Markets live chat transcript for the chat ending at 12:04 on 4 Jul 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Tin hat time
PM:
This FT Alphaville’s daily markets commentary, incorporating Markets Live.
NH:
morning
PM:
Someone’s doctored my picture
NH:
what’s that picture above
PM:
Monkey
PM:
Very funny
NH:
not a board member of Bungle Bank??
PM:
Let me go and see whether i can fix
NH:
right, let’s get on with it
PM:
Been racking our brains this morning for a new name for B&B – Bungle and BBB don’t quite do the trick.
NH:
Junk?
PM:
maybe
PM:
You just couldn’t make the B&B story up could you?
PM:
Anyway, we should salute the man who saved Britain’s financial system this morning.
NH:
Who’s that?
PM:
Alan Parker.
NH:
Oh, of course – boss and founder of Brunswick, Britain’s leading financial PR company.
PM:
In their hour of need it seems the FSA brought in Big Al to calm everyone down – and get the message across properly.
PM:
This situation is under control.
PM:
We should mention that this was a great hit by our colleague Peter Thal Larsen – he and Jane Croft rumbled the fact that Moody’s was about to downgrade BB- to
NH:
That meant TPG had to make a decision as to whether they were in or out.
NH:
And the PE money ran for the door.
NH:
So now we have this weird situation.
NH:
TPG was clearly relieved to avoid paying 55p a share. Yet the market price is holding at 55.5p.
PM:
How does that work?
PM:
If I was a weirdo conspiracy type I might suggest that there is some sort of share support operation underway here.
NH:
Hmm – noticed that one commenter suggested BB- should be suspended while the whole thing is sorted out.
PM:
Yes – can see the point there – but there is one reason why that has not happened.
PM:
The authorities want to avoid a run on the bank.
NH:
Of course they do. Pictures of old people in tea-coloured jackets, with little fold up stools, queuing round the block – it doesn’t look good.
NH:
so, why do we think TPG cut and run??
NH:
the official spin seems to be that the Moody’s d/g
NH:
made their business plan unworkable
NH:
money would have cost more, been more difficult to obtain
NH:
and that sennt their calculation up the spout
NH:
however, there is a big hole in that theory
PM:
Which is?
NH:
and we are indebted to a commenter for this
NH:
Super SWF
NH:
he was talking to some senior people about the impact of the d/g on Bungle bank costs of funs
NH:
he was told
NH:
it was already paying a high cost of funds, as the “troubles” at the bank had been priced in by the debt markets to a large extent
NH:
Today for their maturities of less than a year (where all banks are funding at the moment) my contact expected the cost of funds to rise for BB/ by an extra 5-10bp which would suggest maximum £40m rise in cost of funds, probably much less. (for context 07A PBT ex writedowns was £350m).
PM:
Hmm — difficult to see why this changed the investment case so radically — causing TPG to walk
PM:
No?
NH:
quite
NH:
so the suspicion remains that TPG dug up some real nasties as they got to grips with the books
NH:
and remember they were brought in to underwrite the revised cash call at very short notice
NH:
now as Bungle Bank has the reporting systems of a corner shop
NH:
it is quite possible some bad stuff surfaced
PM:
Hmmm
NH:
especially on BTL and Self Cert
PM:
Liar loans and buy to flip
PM:
I think the point here is that no one can predict how this customer base will respond to a serious fall in UK house prices
PM:
Say something in the region of 20%
PM:
As with US subprime — the delinquency rate could outstrip all historical illustrations
NH:
overall, I think what we have got here is a Northern Rock in slow motion
NH:
after the Moody’s d/g one has to think that this bank is closed for new business
NH:
and essentially in run off
NH:
I mean how can they compete
NH:
aganist banks who can raise money much more cheaply
PM:
I must say i agree
PM:
Slow motion Crock — i like that
Readers may also know this former bank as Northern Rock.
PM:
Throng — that is very funny 
NH:
good name but I still prefer Bungle Bank
NH:
of course a few reputations are going to be shredded by this
NH:
TPG presumably will be persona non grata in the boardrooms of UK PLC
NH:
and what about Goldman
NH:
as for Clark Kent at Bungle Bank
NH:
he is toast
NH:
this is really an incredible situation
NH:
for the past week we had it rammed down out throats
NH:
that the TPG option
NH:
provided cerrtainty of funds
NH:
as opposed to the Clive Cowedery proposal
NH:
and now look
NH:
I suppose more broadly this hurts the reputation of the banking as a whole
NH:
it really in tatters
NH:
and if anyone wants a good laugh
NH:
they should look at the Luke Johnson piece in the FT on Wednesday
NH:
he called the banking sector a disgrace to capitalism
PM:
PM:
bryce has just sent over a note on bank ethics
PM:
Got that Neil?
