Markets live chat transcript for the chat ending at 12:04 on 2 May 2008. Participants in this chat were: Paul Murphy (PM) Helen Thomas (HT)
PM:
Welcome to Markets Live
PM:
This is the daily markets chat brought to you by the keenly-resourced FT Alphaville
PM:
Neil Hume is on some sort of go slow.
PM:
He’s writing his column for Saturday’s paper
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And Neil can’t do markets live today.
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Bryce Elder has had the temerity to go on holiday between jobs – so he wont be joining us until the end of May.
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And we can actually start with some news about Helen.
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We’ve managed to get rid of her!
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Fobbed Helen off on Lex
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And not just Lex. It’s Lex in New York
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She now knows that you only cross me once.
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One minute she’s on Alphaville, skipping in to work at 7am in London.
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The next she’s stuck in mid-town Manhattan – having to bang out all of 300 words in a typical day. That’ll teach her.
PM:
Anyway, before we get rid, I ve agreed to let Helen have a go on Markets Live
HT:
but you’ve got me for at least a couple more months
HT:
then you’ll have to find someone else to do some work round here
HT:
thanks – study war no more
PM:
Ok — lets get on with
HT:
Lots of mining chatter.
HT:
One big talking point is Xstrata
HT:
Stuff appeared overnight in the Australian Financial Review
HT:
Saying that Xstrata has appointed Rothschild to examine a bid for Macarthur Coal
PM:
Just looking at that.
PM:
Its quite big – A$3.7bn. macarther
HT:
Handily – the Aussie dollar is now close to parity with the US dollar
PM:
Fancy that, eh. Common old aussie dollars almost one to one with the Greenback.
HT:
makes all those pesky conversions easier tho
PM:
Anyway, Macarther said back in the middle of April that it was in talks with an unnamed suitor.
HT:
I guess Xstrata would bound to be taking a look – a natural bolt on perhaps
PM:
Well, I guess Mick Davies must just be twiddling his thumbs since the plan to cash out to the Brazilians fell apart.
Xstrata (XTA:LSE): Last: 4,110, up 78 (+1.93%), High: 4,118, Low: 4,004, Volume: 1.75m
HT:
no sign of monkey today
HT:
maybe he’s heard I’m off and is no longer talking to me
PM:
Just going thru the Aussie press there is this stuff on Rio.
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Interview with Paul Skinner in the Sydney Morning Herald.
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He’s saying that a breakup of Rio Tinto is one option.
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Talking generally about his job being to get the best value for shareholders.
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“it’s not a test of independence or virility”.
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Helen’s tech is even worse than Neil’s
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I thought it was Neil — banging his mouse and generally swearing at the screen
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But now Helen’s suffering from blank window syndrome
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HT: I am truly Neil Hume’s heir
HT:
it only took five mins staring at an entirely pink screen
HT:
where on earth are we?
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Actually — Helen was busy sourcing a piece of breaking news
HT:
sounds like the fallout of the JPM-Bear deal is hitting London
PM:
What are you hearing?
HT:
well, the european Bear equity trading operation is no more
PM:
Price of euro equity traders under pressure
HT:
lot of leaving drinks currently underway
PM:
How said. Dont suppose it will be the last bit of fall out
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But helen — Q below abotu the new fangled NY libor thingy
HT:
tech probs continue here – surprise surprise
HT:
but will do my best – interesting story yesterday in WSJ that Icap is setting up a NY competitor to Libor
HT:
I should add that I haven’t read any of the coverage today I should add
HT:
but it seems to me that Icap have been rather enterprising in getting this going as a response to the concerns voiced about libor
HT:
well, they already produced an indicative series of eurodollar rates on reuters
HT:
so they’re turning that into a daily survey of dollar funding costs in the US market
HT:
but there are some differences between this NYFR and Libor
HT:
it will obviously be conduced in the US timezone
HT:
and instead of being asked about their (theoretical) borrowing rate
PM:
Apparently they are asked where representative bank could fund in the inter-bank market
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Broader funding market — rather than pure interbank
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Think burnt quant makes the key point below
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Libor is such as well established benchmark – -that replacing it is just not going to happen ovenight
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HT: NYFR are saying that this will simply be a sense-check
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HT: not intended as a replacement — jsut another data point
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HT: Correction I’m (helen) saying it will just be a sense check
PM:
How confusing is this?!
