FT Alphaville » Markets live transcript 1 Jul 2008

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Markets live transcript 1 Jul 2008

Posted by Paul Murphy on Jul 01 11:02.

Markets live chat transcript for the chat ending at 12:06 on 1 Jul 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)

PM:

Morning

PM:

Everything calm and organised this morning, obviously

PM:

Sorry — Nei lhas got tech meltdown

PM:

IT are sending a guy

PM:

Who has arrived

PM:

On tonight — No 1 Lombard — dress code is pretty relaxed

PM:

Would have to be for neil to attend

PM:

But it’s not a pub

PM:

Old banking hall turned City drinkery

PM:

No place booked or anything

PM:

i will be some drinks

PM:

But we have no idea who or how many might turn up

PM:

The IT guy has fixed — so big thank you to them

NH:

morning all

NH:

finally managed to get my PC unlocked

PM:

Notice Informa mentioned below. We can come back to that

PM:

We’d better to go straight to the wider, shrinking market

PM:

Something of a melting situation this morning

NH:

Tin hats firmly on

NH:

gone to chin strap three morning

NH:

FTSE 100 been as low as 5,491

PM:

Correction — low of 5467

NH:

now it’s down JUST 125.2 points at 5,500.4

NH:

and remember the Bear Stearns bail out low was 5414

NH:

so we are not far away

PM:

And has been as high as 5626 a little earlier

PM:

Wot sparked it off?

NH:

a combination of factors, mainly related to the banking sector

NH:

rumours that UBS are about to take more write offs

NH:

$8bn is the figure, I heard

PM:

no update on that from the bank this morning — they simply came out with board clearout news and corporate governance stuff

NH:

and there is all sorts of wild talk that the Swiss Banking Federation being very worried about UBS

PM:

Add in the worries about US litigation and regulatory action, and it all adds up to something unpleasant

NH:

on top of that there is also rumours of an imminent profits warning from Deutsche Bank

NH:

and that Bank of America is set to table a low ball/rescue offer for Lehman Brothers

PM:

NH:

actually there is now a rumour that Barclays has lobbed in a $16 a share lowball bid

NH:

closer to home we have had some pretty depressing economic data in the shape of the latest PMI data

NH:

which has got traders worried about stagflation again

PM:

Why?

NH:

well, it’s these sort of numbers that will give the BoE plenty of sleepless nights

NH:

So, according to the latest purchasing managers survey, output in the manufacturing sector contracted at its fastest pace since 1998 with the closely following PMI index falling sharply to 45.8 from 49.5 (v consensus 49.8).

NH:

The breakdown of the survey also revealed new orders at their lowest level since 1998 but a further rise in both input and output prices at 82.1 & 62.6 respectively. Input prices are at their highest level since 1992.

NH:

So basically there is slowing growth and rising costs in the manufacturing sector

NH:

of course before we get too bearish

NH:

its worth remembering that yesterday’s 90 point gain was very technical

NH:

lots of end of quarter window dressing

PM:

so those gains have just evapourated this morning

NH:

yep, there was just nothing behind it

NH:

no follow through buying

NH:

interestingly it is not the banks that are being hit hardest this morning

NH:

they are all down

NH:

Barclays and HBOS both below their respective placing prices

NH:

and RBS flirting with 200p

Royal Bank of Scotland Group (RBS:LSE): Last: 204.75, down 10.25 (-4.77%), High: 215.00, Low: 202.00, Volume: 44.93m

Barclays (BARC:LSE): Last: 281.25, down 10.25 (-3.52%), High: 292.00, Low: 276.50, Volume: 29.36m

HBOS (HBOS:LSE): Last: 269.00, down 7 (-2.54%), High: 276.50, Low: 266.50, Volume: 26.02m

NH:

now its the retailers that have been hit hardest

PM:

Let’s come back to retails — people want to know about Informa

PM:

let’s get this bid stuff out of the way.

PM:

Going to stick out necks RIGHT OUT this morning on this one.

NH:

Hmmm. But it is NOT raw.

PM:

That’s right. This is cooked . In fact it is marinated,cooked, cooled down and then re-heated .

NH:

So there is still a risk with it – but we are pretty well certain that the following is accurate.

PM:

Couple of weeks ago we published this:

PM:

http://ftalphaville.ft.com/blog/2008/06/19/13896/goldman-lined-up-to-fund-informa-bid/

PM:

That was detailing the planning for a £2.34bn bid for Informa by Providence Equity – US buyout house.

PM:

We said it was likely to be pitched at above 500p. The market generally blew a raseberry at us – suggesting no one could put together the accompanying £1.8bn debt package in this market.

NH:

Now the idea of a bid has all but evaporated this morning

PM:

Just take one glance at Informa’s price — down 32 at 380

NH:

that’s a fall of almost 8%

PM:

stocks don’t usually fall 8 per cent unless the bidder has walked away.

