Markets live chat transcript for the chat ending at 12:05 on 18 Nov 2008. Participants in this chat were: Paul Murphy (PM) Neil Hume (NH)
PM:
Morning, welcome to Markets Live
PM:
This FT Alphaville’s daily markets chat.
PM:
Reminder — Monkey’s TARPy on Thursday — El Ryans
NH:
IF YOU DARE
NH:
*NORTHERN ROCK TO BE `SIGNIFICANTLY LOSSMAKING’ THROUGH 2009
NH:
the Crock
Readers may also know this former bank as Northern Rock.
NH:
sorry that just flashed across my screen
PM:
Well doesn’t surprise — remember its portfolio…
PM:
Two obvious themes this morning….
PM:
1. Profit warnings (accompanying Q being, “how stupid is the market?”)
NH:
answer – very
PM:
2. 2. Quantitative easing (accompany Q being “what the Fowke is that?”)
PM:
A — we have done a bit of home work. little bit
PM:
But first
PM:
Glencore mentioned below
NH:
yes
NH:
been tracking the CDS again this morning
NH:
it has ballonned
NH:
up 80bp at 1350bp, new record
PM:
clearly the results from a week or so ago have not settled nerves
NH:
that’s true
NH:
brokers have been going through the figs
NH:
and the conclusion seems to be that while it was good that Glencore were still investing in new equipment it could not disguise the fact that costs and debt jumped
NH:
but this morning’s move is not down to analysis of the results
NH:
it is down to speculation the oil tanker which has been hi-jacked is carrying Glencore’s crude
NH:
now
NH:
this is RAW
NH:
and before we go any further
PM:
(Apols Michael F)
NH:
We should say that we don’t think this is true
NH:
we are being told that Vela oil ships oil for Saudi Aramco to oil majors
PM:
i see
NH:
and in any case they are insured
PM:
so false alarm
NH:
yes
NH:
but I suspect that won’t help the Glencore CDS
NH:
from what I am hearing hedge funds have been pair trading Glencore CDS and Xstrata
NH:
not exactly sure how the trade has been put on
NH:
but the idea is they are short of both
NH:
and each feeds off the other
NH:
especially as the market believes that Glencore has used the Xstrata stake – they own 35% of the comapny – as collateral for loans
PM:
so , hedgies would be short of both Glencore CDS and Xstrata
NH:
well they would probably buy Glencore CDS and short Xstrata
NH:
I guess that’s the way to put the trade on
NH:
but I don’t have the details here so I am guessing
NH:
that said it would explain the movements in the Glencore CDS
PM:
NH:
as most bond analysts don’t think the fundamentals justify anything close to this morning’s price
PM:
NH:
oh, Xstrata shares down 86.5p at 790p
NH:
a fall of almost 10%
NH:
stock looks to be close to its October’s lows
NH:
which was 709p
PM:
Okay — ta
PM:
PM:
back to the profit warning mentioned earlier
PM:
You want to delve into the Mid 250, yeah?
NH:
yeah, it’s a bloodbath
NH:
and if the mid cap index is a good barometer of the UK economy
NH:
then things look very, very bleak indeed
NH:
so
NH:
here is a list of the biggest fallers in the FTSE 250 this morning
NH:
now all these companies have posted results or trading statement
NH:
and look at this trial of devastation
NH:
Laird – that’s a specialist electronics group
NH:
they are off 36%
NH:
down 36.7p at 66.75p
PM:
whoa, why?
NH:
warned worsening economic conditions would hit Q4 sales and revenue
PM:
and that’s enough to wipe 35% off its share price
NH:
well, there is a bit more
NH:
they are saying if trends continue at their present rate sales would be “very significantly below expectations”
PM:
“very significantly” — other wise known as “materially”
NH:
and to put this in a little bit of context
NH:
this update comes just a month after Laird last briefed the market
NH:
and this company is a big supplier to Nokia
PM:
i see
PM:
and they warned on profits on Friday
NH:
they did
NH:
so, should a Laird profit warning really surprised the market
NH:
Moving on
NH:
Wellstream
NH:
this company makes flexible pipes for oil exploration in really, really deep water
NH:
now, with oil at $55 a barrel a lot of these projects are no longer going to viable
NH:
the result is warning that 2009 is going to be a lot tougher
PM:
and how much has that taken off the share price?
