Markets live chat transcript for the chat ending at 12:17 on 20 Jun 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Morning
PM:
Welcome to Markets Live
PM:
This is FT Alphaville’s daily markets twatter
PM:
chatter i mean
PM:
Twatter is copyrighted by S Jones
PM:
Neil is logging on
PM:
Busy thi smorning
PM:
Banks 
PM:
Housebuilders
PM:
telegraph journos
PM:
Sorry — mistake — was just reading a note from the NUJ about job cuts at the telegraph
PM:
The company intends to make 7 or 8 staff journalists redundant within the next week:
Two from Sport
One from Foreign
Two from Design/Graphics
One or two (they are aiming for two) from Property
One from News
PM:
Not good
PM:
NH:
morning all
PM:
Thought we’d have a spot of financial philosophy this morning.
PM:
Pose one or two of the big questions.
NH:
What, like “Why are banks here?”
PM:
Yeah, that sort of stuff
PM:
But seriously. We having been sitting here this morning watching HBOS.
PM:
The stock has been down to 283.75 so far today.
NH:
That’s just 8.75p above the rights issue price.
NH:
currently 288.5p down 8.25p
PM:
And there’s still weeks to go with this cash call.
PM:
which is at 275p (currently)
NH:
NH:
But the big point we are debating – and yes, we are probably a tad premature with this
NH:
But the point is – what if the rights flops?
NH:
You can say glibly that life just goes on – the bank gets its money, the underwriters get the stock
NH:
But it is not like that.
PM:
Sure, if you are a metals basher, or a food producer, say – and your rights flops you actually can just get on with your corporate life.
PM:
The underwriters operate as insurers. They pick up the spare stock and you get your money. They might hate you for it – and your price might be stuck in the sin bin for months or years.
PM:
But life goes on.
NH:
With banks it’s different.
NH:
Banks are built on confidence – and a rights flop is effectively a vote of no confidence.
PM:
Hmm. That’s why, when Bungle Bank’s rights was in trouble the first question was “Who is going to do the rescue takeover.”
PM:
And our suspicion was that the Bank of England had asked Lloyds TSB to take it out – and Lloyds had refused.
PM:
Just our uneducated speculation of course.
PM:
In the event they had to slash the rights price.
NH:
So now we are looking at HBOS and wondering…..
NH:
What happens?
PM:
You’ve got this irony – HBOS, as the country’s biggest mortgage lender, is just too big to fail.
PM:
Obviously it is not in danger of failing – just that the market looks to be issuing a vote of no confidence.
NH:
Obviously it is not in danger of failing – just that the market looks to be issuing a vote of no confidence.
PM:
But there is no one obvious that can just take HBOS over.
NH:
And it is not as though the management are incompetent.
NH:
Recklessly ambitious in some areas, maybe. But not incompetent.
PM:
And good looking, according to James Eden. Andy Hornby.
PM:
Alright, that’s enough big questions. How about the straight forward question about why it is headed south again today?
PM:
The price is all over the place– been in the indicative auction within the last hour.
NH:
yeah but that’s just because of the options expiry this morning
NH:
everything gets stuck into an auction to prevent the index being roofed or smashed
NH:
but we do have a slew of downgrades. And the tone of research is just SOOOO bearish.
PM:
Put some up.
PM:
And remember bickie as we are going through all this.
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
NH:
NH:
this from Credit Suisse
NH:
TP cut to 370p from 450p; Reiterate Underpeform
NH:
A lot is priced in, in our view…
A lot is priced in, in our view…
…however EPS and procyclicality risk remains. We stay Underperform
The HBOS statement wasn’t that negative. The problem was it highlighted the uncertain and volatile environment in which banks currently trade, with few clues where we go from here. Indeed, it’s the tail risk that keeps us cautious on UK banks generally. That the biggest mortgage lender can revise its 2008 house price forecast from -5% to -9% in seven weeks demonstrates the point.
NH:
The range of consensus forecasts, at 44p to 78p for 2009 EPS, is also wider than we can remember. We are towards the lower end of this at 52p despite assuming zero write-downs in 2009. This is about 6% lower than our previous forecast due to lower assumed investment gains (the fact that certain losses are now emerging is also worrying). Admittedly we assume a significant increase in impairment charge to £4bn (£2bn in 2007) but do not think this is unreasonable given the emerging payment strain across several portfolios.
But this is a two pronged issue and our work on procyclicality indicates group RWA could increase by over 30% over the next few years (depending on the severity of the downturn) which would in turn reduce the equity tier 1 ratio (already reliant on 120bps embedded value) by over 150bps, on our estimates.
Everything has a price, and at 0.7 times 2008E tangible equity, we think there’s a lot of downside factored into HBOS. But quantifying this is difficult – assuming an early 1990′s type downturn and applying only to loan impairment misses important issues around the Treasury portfolio, the life company, capital and cost of funding (although there would likely be wider asset margins).
Our new 12-month target price is 370p (from 450p) reflecting earnings downgrades and lower ratings across the sector. While this is 25% above the share price, for now this is not enough to warrant buying the shares given the associated risks and volatility (particularly during the rights period), in our view.
PM:
Should repeat that key par – sums things up nicely
PM:
The HBOS statement wasn’t that negative. The problem was it highlighted the uncertain and volatile environment in which banks currently trade, with few clues where we go from here. Indeed, it’s the tail risk that keeps us cautious on UK banks generally. That the biggest mortgage lender can revise its 2008 house price forecast from -5% to -9% in seven weeks demonstrates the point.
NH:
Okay – and this is from Sandy Chen at Panmure
NH:
now this is bearish
NH:
he has set a 250p target price
NH:
someone call the FSA
PM:
NH:
HBOS
Another cut
We are cutting our forecasts substantially, driven by both higher impairments
as the UK macro deterioration accelerates, and further write-downs on
monoline/negative basis exposures.
Another cut
We are cutting our forecasts substantially, driven by both higher impairments
as the UK macro deterioration accelerates, and further write-downs on
monoline/negative basis exposures.
NH:
There has already been ample commentary on the outlook for rising impairments in the
UK retail and corporate loan books; we expect further rises as the UK macro
deterioration accelerates (see our May sector note “The Devil We Know”) for details.
We are now forecasting impairment charges (including AFS impairments) of 125bp per
RWA in 2008 and 130bp in 2009 – roughly double the 68-70bp per RWA in
impairments recorded in 2005-2007.
UK retail and corporate loan books; we expect further rises as the UK macro
deterioration accelerates (see our May sector note “The Devil We Know”) for details.
We are now forecasting impairment charges (including AFS impairments) of 125bp per
RWA in 2008 and 130bp in 2009 – roughly double the 68-70bp per RWA in
impairments recorded in 2005-2007.
NH:
.. Given last night’s Moody’s downgrades of Ambac (to Aa3) and MBIA (to A2), we will
focus on the £3.3bn of negative basis exposure as at 31 May 08 – the same level as at 31
Dec 07, despite a significant decline in the credit quality of the underlying assets that the
negative basis CDS covered (from 1.00 in Dec07 to 1.08 in Mar08 to 2.54 in May08) and
downgrades of the monolines that provide £2.8bn of the negative basis CDS protection.
We would have expected significant write-downs to be recognised, along the lines of the
the £2.7bn in gross write-downs that RBS detailed in its rights prospectus.
focus on the £3.3bn of negative basis exposure as at 31 May 08 – the same level as at 31
Dec 07, despite a significant decline in the credit quality of the underlying assets that the
negative basis CDS covered (from 1.00 in Dec07 to 1.08 in Mar08 to 2.54 in May08) and
downgrades of the monolines that provide £2.8bn of the negative basis CDS protection.
We would have expected significant write-downs to be recognised, along the lines of the
the £2.7bn in gross write-downs that RBS detailed in its rights prospectus.
NH:
.. The expectation of significantly higher impairment charges as well as further writedowns
drives us to make substantial cuts in our EPS forecasts, from 38.1p to 25.2p for
2008, and from 47.5p to 24.1p for 2009. We also expect that risk-weighted asset growth
will significantly outpace balance sheet asset growth for the next few years, as credit
quality deterioration and falling asset prices continue to translate into rising risk weights.
