Markets live chat transcript for the chat ending at 12:14 on 12 Jan 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Welcome to NEW Markets Live.
PM:
Good morning
PM:
This is FT Alphaville’s regular market chat, but with a fresh approach.
PM:
No, it doesn’t mean we are going to start talking about Estonia or Turkey or something
PM:
Tho we can if people wish. I can assure you we know as little about those markets as all others.
PM:
No, in New Markets Live we will be casting away any notion here that we are providing balanced objective unconflicted opinion here.
NH:
What Murph is trying to say here is that as far as the British banking sector is concerned we are now officially talking out book.
PM:
Not wilfully, mind.
NH:
Our Great Discretionary Manager
NH:
Step forward Mr John Kingman
NH:
Has been confirmed this morning as the buyer of a 44 per cent stake in the soon-to-be born Lloyds Banking Group.
PM:
At the wrong price
NH:
But we’ll be doing our best to repair that – and we’ve already seen some great progress this morning.
NH:
Old Lloyds TSB is up 6.6p at 138p
PM:
Terrific!!
NH:
And Halifax Bag of Shi
PM:
Neil! Hold it there
PM:
PM:
That should read: HBOS, sturdy backbone of the British housing sector and a key backer of entrepreneurial talent, has…
NH:
added 3.2p to 83p
PM:
Good. Lots more where that came from.
PM:
We’re proud long-term investors in the British banking sector.
PM:
How’s the rest of our portfolio doing?
NH:
RBS – that’s up 3.5p at 56.5p
PM:
Excellent.
11:06AM
PM:
On a serious note, this moment feels significant.
NH:
Well, Jonathan Pierce of Credit Suisse seems to share your view.
NH:
He had an under-perform rating on Lloyds, which has now been removed
PM:
Good man. What’s he saying?
NH:
Round two of the Government plan imminent, in our view
■ Credit risk transfer could significantly reduce capital requirements
■ We see a chance this might help . we upgrade Lloyds TSB to Neutral
■ Credit risk transfer could significantly reduce capital requirements
■ We see a chance this might help . we upgrade Lloyds TSB to Neutral
NH:
With regard the financial sector, the Government has one primary objective . to get credit flowing again. Many have sought to explain the banks. Apparent reluctance to lend, and suggested a variety of ways to resolve the situation. One of these is for banks to be forced into raising more capital. We think this is
unlikely in the near term. Instead we believe the next stage of the plan will see the Treasury working far more closely with the banks. In reality, the Treasury needs them . to fill the void left by building societies and non-UK banks . and they need the Treasury . without a loosening in credit, things will get a lot worse.
unlikely in the near term. Instead we believe the next stage of the plan will see the Treasury working far more closely with the banks. In reality, the Treasury needs them . to fill the void left by building societies and non-UK banks . and they need the Treasury . without a loosening in credit, things will get a lot worse.
NH:
The latest initiatives, therefore, are likely to focus on two areas. First, funding, and specifically the extension of the credit guarantee scheme to include ABS. Of greatest importance to us is that these liquidity guarantees are of sufficient duration . in our view, five years.
NH:
Second, and more interesting, managing capital ratios. Specifically, if the authorities were to provide indemnity insurance against deep credit tail risk this might significantly reduce risk weightings against loans while leaving banks exposed to any conceivable losses (hence reducing the burden on the taxpayer and the prospect of lax lending standards). This is possible because Basel II sets risk weighted assets to cover one-in-a-thousand year events (a 99.9% confidence interval). Transferring the one-in-five hundred year event to the Government might seem like a risk worth taking right now. Another option is to dilute the procyclicality of Basel II . the latest FSA guidance on mortgage LGD is an example of how risk weights can be dampened through model adjustments. In fact, we think this change alone could reduce the sector.s risk weighted assets by £50-100bn by 2010 relative to our stress test.
NH:
Overall, this is a key time for the UK banks sector. In practice, the outcome is somewhat binary . if initiatives work (there is no magic fix, but an improvement in credit availability would be a start) we will likely see a rally in the banks. If they don.t, it is questionable whether further capital injections would work and a jump to nationalisation might loom large, in our view. Whatever happens, the
next two years are likely to prove very tough for banks, and fundamentally we can.t get excited. But if these initiatives follow our thinking, that would be good news for a change. We upgrade Lloyds TSB to Neutral from Underperform given its gearing into any potential scheme, the 35% fall in the share price over the last three months, and the shares. proximity to our target price of 125p.
next two years are likely to prove very tough for banks, and fundamentally we can.t get excited. But if these initiatives follow our thinking, that would be good news for a change. We upgrade Lloyds TSB to Neutral from Underperform given its gearing into any potential scheme, the 35% fall in the share price over the last three months, and the shares. proximity to our target price of 125p.
PM:
Hmm – not sure I like that mention of nationalisation.
