Markets live chat transcript for the chat ending at 11:56 on 28 Sep 2007. Participants in this chat were: Paul Murphy (PM) Robert Orr (RO)
PM: Welcome to Markets Live – FT Alphaville’s market commentary
PM: It’s Friday – Neil Hume trad day of rest.
PM: Rob Orr is with me instead. Which of course is refreshing.
PM: While he’s just cranking up his machine I will tell you about a new game we are planning on FT Alphaville
PM: It will be called Click or Clunk, we think
PM: It’s basically Big Brother meets the FT
PM: Which might create a bit of Pink Mist for some people
PM: The idea is that we run edited highlights of the major City columnists each day
PM: And invite readers to click through to the underlying columns — those they want to read in full.
PM: We will then tot up the click numbers to see who we should evict each week
PM: FT talking heads not included…
PM: We dont want any GMTV-type shenanigans
PM: But should be fun tho.
RO: Err, can I join in please.
PM: Oh — sorry — I was thinking youd be as late as Neil
RO: So which columnists are we running?
PM: In Click or Clunk?
PM: People like James Harding, Damien Reece
PM: Martin Pratley
PM: He’s on the Guardian
PM: Maybe someone from the Standard — note the post below
RO: Right, enought of this, shall we move on and talk about Tate & Lyle?
PM: Oh yes — saw that — ouch!
RO: Yup, huge profit warning today from the sugars and sweeteners group.
PM: Just looking at the shares – down a massive 28 per cent.
PM: Quote is 399.5p off 157.5
PM: So what’s the problem?
RO: Well, the company is flagging up several negatives
RO: Firstly, T&L’s sugar trading business has had a bad year, and the group is predicting the division will post a loss for the year, versus a profit of £15m last year.
RO: Secondly, T&L warning that the cost of higher raw materials, particularly maize, is hitting profitability.
PM: That’s bad — but 28% off the shares ????????
RO: Oh, there’s more . . . .
RO: Thirdly, a dispute between the US and Europe over genetically modified corn has led to an oversupply of corn by-products in the US, depressing prices and margins.
RO: Lastly, the weak dollar is also having a negative effect.
RO: To conclude
RO: Given the importance of these factors, the Board views the near term outlook
with caution
PM: Seems investors have abandoned this – never mind caution. I think we suspected that higher raw materials prices were having an effect but this warning looks way worse than people thought.
RO: Of course this is just the latest in a run of bad news from T&L.
PM: There was another massive profit warning in January as I remember.
RO: There was. And a mini-warning in May.
RO: Both related to a slump in demand for Splenda, its sweetener product.
PM: Yes, I remember. Any mention in Splenda here?
RO: Splenda profits will be similar to last year apparently.
PM: So no growth then.
PM: What a mess. This company seems to have a problem communicating. Has the company given any guidance of future profits?
RO: Not in the statement there wasn’t- which seems odd given figures are only five weeks away.
RO: There was a conference call this morning – I’ve just got off the phone with one of the analyst that was on it.
RO: Apparently there was some disquiet that the chief executive was not on the call – left it to the FD and IR guys.
RO: Apparently he never does “run of the mill trading updates” was the excuse, according to my man.
PM: Run of the mill – shares down 28 per cent!
PM: So what else did they say?
RO: Well, they were very reluctant to give guidance on the full year – which is currently about £265m PBT.
RO: Apparently, one of the analysts asked them if they were confident of getting £200m and there was stony silence.
PM: I guess they don’t want to put out a figure and be held to it – but in the meantime analysts are going to speculation.
RO: They are. I have some notes here that are good on the detail – but bear in mind they are from before the conf call.
RO: This from Panmure, also written early this morning.
RO: Tate’s trading statement has almost no redeeming features, with a negative
picture painted in US and European Ingredients and in Sugar. Even their
previous bullish guidance on tax has been diluted with an expected rate of
27% this year now being moved to 34%. We have removed our Buy
recommendation which was predicated on the assumption of rampant US corn
oil prices leading to windfall gains this year, an dour price target is under
review.
RO: Europe outlook poor: We were aware that European maize prices would put the
remaining European business (Eaststarch) under pressure in H2 and next year, but Tate
are indicating a severe impact. Our H2 profit forecast of £15m should probably now be
zero,
RO: US outlook poor: US corn oil prices have risen by around 80% since last year, but Tate’s
comments focus on US corn gluten feed prices which have been depressed (although Q1
on Q1 the USDA still think were up 10%). Even the Mexican HFCS demand coming fully
on stream in a few months doesn’t seem to be having a positive effect, which is puzzl
RO: Sugar trading terrible: After bumper profit last year, the business has made a loss in H1,
after a terrible August
RO: Summary: Tate’s reputation will be dented by this statement, we remove our Buy
recommendation.
