Markets live chat transcript for the chat ending at 11:48 on 9 Jul 2007. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Welcome to Day Ten
PM: That’s Day Ten, without smokes, incorporating Markets Live, FT Alphaville’s daily markets chat.
PM: Neil Hume is with me.
NH: Please don’t spend all week talking about fags.
PM: Ok — distract me then!
NH: Well, we have been waiting for a housebuilder to acknowledge the impact of rising interest rates on demand and this morning we have it
NH: Basically we have got a veiled profits warning from Bovis Homes
PM: Thanks James — only marginally. For others to judge on my temper….
PM: Just looking at Bovis price
PM: shares down 75.5p lower at 844p
PM: That’s a fall of 8.2%
PM: Looks like Bovis has taken the rest of the sector with it
PM: Persimmon off 34p at £11.81 – biggest faller in the FTSE 100
PM: Barratt Devs down 19p at 996p
PM: Redrow off 23p at 518p, Taylor Wimpey 14.7p weaker at 347p
NH: Northern Crock has been dragged down by signs of stress in the housing market
PM: 
— rightly so
NH: down 9.5p at 842p
NH: giving up those suprious gains which were triggered by talk of a bid from ING
NH: right back to the matter in hand. Now this warning is significant on a number of levels, not lease because Bovis is focused on the South East and West of the UK
NH: and together with Scotland that has been strongest area of the UK new house market
PM: Ok — so what have Bovis said this morning??
NH: reading between the lines, the statement basically says that suggesting that first
half results will be broadly flat on last year, with respect to volumes, sell prices, margins and forward orders.
PM: So just about everything then?
NH: yep
NH: in light of that warning, analysts and brokers are wondering how on earth Bovis is going its target of a 10% rise in pretax profits this year
PM: I bet they are. With interest rates expected to rise to 6% and possibly higher it’s difficult to see things getting any better over the summer and autumn
NH: indeed and remember autumn is a key selling period for new houses
NH: actually Bovis have admited as much
NH: says in the statement that Bovis stated that the outcome for the year will depend on the strength of the autumn selling season
NH: and goes on to say there has been a recent slowdown in both reservation rates and visitors
PM: So the medicine being administered by the BoE is starting to work
NH: it looks that way, although I would point that redrow and Persimmon both recently reported on trading and said there had been no slowdown in reservation rates and vistors
PM: Hmmm
NH: but you have to remember Bovis is mostly in the SE and its had higher average selling prices than the rest of the sector
NH: apart from Berkeley
NH: anyway the upshot of this morning’s statement is that analyst are bringing their forecasts for 2007 and 2008 down by around 7-10%
PM: Is that for both years?
NH: yep, Bovis has a Decemeber year-end
PM: any broker comment?
NH: ABN are house
NH: apparently they have cut forecasts for this year and next by 5 and 7% respectively
NH: still trying to get hold of the note, though
NH: here’s some comments from Merrill Lynch
NH: Overall, have to say that the statement reads a little more cautiously than the
other UK housebuidlers to have reported recently, but this almost certainly
reflects a higher average selling price than most of its peers, and it is undoubtedly
the higher-priced end of the market that has seen a greater slowing in activity.
Currently we are looking for FY07 PBT of £148.5m, and eps of 87.3p
NH: and this is from Bridgewell
NH: The company stated that the
shortfall relates to a recent slowdown in both reservation rates and visitors – in
contrast to Persimmon and Redrow, which have both reported recently (although in
keeping with Taylor Wimpey). On the back of the announcement we anticipate
downgrading 2007 and 2008 estimates in the region of 7-10%, which makes the
stock’s premium rating to Bellway look unjustified. We remain Neutral.