PM:
But the rest – extension of credit guarantee scheme to ABS – and some sort of indemnity insurance…
NH:
HM Treasury RE
NH:
or Kingman RE
PM:
Interesting
InterestingPM:
We’re basically talking good bank / bad bank here.
NH:
Well, it’s certainly an option.
NH:
Though Pierce thinks it’s the least likely choice for now.
NH:
The final option likely to be considered is the purchase of toxic assets from banks. The benefits of this would span both funding and capital . through the exchange of illiquid, highly risk weighted assets for liquid, zero weighted cash. As an indication, there is around £60bn of ABS CDO, US sub-prime and RMBS, CMBS and LBO instruments on domestic bank balance sheets, although any plan might extend into traditional loan portfolios.
NH:
The success of such a scheme would depend on how much of these assets the Government was prepared to buy, and at what price. In practice, to make much of a difference we think a fairly considerable commitment would be needed, which might prove untenable from a funding perspective (although this is where quantitative easing might come in useful). Furthermore, similar aims can be achieved through a combination of the unfunded CGS and unfunded capital relief scheme in our view.
NH:
We therefore think this idea will be held back for now.
PM:
ah right
NH:
Just looking at the Credit Suisse conclusion
NH:
We fundamentally remain cautious on the UK banks, and will turn very negative if this plan fails, but we believe a slightly less negative stance is justified for now.
NH:
There’s a lot of responsibility falling on our shoulders here.
NH:
Binary situation – either we support our banks, or we end up owning more of them.
11:09AM
NH:
Meanwhile, those charged with fixing the situation – other than ourselves, obviously — are swaning around on socials.
PM:
Eh?
NH:
It’s in the paper.
PM:
???
NH:
In the splash. I’m sure you read the splash, Murphy.
NH:
Mr Brown and Mr Darling met bankers at Chequers, the prime minister’s rural retreat, for Sunday lunch, but no announcement on a banking package is expected.
Downing Street officials said the lunch, with Eric Daniels, Lloyds TSB chief executive, Marcus Agius, Barclays chairman, and Mervyn Davies, Standard Chartered chairman, was a social occasion which had been in the diary for weeks. Spouses and non-financial figures also attended.
Downing Street officials said the lunch, with Eric Daniels, Lloyds TSB chief executive, Marcus Agius, Barclays chairman, and Mervyn Davies, Standard Chartered chairman, was a social occasion which had been in the diary for weeks. Spouses and non-financial figures also attended.
PM:
Marvelous.
NH:
got that. it was just a social occassion
NH:
no talking shop
NH:
been in the diary for weeks
PM:
11:11AM
PM:
What?
NH:
Whoa – what’s this?
PM:
What?
NH:
From Media Monkey – at the guardian.
NH:
About the GQ feature.
NH:
Times are hard at the Financial Times. Not only are staff being offered a three-day week, they are also having to squeeze in extra work posing as models for GQ. The editor, Lionel Barber, takes pride of place in the advertorial, sorry, feature bigging up the FT in his “bespoke two-piece suit by Stephen Kempson” – a favourite New York tailor whom he has plugged in the paper’s style pages before
NH:
Jo Johnson, brother of Boris and editor of Lex, looks born for Gieves & Hawkes, and Gillian Tett and Roula Khalaf show up the boys by wearing their own jackets. The most notable absence is Alphaville editor Paul Murphy, whose agenda-setting blog is represented by one of his team who is accidentally credited with running it. “You’d be hard pressed to get your foot on the bottom rung of the FT ladder these days without a masters or a PhD,” swoons GQ. “If business journalism really is the new rock ‘n’ roll, then Barber is its Jimmy Page.” But who is its Phil Collins?
PM:
Hadnt seen that.
NH:
Yeah – but this line –
NH:
The most notable absence is Alphaville editor Paul Murphy, whose agenda-setting blog is represented by one of his team who is accidentally credited with running it.
NH:
So it’s just YOUR blog now is it?
PM:
NH:
So myself and Sam and Gwen and Izabella and Tracy and Stacy are just helping you set the agenda are we??
PM:
NH:
Getting a bit of work experience. A few scraps of knowledge and technique brushed off the desk.
PM:
PM:
I had nothing to do with that.
NH:
Of course you didn’t.
NH:
I’m minded to log right off now – would do if it wasn’t the readers.
NH:
And what’s this about “accidentally credited with running it.” ?????
NH:
Jeeez.
PM:
It’s nothing to do with me.
PM:
Can we move on?
11:14AM
NH:
Roche – should talk about that
PM:
Okay – we were on a right Roche story on Friday. Ate up the entire afternoon.
NH:
No Murphy – that was lunch. You and Sam were out at Sweetings until 3.30 – eating lunch.
PM:
Oh yeah, well after that we were completely consumed by by this Roche story.
PM:
Basically, after six months of frustration – the Swiss are ready to re-bid for Genentech in the US.
