Markets live chat transcript for the chat ending at 12:10 on 16 Jan 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: WE ARE BACK
PM: In London
PM: Wearing tin hats, of course
PM: Good morning and welcome to Markets Live – FT Alphaville’s daily markets commentary.
PM: Neil Hume is with me.
NH: morning
NH: a four notch chin strap day
PM: We are also shattered after our day trip to lovely Newcastle yesterday.
NH: Yes, but that was mainly due to the enthusiastic news gathering on the train on the way back.
PM: You know people will think that’s a euphemism, Neil
PM: But let them think what they want. you and I were news gathering!
NH: Prove it.
PM: Okay then!
PM: Everyone will be expecting us to deal first with the wider market shake out.
NH: yes, the FTSE 100 is below the physcologically important 6k figure
NH: off 77 points at 5,949
NH: been as low as 5,934
PM: So it’s bye bye 6K.
NH: You’re news? garnered from your bout of news gathering on the Northern Crock express yesterday??
Readers may also know this former bank as Northern Rock.
PM: Well, actually you had the story yesterday
NH: what Vedanta / First Quantum Minerals u mean???
PM: Yes – but ive got more info on it
NH: Ah, so have I !
NH: So what new info have you got?
PM: Remember this was a piece of EXTREMELY RAW gossip mentioned here yesterday – that Vedanta was considering a ??bn cash bid for First Quantum Minerals, a Canadian firm that is listed in Toronto and also on the Aim market here in London
NH: So what new info have you got?
PM: Well, first on the price…
PM: My understanding is that Vedanta have looked at offering something in the region of C$120 per share.
NH: Snap! Values FQM £4 bn, or £60 a share
NH: FQM is also quoted on AIM, but most of the biz is done in Toronto
PM: And i can reveal that Vedanta have been working on this bid for some time.
NH: snap. since November in fact
PM: This is part of a wider plan to grow Vedanta’s assets in Africa very substantially, in double quick time.
NH: Snap! They are looking directly at two other (smaller) mining acquisitions – might even be part of this FQM transaction
PM: Hmm. Sounds like we were news gathering with the self same person in the train bar late yesterday.
NH: I hope he got hope safely.
PM: 
PM: Yes….in one piece
NH: Anyway, how sure are we on all this.
PM: Well, we are 100 per cent certain that Vedanta has been looking.
PM: In fact, we are 100 per cent Vedanta has made an approach – offering indicative terms, but insisting on absolute secrecy.
NH: Which has now been broken.
NH: What we are told is that Vedanta has been working on this for some months – but if it is going to happen it could all come to a head in the next week or so.
PM: Hmmm
PM: Let’s look at the prices of these things.
NH: In Toronto yesterday the stock was actually down a tad at $82.
PM: So the Canadians were not watching out chaotic ML session then.
NH: The stock was at $100 back in early December, but came rattling back.
PM: Seems Vedanta think they will have to offer 20% above that Dec fig to stand a chance of getting a board recommendation.
NH: Hmm. Think that if V offered £120 now shareholders would bit their hand off.
PM: And the price of FQM in London – on AIM?
NH: up 50p at £42.60
PM: Well the real market in this thing is in Tornoto. London quote just reflects the Canadian quote. — until today perhaps
PM: And Vedanta?
NH: off 5.1% at £18.88
PM: Jeepers! Down 5%?
NH: Hmm. But all the miners are being clobbered this morning.
NH: metal prices heading south on recession fears
NH: take a look at some of these losses
Antofagasta (ANTO:LSE): Last: 602.00, down 30.5 (-4.82%), High: 630.50, Low: 602.00, Volume: 2.04m
Kazakhmys (KAZ:LSE): Last: 1,212, down 55 (-4.34%), High: 1,265, Low: 1,212, Volume: 873.76k
Lonmin (LMI:LSE): Last: 3,387, down 155 (-4.38%), High: 3,515, Low: 3,329, Volume: 711.12k
Rio Tinto (RIO:LSE): Last: 4,809, down 187 (-3.74%), High: 5,140, Low: 4,760, Volume: 4.39m
NH: and that’s despite some daft rumour that the chinese are poised to offer £60 a share for Rio
PM: Ouch
PM: brings us to the wider market.