HT:
let me do my own typing from now on
HT:
so to summarise ( and move on before we completely mangle this)
HT:
it’s NY time, more generic funding than Libor, hypothetical for a representative bank and anonymous
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HT: now using Pauls machine – the short answer is I agree with fxtrader
PM:
a neat way of Icap getting its name in the press – and say they’re responding to customer demand for an alt benchmark
HT:
I’m losing the will to live with my computer
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yes yes, well im sure the kit will be super in NY
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what do you make of the departure of Barclays COO?
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you did a post on it earlier
HT:
the analysts are wringing their hands somewhat
HT:
Idzik well respected, terrible time to lose senior management etc etc
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have you got any notes?
HT:
yup – here’s a brief little number from Caz
HT:
Barclays has announced that Paul Idzik, chief operating officer, is to leave the company later this year. Idzik’s decision follows the completion of his task to change the corporate structure at Barclays.
Comment
Idzik’s departure comes as a surprise and is an unwelcome loss to Barclays. Further, given the turbulent market backdrop, senior management changes are unhelpful. Idzik is a respected executive and was prominent in the bid for ABN Amro; he had primary responsibility for the integration plan and delivery of synergies. The FT reports that the absence of such a challenge was an influence on Idzik’s decision. In our view, this suggests Barclays is not considering a significant M&A opportunity in the foreseeable future.
HT:
and something from Pali
HT:
Barclays Paul Idzik (Chief Operating Officer) is to leave the bank according to FT. It is being reported widely that the departure has been caused by tension between John Varley (Chief Executive) and Bob Diamond (Head of Barclays Capital). Tension here is not a new story, and always vehemently denied by the company.
Analyst comments: If Barclays Capital (c. 30% of PBT) really has not lost as much money as rivals (writedowns £2.2bn as of FY 2007), this puts Bob Diamond in a very strong position. The bank said in its AGM statement on 28 of April that although March was difficult, Barclays Capital was profitable in Q1. Bob Diamond has stated publicly that he sees US rivals blowing up as a great opportunity to take on headcount and expand into the US winning market share.
HT:
The only problem is that growth in investment banking is unlikely to be rewarded by a premium share price rating any time soon. Even if Barclays hasn’t lost money this time, managements who claim they can grow investment banking divisions at “15-20% through time” with RoEs above 20% (as Barclays Capital reports) are going to be treated with a huge amount of “we don’t believe you” type responses. Barclays just held an investor day on it International Retail and Commercial Bank (c. 60% of PBT) highlighting the opportunities there.
There is only so much capital to go round though, and investors are likely to be much more comfortable with Retail and Commercial Banking growth. The bank said they would also hold an investor day on the investment banking businesses but so far we haven’t heard anything.
HT:
Q1 statement planned for 15 May, where hopefully this uncertainty is resolved. Our rec is BUY, TP 600p this is based on our belief that Barclays will not do a rights issue. We also thought that as Bar Cap slowed and the other businesses picked up the slack, the shares would enjoy a re-rating. Until the uncertainty is resolved not likely to happen. Valuation: shares are trading on 7x 09 earnings, Div yield of 7.3%, 1.3x book.
PM:
Barclays price up 5p at 470p btw
PM:
Seems a bit of non-event then
HT:
the Barclays line is just that – Idzik has finished his job of overhauling Barc’s operations
HT:
the failure to win ABN means he can’t spend his time integrating an acquisition
HT:
so he’s off to do other things
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so what about Diamond Bob?
HT:
Idzik was a BarCap man so Diamond on one reading has lost an ally
HT:
but as Pali note – he may not need it – if BarCap’s actually come through OK
HT:
and headhunters say that they’re already making moves to scoop up staff in the US and build up over there
HT:
on the old Varley versus Diamond stories, Idzik was seen as a unifying force according to the FT story today
PM:
which is hard to believe given what we know about his MO
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Modus Operandi — know you love military stuff
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hang on – will paste a bit from your post earlier
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But in his efforts to supercharge the bank’s operations, Idzik had the odd unconventional trick to deploy.
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In 2005, the Guardian reported that Idzik had “tested” the bank’s security operations by vaulting the turnstile, running into his office and waiting to be apprehended. When no burly security contingent arrived to evict him, he made his displeasure unknown to the hapless guards reluctant to strongarm the boss
PM:
He was also a stickler for loyalty. Tales have also emerged from the Barclays office that Idzik named and shamed employees who made the treacherous mistake of holding an account with a rival. He was also known to have taken slovenly employees to task about their appearance. Flip flops apparently were a real no-no even in the height of summer.
Those sporting non-Barclays branded bags were also in for a rollicking. The London Evening Standard’s City Spy column once suggested that some found their offending articles’ straps mysteriously cut. One brave soul who ventured into a meeting with an RBS pen apparently had the item snapped in front of him.
