Markets live chat transcript for the chat ending at 12:05 on 30 Jul 2008. Participants in this chat were: Bryce Elder (BE) Neil Hume (NH)
BE:
Good morning and welcome to Markets Live
NH:
Alphaville’s Daily trawl round the market
NH:
as you will no doubt be aware Murphy is still away
NH:
at his beach hut in Mozambique
NH:
but he did break radio silence yesterday
NH:
he wanted to know about the latest write downs at Merrill’s and the FSA’s dawn raids on this alleged insider trading ring
NH:
and before anyone asks we do not have much more detail on the ring
NH:
as we wrote in the paper this morning it is back office staff
NH:
not traders or corporate financiers
NH:
two of the banks involved are JPMorgan Cazenove and UBS
NH:
and the sums allegedly involved were in the hundreds of thousands of pounds or less
BE:
So, it doesn’t look like they have caught any big fish
NH:
mind you, the FSA won’t care about that
NH:
they just want a few heads to put on pikes
NH:
to really shake people up
BE:
News of the raids has certainly done that
BE:
It was all anyone wanted to talk about yesterday afternoon
BE:
news of the arrests even made it on to Capital Radio
NH:
(and all bandits have reported in, no one is MIA)
NH:
let’s get to the market
NH:
very busy day, lots of companies reporting
NH:
as noted by Worzel below
NH:
and also it’s the start of the half results season from the banking sector
NH:
Lloyds has kicked things off
NH:
and the results have not gone down that well
BE:
stock been as low as 304p
BE:
currently down 14p at 307p
BE:
a loss of around 4.3%
BE:
and that’s despite Lloyds announcing an increased interim dividend
BE:
only a small increase – up by 2% to 11.4p
BE:
but doubtless intended to send a message the market
BE:
“we have a strong balance sheet, with none of that toxic stuff” etc
BE:
and the divi is safe and will not be cut
BE:
the market does not seem too impressed with that move
NH:
and the reason is the market is more worried about an increase in non performing loans, and Lloyds’ capital position
NH:
and one can’t help feeling these will be the figures to look for throughout the reporting season
NH:
anything on impairment charges will be big news
NH:
HBOS up tomorrow remember – and that really will be interesting
NH:
on first glance the figs look to have missed expectations by miles
NH:
however, that because there is statutory results and underlying results
NH:
Stat PBT of 599m was down 70% y/y but UL PBT of £2158m was 10% better than consensus.
NH:
the beat in the underlying figs was down to the wholesale bank
BE:
but what accounts for the difference?
NH:
some chunky write downs
NH:
585m on structured credit writedowns
NH:
£794m volatility adjustment from Insurance division
NH:
£180m on a US regulatory settlement.
NH:
while this may not have a cash impact it does of course affect Lloyds Tier 1 capital ratio which is now 6.2%
BE:
so just above the danger zone
NH:
most of the big banks want to be above 6% at the moment
NH:
now, that makes the decision to raise the dividend even braver
BE:
foolhardy some might say
NH:
that said, one has to consider that this year’s divi increase is much lower than the one seen this time last year
NH:
Lloyds is saying that it will use its financial strength to grow market share in UK mortgages
BE:
and what about these non-performing loans
NH:
here’s where it gets interesting they are up 15% in the past six months
NH:
the impairment is charge is £991m, against expectations which were pitched around £840m
BE:
what have the analysts made of it all?
NH:
we will come to that in a minute, but htis is what the Evening Standard has made of it
BE:
Profit crash rocks banks
Hugo Duncan and Simon English
30.07.08
Britain’s banks were rocked today when Lloyds TSB reported a plunge in profits of £1.4billion - a 70 per cent fall.
The result was far worse than a pessimistic City was expecting and raised fears for high street rivals.
HBOS, which owns Halifax, reports tomorrow and Alliance & Leicester the day after.
Lloyds TSB blamed the global credit crunch and losses in its insurance business. The figures will heighten government fears that more small banks could collapse such as Northern Rock. Lloyds was regarded as the most conservative of the big banks and had won praise for resisting the temptation to make risky loans during the boom years.
Lloyds said it expected house prices to fall by up to 15 per cent this year, which would push tens of thousands of people into negative equity.
Banks have come under fire from consumer groups for squeezing customers with high charges as they themselves struggle with the downturn. Critics of the industry say not enough banking bosses have accepted responsibility for their failures by resigning.
Lloyds TSB chief executive Eric Daniels warned that the British economy was facing a sharp slowdown in the coming months, and will grow by only
1.6 per cent this year - far lower than Treasury estimates of two per cent.
He said the crisis in the financial markets and falling house prices “have impacted consumer confidence and contributed to lower growth” in Britain in the last six months.
Mr Daniels insisted that Lloyds TSB will continue to deliver a strong operating and financial performance”.
