Markets live chat transcript for the chat ending at 12:07 on 18 Jun 2008. Participants in this chat were: Helen Thomas (HT) Neil Hume (NH)
HT:
Hello
HT:
and welcome to Markets Live
HT:
your usual host, Paul Murphy, is gadding about at Ascot
HT:
well, we think he’s just touched down
HT:
having been choppered in
HT:
ill-fitting trousers, outsize hat and all
HT:
he had some trouble with his outfit
HT:
Neil Hume will be joining me
HT:
at some stage
HT:
he’s getting the IT going
HT:
I have asked Paul for his top racing tip but so far with no joy
NH:
sorry been on the phone
HT:
AH HA
HT:
welcome Neil
NH:
no computer issues this morning
NH:
story gathering
HT:
he’s gone again
HT:
sorry readers, give us a mo
HT:
ah – hang on, cjf – party questions I can deal with
HT:
the official Webby celebratory bash has been postponed
HT:
likely to be September by which time I’ll be in NY
HT:
BUT – there are drinks scheduled for July 1st
HT:
put it in your diaries, venue TBC
NH:
am back
NH:
been trying to get hold of this RBS crash report
NH:
I don’t recommend calling the RBS press office
NH:
difficult or what
HT:
they are a tad touchy, no?
NH:
would be easier dealing with Fred the Shred
NH:
right, in case any of you were wondering
NH:
Paul is back tomorrow
HT:
hang on – there’s some raw coming in
HT:
racing RAW
NH:
the most harmful kind
HT:
Paul’s top racing tip is….
HT:
oh lord, he’s sent a load
HT:
I’ll pick one
HT:
3:45 Prince of Wales Stakes
HT:
Literato
HT:
owned by Godolphin, ridden by Dettori, 16 to 1
HT:
it all means very little to me
NH:
I’m unconvinced, Paul’s stock tips are rubbish so I have no faith in his horseracing insight
HT:
these, he claims, have come from a top pro
HT:
anyway – lots of market stuff to get through
HT:
enough nags
HT:
HT:
few questions already on Informa
NH:
let’s deal with that
NH:
the smell of burnt fingers is wafting across the Thames to FT Towers this morning
HT:
yep – distinct stench
NH:
Informa
NH:
caused some real pain
HT:
NH:
a lot of money has been betting on a counter bid from private equity
NH:
and last night, Informa admitted it had received a cash offer from a private equity firm
NH:
which, as we have been saying for weeks, is Providence Equity Partners
NH:
They have been working on this deal for a few months now, we are told
NH:
unfortunately for the punters there was another bit of news last night
NH:
United Business Media decided to end merger talks because the price of Informa had run away
HT:
and where is the price now
NH:
well, the shares jumped 5% to close at 470p yesterday
NH:
as punters bet on a counter bid
NH:
at the moment they are down 46.5p at 423.5p
NH:
a fall of almost 10%
HT:
ouch
HT:
presumably that’s because any bid is likely to be below 500p
NH:
well, that’s not what I am hearing
NH:
talk in the market is the PEP approached Informa chairman Derek Mapp yesterday
NH:
and said that subject to a number of conditions – dd I presume and other stuff – that it was prepared to offer between 520p and 550p a share
HT:
hmmm
NH:
apparently financing is in place with two banks
HT:
well, why would they pay that much?
NH:
well, with UBM out perhaps they won’t
HT:
so that’s what’s spooked people
NH:
yep that an the fact that having a trade buyer in an auction provides some safety
NH:
that backstop has gone now
NH:
and all that’s left is a PE bidder trying to buy a company that has enterprise value of around £3bn
NH:
spilt 50/50 between debt and equity – roughly
HT:
big ask in this environment
NH:
Yep
NH:
and the market does not believe PEP will be able to pull it off
NH:
but
HT:
I knew there would be a but
NH:
presumably PEP are not dumb
NH:
they have been working on a bid for Informa for a while, our spies tell us
NH:
and if that’s the case they would know all about the company’s debt levels
NH:
and the potential to pay a lot of that down by selling bits of Informa
NH:
for example Datamonitor could be offloaded
NH:
and the magazines business sold to Springer Science & Media, which tried to buy Informa a while ago
HT:
So this deal is a doable -
NH:
Yep
HT:
even at 500p plus price
NH:
well, i suspect that it what Inform would hold out for
NH:
they knocked back an offer from Springer at over 600p a while ago
HT:
what do the analysts make of all this
NH:
hang on
NH:
will just get some stuff
NH:
this is from JP Morgan
NH:
We reiterate our Overweight rating on INF.L following
Informa’s announcement Monday after the close that it has
received an approach from a cash buyer. This came on the heels of
an announcement by UBM that it was breaking off talks with
Informa on a proposed all-share nil-premium merger on the basis
of price. We believe there is continued near-term upside to INF.L
stock as M&A discussions and newsflow continue.
Informa’s announcement Monday after the close that it has
received an approach from a cash buyer. This came on the heels of
an announcement by UBM that it was breaking off talks with
Informa on a proposed all-share nil-premium merger on the basis
of price. We believe there is continued near-term upside to INF.L
stock as M&A discussions and newsflow continue.
NH:
A private buyer emerges. We expected UBM’s approach would
flush other cash buyers out of the woodwork, and we would not be
surprised if Springer is back in the picture now (recall Springer
offered 630p for Informa in October 2006).
flush other cash buyers out of the woodwork, and we would not be
surprised if Springer is back in the picture now (recall Springer
offered 630p for Informa in October 2006).
There are good cost
saving opportunities between Informa and Springer (a competitor
under private equity ownership) and a cloudier economy and lower
M&A multiples now could imply a deal below this price
NH:
We see take-out value of Informa at 550p based on a modest
sum-of-the-parts multiple of 11.7x; our price target of 525p applies
a discount to this to factor in the market’s current macro concerns;
downside risks include cyclical slowdown and relatively high debt.
sum-of-the-parts multiple of 11.7x; our price target of 525p applies
a discount to this to factor in the market’s current macro concerns;
downside risks include cyclical slowdown and relatively high debt.
Can private equity raise the financing? Although many
observers have doubted private equity’s ability to raise the ~£3.5
billion for an Informa takeout, we would emphasize ongoing
private equity interest remains in B2B assets with strong growth
and cash generation; we believe Informa’s debt paydown could be
rapid, getting to 3.7x net debt/EBITDA by y/e 2008. Potentially, a
private company with strategic interests could raise the cash.
