Markets live chat transcript for the chat ending at 12:12 on 17 Nov 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Hello – welcome to Markets Live
PM:
The is FT Alphaville’s daily markets chat
PM:
Obviously there is precious little news going on.
PM:
If you get bored you can go here;
PM:
hat tip to commentor Spamalot who left that on Tracy’s Spam spam spam post earlier.
PM:
I can also report that we will of course be tweaking the design FTAV along the lines of www.spam.com – just as soon as I can get everyone to release the necessary video release consent forms.
PM:
HT GKB for that.
PM:
But we must do some proper work.
NH:
morning everyone
NH:
let’s stop messing around
PM:
Okay , Where we going Neil?
NH:
BANKS
PM:
PM:
Why oh why are the banks falling AGAIN!
NH:
Well, thought you’d explain – since this stuff you put up is one reason.
PM:
What – Simon Samuels?
NH:
Yep – Samuels of Citi. Scary stuff out of him.
PM:
Hmm – well this is stuff we have been saying for some time – asked why this downturn should be shallower than previous downturns. I can’t see a single reason to support that.
NH:
The Citi post is here:
NH:
But I’m sure I can give you more of that note here.
NH:
Applying Previous Crises to Today’s European Bank Sector
History — Using primary sources, we analyse the performance of banking industries across previous periods of stress — depression (US, 1930s), deflation (Japan/ Hong Kong, 1990s) and collapse (Sweden, early 1990s).
History — Using primary sources, we analyse the performance of banking industries across previous periods of stress — depression (US, 1930s), deflation (Japan/ Hong Kong, 1990s) and collapse (Sweden, early 1990s).
NH:
Profits, of course, get crushed — Peak to trough earnings declines were over 400% in Sweden, over 160% in the US, 90% in Japan and 50% in Hong Kong.
NH:
Balance sheets shrink — Loan books fell everywhere; c50% in the US depression, c30% in the Japan/Hong Kong deflation, c25% in the Swedish collapse.
NH:
Credit quality — Cumulative credit losses in the three worst years totalled 16% of the loan book in Sweden, 10% in Japan, 9% in the US and 4% in Hong Kong. Our current forecasts for 2008-10 are 2%.
NH:
But watch for GOP — It’s not just the credit cycle that hits earnings. Pre provision profits halved in the US in the 1930s and even in “non depression” countries it fell — 35% in Japan, 20% in Sweden and 10% in HK.
NH:
Look away now — A repeat of the past would see sector earnings wiped out and gross operating profit, loan books and deposit balances fall 30-60%. Valuation metrics (P/E, P/B, P/GOP) would all break down.
NH:
Here’s his conclusion.
NH:
Repeating History?
NH:
As noted at the start of this report, we are not saying that any of these periods will be repeated across the European bank sector over the next few years. Nor are we assessing the policy responses that may have impacted the banking industry at the time. However, we do feel it is worthwhile to at least scope how the European bank sector might look if we did see history repeat itself. Figure 15 does that, by taking the worst year of each of the four periods under review and applying it to our current 2010 forecasts. Unsurprisingly, the results are dramatic:
NH:
Net profit in 2010 would be at best 40% below current forecasts, but more likely wiped out/negative.
Gross operating profit would be 30%-60% below current forecasts.
Loan and deposit balances would be 30%-60% smaller than current forecasts.
Valuations would provide little support.
Gross operating profit would be 30%-60% below current forecasts.
Loan and deposit balances would be 30%-60% smaller than current forecasts.
Valuations would provide little support.
NH:
Roubini-esque, eh?
PM:
Hmm. People accuse us of being too bearish here at Alphaville.
PM:
Dunno why?
NH:
What are the chances of any of these scenarios developing? Currently this is not the base case from any of our economists for any of the geographies in Europe. However, we (and they) are mindful of the increased severity of recessions that are preceded by financial crisis, as shown in Figure 16 from the IMF. We might find ourselves rereading this report in a few years time and thinking that we were way too bearish to even raise this spectre. Or we might not.
PM:
Actually – Citi not bearish on all the banks. This came out from HSBC on Friday I think:
PM:
HSBC Holdings PLC (HSBA.L)
Attractive Combination
Positive capital generation and strong deposit inflows set HSBC apart —
Despite significant earnings downgrades we expect HSBC to maintain a robust capital base, positive capital generation, a progressive dividend policy and strong deposit inflows. This is an attractive combination which we believe justifies a significant valuation premium to the European bank universe.
Attractive Combination
Positive capital generation and strong deposit inflows set HSBC apart —
Despite significant earnings downgrades we expect HSBC to maintain a robust capital base, positive capital generation, a progressive dividend policy and strong deposit inflows. This is an attractive combination which we believe justifies a significant valuation premium to the European bank universe.
Earnings downgrades largely driven by US impairment losses — We have cut our EPS estimates by 41% in 2009 and 24% in 2010. This predominantly reflects higher impairments in the US subprime business and structured credit losses, which we expect to have largely worked through by 2011. Excluding North America we have reduced pre-tax profit by 10% and 11% respectively
PM:
Focus to remain on balance sheet quality — We expect the quality of HSBC’s balance sheet to be a more important driver of investment performance than the near-term earnings outlook. We estimate that HSBC will internally generate $42bn of capital 2008-2011 before dividend payments, with the Equity Tier 1 ratio rising from 7.7% to 9.6% over the period. Stress testing for a severe economic downturn occurring simultaneously in all of HSBC’s key markets reduces this to 6.4%, suggesting little need for capital to be raised.
Reiterate Buy/Medium Risk (1M) recommendation — While slowing economies in developed and developing markets reduce the earnings power of the group, we believe HSBC remains better placed than most to take advantage of potential opportunities as they arise. We estimate that ex write-downs HSBC can earn a high-teen RoE, which with a less risky balance sheet justifies a price to book multiple of 1.7x. Based on a 482p 2009E tNAV we set a target price of 800p (from 900p) and reiterate our Buy recommendation.
NH:
of course, the is a debate raging about Citgroup itself in the blogsphere
NH:
Felix Salmon has been writing some aggressive stuff
NH:
such as this
NH:
Citi’s Achilles Heel: Foreign Depositors
NH:
Dick Parsons, lead outside director of Citigroup, is sounding just a tiny bit defensive these days:
We are confident that the direction our management team has set is the right direction — and the winning direction — for these extraordinary times. Citi is well positioned for growth because of its unique global universal bank model, and because it has the right talent, the right management, and the right approach.
We are confident that the direction our management team has set is the right direction — and the winning direction — for these extraordinary times. Citi is well positioned for growth because of its unique global universal bank model, and because it has the right talent, the right management, and the right approach.
NH:
If you ask me, Citi’s “unique global universal bank model” is in fact its greatest weakness. As of June 30, Citigroup had a whopping $820 billion in total deposits — but its estimated insured deposits were only $126 billion, and fully $554 billion — yes, well over half a trillion dollars — was held abroad.
NH:
The FDIC, of course, doesn’t insure foreign deposits. The governments of the countries in question might provide some level of deposit insurance, but most of this money comes from corporate clients and upper-middle-class Citigold customers who are looking to put their money in a big safe global bank rather than some local shop which could close down tomorrow.
NH:
Citi, of course, is big and global, but it’s not looking nearly as safe these days as it used to be. And so it stands to reason that a large number of Citi’s foreign depositors might be moving their money elsewhere. If that happens, it’s hard to see how Citi can survive without a massive cash infusion of hundreds of billions of dollars. All banks are vulnerable to bank runs, but Citi is one of the few which is vulnerable to even a large minority of its foreign customers deciding to take their money out.
