Markets live chat transcript for the chat ending at 12:11 on 19 May 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Markets Live.
PM:
This is FT Alphaville’s daily markets discussion
PM:
Neil Hume is not with me.
PM:
Hopefully he will be soon
PM:
I was thinking that wather than rambling on as per usual – we could go straight to a major feature this morning.
PM:
But instead I am going to rambe on
PM:
Lots to celebrate this morning.
PM:
Yeap, Reuters screen is fixed. Can now get company data with prices
PM:
Great step forward. Culmination of weeks of work.
PM:
Internet explorer was knackered. Needed to be reloaded.
PM:
will also want to celebrate Portsmouth’s historic victory.
PM:
I had a text from someone at Wembley
PM:
Pee-orts-muff! Always nice to hear ‘Stand up if you hate Scummers’ at Wemblee
PM:
Actually, watching the scenes of the crowd took me back more than two decades.
PM:
I don’t have any warm feelings for Portsmouth as a city at all.
PM:
It’s just poor and too white and gaunt.
NH:
sorry to disturbe this rant
PM:
Oh, Hello Neil
NH:
but morning all
PM:
Portsmouth — It’s just one of those places – like Swindon, say, or Walworth – where all vaguely above average intelligence is constantly siphoned off the gene pool.
NH:
That’s a bit harsh.
PM:
As people grow up and leave
PM:
No its not.
PM:
And apologies to Monkey and other portsmouthians who migh harbour fond memories.
PM:
But I haven’t got any. Just watching fights – or running away from them.
PM:
Stupid drunk matlows all over the place.
PM:
And skate bait.
NH:
What are you going on about Murphy
NH:
You talking some Pompey language?
PM:
Waayu-lu-in at, mush?
NH:
Mush?
PM:
Yeah, mush!
PM:
Face. Or ‘another person, usually male.’
PM:
Oi. You. Mush.
PM:
Portsmouth is a stupid, violent city with crap pubs and the worst curry houses on the planet.
PM:
I came to college in London and lived for a while in New Cross. I remember commenting on how relaxed and safe the place felt, and that you didn’t have to look over your shoulder every time you walked down the street.
PM:
People thought I was being sarcastic. But it was true.
PM:
Sorry Monkey
PM:
NH:
Rather than rambling on as per usual – we are going straight to a major feature this morning.
NH:
Straight to Bradford, Bingley and Bungle.
PM:
The triple B bank.
NH:
Mafair’s finest having a pop at it this morning.
PM:
Pop? Both barrels, looks like.
PM:
Stock’s down 13.2p at 119.75p.
PM:
fall of 10 per cent
NH:
Speculators based in the vicinity of Curzon Street seem to be trying to force the stock down through its theoretical ex-rights price.
PM:
Which is?
NH:
Well, circa 105p at the mo.
NH:
or 129p based on the price is was trading at the close of business on May 13
PM:
Hmm. Theoritical ex-rights stuff. Used to do this in a jiffy during the last recession.
PM:
In theory, assuming all the rights are taken up, if the cash call results in 64 per cent more stock in issue – as with BBB’s 16-for-25 issue – then the ex-rights price is 64 per cent less than today.
PM:
Actually — that per centage is wrong
NH:
Whatever, the hedgies are going to try and force a situation where all this new stock is left with the underwriters.
PM:
Who is that – Citi and UBS?
NH:
Think so – but they will have sub-underwritten.
PM:
Hmm – underwriters on risk. What fun.
PM:
But I am confused.
NH:
Why?
PM:
Well, you know Damian Reece of the Telegraph Media Hub, has complained to the FSA about BBB supposedly misleading the market by denying in April that the bank was considering a rights issue.
NH:
Yes, there was a fresh update on that on Saturday. I will dig it out.
NH:
HAVING complained to the Financial Services Authority (FSA) on Wednesday about the conduct of Bradford & Bingley, I promised readers an update. You may recall that on April 13 The Sunday Telegraph revealed that B&B was considering a rights issue.
The next day the company denied this in a statement and repeated the denial to anyone who subsequently asked, only to announce the rights issue it had been busily considering on May 14. I’ve now received an initial response from the FSA which told me it does not comment on individual firms.
It elaborated by saying that “it is, of course, possible for announcements made to the market to be overtaken if circumstances or decisions made by the issuer change”.
The next day the company denied this in a statement and repeated the denial to anyone who subsequently asked, only to announce the rights issue it had been busily considering on May 14. I’ve now received an initial response from the FSA which told me it does not comment on individual firms.
It elaborated by saying that “it is, of course, possible for announcements made to the market to be overtaken if circumstances or decisions made by the issuer change”.
NH:
Fair point but irrelevant in this case because B&B didn’t change its mind. It was considering a rights issue as we reported – the proof is the fact that it subsequently announced one. Neither did it suddenly start considering one after our original report, because we knew of the company’s deliberations back in April when we originally wrote about it.
If the FSA’s reply means it won’t be investigating the affair, then we will simply redouble our efforts to prove our story was accurate. If this case is not worthy of investigation, I don’t know what is. The FSA proved itself lacking, to say the least, over Northern Rock. Surely it’s not going to repeat the mistake again so soon.
If the FSA’s reply means it won’t be investigating the affair, then we will simply redouble our efforts to prove our story was accurate. If this case is not worthy of investigation, I don’t know what is. The FSA proved itself lacking, to say the least, over Northern Rock. Surely it’s not going to repeat the mistake again so soon.
NH:
And then there was also a piece in the Sunday telegraph by Mark Kleinman. – since it was his colleague Louise Armistead who got the original story.
PM:
I like Louise. I have no idea why she is working at the Telegraph,
NH:
It genuinely gives me no pleasure to describe in this week’s column the sorry tale of Bradford & Bingley, one of our biggest mortgage lenders and a company with which you’re no doubt familiar.
This tale of woe began five weeks ago when this newspaper, acting on a tip-off to my colleague Louise Armitstead, ran with a story outlining B&B’s deliberations over a rights issue to raise several hundred million pounds.
This tale of woe began five weeks ago when this newspaper, acting on a tip-off to my colleague Louise Armitstead, ran with a story outlining B&B’s deliberations over a rights issue to raise several hundred million pounds.
NH:
Not so, said B&B on the morning that our story was published. “Contrary to press speculation today, Bradford & Bingley announces that it is not intending to issue equity capital by way of a rights issue or otherwise,” it stated.
Pretty emphatic, thought the market back in mid-April. Certainly it was enough to make us sample some humble pie and resolve, next time, to get our facts right.
