Markets live chat transcript for the chat ending at 12:16 on 16 Jul 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Welcome to Markets Live, FT Alphaville’s daily markets discussion.
PM:
We were going to try and have a patriotic ML this morning.
PM:
Do the chat standing up or something.
PM:
Encourage the FSA to follow the FSA’s lead and introduce Sale and No return policy.
NH:
Shares in banks are GOOD to buy, but can’t be sold. (freely).
PM:
We just couldn’t do it.
PM:
I’m a Murphy, so im a republican by default.
PM:
Neil just doesn’t do the Stand Up And Sing the National Anthem stuff.
PM:
He’s in the radical camp who believe that you need buyers AND sellers to make a market.
NH:
It’s just daft and it is going to blow right up in the face of Christopher Cox.
PM:
Now, just to be clear here, we don’t condone malicious rumour mongering.
NH:
And we also understand that unfettered naked shorting can cause huge settlement problems in equity markets.
PM:
But this is about perceptions. If those in charge of the system are reduced to manipulating market prices then you simply encourage everyone to believe that we are in a crisis.
NH:
And that the crisis is getting deeper.
NH:
as one look at the banking sector this morning shows
PM:
We will come back to So-op
PM:
First — let get some prices up
HBOS (HBOS:LSE): Last: 236.75, down 23.25 (-8.94%), High: 264.50, Low: 236.50, Volume: 38.32m
Royal Bank of Scotland Group (RBS:LSE): Last: 153.60, down 13.7 (-8.19%), High: 169.90, Low: 152.60, Volume: 99.86m
Barclays (BARC:LSE): Last: 243.50, down 17 (-6.53%), High: 264.50, Low: 243.50, Volume: 33.77m
Lloyds TSB Group (LLOY:LSE): Last: 257.00, down 16 (-5.86%), High: 276.75, Low: 256.25, Volume: 40.95m
PM:
Current market cap of RBS is 24 billion (taht includes the new 12bn of course)
NH:
so it needs to halve again
PM:
Notice people asking about Sir Fred’s tenure
PM:
Point is tho that these blows are across the sector
PM:
Every banks is being dumped
PM:
And we cant just junk all the banking ceos
NH:
but there is a specific rumour doing the rounds about RBS
NH:
RBS: -8% now on subprime issues – COMP denied
NH:
RBS:
* Confirmed with company there is no new news in relation to sub-prime…
* this rumoured £9bn is a complete red herring.
* On construction/property exposure in Spain we would estimate this to be
£2-3bn (our numbers not the company) so in the context of the group balance
sheet not the biggest issue the group faces.
NH:
that’s just come out of UBS
NH:
of course there are also rumours about the write downs in a home equity portfolio in the US
NH:
remember RBS is the biggest foreign bank operating in the US
NH:
including the bits it bought from ABN, 15% of pretax profits are expected to come from the US
NH:
but as HSBC found out, lots of profit in the US can quickly no profit
PM:
yes, i was reading your post on that earlier
PM:
Something of a mystery
PM:
And RBS has been so opaque abotu it in its statements
PM:
This seems to be a Larry Fish productions
PM:
A man who has appeared in the odd league table for executive renumeration
NH:
right, just got another rumour through on RBS
PM:
usually somewhere near the top
NH:
apparently RUMOURS out there about some nasty emerging from the sludge that is ABN
NH:
(b) rumours of 3 – 5 bn GBP further write downs
PM:
This is just generallised panic
PM:
get the sense that people are making up stories to match the fall in the price
PM:
No doubt some will see it as an orchestrated raid — but its clearly not
NH:
that said, there is a very specific story doing the rounds in Barclays
NH:
SHANGHAI (Dow Jones)–China’s Cabinet has rejected a proposal by China Development Bank to increase its investment in
subprime-hit Barclays
by up to GBP136 million, Caijing Magazine reported
Wednesday, citing unnamed sources.
PM:
Chinese refused to throw good money after bad
NH:
and who can blame them??
NH:
Got some very interesting stuff here from one analyst.
NH:
Apparently the Chinese funds were due to hit the Barclays bank account tomorrow!
NH:
Spoke to BARC Investor Relations. He had seen the story as well. Referred me to the prospectus which does not mention Cabinet approval as a condition of CDB supplying the funds, so theoretically they are committed to supplying the funds. That said, he did admit that the money had not yet hit BARC bank account (supposed to arrive tomorrow). IR questioned why CDB or Chinese authorities might want to pull out now, given they already put in £1.5bn last summer, and agreed two weeks ago to take up their share of capital raising, so withdrawing now this would potentially just damage further their existing investment.