HT:
he’s been a rich source of newspaper diary stories over the years
HT:
I hope I’m not sent home for wearing flip flops this summer
HT:
do we have an FT Alphaville dress code?
PM:
errr no – and if we did, I don’t think you’d be the one in contravention
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anyway – you won’t be here this summer
HT:
before we depart banking
HT:
the RBS rights issue prospectus is floating about
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but at 148-pages I haven’t had a chance to read and digest
HT:
(and possibly never will)
PM:
there was an analyst note on it wasn’t there
HT:
so we’ll stick that up
HT:
While there is little startling in the rights issue prospectus, there are,
nevertheless, a few details worthy of note. We welcome the pro-forma financial
statements, which should help the market get to grips with the real dynamics of
the group (and we will attempt to reconcile these with the information provided
at the FY07 results). Additionally, the directional impact of Basel 2 on capital
ratios is down, and at least parts of the balance sheet expanded in Q108. The
shares trade on 7.1x 09e after incorporating the impact of the rights issue and
disposals. We rate RBS Market Perform.
Shares issued: 6,123,010,462 new shares will be issued at 200p to raise the net £12bn
(after deducting £246m of expenses).
Basel 2. RBS comments that the transition to Basel 2 on 1 January, 2008, resulted in
‘an overall increase in the Group’s RWAs and an increase in deductions applied to
regulatory capital, together resulting in a decrease in RBS’s Tier 1 capital ratio’.
Directionally, that can be tallied with the FY07 results disclosure that ‘reported capital
ratios are expected to be similar to their Basel 1 equivalents’.
Writedowns. ABN Amro accounted for £2.3bn of the £5.9bn pre-tax taken in Q108.
Pro-forma numbers. For the first time, RBS has published a ‘look through’ income
statement and balance sheet. We will attempt to reconcile these with the financials
reported at the time of the FY07 results.
Q108 balance sheet data. Details are fairly scant, but (including all of ABN Amro)
reported debt securities have increased 4% to £284bn.
Dividend. As previously indicated, 45% is the indicated sustainable rate post rights
issue. The target for 2008 is a similar payout ratio to 2007 (ex the write-downs and
non-recurring items, which amounted to a net positive £24m). To avoid doubt, the new
shares will not be entitled to the H108 dividend, but will be entitled to the 2008 final
dividend.
PM:
thanks for that. v useful
HT:
What’s the market doing generally?
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Footsie up 53 at 6140
HT:
what with computer meltdown, job moves announcements we seem to have neglected that soemwhat
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The miners have come back
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Bounce in some of the large retailers — Next particularly
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Right – let’s do a little plug for the BBC.
HT:
Oh yeah, they need the traffic.
PM:
No this is serious. Their Working Lunch effort is running the second part of a two parter on boiler-rooms – this lunchtime at 12.30
PM:
It was on yesterday, but I missed it. Second part today.
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Here’s a link explaining
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Ive been writing about boiler rooms and British penny bucket shops for so long now.
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And still the regulators struggle to control them
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Actually Neil was saying earlier that one of the better analysts he speaks to – when he was phoned by one of these scamsters from Spain he emailed the brilliant FSA
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Thanks v much, but because the operation is in Span they are not regulated by the FSA.
HT:
So much for joined up Euro regulation.
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Cadbury began trading this morning
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I dont have any particular insights
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But the market has been relatively stable
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Traded in a band of 637p to 622p
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NOTE from our diligent friends at Assanka
Cracking little software shop who built FT Alphaville
PM:
The problem appears to be that there is a failure at LINX, the London
Internet Exchange, and is affecting several dozen ISPs, ours included,
which means that some users may be experiencing intermittent routing
problems. It seems strange that this is disproportionately affecting
Helen rather than Paul, so I’m liaising with FT IT to check that this is
not a login problem.
HT:
what would we do without them
PM:
Back to Cadbury — here’s some stuff from Bernstein looking forward 18 months
PM:
Was published yesterday
PM:
With the imminent split of Cadbury Schweppes into 2 separate entities (Cadbury plc and Dr Pepper Snapple, or DPS), we are seeing some confusion on where the new Cadbury plc might trade when it lists on May 2nd. We explain our views in this report (please click the link). Perhaps of more interest, we also explain where we think it could trade 18 months from now.