NH:
• Other offers on the way? We believe other private buyers could
be circling Informa and wonder if UBM may return (it has the
right to counteroffer if Informa receives a bid, which it has), but in
any case this would require a combination of price and synergies.
be circling Informa and wonder if UBM may return (it has the
right to counteroffer if Informa receives a bid, which it has), but in
any case this would require a combination of price and synergies.
Informa does not need to do a deal and could well remain
independent – in its press release Informa noted that trading
conditions remain solid – so it may not be willing to sell into a
downturn. We would monitor the likelihood of a transaction
occurring before considering taking profits on this recent run-up.
HT:
interesting
HT:
v bullish on the PE angle
NH:
this is from Numis
NH:
UBM and Informa have called off merger discussions following an approach by a third party for Informa. The approach is rumoured to be from Providence Equity Partners, though other potential bidders include Apax, Springer (Cinven/Candover) and Carlyle.
We expect a bid for Informa to be pitched at c.500p, representing a 30% premium to the undisturbed price. We have again been impressed by the financial discipline of UBM.
NH:
UBM/Informa: In The Power of 3, our recent B2B sector piece, we calculated that a combination of UBM and Informa could generate 20% upside on a ‘blue sky’ scenario, with 14% coming from cost savings and 6% from revenue synergies. We also estimated that, ignoring synergies, UBM could afford to pay 450p for Informa before destroying value, rising to 500p if it was willing to pay all of the synergy value to Informa shareholders.
Informa: Informa has received an approach from a third party, rumoured to be Providence Private Equity. As highlighted in our sector piece, we believe B2B groups are structurally sound, while valuations have been depressed by cyclical fears. We note the difficulties in raising £3bn+ in the current credit markets, though as a business built by acquisition/merger, Informa could be dismantled into more manageable pieces relatively easily in our view.
NH:
For example, Springer may enter a consortium to secure the Scientific assets. Informa rejected a bid of 630p in late 2006, and the recent share price low was 288p. We believe a PE bid would need to be pitched at c.500p to succeed, and this would represent a 30% premium on the price before the merger talks with UBM were announced.
UBM: We have again been impressed by the financial discipline exhibited by UBM. As with Emap B2B, UBM has not been tempted to pursue a deal which it did not believe were in its shareholders best interests. Although the combination would have delivered meaningful synergies on a nil premium basis, these would clearly have been diluted had UBM had to pay a premium.
NH:
For example, if we prudently include only cost synergies, we estimate that UBM would have enhanced its pro forma EPS by +16% if it had concluded a nil premium deal, but this would have fallen to just +7% if it had structured an all share deal valuing Informa at 450p. Our target price remains 646p for UBM and our recommendation is Hold.
HT:
another broker pushing the break up line
NH:
yep
NH:
anyway the market remains sceptical
NH:
and for those of you who missed it, check the execellent comment from Montesquieu below
NH:
clearly someone who knows what he is talking about
HT:
HT:
moving on
HT:
to Bob’s World
NH:
yep we have this very bearish RBS note
NH:
actually, we have the email that Bob Janjuah sent to clients
NH:
OK, we can’t copy and paste all of it
NH:
but we do have some highlights
NH:
I am pleased with the call from last Thursday, to significantly reduce
shrt stk/shrt credit bets. At that point iTraxx XO was above 500, and
S&P was in the low 1330s. We are now just above 450 XO and 1360 S&P.
shrt stk/shrt credit bets. At that point iTraxx XO was above 500, and
S&P was in the low 1330s. We are now just above 450 XO and 1360 S&P.
NH:
Looking forward, nothing has changed for me. Tactically, and as
mentioned above, whilst it was prudent to go from ’10 out 10′ SHORT
stks/credit to ’2 or 3 out of 10′ SHORT at the back end of last week, I
still want to retain at least some small short interest in credit and
stks, because over the course of end June and early July, we will be
transitioning from the zone of my tactical call INTO the zone of my
VERY BEARISH strategic call for Aug/Sept/Oct.
mentioned above, whilst it was prudent to go from ’10 out 10′ SHORT
stks/credit to ’2 or 3 out of 10′ SHORT at the back end of last week, I
still want to retain at least some small short interest in credit and
stks, because over the course of end June and early July, we will be
transitioning from the zone of my tactical call INTO the zone of my
VERY BEARISH strategic call for Aug/Sept/Oct.
NH:
This calls looks for S&P down at 1050 +/- 50 points during this 3 mth
window, and whilst credit will relatively outperform stks, I still see
XO at 650/700 during this period, HiVol up at 275/300, Main up in the
130s, and IG10 at/close to 200. Whilst I think August and September are
the key risky months, the reason I’d be small shrt (now) over late June
and July, when I suspect risk assets will try to rally (1405/1420
intra-day S&P, low 70s Main, mid-130s HiVol, 425ish XO, PERHAPS!) is
that the risk is that the coming big sell off actually starts EARLIER
rather than later.
window, and whilst credit will relatively outperform stks, I still see
XO at 650/700 during this period, HiVol up at 275/300, Main up in the
130s, and IG10 at/close to 200. Whilst I think August and September are
the key risky months, the reason I’d be small shrt (now) over late June
and July, when I suspect risk assets will try to rally (1405/1420
intra-day S&P, low 70s Main, mid-130s HiVol, 425ish XO, PERHAPS!) is
that the risk is that the coming big sell off actually starts EARLIER
rather than later.
HT:
I’d add that it looks like there must be two of these uber-bearish notes flying around
HT:
from RBS
NH:
ll of which is actually a very confusing way of saying that whilst
mrkts will likely rally for the next 2/4 wks, we won’t see S&P above
1405 closing/1420 intra-day, and that the risks are that the Aug/Sept
20/25% sell off actually begins earlier, in July. So for me, I want to
be positioned to capture the very big bear move coming over the next 3
months, and am prepared to see mrkts rally a bit in my face over the
next few weeks, as a fair trade off against being positioned for a sell
off that surprises by coming earlier than I expect.
mrkts will likely rally for the next 2/4 wks, we won’t see S&P above
1405 closing/1420 intra-day, and that the risks are that the Aug/Sept
20/25% sell off actually begins earlier, in July. So for me, I want to
be positioned to capture the very big bear move coming over the next 3
months, and am prepared to see mrkts rally a bit in my face over the
next few weeks, as a fair trade off against being positioned for a sell
off that surprises by coming earlier than I expect.
NH:
I really do think much of the ‘expected’ Q3 federally induced grwth
bounce has been seen in Q2. And as we get into data for June/July/Aug,
both the seasonal adjustment in Crude falls away out of CPI – thus the
CPI data for June, July and Aug will more fully reflect the real prices
increases seen, and not some statisticians fantasy, AND the Birth/Death
Adjustment on payrolls becomes less powerful (creates less ‘jobs’) -
especially in July (the August release), when historically the B/D
adjustment is NEGATIVE.