NH:
Analyst thoughts:
We are in a nervous market, so investors may “sell first, and ask questions later” but my view is relative to RBS, BARC looks in better shape. Given the money is due to arrive tomorrow this story has a very short shelf life, and we will soon know one way or the other. On an absolute basis, shares probably continue to fall. We rate both BARC and RBS Neutral.
NH:
that’s from an analyst who prefers annonimity
PM:
Thank yo u dead ringa
NH:
and we also must take a quick look at HBOS
NH:
although the rights issue deadline in Friday
NH:
for intents and purposes, the effective deadline is this morning
NH:
like now, this morning
PM:
And its easy to meet the deadline — just dont send in the form!!
PM:
That ws a very funny post you put up earlier — showing the MOST and DKB action plan for dealing with the rump
PM:
Cos we now know that it wont be a rump – its a stick
NH:
a bloody great one at that
PM:
Punch 7 Judy meets the british banking sector
PM:
Rights at 275p; market price at 237p of course
NH:
and for those of you who missed the post earlier here are some highlights or how the underwriters plan to wield their stick
NH:
Subscription period ends on Fr, 18/07. BUT Accounts need to have their selections on rights in by 3pm UK time on We, 16/07. We believe most custodian deadlines are late morning on Wed. Rights trade nil paid for the final time on Wed. Pls advise your clients to check with their respective back office in order not to miss the deadline
NH:
The proportion not taken up, called the ‘rump’, is expected to be placed by the JBRs, acting as placing agents to the shareholders, on Mo, 21/07. However according to UK regulations, the rump can only be placed at £2.75 or higher, TO MAKE VERY CLEAR – RUMP WILL NOT BE OFFERED BELOW £2.75
NH:
f the JBRs believe that the shares cannot be placed at £2.75 or higher, there WILL NOT be a rump placement and the rump becomes what is called a ‘stick’. The banks and the sub-underwriters (with no exception) become therefore owners of the stick shares
NH:
In the event of a stick, sub-underwriters will be allocated first on a pro-rata basis subject to their sub-underwriting allocations. The amount not allocated to sub-underwriters will be held by the JBRs
NH:
DKIB and MS will manage the stick together as is common practice in situations where underwriters are left with stock. The banks intend to manage the position with a clear objective of minimizing any price impact from a perceived overhang. As you know, both DKIB and MS think there is tremendous value at 275p and will manage accordingly.
NH:
FOR THE LARGE SHORT BASE:
There are mainly 3 ways to close out their shorts: (i) either by buying rights and exercise them or (II) by buying shares in the rump (if any) or (iii) by buying the shares in the markets before or after the end of the rights issue. Most HFs in shorting the stock hedged that short through many usual mechanism. In any event if they do not buy the stock now or exercise the rights, their currently hedged shorts will become naked directional shorts with potential for a short squeeze
PM:
You know there is actually still a market in the nil paids
PM:
Yep the price is 0.11 to 0.12
PM:
Maybe they shoudl sell em thru some penny dreadful buckshop
PM:
Hello Mrs Spank, like a million Barcs?
PM:
Suppose its a little insurance policy for those still shorting HBOS
NH:
and before we wind up on the banks
NH:
interesting note out of Credit Suisse this morning
NH:
looking at bank CDS’s which are rising
NH:
Summary: UK bank share prices continue to dive – down 7% this month alone – but credit markets are
wobbling as well. We are still some way of the conditions in March but many UK bank CDS and the itraxx
crossover are back to the levels of early April. The drivers are obvious – more recently the situation
with GSE’s, the failure of Martinsa, house price data, etc.
NH:
The good news is the UK cash market has
brushed off today’s higher than expected inflation data. Indeed UK base rate expectations over the next
year have turned negative this morning, with September 2009 yields falling 10bps in the last few hours
alone. On the one hand this is useful for banks and their customers, but is also worrying as it clearly
demonstrates fear over the economic outlook. Overall we remain cautious UK banks. The sector is
trading around 1 times tangible book value, but a move to the previous trough of 0.75 times in 1990
remains a real possibility, in our view.
NH:
House prices are our key metric in assessing the fortune of the
sector and the RICS survey again demonstrated the geographically non-discriminate nature of this credit
withdrawal. Nothing we see encourages us here, and suggests a continued sharp decline in the national
HPI over the next few months. Indeed, property derivatives continue to factor in a 32% fall in prices peakto-
trough in this cycle.
NH:
Cash markets. It has been relatively calm in the interbank market over the last few days, with some
improvement in liquidity following the June turn, and LIBOR OIS spreads holding fairly steady. Indeed,
3m LIBOR SONIA remains around 74bps, relatively unchanged over the last few weeks. However, future
contracts point to continued wide spreads with September 2008 contracts at 78bps and December 2008
at 82bps. Even June 2009 spreads are 65bps – the cash market is telling us this isn’t going to end
anytime soon. A more recent flight to safety is also demonstrated through US T-Bills OIS spreads which
have moved from -18bps last week to -58bps today. This is despite concerns over US Government
backing the GSE.