NH:
and this
NH:
Is Your Money Safe at Citibank?
NH:
The massive Wall Street rally this afternoon, and a statement in support of Citigroup’s chairman, didn’t help Citi, which closed down slightly on the day at $9.45 a share. Clearly the market is very worried about Citi’s future, and the fact that it’s trading in single digits — which means that a modest $1 decline in the share price means headlines about a 10% plunge — doesn’t help.
PM:
NH:
But this is important: don’t panic. Citi really is too big to fail, and its depositors are safe. Sprizouse is wrong when he says this:
The FDIC cannot protect all of CitiBank’s depositors if the massive behemoth of bank goes under.
In fact, the FDIC can easily protect all of Citi’s insured depositors. According to the FDIC, the combined total domestic deposits of Citigroup’s insured subsidiaries was $266 billion as of June 30. Of that $219 billion was in the largest subsidiary, Citibank NA, and of that, just 40.58% was actually insured — or about $89 billion.
The FDIC cannot protect all of CitiBank’s depositors if the massive behemoth of bank goes under.
In fact, the FDIC can easily protect all of Citi’s insured depositors. According to the FDIC, the combined total domestic deposits of Citigroup’s insured subsidiaries was $266 billion as of June 30. Of that $219 billion was in the largest subsidiary, Citibank NA, and of that, just 40.58% was actually insured — or about $89 billion.
NH:
Now that number will have gone up when the FDIC raised its insurance limit to $250,000 from $100,000, but even now I doubt that the total amount of money the FDIC is insuring at Citibank is much more than $100 billion. A lot of money? Yes. But not a huge amount by TARP standards, and easily within the abilities of the US government to cover.
Now, if you have uninsured deposits at Citibank — and the vast majority of Citibank’s $773 billion in deposits are uninsured, mostly because they’re held outside the US — then you might do well to wonder how safe those deposits really are. If even a large minority of those depositors ends up deciding to move their money elsewhere, then Citi, I’m pretty sure, is toast.
Now, if you have uninsured deposits at Citibank — and the vast majority of Citibank’s $773 billion in deposits are uninsured, mostly because they’re held outside the US — then you might do well to wonder how safe those deposits really are. If even a large minority of those depositors ends up deciding to move their money elsewhere, then Citi, I’m pretty sure, is toast.
NH:
But for most individuals with checking accounts, CDs, and the like at Citibank, there’s nothing to worry about, even if Citi fails. And the same is true for anybody with a brokerage account at Smith Barney. Your money is safe, you can sleep easily tonight.
PM:
And this is from Bronte Capital — where John Hempton has belatedly pubbed a note on Citi from some time ago
PM:
Is Citigroup going under? Is Sheila Bair’s erratic behaviour really her trying to save Citi?
Readers will know that I think pretty lowly of the head of the FDIC. Maybe I am wrong.
I have been puzzling this weekend – trying to work out what is going on using the assumption that all is part of a grand and competently executed strategy.
And the result was unsettling. The best hypothesis I came to is that Citigroup is going down and that Sheila Bair is trying to save it.
Sheila Bair – as readers will remember – forced Wachovia to sell itself in three days whilst other parties had not had anything like enough time to complete due diligence. She – unilaterally and incorrectly – told the world that this deal could not be done without government assistance. She unilaterally decided to issue a guarantee that on a pool of $312 billion of Wachovia assets Citigroup could not lose more than $42 billion. She made that decision even though Wells Fargo was telling her that all they required was more time to do due diligence.
Given that Wells Fargo was willing to acquire Wachovia at no-cost to taxpayers that looks like a very bad decision indeed. But this is the post assuming that Sheila Bair is smarter than all of us………
PM:
Those two bloggers are well worth a read
PM:
Sorry — meant to put that in a quote box
PM:
NH:
and to put things in a little bit of context Pandit, the boss of Citi, is going to try and rally the troops today
PM:
Yes, saw that
PM:
Town hall meeting of 350k staff
NH:
that’s some town hall
NH:
here’s was our story from this morning on the meeting
NH:
Vikram Pandit, Citigroup’s chief executive, will today attempt to rally his troops with a speech to employees aimed at restoring internal morale and allaying investors’ fears over the company’s strategy and share price.
The announcement that he will hold a “town hall” meeting for the financial services group’s 350,000 staff follows a week marked by talk of a boardroom revolt, job cuts and rising doubts over Mr Pandit’s ability to turn round the company.
NH:
The concerns have been heightened by the underperformance of Citi’s shares, which ended the week below the psychologically important level of $10. At Friday’s close of $9.52, Citi’s market valuation is less than $51bn, some three-quarters lower than when Mr Pandit took over in December.
But in a memo to staff announcing the meeting, he said Citi had “plentiful capital, abundant liquidity and our revenue is strong”. The document, which was obtained by the Financial Times, said Mr Pandit would talk about the “accomplishments over the past 11 months”.
PM:
Will be less thatn 350k soon, of course, sadly.
PM:
But bank insisting that balance sheets is fine and revenues are flowing
NH:
rest of the story can be found here
NH:
and before we move on from the banks, some prices
Lloyds TSB Group (LLOY:LSE): Last: 151.30, down 14.7 (-8.86%), High: 167.50, Low: 150.50, Volume: 12.18m
HBOS (HBOS:LSE): Last: 80.20, down 6.3 (-7.28%), High: 86.90, Low: 80.20, Volume: 2.45m
Royal Bank of Scotland Group (RBS:LSE): Last: 49.30, down 1.7 (-3.33%), High: 52.60, Low: 49.20, Volume: 23.57m
Barclays (BARC:LSE): Last: 157.30, down 1.8 (-1.13%), High: 162.80, Low: 156.00, Volume: 8.05m
PM:
Look at Lloyds!!
PM:
Dear me
PM:
Placing price for Lloyds?????
NH:
The
proposed capital raising comprises a proposed open offer to Lloyds TSB’s shareholders of approximately
2.6 billion ordinary shares at 173.3 pence per share (the “Issue Price”) (the “Placing and Open Offer”).
HM Treasury has agreed that, to the extent these shares are not taken up by eligible Lloyds TSB
shareholders (or placed with other placees), HM Treasury will acquire such shares at the Issue Price
proposed capital raising comprises a proposed open offer to Lloyds TSB’s shareholders of approximately
2.6 billion ordinary shares at 173.3 pence per share (the “Issue Price”) (the “Placing and Open Offer”).
HM Treasury has agreed that, to the extent these shares are not taken up by eligible Lloyds TSB
shareholders (or placed with other placees), HM Treasury will acquire such shares at the Issue Price
PM:
Kingman Investment Management taking that one i guess
NH:
and if the HBOS deal does not go through for any reason, they will need to raise more money
NH:
If the Acquisition and Placing and Open Offer do not complete, HM Treasury has stated that it would
expect Lloyds TSB to take appropriate action to strengthen its capital position. The FSA has advised
Lloyds TSB that if the Acquisition were not to occur, it would require Lloyds TSB to raise £7 billion of
additional capital, made up of £5 billion of Core Tier 1 equity and £2 billion of Tier 1 instruments
expect Lloyds TSB to take appropriate action to strengthen its capital position. The FSA has advised
Lloyds TSB that if the Acquisition were not to occur, it would require Lloyds TSB to raise £7 billion of
additional capital, made up of £5 billion of Core Tier 1 equity and £2 billion of Tier 1 instruments
PM:
Have you got the timetable??