Lloyds TSB made £599 million in the six months to June, down from almost £2 billion a year ago. The bank said its underlying performance reflected good “momentum”.
But the City is now fearful of the future prospects for the company. Simon Pilkington, an analyst at Cazenove, said: “The dividend is unsustainable. We perceive a long-term challenge to the group’s capital position.” Bank shares across the world have collapsed this year in the wake of the credit crunch.
This morning Lloyds TSB fell 15p to 306p. It insisted it will not have to raise fresh cash from investors unlike rivals. Royal Bank of Scotland, Barclays and HBOS have all been forced to raise billions of pounds to shore up balance sheets.
NH:
wow. more Northern Rock’s on the way
NH:
they are all worried about non performing loans
NH:
this is from Sandy Chen at Panmure Gordon
NH:
While the H1 2008 results confirm our expectations that bad debts will rise
and growth will be harder as the UK macro slows further, the 2% interim
dividend hike signals LLOY’s intention to trade through this credit crunch.
Underlying PBT of £1.57bn was down 19% yoy and underlying EPS of 19.6p was down 24% yoy; both were 10% below our forecasts. The interim dividend has been raised by 2%, confounding expectations (not ours) of a cut.
NH:
LLOY is trying to grow in a slowing market, and we expect it will get harder to do so.
Gross customer loans grew by 9.4% in 1H08 and were up 14.7% yoy, driven in particular by £16.8bn of gross new mortgage lending (£7.3bn net of redemptions). This gave them an 11.3% share of gross new mortgage lending and a 24.4% share of net new mortgage lending in 1H08.
The lower-margin mortgages had a mix effect on overall Banking
Margins, which were flat half-on-half at 2.82%.
The overall impairment charge of £1,099m was up 31% yoy and up 15% hoh; credit
quality trends are deteriorating in both Retail and Wholesale, and we expect this will
accelerate through 2009.
So where does this leave us? We will review our 2008 EPS forecast of 41.7p, but our
forecast of 32.6p for 2009 looks about right. Maintain Hold.
NH:
and this is from Bruce Packard at Pali International
NH:
Conclusion Results look ok, notwithstanding the big miss versus Reuters consensus. Lloyds down 28% YTD, but has outperformed the domestic UK banks. Lloyds have grown the interim divi by 2%, which may be the talking point today. Bulls will say this demonstrates LLOY isn’t in as much trouble as the other banks, sceptics will point out that both RBS and HBOS grew their divi at the FY, only then to do a rights issue 2 months later.
NH:
and finally here are the thoughts of house broker Lloyds
NH:
Weaker capital position — RWAs grew by 16% annualised in 1H08, although
c3% represents the pro-cyclical impact of falling house prices under Basel II. A
combination of faster balance sheet growth and higher than expected credit
market losses and insurance volatility resulted in an Equity Tier 1 ratio of 6.2%,
60bp below our forecast. Although not especially weak we would have
preferred to see Lloyds TSB strengthening its capital position at this point in
the cycle. While the dividend has been increased, growth has slowed to 2% in
1H08 (CIR 5%) reflecting the deteriorating economic outlook
BE:
That last one’s Citi - they’re the shop broker.
NH:
actually the funiest note on Lloyds has come out of BNP Paribas
NH:
the analyst who used to sing on the sqwak box when he was at Dresdner
NH:
he also rapped his answer phone message
NH:
he reckons these results are the last roll of the dice for Lloyds
NH:
We have to admire Eric Daniels’ bravery – not many of us would have been bold
enough to increase the dividend in such uncertain times; our forecast was for a flat
dividend. However, fortune does not always favour the brave – with the shares
yielding 11.2%, it is clear that the market has severe doubts about the sustainability of
the dividend – rightly so. In our core macro scenario, which is for the UK to flirt with
recession, the dividend will be uncovered on a statutory basis in 2008, with cover
improving to 1.5x in 2010e. In this scenario, we think Lloyds TSB can squeak through
without a dividend cut. Of course in a 1990s macro scenario, the dividend is toast.
NH:
► Weak capital – core Tier 1 below 5%
The dividend decision reflects a robust operating performance in the first half of 2008
– subject to a raft of headwinds in the second half of 2008 and beyond. Equity Tier 1
tumbled to 6.2%, which includes a 2.6% “double counting” benefit from the embedded
value sitting in the life business. Half of the double counting will be eliminated from
2012 – bringing forward that adjustment takes Lloyds TSB’s core Tier 1 to 4.9%.
NH:
► Statutory PBT down 70%, “underlying underlying” PBT up 11%
Scope for confusion? Stripping out GBP585m of toxic waste write-downs (GBP387m
already owned up to in the Interim Management Statement for Q1 2008), GBP505m
negative investment variance/GBP289m policyholder interests in its long-term savings
business, and a GBP180m terrorism-related charge (already disclosed), Lloyds TSB
reported an 11% increase in underlying underlying PBT.