NH:
sharply once again. Today, the i-traxx crossover is around 20bps wider at 562bps with the UK banks
again underperforming and typically 5-15bps wider.
NH:
Barclays 172bps 53bps 119bps 130bps
HBOS 253bps 77bps 169bps 186bps
HSBC 155bps 42bps 60bps 64bps
Lloyds TSB 135bps 42bps 76bps 84bps
RBS 204bps 55bps 115bps 123bps
Standard 140bps 45bps 75bps 76bps
i-traxx co 636bps 396bps 540bps 562bps
NH:
March high May low Yesterday Today
PM:
if readers can make that out….
NH:
A&L is reasonably steady, having come in a lot yesterday towards 110bps. B&B however is close to its
all-time high and indicated around 375bps. Spare a thought for the Spanish banks though where the
failure of Martinsa has driven spreads on several of the domestics up 25-50bps today.
• In RMBS, we are seeing general spread widening as well with Permanent AAA bonds trading around
130bps on CDS, and cash offers at 135-140bps with hardly any bids (CDS outperforming a little given
the short base). Still hardly any market in BBB but indicated around 750-800bps.
NH:
Rate expectations and swap rates. Against all of this, the good news for UK banks is the sharp
turnaround (again) in rate expectations. Despite the CPI numbers this morning (3.8% y-o-y versus
consensus 3.6% y-o-y) yields have moved in further across most parts of the curve (September 2009 by
a not insignificant 10bps). Today the cash markets are factoring in a 10bps fall in UK base rate over the
next 12 months versus a 4bps hike yesterday – this is the first negative reading since May and the 82bps
of hikes that were factored in just one-month ago. With this, the two-year swap rate has come back a lot
in recent weeks to trade about 5.82%, well below the 6.47% recent high. However that remains some 15-
20% above the equivalent swap two years ago, and when the widening of mortgage spreads is taken into
account still implies notable payment strain for those moving onto new deals (if accessible at all).
PM:
HBOS at 253 in March, now 186p
PM:
May low was 75pbs tho
PM:
Not much more we can say about the banks
PM:
how about the wider market?
NH:
well, it has busted through Tuesday’s lows
NH:
now 90 points from the 5,000 level
NH:
off 81 points at 5,090.9
PM:
The Dow future is pointing to another 100 point drop at the opening over there
PM:
So volatile yesterday
PM:
But London was up earlier no?
NH:
but now under real pressure
NH:
that said, it is not a complete wipeout yet
NH:
our FTSE 100 risers box on Reuters is not completely blank
NH:
and the mining sector seems to be holding its own on the back of this goldman note
PM:
Ah — taht was mentioned below
NH:
yep. quite interesting. it basically looks at what mining stocks to buy if the chinese economy slows more rapidly than expected
NH:
Safe havens if a Chinese slowdown is sharper than we fear
NH:
Coal, iron ore and aluminium the least exposed
We have run a scenario analysis in which the Chinese economy slows in 2009. We assume GDP growth of
8%, versus our current forecast of 10%. We attempt to assess likely metals prices in such a scenario – bulk
commodities and aluminium see the most limited falls, lead the largest.
NH:
Zinc and nickel earnings hit most
Our analysis suggests that zinc and nickel prices (already around the marginal cost of production) could fall
further, implying mine closures (albeit temporarily). As a result, in our scenario analysis companies with nickel
and zinc exposure see the largest earnings falls, as prices for these two metals are already closest to
production costs. In our scenario, Boliden is loss making and Nyrstar just about breaks even. In contrast,
Kazakhmys and Norsk Hydro see more than 30% falls in 2009E net income, as copper and aluminium prices
remain well ahead of the production costs we would expect.
NH:
Increasing coal and aluminium prices; updating exchange rates
Our estimates reflect higher coal and aluminium prices and updated forex. We also introduce interim
estimates for our coverage universe ahead of the upcoming reporting season. We have cut our Norsk Hydro
estimates after its profit warning on July 14. Nyrstar sees large changes, 2008E EPS falls 23% as we adjust
our model for carry-over tonnage and concentrate inventories. Our 12-month price target falls to €15.9 from
€17.8.
NH:
Anglo American and Vedanta our preferred Buy ideas
The commodity mix and relatively high cash-return profiles of Anglo American and Vedanta mean they
remain our top Buy ideas.