PM: Right — thanks for that
PM: 
PM: Right, lets turn to the wider market
NH: Despite the weakness in the housebuilding sector, the market is up
NH: FTSE 100 up 9.8 points at 6,699.9
NH: hit 6,725.9 earlier this morning, which was just 7 points from the seven year high it reached on June 15th
PM: So the sub prime jitters are behind us
NH: It would appear that way
NH: once again the mining sector is making the running this morning
NH: more commodity prices upgrades this time from JP Morgan
NH: However, it is Tate & Lyle which is leading the FTSE 100 higher
NH: shares in the sugar producer up 19.5p to 573p after a push from Credit Suisse
NH: : now this is significant because the food analyst at CS is good
NH: his name is Charlie Mills and he was the only analyst to predict Tate’s huge profits warning in January.
PM: Mr Mills is a real veteran. Has been covering the sector for quite a while
PM: so what’s he view on Tate?
NH: it’s cheap. He reckons it is trading on around 12 times forward earnings
NH: hang on let me paste a little of the note
NH: Its either feast or famine with the Tate share price, or so it would seem. Either the market goes overboard on the added-value
story, or it dismisses the business as being entirely commodity-based. The latter seems the case right now
NH: Sceptics might rightly point to the significant reduction in the earnings prospects over the last 6 months (down a third in line
with the share price), but more than half of this reflects a sharpening (and improving the quality of) the portfolio
NH: Tate today looks a better quality earnings stream than hitherto, but on under 12x new-year earnings has a rating that doesn’t
reflect this in our view.
NH: For those unconvinced by the developing ingredient story however, the commodity angle still remains strong. The share for 3
years now have had a distinctly ‘seasonal’ feel, with an average H2 share price rise of 28% (versus 5% in H1) in anticipation of good pricing in the HFCS negotiations
NH: The fundamentals in HFCS remain just as strong this time round, with tight capacity, the potential for Mexican demand to pick
up and, it may surprise some to learn, currently lower corn costs than last year (US corn price has fallen 25% in the last 3
weeks).
NH: So Tate shares seem to have the best of all worlds – a low valuation, an unappreciated ingredient story, continued strength in
its commodity lines, and a nice seasonal shape to its share price. Not to mention that the shares are off 27% thus far this year
putting it in the 10 worst performers in the FTSE350. We are raising our rating to outperform with an APV based price target
of 640p (was 630p)
PM: No mention of a private equity bid, then
NH: no, strange that.
PM:
NH: Looks like one of the potential counter bidders for ICI has ruled itself out
PM: Who??
NH: BASF
NH: this was reported in HET FINANCIEELE DAGBLAD this morning
NH: it quoted board director STEFAN MARCINOWSKI as saying that BASF was NOT INTERESTED IN TAKING OVER ANY RIVALS, AS they ARE TOO EXPENSIVE AT PRESENT and CLOSE TO THEIR MAXIMAL VALUE
PM: Youre dutch sometimes proves v useful
NH: busy morning in Holland. busier than the UK that is.
PM: yeah, saw that deal for Univar — taken out by CVC — €1,5bn recommended deal
NH: that’s 53.3 euro bid
NH: price up 36% at 53euro
PM: Anyway — back to ICI — how have the shares reacted to this BASF stuff
NH: they are actually up – 1p better at 616p
NH: but that’s probably because most people expect Akzo Nobel to come back with a higher offer
NH: also this story may have an impact on Linde, which was higher on vague takeover rumours last week
PM: Linde is the German gases company that acquired BOC last year
NH: it is, but getting back to low countries
NH: seen Numico this morning
PM: Hadnt caught my eye, must confess
NH: big food company
NH: stock has shot up 12% on talk it could be a takeover target for Danone
NH: which assuming it sell its biscuit biz to Kraft will be flush with cash later this year
PM: Right — thanks for that. Very continental
PM: 
NH: hang on flash – Numico shares suspended on Euronext pending announcement
PM: Sounds a bit early for Danone to be moving
NH: yeah, could be private equity though
PM: One to watch…
PM:
PM: let’s get on to something a bit fruitier
NH: sports direct international
PM: That’ll do nicely
PM: It’s not down again is it?