I really do think much of the ‘expected’ Q3 federally induced grwth
bounce has been seen in Q2. And as we get into data for June/July/Aug,
both the seasonal adjustment in Crude falls away out of CPI – thus the
CPI data for June, July and Aug will more fully reflect the real prices
increases seen, and not some statisticians fantasy, AND the Birth/Death
Adjustment on payrolls becomes less powerful (creates less ‘jobs’) -
especially in July (the August release), when historically the B/D
adjustment is NEGATIVE.
NH:
All of which means that I DO NOT see the Fed raising rates; instead I
think the markets will call the Fed’s bluff and the Fed will be found
wanting – I just can’t see them hiking rates into the peak of the
election cycle. What I do think we will see is gradually weaker and
weaker grwth data, heavy revisions downwards of H2 08 and 09 grwth and
earnings expectations and, most likely in July and/or Aug, Payrolls at
negative 150/200k yet inflation HIGHER with US CPI Headline at/close to
5%. This backdrop, and the massive credibility chasms down which the Fed
and maybe even the ECB will plummet when they fail to hike in the face
of higher inflation, will combine to give us the big risk asset sell off
discussed above.
think the markets will call the Fed’s bluff and the Fed will be found
wanting – I just can’t see them hiking rates into the peak of the
election cycle. What I do think we will see is gradually weaker and
weaker grwth data, heavy revisions downwards of H2 08 and 09 grwth and
earnings expectations and, most likely in July and/or Aug, Payrolls at
negative 150/200k yet inflation HIGHER with US CPI Headline at/close to
5%. This backdrop, and the massive credibility chasms down which the Fed
and maybe even the ECB will plummet when they fail to hike in the face
of higher inflation, will combine to give us the big risk asset sell off
discussed above.
NH:
y main task now is to try identify with more precision the timing and
levels at which to get UBER shrt stks and credit….its when, NOT if in
my view….
levels at which to get UBER shrt stks and credit….its when, NOT if in
my view….
Cheers
bob
ps – anyone who can tell me what I am missing in the UK, with the FTSE
up over 1.5%, plse feel free to fwd your shrts…at this point, all I
can see and say is that the FTSE is setting itself up for a mighty big
fall…..
NH:
Bob Janjuah
RBS Global Banking & Markets
Office: +44 20 7085 3249
RBS Global Banking & Markets
Office: +44 20 7085 3249
HT:
that’s an email right?
HT:
not an official RBS note
NH:
no, the stuff quoted by the DT this morning seems to be different
NH:
DC, hope you are taking notes
NH:
that might give u a clue on the direction of the market!
HT:
do you know this guy Janjuah?
NH:
nope, new bear on the block
HT:
yeah – learner bear
HT:
noticed that an old favourite Alphaville bear Albert Edwards is still proving popular in his new home
HT:
moved to SocGen
NH:
yep, he is the original uber bear
HT:
and notched up a couple of awards in the latest Extel survey
HT:
so the punters obviously still ilke it
NH:
HT:
time to look at wider market
NH:
OK
NH:
FTSE 100 given back all yesterday’s gain and some more
NH:
index down 85.3 points at 5,775.6
NH:
oils, banks and miners pulling the index down
NH:
although the biggest falls are once again in the housebuilding sector
NH:
the rally which followed the FSA short selling clamp down are evaporating fast
NH:
hang om just getting some interesting flashes coming over the wires
NH:
from John Paulson
HT:
flash
HT:
MONACO – HEDGE FUND MANAGER JOHN PAULSON SAYS US ECONOMY GOING INTO RECESSION, TO LAST INTO 2009
HT:
more cheery stuff
HT:
here are the housebuilder moves
Taylor Wimpey (TW:LSE): Last: 64.00, down 9.75 (-13.22%), High: 73.75, Low: 63.50, Volume: 6.21m
Barratt Developments (BDEV:LSE): Last: 82.00, down 8.5 (-9.39%), High: 91.00, Low: 78.75, Volume: 5.35m
Persimmon (PSN:LSE): Last: 383.00, down 30 (-7.26%), High: 412.50, Low: 383.00, Volume: 1.92m
Bellway (BWY:LSE): Last: 480.00, down 48 (-9.09%), High: 524.00, Low: 480.00, Volume: 609.95k
Bovis Homes Group (BVS:LSE): Last: 345.50, down 31.75 (-8.42%), High: 376.25, Low: 344.00, Volume: 1.00m
HT:
what’s done the damage?
NH:
good question
NH:
but we need to go back to this Paulson and some breaking news on thornburg
HT:
Another Paulson flash on Reuters:
HT:
PAUSLON PUTS TOTAL FINANCIAL SECTOR LOSSES AT $1.3 TRILLION
HT:
he’s outdone the IMF
HT:
PAULSON SAYS CREDIT CRISIS IS NOT OVER, STILL SHORT CREDIT
HT:
and he cleared up by being short on the way in
HT:
HT:
breaking news on Thornburg
NH:
right some very bearish wires on Thornburg Mortgage Inc
NH:
MAY NOT BE ABLE TO CONTINUE AS GOING CONCERN
NH:
looks like a division has defaulted on a loan
NH:
it’s all doom and gloom this morning
NH:
Sam J is telling me that Thorburg is big
HT:
this goes on and on -subpoenas, class-action litigation, uncertainty about liquidity
NH:
here’s a post Sam J did last week
NH:
NH:
sorry to keep jumping all over the place this morning but we have got the original bearish call from Bob at RBS
NH:
actually came out on June 11
NH:
so I am not sure why everyone jumping up and down about it
HT:
maybe the DT will report yesterday’s bearish call next week
NH:
anyway for what it is worth, here it is
NH:
Playing Out As Expected
I put out a CSI Flashnote on May 28th where I summarised my multi month
strategic and multi week tactical calls. The tactical call is so far playing
out almost perfectly. Stocks and credit did indeed make a small rally off the May
stock lows/spread wides into month end, as expected. Also as expected, the
rally was weak, S&P barely holding 1400 and the iTraxx Crossover index
struggled to get back below 450 for anymore than a few hours. And over the last
10 days we have seen S&P down at 1350 (1440 peak in May), Crossover over
500 (390s in May), Main/Europe up in the 90s (from low 60s in May) and HiVol up
in the 170s (from low 120s in May). My targets for the June sell off, which I
expect to last another week to 10 days, remain 1300/1330 for S&P, 180/200 for
HiVol, 100/110 for Main and 130s for IG 10 in the US (currently 117). And I think
Crossover can hit the 525/550 zone.