Only we already had. Last Wednesday, B&B decided it was, after all, planning to raise several (three, to be specific) hundred million pounds in the form of “equity capital by way of a rights issue”.
Pretty emphatic, thought the market back in mid-April. Certainly it was enough to make us sample some humble pie and resolve, next time, to get our facts right.
Only we already had. Last Wednesday, B&B decided it was, after all, planning to raise several (three, to be specific) hundred million pounds in the form of “equity capital by way of a rights issue”.
NH:
Oh dear. For Steven Crawshaw, B&B’s rather embarrassed chief executive, the excuses could not pour forth from his lips quickly enough.
Crawshaw, who at least had the guts to call me on Thursday to explain his decision, said his board’s original statement had been necessitated by the likelihood that B&B “was not anticipating an orderly market in its shares”.
In other words, it’s fine to deny something you know to be true; much worse, clearly, to admit to considering a move likely to have a detrimental effect on your share price.
Crawshaw, who at least had the guts to call me on Thursday to explain his decision, said his board’s original statement had been necessitated by the likelihood that B&B “was not anticipating an orderly market in its shares”.
In other words, it’s fine to deny something you know to be true; much worse, clearly, to admit to considering a move likely to have a detrimental effect on your share price.
NH:
In truth, our use of the word “emergency” in the original story was marginal at that moment; but as commentators have been pointing out since Wednesday, a 16-for-25 rights issue hardly chimes with the idea of a company wearing the trousers in its investor relations department.
There are other important questions which have so far gone unanswered. Did Bradford & Bingley’s non-executives know how close the bank was to launching a rights issue at the time it issued a statement denying the plans? If they did know, was there unanimity about the board’s response?
The point of these comments is nothing at all to do with this newspaper having been wronged. Business journalism presents a fine balance between instinct, certainty and judgment. At a time of chronic uncertainty in financial markets, as these last months have been, that responsibility becomes more acute. There are times when newspapers get things wrong or call situations prematurely. In those situations, we hold our hands up. This was not one of them.
There are other important questions which have so far gone unanswered. Did Bradford & Bingley’s non-executives know how close the bank was to launching a rights issue at the time it issued a statement denying the plans? If they did know, was there unanimity about the board’s response?
The point of these comments is nothing at all to do with this newspaper having been wronged. Business journalism presents a fine balance between instinct, certainty and judgment. At a time of chronic uncertainty in financial markets, as these last months have been, that responsibility becomes more acute. There are times when newspapers get things wrong or call situations prematurely. In those situations, we hold our hands up. This was not one of them.
NH:
Which is why when the chief executive of a company upon which millions of Britons depend for the security of their homes is prepared to mislead them so flagrantly, his position might well have become untenable. Does he believe people are entitled to that view?
“It’s a free country,” was his response.
My view is that Crawshaw should probably go, if for no other reason than that during the last five weeks, lots of small shareholders in B&B will have been trading in its stock in blissful ignorance of the bank’s plans to dilute their investment.
“It’s a free country,” was his response.
My view is that Crawshaw should probably go, if for no other reason than that during the last five weeks, lots of small shareholders in B&B will have been trading in its stock in blissful ignorance of the bank’s plans to dilute their investment.
NH:
It is true that B&B’s rights issue was not the result of a misguided or punishingly expensive acquisition, but there’s a world of difference between springing something on the market without prior warning and ploughing on with a piece of corporate activity that’s already supposed to be off the agenda.
And if he does ultimately decide that it’s a resignation issue, Crawshaw shouldn’t worry: there are plenty of other B&Bs where he could spend his new-found spare time.
And if he does ultimately decide that it’s a resignation issue, Crawshaw shouldn’t worry: there are plenty of other B&Bs where he could spend his new-found spare time.
PM:
thanks for that
NH:
Are you still confused?
PM:
No – not really – I just find it ironic that the hedgies are making hay with this story – when it’s the Telegraph that vowed to go after the champagne swilling bank robbers that dared to question the financial strength of poor HBOS.
NH:
Hmm.
PM:
PM:
We should look at the other banks –
NH:
they are all rubbish
PM:
t for t 1 — referring to the KIO — Kuwaitis??
NH:
especially RBS
NH:
they were down 5% on Friday
NH:
and they are down by that much again this morning
NH:
off 14.25p at 252.25p
PM:
oh dear me
NH:
looks like Mayfair’s finest having another go
NH:
RBS really are very weak
NH:
and although there are lots of explanations out there
NH:
none real seems to get to the bottom of why they have lost 10% in two trading sessions
NH:
this is a big company
PM:
Very interesting
NH:
on Friday there was speculation of a problem at ABN
NH:
this seemed to be related to an options position
NH:
then there was talk there had borrowed a huge amount from BoE’s SLUSH fund
NH:
and then there was some complex explations about a load of retail punters getting their holdings in CREST and selling
NH:
but what does seem clear is that weakness can be pinpointed to Thursday’s closinig auction
NH:
ahead of the stock going ex-rights it got hammered and has not stopped since
NH:
if RBS has gone ex this badly what will happen to HBOS and BBB?????
PM:
I dont know what to add
PM:
helen has just published a note on BBB — wil be worth a read
PM:
Though it might be a bit Lux-esque
PM:
Sorry, Lex
Royal Bank of Scotland Group (RBS:LSE): Last: 254.25, down 12.25 (-4.60%), High: 269.00, Low: 250.75, Volume: 53.53m
HBOS (HBOS:LSE): Last: 457.00, down 12.25 (-2.61%), High: 472.25, Low: 455.00, Volume: 6.13m
Alliance and Leicester (AL:LSE): Last: 429.75, down 11.25 (-2.55%), High: 445.25, Low: 426.00, Volume: 1.09m
Bradford and Bingley (BB:LSE): Last: 118.75, down 14.25 (-10.71%), High: 133.50, Low: 118.75, Volume: 4.55m
PM:
PM:
Wider market
NH:
It is all about the mining sector AGAIN
NH:
they just keep going up, up, up
NH:
and the banks keep going down, down, down
PM:
Holding the FTSE up
PM:
Current reading is 14.4 at 6320
NH:
index being led higher by kazakhmys
NH:
stock up 102p at £19.25
NH:
that’s a gain of 5.5%
NH:
now, Credit Suisse has come out this morning and slapped a £27 target price on the Kazakh miners
NH:
and this is somewhat ironic as CS is joint broker to ENRC
NH:
which recently lobbed in a lowball offer of £15.50 for Kaz
PM:
Why worth 27 quid??