NH:

But that is not the case here

PM:

We are going to bet the ML proverbials that the market is calling this wrong.

PM:

NH:

of course if the Dow plunges 400 points tonight, all bets could be off

PM:

Yep

NH:

be as of earlier this morning we think the following holds

PM:

Give ‘em detail Neil.

NH:

Okay.

NH:

PE team consortium now firm consists of Providence Equity (Gus Schwed), Hellman Friedman (Patrick Healy) and Carlyle Group (Frank Falezan)

PM:

I said detail Neil!

NH:

Wot – ive given you the name of the individuals leading this!

PM:

It’s not just “Carlyle” – it’s the CEP III Participation fund.

NH:

Okay – when the led provider of finance here is ING, but Goldman Sachs are also on the case.

NH:

The PE consortium first put 485p on the table – which we assume caused United Business Media to walk away from its own merger plan with Informa.

PM:

Yep – and then they had a meeting last week.

NH:

Last Thursday I think – this is the PE boys, Informa management.

PM:

Along with Greenhills and JPMorgan.

NH:

Simon Burrows and James Seagrave.

NH:

After that meeting, the PE consortium CONFIRMED that it was ready to offer in excess of 500p.

PM:

Five quid plus – but conditional on due diligence.

NH:

Which the PE team reckon will take three weeks.

PM:

Now – question – If you are the management of Informa and you have got a firm offer of 500p or more….

PM:

And your market price is in the region of 380p….

PM:

How can you turn down the bid??

NH:

Well you can’t – in fact you would rush to make sure it is still on offer.

PM:

Which we understand it is.

NH:

This deal is ready to go. We know that on the PE numbers they can afford up to around 550p and still get an IRR of 20%

PM:

They are telling Informa that they expect to make annualised cost savings of £30m – but the real number is probably significantly higher.

NH:

They are telling Informa that they expect to make annualised cost savings of £30m – but the real number is probably significantly higher.

PM:

So, don’t blame us if this deal gets Crunched – but a market price of 385p is just wrong, in our humble (educated) opinion.

NH:

I can quite see why the market does not believe this givem Informa’s debt leve

NH:

but these talks are very real

NH:

and an offer of just over 500p has been put to the board of Informa

NH:

last week

PM:

And i think they have put it in writing to Derek Mappin

NH:

the chairman

NH:

of course the deal could be crunched at any point

PM:

if that is the spelling

NH:

but as we understand it, this deal was full steam ahead

PM:

Sorry — that should have been Derek Mapp, chairman of Informa

NH:

but look everyone, the market is incredibly volatile at the moment

NH:

and deals could get pulled at moments notice

PM:

sure

NH:

but there seems little reason to doubt the seriousness of the PE bidders

PM:

none at all

PM:

Okay — think we have stuck our neck out as far as it will go on that one.

PM:

Let’s move on

PM:

Neil just on the phone

NH:

right off now

NH:

what shall we look at now

NH:

comment below on the fund managers

NH:

had a few calls this morning on the sector

NH:

the half year is very important

NH:

those valuations are used to determine fees etc

NH:

as such a few analysts have been reworking numbers

NH:

this in from Jason Streets at Evo Securities

NH:

We have cut our estimates for most of the asset managers today in a month end,
marking to market exercise, and we have cut some price targets. June has been a
bloody month in both equity and debt markets. The biggest downgrades are in HGI,
ADN, SDR and NSAM. We have also tidied up our estimates for CLIG where we still
have substantial growth but have allowed for a higher payaway to intermediaries. We
have not changed any rating

NH:

There is no evidence yet that the poor market for retail flows seen around the year end
has returned. Flows in general had picked up a bit in April and May though they are still
low. There is no data available yet for June. Institutional clients also seem to have
suffered from a general slowdown in the investment decision making process with the
awards of new mandates being put on hold.

NH:

We expect that the long-biased companies will be looking again at costs. In particular
ADN and SDR who have not yet announced any plans to reduce costs this year. HGI has
already indicated that the second £10m of savings will be implemented – this is helpful
but the cost base remains high and the high proportion of earnings expected from
performance and transaction fees should lead to a discount multiple, in our view.

NH:

Fast markets and a high beta combine to make asset managers especially volatile. And
in those circumstances – with forecasts being out of date every day the market is open –
investors tend to resort to simple valuation metrics. We find that the market appears to
be looking at December PE ratios generally unadjusted for performance fees or capital
structure. This throws up some anomalies when what we believe are the right
adjustments are applied: in particular ADN looks expensive and SDR and ASHM, after
very weak performance in June, cheap by comparison.