NH:
► Lloyds TSB remains our least preferred UK domestic bank
We continue to recommend a switch into RBS or HBOS (or our third pick Barclays).
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
BE:
Reading that back, Mr Packard makes a fair point.
BE:
just because a bank raises its divi
BE:
it means absolutely nothing
NH:
personally I think the raising the dividend while the capital position is heading south
NH:
seems an odd thing to do
NH:
once the insurance double-counting is stripped out Lloyds does seem to be thinly capitalised
NH:
yet it is talking about growing into the downturn
NH:
still at least the banks seems to have given up on German acquisitions
NH:
Good from point from Lemmy below. The divi stuff is all bravado
NH:
a dividend yield of 11% says one thing to me - it will be cut
NH:
and I have lost count of the number of brokers who have been saying this about Lloyds in the past couple of days
NH:
to some questions below
NH:
we have no new info on Informa
NH:
apart from what our media guys wrote this morning
NH:
stock is now down 3.5p at 433.75p
NH:
people worried that one member of the original PE bidding consortium has walked
NH:
BSB - on double counting think it is being faded out by 2012
NH:
Bryce is trying to dig out some notes now
NH:
shares currently up 51.5p at 876.5p
BE:
Here’s KBW, who are positive
BE:
European Insurance: United Kingdom 30 July 2008
Admiral
(ADM.LN, 825p, Outperform, Target: 1315p)
1H08 results - beating consensus
Admiral reported its 1H08 results, with pre-tax profits up 16% YoY to
£100.3mn, beating KBWe and consensus of £95.8mn and £95.5mn, respectively. A
key driver of the beat was the underwriting result of £20mn (KBWe £17.3mn),
which was driven by a better-than-expected combined ratio of 85.8%, supported
by a reserve release of £18.4mn that positively contributed 24 percentage points
to the combined ratio. 1H08 net profit increased 19% YoY to £71.9mn vs. KBWe
of £67.1mn. This meant that Admiral increased its dividend per share by 26%
YoY to 26p, equivalent to a payout ratio of 95%. Management maintains its
dividend policy to only retain what funds the business needs to provide prudent
contingency and support its plans for growth. We believe Admiral is
well-positioned for an expected upturn in the UK motor market pricing cycle and
we have an Outperform recommendation on the stock.
Bullish investment case. The stock is not expensive in our view and is believed to be
well placed to benefit from a forecast pricing cycle upturn in the UK retail motor
market. Confused.com is expected to be a long-term winner in an anticipated
consolidation phase in the internet price comparison site market. The stock uniquely
has very very limited balance sheet risk and should produce growth despite the current
economic turmoil.
Positive comments on UK motor market. The pure year combined ratio deteriorated
to 109.6% (KBWe 108.2%) for all business. But this was due to the expense ratio
increasing to 20.8%, which primarily reflects the mathematical result of increased
premium retention in 2008. A positive result was the improvement in the pure loss
ratio to 88.8% (KBWe 89.7%) vs. 90.3% in 1H07. Comments from management on
the recent rises in market premiums and a relatively benign claims experience over the
last 18 months mean that Admiral is seeing, for the first time in seven years, a real
prospect of falling underlying loss ratios in its UK business.
UK underwriting drives profits. A 1H08 combined ratio of 80.1% vs. 88.7% in
1H07 in the UK is driven by an 11 percentage point reduction in the loss ratio.
Reserve releases of £18.4mn positively impacted the loss ratio by 25% in the UK.
While there has been no change to Admiral’s prudent reserving strategy in 2008. An
increase in the UK expense ratio primarily reflects the mathematical result of
increased premium retention to 22.5% from 27.5% in 2008.
Low premium rate growth benefits policy number growth. Admiral put through
c3% YoY rate increases in the UK, which, according to management, is 2-3
percentage points lower than the overall market. Admiral did not match the substantial
price increases in the market that occurred in 2Q08, which management believes
contributed to the robust growth in vehicle count in 1H08.
BE:
Confused.com quotes and revenues increase. The internet price comparison business
saw revenues increase 7% YoY and a record number of quotes in 1H08. However,
operating profits fell -21% to £15.6mn due to increased marketing spend as Confused
continues to defend its position in this market. We expect Confused to be a long-term
winner in the price comparison market.
Ancillary profits unaffected by economic conditions. Concerns over the sensitivity
of ancillary profits to the economy appear unjustified as ancillary revenue per vehicle
reached £71 in 1H08 compared to £68 in 1H07. This increased ancillary operating
profit by over 20% YoY to £45.5mn.