Boliden remains our preferred Sell idea
In our slowdown scenario Boliden appears to be loss making with very low sector-relative cash returns. As
such, we consider it high risk and it remains our key Sell idea
NH:
RBS shares price now in auction
PM:
Caused by disruptive trading — taken off SETs temporarily
NH:
it was a father and daughter event
NH:
and i left before the parental races
NH:
in any case my daughter had a strop and refused to take part in several races
NH:
she was however, the winner in the skipping race
NH:
which she is very good at
NH:
and twist the rope and everything
PM:
Obligatory summer hol
PM:
Mine starts this weekend
PM:
Neil has just gone to get the blurb on Citizens
PM:
just to illustrate this point about RBS being treated like a regional us bank
NH:
n 1828, Citizens Financial Group got its start as a small community bank called the High Street Bank in Providence, Rhode Island.
Citizens Financial Group, Inc. is a $160 billion commercial bank holding company. It is headquartered in Providence, R.I., and, through its subsidiaries, has more than 1,600 branches, more than 3,500 ATMs and more than 24,000 employees. Its two bank subsidiaries are RBS Citizens, N.A. and Citizens Bank of Pennsylvania. They operate a 13-state branch network under the Citizens Bank brand in Connecticut, Delaware, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and the Charter One brand in Illinois, Indiana, Michigan and Ohio. CFG has non-branch retail and commercial offices in about 40 states. It is one of the 10 largest commercial banking companies in the United States ranked by assets and deposits. CFG is owned by RBS (The Royal Bank of Scotland Group plc).
PM:
That includes Charter One i guess
NH:
006 – RBS (The Royal Bank of Scotland Group plc) combined the domestic asset finance businesses of Citizens Bank and Charter One Bank with its existing US RBS Lombard business. The newly created entity, RBS Asset Finance, ranks as the 8th largest bank lessor in the United States with assets of approximately $6 billion.
2007 – Citizens Financial Group, parent company of Charter One Bank, acquires GreatBanc, a $1.2 billion bank holding company with three community-banking subsidiaries including GreatBank, GreatBank Chicago and First National Bank. This transaction expands Charter One’s presence in Chicago, Skokie and Evanston and provides entry into the towns of Olympia Fields, Chicago Heights, Frankfort, Cary and Algonquin.
On September 1, 2007, Charter One Bank, N.A., Citizens Bank of Connecticut, Citizens Bank (Delaware), Citizens Bank New Hampshire, Citizens Bank of Massachusetts, Citizens Bank of Rhode Island, Citizens Bank, N.A. and RBS National Bank became one bank: RBS Citizens, N.A., operating through its Citizens Bank and Charter One brands and RBS Card Services. Citizens Bank of Pennsylvania, which has branches in Pennsylvania and New Jersey and a commercial loan office in Virginia, remains a separate bank. It is not part of RBS Citizens, N.A.
PM:
Remember when we got that Charter One story at the Guardian?
PM:
$10bn — and the bank would not talk to us at all
PM:
had to print it blind
PM:
Then RBS sent the confirmatory statement to everyone but us
PM:
I was rather irritated at the time
PM:
I suspect the arrogant edge to RBS has worn away little by now
PM:
Co-op taking over Somerfield of course
NH:
someone else trying to make a go of it then??
PM:
Seen this from the Somerfield/Co-op release?
PM:
The Co-operative Group and Somerfield today announce that they have entered
into an agreement for the Co-operative Group to acquire Somerfield for £1.565bn
on a cash free debt free basis.
NH:
Cash free debt free – what does that mean.
NH:
they bought it for nothing??
PM:
Well I had no idea, so I rang up the felt..
PM:
Well it’s a female felt actually, but we dont have a suitable emoticon
PM:
it turns out it’s “enterprise value”
PM:
Yeah – I know. Thought I must be stupid – but apparently that’s what the lawyers insisted the call the terms – cash free debt free.
NH:
how much did the equity fetch??
NH:
and how much debt is there in Somerfield
NH:
given the involvement of one Mr T, one presumes loads
PM:
Well, the mooted price previously was £2.5bn
PM:
But the cash free debt free consideration is £1.56bn
PM:
We were going to talk about high yielders, no?
PM:
This little table is from Mike Lenhoff at Brewin Dolphin. He was pointing out this morning that the prospective divi yield on the footsie is above 5 per cent – and above the yield on 10 year gilts…
PM:
Here’s his list of high yielders, not just footsie
PM:
Premier – 10.2
Kesa 10
M&S 9.3
Close brthers 8.2
Drax 7.4
Greeene King 6.4
Inchcape 5.9
Land Secs 5.8
C&W 5.6
National Grid 5.5
Vodafone 5.5
Carnival 4.8
Severn Trent 5.4
IMI 5.4
BP 5.1
NH:
not the classic buy signal though
PM:
Those are prospective divis
NH:
if the trailing dividend yield on the FTSE All Shares exceeds the 10-year gilt
NH:
then it is time to buy
NH:
prospecitve divis mean nothing
NH:
i mean RBS yields over 10%
NH:
does anyone expect that payout??
