Markets live chat transcript for the chat ending at 12:13 on 13 Mar 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM: Morning — welcome to Markets Live
PM: Still alive despite Neil removing his tin hat at this time yesterday
PM: Neil is here now
PM: That wasnt a very sensible thing to do, was it Neil?
NH: no but it was a joke
NH: before anyone brings up the Northern Rock flip flop
NH: anyway, the central bank inspired rally did not last long
NH: it has come to a shuddering halt
PM: V funny Rose — below
NH: FTSE 100 down 93.7 points at 5,692.7
NH: a number of factors have spooked the market this morning
NH: The Dow’s reversal overnight
NH: a 2% intraday fall from high to low, led by profit taking in those sectors which had made the largest gains on Tuesday (i.e. Banks, Financials, Real Estate, Housebuilders etc).
NH: record crude price
NH: and the dollar
PM: ah yes, the $
PM: New low against the Euro and 100 Japanese yen for the first time since 1995
NH: and that’s been triggered by renewed fears about the US economy
NH: and of course this conspiracy theory
NH: that the only reason the Fed and friends agreed to pump all this extra liquidity in to the market is that they are worried a leading bank in trouble
NH: and of course we have CCC
PM: Yes — what has the actual quote done for Carlyle Cap Corp?
NH: down 70% to 0.83
PM: Hmm. surprised not 100%
PM: Very interesting stuff on Peston’s blog this morning
PM: re ccc
NH: and hats off, its good
PM: Basically his point is that the Fed’s new laundry facility encouraged the banks to pull the rug on CCC
PM: cos they can swap CCC’s dirty mmbs for nice clean T-bills
PM: Now, if that starts happening across the hedge fund space….
PM: I think the next few weeks are going to be rather interesting
NH: it could be very interesting
PM: We’ll have to slap an 18 rating on this site
PM: So much blood might be involved
PM: 
PM: Right — Capital & Regional — certain readers with burnt digits 
PM: Worzel for one
PM: And tuna
NH: but worth pointing out just about everything in the market is lower this morning
NH: FTSE 250 for example off 2%
PM: And Capital & Riegional is down 2.08% off 10.5p at 542
NH: anyway, very interesting note has come out of Cazenove
NH: they have upgraded to “outperform” and make some interesting comments on Martin Barber
NH: here’s the note
PM: We are having trouble pasting….
NH: so we will have to summarise it
NH: Cazenove said they company have clarified its financial position
NH: and they say that a potential catalyst for a re-rating
NH: is the possibility that Martin Barber
NH: finding a buyer for the group
PM: Oh, really.
NH: and realising the worth of the business in which he is a significant shareholders and where Caz believes other shareholders are supportive
PM: Basically that’s the same story we were hearing yesterday
NH: and it is worth pointing out that there is a big property conference going on in France at the moment
PM: At Cannes
NH: and alot of the speculation seems to be coming out of there
PM: Just one other point to make here re stories like CAL
PM: PLEASE DONT FOLLOW THEM IF YOU ARE GOING TO COME BACK AND BLAME US WHEN THE PRICE MOVES AGAINST YOU
PM:
NH: conference is called MIPIM 2008
PM: Thanks for pasting that TJB
PM:
PM: I know its difficult when everythign is dropping in unison
PM: But any particular featrues caught you eye yet?
NH: Wolseley
NH: bears are really getting their claws in to the stock
PM: 
NH: Goldman Sachs and ABN Amro have both come out and said sell
NH: and that has hit the price
NH: down 34.5p at 552.5p
NH: that’s the lowest level since April 2003
PM: ok
NH: and currently the biggest faller in the FTSE 100
NH: notes are both pretty interesting
NH: but the ABN one is significant because they are house broker
NH: they have cut to sell with a 530p target price
NH: and are saying that Wolseley needs a stronger balance sheet to see them through the US housing downturn
NH: which is obviously quite concerning
PM: Hang on a minute
PM: that means they need a rights issue
NH: yep
NH: that’s what the company’s house broker seems to be hinting
PM: whoa
PM: have we got the note?
NH: Of course
NH: In our view, Wolseley needs a stronger balance sheet to sustain it through
likely deterioration in the trading environment in the US and Europe and
provide capacity for it to maximise consolidation opportunities in the
downturn. Downgrading to Sell with 530p TP.
NH: Wolseley interims – Monday 17 March 2008
NH: Wolseley will, in our view, highlight a continuing deterioration in
trading on Monday with further consensus downgrades to FY08 and FY09
looking inevitable. The focus will likely be on the latest performance of
Stock and Ferguson; however, we see increased risk that following poor
trading comments for parts of Wolseley’s European operations
(self-inflicted in 1H, in our view), the agenda will now move to macro
concerns in terms of the outlook in the key markets of the UK and Nordic
regions.
NH: Forecasts cut
We have cut FY08 earnings forecast by 11.8% from 57.5p to 50.7p and FY09
earnings by 21.9% from 51.2p to 40.0p, reflecting a reduction to our
housing starts forecasts, weaker lumber prices, expected weakness in UK
new housing demand and a slower growth rate in the Nordic region given
weaker housing data and the increase in Swedish interest rates.
Downgrading to Sell from Hold
We have reduced our price target from 630p to 530p, reflecting changes to
earnings, sales and our DCF valuation. Our price target is based on a
weighting of earnings and sales multiple in conjunction with DCF. We
remain concerned, however, that earnings erosion from our revised
forecasts remains a risk given the group’s operational and financial
gearing.