PM:
We screwed up on this initially – getting our Roche strategy in a spin over Avastin.
NH:
Yeah – that was our fault – but fixed now.
NH:
We were told they are going to bid mid 90s –dollars – about $10 above the prevailing share price in New York.
NH:
but they could offer more if they get an agreement from the independent directors of Genentech, which has the ticker DNA
PM:
Big deal this – Roche need $45 billion or so to buy out the minorities.
PM:
So if and when this deal happens it will be seen as a very important sign that the corporate debt markets are open once again.
NH:
Need up to $35bn of debt financing.
NH:
We believe they have agreed the facilities – but have yet to sign with the banks – -led by JPM and HSBC
PM:
We were also told that in terms of getting the cash component together Roche has talked about passing its final dividend – saving about $4bn.
PM:
But that’s the one element of the story that is being knocked-back in follow up coverage.
NH:
well, that was the latest thinking from the Roche side we understand
NH:
but these plans are flexible
NH:
nothing is set in stone
NH:
and in any case the wording from Roche on the divi is interesting
NH:
ZURICH, Jan 12 (Reuters) – Swiss drugmaker Roche Holding AG said on Monday
its dividend policy remained unchanged and that its statement from last February
was still valid.
its dividend policy remained unchanged and that its statement from last February
was still valid.
NH:
Anyway , here’s some research on the matter..
NH:
From Merrill lynch
NH:
Press suggest Roche financing for Genentech acquisition may be in place
A story in the FT over the weekend suggests that Roche is close to securing financing it needs for the acquisition of the 44% of Genentech that it does not already own and may make a new offer at $95. Recall that Roche originally made on $89 offer last summer which was rejected by the Genentech independent directors and the acquisition has subsequently stalled amid problems in gaining financing.
NH:
Article suggests attractive terms
Despite the current freeze in credit markets which we believe makes raising the $53bn needed to complete a deal difficult in the near-term, the article suggests that the required funds may be raised at 4% allowing a new offer to be made. If accepted and the credit terms suggested in the press are achieved we would see this as highly attractive .
NH:
11% accretive in 2012, 4% in 09, NPV positive
Based on the speculated terms we would see the acquisition of the minorities as 4% accretive in 09, 11% in 2012 and NPV positive (recall we have previously indicated that a deal up to $100 as NPV positive). The only potential negaitve is that the article suggests that Roche may cut its dividend to aid the financing something which we see as unlikely but also likely to be unpopular with investors in yield starved markets.
NH:
Rationale for deal remains attractive
As a reminder we see strong strategic rationale to the deal – it secures Roches access to the premier R&D engibe and allows some cost duplocation to be removed.
NH:
And some more
NH:
Paul is on the case
PM:
And here’s some stuff from Morgan Stanley — Andrew Baum
PM:
Quick comment: The rumour (FT, January 9-10 2009)
of secured financing for a forthcoming c.$95/ share DNA
bid at a remarkably low 4% interest rate is a potential
positive development for Roche. Neither company has
commented on the FT article. However, we believe
DNA’s Board will dismiss such an offer as with the
June ’08 $89/share proposal. We anticipate Roche will
ultimately be forced to offer in excess of $100/share to
secure DNA Board approval. A hostile tender offer
seems unlikely given Delaware Law. Ultimately, given a
flurry of recent precedents, we wonder whether
contingent value rights may be required to bridge the
valuation gap between the two parties (see below).
While we highlight the 26% upside to our intrinsic value,
we continue to believe the stock will be range bound
until 2H09 when both the putative transaction and
adjuvant Avastin trial uncertainty are resolved.
c.$95/share offer attributes little value to additional
synergies or adjuvant Avastin potential. The
Financial Times reported that strong demand for
high-grade debt offerings have enabled Roche secure a
$30-$35bn credit facility with the aid of a ten-bank
syndicate (together with a passed $4bn dividend)
towards an offer for the minority 44% in DNA at a price c.
$95/share (a modest 6.7% bump to the original offer) .
Consistent with the views of our US biotech team, we
doubt DNA’s Board will accept the offer given DNA
shareholders would receive little value from either the
adjuvant Avastin call option or merger synergies.
of secured financing for a forthcoming c.$95/ share DNA
bid at a remarkably low 4% interest rate is a potential
positive development for Roche. Neither company has
commented on the FT article. However, we believe
DNA’s Board will dismiss such an offer as with the
June ’08 $89/share proposal. We anticipate Roche will
ultimately be forced to offer in excess of $100/share to
secure DNA Board approval. A hostile tender offer
seems unlikely given Delaware Law. Ultimately, given a
flurry of recent precedents, we wonder whether
contingent value rights may be required to bridge the
valuation gap between the two parties (see below).