NH:
hang on one minute
NH:
oh, they have just had a quarter of their market sliced off
NH:
down 133p at 370p
NH:
stock was £14.40 back in May
PM:
NH:
let’s move on to
NH:
Carphone Warehouse
NH:
half year results out this morning
NH:
and concerns about cashflow have seen its shares walloped
NH:
down 20.5p at 110p
NH:
down 16%
NH:
actually we will come back to Carphone in a bit
NH:
but for now
NH:
the company has confirmed a strategic review
NH:
but claim they have not received any offers for their telecoms business
NH:
anyway, this must be a massive disappointment for Dunstone
NH:
hatches a plan to try and talk up the share price/generate shareholder value
NH:
and the market just does not want to know
NH:
shares gets smacked
NH:
moving on a again
NH:
Burberry
NH:
results out
NH:
shares down 9.5% at 181.5p
PM:
That’s a result – only off 10%!
PM:
NH:
suppose you are right
NH:
company saying trading has been harder in the second half of the year, particularly in the US
PM:
which is no surprise
PM:
actually is any of this a surprise
PM:
???
NH:
well it clearly is to the market and analysts
NH:
to the man in the street… probably not
NH:
and there is one more company that has reported this morning
NH:
Easyjet
PM:
right I think I can guess what has happened here
PM:
outlook uncertain
NH:
well yes
NH:
The economic outlook remains very difficult and highly uncertain. Despite this, easyJet’s forward bookings for the first quarter of the financial year are currently slightly ahead of prior year.
NH:
In order to limit margin dilution over the winter from the impact of higher fuel costs easyJet has withdrawn lower yielding flights, and as a result aircraft utilisation this winter will fall to an average 9 hours a day from 11.6 hours in the previous winter.
NH:
but that’s not the most interesting thing here
NH:
the row with Sir Stelios is
NH:
and he is refusing to sign off the accounts
NH:
After extensive discussions with the easyJet Board and having taken appropriate professional advice at my own expense, I regret to inform you that I as a director of easyJet PLC I am unable to approve the annual accounts for the following reasons. I am concerned about the application of certain of the accounting policies adopted by the board in a way that I believe is at odds with current commercial realities and the macro-economic climate. Their implications only became obvious to me this year because of the acquisition of GB Airways:
NH:
On a separate matter I believe the dividend policy of the company should be changed. We must pass a board resolution to plan to pay a dividend by say 2011 if the markets and the liquidity of the company allow. Dividends must be planned several years ahead as they compete for cash with capital expenditure. It just makes good business sense for every properly run, mature company to plan to pay a dividend to its loyal shareholders one day.
NH:
This statement would not be complete if I didn’t comment on the record, in an RNS so all shareholders and potential shareholders have an equal opportunity to read my views, about the recent speculation in the media about my motivations for seeking to appoint two more non-executive directors on the board of easyJet. In fact I will simply quote again part of the letter which I sent to the board last Thursday 13 November 2008:
NH:
‘We as the Controlling Shareholders, continue to consider Sir Colin Chandler to be a suitable Chairman for the Company. In fact we have been impressed with the way he has been managing this difficult situation on behalf of all shareholders. We are also aware of the provisions of the Combined Code on Corporate Governance concerning the independence of Chairmen and given our publicly stated commitment to adhere to the highest standards of corporate governance, we do not wish to insist on the Chairman of the Company being someone who is clearly not independent.