I put out a CSI Flashnote on May 28th where I summarised my multi month
strategic and multi week tactical calls. The tactical call is so far playing
out almost perfectly. Stocks and credit did indeed make a small rally off the May
stock lows/spread wides into month end, as expected. Also as expected, the
rally was weak, S&P barely holding 1400 and the iTraxx Crossover index
struggled to get back below 450 for anymore than a few hours. And over the last
10 days we have seen S&P down at 1350 (1440 peak in May), Crossover over
500 (390s in May), Main/Europe up in the 90s (from low 60s in May) and HiVol up
in the 170s (from low 120s in May). My targets for the June sell off, which I
expect to last another week to 10 days, remain 1300/1330 for S&P, 180/200 for
HiVol, 100/110 for Main and 130s for IG 10 in the US (currently 117). And I think
Crossover can hit the 525/550 zone.
NH:
Thereafter I expect markets to attempt to go a little better over the very end of
June and into July, but this will, I think, be a pretty feeble rally both in terms of
size (50/70 S&P points) and time (2 to 4 weeks). What it will do however is set up
what I think will be THE SIGNIFICANT opportunity this year to get short stocks
and/or credit (credit will react to, and ‘relatively’ outperform stocks). For me mid-
July through to October is likely to be the most bearish period we will experience
in the bear market that began in Q4 of last year. This is the period where my
strategic call kicks-in. Please refer to my Flashnote of the 28th May for details;
suffice to say that I expect S&P down at 1050 +/-50 points during this period,
with HiVol up at 275/300, Crossover up at 650/700, Main up in the 130/150 zone,
and IG10 up at 200.
June and into July, but this will, I think, be a pretty feeble rally both in terms of
size (50/70 S&P points) and time (2 to 4 weeks). What it will do however is set up
what I think will be THE SIGNIFICANT opportunity this year to get short stocks
and/or credit (credit will react to, and ‘relatively’ outperform stocks). For me mid-
July through to October is likely to be the most bearish period we will experience
in the bear market that began in Q4 of last year. This is the period where my
strategic call kicks-in. Please refer to my Flashnote of the 28th May for details;
suffice to say that I expect S&P down at 1050 +/-50 points during this period,
with HiVol up at 275/300, Crossover up at 650/700, Main up in the 130/150 zone,
and IG10 up at 200.
NH:
The drivers are, I think, clear. Read Kit’s piece herein for his key top down macro
thoughts. Committed readers will know that, since last year, I have insisted that
the housing/credit downturn would last a long time and have serious
ramifications. And, since I am an anti-monetarist, I have also warned since last
year that inflation is a global problem because of globalisation, which was
always going to risk putting G7 central bankers into a dangerous corner at some
particularly nasty point in time. Well, I think we have got to that point and I think
what is clear now is that the Fed/ECB will only cut this year if we see significantly
higher unemployment/growth weakness, and/or if equity markets genuinely
crater. Global inflation and the inability/unwillingness of Asia/EM to control it
means that G7 growth will have to be weaker for longer to get rid of inflation. The
problem for the West is that our growth slowdown will be gradual, slower for
longer, but will avoid a single major negative quarter. So in Q3/Q4 we are likely
to see ongoing growth weakness, driven by the squeeze on consumption and by
banks lending a LOT less and charging a LOT more, but at the same time
inflation is going to be stubbornly high, thus handcuffing the Fed and ECB. The
Fed in particular is in panic mode – it is desperate to jaw-bone the market into
believing that growth is now fixed (it is NOT) and that it has adopted Volckeresque
tone with respect to inflation (it has NOT). Many, including me, do not
think the Fed has the courage (election year!!) or indeed the need to raise rates
this year, but unfortunately USD weakness is putting the Fed into a real policy
bind. The scoop for major policy error has just super-spiked.
thoughts. Committed readers will know that, since last year, I have insisted that
the housing/credit downturn would last a long time and have serious
ramifications. And, since I am an anti-monetarist, I have also warned since last
year that inflation is a global problem because of globalisation, which was
always going to risk putting G7 central bankers into a dangerous corner at some
particularly nasty point in time. Well, I think we have got to that point and I think
what is clear now is that the Fed/ECB will only cut this year if we see significantly
higher unemployment/growth weakness, and/or if equity markets genuinely
crater. Global inflation and the inability/unwillingness of Asia/EM to control it
means that G7 growth will have to be weaker for longer to get rid of inflation. The
problem for the West is that our growth slowdown will be gradual, slower for
longer, but will avoid a single major negative quarter. So in Q3/Q4 we are likely
to see ongoing growth weakness, driven by the squeeze on consumption and by
banks lending a LOT less and charging a LOT more, but at the same time
inflation is going to be stubbornly high, thus handcuffing the Fed and ECB. The
Fed in particular is in panic mode – it is desperate to jaw-bone the market into
believing that growth is now fixed (it is NOT) and that it has adopted Volckeresque
tone with respect to inflation (it has NOT). Many, including me, do not
think the Fed has the courage (election year!!) or indeed the need to raise rates
this year, but unfortunately USD weakness is putting the Fed into a real policy
bind. The scoop for major policy error has just super-spiked.
NH:
It seems that all the chickens are coming home to roost, with Q3/Q4 a pivotal
point for the global economy and for financial markets. Q3 is of course when the
economic bulls tell us we are ‘meant’ to see a US rebound due to the Federal
handouts – but could it be that relatively ‘OK’ Q2 growth data reflects the fact that
a lot of the cheques have already been distributed and spent, or spent in
anticipation. If so, we will see little or no Q3 bounce – something which I think the
markets will take very badly. In any case, with the new central bank ‘enviromen
point for the global economy and for financial markets. Q3 is of course when the
economic bulls tell us we are ‘meant’ to see a US rebound due to the Federal
handouts – but could it be that relatively ‘OK’ Q2 growth data reflects the fact that
a lot of the cheques have already been distributed and spent, or spent in
anticipation. If so, we will see little or no Q3 bounce – something which I think the
markets will take very badly. In any case, with the new central bank ‘enviromen
NH:
feel that much higher vol spikes are assured, as are weaker growth (1% G7 GDP
+ sub-5% EM GDP = Global Recession) well into 2009. The really ugly spoiler is
that we may need to see much lower global growth in order to get lower inflation,
and the real risk is that we won’t see this level of extreme slowdown in time to
avoid major policy errors. For me, the outlook for risk assets is unreservedly
BEARISH for Q3 and Q4. The significant bearish repricing I expect to see during
August/September/October will be driven by massive negative revisions to
growth AND stubbornly high inflation, leading to earnings deterioration, massive
negative revisions to earning expectations for H2 08 and deep into 2009, weaker
and weaker credit metrics, higher and higher defaults, and on-going
problems/deleveraging in the financial sector.