NH:
i reckon the FTSE 100 needs to fall another 10-15% before we get the trailing divi yield and the 10-year gilt crossing
NH:
this is of course happened back in 2003
NH:
when the FTSE 100 hit 3,200
PM:
yes, that was a two week squall to it to that level
PM:
Forced selling by the insurers
PM:
FSA had to step in on that occasion as well
PM:
bascially, released the insurers from the capital requirements
PM:
So what else is moving this morning?
NH:
and if it continues to decline at this pace the company will cease to exist by the end of the month
PM:
stock at 47p, down 7.75p
NH:
it’s been lower than that this morning
NH:
and that point the company was worth just £106m
PM:
so what’s driving it lower?
NH:
well, there are concerns about trading
NH:
falling ad revenues, circulation and all that stuff
NH:
and there are also worries about banking covenants being breached
NH:
is the ghost of one Robert Maxwell
NH:
if Trinity investors thought they had heard the last of him when he fell off the back of that boat
NH:
they should think again
NH:
because the company’s huge pension fund deficit is in danger of dragging the whole ship down
NH:
its schemes deficits – £125m – are now bigger than the company
NH:
and it liabilities are now 14 times bigger than the company
PM:
So Trinity Mirror is a big pension fund with a newspaper business attached
NH:
and here are the scary bits
NH:
the scheme is overweight equities – 55% at the end of 2007
PM:
So that’s a big punt on a falling market
NH:
the two largest schemes are due to be re-valued this year
NH:
which means Trinity will probably have to put some cash in
NH:
and this could be a problem coz Trinity has got quite a bit of debt
PM:
that all looks a bit of mess
NH:
especially against the backdrop of slowing economy and falling ad revenues
NH:
and the pension fund is problem if Trinity ever wants to recapitalise via rights issue
NH:
actually, there is plenty of analyst comment around this morning on this subject
NH:
Trinity Mirror (Sell) – Stock comes under further pressure for good reason
Trinity fell a whopping 18.6% yesterday to 54.75p on the back of a multitude of concerns including trading concerns, pension deficit and debt covenant headroom. Below we cover the key points:
NH:
Pensions: The pension schemes are large (liabilities were £1.53bn at end 2007 – over 10x mkt cap) and had a deficit of £125m at the end of 2007. Two of the large schemes are due to be valued this year and after discussions with TNI we expect an increase in cash contributions.
NH:
Despite this we only expect a reduction in the deficit to £120m given assumptions changes and we have not factored in a potentially negative change to discount rates. While the scheme had 55% in equities at the end of 2007 we expect all of the normal and top-up contributions to have been put into cash and therefore equity % will continue to fall. The pension scheme issue remains a bid deterrent and a problem in a rights issue scenario.
NH:
Trading Outlook: DMGT is scheduled to update on 23 July. This will provide an insight into current trading and whether the sharp acceleration in the rate of advertising revenue decline has continued across the industry. Signals from the recruitment, property, autos and retail market all support an expectation of worsening conditions.
NH:
Debt: We flagged in our recent note that the new facilities reduced the level of headroom that TNI had and that if TNI experienced the full effects of a recession it could breach its ND/EBITDA covenant, raising the risk of a rights issue or higher finance costs. We forecast Net Debt of £412m and £426m vs consensus of £402m and £388m respectively. We believe our pension assumptions are a key contribution to the variance and that consensus may need to catch up.
NH:
Valuation: Stock now trades on 2009 EV/EBITDA 4.4x and P/E 2.1x. While the stock has blown through our 92p Target Price we note we have previously flagged target prices remain vulnerable to further cuts given the unappealing profile and risks of the stock, particularly further earnings downgrades. Volatility looks likely to remain high as short activity combines with news flow and the shares trades as an “equity stub”.
NH:
and this is from Landsbanki
NH:
Trinity Mirror (Media, Hold, Mkt Cap £175m, SP 57p) – Rating post estimate cut suggests further EPS risk
We cut our numbers today in line with our downside case for newspaper advertising, with a 24% cut to pre tax profits at Trinity in 2009. On a humble P/E of 2.1x 2009E, the shares anticipate another wave of estimate cuts even after recent price falls. EPS risks and pension issues remain ahead of the interims this month. Hold.
