Markets live chat transcript for the chat ending at 11:58 on 6 Jul 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Markets Live – FT Alphaville’s market commentary
PM: Neil’s with me
PM: he’s got new kiit
PM: So we’re late of course
PM: kit, even
NH: morning. i’m in
PM: Raring to go.
PM: Day Seven – you know
NH: And you’re stil not smoking
PM: I’m not – c-stick free for almost a week.
PM: But my blinking head is all over the place, cant write, can’t think straight, can hardly speak at times.
NH: No real side-effects then
NH: People (other than me) being supportive?
PM: Well, yes, chatting with Philip Stevens in the lift yesterday – he gave up last November.
PM: He’s still using gum occasionally, but says it gets easier etc, and your mind does eventually return to something approaching an even kilter.
PM: So embarrassing.
NH: Why embarrassing?
PM: Well, I spent the entire conversation called him “Peter.”
PM: Right let’s get straight into this morning
PM: Neil thinks has a good story in Quintain Estates
NH: well, its obviously pretty RAW
PM: Do go on
NH: Expecting some action shortly
PM: For those of you who don’t know Quintain it is a property developer
NH: Its highest profile sites are around the Wembley and the Dome in London
PM: The Dome?
PM: It’s not called the Dome anymore
PM: It’s called the O2
NH: Alright
NH: Paul lives south of the river and knows about these things
NH: I don’t and only venture over into the bad lands south of the river for work
PM: We should also point out that John Plender, one of our senior columnists, is chairman
PM: Of Quintain — that is — not daft enough to be a director of the former Dome
NH: He is
PM: He’s not
NH: no he is the chairman of Quintain i meant
NH: Right with those caveats out of the way we can get on with the story
NH: Apparently a big stake is about to change hands at 920p
NH: must stress that this may not happen today but sources tell it should in the near future
PM: How big is this stake?
NH: Almost 10%
NH: the position is held at ABN Amro
NH: its a hedge for a CFD position
PM: Who is the underlying owner? — party with economic exposure ?
NH: Well, we wrote earlier this year – exclusively I might add – that the owner is Paul Kemsley
PM: 
NH: Kemsley is a property developer who runs a company called Rock
NH: You might have seen him on the Apprentice. He was one of the interviewers called in by Sir Alan Sugar to grill the apprentices
PM: Kemsley is also a vice president of Tottenham Hotspur football club and a close friend of Daniel levy, the boss of the club
PM: So we think that Kemsley is about to sell his position?
NH: That’s what we are hearing – for a price just above 900p
PM: And do we have any idea who the buyer might be?
NH: NO names but the talk in the market is that it is an overseas buyer and the stake will be parked in a foreign bank, possibly an Irish one
PM: v Interesting — conjours up all sorts of possibilities
NH: it does. i’m if it proves to be true the usual suspects will be trotted out
PM: McManus, JP, Desmond — various Coolmoor mafia
NH: could be quite a shrewd move picking up a large lump of Quintain
NH: If the 02 takes off the area around it could prove to be quite valuable
PM: How the helll, do you know ? North Londoner
NH: i don’t. what do you think sarf londoner???
PM: Well, what I do know is that people forget there is bleeding great gas plant next to the Dome / o2
NH: ahhh
PM: And a six lane motorway leading to the Blackwall tunnel
NH: sounds lovely
PM: And its not in Greenwich,
PM: It’s in a nomans land , roughly Charlton
NH: it gets worse
PM: Called “North Greenwich” — which used to be a joke name for the isle of Dogs
PM: Anyway — only joking. There is actually loads of development potential in that area
NH: must be fairly near wharf no?
PM: Yes, yards
NH: good tube link??
PM: One tube stop
NH: to the wharf that is
PM: n Green to the wharf
PM: Anyway, what are Quintain shares doing?
NH: nice ticker on Quintain – QED.L
NH: shares up 34.5p at 864.5p
NH: that’s a rise of 4.1%
PM: 
NH: Actually we are seeing quite a bit of interest in the property sector this morning
PM: Why’s that?
NH: after the market closed last night, British land quietly stuck out an announcement
PM: Saying?