PM:
Seems not –cant find it
PM:
PM:
Let’s go to two important things mentioned below
PM:
1. The price increase of the paper to 180p
PM:
Overdue, obviously. Think of the value on offer every day
PM:
And you get this online service for free
NH:
and the Sat paper is being held, for the moment
PM:
Some people ref to us as the Last Remaining Quality Newspaper in Britain
PM:
100 plus foreign correspondents
PM:
PM:
Moving swiftly on…
PM:
2. Monkey’s TARPy
PM:
The London AV team will definitely be there. large
PM:
Drinking boots/glad rags on from 5.30/6
PM:
At El Ryans, former ace Guinness bar. Assume they still do the black stuff with tapas
PM:
And quite heroic of Monkey to organise this
NH:
(Swiss Swatch – do you have any source material on the G20 dinner/wine list)
PM:
Neil — taht can come out of brackets
PM:
Fascinating story — we’d like more detail on G20 drinking habits
NH:
$499 win drunk at the G20 meeting. feeling the pain with us all
NH:
PM:
Okay — wider market ????
NH:
we are down
NH:
off 75 points at 4,158 now
NH:
banks leading us lower
NH:
but, but, but
NH:
it is soooooo quiet out there today
NH:
volume thin
NH:
G20 a disappointment
PM:
What did people expect????
NH:
dunno, but they did not get it
NH:
here’s what UBS made of it
NH:
Overall, the G20 meeting was largely a re-statement of already implemented or muted policy
responses.
responses.
NH:
While it re-affirmed the necessity for strong national counter-cyclical monetary and
fiscal responses, it offered little in the way of new initiatives to support growth. The considerable
attention paid to financial regulatory and supervisory policy was to be expected (and is
appropriate), but the implications for the financial sector are unlikely to be clear until specific
measures are adopted within the framework of the Financial Stability Forum and in accordance
with national regulations and legislation. In short, the G20 statement provided precious little
guidance for investors, even though it provided a reaffirmation of ‘best practice’ across various
policy responses.
fiscal responses, it offered little in the way of new initiatives to support growth. The considerable
attention paid to financial regulatory and supervisory policy was to be expected (and is
appropriate), but the implications for the financial sector are unlikely to be clear until specific
measures are adopted within the framework of the Financial Stability Forum and in accordance
with national regulations and legislation. In short, the G20 statement provided precious little
guidance for investors, even though it provided a reaffirmation of ‘best practice’ across various
policy responses.
NH:
of course, Wall Street was hit by another late, late sell off on Friday
NH:
and I am picking up rumours this morning that some Lehman traders are being unwound.
PM:
interesting — thought all of the LEH overhang would have been sorted by now, but maybe not
NH:
sorry trades
NH:
let’s move on readers
NH:
PM:
PM:
Where next?
PM:
miners?
NH:
they were all up earlier this morning
NH:
and still just about holding on
PM:
Don’t tell me – this was on the back of Chinese optimism yeah?
PM:
China displayed its new economic strength and profile at the G20 meeting – and now everyone has been reminded that it will continue to modernise – and that is going to take lots of raw materials.
PM:
So commodity prices are going to snap back higher
PM:
And everyone is going to start going China China China again.
NH:
Er, well yes – that is sort of what is behind today’s fresh rally – in the miners
PM:
Told you. This job is so easy now.
NH:
Yeah, sure.
NH:
But the specific trigger is this – heavy weight note from Merrill Lynch.
NH:
Daniel Fairclough from their metals and mining team.
PM:
Ah – what’s he saying?
NH:
China stimulus should not be under-estimated
NH:
China investment plan should not be under-estimated
The RMB4bn stimulus plan confirmed last week illustrates the determination of China to maintain its strong growth trend and supports the MLest 8.6% GDP growth forecast for 2009 which underpins our broadly positive stance on the metals. There was much debate as to how much of the RMB4bn number had already been announced but we make three points: RMB3.1bn is incremental to the existing 5yr plan; the stimulus will should contribute 3% to GDP growth in 2009 and 2010; while the spend accelerates immediately, the multiplier-effect from increased wages and confidence should kick-in later.
The RMB4bn stimulus plan confirmed last week illustrates the determination of China to maintain its strong growth trend and supports the MLest 8.6% GDP growth forecast for 2009 which underpins our broadly positive stance on the metals. There was much debate as to how much of the RMB4bn number had already been announced but we make three points: RMB3.1bn is incremental to the existing 5yr plan; the stimulus will should contribute 3% to GDP growth in 2009 and 2010; while the spend accelerates immediately, the multiplier-effect from increased wages and confidence should kick-in later.
NH:
China lifts export taxes on steel – slight negative for prices
In an effort to bring relief from the weak domestic demand conditions the Chinese government has cancelled steel export taxes (effective on 1st December) on HRC, plate, large section, welded pipe, and other products, which were 36% of exports in first nine months of 2008. Export rebates on higher value products (CRC, galvanized, coated, and specialty steel) which represents an additional 38% of exports are likely to follow. In our view, this is disappointing at the margin as it lowers the incentive price on exports and, if sustained, would reduce international steel prices by ~$25/t. However, this does not materially affect our positive stance on MT and TKA
In an effort to bring relief from the weak domestic demand conditions the Chinese government has cancelled steel export taxes (effective on 1st December) on HRC, plate, large section, welded pipe, and other products, which were 36% of exports in first nine months of 2008. Export rebates on higher value products (CRC, galvanized, coated, and specialty steel) which represents an additional 38% of exports are likely to follow. In our view, this is disappointing at the margin as it lowers the incentive price on exports and, if sustained, would reduce international steel prices by ~$25/t. However, this does not materially affect our positive stance on MT and TKA
NH:
Continued signs of increased activity in scrap steel markets
We continue to monitor regional scrap prices as a leading indicator of steel prices. Heavy scrap in China has increased three weeks running and is now 29% off its low point. We are also seeing signs of increased scrap activity in Turkey, in Japan and in the US. If this is sustained then we would expect steel prices to follow.
We continue to monitor regional scrap prices as a leading indicator of steel prices. Heavy scrap in China has increased three weeks running and is now 29% off its low point. We are also seeing signs of increased scrap activity in Turkey, in Japan and in the US. If this is sustained then we would expect steel prices to follow.
NH:
NWR (good) & Lonmin (bad) to report results this week
NWR is due to report 3Q2008 earnings next Thursday (20th Nov). We forecast earnings up slightly from Q2, with EBITDA +5% to EUR151.5 million, net profit +12% to EUR79.8 million. Lonmin is due to report FY08 results on Tuesday (18th Nov). We forecasts EBITDA of $1bn (+14% YoY) and reported EPS of $3.79 (+85% YoY). We see ongoing risks to Lonmin’s volumes, project pipeline (Akanani; expansion of
Limpopo) and the balance sheet given limited cash flow at current PGM prices.
NWR is due to report 3Q2008 earnings next Thursday (20th Nov). We forecast earnings up slightly from Q2, with EBITDA +5% to EUR151.5 million, net profit +12% to EUR79.8 million. Lonmin is due to report FY08 results on Tuesday (18th Nov). We forecasts EBITDA of $1bn (+14% YoY) and reported EPS of $3.79 (+85% YoY). We see ongoing risks to Lonmin’s volumes, project pipeline (Akanani; expansion of
Limpopo) and the balance sheet given limited cash flow at current PGM prices.