NH:
I have but it has crashed my system
NH:
before we turn to that let’s put up some of the analyst communities reaction to the latest chapter in the Bungle Bank saga
PM:
yes — i will do the ethics chart as a separate post a little later
NH:
this is from MF Global – good note
NH:
B&B on the brink
*Moody’s is likely to keep B&B on negative watch even after the right issue B&B faces the problems that:
1) securitisation vehicles continue to suck better assets from the balance sheet
2) the bank may not be able to secure wholesale funding to finance new business
3) the recent strong performance in collecting retail deposits may reverse
*Management shackled itself to the TPG horse that has now bolted and should leave as soon as the
rights issue is completed While Citi and UBS are underwriting the enlarged £400m rights, further details
are not available, including any clauses that may allow them to back out
*Moody’s is likely to keep B&B on negative watch even after the right issue B&B faces the problems that:
1) securitisation vehicles continue to suck better assets from the balance sheet
2) the bank may not be able to secure wholesale funding to finance new business
3) the recent strong performance in collecting retail deposits may reverse
*Management shackled itself to the TPG horse that has now bolted and should leave as soon as the
rights issue is completed While Citi and UBS are underwriting the enlarged £400m rights, further details
are not available, including any clauses that may allow them to back out
NH:
*Moody’s has downgraded because:
1) arrears are rising faster than at any peer, up from 2.10% to 2.79% in the first four months of the year
2) B&B is committed to keep buying up to £350m per quarter from GMAC. These loans are of poorer
quality than B&B’s own loans, with arrears up from 3.29% to 5.04% in the year to April
3) The position of unsecured creditors is deteriorating as 50% of assets are pledged to secured creditors
and the remaining assets are of lower quality
4) Moody’s expects further write-downs treasury asset write downs of low to mid double digit millions
1) arrears are rising faster than at any peer, up from 2.10% to 2.79% in the first four months of the year
2) B&B is committed to keep buying up to £350m per quarter from GMAC. These loans are of poorer
quality than B&B’s own loans, with arrears up from 3.29% to 5.04% in the year to April
3) The position of unsecured creditors is deteriorating as 50% of assets are pledged to secured creditors
and the remaining assets are of lower quality
4) Moody’s expects further write-downs treasury asset write downs of low to mid double digit millions
NH:
Interestingly Moody’s has a higher rating on B&B than it would otherwise have because it expects
support from the authorities. An old style, bail out orchestrated by the Bank of England behind closed
doors would appear to be B&B’s best hope of survival and, according to previous press comments, the
way the Governor would prefer to sort out the industry’s issues
support from the authorities. An old style, bail out orchestrated by the Bank of England behind closed
doors would appear to be B&B’s best hope of survival and, according to previous press comments, the
way the Governor would prefer to sort out the industry’s issues
NH:
*The possibility that B&B will trade below its rights price is likely to weigh on HBOS, which is also trading
at its rights level today
*This may increase pressure on management to behave as if it has a problem, instead of having a rights
issue while hinting that it does not need the money
*Trading at 0.7x tangible book (post rights) the market is clearly saying HBOS is also at risk of not
surviving
*Management should immediately consider the sale of BankWest in Australia We estimate that this would
lift core tier 1 by 100bps from the year end 2007 level and boost core tier 1 to 7.5% including the rights
*At that level of capital cushion, HBOS could be expected to perform like the banks listed during the
1990-2 downturn and stage a powerful rally, even if economic woes brought the stock back down later in
at its rights level today
*This may increase pressure on management to behave as if it has a problem, instead of having a rights
issue while hinting that it does not need the money
*Trading at 0.7x tangible book (post rights) the market is clearly saying HBOS is also at risk of not
surviving
*Management should immediately consider the sale of BankWest in Australia We estimate that this would
lift core tier 1 by 100bps from the year end 2007 level and boost core tier 1 to 7.5% including the rights
*At that level of capital cushion, HBOS could be expected to perform like the banks listed during the
1990-2 downturn and stage a powerful rally, even if economic woes brought the stock back down later in
PM:
Here’s some stuff from Caz earlier
PM:
Cazenove comment
The reasons for the credit rating downgrade are unsurprising given the trading statement on 2 June. However, Moody’s downgraded the company on 3 June in light of the information in the trading statement and the revised capital raising plan, and so it is unclear what has occurred over the past month to cause Moody’s to downgrade again. For B&B, the capital position is ultimately unchanged; it will receive the same amount of capital but now from a larger rights issue. However, the trading performance remains weak and we expect it will continue to deteriorate as impairment rises and the rating downgrade leads to additional funding costs. We retain an UNDERPERFORM recommendation.
The reasons for the credit rating downgrade are unsurprising given the trading statement on 2 June. However, Moody’s downgraded the company on 3 June in light of the information in the trading statement and the revised capital raising plan, and so it is unclear what has occurred over the past month to cause Moody’s to downgrade again. For B&B, the capital position is ultimately unchanged; it will receive the same amount of capital but now from a larger rights issue. However, the trading performance remains weak and we expect it will continue to deteriorate as impairment rises and the rating downgrade leads to additional funding costs. We retain an UNDERPERFORM recommendation.
PM:
And this is from Execution
PM:
Well you couldn’t make this stuff up. As suggestted in yesterday’s FT TPG have now pulled out of the rescue of B&B on the back of a likley further downgrade by Moody’s to Baa1. B&B (Hold) now move back to a revised plan A where they go for a rights issue of £400m. However, the original rights issue was fully underwritten at 82p. This is now underwritten at 55p. a new prospectus needs to be issued and a new timetable published. The new issue has the support of M&G, L&G. Insight and Standard Life so B&B looks like it will get its cash. Nonetheless, shares will be weak through this period and investors should be concerned by what has triggered the Moody’s downgrade – likley to be rising delinquencies and therefore should have a negative read across to HBOS. For the long term Baa1 is not a viable credit rating for a bank. Having ridden over pre-emption rights to get TPG in, rejected Clive Cowdrey’s offer at 77p and allowed the underwriters off the hook at the original 82p rights the incompetence of B&B’s senior management is stunning. Root and branch changes are needed to make this bank a viable commercial entity beyond this crisis.