NH: before we do
NH: one thought on Vedanta
NH: this would be a pretty chunky acquisition, right??
PM: Yep
NH: so how would it be funded??
NH: presumably, the majority shareholder in Ved – the Agarwal family – would not want to see their holding in the company diluted
PM: you are dead right
There is no question on this — it would be in cash.
NH: OK
NH: and how easy is it raise cash at the moment??
PM: Ah, well that is another matter…
NH: it is but remember, if the Rio/BHP deals goes through
NH: the banks will have lent a lot of cash to the mining sector
NH: will they want to add to that at a point where they are having to raise capital themselves??
NH: just a thought
NH: and if the US heads into recession
NH: metal prices will suffer
NH: demand from the BRIC economies will not be enough to support price indefinately
PM: Hmm. So you dont believe in de-coupling then
NH: i do, just think it has been overstated
NH: the US is still the world’s biggest economy
NH: if that goes into a deep recession everyone will suffer
NH: perhaps not as much as in the past
NH: but there is no way that China and India will be able to take up all of the slack
PM: 
PM: Anyway — wider market…
NH: it’s still tin hat time out there
PM: what are we to do??
NH: seen these comments from Crispin Odey this morning?
PM: No — do share
NH: it is his annual report for 07
NH: came out this month
NH: and it is pretty bearish
PM: Do share!
NH:
There is an African saying that ‘sometimes an old man lying on the ground can
see further than a young man at the top of a tall tree.’ I like the word
‘sometimes’. However, last year the guys wearing the ties saw furthest. Indeed
they were probably out done by the even older guys wearing the cravats.
Unusually in my case, this was all achieved without breaking into a sweat.
Markets which had seemed impossible to read for the previous two years because
they did not listen to the past suddenly started to fall over as they encountered
worries that they had not known existed. Who would have believed that a bear
would have got into the inter-bank money market?
NH: Of course in the language of the markets not much has yet been said. Emerging
markets have continued on course for the moon; Developed world markets have
crept along silently but not painfully. There are more red faces than red ink at
present. However, the future is now rather more clearly in outline and with it
comes the realisation that it is not going to be easy for the authorities to keep
the show on the road. Five years of living off expanding balance sheets has not
so much grown the world economy as bloated it. Expanding the waist line has
turned out to be no solution to improving the metabolism.
The banking sector has been the unwitting author of the coming disaster. The
story of Northern Rock is instructive Here was a widely admired and highly
successful financial institution, which failed but not because of the normal
banking weaknesses of bad lending or misfeasance. Rather it had grown too fast
PM: Lovely saying
PM: sometimes an old man lying on the ground can
see further than a young man at the top of a tall tree
NH: and too far from its foundations. It started almost 10 years ago with a fairly
harmless habit of extending its growth a bit beyond its normal capacity through
selling some mortgages and using the proceeds to lend again (securitisation).
Encouraged by experience and applauded by observers, this top up activity
gradually expanded until by 2007 it had became the core business. Northern
Rock had ceased to be a conventional bank; it had become a debt originator and
loans were growing at 40% pa. For some time the Bank of England had warned
that it would not advance money against mortgage collateral and as gravity was
switched back on it became clear that NR were just one part of a debt creation
process, and could not survive without the continued connivance of their
funding counterparts – the investment banks and their clients. Little by little
they had lost control of their destiny and there was no way back.
NH: Another example is Intermediate Capital Group, the established and respected
mezzanine finance provider. In common with other private equity market
participants it had dealt with the difficulty of negative carry on deals in recent
years by accepting PIKs (Payments In Kind) instead of interest. During asset
inflation the practice flourished, but now, as the tempo slows what started as
money has turned out to be smarties. ICP announced a rescue rights issue today.