The starting point for assessing valuation and potential trading levels is our proforma split of the 2007 P&L of Cadbury Schweppes between confectionery and beverages (recently updated based on further details disclosed in the final DPS Form 10 and on further clarifications from management). We have increased the allocation of EPS to confectionery, and decreased the allocation to beverages. Our new estimates split 2007 combined underlying EPS, allocating 17.2p to confectionery and 13.0p to beverages. In our projections for 2008 we have 21.1p in confectionery (23% growth) and 13.0p in beverages (flat). Outstanding EPS growth in confectionery comes from +6.2% organic growth and +140bps of margin growth (from a very low base of 9.8%), helped by a 6% EBIT impact from FX.
PM:
While Wrigley-Mars has dominated the news flow in the last 2-3 days, the disappointing “when issued” trading of DPS should not be ignored. The when-issued price of $27.95 is below our expectations (our updated estimate is $35) and below the expectations of Cadbury management (at the AGM the Chairman said that he believed the value of each DPS share would be $33). Lack of earnings visibility, a lack of analyst coverage and flowback concerns are all probably contributing to this low valuation which we estimated at 13x 2008 EPS, or a +10% discount to the US Bottlers which are arguably inferior businesses. The recent experience of Hanes Corp being spun out of Sara Lee provides hope that the low valuation is transitory: after being lacklustre during “when issued” trading, Hanes’ stock was +7% on the first day of formal trading, +23% after 3 months, +49% after 12 months, and is now +79% 20 months later.
However, investors are backing out $27.95 from the current price of Cadbury Schweppes, estimating 2008 EPS of Cadbury plc, and calculating a 2008 PE for Cadbury plc ranging from 19x to 22x. Based on our figures the 2008 multiple is 19.3x, but we would argue that this is significantly under-valuing the beverage business, and so allocating too much value to confectionery. The above ticker table continues to reflect our $35 DPS valuation, which therefore has confectionery trading at 17.3x.
In terms of where Cadbury plc might trade, it should first be remembered that for every 100 shares of Cadbury Schweppes, investors get 64 shares in Cadbury plc. Assuming a 64:36 split in the value of Cadbury Schweppes between confectionery and beverages (i.e. in line with the share allocation) Cadbury plc will trade at its immediate pre-split price…represented as: £5.79 x 0.64 ÷ 0.64 = £5.79. Indeed, this is the methodology used by Cadbury’s Chairman to derive his $33.
PM:
The headline price could be, in fact, below or above current levels. The 64:36 value split is only an estimate made by Cadbury (or its investment bankers)…and does not (in our view) reflect the EPS contribution of the 2 sides, or the future financing allocation, or the growth profile, or how investors will value the various pieces. We have 4 additional options of where Cadbury plc might trade.
- European Food Averages. Cadbury’s European Food peers currently trade at 16.3x 2008 EPS. Assuming the business trades in line with peer averages, and applying this 16.3x valuation methodology to our 2008 confectionery EPS, Cadbury plc would trade at £5.38.
- Current Confectionery PEs. As discussed above, using our $35 DPS estimate, Cadbury is trading at 17.3x 2008 earnings. Applying this to our 2008 confectionery EPS, Cadbury plc would trade at £5.71. Assuming the current “when issued” price of DPS, Cadbury is trading at 19.3x 2008 earnings, and applying this to our 2008 confectionery EPS, Cadbury plc would trade at £6.38.
- Premium to European Food Averages. After Cadbury spins the beverages business, we believe investors could value Cadbury plc to reflect the huge upside potential from 3-4 years of strong top-line growth and outstanding margin growth. In addition we do expect increased bid speculation given that, as a standalone confectionery business, Cadbury could be an attractive acquisition target. Valuing the confectionery business at a 10% premium to its Food peers would give a 2008 PE of 17.9x such that Cadbury plc would trade at £5.92.
- Global Confectionery Multiples. Valuing Confectionery using Global confectionery peer multiples (i.e. the average of Hershey and Wrigley, pre-acquisition), less a “prudent” 15% discount to reflect lower food multiples in Europe, gives a 2008 PE of 18.9x and would mean Cadbury plc would trade at £6.23.
We estimate a valuation towards the top-end of the range, at £5.75 to £6.25 on the first day of trading. However, it should be emphasised that comparison to the previous pre-split price will be deceptive/meaningless, even though Cadbury plc will (rather confusingly) be retaining the CBRY ticker. To compare the stocks/prices will be comparing apples and oranges.