+ sub-5% EM GDP = Global Recession) well into 2009. The really ugly spoiler is
that we may need to see much lower global growth in order to get lower inflation,
and the real risk is that we won’t see this level of extreme slowdown in time to
avoid major policy errors. For me, the outlook for risk assets is unreservedly
BEARISH for Q3 and Q4. The significant bearish repricing I expect to see during
August/September/October will be driven by massive negative revisions to
growth AND stubbornly high inflation, leading to earnings deterioration, massive
negative revisions to earning expectations for H2 08 and deep into 2009, weaker
and weaker credit metrics, higher and higher defaults, and on-going
problems/deleveraging in the financial sector.
NH:
I do not think I can be much blunter. If you have to be in credit, focus on quality,
short durations, non-cyclical defensive names. Avoid cyclicals, weak BBBs and
High Yield (except on a name-by-name bottom up basis in the 1st lien market).
Emerging Markets will NOT be a safe haven. Cash is the key safe haven – the
best proxy for me is 2/3 year dated AAA/AA swaps. In ‘real’ credit, I continue to
like big bank senior/LT2 risk vs corporates or vs bank equities. As I said in my
December/January Outlook presentations, 2008 is a year that is all about not
losing money and not losing your jobs. The very nasty period is soon to be upon
us – be prepared.
short durations, non-cyclical defensive names. Avoid cyclicals, weak BBBs and
High Yield (except on a name-by-name bottom up basis in the 1st lien market).
Emerging Markets will NOT be a safe haven. Cash is the key safe haven – the
best proxy for me is 2/3 year dated AAA/AA swaps. In ‘real’ credit, I continue to
like big bank senior/LT2 risk vs corporates or vs bank equities. As I said in my
December/January Outlook presentations, 2008 is a year that is all about not
losing money and not losing your jobs. The very nasty period is soon to be upon
us – be prepared.
HT:
thanks
HT:
time for a
HT:
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
HT:
HT:
back to housebuilders then
HT:
that’ll be cheery
HT:
NH:
yes
NH:
does not appear to be any bearish eco data driving the sector lower this morning
NH:
BoE minutes were not that surprising
NH:
the only thing I have heard is that UBS have been making some more bearish noises
HT:
what are they saying?
NH:
yep, their housebuilding analyst Mark Stockdale has issued notes on Redrow and Bellway this morning
NH:
well, he starts by stating the obvious
NH:
trading remains tough, no visibility
NH:
but then he gets onto land write downs
NH:
and this is where it gets interesting
NH:
then he gets on to banking covenants being breached
NH:
and cash calls
HT:
bearish again then
NH:
very
NH:
here’s the note
NH:
T.rading remains tough; no visibility Trading remains tough
Industry data remains tough and Redrow’s last announcement (13/05/08) pointed to
reservations down c65% in the 5-6 weeks to that statement. We suspect not much has changed in the month since this update.
Land write downs likely
Industry data remains tough and Redrow’s last announcement (13/05/08) pointed to
reservations down c65% in the 5-6 weeks to that statement. We suspect not much has changed in the month since this update.
Land write downs likely
NH:
Given UBS’ forecast that prices could drop by 20% 2008-2009E and the likelihood that volumes could be down 35-40% over this period, Redrow – like virtually all of its peers in the industry – could be annualising at very low or zero EBIT from Q308E, in our opinion. In this context, land write downs could well occur.
Covenant issues rising
Industry average EBITA/interest cover covenants are c3x and will be broken on our scenario analysis. Though Redrow is focussing on cash generation, an equity issue cannot be ruled out in our view.
NH:
Valuation: discounting a lot but not enough
Given the extremely poor outlook, extremely poor visibility and balance sheet risk, we reiterate our Sell rating on Redrow but with a new PT of 169p down from 208p. In our NAV we previously set our PT based on a 25% cut to land and WIP whereas now we set a PT based on a 50% cut to land values. Next trading information is FY08 trading update 03/07/08.
Given the extremely poor outlook, extremely poor visibility and balance sheet risk, we reiterate our Sell rating on Redrow but with a new PT of 169p down from 208p. In our NAV we previously set our PT based on a 25% cut to land and WIP whereas now we set a PT based on a 50% cut to land values. Next trading information is FY08 trading update 03/07/08.
HT:
cheers
NH:
and here is what Mr Stockdale thinks of Bellway
NH:
Poor sector outlook Poor sector outlook
UK Housebuilders are surrounded with uncertainty/poor visibility on price developments and mortgage availability. There are considerable fears about land write downs and possible equity issues surrounding the sector.
UK Housebuilders are surrounded with uncertainty/poor visibility on price developments and mortgage availability. There are considerable fears about land write downs and possible equity issues surrounding the sector.
NH:
FY08E cut in line with guidance
We cut 2008E to July PTP to £181m from £198m and EPS to 111.0p from 121.4p. We still model on house price deflation of 6% and volume down 25% for 2009E, but we would like to stress that the risks are firmly to the downside. We now expect a price deflation of 20% annualised from H208E as quite likely, with volume down 40%. This would eliminate EBIT for F.Y09E.
We cut 2008E to July PTP to £181m from £198m and EPS to 111.0p from 121.4p. We still model on house price deflation of 6% and volume down 25% for 2009E, but we would like to stress that the risks are firmly to the downside. We now expect a price deflation of 20% annualised from H208E as quite likely, with volume down 40%. This would eliminate EBIT for F.Y09E.
NH:
Worst case scenario analysis
We model the worst case scenario, under which prices fall by 20% and volumes decline by 40% as a scenario analysis. This would eliminate EBIT FY09E. Under the assumption of no dividend payout FY09E and stoppage of land buying over and above land creditors, we estimate Bellway
could reduce debt and land creditors from £364m to £158m by July 2009E.
Gearing thus remains moderate, even under a worst case scenario. 45% cut to book land value to give 500p PT We cut the January book value of land by c45% to arrive at a price target of 500p (down from
580p).
NH:
We view the risk of an equity issue as limited for Bellway, given its strong balance sheet. However, we believe dividend policy might be at risk for FY09E. Next trading update is October 14th.