NH:

Man Group remains the standout stock in the sub-sector: the only company seeing
consistent upgrades and able to hold on to its multiple. All the others have seen
multiple erosion over the past 12 months, they require markets to consolidate before
they will perform and yet the prospects for Q3 are looking less than rosy.

NH:

Aberdeen remains as Sell 110 130 -5% -16%
Henderson remains as Reduce 110 110 -13% -15%
New Star remains as Buy 120 130 -13% -21%

PM:

Very interesting theme this

NH:

it is but so is this

NH:

just out of Switzerland

NH:

RTRS-HEAD OF SWISS BANKS WATCHDOG EBK – WANT TO AGREE
CAPITALISATION TARGETS FOR UBS AND CREDIT SUISSE BY OCTOBER
AND INTRODUCE THEM IMMEDIATELY

NH:

RTRS-HEAD OF SWISS WATCHDOG – SERIOUS ABOUT INTRODUCING
PROPOSED RULES ON CAPITALISATION INCLUDING EXTRA CAPITAL BUFFER FOR LOSSES AND
USING LEVERAGE RATIO

NH:

TRS-HEAD OF SWISS WATCHDOG – GOOD REASON TO BE TOUGHER WITH
UBS AND CREDIT SUISSE AND SINGLE THEM OUT FOR SPECIAL TREATMENT BECAUSE OF
IMPORTANCE TO SWITZERLAND

NH:

RTRS-HEAD OF SWISS WATCHDOG – NEW RULES MEAN NO SHARE BUYBACKS
AND BEING CAREFUL ABOUT DIVIDENDS

NH:

RTRS-HEAD OF SWISS WATCHDOG – NEW RULES MEAN WEALTH MANAGEMENT
CAN NO LONGER FINANCE INVESTMENT BANKING

NH:

RTRS-HEAD OF SWISS WATCHDOG – BANKS COULD TAKE THREE OR FOUR
YEARS TO REACH CAPITAL LEVELS DEPENDING ON PROFITS

PM:

We should mention that that is a Reuters exclusive

NH:

all pretty bearish though

PM:

Saying they should be singled out for special treatment because “they are important to Switzerland”

NH:

UBS shares currently off 6.2% at 20.12

PM:

hmmm

PM:

NH:

right,let’s go back to the retailers, which are among this morning’s biggest fallers

Kingfisher (KGF:LSE): Last: 105.80, down 6.5 (-5.79%), High: 112.00, Low: 104.00, Volume: 12.46m

Carphone Warehouse Group (CPW:LSE): Last: 185.20, down 12.7 (-6.42%), High: 197.20, Low: 183.00, Volume: 2.57m

PM:

What is going on here – -why more bearishness amongst the retailers?

NH:

well, it could be down to comments from Lord Harris of Peckham

PM:

ahhh, the Carpetright boss

NH:

yep

NH:

Co have had figures out this morning

NH:

and they are pretty disappointing

NH:

but here’s is what the good Lord had to say about the retail environment

NH:

and remember this guy is a retail veteran

NH:

Lord Harris of Peckham, Chairman and Chief Executive, said:

NH:

“This year sees the twentieth anniversary of Carpetright. During that time, the Group has grown at a strong pace and this year, despite adverse market conditions, I am pleased to report we have produced yet another solid performance.”

NH:

“My fiftieth year of selling carpets has been a challenging one. There is no doubt that the UK floor coverings market became more difficult, in line with other housing and DIY related sectors. This challenge has remained and I believe that the next year will be one of the most difficult I have seen. However, against this background, we are continuing to invest for the future. Carpetright is well placed to weather this period with its strong competitive position, clear UK and European strategic plans, and continued focus on margin growth and strong cash generation.”

NH:

so in 50 years of flogging carpets, the Good Lord sees next year as perhaps the toughest ever

PM:

NH:

and not good news for Kingfisher or Home Retail Group

PM:

that’s quite bearish

NH:

or Wolseley for that matter, which has been flattened again this morning

NH:

keeps having chunks of 5% taken out of it each and every day

PM:

For seemingly weeks on end

NH:

stock down 27p at 349p – a drop of 7%

PM:

This has already come down from 13 quid

NH:

I wonder what Bill Gates makes of all this doom and gloom in the carpet world

PM:

Eh?

NH:

Bill Gates, the Microsoft founder

NH:

he’s a shareholder

NH:

in Carpetright

PM:

joking

NH:

nope

NH:

he has an investment vehicle called Cascade

NH:

it has built a 4% position in Carpetright

PM:

So what are the shares doing

NH:

stock off 50.5p at 609.5p

PM:

goodness – down 7.6%

NH:

yep and Cazenove have downgraded

NH:

Carpetright – FY2008 results in line with expectations, outlook tough. Recommendation downgraded. [CATVU.L, CPR LN], 660p, IN-LINE (From OUTPERFORM)

NH:

Carpetright’s shares have been substantially de-rated along with the sector in the last few months and the shares are now trading on a PE of 11.4x 2009E.