NH:
OK
NH:
Jeremy Grey, the mining analysts at CS, is a real bull
NH:
a total convert to the super cycle theory
NH:
anyway on Kaz
NH:
he has been looking at some of their “other businesses”
PM:
Kaz is mainly known as a copper producer
NH:
it is
NH:
But Mr Grey has been looking at its expansion into power and coal
NH:
he reckons the power business alone is worth 220p on the share price
NH:
here is a little factoid
NH:
did you know that Kaz is largest power supplier in Kazakhstan with 22.3% of the market share
PM:
er, no
PM:
didn’t know that
NH:
and that by 2015, the power ops could generate EBITDA of $700m
NH:
it makes just $70m at the moment
PM:
OK, lets have a look at the note
PM:
Ie got it
PM:
How many FTSE-100 stocks are trading on a PE of only 5.1x times? We believe that Kazakhmys is the cheapest company in our mining universe, producing copper which has arguably one of the best demand and supply dynamics of all our commodities.
The market took time to appreciate their 14.6% holding in ENRC. Now it seems the market is also underestimating the recent acquisition of 2,200 megawatts of power that has the potential to increase to 4,000 megawatts with an investment of only $650 million.
PM:
We think this power asset is worth £2.20 per share. The recent rally in ENRC means their 14.6% stake is now worth $5.4 billion or £6 per share. Net of the ENRC stake and the power assets, Kazakhmys is currently trading on only 5.1x times on ‘08 earnings. Our new price target of £27 per share implies a P/E of 9.4x ‘08 earnings (after stripping out the value of ENRC and the power business)
PM:
Figure 1: Kazakhmys – P/E excluding stake in ENRC and power business
Particulars Amount (£)
Current share price 18.4
Less: Value of stake in ENRC 6.0
Less: Value of the power business 2.2
Share price excl. stake in ENRC and power business 10.2
2008 EPS estimate 2.0
P/E excluding value of stake in ENRC and power business 5.1x
Particulars Amount (£)
Current share price 18.4
Less: Value of stake in ENRC 6.0
Less: Value of the power business 2.2
Share price excl. stake in ENRC and power business 10.2
2008 EPS estimate 2.0
P/E excluding value of stake in ENRC and power business 5.1x
PM:
Figure 2 illustrates the upgrades in our earnings estimates for 2008 and 2009 to reflect our increase in copper forecasts to $4.00 per pound, we did on April 28 in our note entitled Copper – Just like the summer of ’69. Our previous copper forecasts were $3.60 per pound in 2008 and $3.50 per pound in 2009. The reality is that copper supply fundamentals are so tight right now that any further strike action at Codelco could see prices break out to new highs. On a best case scenario, supply is growing by only 1.9% this year amidst a demand backdrop of 3-4%. Last year copper demand was 5%.
PM:
We arrive at our new price target price of £27 per share by taking our DCF for the group’s Kazakhstan copper operations of £18.8 per share and then adding their 14.6% stake in ENRC which is now worth £6 and then adding the recently acquired power business of £2.2 per share. Some investors may argue that the ENRC stake deserves a holding discount. Given our positive outlook for ferrochrome, which is ENRC’s largest business we think this value is likely to increase further going forward
PM:
bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
PM:
(Thanks t for t 1)
NH:
and it worth noting that from June 6, Kaz will be free to sell its holding in ENRC
NH:
and given the run ENRC has had, I wonder if they will lob it out
PM:
ENRC shares are currently up 27 p at 14.71
PM:
Floated at 540p back in December — extraordinary run
NH:
mind you it does have next to no free float
NH:
so it is very easy to squeeze higher
NH:
here’s a bit more on the coal and power ops of Kaz
NH:
We value the power business at $2 billion assuming that their output could triple in the next 6 years as scheduled. Our valuation also assumes that the power tariffs in
Kazakhstan could grow by 15%pa, which we believe to be conservative considering that the country has one of the lowest power tariffs in the world (Figure 4) and the recent increases in thermal coal prices. On 5th February 2008, Kazakhmys announced the acquisition of Ekibastuz, the largest power plant in Kazakhstan and its associated Maikuben West coal mine for a total acquisition cost of $1,481 million
Kazakhstan could grow by 15%pa, which we believe to be conservative considering that the country has one of the lowest power tariffs in the world (Figure 4) and the recent increases in thermal coal prices. On 5th February 2008, Kazakhmys announced the acquisition of Ekibastuz, the largest power plant in Kazakhstan and its associated Maikuben West coal mine for a total acquisition cost of $1,481 million
NH:
With this acquisition, Kazakhmys has become the largest power supplier in Kazakhstan with 22.3% of the market share. In 2007, the Ekibastuz power plant produced 9,434 GWh of electricity with an operational capacity of
2,250MW.
2,250MW.
Nearly 20% of the coal requirements of the power plant is fed by the Maikuben
West coal mine (3.1 million tonnes of annual coal capacity) which has an estimated mine life of 30 years, according to the group. Kazakhmys intends to double the capacity of the power plant from 2.2GW in 2007 to 4.0GW by 2014 by spending $650 million in the next three years.
NH:
The increase in capacity would triple the output from 8,900GWh in 2007 to
27,000GWh in 2014. Management believe that EBITDA from the power business could grow as much as 10 times from $70 million in 2007 to $700 million by 2015.
This acquisition appears to be master stroke with the rapidly growing power demand in Kazakhstan and Russia, which are dominant players in power intensive industries such as magnesium (19,000KWh/tonne), aluminium (15,000KWh/tonne), steel (7,000KWh/tonne) and zinc (6,000KWh/tonne) due to very low power tariffs.
27,000GWh in 2014. Management believe that EBITDA from the power business could grow as much as 10 times from $70 million in 2007 to $700 million by 2015.
This acquisition appears to be master stroke with the rapidly growing power demand in Kazakhstan and Russia, which are dominant players in power intensive industries such as magnesium (19,000KWh/tonne), aluminium (15,000KWh/tonne), steel (7,000KWh/tonne) and zinc (6,000KWh/tonne) due to very low power tariffs.
The power tariff in Kazakhstan is one of the lowest at USc1.8/kWh followed by Russia with USc2.5/kWh. According to Kazakhmys, the power demand could increase by 8% in 2008 and 5-6% in long term.