NH:
sector being taken apart as we speak
NH:
Taylor Wimpey now down 17%
HT:
messy
NH:
Redrow off 14.5%
NH:
Barratt 12%
NH:
perhaps the Mayfair bank robbers are having one final go ahead of Friday’s clamp down
HT:
no rights issue here yet though
NH:
true
HT:
short away
HT:
the cloak of anonymity is yours
NH:
hmmm, this highlights are real weakness of the FSA move
NH:
everyone knows the housebuilders need cash calls
NH:
but if the prices wrecked and they can’t raise enough
NH:
what then
NH:
how will the FSA protect out housebuilding sector
NH:
looks to me as a fund is having to liquidate positions in the housebuilders
HT:
yup – I know VP disagrees with the whole premise that the FSA needs to protect the market as a place for capital raising
NH:
can’t see any other reason for the way the sector is moving today
HT:
but this patchwork approach isn’t going to help much in any case
HT:
HT:
any RAW?
HT:
horse tips aside
NH:
yes, a few bits and peice this morning
NH:
we too are hearing that Drax is considering a bid for UK Coal
NH:
UK Coal shares up 2.5p at 554p
NH:
I think the two companies already have supply agreements so this has to be possible
NH:
also hearing that Friennds Prov might be about to sell its stake in F&C Asset Management
NH:
and on British Energy
NH:
hearing that EDF might came back with a final offer of around 725p
NH:
and that will be a take it or leave it type of thing
HT:
ok
HT:
let’s do retail
HT:
NH:
good pont below on SBRY
NH:
strip out in the inflation and sales really do look quite poor
HT:
what do you make of Trevor Bish-Jones exiting Woolies?
NH:
and SBRY Looks expenisve
NH:
here’s what Oriel Securities made of it all
NH:
Sainsbury’s Q1 trading statement is short on detail and what detail there is, is in line
with the consensus, and our forecasts.
• LFL (ex fuel) is 3.4%, down from the 4.1% last seen: we were expecting 3.5%. This
running rate is a touch ahead of Tesco’s, but still represents very limited volume growth.
• There is no comment on margins, other than to say that the promotional stance has been
enhanced.
• We won’t change forecasts today but we would comment that year two numbers are
increasingly looking a stretch here.
• the underlying stance remains negative. The lack of volume growth in the industry may
drive more activity on price and that could impact forecasts materially: from mid teens
valuations that is not in the price.
• The shares have been weak but at 336p the shares still trade on 15x PE and that’s too
high. Keep selling to 300p at least.
• As an aside, we think that the continued sharpening of promotional positions from the big
4 will make life increasingly difficult for M&S, where we remain SELLERS too.
with the consensus, and our forecasts.
• LFL (ex fuel) is 3.4%, down from the 4.1% last seen: we were expecting 3.5%. This
running rate is a touch ahead of Tesco’s, but still represents very limited volume growth.
• There is no comment on margins, other than to say that the promotional stance has been
enhanced.
• We won’t change forecasts today but we would comment that year two numbers are
increasingly looking a stretch here.
• the underlying stance remains negative. The lack of volume growth in the industry may
drive more activity on price and that could impact forecasts materially: from mid teens
valuations that is not in the price.
• The shares have been weak but at 336p the shares still trade on 15x PE and that’s too
high. Keep selling to 300p at least.
• As an aside, we think that the continued sharpening of promotional positions from the big
4 will make life increasingly difficult for M&S, where we remain SELLERS too.
NH:
SBRY currently off 9p at 327p
HT:
How’s Woolies fared?
HT:
not sure new management is going to help there
NH:
down 0.6p at 9.19p
HT:
at least Bish-Jones was well-liked
NH:
nope, Trevor Bish Bash Bosh did as good a job as anyone could have
NH:
you can put a lipstick on a pig
NH:
but it still remains a pig
HT:
any comment?
NH:
yep
NH:
this is Philip Dorgan at Panmure
NH:
Early days, but lead indicators not good
Poorish sales, margin pressures and the departure of a chief executive do not
a good announcement make. Earnings visibility is low, average debt levels
will put off bidders and the break up scenario is not value-enhancing.
Poorish sales, margin pressures and the departure of a chief executive do not
a good announcement make. Earnings visibility is low, average debt levels
will put off bidders and the break up scenario is not value-enhancing.
NH:
Like-for-like sales within Woolworths Retail were down by 2.2% in Q1, partly due to
slightly demanding comparisons from the previous years promotion of high ticket
electrical goods. Margins have been affected by cost pressures, price investment and the
strength of the entertainment affected the mix.
slightly demanding comparisons from the previous years promotion of high ticket
electrical goods. Margins have been affected by cost pressures, price investment and the
strength of the entertainment affected the mix.
NH:
Elsewhere in the group, third party sales in Entertainment UK and Bertrams were -0.6%,
which was in line with expectations. The expected operational savings are beginning to
come through. 2 entertain, the Group’s joint venture with BBC Worldwide, has shown
strong sales growth of 29.8%, reflecting a good performance from Planet Earth in the
US and other international markets. Woolworths is currently reviewing its options in
relation to this company.
which was in line with expectations. The expected operational savings are beginning to
come through. 2 entertain, the Group’s joint venture with BBC Worldwide, has shown
strong sales growth of 29.8%, reflecting a good performance from Planet Earth in the
US and other international markets. Woolworths is currently reviewing its options in
relation to this company.
NH:
Not explicit, but there is a profit warning in this announcement. To be fair, the company
loses money in H1 and makes all its money in Q4, so there can be no explicit guidance at
this stage of the year, but we see downside risk to consensus. We recently reduced our
pretax forecast for 2008/9 from £30m to £25m. This compares with consensus of
£28m.
loses money in H1 and makes all its money in Q4, so there can be no explicit guidance at
this stage of the year, but we see downside risk to consensus. We recently reduced our
pretax forecast for 2008/9 from £30m to £25m. This compares with consensus of
£28m.
NH:
We also reduced our target price, partly as a consequence of lower estimates, but also
due to a change in our SOTP analysis. In 2007/8, Woolworths year end debt rose from
£103m to £124m. However, its average net debt increased from £113m to £246m,
reflecting the full year effect of the THE and Bertram acquisitions, and the increased
working capital requirements of the enlarged Entertainment Wholesale business.
! The increased debt has a substantial effect on the SOTP analysis, reducing it by 8.5p and
taking our Best Case SOP down to 13.3p. The problem with lower forecasts is that this
will obviously increase the average debt during the year, so we are reducing our target
price further to 9p.
due to a change in our SOTP analysis. In 2007/8, Woolworths year end debt rose from
£103m to £124m. However, its average net debt increased from £113m to £246m,
reflecting the full year effect of the THE and Bertram acquisitions, and the increased
working capital requirements of the enlarged Entertainment Wholesale business.