NH:
3 stocks to focus on: Anglo American; ArcelorMittal; NWR
Anglo American (BUY): diversified exposure; low/mid-cost assets; solid balance sheet; opportunities to capitalise on potential iron ore divestments in Australia?
ArcelorMittal (BUY): apparent demand to improve in 1H09; contract prices to increase on 1st Jan; scrap markets leading steel prices higher; trading at <0.5x BV
New World Resources (BUY): niche local player means less exposed to volume
risk than seaborne peers; trading on 3x EPS and 40% FCF yield assuming $150/t
HCC (half current benchmark levels).
Anglo American (BUY): diversified exposure; low/mid-cost assets; solid balance sheet; opportunities to capitalise on potential iron ore divestments in Australia?
ArcelorMittal (BUY): apparent demand to improve in 1H09; contract prices to increase on 1st Jan; scrap markets leading steel prices higher; trading at <0.5x BV
New World Resources (BUY): niche local player means less exposed to volume
risk than seaborne peers; trading on 3x EPS and 40% FCF yield assuming $150/t
HCC (half current benchmark levels).
PM:
Okay – thanks for all that.
Anglo American (AAL:LSE): Last: 1,243, down 48 (-3.72%), High: 1,327, Low: 1,243, Volume: 4.19m
PM:
And Arcelormittal is off 1.5%
PM:
NWR — down 26p at 253!!
NH:
Hang on New World taken a bath!
PM:
Er, yes – they have figs due out v soon.
NH:
But anyway – the ML stuff gives you a flavour of what some people are saying about China.
PM:
While the UN are saying that it is an increasingly divided society.
PM:
The gulf between rich and poor in China is affecting growth by deterring consumption and holding down productivity, according to a report released by the United Nations Development Programme.
It tracks the vast and increasing gaps between rural and urban areas and regions of China – warning that differences in income are matched by disparities in social welfare, education and elderly care.
While Beijing and Shanghai have reached the development level of countries such as Cyprus and Portugal, provinces such as south-western Guizhou are comparable to Namibia or Botswana.
The Human Development Report argues that pressing ahead in providing basic healthcare, education and welfare to all Chinese citizens will boost the country’s economy in the face of the global slowdown.
Chi Fulin, one of its authors, told reporters: “Equalisation of basic public services is an important condition for expanding domestic demand and maintaining steady and rapid economic growth.”
It tracks the vast and increasing gaps between rural and urban areas and regions of China – warning that differences in income are matched by disparities in social welfare, education and elderly care.
While Beijing and Shanghai have reached the development level of countries such as Cyprus and Portugal, provinces such as south-western Guizhou are comparable to Namibia or Botswana.
The Human Development Report argues that pressing ahead in providing basic healthcare, education and welfare to all Chinese citizens will boost the country’s economy in the face of the global slowdown.
Chi Fulin, one of its authors, told reporters: “Equalisation of basic public services is an important condition for expanding domestic demand and maintaining steady and rapid economic growth.”
NH:
Where’s that from?
PM:
The Guardian – Tania Branigan.
NH:
Is she in Beijing now?
PM:
Yes, with Dan Chung.
NH:
Together?
PM:
Well I think its public. 
PM:
Chung is an ace photographer. I went to China with him a few years ago.
PM:
Anyway – what else mining wise?
NH:
ah, this is a good one
NH:
Gem Diamonds
NH:
big blow up this morning
NH:
stock down 131.25p at 214p
PM:
NH:
that’s almost 40% down on the day
NH:
now Gem as the name would suggest
NH:
digs kimberlites and other diamond related stuff out of the ground
NH:
in places like Lesotho, Australia, Indonesia, Democratic Republic of Congo
NH:
company floated in Feb 2007 through JPMorgan Caz
NH:
listed at 950p
PM:
PM:
whot. has. happened?
NH:
profit warning
NH:
one which the market just did not see coming
NH:
did you remember seeing this a week or so ago
NH:
Mr Laurence Graff has today informed Gem Diamonds Limited (‘Gem Diamonds’ or ‘the Company’) that he is indirectly interested in 2,824,744 ordinary shares in Gem Diamonds, representing approximately 4.5%. of Gem Diamonds’ issued share capital.
NH:
These shares have been acquired as an investment and Mr.Graff confirms that he does not intend to make a formal offer for the Company. Mr. Graff intends to be a long-term investor in Gem Diamonds.
PM:
Missed that
NH:
Commenting on the investment, Mr Laurence Graff said:
NH:
‘Gem Diamonds is an excellent company that produces some of the finest diamonds in the world today. Our investment in the company reflects our confidence in its fundamental value and in the management’s ability to realise this value for shareholders from its asset base. We are also very much looking forward to talking with the management of Gem Diamonds to explore ways of working together fruitfully.’
PM:
hmm, I wonder if Mr Graff thinks Gem is an excellent company now
PM:
as for fundamental value
NH:
and I am thinking that chat with management could be coming sooner rather than later
and I am thinking that chat with management could be coming sooner rather than laterPM:
anyway who is Mr Graff?
PM:
a big player in the diamond world??
NH:
I think so
NH:
here’s some corporate blurb
NH:
Mr Graff (‘Graff’) owns Graff Diamonds International Limited, a UK company, and also a number of other business interests. Graff is involved in the cutting and polishing of the diamond, the initial vision and design of the piece through to the final exquisite Graff jewel. Diamonds are sourced in the rough from various mines around the world, including in Canada, Australia, Russia, South America and South Africa.
NH:
Graff sources some of its diamonds from Gem Diamonds. Amongst other major diamonds, Graff notably purchased in 2006 the Lesotho Promise (603 carat, world’s 15th largest mined diamond), and in 2007 the Letseng Legacy (493 carat, world’s 18th largest mined diamond) both from Gem Diamonds’ Letseng mine in Lesotho.
NH:
Tens of thousands of carats of rough diamonds are cut and polished by a team of over 300 in Graff’s diamond cutting facility based in Johannesburg, South Africa. Headquartered in London, Graff Diamonds has 32 stores worldwide where the company’s luxury pieces are sold.
NH:
hang on a minute
NH:
this is better
NH:
much more colour
NH:
by our fashion writer
NH:
sorry editor
NH:
Seems Mr Graff is trying to flog a $75m diamond necklace at the moment
PM:
really?
NH:
apparently
NH:
this was published 10 days ago
NH:
This week a $75m necklace will land in New York – not long after the New York Federal Reserve estimated 78,000 jobs would be lost on Wall Street. From the outside, this does not seem like ideal timing, but according to Laurence Graff, the creator of the piece and the man who decided to display the necklace on the November 13 opening of his enlarged Manhattan flagship:
NH:
“It is possibly the most important diamond necklace ever made. Sure there will be people who think that is a crazy sum for a necklace, especially now, but how do you value a piece that is absolutely unique in history? How do you value the Mona Lisa? All you can do is appreciate it, no matter when.”
NH:
Mr Graff has already had offers for the necklace, the only one ever made to have been carved from a single piece of rough (the 603-carat Lesotho Promise, the 15th largest diamond ever found, which has been cut into 26 different gems, including a 76-carat pendant drop). So, while cold winds are howling through even the high-end retail world, Mr Graff is relatively unperturbed. In his view, gems – especially diamonds – are as close as you can get to a sure thing. Even in a recession, they are forever.