NH:

This is substantially below historic levels reflecting justifable concerns over the company’s relationship to the housing market, but is a considerable premium to sector, which is where Carpetright always tends to trade given its superior returns generation, strong balance sheet (net debt:EBITDA 0.7x, interest cover 29x, freehold on the balance sheet) and attractive yield of 7.4%. This makes the company one of the most attractive income stocks in the sector, in our view, and we would expect the yield to act as a support in the near term.

NH:

Having said that sentiment on housing data will continue to drive the share price and with that data worsening almost daily, we think it unlikely the shares will outperform, hence we are downgrading our recommendation to IN-LINE.

PM:

and talking of house price data

PM:

that nationwide survey was out earlier this morning, and surprisingly it was a little bit better than expected

NH:

yep

NH:

although house prices fell for the eighth straight month in
June

NH:

the decline was nowhere near as heavy as May

NH:

prices actually fell 0.9% on the month in June, or 6.3% lower on the year.

NH:

now, that’s much smaller than May’s 2.5% home price drop, which
was the sharpest fall since the Nationwide monthly index began in January 1991.

NH:

economists were looking for a 1.0% home price drop for June on the month and a 6.3% price decline on the year.

PM:

so a glimmer of hope

PM:

That will be good news for Gwen

PM:

She’s tryign to sell her flat in Spitlefields

PM:

Gwen Robinson — our Tokyo operative

PM:

Does the 6am Cut

NH:

here’s what Howard Archer at Global Insight made of it all

NH:

Although the Nationwide reported that the pace of house price falls slowed to 0.9% month-on-month in June from 2.5% in May (the largest in the survey’s 17-year history), this is hardly the most reassuring of news and does little to dilute concerns that we are headed for a sharp correction in house prices. Indeed, house prices fell 3.7% quarter-on-quarter in the second quarter of 2008, compared to a drop of 2.0% in the first quarter, while June marked the eighth successive monthly fall in house prices. Meanwhile, the year-on-year decline in house prices widened to 6.3% in June from 4.4% in May and 1.0% in April. This is the largest annual fall in house prices since December 1992.

NH:

The Nationwide data indicate that major downward pressure on house prices continues to come from very weak market activity, stretched buyer affordability and tight lending conditions. Elevated affordability pressures on potential house buyers stem from high house prices and modest disposable income growth, while very tight credit conditions are leading to markedly fewer and more expensive mortgages being available. Indeed, average two-year fixed mortgage rates are now at an 11-year high above 7.00% according to Moneyfacts. Furthermore, potential house buyers now have to provide higher deposit levels, which is a particularly major problem for first-time buyers. On top of this, arrangement fees have risen sharply

NH:

Meanwhile, latest data from the Bank of England show that seasonally-adjusted mortgage approvals for house purchases slumped to 42,000 in May. This was the lowest level since comparable records began in 1993 and down a staggering 63.8% year-on-year from the May 2007 peak of 116,000. The Bank of England also revealed that mortgage lending retreated sharply to £4.1 billion in May from £6.2 billion in April. This was the lowest level since March 2001 and was markedly below the £7.1 billion monthly average for the previous six months. Furthermore, latest survey evidence shows that agreed house sales are very low, buyer interest is continuing to decline, it is taking longer to sell a house and sellers are achieving a falling percentage of their asking price. All these factors point clearly to further declines in house prices

NH:

Very low housing market activity seems set to push house prices markedly lower still over the coming months. Indeed, Global Insight forecasts house prices to fall by 12% in both 2008 and 2009, before gradually flattening out during 2010. As a result, house prices are seen falling 24% in nominal terms from their October 2007 peak of £186,044 to stand at £141,003 at the end of 2009 (based on the Nationwide measure). Furthermore, we consider the risks to these forecasts to be very much loaded to the downside, particularly if the Bank of England’s next move is to raise interest rates.

NH:

We see extended downward pressure on house prices coming from serious buyer affordability constraints, limited and more expensive mortgages available due to ongoing tight lending conditions, a deteriorating economic outlook and little likelihood that the Bank of England will cut interest rates any time soon. Indeed, it is very possible that the Bank of England’s next move could be to raise interest rates, which would clearly be very bad news for the housing market. The marked deterioration in sentiment over the housing market also heightens the risk that house prices will fall sharply over the next couple of years. On top of this, unemployment is now starting to rise, which along with a substantial number of homeowners having to re-mortgage at higher rates, is increasing the likelihood that people will have to sell their house for “distressed” reasons.