While we highlight the 26% upside to our intrinsic value,
we continue to believe the stock will be range bound
until 2H09 when both the putative transaction and
adjuvant Avastin trial uncertainty are resolved.
c.$95/share offer attributes little value to additional
synergies or adjuvant Avastin potential. The
Financial Times reported that strong demand for
high-grade debt offerings have enabled Roche secure a
$30-$35bn credit facility with the aid of a ten-bank
syndicate (together with a passed $4bn dividend)
towards an offer for the minority 44% in DNA at a price c.
$95/share (a modest 6.7% bump to the original offer) .
Consistent with the views of our US biotech team, we
doubt DNA’s Board will accept the offer given DNA
shareholders would receive little value from either the
adjuvant Avastin call option or merger synergies.
PM:
$95/share @ 4% – still too good to be true? Using our
proprietary flexor tool (available on request), we
calculate that the rumored transaction details would
result in immediate core EPS accretion (10% in 2010),
with significant upside given lowly cost-reduction
guidance. Our proforma ‘09e-‘12e EPS CAGR
approximates 12% vs. industry’s low-single-digits and a
2009e P/E of 13 compared to10 for its peers. On a DCF
basis, the potential offer attributes only a modest value
to adjuvant Avastin potential (adjuvant Avastin NPV is
c.SFr 40/share for Roche on a stand-alone basis).
proprietary flexor tool (available on request), we
calculate that the rumored transaction details would
result in immediate core EPS accretion (10% in 2010),
with significant upside given lowly cost-reduction
guidance. Our proforma ‘09e-‘12e EPS CAGR
approximates 12% vs. industry’s low-single-digits and a
2009e P/E of 13 compared to10 for its peers. On a DCF
basis, the potential offer attributes only a modest value
to adjuvant Avastin potential (adjuvant Avastin NPV is
c.SFr 40/share for Roche on a stand-alone basis).
PM:
And here is Rodman & Renshaw
PM:
Roche (RHHBY.PK, Not Rated) expected to tender $95-per-share bid
for DNA. Friday afternoon, in line with our expectations, Roche
disclosed that it is preparing a new offer for Genentech expected to be at
$95 per share for a total consideration of around $44bil. While Roche
has not provided significant details, the bid is expected to be presented
to Genentech’s board this month ahead of the disclosure of Roche’s
4Q08 earnings numbers.
In our view, DNA still undervalued in the new offer. Recall that we
have previously estimated the fair value of Genentech to be
approximately $95 per share based on a Sum-of-Parts valuation (see
Tables 1 and 2 on page 2 and 3, and please refer to our notes from July
21st, 2008). We now believe that the deal is likely to be done at a
modest premium to our fair value estimate and remind investors of the
historical deal premium in the range of 25-30%.
Roche may have the necessary financing. According to the article,
Roche has secured the necessary debt financing of up to $35bil to
sustain a $95-per-share bid, presuming another $9bil in cash and $4bil
from passing the year-end dividend. Reportedly, Roche will use an
existing $10bil revolving credit facility and has secured a commitment for
up to $25bil from a syndicate of competitor banks. The cost of funds to
Roche is reported at 4%, which is relatively cheap, but we point out the
current challenging credit markets.
We reiterate our Market Outperform rating and $90 price target on a
stand-alone basis. We reach our target price using a Discounted Cash
Flow (DCF) valuation (See Table 3 on Page 4). This valuation method is
more conservative than the Sum-of-Parts valuation since it takes into
account future CapEx and working capital expenses. We forecast sales
and individual expenses until 2015 to calculate the free cash flow in each
year. Assuming a conservative terminal growth rateof 3% to calculate the
terminal value, we discount the numbers to 2009 by using the Weighted
Average Cost of Capital (WACC) of 9.8% to achieve the value of the
firm. Subtracting the long-term debt of $2.48bil and adding back cash,
we derive the value of equity. Dividing by the outstanding shares, we
reach out target price of approximately $90. Our Sum-of- Parts valuation
method gives us a price target of approximately $95 on a stand-alone
basis. Adjusting for the average and median historical acquisition
premiums gives us an acquisition target price range of $116 to $124 per
share
for DNA. Friday afternoon, in line with our expectations, Roche
disclosed that it is preparing a new offer for Genentech expected to be at
$95 per share for a total consideration of around $44bil. While Roche
has not provided significant details, the bid is expected to be presented
to Genentech’s board this month ahead of the disclosure of Roche’s
4Q08 earnings numbers.
In our view, DNA still undervalued in the new offer. Recall that we
have previously estimated the fair value of Genentech to be
approximately $95 per share based on a Sum-of-Parts valuation (see
Tables 1 and 2 on page 2 and 3, and please refer to our notes from July
21st, 2008). We now believe that the deal is likely to be done at a
modest premium to our fair value estimate and remind investors of the
historical deal premium in the range of 25-30%.