This will keep pressure on HBOS’ capital ratios.
drives us to make substantial cuts in our EPS forecasts, from 38.1p to 25.2p for
2008, and from 47.5p to 24.1p for 2009. We also expect that risk-weighted asset growth
will significantly outpace balance sheet asset growth for the next few years, as credit
quality deterioration and falling asset prices continue to translate into rising risk weights.
This will keep pressure on HBOS’ capital ratios.
NH:
.. We expect that ROIC will fall from 9.4% for 2007 to 3.4% in 2008 and 3.5% in 2009.
We cut our ROIC-based share price target from 350p to 250p, and maintain Sell. We
realise that setting a share price target below the rights price of 275p is controversial; we
stress that it is a reflection of our overall view on the UK banks and the outlook for
earnings in very tough macro environments.
We cut our ROIC-based share price target from 350p to 250p, and maintain Sell. We
realise that setting a share price target below the rights price of 275p is controversial; we
stress that it is a reflection of our overall view on the UK banks and the outlook for
earnings in very tough macro environments.
PM:
Whoa. He’s all but halved next year’s eps forecast. Less than 25p.
PM:
And you can see the effect of the monoline downgrades – MBIA etc. Those are feeding directly into higher writdown forecasts, which in turn are causing sector-wide forecast cuts.
PM:
And hence selling.
NH:
Okay – and this is from Lehman – expecting rather better eps – but still been cut substantially:
NH:
HBOS (HBOS LN, 318.8p, 3-UW/1-POS, PT 320p, R Law) CUT PT TO 320p VS 520p, CUT EPS ESTS & REIT 3-UW FOLL’G TRADING S’MENT: CUT TBV ESTS ON RIGHTS ISSUE DILUTION & FURTHER EXPECTED WRITEDOWNS
EPS (STG) ’08 75.9 to 70.0, ’09 74.3 to 58.5
Although the shares have fallen to 76% of tangible BV, they are likely to remain unattractive until investors are more confident of an approaching end to the decline in asset values
Mkts likely to focus on negative newsflow & sentiment towards the UK domestic mortgage groups in 2H08. Continue to prefer the Far Eastern banks to the domestic UK banks and Lloyds TSB amongst the domestic groups
EPS (STG) ’08 75.9 to 70.0, ’09 74.3 to 58.5
Although the shares have fallen to 76% of tangible BV, they are likely to remain unattractive until investors are more confident of an approaching end to the decline in asset values
Mkts likely to focus on negative newsflow & sentiment towards the UK domestic mortgage groups in 2H08. Continue to prefer the Far Eastern banks to the domestic UK banks and Lloyds TSB amongst the domestic groups
NH:
Actually, just while ive got it up might as well pub the rest of Lehmans bearish stance on the banks generally.
NH:
BANKS (1-POS, J Peace) STILL WARY OF DOMESTIC UK, IRISH & SPANISH BANKS & THE INVESTMENT BANKS; KEY 1-OWs HSBC, STANDARD CHARTERED, BBVA, SANTANDER & BNPP
We believe the mkt will be willing to pay a premium for banks with strong b/sheets. even if growth is lacklustre. At the same time, we think banks with weak b/sheets & above-avg credit cycle exposure should be seen as value traps
We do not expect any “reversion to mean” of stock P/E multiples while asset prices continue to fall and while trading around the mean and we expect to hold our fundamental views for at least 12 mths
1-OW recommendations include HSBC, Standard Chartered, BBVA, Santander & BNP Paribas. Our key 3-UW recommendations are RBS, HBOS, Bank of Ireland, Banco Popular, UBS & Deutsche Bank
We believe the mkt will be willing to pay a premium for banks with strong b/sheets. even if growth is lacklustre. At the same time, we think banks with weak b/sheets & above-avg credit cycle exposure should be seen as value traps
We do not expect any “reversion to mean” of stock P/E multiples while asset prices continue to fall and while trading around the mean and we expect to hold our fundamental views for at least 12 mths
1-OW recommendations include HSBC, Standard Chartered, BBVA, Santander & BNP Paribas. Our key 3-UW recommendations are RBS, HBOS, Bank of Ireland, Banco Popular, UBS & Deutsche Bank
NH:
In for a penny, in for a pound – let’s have a pop at all the US banks while we are at it!
NH:
Here’s Merrill Lynch on the US regional banks.
PM:
NH:
Significantly cutting EPS estimates in ’08 and ’09
For the large cap regional banks, we are cutting our ’08 EPS estimates by a
median 15% and an average of 22% and our ’09 EPS estimates by a median 17%
and an average of 19% (see Table 1). Furthermore, our estimates are now below
consensus levels by a median 23% in ’08 and 24% in ’09 (see Table 2).
For the large cap regional banks, we are cutting our ’08 EPS estimates by a
median 15% and an average of 22% and our ’09 EPS estimates by a median 17%
and an average of 19% (see Table 1). Furthermore, our estimates are now below
consensus levels by a median 23% in ’08 and 24% in ’09 (see Table 2).
NH:
The drivers are much higher loan losses & reserve building
The large EPS cuts are driven by two main factors. First, we are increasing our
credit loss assumptions across nearly all consumer & commercial loan categories,
with especially significant increases in residential construction and 2nd lien home
equity loans. Overall, we are now assuming that the median large regional bank’s
net charge-off ratio will increase from 0.28% in ’06 & 0.38% in ’07 to 1.14% in ’08
& 1.52% in ’09. Second, due to higher credit loss estimates and rapidly rising loan
delinquencies and NPAs, we are also materially increasing our assumptions for
additional loan loss reserve building. For example, we are now assuming that our
median bank will finish ’08 with a reserve-to-loan ratio of 1.90%, up from 1.55% at
3/31/08
The large EPS cuts are driven by two main factors. First, we are increasing our
credit loss assumptions across nearly all consumer & commercial loan categories,
with especially significant increases in residential construction and 2nd lien home
equity loans. Overall, we are now assuming that the median large regional bank’s
net charge-off ratio will increase from 0.28% in ’06 & 0.38% in ’07 to 1.14% in ’08
& 1.52% in ’09. Second, due to higher credit loss estimates and rapidly rising loan
delinquencies and NPAs, we are also materially increasing our assumptions for
additional loan loss reserve building. For example, we are now assuming that our
median bank will finish ’08 with a reserve-to-loan ratio of 1.90%, up from 1.55% at
3/31/08
NH:
Thus, we now expect the median large regional bank’s loan loss
provision-to-loan ratio to increase from 0.57% in ’07 to 1.87% in ’08 and to remain
elevated in ’09, which should materially weaken EPS results and reduce the
median bank’s ROTCE from 27% in ’06 & 23% in ’07 to 14% in both ’08 and ’09,
implying fair value at a median of about 1.3x tangible book vs. a current level of
1.5x. We do not expect credit metrics to begin to recover until 2010.
provision-to-loan ratio to increase from 0.57% in ’07 to 1.87% in ’08 and to remain
elevated in ’09, which should materially weaken EPS results and reduce the
median bank’s ROTCE from 27% in ’06 & 23% in ’07 to 14% in both ’08 and ’09,
implying fair value at a median of about 1.3x tangible book vs. a current level of
1.5x. We do not expect credit metrics to begin to recover until 2010.
NH:
Maintaining opinions; significantly lowering POs.
Thus, we are maintaining our Underperform ratings on BAC, FITB, KEY, MTB,
RF, STI, WB, and WFC. We have Neutral ratings on BBT, NCC, PNC and USB.
We have no Buy opinions. We are also reducing our Price Objectives as follows:
BAC from $28 to $25; BBT from $32 to $24; FITB from $18 to $9; KEY from $11
to 10; MTB from $74 to $66; NCC from $6 to $5; PNC from $66 to $59; RF from
$16 to $10; STI from $41 to $30; USB from $32 to $30; WB from $19 to $15 and
WFC from $22 to $20. Furthermore, following recent dividend cuts at WB, NCC,
KEY and FITB, we are forecasting dividend cuts at BAC, RF, STI, and WB.