NH:
Numbers cut in line with new house view on newspaper sectors: In this note we
amend our estimates for Trinity Mirror, in line with our new house view on the regional and national newspaper sectors. In essence, we now look for a 28% classified advertising decline over the two-year period 2007-2009, whereas prior estimates were for a fall of half this amount.
This results in a 24% cut in pre-tax profits to £93.3m in 2009 and a 32% cut in EPS to 25.5p. Following management’s own comments at the recent trading update, we have trimmed the dividend (now 7p, was 22p before the trading update) in response to our forecast change, market yields and the need for Trinity to conserve cash.
NH:
Key risk remains the ad market but pension liabilities will be a feature: The key risk to these numbers remains the weakness of the advertising market, although we recognise that our current estimates – in the regionals if not the nationals – represent record two-year falls.
We also believe the scale of Trinity pension liabilities will be a feature of the interims, given recent equity market falls. Net debt falls to £410m in 2009 and net debt/ EBITDA to 2.7x at that point.
NH:
Investment case: Trinity now has one-third the equity value it had at the start of the second quarter, with the share price down by 85% since the start of the year. On the basis of our revised numbers, the group is trading with a 2009 P/E of 2.2x or an EV/ EBITDA multiple of 3.9 (including net pension liabilities). This is a discount to the likes of DMGT and Johnston Press on comparable advertising assumptions.
Where is Trinity Mirror different? Either the market is expecting another step down in EPS (led by a more cautious national advertising outlook) (this note is evidence of this), or the group’s pensions liabilities loom large ahead of the interim update
NH:
(undoubtedly true), or the impact of dividend cuts have wrong-footed a traditionally income-oriented share register (likely). In any event, a Buy case remains problematic while a P/E of 2.2x 2009E already factors in bad news. We reiterate our Hold.
PM:
and from one stock market dog
PM:
just been looking at the chart
PM:
Theres a selling frenzy
PM:
Quick jump to barclays
PM:
That’s Peter Thal Larsen — the FT’s banking editor
PM:
He’s saying this tale about the Chinese not putting up their money is NOT true
NH:
yes, he says the money it sitting in an account in Hong Kong, awaiting transfer
PM:
barc holding up nicely
NH:
right back to Wolseley
PM:
Had the chart up on this
PM:
this stock was 550p at the begiining of June
PM:
RBOS getting slotted now
NH:
stock is also getting slotted big time
NH:
that’s a fall of 10.25%
PM:
Mr Blackwell — sorry to contradict — but RBS is trading at 148p, down 20p — 11.6%
NH:
yeah, you must be on delayed pricing
NH:
trading statement out this morning
NH:
and the only bit of goods news is that building materials company has not pressed the button on a rights issue
NH:
apart from that it is dismal
NH:
the company is scrambling around for cash, so it doesn’t breach its banking covenants
NH:
so, the final dividend has been axed to save £150m
NH:
more costs are being cut
NH:
acquisitions and cap ex are being reigned in
NH:
disposals are being prepared
NH:
and analysts are still not convinced the company will be able to avoid a massive cash call
PM:
What’s the debt position then?
NH:
covenants are 3.5x net debt/EBITDA
NH:
and debt has fallen £183m since the start of the year but still stand at at £2,7bn, vs a market value of £1.9bn and falling
NH:
Gearing is now at 77%
NH:
that’s the view of analysts too
NH:
Conditions are getting worse across all geographies for Wolseley
• Revenue is up 1% in the first 11 months but trading profit is down 28%; this should be in everyone’s numbers anyway for 2008
• There will be no final dividend but equally there is to be no equity rights issue or placing (because they couldn’t get it away?)
Instead it is all hands to pumps to avoid breaching covenants (3.5x net debt/EBITDA); focus on getting cash in the door, cutting costs, acquisitions and capex to be pared back and assets to be disposed (both property and businesses)
NH:
the industrial and commercial markets; if these break, as we believe they may, it will be very difficult to avoid breaching covenants
• UK profits down 17% as the housing market has deepened and spread; France profits – 15% but it feels like we are still to see the worst and Nordic continues to slow as the housing market weakens there too
• All of this (and more) is discounted in the price already but the markets have not
bottomed out yet. This means the spectre of breached bank covenants and equity
issuance remains. SELL.
NH:
and this is from Landsbanki
NH:
Wolseley (Support Services, Hold, Mkt Cap £1.986bn, SP 290p, TP 300p down 50p from May’s IMS) – Full year trading update – Further weakness
Further pressure in H2 to July 2008 – dividend is being passed
The profile of the trading update was indicated at the time of the IMS on 21 May 2008 when the downturn in US housing activity was highlighted as the most severe element in the profit decline.
The trading outlook comments highlight the downside risk of further weakness in US housing and a medium-term decline in industrial and commercial activity in US construction.