What were the authorities thinking when they revoked the Glass-Steigel Act
which had carefully ensured the separation of investment banks from money
centre banks? The nature of investment banks is to be transaction-orientated,
focussing on the short term. The strength of general bankers is that they are
relationship based and forced to think long term. Put the two together and the
investment banker’s quick buck approach starts to predominate, simply because
that is where the profits are greatest and most immediate. Very quickly the game
becomes how much can you package and how little can you can commit. SIV’s
spring instantly to mind. In the hang-over stakes, it is not yet mid morning.
Surely we will see some re-enactment of this post 1929 legislation later this
decade?
NH: However, for my money this year is going to be dominated by rising WAGES.
For the last twelve years the OECD has enjoyed an exceptionally benign
inflation environment thanks largely to the influence of cheap labour in the
developing world helping to cap wage pressures in the developed world. We are
now experiencing exceptionally high cost of living increases thanks to
commodity price increases and 20% + per annum wage growth in emerging
markets; yet so far wages in the OECD countries have not started to move It
seems hopeful to believe that this will continue, even into a developed world
downturn.
NH: Thanks to the banking crisis, interest rates may fall in the short term, but
inflationary expectations are rising and if I am right then the rise in wages this
year will surprise everybody in much the same way as the insidious inter bank
bear. It will be compounded in some countries by their falling currencies..
In the U.K. for example my expectation is that sterling will fall some twenty
percent against the euro and nearly that against the dollar. Simple maths
suggests that the consequent import price rises alone should add some 7% to
inflation, which is already running at close to 4.5%. Today’s union pay demands
of 7% may still be behind the curve!
At this point, I really cannot see how the Chancellor of the Exchequer or the
Governor of the Bank of England can act to improve things from here. By April
the effect of the credit crunch will no longer be confined to liquidity concerns;
loan defaults and credit losses will be coming through too. House prices will be
falling fast, and volumes will evaporate, whilst banks will be widening net
interest margins to protect themselves and in the process driving ever higher the
cost of borrowing. The Bank of England will be under enormous pressure to cut
rates even though inflation will be rising and then we have a currency crisis like
the one that Dennis Healey faced in 1976. So much for the monetary outlook
NH: On the fiscal side, the UK Government’s finances are so cyclically geared and
their spending so out of control that by the end of this year, with a deteriorating
economy, they will have to be talking about the most unpalatable taxes being
raised. Possibly that may be the first time to start investing again.
Dominated by Germany and to a lesser extent France, Europe may be reasonably
happy to have a strong Euro for its anti-inflationary powers. However, the PIGS,
as they are known, will not be enjoying the ride. Portugal, Ireland, Greece and
Spain will feel the pain and by the autumn will be envious that the UK, whilst it
will have had the worst of this year, will be better set up to weather 2009.
The USA will suffer from many of the same problems as the UK -. they may
easily be already in recession. They certainly have the same credit cycle problems.
Wages should also start to misbehave. Furthermore they will have to
contemplate a democratic victory in the autumn. Wall Street is fast becoming
very unpopular auguring rising taxes for the rich. In this era of big government,
which started in the USA with Bush jr as far back as 1998 and is ubiquitously
entrenched elsewhere, the private sector must expect to be harried and taxed
even as it finds itself coping with costs increasingly passing outside of their
control. For the world the fact that the USA will be entering a collectivist era
will weaken the spirit of free enterprise everywhere. I hope that you have
thought about this because it will dominate how your wealth fares over the next
few years.
We have already seen a little of this new world last month, when the state of
Alaska decided to take another $1.6 billion off the oil industry a year in taxes,
whilst at the same time revoking licences legally granted in the 70’s which they
felt were not being properly exploited.
NH: here’s the concusion
NH: Too early to be a buyer.