Thus, we are maintaining our Underperform ratings on BAC, FITB, KEY, MTB,
RF, STI, WB, and WFC. We have Neutral ratings on BBT, NCC, PNC and USB.
We have no Buy opinions. We are also reducing our Price Objectives as follows:
BAC from $28 to $25; BBT from $32 to $24; FITB from $18 to $9; KEY from $11
to 10; MTB from $74 to $66; NCC from $6 to $5; PNC from $66 to $59; RF from
$16 to $10; STI from $41 to $30; USB from $32 to $30; WB from $19 to $15 and
WFC from $22 to $20. Furthermore, following recent dividend cuts at WB, NCC,
KEY and FITB, we are forecasting dividend cuts at BAC, RF, STI, and WB.
NH:
Banks stocks now appear to be in capitulation mode
Over the past seven weeks, the BKX Bank Index is down 26%, and bank stocks
now appear to be in capitulation mode, which means they could trade below fair
value in the near-term as 1) emotion, 2) very high credit risk, 3) more dividend
cuts and capital raises, and 4) a very uncertain earnings outlook all weigh on bank
prices. Still, as more large banks cut dividends, raise capital, and significantly
(and more realistically) increase their credit loss and reserve building assumptions
(similar to WB, NCC, KEY & FITB), we should get closer to fully discounting the
credit cycle in bank stock prices and commencing a sustainable price recovery.
Over the past seven weeks, the BKX Bank Index is down 26%, and bank stocks
now appear to be in capitulation mode, which means they could trade below fair
value in the near-term as 1) emotion, 2) very high credit risk, 3) more dividend
cuts and capital raises, and 4) a very uncertain earnings outlook all weigh on bank
prices. Still, as more large banks cut dividends, raise capital, and significantly
(and more realistically) increase their credit loss and reserve building assumptions
(similar to WB, NCC, KEY & FITB), we should get closer to fully discounting the
credit cycle in bank stock prices and commencing a sustainable price recovery.
PM:
Capitulation mode!
PM:
Okay – let’s move on.
NH:
Hang on – ive just got ML’s stuff directly on HBOS
NH:
ML on ML!
NH:
Manus Costello.
PM:
Isn’t it nice that Merrills have reversed that policy decision on giving the press access to their latest stock-specific research?
NH:
PM:
Print it.
PM:
Or at least print excerpts
NH:
15% EPS & PO cuts due to margins & asset quality
Yesterday’s trading update to the 31st May was broadly as expected given the
deteriorating macro backdrop. This was in itself somewhat reassuring following
profit warnings elsewhere. We have cut our PO by 15% and 2008 and 2009 EPS
estimates by 15% and 13% respectively, due to weaker margins and asset quality.
Yesterday’s trading update to the 31st May was broadly as expected given the
deteriorating macro backdrop. This was in itself somewhat reassuring following
profit warnings elsewhere. We have cut our PO by 15% and 2008 and 2009 EPS
estimates by 15% and 13% respectively, due to weaker margins and asset quality.
NH:
Arrears rising in-line with management expectations
Arrears are rising, but management stress they are doing so in-line with
expectations. We have increased our 2008 and 2009 mortgage impairment
forecasts from 6bps and 16bps to 10bps and 30bps respectively following the
announcement.
Arrears are rising, but management stress they are doing so in-line with
expectations. We have increased our 2008 and 2009 mortgage impairment
forecasts from 6bps and 16bps to 10bps and 30bps respectively following the
announcement.
NH:
Asset re-pricing to mitigate funding hit to margins
Following updated guidance we have trimmed our 2008 group interest margin by
2bps to 114bps. Asset re-pricing, especially of mortgages is helping offset funding
costs, but we see margin volatility as likely to continue.
Following updated guidance we have trimmed our 2008 group interest margin by
2bps to 114bps. Asset re-pricing, especially of mortgages is helping offset funding
costs, but we see margin volatility as likely to continue.
NH:
More bad news to come…
Deteriorating macro and the assumptions incorporated into guidance cause us to
believe more bad news could be on the way. For instance, management’s revised
2008 9% house price drop forecast compares to derivative market expectations of
a 15% fall. In addition we see additional treasury impairments of £40mn due to
mono-line downgrades.
Deteriorating macro and the assumptions incorporated into guidance cause us to
believe more bad news could be on the way. For instance, management’s revised
2008 9% house price drop forecast compares to derivative market expectations of
a 15% fall. In addition we see additional treasury impairments of £40mn due to
mono-line downgrades.
NH:
Maintaining our Underperform recommendation
HBoS is optically cheap on 0.7x 2009 tangible book and 5.5x 2009E earnings with
a 13% RoE, versus sector averages of 7.3x, 1.3x and 16% respectively. However,
our PO offers no upside, versus the 19% sector average and we consider risks to
our estimates to be skewed to the downside.
HBoS is optically cheap on 0.7x 2009 tangible book and 5.5x 2009E earnings with
a 13% RoE, versus sector averages of 7.3x, 1.3x and 16% respectively. However,
our PO offers no upside, versus the 19% sector average and we consider risks to
our estimates to be skewed to the downside.
PM:
Their 09 eps forecast if 50.7.
PM:
Pretty wide market in that forecast – across the various analysts.
PM:
Any disclosure from evil short sellers??
PM:
Confessionals?
NH:
nothing this morning, but then we are not expecting anything until Monday
PM:
repenting hedgies>
NH:
i think the rules from the FSA come in a midnight
NH:
and then u have to report at the end of the next biz day
NH:
Monday
NH:
so we should be able to name and shame the guilty on Monday
PM:
PM:
Right — to questions below
PM:
We have no more info on Informa — printed everything we have yesterday here.
NH:
but note the wording of yesterday’s statement
NH:
it says a consortium including
NH:
which means
NH:
Providence and Caryle couldbe joined by others
NH:
and of course
NH:
UBM could always buy assets from the consortium
NH:
another thing
NH:
we did also have quite a bit of feedback on the high yield
NH:
bond sorry
NH:
that the bidders are planning to issue
PM:
11.75% paper
NH:
apparently there has not been a HY bond for what a year??
PM:
Somethign like that
PM:
Everyone doubts the idea that Providence can raise the necessary debt, but the fact is this PE firm has been working flat out on this deal for almost a month
NH:
so ignore the spind from the
NH:
that this deal is at a very early state
NH:
sorry stage
NH:
it isn’t
NH:
in fact the PE team have already talked to CEO of Informa
PM:
Peter Rigby
NH:
indeed, they want him on board
NH:
other questions
NH:
we have no idea why Central Africa is not trading near the price targets
PM:
Possibly because people are cautious of what they ahve said
NH:
as for Punch Taverns, the reason the stock was weak yesterday was a very bearish note from Morgan Stanley
NH:
now remember, this is one of the company’s brokers
NH:
and this note goes into depth about their balance sheet and debt
NH:
it concludes that they will scrape through without a cash call but it will be a close thing
PM:
Neil has gone off to get the punch note
NH:
do u know what Punch’s net debt figure is??
PM:
er, no
NH:
£4.9bn
PM:
NH:
and what is the companny’s market cap??
PM:
go on
NH:
£968m
PM:
And share hodler funds???
NH:
here’s the note for those of you who missed is yesterday
NH:
We think Punch’s share price is likely to remain very
volatile and could easily drop significantly further.
This is because the company will face a series of
balance sheet obstacles over several years. Our
analysis of its debt securitizations suggests that Punch
A and Punch B would fall below their cash trap tests in
2009 and 2010 respectively with just a 1% EBITDA
decline, and Spirit would drop below with just a 5% drop.
volatile and could easily drop significantly further.
This is because the company will face a series of
balance sheet obstacles over several years. Our
analysis of its debt securitizations suggests that Punch
A and Punch B would fall below their cash trap tests in
2009 and 2010 respectively with just a 1% EBITDA
decline, and Spirit would drop below with just a 5% drop.