International expansion continues. Policyholder numbers in Europe have reached
60k and 10k in Spain and Germany, respectively. And Admiral’s Italian operation was
launched on-time and under-budget in May this year.
Reinsurance and quota-share agreements. Admiral increased its retention of UK
motor premiums to 27.5% in 2008 from 22.5% in 2007, which will be maintained at
this level for 2009. New arrangements have been finalised for 2010 and 2011, with
Admiral having to retain a minimum 25% of premiums, but also having the option to
increase its retention level by 5% each year from the 27.5% base of 2009, i.e. the
maximum retention level for Admiral in 2010 and 2011 is 32.5% and 37.5%,
respectively.
BE:
Admiral Group (ADML.L)
Cycle Turning
Earnings Better than Expected — At £100m, Admiral’s H108 profits were better
than our £96m forecast. We would expect consensus profits for 2008 to rise
over £200m, setting the stock on 15x. A pay-out ratio at the full year similar to
H108 (95%) implies a dividend of 52p, giving a yield of 6.3%.
Mix Issues — Confused.com, which had made £20m in H107 and £17m in
H207, came in with £16m in H108. While revenues are still rising (6%), the ad
spend to generate quotes is also up, reflecting increased competition. There
are few signs that the war is abating. The shortfall here was more than made
up by higher reserve releases/ profit commissions as the back years developed
still better than predicted (a £6m difference versus our forecast).
Pricing Cycle Issues — Industry data (from the AA and Deloitte’s) pointing to a
6% Y-on-Y increase in rates has yet to be reflected in Admiral’s experience
(+3%). The group has used the jump in market rates in Q208 to increase
volume (UK vehicles up 7% in H108). Management sees real prospects for a
market turn now and, combined with benign claims, an improvement in U/W.
Re-think on Underwriting Stamp — The group has re-thought its policy. It is
now intending to continue ceding two-thirds or more of the business – not
because it is less confident on the cycle but because lucrative new reinsurance
terms mean it has a similar earnings opportunity at lower risk.
Ancillary Income Flourishes — UK Ancillary income/ policy rose from £69 at
December to £71 now, lifting profit by 19% to £44m. There are no signs of a
recessionary squeeze. Spain is beginning to show some form – rising volumes,
falling loss ratio and ancillary income already at £59 per policy.
Remaining Positive — The shares have trod water for 18 months waiting for a
cycle turn to provide greater earnings impetus – this is now at hand.
NH:
I think Citi might be house
BE:
Joint shop with Merrill Lynch, yes.
NH:
Right, time to move on to the wider market
BE:
we are off to the races
BE:
FTSE 100 up 78.5 points at 5,396
BE:
and that follows a remarkable performance from Wall Street overnight
BE:
and particularly the US banking sector
BE:
did you see the turnaround in Merrill?
BE:
opened 10% lower. Ended 8% higher
NH:
so people really are buying the line that Merrill has finally lanced the boil through the firesale of this CDO portfolio
BE:
Can you lance a boil with a firesale?
NH:
with a hot poker you probably could
BE:
: looks like US stock indices increased more than 1% after the close in Europe
NH:
so that explains most of our move this morning
BE:
although the weaker crude price is obviously helping matters as well
BE:
that said, the falling oil price is not holding the miners back
NH:
(England won toss and batting in the Third Test, currently 19-0)
NH:
nope, they are good market again this morning
NH:
right, the automated ticker thing is not working
NH:
so will have to type it out
NH:
Ferrexpo biggest riser in the FTSE 100 at the moment
NH:
Vedanta 116p better at 20.05
NH:
and ENRC up 31p at 964p
NH:
I heard late yesterday that Morgan Stanley were giving the sector a real push
NH:
and that is quite interesting coz it was their analyst Wiktor Bielski
NH:
who advised people to get out of the sector a few months back
NH:
anyway, here is the note that was flying around yesterday
NH:
One of the reasons why Wiktor Bielski argued the mining sector recently was ripe for selling was because valuations looked stretched and a disconnect between equity prices and commodity prices had opened up. Well, that gap has now closed (see chart below) as equites have been sharply de-rated and, interestingly, certain commodities have staged something of a recovery.
NH:
So, in summary,
1. Lead prices have bounced 45% off the bottom. Zinc is up 10% from the bottom. Nickel remains weak but copper and Aluminium remain resilient.
2. The equities have sharply de-rated to p/e’s of 5-6x ‘09.
3. Concerns on downgrades due to rsing costs are diminishing as stronger top line offsets higher costs. Bodes well fro reporting season.
4. China macro shift more toward growth concerns than curtailing inflation is helpful. Good costs performance form Vedanta today.
5. As world falls apart elseweehere (MER), all those that jumped wisely off the mining wagon a few months ago might find themselves wanting to climb back on now as risk/reward has swung firmly in the other direction as valuations look very cheap again.