Stock exchanges defied gravity last year as investors still saw growth going out
into the future, but in a world in which wages dominate, shares and share
trading wilts. This year will be hard on these shares. Property will continue to do
badly and so will the property retailers – the pubs and Big Yellow Group. After a
halcyon period clothes retailers in the UK will suffer weak demand and rising
input costs. Be especially worried if they are operationally geared like Next.
Currencies will be crucial, inflation is back and that means the carry trades will
disappear. Some time this year even Japan will get inflation. Bonds have lived a
charmed life but may be that is about to change. All in all then 2008 promises
to be a roller coaster. However lying on the ground is not lying on the beach for
this old man.
PM: Thanks for all that. Lovely prose. But that’s enough
PM: While we are on generalised bear alert
PM: let me jsut mention that Sam has just put a post up on the home page about S&P re-basing all its subprime loss assumptions
PM: Stuff came out overnight
PM: AND IT IS HAIR RAISING!
PM: Picked up by a US site — Housing Wire — but i think it has a lot further to run
PM: Here’s a quick extract from the S&P press release
PM: NEW YORK (Standard & Poor’s) Jan. 15, 2008–Standard & Poor’s Ratings Services
today announced that it has revised the assumptions it uses for the
surveillance of U.S. residential mortgage-backed securities (RMBS), and that
the correlation and recovery assumptions used to rate and monitor
collateralized debt obligation (CDO) transactions backed by U.S. RMBS are in
the process of being revised.
PM: We have made three fundamental changes to our surveillance assumptions for
U.S. RMBS.
1.) We extended our stresses of the expected loss amount over the
lifetime of the transactions (compared with the 36-month period we currently
use) to evaluate the adequacy of credit enhancement. Because we expect the
duration of the housing downturn to be longer than previously anticipated, we
believe that using a longer term and corresponding revisions to loss curves
may be appropriate.
2.) We revised our expected losses for the 2006 vintage subprime
collateral to 19% from 14%, as delinquencies continue to rise, and we will
recalculate lifetime loss expectations for all vintages of U.S. RMBS.
Additional losses are projected to result directly for the additional
delinquencies and defaults.
3.) We revised our assumptions on availability of excess spread, as the
increased number of loan modifications will likely reduce future excess spread
available to cover credit losses. These assumptions are consistent with
scenarios recently published in “Reviewing The Impact Of Rate Freezes On Rated
U.S. First-Lien Subprime RMBS Under Two Scenarios,” which was published on
Dec. 21, 2007.
PM: The implications of this seem to be just too extreme to compute – in my view
NH: that does not look good
NH: 
NH:
NH: while we are on the bearish tack
NH: just wanted to point out that the FTSE 250 is in bear market territory
NH: hit 12,220.17 in May last year
PM: JEEPERS! — OFF 161 POINTS AT 9604 TODAY
NH: that’s a drop of around 21% according to my maths
PM: and 1.6% today alone
NH: and 20% is the technical definition of a bear market
PM: Mid cap crash !
NH: actually the performance stats across the board do not make encouraging reading
NH: FTSE 100 is off 7.6% since the start of the year
NH: and the mid cap index is down 9.8% in the same period
NH: happy new year
PM: That’s almsot 10% in two weeks — that is 1 per cent per trading day!
NH: yep and that’s because the mining sector, which acted as a powerful prop last year, is coming under pressure
NH: US slowdown fears as I said earlier
PM: yep
NH: in fact the mining sector is responsible for around 30 points of today’s drop
PM:
PM: To some questions/points below…
PM: Yes, v good article by Martin Wolf this morning.