NH:
“I’ve been through a number of downturns, and you can’t just stop and start because there’s a problem in the financial world,” says Mr Graff.
NH:
“Besides, in a downturn, people continue to buy jewels: it’s a safe place to put your money,” he says. “You put your money in the stock market and suddenly it can be gone, but if you put it into treasure” – Mr Graff tends to use “treasure” as a synonym for “jewellery” – “historically, that’s the safest place to store your wealth. I always advise people: when you’re up, buy jewels – women in particular, because a piece of jewellery is hers: of all the goods that you can invest in, a house is shared property, as is art, but a ring or a necklace is a different story.”
PM:
Comparing with the Mona Lisa????
NH:
what about this line, obviously does not apply to diamond producers
NH:
“Besides, in a downturn, people continue to buy jewels: it’s a safe place to put your money,” he says. “You put your money in the stock market and suddenly it can be gone, but if you put it into treasure” – Mr Graff tends to use “treasure” as a synonym for “jewellery” –
PM:
NH:
hmmm, sounds like Mr Graff has not got some first hand experience of the stock market
NH:
readers can find the rest of the story here
PM:
So waht has actually gone wrong at Gem???
NH:
well, the price of diamonds has been crunched
NH:
relative to the first half of the year the average price in Q4 is down 45%
NH:
as a result Gem will post a loss this year
NH:
and they are also mothballing some mines
NH:
in fact only one mine will be left operating at full tilt
NH:
Letseng which will continue to operate at full levels
PM:
that seems incredible
NH:
I agree
NH:
I can’t believe this is all down to average diamonds prices
NH:
surely Mr Graff would have know about that
NH:
anyway house broker, Caz reckons Gem will make an underlying loss of 15.4 cents a share this year
NH:
here’s the note
NH:
Gem Diamonds – strategic review [GEMD.L GEMD LN 345p] OUTPERFORM
Gem Diamonds has released the results of a strategic review this morning, conducted over the last two months in response to current commodity market conditions. Management are acting to maintain profitability and cash generation and minimising capex by focusing on the most robust areas of the group’s asset portfolio, including the Letseng mine and the high value areas at Ellendale
Gem Diamonds has released the results of a strategic review this morning, conducted over the last two months in response to current commodity market conditions. Management are acting to maintain profitability and cash generation and minimising capex by focusing on the most robust areas of the group’s asset portfolio, including the Letseng mine and the high value areas at Ellendale
NH:
Key points:
Pricing has continued to deteriorate markedly, with QTD prices at Letseng down a further 11% vs Q3 to $1,382/ct, leaving the FY08 YTD average at 1,916/ct. Backing out the November tender (using the simplifying assumption of equal sales in Oct and Nov) implies a Nov tender price of c.$1,100/ct. We have reduced our pricing assumptions at Letseng again, to $1,900/ct for FY08, $1,500/ct in FY09 and $1,700/ct thereafter.
Pricing has continued to deteriorate markedly, with QTD prices at Letseng down a further 11% vs Q3 to $1,382/ct, leaving the FY08 YTD average at 1,916/ct. Backing out the November tender (using the simplifying assumption of equal sales in Oct and Nov) implies a Nov tender price of c.$1,100/ct. We have reduced our pricing assumptions at Letseng again, to $1,900/ct for FY08, $1,500/ct in FY09 and $1,700/ct thereafter.
NH:
We have made a first pass at revised numbers which implies a FY08E headline loss for the group of 44.8c/share and an underlying loss of 15.4c/share (pre-amortisation, share-based payments and other one-offs) and a profit in FY09 (underlying), consistent with the statement in today’s release that “performance for 2008 will be significantly lower than our earlier expectations and may result in a loss for the full year”. Gem may also choose not to hold a December tender if prices remain depressed which would reduce volumes by c.15%, we believe.
NH:
Investors are unlikely to be surprised by today’s announcement and, in our view, the measures being implemented/considered by management all appear sensible given the current price and economic uncertainty.
PM:
unlikely to be surprised????????
PM:
the stock is off 40%
NH:
Valuation and recommendation
On our provisionally revised numbers, Gem Diamonds is trading on 27.8x FY09E and 7.3x FY10E PER respectively. We would highlight that Q4 is a traditionally weak period for rough pricing as jewellers stock up for the busy Thanksgiving/Christmas period in Q2/Q3, while Gem also remains cash generative and has a net cash position, which should help it to weather the current environment.
On our provisionally revised numbers, Gem Diamonds is trading on 27.8x FY09E and 7.3x FY10E PER respectively. We would highlight that Q4 is a traditionally weak period for rough pricing as jewellers stock up for the busy Thanksgiving/Christmas period in Q2/Q3, while Gem also remains cash generative and has a net cash position, which should help it to weather the current environment.
NH:
There is also the possibility of the recently-discovered 478ct stone being sold before year-end, although the current environment suggests that may be unlikely. Nonetheless, valuation support for our OUTPERFORM recommendation is severely diminished, there will be little clarity on FY09E pricing until Q2 09 and there is a risk that our pricing forecasts have to come down further. Our recommendation is therefore under review.
PM:
thanks for that
NH:
and here’s a quick bit of comment from Ambrian
NH:
We have always rated Letseng as a good project due to its high-value diamonds, although we had some concerns about the maintenance of volume and quality in the long term. However, the other costly projects and acquisitions were unlikely to make a material impact on the overall picture (other than increasing volumes). This general cutback has been spurred by the global economic downturn, but the market is unlikely to be impressed as it may be read as somewhat overdue.
PM:
PM:
lets move on
NH:
did you see this in the paper this morning??
NH:
on VW
PM:
go on
NH:
The surge in Volkswagen’s share price last month not only left hedge funds reeling, but also caused a crisis for one of Germany’s richest men.
NH:
Adolf Merckle, owner of a large family group that employs more than 100,000, is in talks with a consortium of almost 40 banks over a bridging loan after losing a large sum by betting on a falling VW share price.
NH:
Several bankers told the FT that Mr Merckle’s VEM investment company made a “high three-digit million euro” loss after selling short VW shares.
Neither Mr Merckle, who is Germany’s fifth-richest person with a net worth of $9.2bn, according to Forbes magazine, nor a spokesman could be reached for comment yesterday.
NH:
rest of the story can be found here
PM:
so another victim of the VW fruit machine
NH:
indeed, swallowed all his money
NH:
and Mr Merckle is not only Germany’s fifth richest person
NH:
but he also owns 80% of Heidelberg Cement
NH:
which readers may remember acquired Hanson last year for £8bn
NH:
now
NH:
that deal left HC as one of the indebted companies in its sector – around 4.4 times net debt
NH:
to ebitda
NH:
and its CDS trading are trading at 1400bps
NH:
now this morning’s revelation has hit confidence in Merrckle’s ability to keep funding the business
NH:
HC shares 16.4% at 42.95 euro.
PM:
oh dear me
NH:
and here is a very quick bit of comment
NH:
Major shareholder is said to need cash
NH:
Topic: According to press rumours, Adolf Merckle, major shareholder of HeidelbergCement
who has as stake of approximately 80% (27% + 53.6% by Spohn Cement), is evaluating
divestments of other shareholdings.
who has as stake of approximately 80% (27% + 53.6% by Spohn Cement), is evaluating
divestments of other shareholdings.