NH:
It is therefore hard to see the shares performing in
an environment where investor focus on balance sheets
is intensifying, clarity on these issues could take some
time, and valuation arguments are not working. At the
same time, trading is still deteriorating, and we cut
forecasts again. If the shares return to their trough
EV/EBITDA of 8.0x, they could drop another 80%.
an environment where investor focus on balance sheets
is intensifying, clarity on these issues could take some
time, and valuation arguments are not working. At the
same time, trading is still deteriorating, and we cut
forecasts again. If the shares return to their trough
EV/EBITDA of 8.0x, they could drop another 80%.
NH:
However, we think Punch can trade through these
issues without needing to raise new equity. Punch
can still extract a similar amount of cash from the nets,
even if it falls beneath the cash trap tests, via the tax
shield and injecting new pubs. The cash remains in the
nets and can be extracted at a later date once trading
improves. Debt is paid down even with no profit growth.
And Punch has low corporate needs. Punch’s actual
covenants need an 18% EBITDA drop to be breached
for its leased pubs, unheard of in this relatively resilient
sector, and a 40% drop in Spirit managed pubs. This all
suggests that Punch can trade through these issues.
issues without needing to raise new equity. Punch
can still extract a similar amount of cash from the nets,
even if it falls beneath the cash trap tests, via the tax
shield and injecting new pubs. The cash remains in the
nets and can be extracted at a later date once trading
improves. Debt is paid down even with no profit growth.
And Punch has low corporate needs. Punch’s actual
covenants need an 18% EBITDA drop to be breached
for its leased pubs, unheard of in this relatively resilient
sector, and a 40% drop in Spirit managed pubs. This all
suggests that Punch can trade through these issues.
NH:
At some point the shares will look very interesting,
given the record low P/E of 5x. This is now a record 50%
discount to Enterprise Inns, so clearly a lot of concern is
already priced in. If financial conditions improve, or
indeed if pub trading stabilizes, Punch shares could rally
very hard in a very short period of time.
given the record low P/E of 5x. This is now a record 50%
discount to Enterprise Inns, so clearly a lot of concern is
already priced in. If financial conditions improve, or
indeed if pub trading stabilizes, Punch shares could rally
very hard in a very short period of time.
NH:
Punch Taverns faces four debt-related obstacles to
overcome in the next three years, which will likely
continue to weigh on its share price.
overcome in the next three years, which will likely
continue to weigh on its share price.
NH:
(1) Punch A (£2.2bn securitized debt) could drop below its
cash trap test in F2009. Punch A raised 15% more debt last
summer on the same pubs, and trading performance has been
lackluster, while interest and principal repayments are rising.
While H108 DSCR was 1.61x, Q208 was just 1.51x, and we
estimate just a 1% drop in EBITDA would take F2009 DSCR
below 1.5x, its “cash trap” test.
cash trap test in F2009. Punch A raised 15% more debt last
summer on the same pubs, and trading performance has been
lackluster, while interest and principal repayments are rising.
While H108 DSCR was 1.61x, Q208 was just 1.51x, and we
estimate just a 1% drop in EBITDA would take F2009 DSCR
below 1.5x, its “cash trap” test.
NH:
(2) Spirit Issuer (£1.25bn) could drop below its cash trap
test in F2009. The Outside Payment test was amended from
1.3x to 1.7x with the managed to lease conversion programme.
While DSCR (OpFlex) has been resilient at over 1.8x as the
conversions boost profits, it would take just a 6% EBITDA drop
to undershoot the 1.7x test, which, given the higher operational
gearing in managed pubs, would only take a 3% sales decline
test in F2009. The Outside Payment test was amended from
1.3x to 1.7x with the managed to lease conversion programme.
While DSCR (OpFlex) has been resilient at over 1.8x as the
conversions boost profits, it would take just a 6% EBITDA drop
to undershoot the 1.7x test, which, given the higher operational
gearing in managed pubs, would only take a 3% sales decline
NH:
3) Punch B (£1.2bn) could drop below its cash trap test in
2010. Punch B’s principal repayments kick in in Q210, and we
estimate its DSCR will drop from 2.0x to just 1.55x, even with
flat EBITDA. A 1% drop would also take it below 1.5x by
calendar 2010.
2010. Punch B’s principal repayments kick in in Q210, and we
estimate its DSCR will drop from 2.0x to just 1.55x, even with
flat EBITDA. A 1% drop would also take it below 1.5x by
calendar 2010.
NH:
(4). Convertible repayment in F2011. It is still 3 years away,
but Punch will need to refinance its £295m convertible, which is
well out of the money (conversion price 1178p). Assuming our
forecasts are correct, the company will still be generating
significant net income in 2011, so should be able to raise bank
debt or indeed another convertible, but it is likely to cost more.
but Punch will need to refinance its £295m convertible, which is
well out of the money (conversion price 1178p). Assuming our
forecasts are correct, the company will still be generating
significant net income in 2011, so should be able to raise bank
debt or indeed another convertible, but it is likely to cost more.
NH:
What does this mean? Falling below the cash trap tests
means there are restrictions on upstreaming cash from the
securitization buckets. Given the trading environment
continues to deteriorate, and rental income tends to lag beer
volume declines, the risk of another 1-2% EBITDA decline
cannot be ignored. But Punch has various options open to it if
it drops below. It can still extract a very similar amount of cash
from the securitization nets via its tax shield and from injecting
new pubs (though there are a limited number of pubs to inject).
The cash remains in the nets, thus boosting DSCR with higher
interest income, and the cash can be extracted at a later date
once trading has improved. And Punch has very low corporate
needs, with a low dividend, minimal cash tax, and flexible
acquisition plans. It has not been extracting much cash anyway.
This suggests Punch can trade through these issues.
means there are restrictions on upstreaming cash from the
securitization buckets. Given the trading environment
continues to deteriorate, and rental income tends to lag beer
volume declines, the risk of another 1-2% EBITDA decline
cannot be ignored. But Punch has various options open to it if
it drops below. It can still extract a very similar amount of cash
from the securitization nets via its tax shield and from injecting
new pubs (though there are a limited number of pubs to inject).
The cash remains in the nets, thus boosting DSCR with higher
interest income, and the cash can be extracted at a later date
once trading has improved. And Punch has very low corporate
needs, with a low dividend, minimal cash tax, and flexible
acquisition plans. It has not been extracting much cash anyway.
This suggests Punch can trade through these issues.
NH:
We expressly do not think Punch’s business model is
broken, or that it needs an ‘equity cure’. Leased pubs are
relatively resilient, and our bear case EBITDA is only another
5% downside (bear case EPS 66p, 12% downside). Punch’s
actual covenants need an 18% EBITDA drop in tenanted pubs,
hard to see with the high level of index-linked rents, and a 40%
in Spirit, which would be a very aggressive 20% sales drop.
broken, or that it needs an ‘equity cure’. Leased pubs are
relatively resilient, and our bear case EBITDA is only another
5% downside (bear case EPS 66p, 12% downside). Punch’s
actual covenants need an 18% EBITDA drop in tenanted pubs,
hard to see with the high level of index-linked rents, and a 40%
in Spirit, which would be a very aggressive 20% sales drop.
NH:
At some point the shares will look very interesting,
given the record low P/E of 5x. This is now a record 50%
discount to Enterprise Inns, so clearly a lot of concern is
already priced in. If financial conditions improve, or indeed if
pub trading stabilizes, we could easily see Punch shares
rally very hard in a very short period of time.
given the record low P/E of 5x. This is now a record 50%
discount to Enterprise Inns, so clearly a lot of concern is
already priced in. If financial conditions improve, or indeed if
pub trading stabilizes, we could easily see Punch shares
rally very hard in a very short period of time.
NH:
However:
• It will be some time until these issues are resolved.
There is thus little visibility.
• It will be some time until these issues are resolved.
There is thus little visibility.
NH:
• Condition or Covenant? While the cash trap threshold
is explicitly a condition that needs to be exceeded in order to
upstream cash, it looks and smells like a covenant, and an
actual “breach” could cause another drop in the share price.
is explicitly a condition that needs to be exceeded in order to
upstream cash, it looks and smells like a covenant, and an
actual “breach” could cause another drop in the share price.