PM: recommended read
PM: optinos expiry good point
NH: could be lively on Friday
PM: Dunno about armorgroup — we need to look into that
PM: Iraq security operation
NH: as for Woolies
NH: trading statement out today
NH: looked ok on the face of it
NH: but digginig a little deeper
NH: well
NH: Retail small full-year profit includes over £10m of property disposal profit, so ex that would still be in small loss
NH: £4m of non-recurring costs in the dullish EUK profit outcome
NH: Refused to commit to the final dividend: decision to be taken after Easter by the Board at time of the finals etc etc. Not a ringing endorsement…
PM: hmmm
NH: and KBC have cut to Sell
PM: reliant on easter egg sales then to pay divi
PM: Just pulled the price up!
PM: Woolies are down 2p at 7.9p
PM: 20%
PM: Woolies at 8p.. Who would have thought
PM: Penny dreadful
NH: here’s the KBC note
NH: We believed the strength of the videogames market would lift the retail business this Christmas given Woolies c8% market share. The fact that it hasn’t suggests materially weaker trading in other parts of the business given LFL sales have fallen 3.2% in the 49 week period (-0.4% for 38 week period) and suggests double-digit declines in the last 11 weeks. Management highlights in the statement this is due to a focus on profitable sales, which must be the case given 100bps improvement in gross margin and the retail division is expected to deliver a profit this year – but property disposals are key to the final result. Guidance that “profits will be ahead of the prior year and within the range of current market expectations” fills us with dread and suggests to us that consensus could fall substantially to below £20m. Will the dividend be safe? Possibly given 1.77p was paid out on similar profits last year. But even on a halved dividend the yield would be c9%. The market may take some comfort from the statement given expectations may have been for a worse outturn and therefore we may see a relief bounce as the shares have fallen precipitously. Our issue is that greater guidance is required but regardless we move from Buy to Sell.
NH: Disappointingly, the recent jewel in the crown, EUK, will underperform this year because operating costs have been higher and margins depressed by the higher proportion of lower margin videogame consoles.
Management’s focus on tight cost control and on profitable sales is a good thing but it raises the question on how this Group moves forward sufficiently to offset the intense competition, primarily the grocers. In our view, the Woolworths brand and sub brands (Ladybird/Chad Valley) have value, the multi-channel opportunity is large, there is substantial self help and margin potential and Woolies is one of the largest toy retailers (25% share), particularly smaller/pocket money type toys, which we believe is reasonably defensive. But we need to see evidence that all management’s efforts deliver more than status quo.
PM: Good points below from Pakora
PM: spicy mix
PM: looks like the readers dont like Woolies either
PM: Why are the management still in jobs there?
PM: trevor bish bash bosh
NH: the nicest man in retail apparently
PM: And the hapless Richard North is chairman — having succeeded the Fat Controller
NH: Gerald Corbett you mean
PM:
NH: miners not the only stocks under pressure this morning
NH: the LSE has taken a whack
London Stock Exchange Group (LSE:LSE): Last: 1,574, down 137 (-8.01%), High: 1,708, Low: 1,546, Volume: 1.12m
PM: 8%
NH: have not seen the report
NH: but hearing that Sanford Bernstein
PM: What, the respected US analysis house
NH: have slashed their target price to…..
NH: wait for it…
NH: 600p!
PM: WHAO!
NH: apparently
PM: Are you kidding??
PM: 600p — with the market price above 15 quid still
NH: it seems SB thinks the Europe stock exchange market has reached an inflection point
NH: with last 3 years’ revenue growth of 18-30% a year
in equity platforms likely slowing toward single digits
NH: %. Says with about 90% equities exposure,
even post Borsa Italiana acquisition, LSE revenues are exposed to pricing
pressure, volume growth decline and market share loss
NH: punchy stuff
NH: but as we suspected 600p may not have right
NH: thxs flip top bin
NH: still £16 was quite bearish anyway
PM: Ah — DOW JONES correction
PM: 10 quid makes a different!
NH: anyway moving on
PM:
NH: the other big faller today is Cable & Wireless
NH: broker has cut its target price to 190p, citing weakness in one of the company’s key Caribbean markets
NH: We downgrade Cable & Wireless to Equal-weight-V and reduce the price target by 10% to 190p (12% implied upside) on changes in our Caribbean estimates due to weak results in Jamaica (results that highlight higher risks across the portfolio than Western European incumbents, in our view) and due to our pensions analysis that reveals an overstated EBITDA and EPS.