NH: that it had bought back shares for the first time since 2003
NH: Co repurchased 1m at nearly £13.70
NH: Said it expected to make further purchases totalling up to £250m over the next 12 months
NH: Now I think this is very significant
PM: yes, property stocks have been hammered this year
PM: The sector is down around 20% and most of the blue chip property companies are trading at 20-25% discounts to net asset value
NH: Now what British land said its statement last night was that the gap that has opened between share prices and asset values was too big and people had got too gloomy on the outlook for the property sector
PM: yeah, tho British land et al are partly to blame for this
PM: After all they have used every results announcement to talk down the market
NH: they have and perhaps it has backfired on them a little bit
NH: Anyway, most people in the market reckon that Land Securities will be the next big property company to start buying back shares
NH: It has an AGM on July 17, where shareholders we be asked to vote on a resolution that will make repurchasing shares much easier
PM: Like British Land, Land Secs has not bought back shares for years
PM: Do we have any analyst comment?
NH: Yep
NH: this is from Caz and it cover both B Land and Land Secs
NH: Year to date British Land’s shares are down 20%, underperforming the sector by 3.5%. As a result British Land, like Land Securities is currently languishing at a very wide discount to NAV of 21% to current NAV. We believe that one of the reasons for the fall in British Land and Land Securities’ share prices is their liquidity in a market where investors are becoming increasingly nervous about the sustainability of property values (irrespective of the subsector) in the current interest rate environment, despite what our forecasts (and others in the property industry) are suggesting will happen.
NH: Although the higher gearing could turn against British Land if values start to slide we are not forecasting any falls in value even in their retail portfolio, given the prime quality of the assets (although we accept it remains a downside risk).
NH: Therefore we believe British Land and Land Securities not only look the best value amongst the majors but also have the most potential upside given their exposure to the Central London office market. The company’s announcement yesterday to start buying back shares (1m bought at an average of 1369.8p – which adds an additional 1p to our FY2008E NAV) underpins, in our view, the company’s belief in the growth potential of the company. We believe this will be taken positively by investors.
NH: If British Land made further purchases up to £250m as it is suggesting then we believe this could add another 17pps to our NAV forecast and increase our FY2008E net debt/equity forecast from 72% to 77%. We retain our OUTPERFORM recommendation for British Land.
NH: Also got some interesting comments from Deutsche Bank
NH: This came out yesterday but I think DB are pushing it again this morning
NH: We believe the UK REITs’ YTD weakness has significantly improved the
group’s risk vs reward proposition. While we acknowledge that interest
rate concerns and the potential for property price weakening are likely
to create further noise in the near term, we believe that much of the
potential downside is priced into the shares. As such, we are
maintaining our Buy rating on BLND and upgrading LAND and HMSO to Buy
from Hold. Our target prices, which are based on forward NAV ests, imply
upside of 25-34% from here.
NH: During 1H07, the UK real estate stocks generated a total return of -17%
(versus an approximately 7% gain for the FTSE 100) fuelled primarily by
concerns about rising interest rates and the impact they might have on
cap rates. LAND and BLND have been hit particularly hard, posting
declines of 23% and 21%, respectively, while HMSO has held up relatively
well (-8%) as bid speculation has buoyed its share price.
NH: At these levels, though, LAND and BLND are both trading at 19% discounts to spot
NAV, while HMSO is trading at a 5% discount to spot NAV. Furthermore,
LAND and BLND are both trading at approximately 21% discounts to our
12-month forward NAV estimates, while HMSO is trading at a 12% discount
to our forward NAV estimate.
NH: At current levels, we believe the shares have fairly limited downside.
First off, we believe it is increasingly likely that buyback programs
within the group will become more widespread. Indeed, on 17 July, LAND
shareholders will have the opportunity to vote on a resolution
authorising the company to buy back shares.
NH: Also, given the widening disconnect between public and private market pricing reflected in the share prices of these stocks, we think a potential private equity bid
for a UK major cannot be ruled out. Furthermore, while interest rate
concerns have weighed on the group throughout the year, the market
already appears to be pricing in not only a hike this afternoon, but
further hikes beyond it (perhaps to 6.25%).