NH:
Complex and uncertain. Each securitization tranche
has 5-10 different debt structures, each with different interest
costs and amortization profiles, with different conditions and
covenants (some of which change over time).
has 5-10 different debt structures, each with different interest
costs and amortization profiles, with different conditions and
covenants (some of which change over time).
NH:
• Valuation no floor in this market. Punch’s P/E may
look low, but its EV/EBITDA multiple of 9.5x does not, and its
dividend yield of 4% is hardly high.
look low, but its EV/EBITDA multiple of 9.5x does not, and its
dividend yield of 4% is hardly high.
NH:
• Have the shares fallen enough? A cursory analysis of
companies which have had to raise equity or rumoured to be in
need of raising equity implies a trailing P/E of 3x as an average,
and an average share price decline of 65%. Punch now
matches the share price drop but not yet the P/E.
companies which have had to raise equity or rumoured to be in
need of raising equity implies a trailing P/E of 3x as an average,
and an average share price decline of 65%. Punch now
matches the share price drop but not yet the P/E.
NH:
If the shares return to their trough EV/EBITDA of 8x, this
implies just 90p per share (given debt is now 7.7x EBITDA),
which we introduce as our new ‘extreme bear case’. So we
think the shares could easily drop further, but that this will be
sentiment driven rather than being caused by any major
financing issues. We therefore remain Equal-weight. Our
preference is for Enterprise Inns, which has no imminent
balance sheet issues and upside from the REIT conversion
implies just 90p per share (given debt is now 7.7x EBITDA),
which we introduce as our new ‘extreme bear case’. So we
think the shares could easily drop further, but that this will be
sentiment driven rather than being caused by any major
financing issues. We therefore remain Equal-weight. Our
preference is for Enterprise Inns, which has no imminent
balance sheet issues and upside from the REIT conversion
PM:
Jeepers. I need a drink after that
NH:
Punch drunk
PM:
Go back thru that carefully — from the house broker
PM:
This biz has 1,.7bn of shareholder equity
PM:
So gearing is close to 300%!!!!!!!!
NH:
in an industry that’s struggling
PM:
But what is a cash trap test ??
NH:
dunno, sounds dangerous though
PM:
NH:
actually, I have been looking at the pub sector
NH:
there is massive gearing across it
NH:
i know these businesses are supposed to be highly cash generative
NH:
but some of the numbers are staggering
PM:
hmmm
PM:
But we should move on
PM:
PM:
Plug for mike now
PM:
You know how we are generally pretty ignorant about the true workings of the money markets – and that we don’t really understand the dynamics between libor and the base rate etc.
PM:
Which usually comes to light when the readers ask questions we can’t answer.
NH:
yes
PM:
Well, I’ve found a man who probably can answer questions.
PM:
Chris Oulton is doing a Q&A on the ft.com markets pages on Monday.
PM:
Use that link to leave a question if you want.
PM:
Mr Oulton is a top, top end money manager.
NH:
Can we go on and ask him a few questions ourselves?
PM:
Well I guess so, so long as you do it under your own name.
PM:
Oh, and you will probably be placed at the end of the queue.
PM:
Anyway – follow that link for true money market enlightenment.
PM:
PM:
Wier market?
PM:
wider even
NH:
yep and then we should move on to the housebuilders
NH:
right, FTSE 100 down again
NH:
off 7.4 points at 5,700
NH:
as mentioned earlier banks weak
PM:
(thanks for that DLC — looks worth looking into)
NH:
and thanks to Montesquieu
NH:
excellent post below
NH:
There is a wider consortium close to being formed with “in principle” commitments having been received. Having said which, there is a delicate interaction between proposed capital structure, advanced due diligence around current trading (there are pockets of weakness emerging despite the quality of the asset portfolio), and the exact composition of the equity piece.
The lead time for preparations for this transaction extend significantly beyond a month. However, the disclosures around proposed debt structure resemble more closely an exercise in pre-marketing and market-testing than a reflection of a fully credit-approved transaction. But every effort is being made to deliver a transaction which will have the enthusiastic support of Mr Rigby.
PM:
However, i would add on this informa matter — there is a widespread assumption that these details are coming out for “marketing purposes”
PM:
i can assure you — from our end — that that is not the case
PM:
The source is shewrd, not some felt
PM:
Promise!
PM:
NH:
housebuilders
PM:
step forward Building magazine
PM:
The UK’s leading magazine for construction professionals featuring the latest news, features and intelligence from the Building industry.
NH:
yep, hat tip to the boys and girls at Building.co.uk
NH:
they have caused massive gyrations in the share prices of the entire housebuilding sector this morning
NH:
and left the paws of some bears seriously burnt
NH:
PM:
that will go down well at the FSA
NH:
smelling serious charred flesh in the office this morning
NH:
check some of these moves
Barratt Developments (BDEV:LSE): Last: 92.00, up 13.75 (+17.57%), High: 98.00, Low: 87.00, Volume: 16.62m
NH:
wow
Persimmon (PSN:LSE): Last: 393.00, up 28 (+7.67%), High: 403.00, Low: 369.00, Volume: 3.82m
Bellway (BWY:LSE): Last: 520.00, up 44 (+9.24%), High: 530.00, Low: 487.00, Volume: 1.46m
Redrow (RDW:LSE): Last: 165.50, up 11.25 (+7.29%), High: 180.00, Low: 154.50, Volume: 2.28m
Taylor Wimpey (TW:LSE): Last: 72.75, up 6.25 (+9.40%), High: 76.25, Low: 70.50, Volume: 15.17m
Bovis Homes Group (BVS:LSE): Last: 376.00, up 30.25 (+8.75%), High: 380.75, Low: 357.75, Volume: 1.32m
NH:
that’s right folks, we have a serious melt up in the housebuilder sector
PM:
yep
NH:
and it’s all down to this article
NH:
By Tom Bill
NH:
Barratt has struck a deal with its banks to buy embattled chief executive Mark Clare more time to turn its fortunes around.
The housebuilder is in talks with the Royal Bank of Scotland, UBS, HSBC and Lloyds. Sources close to the talks said an agreement had been reached to waive a clause that could have put Barratt in breach of its lending covenants after it writes down the value of its landbank in July
NH:
These “asset cover covenants” govern the ratio of debt to assets, and breaches were thought likely, given the falling land market and Barratt’s debt of £1.8bn.
A source close to the talks says all Barratt’s other refinancing options have been ruled out. It is understood the waiver will remain until it has repaid the remaining £400m it borrowed to fund the £2.2bn acquisition of Wilson Bowden in February 2007. It has until the middle of 2011 to do this.
A source close to the talks says all Barratt’s other refinancing options have been ruled out. It is understood the waiver will remain until it has repaid the remaining £400m it borrowed to fund the £2.2bn acquisition of Wilson Bowden in February 2007. It has until the middle of 2011 to do this.
NH:
The source said: “The picture has become a lot clearer in the past few days. Despite rumours about Barratt’s future, the banks are very understanding of its position.” An announcement is expected from Barratt at its next trading update on 10 July; it declined to comment this week.
NH:
The source added that Barratt had fended off “numerous approaches” from vulture funds over the past 10 days. Investors understood to have contacted the £3bn-turnover housebuilder last week include US-based Polaris Capital Management.
Calls have grown for Clare to leave the company since Barratt’s share price halved to 60p over three days last week. Clare said no discussions have taken place about his exit.
NH:
Barratt’s move comes as the outlook for housebuilders continues to worsen. The Construction Products Association predicts that housing starts will fall to their lowest level since 1945 and construction output will drop 1.3% this year.
Companies are continuing to try to address the market problems. Subcontractors this week accused Taylor Wimpey, whose credit was downgraded by ratings agency Fitch to “junk status”, of holding off payments until the end of its half year in June to strengthen its balance sheet. The company has denied it has such a policy
PM:
hmmm
PM:
I must say I am surprised by the reaction
NH:
why??