NH: EBITDA includes £20-30mn non-cash pension finance income – stripping this out reduces our altnet FCF forecast by c.10-15%. £200mn of guided FCF is therefore only possible by exceeding the altnet’s £400mn EBITDA guidance, and likely only by F2011e at the earliest. If the pension fund is ‘sold’,
EBITDA will be negatively impacted initially, or may require a top-up payment.
NH: : Our base case valuation falls by
16p to 185p. With long-term guidance fully priced into
consensus estimates, sector beating upside requires a
full house of (1) an M&A premium on the altnet business,
(2) full leverage in the international business (3) a 4pp
improvement in international margins and (4) no
payment for any pension scheme divestment. We
believe the combination is ambitious. A ‘perfect storm’
scenario in which the altnet misses long-term guidance
and a pension deficit re-emerges could lead to downside
case of 140p.
PM: Hmmm
PM: that stuff on the pension looks interesting
NH: very interesting
NH: there has been a whisper around on this for quite a while
NH: basically a number of smart people thought C&W’s cash generation was not as it seemed
NH: and complained the figures were difficult to get at
PM: and now we have a large broker flagging it up
PM: do we have anymore on this pension stuff?
PM: seems to me as if it might be worth looking into
NH: hang on a minute
NH: here it is
PM: Got some more on this from Morgan Stanley?
NH: An analysis of pensions causes an overstated EBITDA and
EPS in the altnet business. Valuations of C&W’s altnet
business have been based around simple maths from the
company’s turnaround plan: £400m EBITDA (as guided) by the
end of the decade; 10% capex to sales (c.200m) and no tax for
several decades – i.e £200m of FCF.
But an analysis of pension credits and actual cash
contributions causes a difference in underlying vs reported
EBITDA in FYMar2008 of £20-30m – a very material 10-15% of
the FCF.
NH: How do we adjust? We add back the pension credit and
replace with an estimate of the actual cash contribution made.
We show this adjustment in Exhibit 4, amounting to £30m in
F2008. The NPV of these adjustments equates to 13p off our
valuation.
NH: The Background:
The pension credit is made up of three parts:
(1) The service cost (the amount ‘earned’ by employees in that
year, equivalent to the actual employers contribution);
(2) the interest cost (the ‘unwinding’ of the liability as it gets
closer to being paid); and
(3) the expected return on the assets within the fund.
The net of (2) and (3) we term ‘pension finance income’.
NH: There are two ways to account for pensions within the income
statement.
Method 1 – the ‘BT way’: The first, and preferable in our view,
is to account for the service cost above the line (ie within
EBITDA), while the net pension finance income (the net of the
interest cost and expected return on plan assets) is charged to
the interest line.
Method 2 – the ‘C&W way’: is to account for all three items
within EBITDA.
NH: Though both methods are perfectly acceptable under current
accounting standards (several UK plc’s still account like C&W),
we prefer the first method, since it removes the non-cash
distortions of net pension finance income when judging the
operational performance of the business at the EBITDA level.
NH: The net pension finance income element (net positive in the
case of both BT and C&W) can be useful in judging fund
performance when the scheme is in deficit; but it flatters the
company when the company is in surplus. The company does
not ‘own’ the surplus (the pension scheme members do), hence
any positive movement to increase the surplus does not
accurately reflect a benefit to the company, in our view.
Either way, our valuation should aim to get as close as possible
to the underlying cash performance of the company. In our
valuation then, we remove the pension credit and replace with
the underlying cash contribution (also equivalent to the service
cost), something that was not being captured previously in our
working capital calculation.