NH:
‘We as the Controlling Shareholders, continue to consider Sir Colin Chandler to be a suitable Chairman for the Company. In fact we have been impressed with the way he has been managing this difficult situation on behalf of all shareholders. We are also aware of the provisions of the Combined Code on Corporate Governance concerning the independence of Chairmen and given our publicly stated commitment to adhere to the highest standards of corporate governance, we do not wish to insist on the Chairman of the Company being someone who is clearly not independent.
PM:
ooooooh
NH:
Last, but not least, I would like to place on record that I believe that with careful cash management and in particular more prudent capital expenditure easyJet PLC and its shareholders will be THE winners in European short haul aviation. We must focus on cash flows forecasts and not on carrying more passengers. I am happy that the board of easyJet PLC works as it should do. In fact, during the board meeting to approve the accounts we have reached agreement that we will use the time between now and the company’s AGM to seek to agree whether I shall appoint one or two additional non-executive directors and who these would be. As to the details of our future strategy, these are best discussed in our boardroom in Luton and not in the newspapers.
NH:
bickie
Reminder to readers – if you arrived late and want to stop the dialogue ‘jumping’ as you catch up, hit the ‘pause auto-scrolling’ tab at the bottom right hand corner
PM:
now that’s what I call a bust up
PM:
any analyst comment?
NH:
plenty
NH:
This is from Citi
NH:
Sir Stelios issue — Sir Stelios abstained from voting on the passing of the
accounts, as expected, following easyJet’s press release last Friday. In a letter,
he referred to various accounting issues relating to the GB Airways acquisition
a year ago. We believe these are minor in nature and immaterial to cash flow
and valuation. His reasons are unclear, except that he wants to exert more
influence on the Board in order to start receiving dividends from 2011. The
concern is that if easyJet stops growing, its valuation could be de-rated. We
believe that easyJet can continue to grow at 5-10% p.a. and still afford a
dividend. We do not expect significant Airbus order cancellations. The share
price has declined 13% since this issue came to light on Friday. We remain
buyers on share price weakness.
accounts, as expected, following easyJet’s press release last Friday. In a letter,
he referred to various accounting issues relating to the GB Airways acquisition
a year ago. We believe these are minor in nature and immaterial to cash flow
and valuation. His reasons are unclear, except that he wants to exert more
influence on the Board in order to start receiving dividends from 2011. The
concern is that if easyJet stops growing, its valuation could be de-rated. We
believe that easyJet can continue to grow at 5-10% p.a. and still afford a
dividend. We do not expect significant Airbus order cancellations. The share
price has declined 13% since this issue came to light on Friday. We remain
buyers on share price weakness.
NH:
this is from Merrill
NH:
PBT slightly above management guidance, outlook fairly
cautious but could still be profitable
cautious but could still be profitable
NH:
Pre-tax profit (before one-off charges) fell 35.7% y-o-y to £123mn and was above
our forecast (£110mn) and a touch above the top end of earlier management
guidance (£110mn – £120mn). Group operating profit (before GB Airways) was
£103.9mn vs. £172.8mn last year and ML forecast of £98mn. Exceptional items
amounted to £12.9mn and included one-off charges related to restructuring at GB
our forecast (£110mn) and a touch above the top end of earlier management
guidance (£110mn – £120mn). Group operating profit (before GB Airways) was
£103.9mn vs. £172.8mn last year and ML forecast of £98mn. Exceptional items
amounted to £12.9mn and included one-off charges related to restructuring at GB
NH:
Valuation & Conclusion – Boardroom debate creates
uncertainty, retain Neutral
uncertainty, retain Neutral
NH:
We estimate easyJet trades on a 09/08E EV/IC multiple of 0.59x, close to a 10%
discount to the historic 5yr average. Last week, it emerged there is a debate
between the main Board and founder and significant shareholder, Stelios Haji-
Ioannou regarding the future strategy/expansion of the group. Stelios has also
stated today he has not approved the accounts (concerns include accounting for
GB Airways, fleet value and Gatwick slots). Until the boardroom debate is
resolved and the group’s strategy and financial targets are clarified, uncertainty
may continue. Our recommendation remains Neutral.
discount to the historic 5yr average. Last week, it emerged there is a debate
between the main Board and founder and significant shareholder, Stelios Haji-
Ioannou regarding the future strategy/expansion of the group. Stelios has also
stated today he has not approved the accounts (concerns include accounting for
GB Airways, fleet value and Gatwick slots). Until the boardroom debate is
resolved and the group’s strategy and financial targets are clarified, uncertainty
may continue. Our recommendation remains Neutral.