Well you couldn’t make this stuff up. As suggestted in yesterday’s FT TPG have now pulled out of the rescue of B&B on the back of a likley further downgrade by Moody’s to Baa1. B&B (Hold) now move back to a revised plan A where they go for a rights issue of £400m. However, the original rights issue was fully underwritten at 82p. This is now underwritten at 55p. a new prospectus needs to be issued and a new timetable published. The new issue has the support of M&G, L&G. Insight and Standard Life so B&B looks like it will get its cash. Nonetheless, shares will be weak through this period and investors should be concerned by what has triggered the Moody’s downgrade – likley to be rising delinquencies and therefore should have a negative read across to HBOS. For the long term Baa1 is not a viable credit rating for a bank. Having ridden over pre-emption rights to get TPG in, rejected Clive Cowdrey’s offer at 77p and allowed the underwriters off the hook at the original 82p rights the incompetence of B&B’s senior management is stunning. Root and branch changes are needed to make this bank a viable commercial entity beyond this crisis.
PM:
And here is collins stewart on the matter
PM:
A second bungle. Debt downgraded, TPG walks away
■ Yet another bungled capital raise, debt rated only three above junk
B&B’s long-term debt rating was downgraded to Baa1 yesterday, just three notches above junk. This, in itself, is relatively startling for a deposit-taking bank in an OECD economy but we categorically do not believe there is a material risk of depositors losing money. This is not Northern Rock. This debt downgrade then triggered TPG terminating its commitment to inject £179m into the bank – this had been widely rumoured in the press. That the board of B&B and its financial adviser (Goldman Sachs) rebuffed Cowdery’s materially higher offer only to see its back stop position weaken significantly is to their detriment.
■ Yet another bungled capital raise, debt rated only three above junk
B&B’s long-term debt rating was downgraded to Baa1 yesterday, just three notches above junk. This, in itself, is relatively startling for a deposit-taking bank in an OECD economy but we categorically do not believe there is a material risk of depositors losing money. This is not Northern Rock. This debt downgrade then triggered TPG terminating its commitment to inject £179m into the bank – this had been widely rumoured in the press. That the board of B&B and its financial adviser (Goldman Sachs) rebuffed Cowdery’s materially higher offer only to see its back stop position weaken significantly is to their detriment.
PM:
Now a £400m rights issue at 55p, backed by “major shareholders”
Four major shareholders are now reportedly backing the issue though the extent of sub-underwriting is unknown. We feel that the price can easily trade down through 55p (as HBoS has fallen through its rights price).
■ A Cowdery return unlikely; would be at lower levels in any case
The Cowdery proposal did make some sense – cutting operational costs would create value (though UK mortgage lenders are not massively inefficient) though his funding plans were never elucidated and we feel these to be key to any such deal and a ratings downgrade makes his return less likely, in our view. If he is kind enough to return to this situation, we feel he is likely to be bidding at materially less than the reported 70p+ of his last proposal.
Four major shareholders are now reportedly backing the issue though the extent of sub-underwriting is unknown. We feel that the price can easily trade down through 55p (as HBoS has fallen through its rights price).
■ A Cowdery return unlikely; would be at lower levels in any case
The Cowdery proposal did make some sense – cutting operational costs would create value (though UK mortgage lenders are not massively inefficient) though his funding plans were never elucidated and we feel these to be key to any such deal and a ratings downgrade makes his return less likely, in our view. If he is kind enough to return to this situation, we feel he is likely to be bidding at materially less than the reported 70p+ of his last proposal.
PM:
We would SELL B&B to 50p… and BKIR on the read-across
Mgmt has bungled here, in our view and the rights process is now being lengthened meaning likely further stock price falls we feel. We would SELL B&B down to 50p. Ratings agencies are, in many areas, simply catching up with what the equity market is already aware of. UK non-standard mortgage lending remains an area of concern, HBoS (Hold) at 0.6x book value is already discounting a major credit cycle here, though BKIR (Sell) with its wholesale-funded UK BTL business, as well as having weaker macro drivers (falling Irish GDP and faster-falling Irish house prices) and trading at c.1x book value is likely to be negatively impacted by this news.
Mgmt has bungled here, in our view and the rights process is now being lengthened meaning likely further stock price falls we feel. We would SELL B&B down to 50p. Ratings agencies are, in many areas, simply catching up with what the equity market is already aware of. UK non-standard mortgage lending remains an area of concern, HBoS (Hold) at 0.6x book value is already discounting a major credit cycle here, though BKIR (Sell) with its wholesale-funded UK BTL business, as well as having weaker macro drivers (falling Irish GDP and faster-falling Irish house prices) and trading at c.1x book value is likely to be negatively impacted by this news.
PM:
Note they are also saying sell Bank of Ireland
PM:
the Irish economy is in tatters
PM:
havent seen latest house price news from there — but i bet it is not good
PM:
BoI off 2.8% currently
PM:
Trading at 5.33
PM:
And how about HBOS — how in heavens is that holding up this morning?
PM:
Off 4.5p at 275
NH:
dunno, beats me. could be that Australia disposal story from yesterday
PM:
I guess so
NH:
which we will come back to in a mo
NH:
but before that
NH:
the war or words between TNS and WPP has escalated
NH:
this is now WAR
NH:
guess what
PM:
What?