NH:
It is now clear that Europe, notably the UK is showing further signs of weakness. Despite the July period of trading (one of the most important in the group’s year) not being in this assessment the board has taken the decision to pass the final dividend.
The level of debt has fallen by £183m to £2,711m since January but this is not sufficient to offset cash concerns in a weakening market. Gearing is now at 77% against 84% at the 31 January, in line with our forecast.
Revenue is up 1% but trading profit down 28% in the 11 months to end June. PBT is down 35% on a pre amortisation and impairment charge basis. Cash flow is the key area at the moment for the group and it is clear the concerns here are that it is finding
European markets slowing faster than anticipated at the IMS in May.
NH:
Having reduced our forecasts and price target at the time of the IMS in May, we are now looking at a further reduction in earnings but having been more cautious in the US against current trading in the last quarter so there is more a shift in emphasis in reduced earnings in the fiscal last quarter to Europe with an overall reduction in earnings of around 8% expected to leave eps at 39.4p leaving the group on 6.8x July 2008’s earnings. The final dividend is passed.
The look through to Travis Perkins and SIG is limited due to Wolseley’s exposure to the US and significant changes to its logistics operation
NH:
and this is from Arbuthnot
NH:
Wolseley – Trading statement
Dreadful trading and the final dividend has been waived. US is shocking, Europe poor and a particularly nasty performance in the UK. The outlook statement states that conditions are “likely to deteriorate”. They are focusing on actions necessary “to ensure that the Group remains within Banking covenants”. Much of this is already in the price so there may be a brief relief rally. Not for long though. Pass the Valium.
PM:
Just on the wider picture
PM:
Tony Tassle has just been over from the news desk
PM:
Sreekala Kochugovindan has a note out from BarCap
NH:
and how do you pronounce that?
PM:
Equities continue to tumble as investors shun banking stocks. Our sentiment-based equity
risk indicator remains within extremely bearish territory, and suggests that equities may
continue to sell-off aggressively.
Last month, our sentiment-based equity risk indicator signalled crisis for the first time
since February. Since then, a combination of inflation and credit fears have driven the
S&P500 down 10% while the financials sub-sector has fallen almost 25%. The latest
reading shows a mild improvement in investor confidence; however, risk aversion
remains within crisis territory, suggesting the equity sell-off may continue. Figure 1
plots the risk indicator against the S&P500. The chart on the left plots the probability of
crisis since 1996. The chart on the right converts the same information into a binary
crisis signal, where the value 1 indicates the potential for a sharp equity sell-off. The
indicator currently suggests a 77% probability that equities continue to sell-off
aggressively, down from 82% the prior month but still elevated enough to remain
within crisis territory.
PM:
So she’s not so hopeful
PM:
i should add that we dont think this sell off is Dow related
PM:
it is concentrated in the banks — and the likes of Wolseley
PM:
HBOS now 50p below its rights price
NH:
right a few bits of RAW
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
PM:
if you can stomach it in this market
NH:
bid rumours in ITV again
NH:
Bertelsmann is the name in the frame this morning
NH:
this came out of Dresdner earlier this morning
NH:
Bertelsmann has just sold its US book, music & DVD club business for estimated €250m. Wall St Journal today saying it’s looking to sell its clubs businesses
in UK, Russia & Australia (DKe c€250m) & stake in SonyBMG JV could be sold by
next month (DKe €1-1.5bn based on up to 2x EV/Sales). Plus Bertelsmann has
c€1bn earmarked for acquisitions over next 2 years from cash flow. Couldn’t own
Five as well as ITV (ad share would be >40%). RTL bought 35% of Five from UBM
in 05 for €880m but marking this down in line with drop in value of ITV over
same period, is now worth probably c€350m. Add to this c€250m from other club
sales & Bertelsmann has total potential firepower of €2.9-3.4bn.
NH:
ITV (Buy, PT 85p) would cost £2.5bn (market cap £1.6bn, debt £770m + pension
fund deficit £112m) or €3.1bn. In theory makes ITV achievable but Bertelsmann
won’t be able to access €1bn from cashflow immediately & is risk might have to
indemnify pension fund trustees to potential max of c€1.25bn – although trade
buyer should be able to just absorb ITV pension into its own fund hence this is
really only valid risk if it’s straight financial buyer.