PM: thanks for that
PM:
PM: note KK’s news below on optino strike at 5925 on the Footsie – v bearish
PM: Cash index is now off 94.5 at 5931.4
PM: 
PM:
PM: Come on then — give us some good news
NH: well it was good earlier
NH: not looking quite as good now
NH: Marvellous company called Pearson
PM: hey!
PM: Owner of the FT and this website
NH: touched 665p earlier today
NH: which given the market backdrop was an impressive performance
NH: alongwith everything else it has been dragged back
NH: stock now off 4p at 648p
NH: which is a creditable performance in the circumstances
PM: it is!
PM: Why is it up ? 
NH: this will cheer up a few share scheme savers
NH: MOrgan Stanley (him again) has increased its target price to 785p from 760p
PM: Who has written this perceptive piece of research???
NH: Patrick Wellington
NH: wanna see the note???
PM: oh go on , if we must
NH: We upgrade Pearson to Overweight from EW with 18% implied upside to our price target of 785p (up from 760p), and recommend switching out of Reed (EW, price 614p, target 605p) after a
strong run that has seen its share reach levels touched only three times in a decade relative to Pearson.
NH: We favour Pearson due to the continued upgrading of underlying forecasts from strong trading in all parts of the group, and note that if its depressed margins (14.7% in 2007e) reach the industry standard of 17.5% it would add 20% to 2008e EBITA, which we think achievable given it is starting to see strong organic revenue growth in its Education businesses.
NH: Contrary to the market’s view, Pearson’s Schools performance is linked primarily to the adoption cycle (strong in 2008 and 2009) rather than to the economy. Share trades at an 18% 08e P/E discount to Reed.
PM: thanks for that
PM:
PM: anything else managed to buck the trend??
NH: British Airways flying high
NH: been remarkably resilient through the latest market squall
NH: actually risen in the last week or so, which makes me wonder if there is not something in these stake building rumours
PM: but I though Emirates had dismissed all that talk
NH: they did
NH: but there is more than one airline in the middle east that is backed by stake money and could be building a position in BA
PM: Such as ?
NH: Eithad – the national airline of the United Arab Emirates
NH: they could build a position and use it to strike a code sharing deal with BA
NH: and possibly fund the purchase of some slots at Heathrow
NH: together with BA
NH: this is all speculation of course
NH: RAW market info
NH: but volume in BA shares has picked up in the past week
NH: and where there’s smoke
NH: actually Goldman Sachs have picked up on these stake building rumours this morning
PM: Oh yeah? And they are saying?
NH: that BA has huge strategic value
NH: slots at Heathrow
NH: the company also cheap as chips
NH: and there is no reason why a middle east or far east airline could not build a significant minority position
NH: just digging out the Goldman prose for you
NH: We upgrade BA to Buy from Neutral, but reduce our price target to 330p (from 350p) and our 2009 and 2010 EPS estimates by 15% and 19%, respectively. BA screens as very cheap on an all-time low EV/sales multiple of 0.6x and on P/B of 1.0x (FY09), in particular when reduced leverage is taken into account.
NH: We believe it is a strategically attractive asset due to its Heathrow position and its returns and has a capex liability no bigger than Air France-KLM or Lufthansa. We are, however, concerned that consensus is too high versus our estimates and expect company guidance for 2009 to be below consensus expectations.
NH: BA has underperformed Lufthansa by 5%, 19% and 28% on a 1, 3 and 6-month view. Although BA is more exposed to the US economy and financial services, the difference in leverage between the two is nugatory and both make their money from flying long-haul premium passengers. We don’t believe Germany’s macroeconomic prospects are as radically different as implied by the relative performance.
NH: We continue to view BA as the “jewel in the crown” in European aviation due to its high returns, Heathrow real-estate (slots) and its uncluttered business model. As the Air France-KLM merger showed, there are ways around foreign ownership rules.
NH: A Middle Eastern or Asian carrier backed by sovereign wealth would likely face no
constraints on taking a large minority stake. BA’s returns have peaked, in our view, but the low supply
constraints at Heathrow means we believe BA can trough at higher returns than historic lows.