PM: The line on PE is quite interesting
NH: It is. but it would be a pretty brave move to buy a property company at this stage in the interest rate cycle
PM:
PM: let’s turn to the wider market — where we can also answer Scramble below — asking about Cairn …
PM: And Greenback….
NH: FTSE 100 has bounced back from Thursday’s losses
NH: Currently up 38.3 points at 6,673.5 and it is all down to the heavyweight oil sector
NH: Royal Dutch Shell, BP, BG and BHP Billiton, which has a very big oil and gas business, are among the biggest risers in the FTSE 100
NH: And that follows news that the crude price has raced past $75 a barrel this morning
PM: When was the last time it traded at that level??
NH: nearly a year ago
NH: This morning’s rise seems to have been prompted by worries of further unrest in Nigeria
PM: Umm. Oil at $75 a barrel is going to be quite inflationary
NH: it does
PM: And that’s the odd thing about the London market
PM: Because it is so weighted towards oil – if those stocks move so does the index regardless of that fact that the underlying reason for the move is actually quite negative
PM: Should mention that the FTSE 100 paused at 6666 this morning at 6 mins past 10 — did you notice that?
NH: scary
PM: Satanic stock, eh?
PM:
PM: Alphaville Party ! — as suggested by Greenback
PM: Im on for this — but off on hols in three weeks
NH: as am i
PM: And I’m giving up smoking at the mo — so not best company
PM: We will def have a first birthday party — around Oct 23
NH: perhaps we could do something informal before that, say the second week of September, when the market is back in full swing
PM: yes, everyone back from hols, etc.
PM: Maybe have one meet in the City
PM: And one in Mayfair, amongst our core readers
NH: hopefully!
PM:
PM:
NH: plenty of interest in the retail sector this morning and on Marks & Spencer in particular
PM: Shares under pressure again
NH: down a further 7.5p to 618p
PM: Have had a truly, truly awful run in the past couple of months
NH: Down around 18%
PM: Ouch
NH: Trading update on Tuesday
NH: real concerns that earnings guidance will have to be lowered because of the recent dismal weather
PM: Well, that would be logical
PM: trading can’t be good
PM: Where are forecasts pitched for this year?
NH: According to reuters , EPS for the year to March 2008 is expected to be around 44.6p
NH: In terms of PBT brokers seem to be going for something just over £1bn
PM: Ok
PM: Do you think most of the bad news is already in the price and that come Tuesday the shares will rally?
NH: it could be and the stock could have a bounce on Tuesday as the bears buy back their short positions
NH: and a few brokers are taking a postive line on M&S this morning
PM: Such as?
NH: Deutsche Bank
NH: issued a note this morning which argues that one bad month – ie June – will not spoil a great recovery story
NH: Hang on. Will just paste a bit
NH: Shares down 15% , forecasts and price target down 2%
M&S shares have fallen 15% due to concerns that market share gains have
stalled, rising interest rates will hurt demand and that June sales have been very
weak leading to a downbeat Q1 sales update next week (10 July).
NH: We are certain that trading has been weak in June – it’s been the wettest June ever. But we are equally confident that the recovery program is intact and that this is a strong
buying opportunity. Product ranges and brand perception are still improving, and
this year profits will benefit from the modernisations for the first time; Buy.
NH: People don’t go shopping in boats
May and June have been incredibly wet. So we project Q1 food LFLs of only 1.3%
and clothing of 1%. M&S will have missed its budget, but we estimate only by
£18m. We have also trimmed our forecasts for the rest of 2007/8 to reflect higher
interest rates, which takes £24m off forecasts. But our staff bonus forecast was
£22m too high. Hence the net change to our forecast is only £20m, or 2%.
NH: The recovery story is intact, and share buybacks may start soon
The earnings recovery to date has come from cost savings, lower prices,
improved product ranges and award-winning advertising. The profit uplift from
store modernizations starts this year, as does a gradual acceleration in new space.
The balance sheet is under-geared, so M&S may start buying shares back this year
NH: Valuation (target price down from 830p to 815p) and risks
Our target is based on a 5% discount to our DCF using an 8.5% WACC and 0%
terminal real growth rate. The headline 2008/9 PE of 12 times is a 6% discount to
the sector. However it makes sense to strip out the retail property, in which case
the retail PE is a very low 8.8 times. The biggest risk to our target would come
from less fashionable M&S clothing ranges.