PM: Dented is an understatement. Just to recap, T&L shares down 28.5 per cent as I write this.
RO: Have another from Investec.
RO: Tate & Lyle has issued a H1 2008 pre-close trading statement which we
interpret as cautions and downbeat. Concerns for us are depressed European
Ingredients profitability, a negative surprise on the tax rate and the absence of
a more upbeat assessment of US sweetener profits. We interpret the statement
on Sucralose as cautiously positive. Despite 2008 being a year of transition,
we view this statement as concerning and a negative surprise overall.
RO: We interpret the statement on Sucralose as cautiously positive in the context of
the hoped-for revival in sales growth as the product comes off allocation. We are
also pleased to find that Tate will have no exposure to the wheat market after
the partial exit from TALFIIE completes next week.
RO: While we weren’t expecting earnings fireworks from Tate in 2008 we view this
update as disappointing relative to our expectations and are unsurprised that the
stock has opened considerably lower this morning. We will be reviewing our
forecasts, target price and recommendation in the light of these results.
PM: Ok thanks for that — but look, im intrigued by the CEO being too busy to come to the phone
RO: I know, very odd.
PM: This is Iain Ferguson, yes?
RO: yes
PM: Iain Ferguson, CBE, Chief Executive
PM: Just pulling his biog up
PM: ceo since May 2003
PM: So, four years and four months
PM: What do you think spread is on his survival?
RO: I can’t even guess.
RO: Responding to GKB, below.
RO: Looking at Unilever and Cadbury today, they also being dragged down by the same fears over rising soft commodity prices.
RO: Dairy groups – the price of milk has also rocketed. Bread, you name it.
PM: Unilever down 44p at 15.48
PM: Cadbury off 11.5p at 562p
RO: Of course, some of this can be passed on to consumers, but the bottom line will inevitably be hit.
RO: thanks anon2, ABF is another.
PM: Tate caned
RO: anon and anon2 – are you related?
PM: thanks rahodeb
PM: 
PM: Shall we take a look at the wider markets?
RO: We can. FTSE down 48.5 points to 6438 as I write this, largely due to weakness in the mining sector.
RO: Except Lonmin, which is being boosted by the platinum price.
RO: Wall Street had another good day, and the S&P 500 closed up 6 points to 1,531.4, that’s its highest level since the middle of July.
RO: I also make that 22 points off its all-time high!
PM: That’s madness.
RO: What crisis?
RO: Should also point out that we are almost at the end of the quarter so hedge funds will be keen to boost their portfolios after what has been a torrid three months for some.
PM:
PM: With it being a down day — how is my favourite stock doing today
RO: Northern Rock you mean? Down 10.4p to 183.1p.
PM: Oi! Pack it in now!
RO: What?
PM: We don’t mention that name on here!
RO: So what do we call it?
PM: PFKAR — is the current code, i believe, but we change regularly
PM: That’s Pebble Formerly Known As Rock – as one of our readers christened it.
RO: Talking about Christ…
PM: Was I?
RO: Well, christened…
RO: Did you see the size of RAB Capital’s increased in the Crock yesterday?
RO: 6.66 per cent
PM: Hmm. Devilish holding.
PM: And isn’t the guy who runs RAB a committed Christian?
RO: He is – Philip Richards.
RO: But, look what I found most entertaining about RAB yesterday is that they also raised their stake in Subsea Resources
PM: Oh, yes saw that – Submerged Investments.
RO: It’s a salvage specialist – salvaging shipping wrecks.
RO: Or at least it wants to be.
PM: Yep – Mr Richards obviously believes their money in wrecks.
PM: How’s Wreck doing now?
RO: Which one? Crockwreck or Submerged wreck?
PM: Both!
RO: Former bank down 10.8p at 182.7p
RO: Subsea – up 0.25p at 1.15p
PM: Marvelous
PM: To be serious for a moment ….
RO: Uh oh
PM: This bank wreck is having a serious effect on consumer confidence
PM: There was a “consumer morale” survey a bit earlier – showing a sharp dip after the wreck.
RO: Consumer Confidence Crocked!
PM: Very good
PM: Also – Helen’s doing a separate post on the coming British subprime problem – figs from S&P.
PM: Doesn’t look pretty. 80k subprime Brits to re-fix mortgages by the end of next year.
PM:
PM: Right — let’s move on
PM: We must look at Compass
PM: Oncefamous wants to know
PM: And we’ve had to look twice at the price
PM: Stock is currently down 17.2 at 293
RO: Had a trading update yesterday which on the face of it looked good
PM: Yes — the shares jumped on that yesterday
RO: But they ended lower
PM: So what has gone wrong today?
RO: Well, seems the damage is being done by a downgrade from Panmure Gordon
RO: Analyst over there is highly respected
RO: He actually cites our story today from Chris Hughes
PM: have you got more details?