NH:

Clearly, a marked housing market correction is adding to the already serious downside risks to economic growth, particularly through weighing down on consumer spending. Obviously the more that house prices fall, the more people will be trapped with negative equity, although it must be borne in mind that average house prices rose by 190% over the decade to August 2007 on the Halifax measure. Nevertheless, those people who took out 100% or even 100%+ mortgages within the last two years are particularly vulnerable to falling into the negative equity trap.

NH:

and here’s a bit more on houses

NH:

this is from Cazenove

NH:

UK Housing Market Briefing – Mortgage rationing becomes a famine, Sector Neutral

The sector has fallen 55% so far this year yet our EVAP valuation metric suggests that the value entry point has not been reached.

NH:

While the shares are searching for valuation support we believe our traditional valuation metrics are becoming increasingly redundant, with trading conditions likely to remain diabolical until either the mortgage market re-opens or house prices correct. We believe that greater disclosure on landbanks would aid stability in the shares. With sales, margins and earnings in free-fall, ascertaining an anchor asset valuation on land would, we believe, steady some nerves.

NH:

In this note we re-run our sensitivity analysis based on a 20% fall in house prices and assess the impact on net asset values, EPS and dividends, we also compare land-based EV metrics to current and possible future land prices. Land is key to current valuations and will remain so until the mortgage/house price gridlock unwinds.

NH:

We have started to track a new valuation metric based on EV per plot. We adjust EV to include pensions, land creditors and adjust debt to reflect average debt levels rather than the suppressed level disclosed at each period end. We then compare that to what we believe the price of land will be, in the open market, following a 20% decline in house prices. When the EV measures fall below the market measure, we may have found our value entry point; we are not there yet.

Meanwhile, mortgage rationing has given way to a mortgage famine and Tony Pidgley, the managing director of Berkeley Group, in his fifth decade in the housing industry has never known it so bad.

PM:

thanks for all that

PM:

any other notable fallers this morning???

NH:

Hays

NH:

which is now a focused recruitment group

NH:

stock off 10.7p at 79.75p

NH:

that’s almost 12% wiped off its market cap this morning

NH:

now the reason for the fall

NH:

from what we are hearing

NH:

is some very cautious comments in half year round up meetings

NH:

now recruitment consultants don’t have much visibility at the best of times

NH:

but it seems the market is even more difficult to judge at the moment

NH:

and ominously its overseas operations, which were offsetting the weakness in the UK, are seeing tougher times ahead

NH:

anyway, just picked this up from Panmure Gordon

NH:

they saw the company last might and reckon there is a good chance of downgrades with the July 10 trading update

NH:

Following a sales meeting with the company last night, we maintain a
cautious stance on the shares believing there to be a good chance of
downgrades in its next update on 10 July. With its UK business already in
.profit protection. mode as headcount growth has significantly slowed,
comparatives in its overseas business are getting tougher and likely to come
under increasing pressure. For now we maintain a Hold recommendation on
the shares, although we believe things will get worse before they get better.

NH:

Sales meeting: We had the opportunity to have a 1-2-1 meeting with FD Paul Venables last night, who was able to run through the current prospects of the business (up to and including Q3 2008, a trading update on 10 July will cover Q4). He observed that the current climate feels more like the recession of the early 1990s rather than the slowdown of 2001-03.

NH:

What does this mean for Hays?

NH:

The company still generates c60% of NFI in the UK, which has come under increasing pressure recently. While its overseas business was growing strongly at c40% during Q3, this will come under pressure in the current climate with comparatives getting tougher.

Overall Hays has a 6% exposure to investment banking (10% including wider areas such as city accountants/lawyers etc) and a 12% exposure to the private and commercial property market. Of course, Hays does have the advantage of having a strong balance sheet.

NH:

Consensus EBITA would have to halve for the company not to be in a position to pay down debt, while the company is prepared to actively manage its cost base should things get worse and is likely to move increasingly into profit protection mode.

Forecasts: Ahead of its next update on 10 July, we believe Hays will be on track to hit our 2008E forecasts of £237.9m (EPS11.9p). Our key concern would be the extent to which 2009E consensus forecasts will be under pressure, with downgrades likely in our view. Our current adjusted PBT forecast of £263.5m (EPS 14.2p) could go as low as £200.0m (10.0p).

NH:

Valuation: Our target price of 98p remains in place for now. At present we have a Hold recommendation on the shares, albeit the risk/reward remains on the negative side in our view.

NH:

right, a bit more on Wolseley for those who are interested

NH:

this came out of Goldman earlier

NH:

We expect all Wolseley’s end markets to deteriorate into FY2009, with greater pressure than we had
previously thought in France and indicators for non-residential construction in the US increasingly negative.

NH:

We reduce our FY2009E EPS by 4.7%, which primarily reflects weaker French and US businesses. With the
EV now almost equally weighted between debt and market cap, we would also expect stock volatility to
increase further. We reduce our 6-month price target to 346p (from 465p), implying 11% potential downside.