NH: Equity story needs a stronger balance sheet
Wolseley is all about maximising efficient building products distribution
and using cash generation to consolidate its market positions. The group’s
financial gearing position has removed the firepower for this strategy
just when we believe it would be most effective (in buying up distressed
competitors) and has created additional risk for Wolseley shareholders if
banking covenants are breached.
In our view Wolseley needs additional
capital to (i) underpin its business model for equity holders and (ii)
create the capacity for Wolseley’s operational management to maximise
opportunities into the current downturn.
PM: Jeppers
PM: Needs additional capital…
NH: ABN appear to be a little embarrased by this note
PM: Oh yeah– why’s that?
NH: because it’s not on the daily research email
NH: for the press
PM:
NH: all we have today is
Economics Focus
Arriva (Buy)
BPP Holdings (Add)
TKH Group (Hold)
Global FX Daily – Europe
UK Smaller Companies Daily
NH: note penned by John Messenger and William Jones
PM: So the Sell notes appear in unmarked brown envelops
PM: Anyway — aggressive stuff on Wolsley
PM: got any more on the balance sheet issues???
NH: yep
NH: Wolseley has increased the debt funding inherent in its operations since 1999. This has added significant gearing to both earnings and enterprise value calculations for shareholders. In the 1980s and 1990s Wolseley did not operate with net debt /
EBITDA above 1.0 times as shown in Chart 1 below. On our forecasts, the group will
see net debt / EBITDA increase to 2.8 times for FY2008 and 3.0 times for FY2009 on
our base case forecasts, which assume no further acquisition spend. On our bear case
NH: We are uncomfortable with this level of debt relative to EBITDA and believe it will
significantly constrain Wolseley at a time when it should be positioning itself to
implement its strategy of consolidating weaker competitors at attractive prices And
thus (i) consolidating its market positions and reducing competition, (ii) unlocking
cost savings and synergies when underlying earnings will be under pressure, and (iii)
creating operational gearing on the upside, enabling the company to come out of the
downturn stronger with more rapid margin rebound potential.
NH: We see the group’s debt and covenant position as well as the lack of balance sheet
firepower as fundamental negatives for Wolseley investors. In our view, the first
factor undermines the potential return on equity given the demands debt providers
may make in the future, and the second factor prevents Wolseley’s management
from doing what it does best – driving synergies and growing the business. Until
Wolseley is able to address this issue, we don’t see a robust equity investment story:
we see Wolseley being driven by its markets and the group forced on to its back foot.
PM: Thanks for that
PM: and what about Goldman?
PM: Why are they selling Wolseley?
NH: same sort of reasons
NH: Concern about construction markets in the US and Europe
NH: but it is also concerns by a couple of quirks in the Wolseley business model
PM: what are they??
NH: volume rebates and construction loans
PM: they are not into sub prime are they??
NH: and I must confess I did not know a whole load about it
NH: So I had better let Goldman explain
NH: this is from the note
NH: As construction markets in both the US and Europe weaken we expect Wolseley’s earnings to continue to decline. We also expect housing starts in the US to fall below 1 mn, and with limited further scope to reduce costs combined with lower volume rebates, see growing losses in this operation.
We cut FY08 and FY09
EPS estimates by 6% and 29% respectively, to levels 7% and 31% below consensus. While Wolseley’s rating could rally ahead of reaching trough earnings we do not expect a sustained rally until housing starts
begin to rise.
NH: We reduce our 6-month multiples-based price target to 565p (from 775p) and cut our rating to Sell (from Neutral).
NH: Construction loans risk
In this very competitive environment there is growing distress amongst both its customers and competitors. This could lead to losses within its construction loans, which equalled £286 mn at the end of FY07 and is all within the Stock operation.
NH: Construction loans are secured principally against homes in the course of construction or homes awaiting sale with an average maturity of nine months (FY07) and an average interest rate of 9.9%. The company has noted that it is more stringent in its lending criteria and has diversified the risk, but we believe that bad debts are likely to increase.
NH: Loss of rebates could cause material profit contraction
Wolseley also operates volume related rebates with many vendors, with the receipt of
these rebates accrued through the year. Extensive reassessment or the value of rebates is undertaken at the interim and full year. The company notes that a slowdown in markets may lead to the actual value of rebates differing significantly from those projected. There is insufficient disclosure to assess the full level of these rebates across the group or the potential impact of declining volumes, but with £11,702 mn of COGS in FY07 and an estimated £11,949 mn in FY08 the value is likely to be tangible, in our view.
PM: Dont like the look of that stuff about volume rebates
NH: yep
NH: Morrison found out to their cost what can happen with vendor payments
NH: when they bought Safeway
PM: hmm — number of examples in the past
PM: think we need to know a lot more about Wolseley in this regard
NH: i agree
NH: but in the meantime, seeing as we have mentioned Wm Morrison
NH: we should have a quick peak at their figures
NH: which look in line
NH: and they have confirmed the buyback which was well trailed in the Sunday papers
PM: funny that
PM: I have lost count of the number of companies that have pre-announced results in the Sundays over the past couple of months
PM: But lets have a lott at the detail of the numbers
NH: Capital return – the company is announcing that it will return £1bn to shareholders via a buyback over the next 2 years with at least £500m being returned this year.
NH: dividend has been raised by 20% (4.8p for the full year)
NH: Co says made promising start to new year
PM: What are the shares doing?
NH: not much
NH: down 5.5p at 289.75p
NH: stock would only have risen if there were upgrades
NH: these have not been coming through
NH: anyway here’s a note from Caz
NH: Recommendation and valuation