NH:
just got something on Anglo American
NH:
: seems that Credit Suisse has cut forecasts ahead of results
NH:
which are due tomorrow, I think
NH:
In the lead up to Anglo’s 1st half results on Thursday, we are
downgrading our ’08 EPS by 7% to $6.35 per share to reflect a $150 per
ounce cut in our platinum estimate to $1,850 per ounce. Platinum represents
some 28% to Anglo’s EBIT and has suffered ETF liquidation and concerns of
weak automotive demand. Despite a lower than expected contribution from
AngloPlats, we expect group EBIT will rise 9% YoY to $5.94 billion in the 1st
half, helped by a weaker rand and strong results in Coal and Ferrous.
NH:
View: Anglos share price is oversold. Our new more conservative ’08 EPS
implies a PE of just 8.8X. Even on a worst case scenario assuming platinum
averages $1,600 per ounce and copper drops to $3 per pound the group is
still on track to deliver $6.26 in 2009 (current forecast $7.08) as higher iron
ore, coal and manganese contract prices begin to hit the bottom line. In short,
trough earnings look robust, illustrating the benefits of diversification.
NH:
Catalyst: Copper is key and continues to defy the bears. The short base is
building by the day and the industry continues to suffer production misses
like those from Escondida, Freeport and Codelco last week. Coal prices are
firming again and iron ore settlements for ’09 could beat our current +20%
forecast.
Valuation: Anglos is trading on trough ’08 earnings of just 8.8X and the
recent bounce is just the beginning of a more sustained rally.
BE:
Platinum seems to be a theme today.
BE:
Goldman’s knocked down its forecasts as well.
BE:
Weak jewellery demand; platinum earnings and target prices fall
PGM price forecasts fall on weaker demand
We are revising our commodity price forecasts to take into account
weakening global demand for PGM products. We continue to expect
platinum prices to increase through 2009 from current spot levels, but
acknowledge that significantly weaker demand for platinum jewellery
products will likely lead to looser platinum markets than we had previously
forecast. Our platinum price forecasts fall to $1,907/oz and $1,963/oz from
$2,107/oz and $2,300/oz for 2008 and 2009 respectively.
Earnings and price targets fall on lower revenues
We are adjusting our earnings forecasts to take account of our PGM price
revisions, and updating our cost assumptions following Anglo Platinum’s
1H08 results. As a result we downgrade our earnings estimates and price
targets for Anglo Platinum, Impala and Lonmin. We retain our sector
relative Neutral ratings for all three stocks.
Upcoming sector catalysts
Updates to 2008 and 2009 production guidance from Lonmin and Impala
during their upcoming results presentations (August 7 and 28 respectively)
will be important for PGM prices and platinum share price performance. In
addition, news flow regarding the ability of companies to develop new
mines within the context of limited power supply will likely direct PGM
price sentiment in the medium term.
BE:
OK, we should have a look at the results from Next
NH:
before we do, just had a couple of interesting emails appear in my inbox
NH:
Cornhill Property Investments brings you a pre-launch opportunity to invest in a fully-furnished villa or apartment at the luxury 5 star Marquis Estate Spa Resort, on the breathtaking island of St. Lucia. The property will be yours for 30 days a year.
NH:
NO CAPITAL GAINS TAX* NO PURCHASE TAX* NO INHERITANCE TAX* NO INCOME TAX*
The Marquis Estate is the largest private estate in St. Lucia and is located on the North East of the island. Situated 15 minutes from the Capital City of Castries, this 600-acre site will comprise three 5-Star hotels, a marina, two signature golf courses, a world class casino, luxury spa & fitness centre, conference & business suites, numerous gourmet restaurants, equestrian, polo, cricket, football and tennis academies and state-of-the-art medical facilities.
NH:
Why St. Lucia?St. Lucia is not only one of the most beautiful islands in the Caribbean, it is also one of the most accessible with direct flights from all over the world arriving daily, helping the island to achieve an extremely strong 85% average occupancy year round.
St. Lucia has a stable economic and political environment with a high probability of price appreciation over the next ten years. St. Lucia has many of the same advantages as Barbados but property prices are currently up to 60% lower. The World Bank has recently placed St. Lucia in the top 30 countries in the world to invest, making St. Lucia the only Caricom country to make the top 30, ahead of Barbados and Antigua.
NH:
an offer to good to refuse
BE:
Can’t go wrong with timeshare.
NH:
St Lucia certaintly beats the Costa de Sol
NH:
and 100% financing available too
NH:
on a more serious note have you seen this S&P report on negative equity??