More importantly, looking forward, we believe that by mid-late 2009, Cadbury management will have convinced investors of the strength of the business by achieving +6% organic growth and +140bps margin growth in FY 2008 and H1 2009, and investors will be more convinced that this performance can be sustained for 2009-2011. Consequently we would expect Cadbury to be trading in line with our more aggressive confectionery valuations. Based on our 2010 estimates (which would still be before the end of the rapid margin acceleration plan, with margins of 13.6%), we estimate confectionery EPS at 30.3p (or 47.3p for new Cadbury plc), which would be 44% above 2008’s levels. We believe the confectionery business could trade at between 18x and 19x, giving a value of £8.50 to £9.00. Again, bid speculation should provide a strong tailwind too. We rate Cadbury outperform with a price target of £7.95.
HT:
right – a quick political diversion
HT:
something just popped in from BGC’s David Buik
PM:
right
HT:
Money is pouring for the “Big Blond Bomber!” This could be a very happy weekend for the boys and girls in blue!
HT:
Boris is beginning to look “home and hosed.” apparently
PM:
is it fair to say you are right leaning helen?
PM:
back to Barclays for a mo
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Bruce Elder has just been on — complaining that he is not on holiday
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Just working out his notice
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And also being v helpful
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here’s an interesting note on Barclays from Bryce
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BRYCE not bruce
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Note from Dresdner Klienwort
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We cut Barclays to Reduce from Hold to reflect expected share issuance and tough
capital markets; our new EPS is 12% below 2009 consensus. We expect £3bn more
writedowns and £3bn of equity raising plus an interim scrip dividend. Without action,
we foresee a 4.7% equity tier 1 ratio for H1 2008. Given the current environment and
the group’s growth aspirations, we expect management to boost capital ratios.
PM:
We forecast a £3bn share issue and an interim scrip dividend: On a ‘do nothing’
basis we expect the equity tier 1 ratio to fall to 4.7% for H1 2008. Even if management is
comfortable with that level, we do not think that the market would agree and so the
shares would likely not benefit. Beyond the scrip, we do not believe that the company will
cut the dividend per share. Our forecasts show a 6.0% equity tier 1 ratio at year end.
► Another £3bn of writedowns in H1 2008: We forecast £3bn of writedowns this year.
Using RBS’s marks suggests £9bn, but Barclays appears to have better quality assets
and we think that RBS has taken a very cautious position. If management does not raise
equity then we would expect suspicion to linger that the company has only taken what it
can afford rather than what’s needed. We expect £700m positive own debt revaluation.
PM:
A large appetite for growth, which requires capital: Management is clear that it sees
many growth opportunities. Bob Diamond sees them in the US for BarCap, from which he
‘won’t flinch’. At the recent investor seminar, the retail and commercial banking division’s
CEO said his ambition and strategy are all about the division as a growth engine. We are
in favour of growth, but it requires capital as profits tend to lag asset growth.
► For 2009, stock is on 7x P/E, 1.7x tangible book, 7% yield: The shares have a lower
P/E than the European banks average of 8.2x, but given the risks surrounding more
writedowns than we forecast and the group’s exposure to capital markets, we believe that
the shares are unattractive. Our new 450p target price is in line with the current share
price but we cut to Reduce in the context of a sector with 21% upside on average.
PM:
But that is not as yet showing thru in Barclays price
HT:
how nice – the FT.com news editor Andrew Slade has just popped up with a mini bottle of champagne for me
PM:
Very nice. Forgot it was not public internally
PM:
Shall we make another internal announcement
HT:
let’s talk about the housebuilders
PM:
After eight years at the FT and Pearson, and having led the transformation of FT.com, Ien Cheng is leaving the FT to join Google’s European leadership team as Director of Product Management for advertising products.
HT:
The talk today is about mergers in the sector
HT:
There is supposed to be interest in Bovis Homes – and someone else, as yet unnamed.
PM:
Now hearing the name Redrow — but…..
PM:
I don’t believe this. It’s just brokers making up stories to try and generate a bit of business. In my view
HT:
Hmm. Tho we have peddled a few takeover stories in the housebuilding sector right here on ML
HT:
all proved to be well off beam
PM:
Hang on hang on.
PM:
They might not have come to fruition. But that doesn’t mean they were wrong.
HT:
well from a share price perspective they look pretty wrong
HT:
but I’ll shush – or Neil Hume will be after me
PM:
Bovis up 5.25p at 468
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We can all blame Helen
HT:
get blamed for everything now I’m off
PM:
Hopefully get a pro back next week
HT:
but it was my PC creating the probs
PM:
Not just your i think
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Sorry for the tech probs
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But thanks for bearing with us
HT:
have a good weekend one and all
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And thank you Helen for stepping in
PM:
We will be back on Monday at 11am. Internet permitting