NH:
they have used the CAPS LOCK button in this statement
PM:
PM:
Show!
NH:
* THE BOARD BELIEVES THAT WPP’S SHARE PRICE CLAIMS ARE MISLEADING
NH:
* THE BOARD HAS COMMITTED TO ALIGN MANAGEMENT INCENTIVISATION WITH THE MERGER BENEFITS
NH:
* THE BOARD IS CONFIDENT THAT GfK-TNS WILL REACH ITS MARGIN TARGET OF BEYOND 15% IN THE MEDIUM TERM*
NH:
* THE BOARD BELIEVES THAT THE NEW BUSINESS MODEL OF GfK-TNS IS AN OPTIMAL MODEL FOR CLIENTS
* THE BOARD BELIEVES THAT THE NEW BUSINESS MODEL OF GfK-TNS IS AN OPTIMAL MODEL FOR CLIENTS
NH:
* THE BOARD BELIEVES THAT WPP HAS ALL THE INFORMATION REQUIRED TO VALUE TNS
NH:
none of that is from the wires
NH:
contained in the statement
NH:
and not only have they capped it up
NH:
but for extra effect that have used the bold button
PM:
This of course is Taylor Nelson trying to merge with GfK of Germany — rather than being taken over by Martin Sorrell’s WPP
PM:
Just cant see the original deal happening tho
NH:
and this morning’s statement says that the largest shareholder in GFK is backing the deal
NH:
Update on voting of GfK-Nerg e.V. (“GfK Verein”) and response to misleading statements disseminated by WPP
The Board of TNS is pleased to note the announcement made by GfK AG (“GfK”) today that the Administrative Board of GfK Verein has, as anticipated, voted in favour of the merger of GfK and TNS, thereby demonstrating its unambiguous support for the merger and confidence that the vote of the GfK Verein on 21 July 2008 will be similarly successful.
Donald Brydon, Chairman of TNS, commented:
“We are very pleased that the Administrative Board of the Verein has voted positively in favour of the merger with TNS. We look forward to working with GfK to create an exciting new global force in market research that will be the envy of our peers.”
The Board wishes to emphasise that TNS’ business is not the media business, nor is it advertising. It provides market information and advisory services. The Board believes that the strong growth prospects in its industry will be more than captured by GfK-TNS.
The demand for information remains a key requirement in terms of clients’ understanding of how their brands are performing and how to maximise their performance in a changing environment.
This means that while advertising may have a challenging future, the Board believes that the demand for information and, in particular, how consumers engage with brands is increasing. The combination of GfK-TNS will be a strong company in this growth industry.
PM:
remember this is a merger that promises to create a firm with three head offices — one in the UK, two in Germany
PM:
It’s a job preservation scheme
NH:
TNS shares not really reacted, up 2.25p at 245.25p
NH:
spread has narrowed since yesterday lunchtime
NH:
so the market thinks a deal more likely
NH:
but probaly also saying WPP will bump again
NH:
possibily by 10p
NH:
PM:
Can we just go back to HBOS briefly
PM:
any reaction to yesterday’s HBOS rumour?
NH:
what the one about them selling their Australian assets?
PM:
yep
PM:
got the stock up 6%
PM:
which will no doubt be of some relief to the underwriters
NH:
only some relief
NH:
the rights issue still has two weeks to run
NH:
and anything can happen in the intervening period
NH:
most of the analysts seem to think that HBOS will not sell
NH:
but if they don’t I reckon they should
NH:
given the state of the housing market and what has gone on at Bungle Bank
NH:
it seems pretty obvious that they have not raised enough money
NH:
anyway
NH:
that’s enough of my opinion
NH:
this is what Caz think
NH:
HBOS – Comment on speculation of BankWest disposal
Renewed speculation that HBOS is to sell BankWest in our view comes at a useful time for the company, with the shares trading around the rights offer price (275p).
We estimate a sale at a 30% premium to the average 2009E PER of the local banks (equivalent to an exit PER of 12.5x) would value the business at £3.0bn. This would result in a c.100bp increase to HBOS’ equity tier 1 ratio (from 6.8% Dec08 to 7.8%) through a £660m post-tax gain (+20bp), £480m lower goodwill deduction (+15bp) and £28bn lower RWAs (+65bp).
NH:
However, we believe a disposal is unlikely for several reasons:
HBOS continues to invest in the business, announcing on 12 June the creation of an additional 700 jobs and the intention to open 50 new branches. While recognising that plans can change, this would appear to be a sign of commitment in light of the speculation surrounding BankWest earlier last month.
HBOS continues to invest in the business, announcing on 12 June the creation of an additional 700 jobs and the intention to open 50 new branches. While recognising that plans can change, this would appear to be a sign of commitment in light of the speculation surrounding BankWest earlier last month.
We estimate the deal would be dilutive to earnings (c.5%) and would reduce the group’s diversification outside of the UK, at a time when such diversity is likely to be increasingly appreciated by investors.
NH:
Australian banks have derated in 2008 (e.g. both ANZ and NAB trade on 8.6x 2009E Bloomberg consensus earnings compared with 11.2x at the start of the year), so management appears to have missed the opportunity to realise the most value from the business. It is unclear whether there would be a significant synergy opportunity given the limited physical infrastructure that BankWest has beyond its core Western Australia market.