NH:
Clearly the outlook for pricing of power of Kazakhstan has a major bearing on the
valuation of these assets. The Government of Kazakhstan’s view is that prices need to
increase at a reasonable rate (without hurting the consumer too much) to encourage
investment in the sector to avoid potential power shortages, which South Africa has
recently experienced. The previous owners of Ekibastuz, AES invested less than $150
million in the assets over the last 10 years, which is symptomatic of an industry that has suffered chronic under-investment. Going forward, Kazakhmys are likely to invest 4 times that to increase the operation’s generating capacity.
valuation of these assets. The Government of Kazakhstan’s view is that prices need to
increase at a reasonable rate (without hurting the consumer too much) to encourage
investment in the sector to avoid potential power shortages, which South Africa has
recently experienced. The previous owners of Ekibastuz, AES invested less than $150
million in the assets over the last 10 years, which is symptomatic of an industry that has suffered chronic under-investment. Going forward, Kazakhmys are likely to invest 4 times that to increase the operation’s generating capacity.
PM:
very interesting
PM:
given the dependency of the Kazak economy on mining and oil, it is a fair bet that there is going to be loads of investment in power and associated
PM:
But was just looking at the screen to try and work out what the free float is
PM:
Reuters dont have numbers for major “inside” shareholders
NH:
which is incredibly poor for a system that costs £1,000′s a month
PM:
But it looks like barely 10 per cent is free
NH:
it is a FTSE 100 company after all
PM:
I think it is ridiculous that companies with small freefloats are included in the FTSE 100
NH:
yeah but who is going to block it???
NH:
the LSE? no
NH:
the UKLA?? no
NH:
the investment banks?? no
PM:
Maybe fTSE itself
NH:
of course, Kaz is not the only miner up this morning
Vedanta Resources (VED:LSE): Last: 2,679, up 118 (+4.61%), High: 2,679, Low: 2,581, Volume: 985.36k
Lonmin (LMI:LSE): Last: 3,569, up 119 (+3.45%), High: 3,572, Low: 3,454, Volume: 334.19k
Anglo American (AAL:LSE): Last: 3,652, up 112 (+3.16%), High: 3,663, Low: 3,568, Volume: 1.99m
NH:
all on the move
PM:
Good moves
NH:
and that looks down to an upgrade at Citi, where a new mining analyst has taken over
PM:
Who is that?
NH:
Heath Jansen
NH:
the previous incumbent Craig Sainsbury, quit last week to go and work in-house at BHP Billiton
NH:
anyway, Mr Jansen has taken a fresh look at the sector
NH:
and guess what
NH:
he is bullish too
NH:
There has been a lot of market chatter as to whether we are seeing a
commodities bubble that is about to burst (our strategy team addressed this
issue last week asserting that, though perhaps closer in the UK, we are not in
bubble territory), with many industry observers calling the top of the cycle.
commodities bubble that is about to burst (our strategy team addressed this
issue last week asserting that, though perhaps closer in the UK, we are not in
bubble territory), with many industry observers calling the top of the cycle.
While we cannot ignore the wave of investment that has flowed into the sector
of late, and the potential unwinding of this trade, we also cannot ignore
fundamentals.
NH:
We believe we are half way through a secular upswing for
commodities and that commodity consumption will remain above trend levels
for the next four to five years.
commodities and that commodity consumption will remain above trend levels
for the next four to five years.
The debate as to how far China (and the rest of the developing world) decouples from a Western slowdown will no doubt keep running. For us, the killer of the cycle would be if developing world nominal GDP growth falls below the cost of capital, and we do not expect to see this any time soon.
NH:
This is of course not just a demand story, and we expect supply to
remain constrained. The supply outlook for each commodity is going to depend
on whether prices rise to the point where returns beat the cost of capital of
investing. This would appear to favour base metals over bulks.
remain constrained. The supply outlook for each commodity is going to depend
on whether prices rise to the point where returns beat the cost of capital of
investing. This would appear to favour base metals over bulks.
So what does this all mean for the stocks? The current cycle has been predominately driven by price; however, margins could come under pressure from increased costs,
potentially resulting in a derating of the sector. Our in-depth look at costs and
incentive prices suggest we will see higher long-term margins than the industry
has experienced over the past 20 years, but at lower levels than the companies
are enjoying. On the back of this work we have upgraded Anglo American
(AAL.L; £35.40; 1M) and Vedanta (VED.L; £25.61; 1H) to Buys, raising our
price targets to £40 and £30.61, respectively. Our top picks are Anglo
American, First Quantum (FQM.L; £44.59; 1M), Kumba Iron Ore (KIOJ.J;
R315.05; 1M), Peter Hambro Mining (POG.L; £13.48; 1H), Vedanta, Ferrexpo
(FXPO.L; £4.11; 1M) and Xstrata (XTA.L; £43.13; 1M).
NH:
In terms of trading the sector, after a strong run, we have hit levels, in price terms, which have historically suggested a good time to take some profits. There are four
occasions since 2003 when the sector has jumped at least 20% in two months,
on average giving back 6% in the ensuing month. Three months subsequent,
the sector has still tended to be in negative territory. But, as we said, we
remain structural bulls and believe investors should either trade the dips or
just stay on for the ride.
In terms of trading the sector, after a strong run, we have hit levels, in price terms, which have historically suggested a good time to take some profits. There are four
occasions since 2003 when the sector has jumped at least 20% in two months,
on average giving back 6% in the ensuing month. Three months subsequent,
the sector has still tended to be in negative territory. But, as we said, we
remain structural bulls and believe investors should either trade the dips or
just stay on for the ride.
NH:
and here are the upgrades in a little more detail
NH:
We have then used these long term prices and margins in determining our
valuations and multiples for the companies under coverage. We have ranked
the companies according to five valuation criteria:
1. Long Term returns and margins
2. Compound earnings growth from 2007 to 2010E
3. Forward PE
4. Free cash flow yield and acquisition potential
5. Volume growth
valuations and multiples for the companies under coverage. We have ranked
the companies according to five valuation criteria:
1. Long Term returns and margins
2. Compound earnings growth from 2007 to 2010E
3. Forward PE
4. Free cash flow yield and acquisition potential
5. Volume growth
The results are summarised in the table below. We have raised our target
prices and recommendations to Buy from Hold for AAL and VED, driven by a
combination of high returns, strong cash flows and production growth.
NH:
VED: We upgrade Vedanta to Buy/High Risk (1H) from Hold/High Risk,
following a detailed study of sustainable margins and returns. Vedanta is
also a unique play on the Indian economy. India continues to grow rapidly
and significant investment and construction is underway in the region.
Metals demand is on the increase and growth is roughly double what we see
in the Western world. Our 12-month target price for Vedanta is £30.61,
reflecting the near-term commodity and earnings outlook as well as longerterm
production growth. The target price reflects the improving operational
performance over the next 12 months as well as the improving
economic/commodity price environment.
following a detailed study of sustainable margins and returns. Vedanta is
also a unique play on the Indian economy. India continues to grow rapidly
and significant investment and construction is underway in the region.