NH:
Our view: HeidelbergCement has to bear high debt due to the takeover of Hanson in August 2007 (EV 14 bn). Rating agencies have downgraded the stock to Ba1wn/BB+ a few weeks ago.
NH:
The company has to refinance around EUR 6 bn in 2010, which is a challenge in the current market environment. Mr. Merckle has made 2 capital increases after the takeover of Hanson (May 07 and Feb 08) in the amount of around EUR 500 mn each, both without subscription
rights.
rights.
NH:
As of the end of September net debt stood at EUR 12.3 bn (gearing 130%).
NH:
Conclusion: Mr. Merckle could sell his stake in the non-listed company Ratiopharm, a generica company with global sales of EUR 1.8 bn (2007). The EV/sales multiples were in the range of 2-3 in the last takeovers. Currently the direct peer STADA is trading at a multiple of 1.3 (2008 estimates
PM:
(Spamalot — got more details on the alleged AMLIN fruit machine? paul.murphy@ft.com)
PM:
Or FTlongroom@gmail.com
PM:
if people want a non-ft address to mail to
NH:
right on to more important maters
NH:
Dinner menu for G-20 summit
NH:
Fruitwood-smoked Quail with Quince Gastrique
Quinoa Risotto
Quinoa Risotto
Landmark Chardonnay “Damaris Reserve” 2006
Thyme-roasted Rack of Lamb
Tomato, Fennel and Eggplant Fondue
Chanterelle Jus
Shafer Cabernet “Hillside Select” 2003
Lolla Rosa, Red Oak and Endive
Cider Vinaigrette
Baked Vermont Brie with Walnut Crostini
Pear Torte
Huckleberry Sauce
Chandon Étoile Rosé
NH:
– Menu for the Dinner in Honor of the Summit on Financial Markets and the World Economy Whitehouse.gov 14 Nov 2008
PM:
that chardonnay is cheap
NH:
how much is that?
PM:
0 $33.60 – winerz.com
PM:
Chafer Cabernet less so
PM:
$400.00 – Wally’s Wine & Spirits
NH:
nice
PM:
Cabin fever — we ahve done some of those lists, courtesy of various brokers
PM:
Will keep an eye out for fresh ones
PM:
PM:
right
PM:
I see you and Bryce have been causing more trouble
NH:
us? as if.
NH:
what are you referring to?
PM:
Carphone Warehouse
PM:
on Saturday
PM:
you and Bryce wrote this
PM:
Carphone Warehouse attracts interest
By Bryce Elder and Neil Hume
Published: November 15 2008 02:00 | Last updated: November 15 2008 02:00
Carphone Warehouse was in focus yesterday amid growing speculation about a major strategic overhaul.
Dealers said the retail group could outline plans to hive out its TalkTalk broadband services business at interim results on Tuesday.
Carphone shares, up 2.7 per cent to 145p, have been buoyed in recent weeks by gossip of bid interest in its telecoms unit.
Industry gossip has linked Vodafone with an interest in Carphone’s telecoms unit, with the firm said to have been unsuccessful with an offer of around £860m, or 90p a share. A rival operator was rumoured to have proposed more than £1 per share.
PM:
and that story was then covered extensively in all of the Sunday papers
NH:
it was
NH:
not that it has helped the share price of Carphone
NH:
down 8.25p at 137p
PM:
Hmmm
PM:
what do we think Dunstone is up to here
NH:
not sure
NH:
but there are lots of theories
NH:
hopefully we will get some more clarity with tomorrow’s figures
NH:
which many people are worried could be accompanied by some gloomy news on current trading
NH:
anyway
NH:
it looks to me as if Dunstone is putting the TalkTalk business in the shop window
NH:
now, he is doing that at precisely the time BSkyB is looking at Tiscali
NH:
perhaps he is trying to send a message to Murdoch
NH:
come and get us – we are a better business
NH:
alternatively he might just be trying to talk up the share price
NH:
which has taken a battering in the past year
NH:
anyway here a couple of notes
NH:
this is from Liberum
NH:
Company ready to talk tomorrow about break-up?
Conservative SOTP looks like 170p/share
CPW has for some time been talked about as a possible value situation, due to
an evident conglomerate discount on even fairly cautious valuation
assumptions.
NH:
Several of the Sunday papers and this morning’s broadsheets carry very similar
looking stories suggesting that CEO and 32.5% shareholder Charles Dunstone will
announce tomorrow that he is examining the potential for the Group to be broken up.
looking stories suggesting that CEO and 32.5% shareholder Charles Dunstone will
announce tomorrow that he is examining the potential for the Group to be broken up.
We assume that Dunstone’s longtime friend and co-founder, David Ross’s 19.4%
would be supportive of any such move. Although the company does not appear to
be committing to any firm timetable, with the reports suggesting a break-up could be
12-18 months away.
NH:
Moreover, Dunstone appears keen to have board seats on both
companies in the event of a demerger. In our view, however, even the
acknowledgement that CPW is looking at options for 2009 could be enough for
10p of upside in the shares in the near term.
companies in the event of a demerger. In our view, however, even the
acknowledgement that CPW is looking at options for 2009 could be enough for
10p of upside in the shares in the near term.
NH:
There are parts of the Carphone investment case that are hard to love in the short
term – notably (1) the lack of clarity on the length and depth of start up losses with
Best Buy in Europe; (2) Weak consumer environment in UK/Europe and; (3) Lack of
clarity on the future prices of copper unbundled local loops from BT and the future
competitive environment once BT begins to install fibre. However, the company has
an ungeared balance sheet and looks to be factoring in a conglomerate discount
that management now seems minded to take steps to close.
term – notably (1) the lack of clarity on the length and depth of start up losses with
Best Buy in Europe; (2) Weak consumer environment in UK/Europe and; (3) Lack of
clarity on the future prices of copper unbundled local loops from BT and the future
competitive environment once BT begins to install fibre. However, the company has
an ungeared balance sheet and looks to be factoring in a conglomerate discount
that management now seems minded to take steps to close.
NH:
On what we consider to be conservative valuation assumptions, we believe Carphone shares can justify a valuation of 170p, 17% above the current share price. This would be equivalent to 9.5x FY3/10 consensus EPS.
NH:
Telecoms: We would expect CPW’s UK fixed line telco ops to be worth 3.5-4x
EBITDA, based on current peer comparisons. There could be scope for this to go
higher if a UK telcos player such as Vodafone, O2 (TEF), or Orange (France Tel)
decided to buy it as part of an integrated fixed/mobile strategy, as there would be
cost and revenue synergies. 3.5x 2010E EBITDA equates to an estimated
standalone P/E for telco of 7.5x – undemanding in our view. It also equates to
£256 per estimated subscriber.
EBITDA, based on current peer comparisons. There could be scope for this to go
higher if a UK telcos player such as Vodafone, O2 (TEF), or Orange (France Tel)
decided to buy it as part of an integrated fixed/mobile strategy, as there would be
cost and revenue synergies. 3.5x 2010E EBITDA equates to an estimated
standalone P/E for telco of 7.5x – undemanding in our view. It also equates to
£256 per estimated subscriber.
NH:
This compares with the £240 that BSkyB is
reportedly looking at paying for Tiscali UK. TalkTalk is a better business in our
view, suggesting that our CPW number could arguably go a bit higher. If we were
Sky, we would ditch Tiscali and start talking to Dunstone.
reportedly looking at paying for Tiscali UK. TalkTalk is a better business in our
view, suggesting that our CPW number could arguably go a bit higher. If we were
Sky, we would ditch Tiscali and start talking to Dunstone.