Other points to consider are (1) Bertelsmann could buy ITV then look to sell on
Production business. Resulting impairment to value of Broadcast business would
arguably be offset by slotting Fremantle in, ie what you lose on not producing
Coronation Street in house, you gain on producing The Bill etc (2) Bertelsmann
could partner with financial sponsor – note Apax/Blackstone/GS consortium bid
for ITV in March 06. (3) Bertelsmann could buy in ITV in partnership with
financial sponsor and then sell Production on to partner within 12 months
NH:
SUMMARY: Bertelsmann CEO went on record in FT in Jan saying ITV was “natural
potential target” & decline in ITV’s share price has brought it more in reach
than ever. Not straightforward transaction given price tag would be stretch &
would need to sell Five (Sky most likely buyer) but could be done. Continue to
believe imminent decision on Sky’s appeal against having to sell its ITV stake
may flush out interested bidders of whom Bertelsmann is most logical but Haim
Sabam, US broadcasters, Endemol & even Mediaset all still in the frame.
NH:
ITV off just 0.3p at 40.2p
NH:
few rumours floating around in Galiform
NH:
but Arbuthnot seem to have shot most of them down
NH:
Galiform – Conversation re MFI
NH:
Conversation with the PR team to Galiform on the extent of its remaining ties to MFI, following the latter having called in the restructuring specialist Kroll.
The supply agreement that was put in place when MFI was sold, where Galiform provides kitchens to MFI ended in 2007, leaving only the provision of central services like IT and Finance as its main ties – with these services ending in October of this year. As such, the negativeimpact of MFI falling into administration is limited from an operational point of view. However, by checking the disposal circular (thank god for Bloomberg!) the main area of risk remains on the property front, with 7 home delivery centres and 25 properties used by MFI having Galiform remaining as head leasee.
NH:
This was 18 months ago though, and we remain unsure if this is still the case, or what the financial impact of this may be. With regards to pensions, MFI employees remained in the Galiform pension scheme anyway, so there will be no change. The shares got walloped on the back of MFI rumours today, and if it continues expect Galiform to make an announcement imminently. However, Galiform’s next reporting date is 23rd July.
NH:
and finally for anyone wondering why Admiral is up
NH:
i am told its all to do with rising insurance rates
NH:
this went up on Post Magazine earlier
NH:
Over the three months ending June 2008 more than £20 has been added to the average quoted premium for comprehensive car insurance, which now stands at over £700, according to the AA’s quarterly British Insurance Premium Index.
Young drivers, who typically buy third party, fire and theft insurance and already pay the highest car insurance premiums according to the AA, are hardest hit because they are the most likely to make a claim.
Since the last index in March 2008, more than £45 has been piled on to the average premium they can expect to be quoted, which is now £884.
Simon Douglas, director of AA Insurance, said: “Car insurance costs are spiralling. While the number of casualties on Britain’s roads is falling the cost of accidents is rising and young drivers are taking an increasing share of the toll. Insurers are also concerned about rising legal costs and personal injury claims and I expect the upward trend in premiums to continue.
“These findings are not good news for those with third party, fire & theft insurance, typically young drivers struggling to pay their first insurance premiums. But young men aged 21 or under are 10 times more likely to be killed or seriously injured on our roads than those aged 35 or over. The figures speak for themselves: the average insurance claim made by young drivers is nearly four times greater than claims made by drivers aged 30 or over.
NH:
Mr Douglas added: “It’s vital that the industry and road safety groups work together to find ways of getting young drivers on the road safely and responsibly – and with affordable insurance premiums. The AA is exploring ways to do just that.”
One year on from last summer’s floods, the latest release of the AA’s British Insurance Premium Index has recorded a modest £1 (0.5%) rise in the average quoted premium for buildings insurance to £209.52, over the quarter ending 30 June 2008. Over the 12 months since July 2007, the average quoted premium rose by 4.3 per cent.
But the most dramatic change, according to the AA is a 22 per cent annual rise in the shoparound index (an average of the lowest three premiums for each risk quoted in the Index) for buildings cover. Since last year’s floods, the average quoted shoparound premium rose to £126.29 from £103.60 in July 2007.
The average quoted premium for contents cover rose by just 12p over the same period to £128.69 while for combined buildings and contents policies, the premium rose 2.2 per cent to a few pence under £300.
Mr Douglas added: “Although home insurance premiums are not rising quickly, it appears that the days of cheap home insurance deals may be numbered. I believe the sharp rise over the past year indicated by the shoparound index for buildings cover suggests that those insurers offering the lowest premiums have revised their rates to take account of predictions of more frequent flash flooding events.”
NH:
admiral up 38.5p at 745p, which in this market and for a financial is amazing
PM:
Some very good jokes below
PM:
Specifically the pairs trade
PM:
and the junior accountant
PM:
Right — we’ve got to go
PM:
Got a lunch with an important person
NH:
Taxloss – what sale??
PM:
thanks for joining us today. And thansk for all the very funny comments
PM:
and the unfunny ones, for that matter
PM:
Unless the world caves in this afternoon we will be back tomorrow at 11am