NH:
they reckon 1.7m borrowers are facing the prospect of NE
NH:
LONDON (Standard & Poor’s) July 30, 2008-With U.K. house prices continuing to
fall, a significant number of U.K. mortgage borrowers could fall into negative
equity, about 1.7 million by our estimation, according to a report published
today by Standard & Poor’s Ratings Services.
“The downward trend in U.K. house prices now seems well established, and we
expect prices to continue falling in the near term,” said credit analyst
Andrew South. “In a separate article published today, our economists forecast
a further drop of around 17% before prices flatten off in 2009.”
NH:
We have researched the risk of negative equity under various house price
scenarios, and estimate that:
– The average U.K. mortgage has a loan-to-value (LTV) ratio of only around
54%.
– Nevertheless, around 70,000 or 0.6% of U.K. borrowers are currently in
negative equity.
– A further house price decline of 17% would raise this number to around 1.7
million (14%).
– Borrowers in the buy-to-let and nonconforming sectors are more exposed to
negative equity under this house price decline assumption.
NH:
Our research is based on a cross-sectional sample of over two million
outstanding mortgage loans from the pools backing residential mortgage-backed
securities (RMBS) and covered bond transactions that we rate.
“House price declines and rising LTV ratios generally are an indicator of
rising mortgage credit risk, and are therefore an important factor in our
rating analysis for RMBS notes,” Mr. South said. “Ratings on both junior and
senior notes could therefore be sensitive to house price deflation, which we
have explored further in our recently published scenario analyses.”
BE:
1.7m doesn’t really seem that high, frankly.
NH:
well, the housebuilders all weak this morning
NH:
Taylor Wipeout off 2.75p at 42p
NH:
Bellway 23p lower at 492.5p
NH:
Barratt Devs off 3p at 102p
BE:
Interesting piece from Cazenove this morning.
BE:
Talking about dividends and landbanks.
BE:
SUMMARY
Volatile is probably the best way to describe share price movements in the sector and for a month at least (and at last) shorting the housebuilders was not a one-way bet in July.
The news at the trading updates was awful
but not as awful as had been feared. Land writedowns in some cases were not as large as the punditry had expected; Barratt appears to have refinanced successfully and set a precedent for others to follow; two-year
swap rates and fixed rate mortgages are coming down. All is well with the world - or is it?
BE:
Well it was good enough for short positions to be closed, but we do not believe a corner has been turned. It is correct that mortgage rates are nudging down, but deposit requirements and arrangement fees are going up. Estate
agents are selling fewer homes than at anytime in the last thirty years, or since records began.
Most importantly, in our view, is the reaction of those in the front-line, the housebuilders. They are cutting or passing dividends, laying off staff and have not bought their own shares.
In June mortgage approvals were 36,000, another record low. A worrying development for the first-time buyer is that following the demise of the 125% and 100% there are now so few 95% LTV mortgages on offer that the Bank of England has stopped providing data on them as there are now too few products to track.
As we head into the results season we see few, if any, positive share price catalysts.
BE:
The recent trading updates have made the detail of the interim and preliminary results virtually redundant. It will be around the ‘outlook’ statements that speculation regarding write-downs and covenant breaches is likely to focus. Order books will undoubtedly have fallen back over the quiet summer months and with falling house prices in the secondary market it will, in our opinion, be hard for the
housebuilders to hold even reduced prices.
Later in this note we review the write-downs announced or forewarned so far. We would suggest that reviewing land values appears to be more of an art than a science and that the inadequacy of IAS2 in relation to housebuilding provides significant scope for different interpretations.
NH:
just had something else pointed out to me re the miners
NH:
they reckon some of the iron ore/ferrochrome plays - Ferrexpo and ENRC have been helped by the strong results from ArcelorMittal
NH:
just been having a look at the Arcelor figs and seems they will be buying more mines
NH:
and improving their self sufficiency
BE:
By the way, I think Ferrexpo looks to be heading back out of the FTSE 100 in the next review
NH:
next review in Septemeber, presumably??
NH:
who else is heading for the drop??
NH:
Bryce is just trying to pull up the market cap table
NH:
sorry it is a bit slow this morning
NH:
like the comments page below
NH:
we do have some more detail on this break up story
NH:
and we are attempting to stack it up
NH:
on paper it makes a bit of sense
NH:
whether it is happening is another matter
NH:
but it does seem clear that there is a buyer for the domestic mail business
NH:
the question is does UPS want to buy the rest
NH:
and we just don’t know that, yet
NH:
stock has drifted up this morning - now 0.4% higher at EUR22.91
BE:
Back to the FTSE rejig: Carphone, Enterprise Inns, Thomas Cook and ITV looking vulnerable at the moment. Autonomy, Pennon, Inmarsat, Serco and Home Retail Group all possibles for promotion.