NH:

Our rating remains Sell and we maintain the shares on our Conviction Sell List.

NH:

Catalyst
We expect the 11-month trading statement on July 16 to highlight tangible deterioration in both the group’s
UK and French operations.

NH:

Valuation
The change in our 6-month price target to 346p from 465p primarily reflects the use of EV-based multiples to
fully reflect the significantly higher debt levels at the company than in previous downturns.

NH:

We now base our
target on the average EV/EBITDA level of 6.8x in the 18 months leading up to trough earnings in the early
1990s (on a current-year basis, the stock has traded between 3.8x and 11.1x over the past 20 years, with an
average of 7.8x). We also consider historical CROCI vs. EV/GCI and relative P/E multiples as secondary
valuation tools.

PM:

Cheers for all that neil

PM:

Now — before we go….

PM:

we have a serious car crash on Aim

NH:

well, it’s more a milk float prang

PM:

wheel come off

NH:

the company in question could well be a write off

NH:

this is serious

NH:

we are of course, talking about Tanfield, the maker of zero emission electronic vehicles

NH:

or, as they have been rather unkindly dubbed by some people in the market, expensive milk floats

NH:

and check the price

PM:

Oh dear — its off 22.7p at 8.99p

NH:

that’s a fall of 71%

NH:

and remember this stock was a 60p last week

PM:

hello? iss taht right

NH:

yes it is

NH:

company unleashed a huge profits warning this morning

NH:

which has left institutions stunned

NH:

in fact they are voting with their feet and selling everything they have got

NH:

and guess what?

NH:

the retail punters are attempting to mop it up

PM:

Mug punters

NH:

on the grounds it must be cheap at 9p

PM:

OK, let’s rewind

PM:

this stock halved last week

PM:

and the company rushed out a statement on Friday

PM:

which gave no indication that a profits warning of this scale was coming

NH:

that’s right

NH:

here’s what they said

NH:

Tanfield Group Plc

Share Price Movement

The Directors of the Company have noted the recent fall in share price following the statement made by Oshkosh Corporation, the parent company of JLG the US manufacturer of Aerial work Platforms, downwardly revising its estimates.

NH:

The Company confirms that it posted its annual report and accounts to shareholders on 26th June 2008, a PDF copy of which will be available on the company’s web site later today and that it will be releasing a trading statement on 1 July 2008.

For further information please contact:

Darren Kell Tanfield Group plc 0845 1557 755
Nicholas Wells Cenkos Securities plc 020 7397 8900

PM:

?!?!?!!?!?!?!!?!?

PM:

Stewards please!

NH:

yep

NH:

one imagines the AIM team will be in touch with the company over this

PM:

i agree

NH:

i mean, when exactly was the company aware that it would have to warn on profits

PM:

so what exactly has gone wrong?

NH:

well, it seems to be down to Tanfield’s Aerial Work Platform division (UpRight and Snorkel)

NH:

they have suffered a big drop in demand in June

NH:

customers were reducing, delaying or just cancelling orders

NH:

which is what Oshkosh/JLG were saying last week

NH:

on top of that margins have been hit because of rising input costs

NH:

as for the milk floats

NH:

well, the ‘growth’ rate of the Zero Emission Vehicles has also been hit by problems with a maturing supply chain.

NH:

in other words, the company did not have enough parts to build them

NH:

and the cash position is much worse than expected

NH:

previous guidance was £18m, its now £11m

PM:

this is dire

NH:

yep

NH:

and we should have know the writing was on the wall a few months back when the company was blaming shorts sellers for doing a number on the share price

PM:

yes, Evil Kinevil was short of this

PM:

Should have cleaned up

NH:

just bringing up the chart now

NH:

amazing

NH:

this stock was trading at 200p a year ago

NH:

shortly after which it raised £115m at 163p

PM:

Go on

NH:

and guess what the funds were needed for??

NH:

Snorkel Holdings

PM:

NH:

this is a spectacular blow up

NH:

much bigger than D1 Oils

NH:

anyway, there is plenty of comment on today’s warning

NH:

this is from St Helen’s the company’s broker

NH:

so this is the positive spin

NH:

if it can be called that

NH:

Substantially revised forecasts for FY08 reflect these factors. Although Tanfield is undertaking remedial action with a much more conservative growth
plan, market weakness will also hit FY09 margins. The recent share price performance (down 61% last week) reflects much of the
reduced expectations although continued price volatility is likely. We
maintain our BUY but reduce our price target to 100p (from 200p).

PM:

A quid — and the market price is 9p ?

NH:

91p upside. Buy!!

PM:

NH:

Zero Emission Vehicles – supply chain immaturity and slower growth planned
H1 shipments were hit by component shortages (112 vehicles were awaiting specialised components at period end) as a number of suppliers failed to ramp up production to plan.