Roche may have the necessary financing. According to the article,
Roche has secured the necessary debt financing of up to $35bil to
sustain a $95-per-share bid, presuming another $9bil in cash and $4bil
from passing the year-end dividend. Reportedly, Roche will use an
existing $10bil revolving credit facility and has secured a commitment for
up to $25bil from a syndicate of competitor banks. The cost of funds to
Roche is reported at 4%, which is relatively cheap, but we point out the
current challenging credit markets.
We reiterate our Market Outperform rating and $90 price target on a
stand-alone basis. We reach our target price using a Discounted Cash
Flow (DCF) valuation (See Table 3 on Page 4). This valuation method is
more conservative than the Sum-of-Parts valuation since it takes into
account future CapEx and working capital expenses. We forecast sales
and individual expenses until 2015 to calculate the free cash flow in each
year. Assuming a conservative terminal growth rateof 3% to calculate the
terminal value, we discount the numbers to 2009 by using the Weighted
Average Cost of Capital (WACC) of 9.8% to achieve the value of the
firm. Subtracting the long-term debt of $2.48bil and adding back cash,
we derive the value of equity. Dividing by the outstanding shares, we
reach out target price of approximately $90. Our Sum-of- Parts valuation
method gives us a price target of approximately $95 on a stand-alone
basis. Adjusting for the average and median historical acquisition
premiums gives us an acquisition target price range of $116 to $124 per
share
11:21AM
NH:
we have got some bad news
NH:
very worryinig
PM:
Neil — you cant release internal FT memos across markets live!!!!!!!!!!!
NH:
what are you talking about?
NH:
I talking about Land of Leather
PM:
NH:
looks like it is the end
NH:
shares been suspended
NH:
Land of Leather Holdings said Monday it requested a suspension, with immediate effect, of trading of its ordinary shares on the Official List, pending clarification of the company’s financial position.
NH:
company was facing a big rent bill
NH:
doesn’t look as if the New Year sale brought enough cash in
NH:
PM:
Oh dear — poor Land of Leather
PM:
What do/did they sell?
NH:
a wide range of leather sofas
PM:
Oh yes
NH:
Leather is the leading leather sofa retailer in the UK and Eire.
NH:
We have the widest collection of leather sofas available in the UK today. Our collection includes over 60 ranges of leather sofas at any one time with an attractive choice of popular colours. We also offer an attractive choice of innovative motion sofas.
NH:
Wherever you are, Land of Leather is near you. We have 109 stores across the UK & Eire today, located primarily in well-known retail parks. Our easily accessible stores showcase our collections in a modern and spacious store setting contributing to a pleasant buying experience for our customers.
Please visit our store finder for a full list of store locations.
PM:
Nice credit terms — spread the cost 29.8%
NH:
The easy way to relax – add power to luxury and you have an electric leather recliner combination that oozes comfort and style. Just sit back and let it happen!
NH:
anyway, we must move on
11:26AM
NH:
actually while we on retail
NH:
some important updates this week
NH:
trading statements from Tesco and DSGi
PM:
Yes — monkey mentioned dixons below
NH:
and it looks like both companies have been using the weekend press to manage expectations
NH:
lower
NH:
. LFLs are now being guided towards Tesco +2.5% tomorrow and DSGi on Thursday with over 10% lfl decline. A Tesco rise of 2.5% would compare with 4.5% for Sainsbury in the same period – Nick would be surprised if the gap were quite this big.
NH:
got that from a broker this morning
PM:
STRNS
NH:
it was – a rival to Pestowire for non financial stories
Top News from Top Sources. The BBC’s Business Editor, Robert Peston, has played in important role keeping the British public fully informed during these difficult times.
NH:
and here’s a bit more
NH:
Dsgi
10-12% would be disappointing given the weak comps and the lift the whole market saw over the new year. Why no profit warning? Well there has been some degree of cost cutting to cut back on the shortfall and quietly DSGI has going along with the profit downgrade that the market has been talking about. The new PBT figure seems to be around £50m from £80m at the time of the interims. If there is margin pressure discovered then we are looking at best a breakeven point for 09-10. This means that the Share price at 20p still looks to high for us and we stick to our 12p price target. Kesa will report next week as the French do not allow sales to until the start of last week rather than Boxing day in the UK. For your diaries: Thursday is the big day for retailers this week.
10-12% would be disappointing given the weak comps and the lift the whole market saw over the new year. Why no profit warning? Well there has been some degree of cost cutting to cut back on the shortfall and quietly DSGI has going along with the profit downgrade that the market has been talking about. The new PBT figure seems to be around £50m from £80m at the time of the interims. If there is margin pressure discovered then we are looking at best a breakeven point for 09-10. This means that the Share price at 20p still looks to high for us and we stick to our 12p price target. Kesa will report next week as the French do not allow sales to until the start of last week rather than Boxing day in the UK. For your diaries: Thursday is the big day for retailers this week.