PM: Hmm
PM: I can see the argument but I am not sure the market is going to buy it if downgrades follow next week’s statement
NH: You could be right. BTW Deutsche are a massive fan of M&S
PM:
PM: Actually — thinking about this party….
PM: Cant wait till Oct/Sept
PM: Why dont we have a really informal one next week?
PM: Friday 13
PM: Bow Wine Vaults — we will get there early — circa 12.10
PM: And take over part of the bar
PM: All welcome
NH: so if you see three people standing there on their own with a warm bottle cheap white win you will know who it is
PM:
NH: all welcome
NH: any change of time or venue will be pasted on the site next week
PM: that’s set then — next Friday — the 13th — Bow Wine Vaults — at Bow Lane — off Cheapside
PM: No 
!!!!!!
NH: but 
most weclome
NH: as are 
PM: 
NH: don’t mind it a few
NH: or 
turn up as well
PM: Right — sorted — tell me mor about the retailers
PM:
NH: sector under a bit of pressure this morning
NH: Kingfisher is down 4.5p at 220p, WH Smith is down 15.5p at 394p and Game group is 5.25p easier at 189p
NH: did you see this ultra bearish note from Morgan Stanley yesterday???
PM: What did it say?
NH: 2008 forecasts for the retail sector could be 20% too high
PM: Jeepers
PM: That is gloomy
NH: Here’s some highlights from the note
NH: We reiterate our Cautious view on the industry as consensus forecasts for the UK retailers could be 20% too high for next year given our economist’s and strategist’s call on an interest rate-induced consumer slowdown in 2H07/1H08, which could be as severe as in 2005.
NH: Despite recent underperformance, the industry remains on a big premium to the UK market, of around 15% based on current consensus earnings but perhaps even as high as 30% or more (given consensus itself may be 20% too high).
NH: Private equity bid speculation may provide some support to individual stocks, but we think that investors should avoid the industry until consensus forecasts have adjusted down. However, we think that investors need to be selective and that selling the industry basket may not be a prudent strategy.
NH: We expect M&S (OW, price 637p, price target 800p) to be relatively
resilient and think that there is valuation support for Kingfisher (UW, 226p, 230p) around current levels. Add these to Kesa (UW, 343p, 300p), Inchcape (OW, 501p, 585p), Carphone Warehouse (EW, 333.50p, 290p) and Signet (OW, 104p, 135p) (which have limited exposure to UK retail) and these names account for more than 55% of the industry’s market cap.
PM: Some good advice in there
PM:
NH: just had a mail from a top contact
NH: got some interesting stats on the short position in the retail sector
NH: sector saw the biggest increase of all sector’s last week, rising by 5%
PM: Interesting
NH: that’s the short position
PM:
PM: Shortie on UBS — just popped into mail queue
PM: ceo peter Wuffli was ousted over night
PM: Talk of the City this morning
NH: no satisfactory explanation for the sudden departure has emerged
PM: here’s a funny snap from one broker this morning…typical of stuff that is now flying around….
PM: - Wuffli’s departure means the following:
- The Hedge Fund debacle years are over, the underperformance over the last year
can now be officially forgotten.
- Change of strategy implies accelarted buybacks and focus on profitability.
Wuffli deayed owing to paying for his botched alternative asset strategy.
- At last, the group can entertain the spin off of the investment bank…top of
the cycle.
- Group excess capital has considerably increased after Baer stake sale.
- Valuation is 12x, sum of parts implies 14x. ie 50% welath management on 18x:
wealth management division, the best in the world. The rest on 10x.
- In short a new era. If you don’t buy now, it will only get dearer!
PM:
PM: Thanks Chips — v good point — but we’re set now. Just mention the matter to IT and everything should be fine
PM: Anything more speculative Neil?