! The increased debt has a substantial effect on the SOTP analysis, reducing it by 8.5p and
taking our Best Case SOP down to 13.3p. The problem with lower forecasts is that this
will obviously increase the average debt during the year, so we are reducing our target
price further to 9p.
HT:
thanks
HT:
VP – astonished that our ultra sensitive profanity filter allows that through
HT:
a loophole!!!
HT:
Neil, is anything rising today?
NH:
not much,
NH:
only six stocks in the FTSE 100
NH:
all defensive
NH:
with the exception of Smith & Nephew
HT:
G4S – security services
NH:
which has proved to be anything but defensive in recent months
HT:
more bank robbers in a downturn?
NH:
back to S&N
NH:
stock being pushed hard by UBS this morning
HT:
S&N up 6 points
NH:
they reckon this is one for the long term -
HT:
at 585p
NH:
which sounds ominous to me
NH:
O.ne for the long run: Upgrade to Buy Oversold on PLUS, near-term US concerns in trauma…
Smith & Nephew lost US$1.4bn of market cap post the Q1 07 numbers, when it revealed that
US$100m of sales acquired with PLUS orthopaedics in Q2 07 were lost owing to the
“discontinuation of unacceptable selling practices”. Another sales-force reorganisation in
trauma, high launch costs associated with wound therapy and weak US endoscopy added to a
m.ixed quarter. …but some good news
Smith & Nephew lost US$1.4bn of market cap post the Q1 07 numbers, when it revealed that
US$100m of sales acquired with PLUS orthopaedics in Q2 07 were lost owing to the
“discontinuation of unacceptable selling practices”. Another sales-force reorganisation in
trauma, high launch costs associated with wound therapy and weak US endoscopy added to a
m.ixed quarter. …but some good news
NH:
BHR (hip resurfacing) continues to grow strongly globally. Furthermore, Stryker has had limited
traction with its competitor product in-licensed from Corin (which recently downgraded
expectations for the year) while Zimmer’s competitor product has been delayed. Furthermore,
6.-7% growth in wound management ex-US is impressive
traction with its competitor product in-licensed from Corin (which recently downgraded
expectations for the year) while Zimmer’s competitor product has been delayed. Furthermore,
6.-7% growth in wound management ex-US is impressive
NH:
. Negative Pressure Wound Therapy (NPWT) is a long-term story
NPWT has started well in the US, having won nine of the ten designated metropolitan areas
included in the first phase of Medicare competitive bidding program. Preferred provider, Apria,
was awarded contracts to provide NWPT to beneficiaries in seven of the nine domestic markets
included in the first phase of the homecare market. However, Q2 08 is too soon to see impact
f.rom NWPT. Valuation: DCF-derived; new Buy rating
NPWT has started well in the US, having won nine of the ten designated metropolitan areas
included in the first phase of Medicare competitive bidding program. Preferred provider, Apria,
was awarded contracts to provide NWPT to beneficiaries in seven of the nine domestic markets
included in the first phase of the homecare market. However, Q2 08 is too soon to see impact
f.rom NWPT. Valuation: DCF-derived; new Buy rating
NH:
On a 12-month view the stock looks oversold and
the fundamentals ex-PLUS are strong. Our estimates are above 2009E consensus but FY 08
EPS will be very back-end loaded (33% in Q4 08) in a year in which management needs to
deliver consistently good numbers to restore confidence. UBS estimates are 10% below
consensus for Q2 08 despite the extra sales day versus Q2 07. We upgrade our rating on the
stock to Buy.
the fundamentals ex-PLUS are strong. Our estimates are above 2009E consensus but FY 08
EPS will be very back-end loaded (33% in Q4 08) in a year in which management needs to
deliver consistently good numbers to restore confidence. UBS estimates are 10% below
consensus for Q2 08 despite the extra sales day versus Q2 07. We upgrade our rating on the
stock to Buy.
HT:
right
HT:
long-term story all round
NH:
HT:
small cap stuff?
NH:
A couple of things
NH:
One is London Scottish Bank
NH:
door step lender
NH:
is something of a tight spot
NH:
as we wrote in the paper this morning
NH:
the company – market cap of £11.9m last night – is trying to raise £40m
HT:
ha
NH:
needs the cash to meet regulatory capital requirements
NH:
anyway, the company has been out and about seeing shareholders
NH:
and from what we are picking up this placing looks like it is going to be done around 2p-3p
HT:
that’s a huge discount
HT:
shares down 1.1 at 7.2p
NH:
yep, but the situation is very fluid so that could change
NH:
as I said before LSB in a very tight situation
NH:
needs to raise cash – at least £32.5m by the end of October otherwise it will be forced to sell Robinson Way, its debt recovery business
NH:
now this is the best bit of the company
HT:
that’s not good
HT:
that’s the bit they’re strategically refocusing on
HT:
which leaves……not a lot
NH:
they won’t be if this fund raising does not get off the ground
NH:
still, suprised the shares have held up so well
NH:
but
NH:
this is not an isolated example
HT:
really
NH:
told the sofa companies SCS and Land of Leather are both struggling to raise finance
NH:
according to recent reports LOL is looking to raise £13m through a share placing
NH:
but if anyone thinks it is going to be done at anywhere close to the current price of 11.5p they must be joking
NH:
shares currently off 0.5p at 11.5p
NH:
as for SCS
NH:
well, if LOL managed to gets its cash call away….
NH:
I wonder whether anyone will back a refinancing at SCS
NH:
its shares are actually up this morning – 0.62p better at 8.75p
NH:
again the market does not seem to have a full grip of how tough things are out there
NH:
and what sort of levels these refinancing will have to be done at
HT:
more doom and gloom
HT:
NH:
right couple of things to mention before we wrap things up
NH:
G4S, which helen mocked earlier
NH:
they are being lifted by a fresh private bid rumours
HT:
I don’t think I mocked
NH:
these have been round before
HT:
NH:
Permira supposed to be looking at them
NH:
and on the housebuilders
NH:
seems the mighty Goldman Sachs has been saying some worrying things
NH:
Focus on fundamentals; not out of the woods yet
NH:
Time to focus on fundamentals
Given recent share price movements and news flow regarding potential
equity injections, we believe it is time to focus on sector fundamentals. We
would avoid companies with high leverage and short land banks. The UK
housing market is only at the start of a deep downturn, which could last up
to three years, in our view. We forecast average selling prices to fall 6% in
2008 and 8% in 2009 on the back of volumes declines of 24% and 8%. This
results in EBITDA declines of 30% in 2008E and 40% in 2009E
Given recent share price movements and news flow regarding potential
equity injections, we believe it is time to focus on sector fundamentals. We
would avoid companies with high leverage and short land banks. The UK
housing market is only at the start of a deep downturn, which could last up
to three years, in our view. We forecast average selling prices to fall 6% in
2008 and 8% in 2009 on the back of volumes declines of 24% and 8%. This
results in EBITDA declines of 30% in 2008E and 40% in 2009E
NH:
Highly leveraged companies might need to recapitalise
We believe that falling profitability and cash generation should continue to
place pressure on balance sheets, resulting in higher sub-sector leverage.