NH:
and Deutsche Bank
NH:
DB comment: we would view the reported numbers and comments on a
relatively difficult trading outlook as in line with expectations. Whilst it
seems that Stelios’ statement has a slightly more conciliatory tone in some
respects than it appeared last week, we think the evident disagreement
with the Board over not only strategy, but also now accounting methods,
creates uncertainty which is likely to weigh on the stock in our view, hence
we maintain our Sell recommendation.
relatively difficult trading outlook as in line with expectations. Whilst it
seems that Stelios’ statement has a slightly more conciliatory tone in some
respects than it appeared last week, we think the evident disagreement
with the Board over not only strategy, but also now accounting methods,
creates uncertainty which is likely to weigh on the stock in our view, hence
we maintain our Sell recommendation.
NH:
PM:
right back to Carphone for a moment
PM:
big corporate announcement this morning
PM:
Dunstone is going to consider a demerger of Carphone’s telecoms business
NH:
yup
NH:
but no one is interested they are more worried about the outlook statement
NH:
company saying the next 12 months are going to be most challenging economic climate it has operated in
NH:
but then Carphone is a relatively young company, so that needs to be placed in context
NH:
and then
NH:
cashflow
NH:
this has been Carphone’s Achilles heel for a while
NH:
and part of the reason why they did the deal on the retail side with Best Buy
NH:
which helped them pay down debt
NH:
from what brokers are telling me
NH:
Merrill Lynch is doing the damage
NH:
and highlighting the negative movement in cashflow
PM:
What are they saying??
NH:
well
NH:
here’s the note
NH:
Carphone Warehouse – Interim Results for 6m to 30 September
Overall a poor set of results with nasty outlook statement. the retail business
reported numbers in line for the period to September while telecom business
underperformed.
Overall a poor set of results with nasty outlook statement. the retail business
reported numbers in line for the period to September while telecom business
underperformed.
Carphone also highlighted a 93k subs reduction from its broadband base post the
period end,
Caveat: please note that the changes in consolidation make comparison with
actual and last year difficult to assess.
NH:
Divisional profitability
Best Buy Europe (Retail)
Revenue £1.6bn vs £1.6bn consensus – in line
EBITDA £99m vs £94m consensus – slightly ahead
UK fixed line
Revenue £697m vs £694m consensus – in line
EBITDA £120m vs £132m consensus – big miss
Best Buy Europe (Retail)
Revenue £1.6bn vs £1.6bn consensus – in line
EBITDA £99m vs £94m consensus – slightly ahead
UK fixed line
Revenue £697m vs £694m consensus – in line
EBITDA £120m vs £132m consensus – big miss
Consolidated data vs consensus is meaningless due to variants in consolidation
NH:
Demerger – statement
We recognise, however, that the structure of the Group may now no longer be
appropriate for the optimal development of the two businesses. The Board has
therefore initiated a formal review of the Group’s corporate structure and capital
requirements, which may lead to a separation of the two businesses. In this
instance we would remain closely involved with both companies. We intend to
provide an update on the review’s progress in Spring 2009.
Outlook
“The immediate consumer outlook remains very uncertain”
“The next 12 months are likely to represent the most challenging economic
climate we have ever operated in”.