NH:

The supply chain is still immature and consequently we have reduced FY08 and FY09
volume assumptions to 500 and 1,000 respectively. The reduced assumptions also reflect the view that ZEV demand will not be immune to the more general credit crunch with potential customers delaying acquisitions. Tanfield has reined in expansion plans to reflect
this new environment.

NH:

Cash position – reduced growth should improve cash position
H1 net cash guidance of £11.1m was substantially below previous guidance (c. £18m) as a result of reduced sales (on AWP and ZEV) and worsening cash collection (AWP). The reduced growth strategy should improve the working capital and cash position as the previous investment in the supply chain reverses.

NH:

and here’s what they have done to their forecasts

NH:

EBITDA for this year goes to £14.1m from £42.7m and the following year it goes to £16.4m from £53.4m

NH:

and that’s the house broker

PM:

NH:

there’s plenty more bearish stuff

NH:

everyone is putting in the boot this morning

NH:

this is from Investec Securities

NH:

Profit warning, significant downgrades
Tanfield has managed to go from the darling of the market to a pariah all
within a year, in our view. We will be lowering our forecasts significantly for
this year and next, and our price target will follow suit. The key question is
whether there is value in the business. We believe that there is, but that it
might take some time to materialise.

NH:

Trading: Revenues of £91m in 1H are below our expectations and we suspect
margins are also shy. The company has seen a marked slowing in Powered
Access in June, with deferment and cancellation of orders from some
customers, particularly in North America and Western Europe. The company
has revised its expectations downwards and is now focused on conserving
cash. It expects to be cash flow positive in 4Q08. The company has £11.1m of
cash at the 1H period end and is indicating this will be sufficient to see it
through. However, we would not be surprised to see additional funds raised.

NH:

Management: We would not be surprised to see changes at an executive level,
given their credibility has been undermined by the statement this morning.

NH:

Outlook: Our view is that on the Powered Access side, markets are only likely
to deteriorate further as the year unfolds and into next. We believe the company
will come under severe margin pressure in North America and Western Europe,
modestly offset by the emerging markets, and as such we will be lowering our
margin expectations to around 7% in FY09, with the risk weighted to the
downside.

NH:

We still believe in Electric Vehicles as a business, especially given
the high oil price. For some time we have been concerned about the
expectations Tanfield set in the market, and hope that these will now become
more realistic. As with many early-stage businesses, customers are slower to
move into volumes and there are supply chain issues.

NH:

Now, this is very interesting

NH:

from Mike Stoddart at Daniel Stewart

NH:

this note actually came out yesterday

NH:

but its very interesting because its suggests tanfield’s problems go much deeper than today’s profits warning

NH:

Mr Stoddard, who famously set a zero pence target price for Silverjet

NH:

has been through the Tanfield accounts which came out last week with a fine toothcomb

NH:

and he has unearthed some very interesting stuff

NH:

and if I was a shareholder I would be really frightened

NH:

here is it

NH:

it is a bit on the long side

NH:

but worth pasting in its entirety

NH:

We are downgrading our bottom-of the range forecast for Tanfield following a review of the 2007 Report & Accounts which were published on Friday.

We now expect a profit before tax and amortisation of intangibles of £20m (previously £34m) which gives EPS of 3.7p (previously 6.4p). At Friday’s closing price of 29p, this would put the shares on a p/e of 7.8x.

NH:

The downgrade is nothing to do with the deterioration in demand highlighted by Oshkosh, the US-based manufacturer of JLG powered-access machines on Thursday. Instead we have reduced our projections of the margins Tanfield will achieve this year in the light of the detail that has emerged from last year’s accounts.
In summary, there was

NH:

a material amount of non-recurring, exceptional gains in Tanfield’s 2007 profits, some of which was not disclosed in the Prelims release, and
a very material amount of one-off costs which were claimed to have held back the 2007 result but which are not mentioned in the Annual Report

NH:

Exceptional gains:

£2.019m snorkel bad debt recovery – this was mentioned in the prelims. We think it should be stripped out to obtain the underlying earnings. When we met the company on 2nd June, they claimed there were offsetting entries elsewhere in the P/L which meant that the net effect was nil. We can’t see how this would work.

NH:

0.75m government grant – the grant was mentioned in the Preliminary Results RNS but neither the amounts nor the accounting treatment were quantified. The only news relating to grants and Tanfield that we have seen was in June 2006 when the regional development agency, One NorthEast, announced the award of a £1.95m Selective Finance for Investment grant to enable Upright to transfer its production from Ireland to its current site in the Vigo Centre. The fact that the Chairman had secured this grant was mentioned in the Operational Review on page 12 of the 2006 Annual Report but the actual payment of it was not disclosed or discussed anywhere else in the document. Tanfield showed exceptional costs of £1.877m in its 2006 accounts: Restructuring costs of £1.8m are from the acquisition of the Upright Business. The costs relate to moving the business from Ireland to the UK, employment costs in respect of cross training and rent of additional factory space whilst the new building was being completed. There is a danger that analysts have been stripping out such restructuring costs to arrive at an underlying figure, without taking account of the receipt of government grants which have effectively paid for the restructuring cost.