PM:
well, is there anything in there we didnt really know already
PM:
Barratt and its banks have been hinting for weeks that there would be a deal
PM:
and when you owe the banks as much money as Barratt’s does it was inconceivable they would pull the plug
PM:
Thought we were expecting covenant relaxations across the sector
NH:
agreed
NH:
banks only pull the plug on companies that don’t owe them any money like Land of Leather
PM:
NH:
then they refuse to provide merchant services
NH:
actually I have a few minor niggles with the piece
NH:
I thought the £400m referred to had to be paid back by next April
NH:
anyway, if the asset cover covenants have been waived
NH:
that is good news for the sector
NH:
basically it means the banks are not too worried by falling land prices
PM:
Yet
NH:
well obviously they will want the entire sector to recapitalise
NH:
but are just giving them some breathing space I guess
PM:
Any analyst comment?
NH:
this is from Alastair Stewart.at Dresdner
NH:
he was the man who said that he could not put a target price on Barratt
NH:
BARRATT DEV – Some first thoughts from our man Alastair Stewart.
* 1) It shows how bad things really are..
* 2) Does not get rid of debts.
* 3) No such thing as a free lunch – Banks would be in charge,
so we may see more aggressive selling of assets to pay down
debts, which given Barrratts size would lead to further
disruptions of the market.
* 4) On the vulture funds approaches – if anyone buys BDEV at
these “low valuations” it would undermine the valuation
perceptions for the rest of the sector.
* 1) It shows how bad things really are..
* 2) Does not get rid of debts.
* 3) No such thing as a free lunch – Banks would be in charge,
so we may see more aggressive selling of assets to pay down
debts, which given Barrratts size would lead to further
disruptions of the market.
* 4) On the vulture funds approaches – if anyone buys BDEV at
these “low valuations” it would undermine the valuation
perceptions for the rest of the sector.
NH:
this from Landsbanki
NH:
Barratt Developments (Household Goods, Buy, Mkt Cap £271m, SP 78.5p, TP 250p) – Full-year 2007 results
Overview – Under pressure Barratt maybe thrown a lifeline if rumours in the trade press are correct. The comments come from Building magazine and indicate that the group’s banks are willingly to waive the group’s loan covenants if Barratt were to breach them, whilst we would not place too much on this story, it does concur with comments made by Mark Pain the FD of Barratt when we had discussions with the group on the debt profile on the 11th June.
Whilst this is a high risk investment, it is the sort of news that may draw some of the shorts out of the market and encourage some revival in the share price.
Overview – Under pressure Barratt maybe thrown a lifeline if rumours in the trade press are correct. The comments come from Building magazine and indicate that the group’s banks are willingly to waive the group’s loan covenants if Barratt were to breach them, whilst we would not place too much on this story, it does concur with comments made by Mark Pain the FD of Barratt when we had discussions with the group on the debt profile on the 11th June.
Whilst this is a high risk investment, it is the sort of news that may draw some of the shorts out of the market and encourage some revival in the share price.
NH:
and this is from Credit Suisse
NH:
Barratt Developments (BDEV.L) Neutral [V] Industry Weighting: Underweight
Comments post reports company has reached an agreement to waive debt covenants
• Bloomberg story this morning suggests Barratt have reached an agreement with its key bankers to waive certain debt
covenants if they are breached, as well stating that the group has been approached by a number of vulture funds in recent
days. Clearly we see both of these issues as providing near term support for the share price today.
Comments post reports company has reached an agreement to waive debt covenants
• Bloomberg story this morning suggests Barratt have reached an agreement with its key bankers to waive certain debt
covenants if they are breached, as well stating that the group has been approached by a number of vulture funds in recent
days. Clearly we see both of these issues as providing near term support for the share price today.
NH:
• As a reminder there have been two concerns with regards to Barratt’s debt 1) risk of breaching covenants and 2) ability to
refinance debt. The former, if this article is to be believed, seems to have been addressed. With regard to the latter note that
the group has been trying to refinance a £400m tranche of a £600m repayment that is due in April 2009 – there is still no
confirmation from the company that this has been completed.
refinance debt. The former, if this article is to be believed, seems to have been addressed. With regard to the latter note that
the group has been trying to refinance a £400m tranche of a £600m repayment that is due in April 2009 – there is still no
confirmation from the company that this has been completed.
PM:
thanks for that
PM:
NH:
in any case not everything connected with the housebuilding industry is heading higher this morning
PM:
really?
NH:
seen Rightmove??
PM:
no
NH:
stock down 20p at 300p
NH:
now below its 2006 float price
PM:
goodness
NH:
which was 335p
PM:
that really is embarrassing
NH:
yep
NH:
currently biggest faller in the FTSE 250
NH:
Citigroup have removed the internet estate agent from its buy list this morning
NH:
basically, Citi are saying that Rightmove is too expensive
NH:
and a growing number of estate agents are not advertising on its site
PM:
Why
NH:
er, because they are going bust
PM:
ah, that would explain it
NH:
they are also worried about the outlook for new homes
NH:
anyway the upshot of it all is that they have slashed forecasts for 2009 and 2010 by 25% and 39% respectively
NH:
here’s the note
NH:
Downgrade to Hold — Following the deteriorating UK housing market outlook,
increased rate of estate agent closures and lower expected ARPA, we cut our 2009
and 2010 forecasts. While we think Rightmove is still well positioned in the long
term, our two years of forecast earnings decline leaves little valuation upside, in our
opinion. We downgrade to Hold/High Risk (2M).
increased rate of estate agent closures and lower expected ARPA, we cut our 2009
and 2010 forecasts. While we think Rightmove is still well positioned in the long
term, our two years of forecast earnings decline leaves little valuation upside, in our
opinion. We downgrade to Hold/High Risk (2M).
NH:
Estate agent casualties accelerate — Rightmove’s estate agents leavers (mostly
closures) accelerated to 300 in May. On that run rate, RMV will lose 2,760
members this year. Net, we forecast 13% fewer agents in 08 and 17% in 09.
closures) accelerated to 300 in May. On that run rate, RMV will lose 2,760
members this year. Net, we forecast 13% fewer agents in 08 and 17% in 09.
New homes development outlook bleak for 2009E — Slow sales of new
developments have boosted revenues in 2008. However, we forecast the number of
new homes developments using Rightmove in 2009 to fall by 45% net.
ARPA slows — After up to 30% price increases in 2008, we expect to see no price
increases for estate agents in 2009. However, we forecast Group ARPA growth of
4% (vs 16% previously) due to Rightmove Choice penetration and some price
increases for new homes developments and Lettings only agents.
Cutting forecasts — Our 2008E numbers remain broadly unchanged. We make
major cuts to our 2009 and 2010 forecasts, cutting PBT by 25% and 39%
respectively. Despite some flexibility to cut costs, with revenues now falling in both
2009E and 2010E, we forecast profits decline of 9% in 2009 and 2010.
Valuation full — Online property ad spend and a 45% forecast earnings CAGR
perhaps justified the 30x P/E in 07, but the cyclical slowdown has caught up: we
believe a new 4% CAGR offers little upside to the 13.6x 08E P/E. We cut our TP to
£3.45.
PM:
thanks for that
PM:
NH:
and staying with the construction industry
NH:
Wolseley getting beaten up this morning
PM:
For anon below
NH:
stock is the biggest faller in the FTSE 100 at the moment
NH:
down 21.5p at 448.75p
PM:
A fall of 5.6% !
PM:
Why is that?
NH:
Morgan Stanley has stoked concerns that the company could breach its banking covenants
NH:
and then require a rights issue
NH:
a very interesting note
NH:
penned by Jessica Flounders
NH:
based on her forecasts
NH:
Wolseley will breach its covs in the year to July 08
NH:
as trading continues to deteriorate she sees net debt/EBITDA of 4.0 for F2009 vs. debt covenants of 3.5.
NH:
Now Flounders reckons Wolseley could prevent a breach by further cost cutting
NH:
but she says that would come at the expense of growth
NH:
so either the share price is basically screwed
NH:
and she has cut her rating to underweight and a set a target price of just 380p
PM:
Ouch!