NH:
wasn’t Charles Dunstone in here yesterday
NH:
wandering around the newsroom
BE:
With the editor. Should we speculate why?
BE:
Er. I guess we shouldn’t.
NH:
right, we should have a look at the results from Next
NH:
the stock initially moved higher
BE:
well, it’s down 16p at 998p
NH:
what’s behind the turnaround??
BE:
Figures are okay rather than blockbuster
BE:
Against expectations of about -4%
NH:
so beter than expected
BE:
But they’ve changed their definition of LFL again, this time to strip mark down activity.
NH:
so, I guess Next is being shunned because of concerns about the economic outlook
NH:
does not seem anything in the figures to get worried about
NH:
yep, something from Citigroup here
NH:
What does it all mean? — As expected, the retail LFL weakened significantly
from the +5% trends during the first 2 weeks of May. We know from the ONS
data that the clothing market slowed sharply in June. Today’s stronger than
expected top line across the 2Q suggests that Next may have picked up some
market share ahead of the sale period. With a deteriorating macro environment,
we fear the worst is still to come with downside risk to our January 2009 and
2010 Next earnings forecasts
NH:
Jan 2009 PBT forecast remains unchanged at £430m (EPS 152p) — On the
back of today’s results we retain our January 2009 PBT forecast of £430m
(EPS 152p, -9% yr on yr). This excludes any incremental share buyback
assumption, beyond the £54m of committed activity.
NH:
Valuation debate — Given our fears that the demanding UK retail demand
outlook in 2008 and 2009, combined with potential gross margin deterioration
and growing cost pressures, will outweigh Next management’s current growth
initiatives, we struggle to argue for any material recovery target valuation
multiples. Our 1050p target price references a sector average 5x target January
2010E EV/EBITDA multiple. This equates to 7.5x 2010E earnings and a 6%
dividend yield.
Sell, target price 1050p — We retain our Sell/Medium Risk investment code,
target price 1050p.
NH:
and this is from Sanford C Bernstein
NH:
This morning, Next released its trading statement for sales for the 26 weeks to 26 July 2008. The company
will not host a conference call for analysts and investors regarding the trading update.
• Full price Retail LFL in 1H08 came in at -6.0%, slightly ahead of company guidance and consensus
estimates of -7.0%. Nevertheless, as Next indicates that end of season sales volumes are likely to be
down on lean inventory, we expect 1H08 total LFL sales to be lower than -6%. Next Retail LFL
improved in 2Q to -2.4% (ahead of consensus estimates of -4.5%) from -9.4% achieved in 1Q, leaving
LFL in 1H08 at -6%.
NH:
The marked difference in performance of the two quarters is caused by unusual
weather patterns in the 1H07 which distorted comparables. Next brand sales was down -1.8% in 1H08
with weakness in Retail sales (-3.1%) partially offset by growth in Directory (+2.0%) (Exhibit 1).
NH:
Guidance for 2H08 trading becomes more cautious as economic risks and soft consumer demands
weigh. Next indicated that it expects full year 2008 LFL to be in line with 1H08 (-6.0%). This matches
our current forecast for the full year but is a reduction of previous company guidance of -3% LFL
purchase budgets for the FW season. CBI data released yesterday indicates that the UK consumer decline
we saw in June continued in July for clothing (Exhibit 2). This confirms the negative trend for the A&F
market reported in the recent monthly TNS data (Exhibit 3 and Exhibit 4).
NH:
We like that Next has taken a down-to-earth cash focus to heart. We think this approach is more
suitable for a mature ‘middle ground’ player. Moving to better product content and higher price points,
as well as to a structurally lower SG&A cost position, would seem the right thing to do in the ‘new world’
competitive environment, as supermarkets and discounters occupy the value position. The risk here
would be for Next to price itself out of its market and stall, as it exaggerates margin defense and/ or fails
to provide credible product content at a higher level. This, and reduced revenue prospects from space
expansion and directory growth, have put off investors and caused material multiple compression.
• The Next share price has marginally risen from recent troughs just after the M&S profit warning.
Continuing negative LFL guidance, partially convincing fashion and product range in womenswear,
possible FX headwinds on COGS make us cautious on share price performance in the next 6 – 12
months. We rate Next Market-Perform with a price target of 1125p.