NH: Mitchells & Butlers
NH: hearing that they might have completed a property JV with Robbie Tchenguiz
NH: hearing talk that details of the deal could appear in one of the Sunday papers
NH: shares down at the moment
NH: and the debate among brokers is how much of this property JV is already reflected in the price
PM: Always fun to spike the Sundays
PM: Judging by the performace of Greene King when it announced a prop deal the other day — the stock could fly
NH: yeah, but the Greene King thing was a geniune surprise. M&B would not be
NH: we don’t know the terms but most analysts have done some modelling on it
PM:
NH: the other hot stock today is Evolution
PM: that’s the mid cap broker with a slightly troubled history
PM: Sorry Neil — just waiting fo rthe phone to ring
NH: who from?
PM: The Evo
NH: that’s the agency guy
PM: Hmm — no call yet
PM: Let me try “Evo, the …..
NH: anyway back to the story
NH: shares rose sharply on Thursday after a block of stock was traded
NH: it wasn’t that big – around 4m shares. 2% of the company
NH: what was odd is the rumours that followed
NH: some wild talk of Cenkos buying a small holding
NH: our understanding is that the company was behind some of the trading – buying shares back
NH: nonetheless that has not stopped the rumours. talk this morning of a 190p bid approach
NH: shares up 9.25p at 142.25p
NH: big move
NH: but stock has been bombed out
NH: and half the co’s market cap is in cash
PM: Hmmm — one to keep an eye on
PM:
PM: Ade — thanks for pointing that out
NH: Right do you want to do your penny stock???
PM: yes, got a punt for the readers this morning.
NH: Oh, go on – some penny dreadful.
PM: Former penny dreadful – but might be about to come good.
NH: Let me guess – mini oil firm with interests near the Galapagos islands?
PM: Nope
NH: Some firm with sugar interests in sub-Saharan Africa?
PM: Nope
NH: Gold in the Pyrenees???
PM: Closer – actually a Portuguese property play.
NH: Oh, please, have you not seen what’s happened to Iberian property this year
PM: Yeah, I know, I know – but is just suspect (ie hear) that this one is interesting.
NH: Go on. I’ve pegged my nose.
PM: Black Raven Properties
NH: Oh go away – name is enough for the first alarm bell
PM: No…. Black Raven Properties – ticker BRP – property company focused on Portugal.
PM: They come out with a statement this morning – but no one seems to have paid attention – price is up just a fraction at 4.75p.
NH: Hmm – spread is 4.5p to 5p – 10%, which sets off the second alarm bell
PM: Well a statement this morning says that the company’s Portuguese fund, White Raven Capital Partners
NH: Third alarm bell
PM: Has exercised an option that gives it full ownership of development called Palacete Vilhena – a former palace in Lisbon
PM: Cost €6.8m – being developed into top end apartments nd forecast to be worth €10.5m when completed.
PM: Trust me – this company has got some interesting things coming down the slipway.
NH: Market cap is almost nothing – under £6m
NH: And you think it’s a banker?
PM: No – I didn’t say that. I think it’s a punt – and a risky one at that.
PM: But it is in to very high end Portuguese property
NH: Don’t buy this unless you are prepared to lose all your capital
PM: it’s a penny punt, pure and simple.
PM: But I think it will be fun and rewarding over the coming months.
NH: Hmm – I think you need to put up more health warnings.
NH: do we have a toxic waste sign???
PM: Fine!
PM: Don’t chase this stock – at 5p or so it may prove to be a bargain. But if it jumps substantially doing rush after it.
PM: It has already moved up from 3p over the past couple of months.
NH: And come down from 10p over the past year! — and I now notice that it did a placing of 9m shares at 6.5p in January, so some of those holders will no doubt be looking to get their money back.
PM: Yes, it’s a penny punt – nothing more, nothing less.
PM: 
NH:
PM: Are we finished?
NH: not quite
NH: just going back to Cairn. think the move is not just down to the oil price
NH: hearing rumours (again) of a pipeline deal for its indian spin-off company Cairn India
NH: also Evo’s just put out a statement saying that one of its employee trust schemes purchase 600,000 odd shares yesterday
NH: that would seem to knock any bid rumours on the head
PM: Ok — thanks for that
PM: Right — we are done for the week. Thanks for joining us and thanks for the comments
PM: Back on Monday at 11am
NH: and don’t forget next Friday – informal drinks, Bow Wine Vaults at just gone 12.00pm.