NH:
Retail: We have used a value for CPW’s remaining half of the business that is
50% below what Best Buy paid for their 50% stake in May of this year. This
seems harsh, but we think it is realistic at present. It looks to us as if Best Buy
bought control, and European General Retail comps have anyway fallen >30%
over this period. 1H results tomorrow morning: Cynics may suggest that the new willingness to
explore corporate restructuring may link with management anticipation of a
further deterioration in trading conditions, and certainly the outlook is key
tomorrow.
50% below what Best Buy paid for their 50% stake in May of this year. This
seems harsh, but we think it is realistic at present. It looks to us as if Best Buy
bought control, and European General Retail comps have anyway fallen >30%
over this period. 1H results tomorrow morning: Cynics may suggest that the new willingness to
explore corporate restructuring may link with management anticipation of a
further deterioration in trading conditions, and certainly the outlook is key
tomorrow.
NH:
We have already had KPIs for 2Q from Carphone, which included
what has turned out to be a weak broadband subs growth number now we have
seen the competitors. So tomorrow is likely to be about profitability of the two
divisions and any changes to outlook. Key numbers to look for are: (1) Telecoms
EBITDA, where consensus is currently looking for £132m, on the way to £294m
for the full year, and (2) Retail (now the Best Buy JV) where 1H market
expectations are £1,429m for Sales and £94m for EBITDA. Results are out at
7am, analyst meeting at 9am.
what has turned out to be a weak broadband subs growth number now we have
seen the competitors. So tomorrow is likely to be about profitability of the two
divisions and any changes to outlook. Key numbers to look for are: (1) Telecoms
EBITDA, where consensus is currently looking for £132m, on the way to £294m
for the full year, and (2) Retail (now the Best Buy JV) where 1H market
expectations are £1,429m for Sales and £94m for EBITDA. Results are out at
7am, analyst meeting at 9am.
NH:
and this is from Investec
NH:
There have been widespread press reports over weekend that Carphone
Warehouse will announce plans to demerge fixed-line and retail operations at
H1 results tomorrow. We have long considered this a clear step for realising
value and the weak share price performance makes this plan increasingly
appropriate.
Warehouse will announce plans to demerge fixed-line and retail operations at
H1 results tomorrow. We have long considered this a clear step for realising
value and the weak share price performance makes this plan increasingly
appropriate.
NH:
We value the fixed-line operation at £920m (100p per share), which at 3.3x
EV/EBITDA is a modest discount to sector peers such as BT on 3.5x. This
leaves the Distribution business trading on only 3.0x EV/EBITDA against the
wider retail sector on 4.9x. Simple mark-to-market against the relevant sectors
would suggest a 25% uplift in the share price to c.180p.
EV/EBITDA is a modest discount to sector peers such as BT on 3.5x. This
leaves the Distribution business trading on only 3.0x EV/EBITDA against the
wider retail sector on 4.9x. Simple mark-to-market against the relevant sectors
would suggest a 25% uplift in the share price to c.180p.
NH:
We would argue that these operations deserve to trade on a premium to peers,
given the significant prospect of attracting trade buyers. Best Buy maintains an
interest in the retail operation and is likely to acquire the remainder of it in the
coming years. Meanwhile, the UK operation’s scale and positioning makes it
highly attractive to bidders such as Vodafone, in our view, which has not yet
acquired broadband assets in the UK, unlike its strategy in other markets (DE,
ESP, IT).
given the significant prospect of attracting trade buyers. Best Buy maintains an
interest in the retail operation and is likely to acquire the remainder of it in the
coming years. Meanwhile, the UK operation’s scale and positioning makes it
highly attractive to bidders such as Vodafone, in our view, which has not yet
acquired broadband assets in the UK, unlike its strategy in other markets (DE,
ESP, IT).
NH:
Shares are inexpensive on 8x FY09E P/E, and with the prospect of a demerger
to crystallise value we see a re-rating in the coming months. At the same time,
the company is likely to benefit from better investor understanding and coverage
as two separate entities. We reiterate our BUY stance with a DCF-based price
target of 225p
to crystallise value we see a re-rating in the coming months. At the same time,
the company is likely to benefit from better investor understanding and coverage
as two separate entities. We reiterate our BUY stance with a DCF-based price
target of 225p
NH:
NH:
we have some Libor fixes
PM:
*DJ 3-Month Sterling Libor Fixed At 4.14875%, Vs 4.17625% Friday
*DJ 3-Month USD Libor Fixed At 2.23875%, Vs 2.23625% Friday
*DJ 3-Month Euro Libor Fixed At 4.1875%, Vs 4.22125% Friday
*DJ 3-Month Sterling Libor Fixed At 4.14875%, Vs 4.17625% Friday
*DJ 3-Month USD Libor Fixed At 2.23875%, Vs 2.23625% Friday
*DJ 3-Month Euro Libor Fixed At 4.1875%, Vs 4.22125% Friday
NH:
US 3-month up again
NH:
is that two or three days in a row?
NH:
any more figs??
PM:
no overnights aas yet
PM:
or OIS
PM:
PM:
Anyway — got any RAW??
NH:
couple of bits
PM:
Reader beware — the system msg seems to have died
NH:
emerging market exhibition company called ITE -
NH:
shares down 4.5p at 74.5p
NH:
and I am hearing rumours of tough trading, which given that ITE does a lot of business in Russia would not be a surprise
NH:
and the second bit of RAW
NH:
Collins Stewart
NH:
it is had a new CEO called Mark Brown
NH:
he was previously the CEO of Arbuthnot Securities and by all accounts a big of cost cutter
NH:
and it seems he has been dispensing some of the same medicine
NH:
am told half of the CS small cap team has been axed
PM:
PM:
bad RAW
NH:
and CS have a trading statement due in the next couple of days
NH:
but it does seem as if Mr Brown is determined to tackle costs
NH:
and reduce cash burn
NH:
in a way the previous incumbent Joel Plasco was not
NH:
am also told that some big names at Citi are also facing the axe
PM:
I am sure there will be much more of this. Great time, run up to Xmas
PM:
NH:
NH:
right what have we got to finish up on??
PM:
Seen this? — 14 themes that will shape the new financial world.
NH:
Oh, goodness, sounds ambitious.
PM:
Quite compact actually — note from Mark Cliffe at ING.
PM:
He’s head of financial markets – research wise. I think.
NH:
Well go on, give us the big 14. is it like the 9 circles of hell??
PM:
1. Tomorrow’s rules won’t be the same as today’s
2. The law of unintended consequences
3. Back to Basics
4. The market isn’t always right
5. The Age of Frugality
6. Trust will need to be rebuilt
7. Keep it simple
8. Politicians will have their say
9. The paradox of thrift
10. Tougher discipline will be imposed
11. Central banks will pay more attention to asset prices
12. From globalisation to localisation
13. A more competitive financial eco-system
14. The cycle still exists… there will be an upswing
2. The law of unintended consequences
3. Back to Basics
4. The market isn’t always right
5. The Age of Frugality
6. Trust will need to be rebuilt
7. Keep it simple
8. Politicians will have their say
9. The paradox of thrift
10. Tougher discipline will be imposed
11. Central banks will pay more attention to asset prices
12. From globalisation to localisation
13. A more competitive financial eco-system
14. The cycle still exists… there will be an upswing
NH:
Okay – why 14?