PM: Thanks for all that. Trend bucking stuff
PM: BA’s price is up 7.5p at 285p currently
NH: and look at the volume too
NH: 10m shares traded already
NH: average daily volume is around 15m
NH: and we have what another 4.30hrs of trading to go
NH: could be something in this stakebuilding rumour you know
PM: one to watch
PM:
PM: Now look we have got through almost an entire hour with out mentioning ,,,,
PM: The anti-bank
NH: lost a bit more value this morning I see
Northern Rock (NRK:LSE): Last: 63.00, down 6.25 (-9.03%), High: 69.25, Low: 52.50, Volume: 3.51m
PM: And that’s off the bottom
PM: Hit a low of 52p
NH: don’t suppose the PM’s comments on the new NEWS AT TEN helped
NH: he emphasised again that temporary nationalisation was an option
PM: Hmm. but nothing has really changed here. this bank is in the financial hospice and it is not going to get out
PM: What price does the gov pay shareholders for nationalisation?
PM: 25p?
NH: dunno but I saw some eye-catching figs in some rival publications this morning
PM: ??
NH: some said HM Govt would cough up 100p a share
PM: but why would then do that — to so off an interloper??
NH: to see off the prospect of Wood and RAB dragging this through the courts
NH: also saw of figure of 250p mentioned
PM: Oh yeah
NH: apparently that is the value that could be raised by putting the company into run off
PM: Those figures on run value etc date from last September
PM: The world has changed a tad since then — ask citi, ML et al
PM: Look at the S&P stuff on the depth and length of the housing bust
NH: i suppose the govt might offer a premium to nominal value
PM: Okay, then 26p
PM:
NH: just had the grim reaper on
NH: he has an interesting observation
NH: a lot of people talking the end of the bull run in the miners, money switching
into Props
NH: could be something in that
NH: in a rubbish market
NH: one would have thought props would be suffering given all the gloomy surveys out today
NH: but no
NH: they are up
Hammerson (HMSO:LSE): Last: 1,020, up 26.5 (+2.67%), High: 1,023, Low: 968.50, Volume: 1.53m
Land Securities Group (LAND:LSE): Last: 1,518, up 33 (+2.22%), High: 1,521, Low: 1,459, Volume: 2.18m
British Land Co (BLND:LSE): Last: 914.00, up 40.75 (+4.67%), High: 918.50, Low: 856.50, Volume: 3.20m
Liberty International (LII:LSE): Last: 961.50, up 19 (+2.02%), High: 969.50, Low: 933.00, Volume: 1.67m
PM: As noted by Concept ABS , we are just getting JPMorgan’s figs out
NH: no massive write down
NH: as was rumoured yesterday
NH: looks like a $1bn
NH: but we are checking the tape now
NH: lots of flashes hitting the tap
NH: $1.3bn on sub prime positions
NH: so it looks as if JPM was the bank that dodged the credit crisis
PM: earnings slightly lwoer than analyst expectations tho
PM: But the rumours of a massive writedown at JPM yesterday were clearly wide of the mark
NH: news is helping market. FTSE 100 now down 92.2 points at 5,933.4
NH: bit of a rally
NH: not sure how long it was last though
PM: Just mention that Libor rates are also down again today
PM: So maybe it is too early to head for the hills
PM: 3m Sterling for example is 5.61 v 5.66
PM: Nice bearish note from bsb below
PM: Just in case we were in danger of getting cheery
NH: no chance of that
PM: Right — we are done!
PM: Thank you for joining us today.
PM: We will be back at 11am tomorrow
NH: by which time we will have fully recovered from our Newcastle trip
PM: In the meantime, we have been sent a photo album of newcastle hot night spots — and, er, some comparisons with rival Swedish establishments.
PM: if you want a copy, drop me a mail — paul.murphy@ft.com
PM: seeya
NH: see ya