NH:
If a disposal is announced, then we would question why management feels it necessary to raise additional capital and increase further its capital ratios so soon after launching a £4bn rights issue. It would be inconsistent with the view given in the IMS two weeks ago (19 June) when management stated it is “on track to demonstrate a resilient performance in 2008″ and confirmed that it expected to report capital ratios within its new target ranges (6-7% equity tier 1; 8-9% tier 1).
The disposal would indicate management is fearful of the future, more not only than it expresses publicly but also more than we see the outlook. Therefore, we believe the disposal of BankWest is unlikely and perversely, if it did occur, would be a negative for HBOS.
PM:
That is a good point
PM:
sale now would be an admission that they had not raised enough money
PM:
and would call into question the competence of management
NH:
it is a fair point
NH:
so what’s the betting then, that this division gets knocked out 12-18 months down the line??
NH:
and before we move on
NH:
Sandy Chen at Panmure has put something out on the Bungle Bank
NH:
It would be natural for investors to hope that Resolution reiterate their 72p
per share offer for a large stake in B&B; in view of the declining
fundamentals and TPG.s withdrawal, however, we think this hope may be in
vain.
per share offer for a large stake in B&B; in view of the declining
fundamentals and TPG.s withdrawal, however, we think this hope may be in
vain.
NH:
In our view, B&B must now run the gauntlet of (1) an emergency rights
issue, (2) more difficult funding conditions, and (3) a rapidly deteriorating
macro environment. Maintain Sell.
issue, (2) more difficult funding conditions, and (3) a rapidly deteriorating
macro environment. Maintain Sell.
The Moody.s downgrade (which we expect will lead to higher funding costs and
increased commitments to the securitisation vehicles) and the past fortnight.s darkening UK macro outlook prompts us to cut our forecasts once again; we now expect B&B will generate losses through 2010, with our 2008E EPS going from -5.3p to -5.7p and 2009E EPS going from 0.05p to -2.4p.
NH:
We expect that ROICs will drop from 8.5% for 2007 to 0.6% for 2008, 1.0% for 2009
and 1.7% for 2010. This in turn drives a cut in our ROIC-based fundamental share price target from 35p to 20p.
and 1.7% for 2010. This in turn drives a cut in our ROIC-based fundamental share price target from 35p to 20p.
NH:
Some pretty bleak forecasts in there
PM:
yep
PM:
Losses until 2010
PM:
Let’s move on from banks
PM:
PM:
Quick wider market
NH:
under pressure following the Bungle Bank news
NH:
FTSE 100 down 25.7 points at 5,450.9
NH:
and Marks & Spencer one of the biggest fallers this morning
NH:
no respite in the wake of the profits warning
NH:
stock off a further 10.5p to 225.5p
PM:
Thats a fall of 4.5%
PM:
Whats going on?
NH:
well, this is not going to please Chairman Rose
PM:
Sounds rather Maoist — chairman Rose
PM:
let a thousand flowers bloom…
NH:
Citigroup
NH:
joint house broker to M&S
NH:
has downgraded to sell
NH:
and set a 205p target price
PM:
Whoa!
NH:
bearish isn’t it
PM:
NH:
and as I said earlier
NH:
that’s the joint house broker
PM:
Yes, but for how much longer
NH:
good question
NH:
but we should not mock
NH:
more analysts need to do this sort of thing
NH:
rather than set hold rating and then tell their clients privately to knock the stock out
PM:
so who is the brave man??
PM:
Or woman?
NH:
step forward
NH:
Richard Edwards
NH:
and the note has an amusing title
PM:
go on
NH:
Every Rose Has Its Thorn
PM:
Ouch
NH:
that won’t please Chairman Rose
NH:
he will want that publication banned in the People’s Republic of Marks & Spencer
PM:
Mr edwards needs a spell in the countryside being reducated
NH:
yes, some re-education for Mr Richards
NH:
deffo needed
PM:
What’s the note saying then?
NH:
that the dismal trends revealed by the company this week
NH:
are going to continue for the rest of the year
NH:
that means, clothing like for likes down 7% and food down 5%
PM:
so what does that mean for the profit forecasts?
NH:
what do you think??
NH:
some pretty big downgrades
NH:
March 2009E and 2010E PBT cut 17% and 29% to £730m and £570m
NH:
that comes at EPS of 32.9p and 25.7p respectively
PM:
and why the sell rating
NH:
well…
NH:
Mr Edwards says that things are so difficult to predict
NH:
and we are so early in the consumer slowdown cycle
NH:
that to recommend buying retail stocks would be foolish
PM:
very wise
PM:
let’s see the note
NH:
here it is
NH:
Every Rose Has Its Thorn
NH:
March 2009E and 2010E PBT cut 17% and 29% to £730m and £570m — in
the wake of the weak 1Q trading statement and our view that weak calendar
2008 UK consumer demand will be weaker in 2009. This equates to 2009E and
2010E EPS of 32.9p and 25.7p respectively.
the wake of the weak 1Q trading statement and our view that weak calendar
2008 UK consumer demand will be weaker in 2009. This equates to 2009E and
2010E EPS of 32.9p and 25.7p respectively.
NH:
UK LFL sales trends weakened markedly in June despite soft comparatives —
Given this, we have assumed that Clothing LFL sales trends remain -7% and
Food -5% throughout this financial year (in line with 1Q sales patterns), and
-5% and -3% respectively, in the year to March 2010.
Given this, we have assumed that Clothing LFL sales trends remain -7% and
Food -5% throughout this financial year (in line with 1Q sales patterns), and
-5% and -3% respectively, in the year to March 2010.