Metals demand is on the increase and growth is roughly double what we see
in the Western world. Our 12-month target price for Vedanta is £30.61,
reflecting the near-term commodity and earnings outlook as well as longerterm
production growth. The target price reflects the improving operational
performance over the next 12 months as well as the improving
economic/commodity price environment.
NH:
AAL: Similarly, we have upgraded AAL to Buy/Medium Risk (1M) from
Hold/Medium Risk, following a detailed study of sustainable margins and
returns. Our 12-month target price for AAL is £40 reflecting the near-term
commodity and earnings outlook as well as longer-term production growth.
We also update 2007 EPS to reflect actuals.
Our favoured stocks are Anglo American, First Quantum, Kumba Iron Ore,
Peter Hambro Mining, Vedanta, Ferrexpo and Xstrata.
Hold/Medium Risk, following a detailed study of sustainable margins and
returns. Our 12-month target price for AAL is £40 reflecting the near-term
commodity and earnings outlook as well as longer-term production growth.
We also update 2007 EPS to reflect actuals.
Our favoured stocks are Anglo American, First Quantum, Kumba Iron Ore,
Peter Hambro Mining, Vedanta, Ferrexpo and Xstrata.
NH:
NH:
actually, just going back to the note that the strategy team at Citi put out on Friday
PM:
What about the mining sector?
NH:
yeah
NH:
it asked the question is the mining sector in a TMT type bubble
NH:
and it was very interesting
NH:
the mining sector has outperformed the market for the last decade pretty much
NH:
I think there were just two years where it lagged small
NH:
and despite the massive share price moves
NH:
the sector has not been re-rated
NH:
it has traded and continues to trade on around 12 times earnings
NH:
obviously this is in stark contrast to the dot.com boom
NH:
where valuations and earnings lost touch with each
NH:
the relationship completely broke down.
NH:
any views out there??
NH:
Paul, what do you think??
PM:
I really don’t know
PM:
there are two polemic views — one says banks are now looking cheap
PM:
The other says the entire world has moved on its hinge — adn that if you arent in resource stocks…
PM:
Comparisons with TMT are natural
NH:
this whole debate about the parallels between the dot.com boom and the mining boom is fascinating
PM:
But the rise of China, India etc is tangible
PM:
Can you put some of hte note up?
NH:
yep, here it is for any of you that missed it
NH:
Most performance measures would have sympathy with bubble believers. The
performance of Mining has been staggering over the past few years. Figure 27
shows that £100 invested in the sector at the start of 1999 would be worth
around £1500 now. Since, start-1999, the Mining sector has outperformed the
UK market by over 800%. No luck here for mean reverters.
performance of Mining has been staggering over the past few years. Figure 27
shows that £100 invested in the sector at the start of 1999 would be worth
around £1500 now. Since, start-1999, the Mining sector has outperformed the
UK market by over 800%. No luck here for mean reverters.
NH:
In fact, Mining has outperformed in 8 of the last 10 years; in 6 of those years
by more than 20%. Its worst year was 2000 when the sector recorded a 9%
underperformance. Year-to-date, Mining has already outperformed by almost
30%, following on from a near-50% outperformance last year.
by more than 20%. Its worst year was 2000 when the sector recorded a 9%
underperformance. Year-to-date, Mining has already outperformed by almost
30%, following on from a near-50% outperformance last year.
NH:
Plotting the performance of Mining (since 1999) and TMT (since March 1995)
compares the returns that fund managers would have enjoyed from these
trades. Both absolute (Figure 31) and relative (Figure 32) returns show that
Mining performance has dwarfed that of the late 1990s TMT experience.
compares the returns that fund managers would have enjoyed from these
trades. Both absolute (Figure 31) and relative (Figure 32) returns show that
Mining performance has dwarfed that of the late 1990s TMT experience.
NH:
But, it was not just the performance of TMT that caused so much pain (or joy)
for UK investors. It was also the weight of TMT in the UK market. TMT peaked
at 35% of the UK market, having been just 10% a couple of years earlier. A few
years later, the group is back to a 10% weight.
for UK investors. It was also the weight of TMT in the UK market. TMT peaked
at 35% of the UK market, having been just 10% a couple of years earlier. A few
years later, the group is back to a 10% weight.
NH:
Figure 33 shows that Mining has recently become a more meaningful weight
than TMT in the UK. This is thanks to persistent outperformance and also to
new index joiners, from the Kazakmys and Xstrata to more recent joiners such
as ENRC and Ferrexpo. The UK market (main board and AIM) have been a
popular destination for Mining groups the world over.
Historically, it has been tough for one sector, or one group of sectors, to
maintain more than a 25-30% weight in the UK market. This was the case for
Oils in the late 1960s and 1970s. TMT found the same at the end of the 1990s.
Financials have recently rubbed up against this same invisible barrier.
than TMT in the UK. This is thanks to persistent outperformance and also to
new index joiners, from the Kazakmys and Xstrata to more recent joiners such
as ENRC and Ferrexpo. The UK market (main board and AIM) have been a
popular destination for Mining groups the world over.
Historically, it has been tough for one sector, or one group of sectors, to
maintain more than a 25-30% weight in the UK market. This was the case for
Oils in the late 1960s and 1970s. TMT found the same at the end of the 1990s.
Financials have recently rubbed up against this same invisible barrier.
NH:
On its own, the Mining sector remains some way off this level, at 12% of the UK
market. But, with other Resources sectors — Oil & Gas and Chemicals — the
weight of this commodities group has moved above 30% in the past few weeks.
This does not mean, by itself, that this is the end of the road for this group.
But, never before has one group of sectors dominated the UK market by much
more than this.
market. But, with other Resources sectors — Oil & Gas and Chemicals — the
weight of this commodities group has moved above 30% in the past few weeks.
This does not mean, by itself, that this is the end of the road for this group.
But, never before has one group of sectors dominated the UK market by much
more than this.
NH:
World domination
Another simple way of looking at the increasing dominance of one group within
the equity market is simply to look down the list of the largest constituents.
Figure 35 shows the current top 10 stocks in the FTSE 100 and the same list at
the end of February 2000.
Another simple way of looking at the increasing dominance of one group within
the equity market is simply to look down the list of the largest constituents.
Figure 35 shows the current top 10 stocks in the FTSE 100 and the same list at
the end of February 2000.
NH:
Then, there were only three TMT stocks in the top 10. Now, there are 7
Resources stocks. In their pomp, TMT stocks in the top 10 accounted for 21%
of FTSE 100 stocks; the top 10 altogether represented 44% of the FTSE 100
index. Now, Resources stocks in the top 10 account for 32% of the FTSE 100
market cap, with the top 10 overall representing almost 50% of the index.