RO: Have the note here
PM: That’s the FT’s C Hughes
RO: It appears from today’s FT article that acquisitions are back on the agenda for
Compass. This suggests the recovery potential in the business is nearing an
end. As such organic growth of 5% with a little help from margin creep
suggests a sub 10% EPS growth post 2008. On a p/e of 18x 2008 the stock
looks expensive. FCF is improving but DCF valuation models while
appropriate should be both robust and used with caution.
RO: Today’s FT article on Compass’s recovery appears to suggest it is running its course. We
believe 5% organic growth in the group is achievable. However in order to keep margins
moving ahead beyond 2008 Compass is likely to rely on increased buying power hence the
need for acquisitions
PM: Ah — back to acquisition trail — recovery near finished
RO: Acquisitions are not a bad thing per se but without them Compass is unlikely to be able to
maintain both growth and margins. Thus DCF valuations which fail to take account of
acquisitions will naturally give rise to a higher forecast share price.
We believe the market will not take kindly to a return to acquisitions but to understand the
contract catering model then acquisitions are a necessity
RO: The essential point is catering is a scale business very similar to Bunzl. The latter trades on
a15x 2008 eps. Even allowing for further recovery at Compass we cannot see why the
shares should trade at more than 17x eps for 2008. As such we move to a sell
recommendation.
PM: Right — that is quite heavy
PM: Fair but heavy — no wonder the stock is off
PM: And thank you rahodeb — Compass losing bearings
PM: 
RO: Company has been trying to turn itself around and would seem that acquisitions are not what the market wants right now
PM: Ok thaanks — lets move on
PM:
RO: Neil Hume has just sent me an email
PM: Is he out story gathering?
RO: He’s doing his column downstairs.
PM: Of course he is. What’s he saying?
RO: Passing on some RAW information.
PM: Untest info then — 
RO: Indeed it is.
PM: Go on then.
RO: Well, the rumour is doing the round again is that Joe Lewis is stakebuilding in Mitchells & Butlers.
PM: Ah yes, fresh from his raid on Bear Stearns of course.
RO: That’s right, Joe Lewis, the secretive British-born billionaire bought a 7 per cent stake in the US investment bank earlier this month.
RO: Talk today is that he’s in the market looking to pick up M&B shares and has offered 680p a share for Axa’s stake.
PM: How much do Axa own?
RO: 9.9 per cent according to my Bloomberg machine.
PM: Interesting information, although we repeat RAW info.
PM: Tell us bit more about Joe Lewis
RO: Made his money in the currency markets. Lives in the Bahamas and plays golf with Sean Connery.
RO: OK, I don’t know for a fact that he plays golf with Sean Connery, but I bet he does.
RO: Owns a big stake in Tottenham Hotspur, and Glasgow Rangers.
PM: Big fish certainly. So how are M&B shares doing?
RO: Down 1p to 609p
PM: Flat
RO: Yes, flat.
PM: So if this stakebuilding rumour is true it hasn’t quite swept the market yet.
RO: Would seem not. In fact, feeling seem to be people are not really convinced by today’s rumour.
RO: Like I said, this is just raw info. To be noted rather than traded on I would say.
PM: OK
PM:
PM: I notice VP is asking about BFD below
PM: That’s Benfield
PM: What can you tell us, Rob?
PM: \I should add the price is up 10.7p at 280 — so quite a move this morning
RO: Well, Telegraph reporting that the private equity arm of Goldman Sachs has made a £700m approach for Benfield.
PM: 
RO: Reinsurance broker of course
RO: That would equate to about 313p, according to my back of the envelope calculations.
RO: Reinsurance market is dominated by global players Marsh & McLennan, Aon and Willis, and Benfield is one of the few independents.
RO: As such, would be a natural target for someone who wanted to get into this space.
PM: Am sure it would. — just looking at this article
PM: But it says that talks between Goldman and Benfield broke down last week.
RO: It does. But goes on to say it could spark an auction for Benfield involving Aon and the like.
PM: Perhaps, but the Goldman line is stale news then?
RO: Well, we’ve made some calls this morning and getting steered away from it.
PM: Crunchy credit markets are not exactly conducive to a deal are they?
RO: No, and to be fair the article makes that point.
RO: Benfield shot up this morning to a high of 305p.
RO: But have fallen back since, I think as people have realised that this potential deal is not imminent.
RO: Now up 11.2p at 281p.
RO: Actually, a note from Clear Capital just dropped into my in box on Benfield. Can cut and paste some.
RO: This morning’s news around takeover talks raises two questions: will the deal will happen and if so, at what price.
RO: Will the deal happen?
