch capture market remains under pressure from the continuing trends of consolidation and commoditisation, thereby rendering it a segment with diminishing long-term opportunity. Our further shift towards transactional solutions positions DICOM Group well for future growth. We are confident that these changes will position us to grow our business over the next few years into one of the most successful providers of integrated content capture, transformation and exchange solutions globally
RO: Has been changed to:
RO: Our competitors are STILL crapping all over the margins and revenues of our bread and butter business – soon there’ll be no hiding from the fact that we have to Do Something. Or at least show what we are doing is maybe working. Hell, I’m going to have to say something about the £3m already thrown at the problem. How can I put it without inviting irritating scrutiny and suggestions of fire-fighting panic management? Christ, where’s M&A to bail us when we need it?
PM: And there’s also his last par:
PM: Does the bulk of public company history not caution against communications strategies that issue the bare minimum information demanded by exchange disclosure requirements? Spirit, please, not just letter
RO: He’s got a point there, tho it’s probably not FDs fault – much as I am loathed to defend them.
PM: No – much better to blame the lawyers in these circumstances.
RO: Well that’s what the PRs do.
PM: Anyway – Dicom – one to watch. And read Adams blog.
PM: And finally — cant add much on this cos of system probs at this end …
PM: But I am told taht we should look at Commercial Group Properties — taht has jumped since we mentioned them here — i think at the end of May
RO: Will just get the price up . . .
PM: Up 10p at 260p — in the middle
PM: Wide spread on this one — highly speculative
RO: Seems to have doubled in last few months
PM: So if you hold them — sell half and you are in for free
RO: And therefore less likely to blame us if and when the prices comes back down to earth
PM: Right — thanks for joining us today — and thanks for all the comments.
PM: Back tomorrow at 11am
RO: Bye