NH:
What does it all mean? — Given our view that sector-wide revenue trends will
weaken further as consumer demand patterns deteriorate across both 2008
and 2009, we have lowered our M&S March 2009 and 2010 EPS forecasts to
33p and 26p respectively, from 42.7p last year. While this remains directionally
consistent with our sector-wide calendar 2008 and 2009 UK forecast agenda,
we argue that at this early point in the current UK consumer down cycle, with
growing input cost pressures across both the General Merchandise and Food
businesses, the M&S P&L outlook still remains opaque and earnings forecast
confidence low.
weaken further as consumer demand patterns deteriorate across both 2008
and 2009, we have lowered our M&S March 2009 and 2010 EPS forecasts to
33p and 26p respectively, from 42.7p last year. While this remains directionally
consistent with our sector-wide calendar 2008 and 2009 UK forecast agenda,
we argue that at this early point in the current UK consumer down cycle, with
growing input cost pressures across both the General Merchandise and Food
businesses, the M&S P&L outlook still remains opaque and earnings forecast
confidence low.
NH:
Rating cut to Sell — We downgrade M&S to Sell/Medium Risk (3M), to reflect
our view that the current sharply deteriorating UK macro environment should
drive a Sell stance on the UK general retailers in the absence of extreme
valuation parameters (which usually requires the prospect of EPS upgrades).
We now have 10 Sell and 3 Buy ratings in UK general retail. Our target price is
cut to 205p (to reflect the UK general retail 15-year average P/E relative of 90).
our view that the current sharply deteriorating UK macro environment should
drive a Sell stance on the UK general retailers in the absence of extreme
valuation parameters (which usually requires the prospect of EPS upgrades).
We now have 10 Sell and 3 Buy ratings in UK general retail. Our target price is
cut to 205p (to reflect the UK general retail 15-year average P/E relative of 90).
NH:
Results Analysis
The M&S 1Q trading statement illustrates the sharp recent deterioration in UK
consumer spending patterns. Specifically, following a mixed trading
performance in April and May, M&S stated that since then “consumer
confidence levels have deteriorated markedly and market conditions have
become more challenging”. This is all the more notable given the weak sales
comparatives from June last year.
The M&S 1Q trading statement illustrates the sharp recent deterioration in UK
consumer spending patterns. Specifically, following a mixed trading
performance in April and May, M&S stated that since then “consumer
confidence levels have deteriorated markedly and market conditions have
become more challenging”. This is all the more notable given the weak sales
comparatives from June last year.
NH:
At the LFL sales levels, 1Q UK LFL sales fell
-5.3%, circa -200bp below our -3% forecast. By division, 1Q General
Merchandise LFL fell -6.2% (CIR -4%); split Clothing -7% and Home +1.6%,
and Food LFL sales fell -4.5% (CIR -2%). Taken together with the above
monthly sales trend, we fear that the June clothing LFL could have faded
towards -10% as consumer confidence “deteriorated markedly”.
-5.3%, circa -200bp below our -3% forecast. By division, 1Q General
Merchandise LFL fell -6.2% (CIR -4%); split Clothing -7% and Home +1.6%,
and Food LFL sales fell -4.5% (CIR -2%). Taken together with the above
monthly sales trend, we fear that the June clothing LFL could have faded
towards -10% as consumer confidence “deteriorated markedly”.
NH:
Moving on the gross margins and operating costs, M&S still expect the boughtin
gross margin to rise this financial year, although offsetting discount activity
and price investment now looks more probable. In addition, despite the
deteriorating LFL sales outlook, M&S have retained their +7% full year
operating cost growth guidance.
gross margin to rise this financial year, although offsetting discount activity
and price investment now looks more probable. In addition, despite the
deteriorating LFL sales outlook, M&S have retained their +7% full year
operating cost growth guidance.
NH:
March PBT forecast cut 20% to £730m
Taken together, these P&L dynamics drive a 20% cut in our March 2009E PBT
forecast. Here we assume respective General Merchandise and Food LFL of
-7% and -5%, alongside a -30bp group gross margin fade. The latter assumes
M&S haven’t bought for our expected -7% clothing LFL, driving greater
clearance activity through 2H.
Taken together, these P&L dynamics drive a 20% cut in our March 2009E PBT
forecast. Here we assume respective General Merchandise and Food LFL of
-7% and -5%, alongside a -30bp group gross margin fade. The latter assumes
M&S haven’t bought for our expected -7% clothing LFL, driving greater
clearance activity through 2H.
NH:
Perhaps more significantly, given our view that UK consumer spending
patterns will be weak in 2008 and weaker in 2009, we forecast -5% and -3%
respective General Merchandise and Food LFL across the year to March 2010.
Taken together with a further -30bp gross margin deterioration, we derive a
£570 million March 2010E PBT forecast (EPS 25.7p, -22% year on year). This
compares with our previous forecast of £800 million.
patterns will be weak in 2008 and weaker in 2009, we forecast -5% and -3%
respective General Merchandise and Food LFL across the year to March 2010.
Taken together with a further -30bp gross margin deterioration, we derive a
£570 million March 2010E PBT forecast (EPS 25.7p, -22% year on year). This
compares with our previous forecast of £800 million.