Over the past few years the insurance industry has seen a convergence between reinsurance and investment banking as increasing number of insurers have used the capital markets to buy standardised reinsurance protection. Two types of deals have emerged. Firstly insurers like Catlin and Brit have issued CAT bonds to achieve smoothing of income statements from CAT volatility. Secondly, players like Farmers (a Zurich subsidiary) have issued $500m contingent debt-equity deals which allow them to raise new capital in the aftermath of a large CAT loss. Our discussions with primary data contacts suggest that most large investment banks are working on specialty deals in the reinsurance market. While in the late 1990s reinsurance deals in the capital markets were rare with only 10-20 such deals happening each year, the frequency of these deals has increased to 100-150 p.a. more recently.
RO: What could be the offer price?
We believe that Benfield is trading at a significant discount to its fair value given its cash generation (Over the past two years the group has returned £150m of surplus cash to shareholders through share buybacks and special dividends) and strength of the franchise. Hence it would not be surprising if Goldman Sachs has taken advantage of these two strengths of Benfield. Our FCFE valuation model warrants a fair value of 347p (£781m). Applying a 25% premium (which is a standard premium for takeover deals) on the pre-rumor share price, yesterday’s close price warrants an offer price of 338p which is still below our FCFE fair value of Benfield.
RO: We reiterate our Positive stance with 29% upside from the current levels.
PM: So they are pretty bullish
RO: Slightly different take from Seymour Pierce.
RO: Despite the fact that part of our investment thesis on the (re)insurance
brokers is that M&A activity should ensure robust valuations, we do not
believe that this will “spark an auction” for Benfield (unlike the
newspaper’s conclusion). Having said that, the company remains a fairly
attractive prospect for potential buyers due to its positive cashflow. We
know Aon had a close look at the company during the first half of 2006
and did not pursue an acquisition. Our view is that if GS can’t raise the
cash required, then most other potential private equity players won’t be
able to.
RO: Although our target price (on a 12 month view) is 310p which makes
313p, on the face of it, a fair price, the company’s longer term growth
prospects once the reinsurance market enters its next hard phase are
considerable. We do not believe that management (which has a 17%
shareholding) or other major shareholders with a longer term outlook
would view any price much under 400p or thereabouts favourably.
RO: At current levels (the closing price last night was 270p, in danger of flirting
with Benfield’s 2003 IPO price) we believe that management’s most likely
next step may well be to launch a new buyback program.
As we don’t expect any new potential buyers to emerge, we retain our
HOLD recommendation and 310p price target.
PM: And they dont expected anything to happen
PM:
PM: Baz below mentions barclays
PM: negative outlook from Fitch has come out
PM: Just try and dig it out:
PM: Fitch Ratings has today assigned Barclays PLC
Long-term Issuer Default Rating (IDR) ‘AA+’/Negative Outlook),
ratings of Long-term IDR ‘AA+’ with a Negative Outlook,
Short-term IDR ‘F1+’, Support ’5′ and Support Rating Floor of
‘No Floor’.
The ratings reflect the application of Fitch’s criteria for
holding companies (refer to report entitled Holding Company
Analysis: Banks and Similar Financial Institutions, dated March
2006 on www.fitchreseach.com). In essence, the Long-term IDR of
an investment-grade holding company is typically aligned with
that of its main operating bank if, in Fitch’s view, the
holding company is prudently managed and has appropriate
liquidity. While BPLC does not fully meet all of the stated
criteria (notably with regard to regulation and formal
liquidity policies), Barclays Bank PLC’s very high
investment-grade ratings and the fact that there is no
intention for there to be any double leverage at BPLC at this
stage are mitigating factors. Were double leverage to be
introduced at BPLC, Fitch would expect a more formal and
suitably prudent liquidity policy to be introduced.
RO: Barclays shares down 8p to 595.25p
PM: Hmm. i dont have an immediate thoughts on that. Think we need to go and talk to the analyst
PM: It’s presented as a technical move — but technical things can have quite an effect in these markets
RO: Certainly can
PM:
PM: And let’s jump straight to Celtic Resources
RO: Getting flashes that Severstal has raised its stake again
RO: Up to 29.7 per cent now.
RO: Severstal has already made an offer for Celtic, but Celtic is holding out for now
RO: But have to say, if Severstal wants this one it will get it for sure
PM: Sevestal bidding at 270p a shares
PM: Whoa – market price up 34p at 235p
PM: Sorry!
PM: That’s 269p in the middle
PM: I was quoting the opening price
PM: So it has raised its offer this morning
PM: latest raid has taken it to just under 30%
RO: Looks a done deal
PM:
PM: Right — we are done for today — do have a row about Barc and Bof A below
PM:
PM: Thank you for joining Rob and myself
PM: next session — Monday at 11am
PM: And remember to look out for Click or Clunk (if that’s what we call it) next week
PM: That’s the new City Editor reality-web game that we are introducing
PM: it’s bound to be a smash hit
PM: maybe
RO: See you next week