All of this means that like 1999-2000, the UK index has become very
concentrated once again, and in a few stocks from the same grouping. In fact,
this time it is worse.
Resources stocks. In their pomp, TMT stocks in the top 10 accounted for 21%
of FTSE 100 stocks; the top 10 altogether represented 44% of the FTSE 100
index. Now, Resources stocks in the top 10 account for 32% of the FTSE 100
market cap, with the top 10 overall representing almost 50% of the index.
All of this means that like 1999-2000, the UK index has become very
concentrated once again, and in a few stocks from the same grouping. In fact,
this time it is worse.
NH:
So, performance and index weights suggest that there are similarities between
Mining (and Resources) and the late-1990s TMT experience. What about
earnings and valuation?
Figure 36 to Figure 39 shows absolute and relative price and earnings trends
for TMT and Mining since 1993. Prices lost connection with earnings trends for
TMT from 1997-98. The bubble was born as investors bought into new
paradigm economic growth, the power of the internet and growth ever-after.
Amen. Sadly, it would take more than a prayer to save heavily invested TMT
investors.
Mining (and Resources) and the late-1990s TMT experience. What about
earnings and valuation?
Figure 36 to Figure 39 shows absolute and relative price and earnings trends
for TMT and Mining since 1993. Prices lost connection with earnings trends for
TMT from 1997-98. The bubble was born as investors bought into new
paradigm economic growth, the power of the internet and growth ever-after.
Amen. Sadly, it would take more than a prayer to save heavily invested TMT
investors.
NH:
It has been a different story for Mining. Price and earnings trends have tracked
each other closely. Earnings performance has justified stellar share price
performance from Mining stocks.
each other closely. Earnings performance has justified stellar share price
performance from Mining stocks.
NH:
The discrepancy between price and earnings trends led to a mammoth rerating
for TMT at the end of the 1990s. The group headed towards a P/E of
50x, which sounds shocking now. In relative terms, TMT traded on more than a
100% premium to the market.
for TMT at the end of the 1990s. The group headed towards a P/E of
50x, which sounds shocking now. In relative terms, TMT traded on more than a
100% premium to the market.
NH:
For Mining, there has been no re-rating. Performance has been earnings
driven. The sector has traded on an average 12-month forward P/E of 12x since
2000, now still trades on a sub-13x 12-month forward P/E and has only in the
past couple of months moved back to a small premium rating against the
market.
driven. The sector has traded on an average 12-month forward P/E of 12x since
2000, now still trades on a sub-13x 12-month forward P/E and has only in the
past couple of months moved back to a small premium rating against the
market.
NH:
But, many investors fear that, rather than seeing a P/E or re-rating bubble,
Mining is benefiting from an earnings bubble. Certainly, in the short-term, our
analysts calculate that share prices are up with spot commodity prices7. This
may well be the case. But, for this earnings bubble to unwind, we would need
to see either a collapse in demand, a rush of supply or the disappearance of
speculative influences on commodity prices. Despite moderating global
demand and rising capex levels, it is hard to identify any of these forces at
work, yet.
Mining is benefiting from an earnings bubble. Certainly, in the short-term, our
analysts calculate that share prices are up with spot commodity prices7. This
may well be the case. But, for this earnings bubble to unwind, we would need
to see either a collapse in demand, a rush of supply or the disappearance of
speculative influences on commodity prices. Despite moderating global
demand and rising capex levels, it is hard to identify any of these forces at
work, yet.
NH:
Tactical
So, our simple bubble framework suggests that Mining is ticking a few more
bubble boxes than it did two years ago. But, importantly valuation and earnings
trends remain supportive for now. So, what should investors do with this thorny
issue? Is it time to take profits on this trade? Is it too late to get on board?
We suggest two ways that investors approach this issue. In the short-term,
Mining stocks have run hard and been re-rated. The sector has hit levels, in
price terms, that have historically suggested a good time to take some profits.
This has also been a reasonable indicator of prospective market weakness.
So, our simple bubble framework suggests that Mining is ticking a few more
bubble boxes than it did two years ago. But, importantly valuation and earnings
trends remain supportive for now. So, what should investors do with this thorny
issue? Is it time to take profits on this trade? Is it too late to get on board?
We suggest two ways that investors approach this issue. In the short-term,
Mining stocks have run hard and been re-rated. The sector has hit levels, in
price terms, that have historically suggested a good time to take some profits.
This has also been a reasonable indicator of prospective market weakness.
NH:
In the near-term, we are nervous about the market (and free rider trade) to
push on aggressively8. But, over the next 6-12 months, we would continue to
back a free rider strategy. This continues to focus on strong balance sheet
companies which have exposure to emerging markets and/or commodities. We
show a screen of potential free riders in Figure 47. There may be better entry
points for those investors with shorter-term investment horizons. We rank by
relative performance since mid-March lows with worst performers at the top.
There could be some relative catch-up to come from some of these more
defensive free riders.
push on aggressively8. But, over the next 6-12 months, we would continue to
back a free rider strategy. This continues to focus on strong balance sheet
companies which have exposure to emerging markets and/or commodities. We
show a screen of potential free riders in Figure 47. There may be better entry
points for those investors with shorter-term investment horizons. We rank by
relative performance since mid-March lows with worst performers at the top.
There could be some relative catch-up to come from some of these more
defensive free riders.
PM:
Thanks for all taht
PM:
PM:
What else is moving?
NH:
shall we have a look at some deal news
PM:
Sure
NH:
Enodis
PM:
As predicted here on Firday
PM:
Manitowoc have returned with a higher offer
PM:
although not quite a level we heard
NH:
er, no
NH:
it’s 294p plus a 2p dividend
NH:
enodis shares currently trading at 305p
PM:
so, the market is expecting ITW to come back with another bid
NH:
yep and so are we
PM:
what are you hearing?
NH:
well the latest market intelligence suggests the following;
NH:
ITW will come back with an offer around 10p above the MTW’s latest effort
NH:
apparently this could happen in a few days because ITW have the firepower (company’s market cap is $28bn)
NH:
and they had been expecting this
NH:
should that come to pass
NH:
they expect MTW to bid again
NH:
apparently they have the firepower to go all the way to 330p
NH:
which sounds a bit toppy to me
NH:
but then again MTW needs Enodis
NH:
it has to rebalance its foods service business, which is too weighted to the cold side – fridges, ice machines etc – and the US
NH:
of course there are some strange things about today’s news
PM:
Such as?