NH:
actually flicking through the note
NH:
what becomes clear is that the divi M&S hiked earlier this year
NH:
will only just be covered by earnings
PM:
Hmmm
NH:
of course another reason for the weakness in m&s could be the John Lewis sales figures
NH:
which on the face of it appear shocking
NH:
sales to the week ending 28 June: – 8.3 %
PM:
goodness me
NH:
a huge drop
NH:
but
NH:
needs to be set in context
PM:
because of the sale?
NH:
yes, John Lewis went on sale last weekend
NH:
a lot of people could have been holding off buying coz they wanted to pick stuff up cheaper in the sale
NH:
and there was also wimbledon on and the European championships
NH:
even so, sales look to be down around 10% on last year
NH:
here’s a snap reaction from Seymour Piece on the figures
NH:
Overall a very weak set of figures. Sales at John Lewis were down by 8.3%. I suspect shoppers were waiting for the Clearance Sale on the Saturday, which was reported to be encouraging, achieving sales up by 20% on the previous opening day two years ago but according to our records down by about 10% against the previous year. During the week there would have been some impact from sporting events, Wimbledon and the two football European Championship semi finals.
NH:
Fashion improved by 2.2% while electricals were down by 15.8% and home down by 13.0%. In fashion, branded menswear and womenswear were the star performers. As in previous weeks, out of town stores performed extremely poorly – Bluewater -24.6%, Brent Cross -17.1% and Cribbs Causeway -16.4%.
There must be more going on here than the higher cost of petrol putting off shoppers going to these destination outlets – perhaps they are progressively being view as not attractive places to visit during the summer. Johnlewis.com sales increased by 19.4%.
Waitrose’s sales increased by 3.0% below the run rate of 5.8%.
NH:
In apparel, our recommendations are M&S (MKS.L) – Sell, Next (NXT.L) – Hold and Debenhams (DEBS.L) – Hold
NH:
and if anyone wants to read more on the John Lewis numbers
NH:
this went up on FT.com a little earlier
NH:
http://www.ft.com/cms/s/0/918f738e-499b-11dd-891a 000077b07658.html?nclick_check=1
PM:
how are the other retailers faring
?
NH:
mixed
NH:
Next are up 27.5p at 881p
PM:
That is an odd move — no?
NH:
it is
NH:
could be some switching out of Marks
NH:
have heard people saying that Marks deserves to trade on the same rating as Next
NH:
because its food business is not what it used to be
NH:
and is facing massive competition
NH:
also positive note from Bernstein
NH:
In general, we remain cautious on the UK consumer and UK discretionary retailers. In particular, UK A&F
retailers are virtually 100% exposed to a weakening consumer environment and do not provide obvious
strategic reasons to be optimistic about their long-term success – i.e., superior business models and retail
capabilities, innovative retail concepts, demonstrated ability to profitably grow abroad, etc.
retailers are virtually 100% exposed to a weakening consumer environment and do not provide obvious
strategic reasons to be optimistic about their long-term success – i.e., superior business models and retail
capabilities, innovative retail concepts, demonstrated ability to profitably grow abroad, etc.
Having said that, are now looking significantly more attractive and current share prices would reflect the
‘strategic gap’ to – for example – mass fashion European A&F retailers. Hence, we begin to perceive the
opportunity for investors to look today at M&S and Next in a more positive light. Indeed, consumer
demand and momentum are still against them, but fundamental value is looking more compelling.
For the short-term, we view Next as a clearer trading opportunity for investors. In fact, Next has de-rated
materially and is now on a very low multiple. The market seems to expect deeply negative results on the
wake of the disappointing 1Q08 trading update by M&S. Nevertheless, Next could continue to surprise and
complement expected negative LFL performance with positive bottom line surprises.
NH:
M&S, as we have previously argued (please refer to our recently published report “M&S: Capital Efficient
Strategy could create material Upside for the Stock – Share Price Support up to 850p” of 23rd April 2008)
that a capital efficient alternative strategy could create material upside for the stock. Hence we are in tow
minds on M&S. On one side we retain our Market-perform rating and cut our target relative PEF, as we
don’t see the current senior management team adjusting their strategic course. On the other, we indicate
with our PT that – even under the current circumstances – the stock provides in our view stronger
fundamental value than currently recognized by the market. Once again, we see the market reacting very
emotionally to M&S – this time on the downside, as previously on the upside.
Strategy could create material Upside for the Stock – Share Price Support up to 850p” of 23rd April 2008)
that a capital efficient alternative strategy could create material upside for the stock. Hence we are in tow
minds on M&S. On one side we retain our Market-perform rating and cut our target relative PEF, as we
don’t see the current senior management team adjusting their strategic course. On the other, we indicate
with our PT that – even under the current circumstances – the stock provides in our view stronger
fundamental value than currently recognized by the market. Once again, we see the market reacting very
emotionally to M&S – this time on the downside, as previously on the upside.
We rate both M&S and Next Market-Perform, with a PT of 355p and 1125p respectively. We are cutting
our M&S PT from 475p to 355p – 50% of this reduction comes from a lower market multiple, 20% from
reduced EPS estimates moving from 40.2p to 37.8p (down 6%), while the remaining 30% comes from a
reduced relative target PEF to 90% (formerly 100%). We are cutting our Next PT from 1295p to 1125p –
80% of this reduction comes from a lower market multiple, 20% from reduced EPS estimates moving from
159.4p to 154.7p.