NH:

£2.186m net profit on foreign exchange – this figure was not mentioned either in the preliminary results release or in the analysts’ meeting. It is shown in note 6 to the 2007 accounts (p49). There is no explanation of why such a large profit was made or where it was included in the P/L. The accounting policies on page 42 suggest that only gains and losses on monetary assets are shown in the P/L, the rest are taken through reserves. We have assumed that it was in the Powered Access division’s results.

NH:

These items, which add up to £4.955m, were probably all H2 items and would explain why the line “other operating expenses” in the P/L, fell from £4.135m in H1 to £0.656m in H2.

The total of £4.955m is equivalent to about 65% of H2 pre-exceptional profits of £7.561m.

NH:

One-off costs which were claimed to have held back the 2007 result :

Zero Emission Vehicles – £1.57m development write-off costs – this was shown in slide 39 of the results presentation and was used as an excuse why the zero emission vehicle result did not match forecasts. There is no mention of this item anywhere in the preliminary results release or in the 2007 Annual Report. Supporters of Tanfield have added back this cost to show an underlying result. We would question the validity of this approach.
Powered Access Platforms – £3.211m Snorkel Costs not capitalised – this was on slide 41 of the results presentation and was used as an excuse as to why this division failed to make forecasts. Again there is no mention of this in the annual report. We would not add it back to get to an “underlying” result.

NH:

you strip out the exceptional gains and leave in the claimed one-off costs, the underlying margins on both of the core businesses look very different. This is why we have assumed lower margins in our revised forecasts – cut from 12% to 6% in powered access and from 15% to 8% in Zero Emission Vehicles.

In addition – there was a £4.4m outflow against provisions in the year but the opening provision was just £262,000 and the closing balance was nil. We are given no explanation of the nature of this £4.4m cost.

NH:

The trading update is on Tuesday. If it leads to reductions in sales forecasts, this will require further cuts in profit projections. Our target price is under review pending tomorrow’s announcement.

PM:

Cheers for all that

PM:

bickie

Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner

PM:

And thanks to Bryce below for adding some stuff on Hays

PM:

I’ve got to run — But Neil has some RAW to share

PM:

Hope to see many of you tonight

PM:

In the meantime — here’s a par sent to me from Ladenburg Thalmann — on Barclays and Lehman

PM:

In this environment, no positive story is listened to and any
negative rumor, no matter how extreme, is believed. This was
the case with Lehman stock on Monday.
• Someone started the rumor that Barclay’s Bank was going to
underbid for Lehman and buy the company for $15 per share.
This rumor ranks up there with the moon is made out of green
cheese in terms of its validity.
• However, in this market, the moon is made of green cheese
and Lehman’s stock plummeted. It fell by $2.44 per share or by
9.1%. It is now below where it was in December of 1998.
• It would have been simple enough for investors and the press
to note that Lehman’s debt is still trading at reasonable prices.
From this it would have been rapidly understood that there was
no reason for Lehman to sell the company let alone to do so at
a discount.
• However, in a financial market characterized by panic and
hysteria, no one checks anything. Rather sell and ask
questions later.
• In sum, the wolves are doing what they are supposed to do.
They are eating lambs. It will be interesting to note who they
eat tomorrow, since this particular rumor has no legs.

PM:

Made me smile

PM:

Seeya

NH:

a quick bit of RAW market gossip before we go. Concerns Aero Investory.

NH:

Company received a bid approach a couple of weeks back from Bridgepoint

NH:

As with Informa, there has been a lot of scepticism over whether a bid would emerge

NH:

And given that management do not want to be acquired that’s fair enough

NH:

However, we hear that Bridgepoint have pushed ahead and tabled an offer

NH:

The figure we are hearing is around 900p

NH:

Which sounds high

NH:

But is around a 20% premium to the 52 week high

NH:

shares are up 15.5p at 582.5p

NH:

anyway, this is RAW market info

NH:

but from folks with a good track record

NH:

that’s it for today

NH:

hope you all emerge from today’s carnage in one piece

NH:

and can make it to No 1 Lombard tonight

NH:

until then

NH:

goodbye

This entry was posted by Paul Murphy on Tuesday, July 1st, 2008 at 11:02 and is filed under Uncategorised. Edit this entry.

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Markets live transcript 1 Jul 2008

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