NH:
Not hearing anything on Hikma, stock is bombed out
NH:
and volume not that high
NH:
after yesterday’s swoops there seems to be a lack of RAW market info around
NH:
the pre-close statement is officially scheduled for September 18
NH:
right, here is something that made me laugh
NH:
concerns Cadogan Petroleum
NH:
a Ukraine oil and gas play that has been an utter disaster since it listed in June
NH:
and the price currently just over 100p
NH:
the company has had some problems with its licenses in the Ukraine
NH:
its predicament has parallels with Regal Petroleum
NH:
although the company disagrees with that
NH:
but like Regal its licenses were challenged by a state back company in a local court that no one had even heard
NH:
Cadogan obviously argues the rulings are invalid
NH:
so, that’s the background
NH:
today’s news is that the UBS, who brought the company to market along with Fox Davies Capital
NH:
with a buy rating and a 200p target price
NH:
now that made me laugh coz it is below the IPO price
NH:
Legal dispute clouds compelling fundamental story
Cadogan’s assets are undeveloped discoveries which have been overlooked by previous owners due to poor Soviet-era technology and, until recently, a low gas price.
Management believes the potential of this acreage can be unlocked through modern drilling techniques and Western reservoir management practices. The early indications have been positive.
NH:
The Company’s shares have fallen since IPO in June due to a combination of a weak equity market, falling oil prices, selling pressure from unlocked Pre-IPO shareholders and concerns over legitimacy of title to two assets
Estimate that current share price implies only 18% probability of a successful resolution of legal proceedings, but UBS notes that management’s confidence remains high and neither JKX nor Regal lost licences when faced with ownership issues
Sector-leading near-term drilling offers significant upside potential
Cadogan offers stand-out near-term drilling, with several key wells expected to reach target depth by the end of the year.
NH:
Combined, these could more than double the current reserve base and offer share price upside potential of 149% if all wells are successful, and 40% downside risk if all are dry.
Initiating with a Buy rating and a 200p price target
Our price target of 200p is set at a 35% discount to underlying NAV of 306p/share to reflect Cadogan’s current licence uncertainties.
At the current share price investors get an attractively priced option on the outcome of the legal proceedings, although risks do remain.
BE:
What’s that line about unlocked pre-IPO shareholders?
NH:
well I had heard rumours about this
NH:
that there were a lot of pre-IPO guys in the stock at a much lower price
NH:
who were sellers when the company listed
NH:
now some people told me the last round of funding before the company listed was quite recent
NH:
but I have not been able to check that out yet
NH:
although it would be interesting to know what people invested at and when
BE:
Hang on - we should be able to get hold of the admission document
BE:
these were the major shareholders at IPO
BE:
Altima Partners 8.49
HBK Master Fund 7.15
QVT Financial 6.20
European Bank for Reconstruction and Development 5.03
William Jeffcock 4.85
DB UK Holdings Limited 4.57
JP Morgan 3.89
Ingalls and Snyder LLC 3.17
Hillside Apex Fund Limited 3.02
Roy Williams 2.34
BE:
don’t think any have sold yet
NH:
just dug out the bit about unlocked shareholders from the UBS report
NH:
Selling pressure from unlocked-up pre-IPO investors: The initial
weakness in Cadogan’s share price was blamed on unlocked-up, pre-IPO
investors who had acquired their positions at between 62p and 123p/share. It
was believed that these holders were capitalising on the enhanced liquidity
enabled as a publicly-listed company to lock-in profits. This situation arose
from the lack of a secondary component to the IPO to soak up this supply, as
well as the diverse and inaccessible nature of Cadogan’s (often noninstitutional)
shareholder base, which made it difficult to lock-up.
NH:
As shown
in the table below, approximately 61m pre-IPO shares were unlocked-up,
while 73m Cadogan shares have traded in the market since IPO. As a result,
assuming not every pre-IPO investor was looking to sell their entire holding,
we believe this selling pressure should now largely have dissipated
NH:
Shareholder No. of shares held post-IPO %
Directors and senior management 5,018,731 2.2
Institutions (locked in) 103,911,290 45.0
Institutions (not locked in) 36,650,988 15.9
Individuals (not locked in) 24,083,566 10.4
IPO shares 61,427,159 26.6
Total 231,091,734 100.0
NH:
interesting that there were so many shares not locked up
NH:
in a biggish float from UBS
NH:
and I love some of the terms in the note
NH:
diverse and inaccessible nature of Cadogan’s (often noninstitutional)
shareholder base
NH:
the stock has ticked higher on this note
NH:
before we go, a request below for some comment on the BA/Iberia merger
NH:
from what I was picking up yesterday the debate seemed to be around synergies
NH:
bears were saying cost cutting/synergies were limited coz the two airlines have a JV already
NH:
but the bulls noted the JV was just on Barca/London routes
NH:
popular with Arsenal FC players that route
NH:
but everyone agreed the synergies would not be as much as the KLM -Air France deal
NH:
but then again KLM was a weaker company than Iberia
BE:
Anyway, there’s a load of upgrades today from the sell side, but it’s mostly the bears moving to neutral.
BE:
British Airways and Iberia in merger talks – further comment
We believe that a BA
This entry was posted by Bryce Elder on Wednesday, July 30th, 2008 at 11:01 and is filed under Uncategorised.