NH:
it does not look as it MTW approached the board of Enodis seeking a recommendation for its new offer
PM:
why would it not do that?
NH:
well, one reason is that ITW will have fewer competition issues that MTW
NH:
so the board my view is previous offer of 282p as more deliverable
NH:
just looking at this morning’s statemetn again
NH:
and the bit on contact details
PM:
And?
NH:
well, there’re aren’t any to speak of
NH:
no bankers
NH:
no London based PR
NH:
no US PR for that matter
NH:
just one company exec
NH:
Carl Laurino
Senior Vice President & Chief Financial Officer
+1 (0) 920 652 1720
Senior Vice President & Chief Financial Officer
+1 (0) 920 652 1720
PM:
NH:
and guess what
NH:
MR Laurino can’t be raised at the moment
PM:
he will be in bed
NH:
PM:
Got any analysts comment?
NH:
quick bit of stuff from Evolution Secs
NH:
Three strands to consider on the back of the 294p reply from Manitowoc for Enodis – can ITW come back? Yes; UK engineers are jacks in the land of giants – global niche with strong market shares – bid activity will only increase, note Chloride/Emerson; and IMI has a strategic decision to make re Drinks dispense. The Thursday presentation is timely and the lifting of forecasts post the IMS is a major positive. Our 557p price target is very conservative and compares to our high case 633p which gives a clearer picture of the upside.
NH:
DETAILS – The 294p bid from Manitowoc compares to ITW’s 280p, M’s orginal bid at 260p and the 140p Enodis price in April. Can ITW come back? Yes – ITW is a $28bn entity with debt of $2.3bn – $2.5bn for Enodis is not a problem.
The takeout multiple is now 21.5x against a sector on 11x. Our jack in the land of giants theme is most visibly highlighted by our largest stock Invensys: it would rank at number 70 in US industrials between Equifax Inc and Navistar. UK engineers are global niche entities with high market shares and therefore attractive to underleveraged global industrial mega cap wanting to boost slowing growth rates.
VALUATION AND RECOMMENDATION – IMI is hosting a presentation on its Drinks Dispense business this Thursday. Typically these presentations are full of detail and not the platform for major strategic announcements. However, the Enodis situation crystallises the mind in the context of the growing concentration within the broader food service eq industry.
NH:
Manitowoc post Enodis would be a $2bn+ sales entity in this segment against IMI at $600m. It raises the question of whether IMI should be in or out with sentiment lagging to the latter. Post the IMS on the 9th, our upgraded 2008 eps number is 46p and if we adjusted for currency we get to 50p, a rough consensus, with a high of 52p. In our sotp, our 557p has Beverage on just 1x sales. If we put in the Enodis number we get to 594p and if we further adjust to put severe service on a Weir 18x type multiple, we get to 633p which is still on 12.7x consensus. If there is a bid for IMI it starts with a 7.
PM:
(wheniwhere young — we use Firefox on our reg terminals, bu the dedicated Reuters terminal uses IE automatically. Firefox does not work with R 3000)
PM:
Thanks for that Neil
PM:
PM:
Interested note below on RBS
NH:
stock getting smashed as we write
NH:
now down 17p at 249p
NH:
can’t be the goldman note
NH:
just looked at that and it is purely technical – adjusting for rights issue
NH:
just bringing the price up on RBS
NH:
short 20% fall in ten days
NH:
wow
NH:
get the 
on
onNH:
and RBS does not even have a great retail investor base like HBOS or BBB
PM:
Just looking at the chart — it is quite terrifying
PM:
Got nil paids?
PM:
down 25% at 50p
NH:
this really is not going well
PM:
Wonder whether anyone will try and support that NP price
NH:
does not bode well for the other banking cash calls
PM:
Starting to see why Barclays indicated they would hold off for now
PM:
PM:
Helen’s fan club noted below
PM:
She’s here for a bit longer
PM:
Collins Stewart — what’s going on there?
NH:
more woe in the financial sector
NH:
IMS this morning
NH:
and the stock weak on the back of it
PM:
Off 5.25p at 101.25
NH:
just had a note in from Sarah Spikes, the financials analyst at arden Partners
PM:
Spikes ex-FT, we shoudl note
NH:
she is a buyer of CS still, but thinks today’s numbers are a little light
PM:
Hmm.
NH:
Unaudited revenue for the four months to Apr 30 was at £57.6m down 21% from the same period last year. We are forecasting a 15% decline in revenue for the first half. If current trading continues as it is, the company will fall short of our estimates by £11m on revenue and £6m on profit, implying a 10% downgrade to our numbers.
NH:
• Collins Stewart’s capital markets business in the UK and USA has created “very low revenue” during the four months.
• The company says that despite a sector-wide slowdown in ECM business, the wealth management unit has performed “solidly.” It has increased its market share in securities and describes its dealing commissions as robust.
• The company says that despite a sector-wide slowdown in ECM business, the wealth management unit has performed “solidly.” It has increased its market share in securities and describes its dealing commissions as robust.
NH:
Hawkpoint has weathered the market downturn in big M&A by focusing on mid-sized M&A and by giving more debt and restructuring advice.
• Given that Collins Stewart had £100m in cash at Dec 07, we will need clarification on the cash position, which this statement says is £45m.
• Given that Collins Stewart had £100m in cash at Dec 07, we will need clarification on the cash position, which this statement says is £45m.
NH:
The company says it plans to emerge from current market conditions as an even stronger franchise, as it will use the continued downturn to recruit more staff and open more offices.
• No change to our Buy recommendation.
• No change to our Buy recommendation.
PM:
thanks for that
PM:
Need to keep a weather eye on Collins Stewart
PM:
(Monkey — we’ve tried everything , but she’ll get bored doing Lax v quickly)
PM:
PM:
We are just about done
PM:
Anything quick on BA Neil?
NH:
yep, a flurry of downgrades following Friday’s figires, which were actually received quite well
PM:
Stock price is down 10.7p at 222
NH:
it was up 3-4% on Friday
NH:
i think the market took the payment of a 5p as a confident signal
NH:
personally, the idea of investing in BA because it will be the last many standing in the sector is not that appealing.
PM:
Got any of the downgrades?
NH:
yep, this is from ABN Amro
NH:
BRITISH AIRWAYS we downgrade from Hold to Sell
We see BA’s recent rally in the face of rising oil prices as unjustified and
downgrade to Sell, target unchanged at £2. BA is making sensible moves in thi
tough environment, but we see downside risks to revenue and challenges in
lowering non-fuel costs.
We see BA’s recent rally in the face of rising oil prices as unjustified and
downgrade to Sell, target unchanged at £2. BA is making sensible moves in thi
tough environment, but we see downside risks to revenue and challenges in
lowering non-fuel costs.