NH: no, its a touch firmer this morning – up 0.75p at 187.75p
PM: So what’s the interest then?
PM: I heard there were Baugur stake building rumours on Friday
NH: there were, but that’s not what I am interested in
NH: House broker Merrill Lynch has issued a note this morning
NH: and it has had a stab at coming up with some numbers
PM: How has it managed to do that without any guidance from the company?
NH: beats me. Perhaps someone at the company is finally talking to the City
NH: anyway given the disasterous pre-close statement back in April, it is fair to say these results are eagerly awaited
PM: And when are they due?
NH: expected on July 24
NH: but I do stress the word expected
PM: 
PM: OK so what are Merrill going for?
NH: not a lot
NH: there expectations aren’t too high
NH: in the first par of the note, Merrill warns investors against expecting too much
NH: actually here is the first par
NH: SPD is due to release its first set of results as a public company. The occasion is
eagerly awaited given that the opaque pre-close statement implied a sharp fall in
LFL sales in the four months to April whilst also confirming FY EBITDA of
c£180m. Details therefore (specifically gross margin components, LFL trends) are
widely expected as is an analysis of current trading patterns. While these may
well be provided we would caution investors against expecting too much. The
evidence of the last five or so months is that there is little willingness to engage
with the market or to discuss key metrics such as LFL sales or markdown costs
PM: An amazing admission from the house broker
NH: yeah not discusing underlying sales growth is certainly odd
NH: anyway getting down to the nitty gritty
NH: expects SPD to make £250m of EBITDA in the year to April 2008
NH: that’s around £14m above consensus
NH: however it says those numbers could be at risk because of weak underlying demand in the sports apparel market
NH: and anyone who has seen the signs in JJB about a £100m stock clear out will know what I mean
PM: Wet weather will not have helped things
NH: here’s some more from the note. might set a few alarm bells ringing
NH: FY08 EBITDA at risk (MLE £250m vs consensus £236m)
We see continuing risk to estimates driven by weak underlying demand in the
sports apparel market (as implied by heavy discounting at JJB); and an
insufficiently predictable P&L model. As an illustration if the LFL environment
through FY08 were to remain negative to the tune of say 10% (we currently
estimate -4.0%) then all other things being equal (unlikely) our EBITDA would fall
by 16% from £250m to £210m and y-o-y growth would fall from 35% to 20%.
NH: In all, these pressures, compounded by the lack of clarity following the pre-close
trading statement, suggest there may be some residual risk that our FY
estimate is not met. The greater impact however, might be on FY08
estimates which could fall by over 15% if the LFL environment is worse than we
estimate
PM: I imagine Merrill have their got their fingers double crossed on this one.
NH: yes, they could do without any more reputational damage
NH: there is a very amusing bit at the end of this note
NH: Merrill lists 10 things investors in SPD should be thinking about
PM: Just the ten?
NH: yep
NH: they are house broker after all
NH: here’s a taster
NH: The timing of the appointment of a permanent non-executive chairman and
additional non-executive directors to the Board, together with an internal or
investor relations contact
NH: Whether there is any clarity on the current trading environment and in
particular how LFLs have trended across FY 07 in comparison with the
equivalent periods in FY06
NH: Whether the management can commit to measuring and disclosing LFL
sales growth in the UK Retail business
NH: The nature of the company’s agreement with Umbro (as disclosed in the IPO
Prospectus) regarding SD’s obligation to buy 65% of all replica England
shirts that Umbro expects to sell in the UK in any given year
PM: What a mad situation
PM: Right, I thing that is enough on Sports Direct
PM:
PM: just to addess Greenback below ….
PM: We had a chat about Numico earlier (scroll back)
PM: just as the shares were being suspended
PM: Suspected its all a bit early for Danone — but we speculated on whether a PE house might have jumped in early….