NH:
there has also been a bit of director share buying
PM:
interesting
PM:
PM:
N Not set wass asking earlier about Avis
PM:
Understand the news there is that Kleinworts are placing a line of 62m shares
PM:
at 14p
PM:
hence market price straight down to that level — of f 4p
PM:
PM:
Quick look at Friends Provident — another big faller this morning
PM:
Shares are currently 5.4p lower at 96p.
PM:
This is because of reports that no one wants to buy Lombard
NH:
that’s not the FT column but a European wealth management business
PM:
I thought it was supposed to be a good business
PM:
But maybe not at circa 600m
NH:
I have a bit of comment on this
NH:
from Panmure
NH:
Friends Provident
Lombard buyers dwindling?
The Scotsman newspaper is reporting this morning that Swiss Life, the only
trade buyer believed to be interested in buying Lombard (at around £600m),
has pulled out. This leaves only private equity firms in the running. If true, it
is not good news, but the shares currently more than discount this trading at
a massive 35% to EV. Despite the current trading outlook we believe that the
shares on a 12 month view should be bought.
Lombard buyers dwindling?
The Scotsman newspaper is reporting this morning that Swiss Life, the only
trade buyer believed to be interested in buying Lombard (at around £600m),
has pulled out. This leaves only private equity firms in the running. If true, it
is not good news, but the shares currently more than discount this trading at
a massive 35% to EV. Despite the current trading outlook we believe that the
shares on a 12 month view should be bought.
NH:
! The Scotsman newspaper is this morning reporting that the only trade buyer interested
in acquiring Lombard (Friends High Net Worth operation) has pulled out. FP acquired
Lombard in 2005 for £394m, and has decided to sell it (along with Pantheon and its 52%
stake in F&C) following its Strategic Review.
! Swiss Life has said publicly that it wants to be No.1 in this market, and it has been
suggested that it was willing to pay c£600m. Earlier this year we said that we thought a
price of c£675m or 29p/share might be achievable, but clearly valuations have come
under pressure since then. Even if those still left in the running for Lombard, believed to
be private equity firms CVC and Friedman, pay less than £600m the downside to our
valuation is still relatively limited.
in acquiring Lombard (Friends High Net Worth operation) has pulled out. FP acquired
Lombard in 2005 for £394m, and has decided to sell it (along with Pantheon and its 52%
stake in F&C) following its Strategic Review.
! Swiss Life has said publicly that it wants to be No.1 in this market, and it has been
suggested that it was willing to pay c£600m. Earlier this year we said that we thought a
price of c£675m or 29p/share might be achievable, but clearly valuations have come
under pressure since then. Even if those still left in the running for Lombard, believed to
be private equity firms CVC and Friedman, pay less than £600m the downside to our
valuation is still relatively limited.
NH:
UK life and Pensions operation, is to retire early in December. We view this as a move
to enable incoming CEO, Trevor Matthews, to stamp his authority on the business and
should not be seen negatively.
! In terms of valuation, we believe FP to be massively undervalued. Sentiment towards the
life sector couldn.t be much worse than it currently is, but for investors with an
investment timescale of more than three months this is a terrific opportunity. With the
H1 reporting season not far off, we suspect that some of the worse fears will soon be
dispelled. New business will have been impacted by the current investment markets, but
insurers like FP are trading at valuations massively below their Embedded Values. FP is
trading at a 30% discount to our 2008 year end EV of 145p. The discounts elsewhere in
the sector are Aviva 23%, L&G 29%, Pru 13% and Standard Life 32%.
to enable incoming CEO, Trevor Matthews, to stamp his authority on the business and
should not be seen negatively.
! In terms of valuation, we believe FP to be massively undervalued. Sentiment towards the
life sector couldn.t be much worse than it currently is, but for investors with an
investment timescale of more than three months this is a terrific opportunity. With the
H1 reporting season not far off, we suspect that some of the worse fears will soon be
dispelled. New business will have been impacted by the current investment markets, but
insurers like FP are trading at valuations massively below their Embedded Values. FP is
trading at a 30% discount to our 2008 year end EV of 145p. The discounts elsewhere in
the sector are Aviva 23%, L&G 29%, Pru 13% and Standard Life 32%.
PM:
good points in there
PM:
And good points below on firms that have rejected bids…
PM:
I can think of any that are still above the rejected offer price
PM:
PM:
Right — i am afraid we do not have any upbeat RAW to share this morning
PM:
Even if it is a Friday
NH:
yes it is very quiet out there, many of my top guys have taken the day off
NH:
coz of Independence DAy in the US
NH:
a lot of them are heading to Wimbledon
NH:
in fact I was invited by one of them
NH:
but had to reject
NH:
too much work to do
PM:
Ah
NH:
PM:
Quick mention of libor — which is looking positively healthy
PM:
sterling 3m at 5.89125
PM:
v 5.91250
PM:
We will put some stuff on ethical banks a little later on the home page
PM:
Sam is busy on something
NH:
and we will see if someone is around to do a blog on the BDEV conference call next week
NH:
all rather depends on what the news flow is
NH:
and while we are talking about housebuilders
NH:
seems that Standard Life have trimmed their holding in Taylor Wipeout
PM:
Stock off 2.25p at 32.75
PM:
Not looking good
PM:
PM:
Right — we are off
NH:
see you all next week
PM:
Thanks for joining
PM:
Thanks for all your comments
PM:
We will be back on Monday at 11am
PM:
Sharp!
PM:
VERY GOOD SS!
PM:
best of the morning i think
NH:
see ya
PM:
bye