PM:
I don’t know.
PM:
Some hard unavoidable truths there – but there’s hope at the end of Cliffe’s piece. I will run theme 14.
PM:
14. The cycle still exists… there will be an upswing
Not so long ago there was still talk of a ‘super-cycle’, despite the evident distress in the developed world. Subsequent events have shown that even super-cycles are prone to busts. Nevertheless, aggressive policy responses should reassure us that another Great Depression is not in the offing and that a recovery will ultimately emerge. Indeed, the crisis presents some tremendous opportunities as asset prices are driven down to below depression levels.
Not so long ago there was still talk of a ‘super-cycle’, despite the evident distress in the developed world. Subsequent events have shown that even super-cycles are prone to busts. Nevertheless, aggressive policy responses should reassure us that another Great Depression is not in the offing and that a recovery will ultimately emerge. Indeed, the crisis presents some tremendous opportunities as asset prices are driven down to below depression levels.
Moreover, while the financial sector faces strong headwinds, there will be positive countervailing forces. Thus, the industry will benefit from savers’ efforts to rebuild their wealth, while in the emerging markets there is still scope for structural expansion of financial services. Survivors with strong, innovative brands will benefit from higher margins as competitors disappear from the scene, and public-sector-led investment initiatives, such as on infrastructure and energy, will present attractive long-term opportunities. The new financial world, while chastened and more conservative, will eventually shake off the current gloom.
NH:
er, thanks for that
NH:
I just wanted to have a quick look at Premier Foods
NH:
the heavily indebted Branston pickle maker
NH:
stock blazing
NH:
biggest riser in the FTSE 250
NH:
shares up 4.25p at 31.25p
NH:
a gain of 16%
NH:
follows reports in the Sunday press that they may have to sell Mr Kippling cakes
NH:
apparently the boss of Premier does not want to do this
NH:
but is he really in any position to argue
NH:
the banks own this company not shareholders
NH:
anyway, a sale of the crown jewels would give the company some breathing space
NH:
but would obviously leave the underlying business weaker
NH:
however, this is all about survival now
NH:
this what Investec Securities made of it all
NH:
Potential Mr. Kipling Disposal
With the IMS due tomorrow, November 18, speculation around what Premier
can do to de-stress its balance sheet continues, with rumours that UB would
like to buy Mr. Kipling. We think that is a good illustration of the potential
benefits to Premier from disposing of a ‘crown jewel’ such as this. While the
disposal would almost certainly be dilutive, this would be more than
compensated by the benefits of increased covenant headroom.
With the IMS due tomorrow, November 18, speculation around what Premier
can do to de-stress its balance sheet continues, with rumours that UB would
like to buy Mr. Kipling. We think that is a good illustration of the potential
benefits to Premier from disposing of a ‘crown jewel’ such as this. While the
disposal would almost certainly be dilutive, this would be more than
compensated by the benefits of increased covenant headroom.
NH:
We think that Kipling is a useful illustration of the potential benefits to Premier’s
valuation from disposing of a ‘crown jewel’ such as Kipling. While such a deal
would almost certainly be dilutive, dilution is arguably no longer the name of the
game, with Premier on an FY09E PER of 1.4x and EV:EBITDA of 4.6x.
valuation from disposing of a ‘crown jewel’ such as Kipling. While such a deal
would almost certainly be dilutive, dilution is arguably no longer the name of the
game, with Premier on an FY09E PER of 1.4x and EV:EBITDA of 4.6x.
NH:
We estimate that Manor Cakes (the Mr. Kipling Division – excluding the Avana
OL cakes business) has sales of c. £250m and EBITDA of c. £30m. A back of
an envelope disposal value could be c. £200m.
OL cakes business) has sales of c. £250m and EBITDA of c. £30m. A back of
an envelope disposal value could be c. £200m.
NH:
Disposing of Mr. Kipling on this basis would dilute FY09E EPS from 18.7p to
17.9p but would lower Premier’s net debt from £1.63bn to £1.43bn.
17.9p but would lower Premier’s net debt from £1.63bn to £1.43bn.
NH:
FY09E year end net debt: EBITDA would fall from 3.8x to 3.6x and EBITDA to
net interest would rise from 3.6x to 3.8x. These ratios are calculated in accord
with Premier’s banking covenants, which include the benefits of the P&L
pension financing credit and exclude the cost of debt issuance amortisation and
the interest on debtor securitisation. The relevant FY09 year-end covenants are
less than 4.0x net debt:EBITDA and more than 3.5x EBITDA to net interest.
net interest would rise from 3.6x to 3.8x. These ratios are calculated in accord
with Premier’s banking covenants, which include the benefits of the P&L
pension financing credit and exclude the cost of debt issuance amortisation and
the interest on debtor securitisation. The relevant FY09 year-end covenants are
less than 4.0x net debt:EBITDA and more than 3.5x EBITDA to net interest.
NH:
So while a deal on this basis would be dilutive, Premier would increase its
covenant headroom materially. And the shares would still be on a FY09 PER of
only 1.5x and FY09 EV:EBITDA of 4.8x, on our forecasts. We think that this is
an indication of the potential upside inherent in Premier’s distressed situation.
covenant headroom materially. And the shares would still be on a FY09 PER of
only 1.5x and FY09 EV:EBITDA of 4.8x, on our forecasts. We think that this is
an indication of the potential upside inherent in Premier’s distressed situation.
NH:
Premier issue an Interim Management Statement tomorrow. We expect the
statement to indicate that H2 trading has been strong and that the company is
confident of meeting its FY08 year-end covenants.
statement to indicate that H2 trading has been strong and that the company is
confident of meeting its FY08 year-end covenants.
NH:
We re-state our Buy recommendation and target price of 90p. Our target price
has been set on an EV:EBITDA-driven SOTP valuation. We continue to view
Premier as a high risk/high potential return special situation. Risks to our
forecasts and TP are material and include trading uncertainties and potential
covenant breach.
has been set on an EV:EBITDA-driven SOTP valuation. We continue to view
Premier as a high risk/high potential return special situation. Risks to our
forecasts and TP are material and include trading uncertainties and potential
covenant breach.
PM:
Ta Neil
PM:
Right — ive got to go — 12.30 lunch
NH:
where to today??
PM:
But i have posted ING in the LR
PM:
Where to – -somewhere on Percy st
PM:
Bam-bou
NH:
isn’t that very flash??
PM:
er
PM:
Bam-Bou is located at No. 1 Percy Street (previously home to the legendary White Tower), an elegant Georgian town-house, furnished throughout in French-Vietnamese style. Two handsome dining rooms, three private rooms and a top-floor cocktail bar create a four-storey hideaway haven.
Head Chef Michelle Makaew has designed the restaurant’s South-East Asian influenced menu, naturally fusing ingredients from Thailand, China and Vietnam.
NH:
nice
PM:
Judging mergermarket M&A awards — so have to work for lunch
NH:
sounds tough
PM:
NH:
price update – FTSE 100 now off 82 points at 4,150
NH:
is there anything else of shall we rap it up
PM:
Monkey — here you
NH:
and look – 3-month Libor-OIS is up 168 vs 163
NH:
the system is getting gummed up again
NH:
cya
PM:
hear you even
PM:
Right — got to go — thanks for joining — thanks for all the comments
PM:
Back tomorrow at 11am!
PM:
Sharp!