NH:
that was from Nick Bubb at Pali
NH:
and here’s a note on Tesco
NH:
from David McCarthy at Hobart Capital
NH:
Tesco announces its Christmas Trading statement and I expect 2.5-3% Like for Like growth for the UK. Influenced by the following factors:
NH:
Comps get easier over Christmas
Poor trading for non-food (especially textiles)
The late Christmas price promotion
Better Christmas all round for food retailers than had been expected
Improved market share performance indicated by AC Nielsen last week
Poor trading for non-food (especially textiles)
The late Christmas price promotion
Better Christmas all round for food retailers than had been expected
Improved market share performance indicated by AC Nielsen last week
NH:
Of course up to 3% LFL still suggests that Tesco is losing market on a like for like basis, as it has a bigger impact from extensions and maturing space than the competition, but the market may breathe a sigh of relief that trading is holding up and has not deteriorated. But this may be more due to a relatively benign Christmas for the food retailers rather than for Tesco per se. Our concern is that Tesco is still off the pace on marketing and is still trying to appear price competitive without putting too much investment into price. The more I think about the recent press campaign comparing price baskets, the less I like it (see last week’s e-mail for a full critique). Tesco will most likely hit consensus numbers there or thereabouts for the current year, but doubt remains on next year. If the market remains tough and LFL sales remain under pressure, Tesco will be faced with a difficult choice:
NH:
Will it accept LFL sales less than its long term budget of 3-4% per annum, and will it let operating margins rise in the UK in the midst of a recession and high price activity from the competition
Will it chase sales, and accept that 2009/10 may be a weaker year for UK operating profits.
Will it chase sales, and accept that 2009/10 may be a weaker year for UK operating profits.
This is a key choice for Tesco and its decision will affect the profitability of the whole industry, and the manufacturing industry in the UK as well over the next year or so. Right now, Tesco is off the boil and is paying the price for some weak pricing decisions made 18 months ago and as of yet, Tesco has not appeared to be prepared to take the pain to correct its earlier errors. Instead it appears to be asking suppliers to write cheques to fill the cash gap created by the Discounter Range. Maybe after the year end is in the bag, Tesco will step up the ante ahead of Easter and become aggressive on price. Doing so would also help ruin Sainsbury’s year end, which comes a few weeks after Tesco.
NH:
All in all, this is just a Christmas Trading statement and will not give too much insight into the fundamentals of the business. On such a short trading period, it is difficult to call the outcome with any degree of certainty, so I would be flattish going into the figures and would remain concerned on the outcome for next year. However, I still believe that Tesco will re-emerge as the long term winner while Leahy remains at the helm, but it is time we all started talking and thinking about his successor.
11:31AM
PM:
Wider market — how is that fairing today??
NH:
a touch weaker
NH:
FTSE 100 down 25 points at 4,424
NH:
and that’s in spite of a good showing from our glorious banks sector
NH:
in fact, Wall Street was weak on Friday
NH:
and then we are getting all this stuff about Citigroup reporting another grim set of figures
NH:
actually there was a big piece in the WSJ
NH:
which I am just trying to get hold of
NH:
By DAVID ENRICH
Citigroup Inc. is expected to report fourth-quarter losses that are billions of dollars greater than previously anticipated, but its lead independent director said the banking giant’s board isn’t losing faith in Chief Executive Vikram Pandit.
NH:
Citigroup is expected to post an operating loss of at least $10 billion when it announces fourth-quarter results on Jan. 22, say people familiar with the matter. This figure could change, they cautioned, as executives finish tallying the numbers. Citigroup’s quarterly net loss will be closer to $6 billion, due to a one-time gain of roughly $4 billion from the sale of its German retail-banking business, a deal that closed late last year.
NH:
Such a loss would be far worse than the $4.1 billion that Wall Street analysts are projecting. It is unclear whether the analysts’ projections accounted for sale of the German business.
The loss would also mark Citigroup’s fifth straight quarter in the red and could bring the company’s total losses for 2008 to more than $20 billion. Citigroup’s largest net loss of this span was $9.8 billion, booked in the fourth quarter of 2007.
Citigroup’s losses will include additional reserves the firm set aside to cover bad loans in the period. One advantage to taking a loss in the fourth quarter is that the first quarter may look better by comparison. A Smith Barney spinoff would yield not only a cash payment in the first quarter, but an additional benefit: Citigroup executives expect to log a pretax gain of up to $10 billion as the joint venture is revalued under accounting rules, one person said.
PM:
cheers for that
11:35AM
PM:
right, let’s get back to some stock specific stuff
NH:
before we do
NH:
some RAW rumours going around
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
Bloomberg – apparently had their worse Dec ever and worst monthly removal rate to date of over 7k terminals removed.
PM:
But Neil havent we spoken by telephone to four people who claimed to be familier with the matter???
NH:
er, yes.