NH:
*Since 23 April, kerosene has risen 9% from US$1190/MT to US$1304/MT, but BA’
share price has risen 9%. We do not see the logic. BA is trading 12% ahead of
our unchanged DCF-based target price. We consequently downgrade to Sell.
share price has risen 9%. We do not see the logic. BA is trading 12% ahead of
our unchanged DCF-based target price. We consequently downgrade to Sell.
NH:
We
continue to see considerable downside risk to long haul premium traffic
strength. We also see downside risk to leisure revenues, where BA hopes it wi
be able to raise fares and surcharges to mitigate the increase in fuel costs.
continue to see considerable downside risk to long haul premium traffic
strength. We also see downside risk to leisure revenues, where BA hopes it wi
be able to raise fares and surcharges to mitigate the increase in fuel costs.
NH:
do accept BA’s core thesis that in the medium term, other carriers will fail,
merge or simply shrink. But it is far from clear to us how rapidly the capaci
will exit.
merge or simply shrink. But it is far from clear to us how rapidly the capaci
will exit.
NH:
We also think it would be wise to be cautious on non-fuel costs,
despite BA’s good track record.
*FY08 surprisingly close to our forecasts
BA reported full year results in line with our expectations, and slightly ahead
of the consensus. It reported operating profit of £875m, compared with last
year’s £556m, our expected £873m and Bloomberg consensus at £844m. The result
equates to an operating margin of 10.0% (after paying the staff bonus). BA is
paying a 5p dividend this year and employee bonuses. We had forecast a 5p
dividend, but had been rapidly losing confidence in it being paid of late, given
recent developments in oil and the economy.
despite BA’s good track record.
*FY08 surprisingly close to our forecasts
BA reported full year results in line with our expectations, and slightly ahead
of the consensus. It reported operating profit of £875m, compared with last
year’s £556m, our expected £873m and Bloomberg consensus at £844m. The result
equates to an operating margin of 10.0% (after paying the staff bonus). BA is
paying a 5p dividend this year and employee bonuses. We had forecast a 5p
dividend, but had been rapidly losing confidence in it being paid of late, given
recent developments in oil and the economy.
NH:
*BA guides breakeven, we forecast a 2% margin for FY09
Guidance for FY09 is cautious: revenue growth of 4%, a fuel cost increase of
£1bn, assuming $120/bbl, and non fuel costs up £200m. This implies operating
profit of £25m and a margin of 0.3%. Our airline models are based on $110/bbl
and we lower our FY09 operating profit forecast 29% from £304m to £215m, FY10F
down 19% from £396m to £322m.
Guidance for FY09 is cautious: revenue growth of 4%, a fuel cost increase of
£1bn, assuming $120/bbl, and non fuel costs up £200m. This implies operating
profit of £25m and a margin of 0.3%. Our airline models are based on $110/bbl
and we lower our FY09 operating profit forecast 29% from £304m to £215m, FY10F
down 19% from £396m to £322m.
NH:
*The greatest risk to our short position is falling oil prices
Falling oil prices are the obvious risk. Otherwise the announcement of an
Atlantic partnership seems likely, should be taken as good news, but would face
complex and lengthy regulatory scrutiny. Buying some or all of bmi could be a
positive long-term strategic move, but worryingly would be seen to increase ris
in the near term.
Falling oil prices are the obvious risk. Otherwise the announcement of an
Atlantic partnership seems likely, should be taken as good news, but would face
complex and lengthy regulatory scrutiny. Buying some or all of bmi could be a
positive long-term strategic move, but worryingly would be seen to increase ris
in the near term.
NH:
and here is a quick note from Morgan Stanley
NH:
BAY.L, British Airways — 2 years negative earnings ahead? /Valuation Is
Vexing
Morgan Stanley & Co. International plc
Penelope.Butcher@morganstanley.com, Mark.D.Thompson, Menno.Sanderse
We reiterate our Underweight-V on BA following FY08 results, as there is ~30% downside
potential to our raised target of 160p (up from 120p) and we believe the stock carries downside
risk of rising long-term fuel costs and declining market value for aircraft assets. Our dilemma is
how to value a company with two years of potentially negative earnings – we cut our forecasts to
reflect new guidance and see our EPS turn marginally negative in FY09 and substantially
negative in FY10, despite allowing for a 5% yield increase. While BA reached its FY08 operating
margin target, it did not give EBIT guidance for FY09 or beyond. It noted that it expects to break
even at an oil price of $120/bbl, and guides for FY09 revenue growth of 4% (primarily from fuel
surcharges) and non fuel cost growth of 3-3.5%, as well as a £1bn increase in its fuel bill.
Vexing
Morgan Stanley & Co. International plc
Penelope.Butcher@morganstanley.com, Mark.D.Thompson, Menno.Sanderse
We reiterate our Underweight-V on BA following FY08 results, as there is ~30% downside
potential to our raised target of 160p (up from 120p) and we believe the stock carries downside
risk of rising long-term fuel costs and declining market value for aircraft assets. Our dilemma is
how to value a company with two years of potentially negative earnings – we cut our forecasts to
reflect new guidance and see our EPS turn marginally negative in FY09 and substantially
negative in FY10, despite allowing for a 5% yield increase. While BA reached its FY08 operating
margin target, it did not give EBIT guidance for FY09 or beyond. It noted that it expects to break
even at an oil price of $120/bbl, and guides for FY09 revenue growth of 4% (primarily from fuel
surcharges) and non fuel cost growth of 3-3.5%, as well as a £1bn increase in its fuel bill.
PM:
Thanks for all that
PM:
We are done. Sorry i lacked inspiration this morning
NH:
and sorry for the lack of RAW
NH:
very quiet this morning
NH:
no updates on Neteller or Trinity at the moment
NH:
but we hope to have some news soon
PM:
We are off. I have a lunch to attend
PM:
Thanks for joining
PM:
Apols about pompey rant
PM:
Thanks for comments
PM:
We will be back at 11am tomorrow
PM:
Happy punting
PM:
Very good maximus
NH:
might use that
NH:
current fav is still
NH:
hbos has no liquidity problems
PM:
Helen likes Bears use four words
PM:
I like — No liquidity problems tonight then
PM:
But there’s loads to choose from
PM:
And will WILL run a proper competition on this
NH:
or what about something from the BBB bank?
NH:
B&B has a strong capital base
NH:
that was from April 14
NH:
right, Paul is on the phone
NH:
rowing with Reuters
NH:
so I am going to wrap this up
NH:
goodbye