PM:
Nothing about cash flow in there
NH:
no
NH:
that was the early morning flash
NH:
but here is something from JP Morgan
NH:
that covers all the bases for the bears
NH:
Outlook, net debt, AOL restatement raises concerns. KPIs were
already known from the trading update, and group profitability was
broadly inline. However we believe today’s focus will be on (a) the
cautious outlook, (b) increased net debt expectations and (c) AOL
subscriber restatements. We believe these concerns will overshadow the
restructuring options the company is reviewing, as indicated by the
weekend press.
already known from the trading update, and group profitability was
broadly inline. However we believe today’s focus will be on (a) the
cautious outlook, (b) increased net debt expectations and (c) AOL
subscriber restatements. We believe these concerns will overshadow the
restructuring options the company is reviewing, as indicated by the
weekend press.
NH:
Three major concerns. Headline profit after tax was £39m vs our
estimate of £37.8m, with headline EPS of 4.2p (JPMe 4.17p). However,
the company’s outlook statement, particularly for distribution raises
earning risk, in our view. Additionally CPW gave FY09 net debt
guidance of £50-100m, this was compares unfavourably with our £57.5m
cash estimate. The company is clearly still clearly exposed to
forex/derivates, and raises questions as to why net proceeds from the
Best Buy transaction have not been used to repay this debt.
estimate of £37.8m, with headline EPS of 4.2p (JPMe 4.17p). However,
the company’s outlook statement, particularly for distribution raises
earning risk, in our view. Additionally CPW gave FY09 net debt
guidance of £50-100m, this was compares unfavourably with our £57.5m
cash estimate. The company is clearly still clearly exposed to
forex/derivates, and raises questions as to why net proceeds from the
Best Buy transaction have not been used to repay this debt.
NH:
Splitting the business, largely expected – but when? The company
confirmed press reports (e.g. Financial Times article this morning) that it
would review the separation of the fixed and distribution businesses. We
do not believe this news will be of surprise to investors, given the recent
press. The company has committed to providing a review of this process
in spring 2009, and we believe this may provide some support for the
stock in the interim.
confirmed press reports (e.g. Financial Times article this morning) that it
would review the separation of the fixed and distribution businesses. We
do not believe this news will be of surprise to investors, given the recent
press. The company has committed to providing a review of this process
in spring 2009, and we believe this may provide some support for the
stock in the interim.
NH:
Earnings clearly under pressure, we are already below consensus
next year. We look for EPS of 16.1p in FY09, and 16.6p in FY10, with
consensus (company) of 16.3p and 19.4p respectively. With the model
operationally geared, we would expect to see consensus falling further.
next year. We look for EPS of 16.1p in FY09, and 16.6p in FY10, with
consensus (company) of 16.3p and 19.4p respectively. With the model
operationally geared, we would expect to see consensus falling further.
NH:
and finally Cazenove
NH:
Cashflow. Net debt at the end of the half stood at £80m versus £843m of net debt at the end of FY2008, the
consensus expectation for £18m of cash and our forecast of £36m of cash. This follows working capital outflow of
£35m (£70m E).
consensus expectation for £18m of cash and our forecast of £36m of cash. This follows working capital outflow of
£35m (£70m E).
NH:
Outlook. The statement indicates that: ”The immediate outlook remains very uncertain”, “predicting the outcome of the
next six weeks of sales is very difficult”.
next six weeks of sales is very difficult”.
Strategy. The Board has announced a review of the Group which will consider the most appropriate structure of the group.
NH:
Valuing the Distribution at a 10% premium for CY2009 implies that the UK Fixed Line business trades on c. £173 per sub – which appears cheap relative to previous UK BB transactions which are typically at c. £500 per sub. However, this reflects the difficult trading environment, the near saturation of the market and the lack of likely bidders at this point in time.
NH:
The shares now trade on a FY2009 PER of 8.8x versus the Telecoms sector on 9.0x for CY2008. With limited visibility
going into the crucial Christmas trading season and the potential for further headwinds in the UK fixed line business this
discount appears justified. We retain our In
going into the crucial Christmas trading season and the potential for further headwinds in the UK fixed line business this
discount appears justified. We retain our In