PM:
And they declined to be identified on account of the fact that they are not formally persmissioned to converse with outside media, such as FT Alpahville, these familier persons said
NH:
indeed.
11:38AM
PM:
Anyway — you cant buy or sell Bloomberg stock. yet
NH:
yeah, but it does have a read across to Thomson Retuers
PM:
Oooh
NH:
which was we reported at the weekend is considering doing something about its dual listing structure
NH:
the UK line trades at 20% discount
NH:
because the Brits are more pessimistic about the outlook for the Reuters finanacial markets business
NH:
and don’t really understand the rest of Thomson
NH:
anyway, a lot of US investors have been buying the UK line
NH:
perhaps if there are enough of them, they will push for that to be delisted
NH:
and get Canadian stock
NH:
which would be a nice arb
PM:
hmm
11:40AM
PM:
let’s mvoe on
NH:
OK, the two of the three biggest fallers in the FTSE 100 are
NH:
Man Group
NH:
and 3i
NH:
down 17.25p at 226.5p
NH:
and 21.5p at 326.5p respectively
NH:
both have been hit by downgrades
NH:
Citi has slapped a sell rating on Man
NH:
and a 200p price target, which is pretty bearish
NH:
basically they are concerned about de-leveraging
NH:
and investors taking their money out of the AHL future fund, which has actually performed very well in the past year
NH:
here’s the note
NH:
$3.8bn fall in AHL AUM due to MGS de-gearing — Man Group has previously
indicated that de-gearing of MGS capital guaranteed products would see a $7.5bn
fall in MGS AUM from end Sept to Dec 2008. Most MGS guaranteed products
were invested 1/3 in AHL and 2/3 in MGS. As a result, we expect the $7.5bn MGS
de-gear to be accompanied by a $3.75bn de-allocation from AHL AUM.
indicated that de-gearing of MGS capital guaranteed products would see a $7.5bn
fall in MGS AUM from end Sept to Dec 2008. Most MGS guaranteed products
were invested 1/3 in AHL and 2/3 in MGS. As a result, we expect the $7.5bn MGS
de-gear to be accompanied by a $3.75bn de-allocation from AHL AUM.
NH:
$1.7bn AHL redemptions — We see a high risk of ‘profit-taking’ at AHL as
liquidity-seeking investors find other funds closed to redemptions. We estimate
AHL could have seen $1.7bn net redemptions in the 3 months to end Dec
2008. We use the changes in total NAV of the open-ended AHL Diversified
Futures, adjusted for investment returns, as our proxy for the whole of AHL.
liquidity-seeking investors find other funds closed to redemptions. We estimate
AHL could have seen $1.7bn net redemptions in the 3 months to end Dec
2008. We use the changes in total NAV of the open-ended AHL Diversified
Futures, adjusted for investment returns, as our proxy for the whole of AHL.
NH:
$3.1bn shadow over guaranteed products — Man’s capital guaranteed products
are provided leverage by 3rd party banks. The terms of leverage arrangements
are typically multi-year, but not usually as long as the fund duration (10-12
years). As such, agreements will need renegotiating in coming years. This
raises the prospect of downward pressure on AUM, as new arrangements may
require funds to be less geared than at present. We estimate this could reduce
Man’s capital guaranteed funds by a total $3.1bn, over a period of 4 years.
are provided leverage by 3rd party banks. The terms of leverage arrangements
are typically multi-year, but not usually as long as the fund duration (10-12
years). As such, agreements will need renegotiating in coming years. This
raises the prospect of downward pressure on AUM, as new arrangements may
require funds to be less geared than at present. We estimate this could reduce
Man’s capital guaranteed funds by a total $3.1bn, over a period of 4 years.
NH:
Downgrade to Sell — The prospect of a negative shock on AHL AUM at the Q3
trading statement and longer term concerns over de-gearing and margin
pressure lead us to reduce our EPS forecasts, downgrade from Hold (2H) to
Sell (3H) and set a 200p price target, based on a sum of the parts valuation.
Within this, we attribute a 170p value to AHL.
trading statement and longer term concerns over de-gearing and margin
pressure lead us to reduce our EPS forecasts, downgrade from Hold (2H) to
Sell (3H) and set a 200p price target, based on a sum of the parts valuation.
Within this, we attribute a 170p value to AHL.
NH:
moving on to 3i
NH:
Morgan Stanley done the damage here
NH:
and this is a pretty well timed downgrade
NH:
3i was the best performer in the FTSE 100 last week
NH:
rose almost 25%
NH:
for reasons that still aren’t clear
PM:
valuation the reason for the downgrade then?