If this persists, we believe highly leveraged companies might need to raise
fresh equity to recapitalise their balance sheets.
We believe that falling profitability and cash generation should continue to
place pressure on balance sheets, resulting in higher sub-sector leverage.
If this persists, we believe highly leveraged companies might need to raise
fresh equity to recapitalise their balance sheets.
NH:
Upcoming results should create better visibility
The sector is about to enter reporting season, starting with Berkeley on
June 27. We believe this will give us better visibility on the current
environment and the potential for asset writedowns for those companies
reporting full-year results – Barratt, Berkeley, Bovis and Redrow. We
expect continued negative data points on mortgage approvals, pricing and
pricing expectations to support our Cautious coverage view.
The sector is about to enter reporting season, starting with Berkeley on
June 27. We believe this will give us better visibility on the current
environment and the potential for asset writedowns for those companies
reporting full-year results – Barratt, Berkeley, Bovis and Redrow. We
expect continued negative data points on mortgage approvals, pricing and
pricing expectations to support our Cautious coverage view.
NH:
Redrow remains our key Sell idea
Given the market’s aversion to house builders with high leverage, we
expect Redrow to underperform in the current environment. In addition to
strong operational gearing to an accelerating housing downturn, it is the
most highly geared housebuilder on our estimates (9.9x average 2009-10E
net debt/EBITDA). Redrow is on our Conviction Sell List, together with
Persimmon. We also rate Berkeley Se
Given the market’s aversion to house builders with high leverage, we
expect Redrow to underperform in the current environment. In addition to
strong operational gearing to an accelerating housing downturn, it is the
most highly geared housebuilder on our estimates (9.9x average 2009-10E
net debt/EBITDA). Redrow is on our Conviction Sell List, together with
Persimmon. We also rate Berkeley Se
NH:
Another three years to go if this correction is similar to 1988-1993
The last major housing correction in the UK occurred between late-1988 and late-1993,
when house price growth fell by more than 35% over a four-year period. The correction
was driven by high interest rates, high mortgage payments relative to disposable income,
and high inventory levels. In the current environment, the problems are slightly different:
tighter mortgage credit, higher household inflation, record real house prices, and lower
inventory levels. We believe the sharp contraction in mortgage availability has accelerated
the house price correction and as a result, the downturn should be shorter than in the early
1990s. However, we believe that this is highly dependant on lending banks returning to the
market with competitive mortgages.
The last major housing correction in the UK occurred between late-1988 and late-1993,
when house price growth fell by more than 35% over a four-year period. The correction
was driven by high interest rates, high mortgage payments relative to disposable income,
and high inventory levels. In the current environment, the problems are slightly different:
tighter mortgage credit, higher household inflation, record real house prices, and lower
inventory levels. We believe the sharp contraction in mortgage availability has accelerated
the house price correction and as a result, the downturn should be shorter than in the early
1990s. However, we believe that this is highly dependant on lending banks returning to the
market with competitive mortgages.
NH:
Falling cash generation driving up leverage multiples
In the current environment, we believe investors should focus on cash generation and the
increase in house builder leverage over the next three years. We examine near-term cash
generation for each house builder under different price scenarios. Our analysis suggests
that Barratt, Redrow and Taylor Wimpey have the weakest cash generating capability over
the next three years. The greatest increase in leverage occurs at Redrow, Bovis and Taylor
Wimpey. Without a significant reduction in debt (or increase in cash flows) we believe
highly leveraged names will struggle in the near term and may need an equity injection.
Berkeley and Bellway appear to have the most resilient cash flows and the lowest gearing.
New equity might be needed to lower leverage
As the housing downturn has intensified, news flow on the need for balance sheet
recapitalisation has increased. We assume the optimal leverage for house builders is 3.0x
2009E net debt/EBITDA, and we analyse the impact of leveraged companies issuing new
equity via a rights issue. On this basis, Barratt and Taylor Wimpey are the companies most
likely to need a capital injection resulting in significant dilution of existing shareholder
stakes; Bellway and Berkeley are the least likely to need a capital injection.
In the current environment, we believe investors should focus on cash generation and the
increase in house builder leverage over the next three years. We examine near-term cash
generation for each house builder under different price scenarios. Our analysis suggests
that Barratt, Redrow and Taylor Wimpey have the weakest cash generating capability over
the next three years. The greatest increase in leverage occurs at Redrow, Bovis and Taylor
Wimpey. Without a significant reduction in debt (or increase in cash flows) we believe
highly leveraged names will struggle in the near term and may need an equity injection.
Berkeley and Bellway appear to have the most resilient cash flows and the lowest gearing.
New equity might be needed to lower leverage
As the housing downturn has intensified, news flow on the need for balance sheet
recapitalisation has increased. We assume the optimal leverage for house builders is 3.0x
2009E net debt/EBITDA, and we analyse the impact of leveraged companies issuing new
equity via a rights issue. On this basis, Barratt and Taylor Wimpey are the companies most
likely to need a capital injection resulting in significant dilution of existing shareholder
stakes; Bellway and Berkeley are the least likely to need a capital injection.
NH:
bickie
HT:
only at the start of a deep downturn
HT:
to last three years
NH:
NH:
HT:
you’re sending me off to lunch in the doldrums
NH:
late bit of RAW
NH:
legal and general being smacked by some bearish rumour
NH:
stock off 4.9p at 111p
NH:
and falling
NH:
111p – that’s a nelson
NH:
not a good score to land on in cricket
HT:
we’re done
HT:
no more misery please
HT:
thanks for joining
HT:
PM back tomorrow from his ascot jolly
HT:
thanks Neil
NH:
hopefully with some gossip
NH:
do we know if he was allowed into the Royal Enclosure??
HT:
not sure
NH:
did he find a top hat to fit his pin head??
HT:
and a jacket sufficiently narrow for his slight frame
NH:
and what about the dodgy raincoat
HT:
left at home I hope – wouldn’t pass the Ascot fashion police
NH:
presumably the doormen at ascot would have removed that
HT:
he’d be evicted along with the WAGs
NH:
and the CHAVS
HT:
we’ll hear all tomorrow
HT:
bye all
NH:
see ya