PM: The premiums PE seem ready to pay are extraordinary — if you look back at average bid premium over say five yars or more it is typically in the 25 per cent range
PM: We are now seeing deal after deal pitched at 35% premium or more
PM: What does that tell you?
NH: they have money to burn
NH: or to be more charitable, perhaps they value things in a different way
PM:
PM: Seen Adventis Gruop at all?
NH: no, what’s that?
PM: marketing agency
PM: Price spiked on very heavy volume on Friday — according to my friend at the Capital Chroncile blog
NH: ah that’s the isoft man. what was he saying???
PM: Well – he doesn’t know, but he senses bid action
PM: And he’s long of the stock
NH: what because of the heavy vols???
PM: Yes, notes that it did the stock rarely trades — 250k per quarter
PM: But did a million shares in the last two hours of business on Friday
NH: up 1.25p at 57p this morning
NH: vol looks good again – almost 400,000 traded by 11.30
NH: not bad
PM: Might be one to watch
PM:
NH: one that we have been watching this morning is the implosion of White Nile
PM: This is Phil Edmonds South Sudan oil exploration punt
PM: White knuckle ride for ashen-faced investors.
NH: you should write headlines
PM: Er, I do
PM: What’s the stock doing today?
NH: Currently off 15p at 75p.
NH: Fell 17p on Friday to 90p – compares with a price of 140p seen at the beginning of June.
NH: hang on, stock just been hit. off a further 20p at 70p
PM: Ouch!
NH: this morning’s fall probably reflects the fact that some lunatic bought 1/2m shares at 90p in the closing auction on Friday
PM:
PM: 
NH: so ludicrous was this trade that the exchange had to extend the price monoitoring period twice
PM: So they couldnt believe anyone so gormless
NH: they were – the trade stood
NH: Anyway, we got news late on Friday that White Nile has been told it was being removed from the oil exploration in Southern Sudan
PM: Well it actually says it hasn’t been told. Says that chairman Phil Edmonds met with the vice president of Southern Sudan last week and was assured that White Nile would be part of the consortium drilling for oil there.
PM: Since become aware of resolutions signed as part of the Sudanese National Petroleum Commission in mid Jun, which say White Nile is being kicked out.
PM: Company saying it is taking all possible steps to protect its position.
NH: there’s only one way to protect your position in south sudan and that’s with an Ak47
PM: Hmm
PM: Fear you are right
NH: but closer to home there is something investors can do to protect their position
PM: 
PM: Like selll the stock
PM: Given the history, how anyone really thought this was a worthy punt I have no idea.
NH: Even at this level it is still valued at something approaching £300m.
PM: What else have they got other than a suspect claim to being involved in the Sudan consortium?
NH: cash and a some sort of exploration JV in Ethiopia
PM: Whot, tht’s worth thick of £300m????????????
PM: Cash seems to anount to no more than £10m
NH: but remember they raised £18m in June. some suckers bought in at 100p
PM: Ah, yes. That followed a similarly priced issues last Nov to raise 12m
PM: Do we know their burn rate?
NH: I would need a few mins to work that out.
PM: yeah, but my point is that Sudan can not be worth much mor than , say £10-20m in option money
NH: although they may get some compensation from the govt over there. remember, members of the Southern govt do have a big holding in White Nile
PM: Hmm — I’m an aggressively seller on this one.
PM:
PM: This cat will not bounce
NH: recalculated market cap looks like £260m ish
PM: So what — plenty of room for another big fall there
PM: And it’s got nothing to do with me giving up cigs
PM: it’s just a
PM:
NH: ok, got the message Mr Angry
PM:
PM: Right — we are off. Thanks for joining us today. Do come back tomorrow for the next edition of Markets Llive at 11am
NH: see u tomorrow
PM: Thanks Bob
NH: the T-Shirt could be a collectors item. might have to keep hold of it
PM: No! — maybe we should have fresh competition…
PM: see ya