PM:
that’s bearish
NH:
PM:
we should take a look at this note
NH:
here it comes
NH:
it is a bit long
NH:
so we may need a bickie
NH:
but it is well worth wading through
NH:
very well constructed argument
NH:
if u will forgive the dreadful pun
NH:
We are downgrading Wolseley back to Underweight with a
price target of 380p. Following significant downgrades, our
estimates are now around 40% below consensus for 2009 and
2010. Part of this is due to a worsening revenue outlook, with
no top-line growth until F2011e. In particular, our analysis of
the Nordic region suggests consensus is far too optimistic on
the outlook for this market. We are also pushing out the
recovery in US housing starts to 2Q C2009 following the latest
forecasts from our US economists. Our detailed forecasting
also suggests the operating leverage will be greater than many
currently anticipate.
price target of 380p. Following significant downgrades, our
estimates are now around 40% below consensus for 2009 and
2010. Part of this is due to a worsening revenue outlook, with
no top-line growth until F2011e. In particular, our analysis of
the Nordic region suggests consensus is far too optimistic on
the outlook for this market. We are also pushing out the
recovery in US housing starts to 2Q C2009 following the latest
forecasts from our US economists. Our detailed forecasting
also suggests the operating leverage will be greater than many
currently anticipate.
NH:
We think earnings risk alone would be reason to be cautious,
especially considering Wolseley’s recent outperformance
versus its peers. However, in addition, we believe the net debt
to EBITDA multiple will rise to 4.0 in 2009, thus requiring the
company to take action to reduce its leverage
especially considering Wolseley’s recent outperformance
versus its peers. However, in addition, we believe the net debt
to EBITDA multiple will rise to 4.0 in 2009, thus requiring the
company to take action to reduce its leverage
NH:
Why we are turning negative again
Consensus view on Nordic is too positive
Consensus view on Nordic is too positive
NH:
Having studied the economic outlook for the Nordic region, we
believe this market faces the same pressures on growth as the
UK: slowing GDP growth, house price deflation, and negative
consumer confidence. Denmark, in particular, has the most
negative outlook, and this accounts for 56% of Nordic revenues.
It is difficult to know exactly what consensus is forecasting for
this division, but our channel checks lead us to believe organic
revenue growth is estimated to be 2% and 8% in 2009 and
2010, respectively. In contrast, we forecast organic revenue
growth of -4% and -5% for both years. The operating leverage
of this business (labour is around 75% of sales) should result in
lower profitability too — we forecast trough margins of 4.9% in
2009 and 2010 versus 6.1% in 2007.
believe this market faces the same pressures on growth as the
UK: slowing GDP growth, house price deflation, and negative
consumer confidence. Denmark, in particular, has the most
negative outlook, and this accounts for 56% of Nordic revenues.
It is difficult to know exactly what consensus is forecasting for
this division, but our channel checks lead us to believe organic
revenue growth is estimated to be 2% and 8% in 2009 and
2010, respectively. In contrast, we forecast organic revenue
growth of -4% and -5% for both years. The operating leverage
of this business (labour is around 75% of sales) should result in
lower profitability too — we forecast trough margins of 4.9% in
2009 and 2010 versus 6.1% in 2007.
NH:
Trough in US housing pushed out for another two quarters
NH:
We now don’t expect to see a trough in US housing starts until
2Q C2009, which is the end of fiscal year 2009 for Wolseley.
The small increase in sales in April (3.3%) has done little to
dent the inventory, which still stands at 10.6 months versus a
historical average of around six months. In addition, we expect
foreclosures to carry on rising, thus adding more homes to
those available for sale. As such, for normalised levels of
inventory to be reached, our economists believe housing starts
need to reach a level in the low 700,000s, with a trough of
712,000 in 2Q C2009. For Wolseley, this implies another
financial year (F2009e) of big declines in housing starts (c.30%
decline), which feeds straight through to the revenue and
profitability of the US Building Materials division. As such, we
now forecast an operating loss of £181 million in 2009 versus
£174 million previously. The group EBITA forecast for 2009 is
£354 million.
2Q C2009, which is the end of fiscal year 2009 for Wolseley.
The small increase in sales in April (3.3%) has done little to
dent the inventory, which still stands at 10.6 months versus a
historical average of around six months. In addition, we expect
foreclosures to carry on rising, thus adding more homes to
those available for sale. As such, for normalised levels of
inventory to be reached, our economists believe housing starts
need to reach a level in the low 700,000s, with a trough of
712,000 in 2Q C2009. For Wolseley, this implies another
financial year (F2009e) of big declines in housing starts (c.30%
decline), which feeds straight through to the revenue and
profitability of the US Building Materials division. As such, we
now forecast an operating loss of £181 million in 2009 versus
£174 million previously. The group EBITA forecast for 2009 is
£354 million.
NH:
No revenue recovery now until 2011
NH:
We reduce our 2010 organic revenue growth forecast from 8%
to -0.6%. This is a result of a number of moving parts. First, we
had previously expected the revenue downturn in the UK and
the US markets (ex. US new residential) to turn negative in
3Q08 and last for four quarters. This didn’t happen though in
3Q, and we now expect it to start in 4Q and to be a longer
downturn (nine quarters of negative revenue growth) ending in
2H10. We are also more negative on the Nordic, UK and US
construction markets, as discussed above.
to -0.6%. This is a result of a number of moving parts. First, we
had previously expected the revenue downturn in the UK and
the US markets (ex. US new residential) to turn negative in
3Q08 and last for four quarters. This didn’t happen though in
3Q, and we now expect it to start in 4Q and to be a longer
downturn (nine quarters of negative revenue growth) ending in
2H10. We are also more negative on the Nordic, UK and US
construction markets, as discussed above.
NH:
Balance Sheet concerns continue to weigh
Until Wolseley reduces it debt position significantly, we believe
the stock will continue to be weighed down by concerns over
debt covenants being broken and the need for an emergency
rights issue.
Until Wolseley reduces it debt position significantly, we believe
the stock will continue to be weighed down by concerns over
debt covenants being broken and the need for an emergency
rights issue.
NH:
deep breath, here comes the stuff on the balance sheet
NH:
The company has repeated on several occasions that it
does not believe debt covenants will be broken. At the
March 17 interim results announcement, CFO Stephen
Webster said: “We have an eminently bankable balance sheet,
a very sound balance sheet, so you can probably tell there’s a
whole load of things that we can do and we’ve done quite a lot
of scenario planning, looking at the downside risks of what may
occur. And we can’t see any credible scenario that will
breach our accounts, so for all those reasons and many more
we are confident that we will remain in compliance with those
covenants going forward.”
does not believe debt covenants will be broken. At the
March 17 interim results announcement, CFO Stephen
Webster said: “We have an eminently bankable balance sheet,
a very sound balance sheet, so you can probably tell there’s a
whole load of things that we can do and we’ve done quite a lot
of scenario planning, looking at the downside risks of what may
occur. And we can’t see any credible scenario that will
breach our accounts, so for all those reasons and many more
we are confident that we will remain in compliance with those
covenants going forward.”
NH:
We believe trading conditions have deteriorated
significantly since then though.
significantly since then though.
On our current estimates Wolseley plc
the company reaches 4.0 times net debt to EBITDA in 2009,
which is beyond the 3.5 times limit stated by debt covenants.
This already assumes an additional £94 million of cost savings
beyond those announced by the company, which would take
the total reduction in SG&A to c. 10% at the group level. In
addition, we cut capex further (£611 million 2008-10e versus
£950 million previously).
NH:
There are options available to the company if debt
covenants were broken:
covenants were broken:
NH:
1. Asset divestments: the company has commented that it
may make asset divestments to strengthen the balance
sheet; however, we are not aware of a significant number
of non-core businesses that could be sold. If there are
only a few peripheral businesses, we wonder whether it
will be sufficient to reduce net debt by c. £350 million to
stay within debt covenants, on our estimates. In addition,
we note the company has said that it would consider
raising capital to make acquisitions if multiples fell to
attractive levels. We find it strange that Wolseley would
take the step of making asset disposals to strengthen its
balance sheet only to raise capital later for acquisitions.
may make asset divestments to strengthen the balance
sheet; however, we are not aware of a significant number
of non-core businesses that could be sold. If there are
only a few peripheral businesses, we wonder whether it
will be sufficient to reduce net debt by c. £350 million to
stay within debt covenants, on our estimates. In addition,
we note the company has said that it would consider
raising capital to make acquisitions if multiples fell to
attractive levels. We find it strange that Wolseley would
take the step of making asset disposals to strengthen its
balance sheet only to raise capital later for acquisitions.
NH:
2. Further aggressive cost cutting: our base case
estimates assume around an additional £110 million of
cost savings at Wolseley on top of the £210 million
announced by the company to date. This results in a total
10% cut in SG&A costs since 2006. More cost cutting
could be achieved, but we believe any more aggressive
cost rationalisation could slow the recovery of the business,
with the risk of losing market share to competitors.
estimates assume around an additional £110 million of
cost savings at Wolseley on top of the £210 million
announced by the company to date. This results in a total
10% cut in SG&A costs since 2006. More cost cutting
could be achieved, but we believe any more aggressive
cost rationalisation could slow the recovery of the business,
with the risk of losing market share to competitors.
NH:
3. Dividend Cut: we currently forecast flat dividends per
share of 33.5p in 2009 and 2010, which requires £220
million cash outflow per annum. This could be cut;
however, even if we assume zero dividend in 2009, net
debt to EBITDA would only fall to 3.6. Thus, although
there is evidence that dividend cuts can be a positive
inflection point for share prices (see The Implications of
Dividend Cuts, Graham Secker, April 17 2008) we think
this is unlikely to be the case for Wolseley.
share of 33.5p in 2009 and 2010, which requires £220
million cash outflow per annum. This could be cut;
however, even if we assume zero dividend in 2009, net
debt to EBITDA would only fall to 3.6. Thus, although
there is evidence that dividend cuts can be a positive
inflection point for share prices (see The Implications of
Dividend Cuts, Graham Secker, April 17 2008) we think
this is unlikely to be the case for Wolseley.
NH:
4. Higher interest charge: we recognise that Wolseley is in
constant dialogue with its financiers and that it may be able
to change its terms and conditions on the debt. This is
especially the case as the problem is cyclical rather than
structural.
constant dialogue with its financiers and that it may be able
to change its terms and conditions on the debt. This is
especially the case as the problem is cyclical rather than
structural.
NH:
5. Raising equity: buying into rights issues from distressed
companies has been positive for investors in the past
companies has been positive for investors in the past
PM:
goodness
PM:
We suddenly have a fair portion of UK PLC seemingly getting close to breaching their borrowing agreements
PM:
Quite extraordinary — and inevitable
NH:
there will be loads more rights issues
PM:
Note to Monkey below — we were discussing Battersea earlier –
PM:
It is the perfect contrarian indicator
PM:
Everytime a redevelopment plan comes out, property falls thru the floor
PM:
Clearly things are now going to get really really bad
NH:
they are
NH:
very bad
NH:
we should make a price on level on HBOS impairments by the end of the year
PM:
PM:
(Greenback — thank you for drawing everyone’s attention to that 
)
)PM:
Lux made a rare slip up there
PM:
Easily done
NH:
it won’t happen when Helen is there
PM:
Bet it does
PM:
Anyway, before we finish off — any RAW for the weekend?
NH:
not a lot
NH:
everyone seems to be at Ascot
NH:
but there is one rumour
NH:
concerns F&C Asset Management
PM:
STOP
PM:
Thank you VP
NH:
HISTORY HAS JUST BEEN MADE
NH:
Elgin Capital LLP-Disclosure of Short Position – Melrose PLC
NH:
RNS Number : 1668X
Elgin Capital LLP
20 June 2008
Elgin Capital LLP
20 June 2008
TR-3 : Disclosure of Disclosable Short Position relating to Securities
which are the subject of a rights issue
1. Full name of person(s) holding the disclosable short ELGIN CAPITAL LLP
position :
2: Name of the issuer of the relevant securities MELROSE PLC
3: Disclosable short position 0.89%
4. Date that disclosable short position was reached or 20TH JUNE 2008
exceeded
For notes on how to complete form TR-3 please see the FSA website.
This information is provided by RNS
The company news service from the London Stock Exchange
PM:
Evil Elgin Capital
PM:
NH:
that’s the first ever short selling disclosure
PM:
Poor Melrose
PM:
back to that RAW
NH:
concerns F&C Asset Management
NH:
talk in the market that Friends Prov have found a buyer for their 49 per cent stake
PM:
any idea who
NH:
some people are saying it could be Aberdeen Asset Management
NH:
but I am not sure about that
PM:
ok
PM:
So a bid for the stake would mean a bid for the whole firm
NH:
unless the buyer gets a white wash from the Panel
NH:
and that seems unlikely
PM:
who would want to be an asset manager at the moment?
NH:
er dunno
NH:
F&C has a market cap of £775m
NH:
so it’s not the biggest deal in the world
NH:
anyway, shares not doing much at the moment
NH:
up 1.25p at 154.75
NH:
Friends Prov up 1.7p at 113.7p
PM:
(Thank you very much Luther )
)NH:
come on let’s name and shame these evil people
NH:
where are they based?
PM:
St James, stupid
NH:
ah yes
NH:
Elgin Capital LLP
Elgin Capital LLP
21 Palmer Street
London SW1H 0AD
United Kingdom
Telephone
* +44 (0)20 7340 9000
Facsimile
* +44 (0)20 7340 9001
Marketing
* Beatriz Carrillo
* +44 (0)20 7340 9119
* bcarrillo@elgincap.com
NH:
not Mayfair
NH:
how disappointing
NH:
another myth explodes
NH:
not all evil short sellers are in Mayfair
NH:
someone tell the FSA
NH:
they are in Victoria
NH:
this has to be stopped
NH:
where next??
NH:
Knightsbridge
NH:
Chelsea
NH:
Wimbledon
PM:
Where next?
PM:
Go her
PM:
very funny post by helen re Bud
NH:
Elgin specialises in managing corporate credit risk in the European capital markets. Elgin believes that the application of a disciplined investment process that encompasses diligent fundamental proprietary research as well as prudent risk management will lead to superior credit selection. This process, when properly applied, will yield attractive risk-adjusted total returns.
Elgin’s management believes that Fundamental research is the most important factor behind managing a portfolio of corporate obligations. This research is conducted in a variety of ways encompassing proprietary company models, direct corporate contact and also utilising third party advisors as well as rating agencies.
Strong knowledge of financial markets and instruments complement fundamental research. Collectively the members of the team have extensive hands-on experience across all facets of the capital markets.
PM:
She hasnt put her name on it because she is fearful of American reprisals when she lands in Manhattan
NH:
HBOS under further pressure
NH:
stock now trading at 284.5p
NH:
has that come down with the wider market??
PM:
Yes — looks like it
PM:
Footsie off 55 now
NH:
what’s caused that
PM:
that seems to be on the back of the Dow future
NH:
were there monoline downgrades overnight??
PM:
Footsie off 66 now
NH:
no 70 points
PM:
dear or dear
PM:
Okay — we are going to go
NH:
just picking up some more rumours
Vague rums of bank in trouble (far eastern I believe) , also rums ml guiding down no.s
NH:
this looks horrible
NH:
FTSE 250 down 220 points in three days
PM:
The Jap bank rumour was going around earlier
PM:
V vague
PM:
I’m with the theory that this is monoline related
PM:
The downgrades working thru into bank forecasts
PM:
Not a pretty site
PM:
PM:
Sight even!
PM:
We are off
PM:
Thank you to everyone for your comments
NH:
before we go a couple of RAW bits
NH:
bid rumours around in some small cap stock called Fairpoint
NH:
and on Coffeeheaven, now hearing that Starbucks is looking at the company
NH:
apparently, the CEO gave a speech recently in which he flagged eastern europe as an area for expansion
PM:
Okay – but those are completely RAW
PM:
So reader beware
PM:
We will come back later if there is a big big drop
PM:
But we do have other work to do round here you know!
PM:
In any case, definitely back at 11am on Monday
PM:
Thanks for joining
PM:
seeya