NH:
pretty much
NH:
following a 45% bounce off its recent low, MS reckon the risk rewards are now finally balance
NH:
and there is much better value elsewhere in the sector
NH:
here’s quick summary of the downgrade
NH:
We downgrade 3i to Equal-weight on de-gearing risk and cut our price target by 51% to 350p – although the stock looks cheap at a ~40% discount to our March 2010e trough NAV of £6.01, we now take a more cautious stance. The capital and funding position and ability to invest to take
advantage of opportunities lack clarity in an era of lower leverage, at a time when the
fixed-income markets are facing cyclical and paradigm shift changes.
advantage of opportunities lack clarity in an era of lower leverage, at a time when the
fixed-income markets are facing cyclical and paradigm shift changes.
NH:
After a ~45% bounce off lows, we view the risk-reward as more balanced and would look for greater clarity on asset sales to lower gearing and capital pressures before becoming more positive. We prefer Partners,
DB1, Baer and ADN.
DB1, Baer and ADN.
NH:
and here is a bit more
NH:
analyst Bruce Hamilton makes the point that concerns about an SVG style capital raising, will weigh on the sector
NH:
While cheap in an historical context, 3i’s valuation is more
aligned with other listed private equity funds (e.g. SVG and
Candover).
aligned with other listed private equity funds (e.g. SVG and
Candover).
NH:
Specifically, we see a tail risk of a dilutive capital
raising in a worsening macro environment if management is
unable to execute stake sales to manage the debt maturity
profile – ~£1bn of debt coming due over three years and a
further £650mn in the following two – and group gearing (which
we estimate will rise to >70% net debt to equity in our base
case), against a declining portfolio value where valuation
opacity is exacerbated by leverage at an underlying company
level, particularly in the buyout book. We see a better
risk-reward trade-off at Partners and cleaner beta at Baer or
Aberdeen (all rated Overweight). We also remove 3i from our
banks/div fins model portfolio.
raising in a worsening macro environment if management is
unable to execute stake sales to manage the debt maturity
profile – ~£1bn of debt coming due over three years and a
further £650mn in the following two – and group gearing (which
we estimate will rise to >70% net debt to equity in our base
case), against a declining portfolio value where valuation
opacity is exacerbated by leverage at an underlying company
level, particularly in the buyout book. We see a better
risk-reward trade-off at Partners and cleaner beta at Baer or
Aberdeen (all rated Overweight). We also remove 3i from our
banks/div fins model portfolio.
NH:
We expect the real debate to be driven by ongoing concerns
around gearing at an underlying portfolio and group level,
funding and the potential for the double leverage in the model
to lead to capital raising risk. This is in an environment where
debt markets are not set to improve, viz the recent SVG deeply
discounted (~45% discount) capital issue to meet unfunded
capital calls amid a slowdown in portfolio realisations, and set
against a sharp decline in portfolio values.
around gearing at an underlying portfolio and group level,
funding and the potential for the double leverage in the model
to lead to capital raising risk. This is in an environment where
debt markets are not set to improve, viz the recent SVG deeply
discounted (~45% discount) capital issue to meet unfunded
capital calls amid a slowdown in portfolio realisations, and set
against a sharp decline in portfolio values.
NH:
As such, and while we see the value argument, we view the
investment as carrying significant risk if debt markets remain
challenged and portfolio health deteriorates more aggressively
than we assume. Our bear case sees a more aggressive 50%
portfolio reduction due to further market declines, and
increased provisioning against a challenging debt financing
market implies NAV declining to £2.45.
investment as carrying significant risk if debt markets remain
challenged and portfolio health deteriorates more aggressively
than we assume. Our bear case sees a more aggressive 50%
portfolio reduction due to further market declines, and
increased provisioning against a challenging debt financing
market implies NAV declining to £2.45.
PM:
thanks for that
11:46AM
PM:
Bryce mentioned below that $ LIBOR OIS is back below 100 bps
PM:
Doesn’t it need to be at less than 20 tho before we are back to historical norms?
NH:
it does and here are the rest of the Libor fixes
NH:
*DJ 3-Month USD Libor Fixed At 1.16%, Vs 1.26% Friday
NH:
DJ 3-Month Sterling Libor Fixed At 2.3275%, Vs 2.38375% Friday
NH:
DJ 3-Month Euro Libor Fixed At 2.64813%, Vs 2.68875% Friday
NH:
Jan. 12 (Bloomberg) — The Libor-OIS spread, a gauge of banks’ willingness to lend, narrowed 10 basis points to 98 basis points today.
The last time the spread closed below 100 basis points was on Sept. 12, the final working day before the collapse of Lehman Brothers Holdings Inc.
The last time the spread closed below 100 basis points was on Sept. 12, the final working day before the collapse of Lehman Brothers Holdings Inc.
NH:
so there we are, lowest level since the day before Lehman went under
11:48AM
PM:
For those interseted in currencies we would note that the $ is back below 90 Yen
PM:
Tho strong against both Euro and the krona — i think
11:49AM
NH:
let’s move on and have a look at the Toxic Pub company
NH:
very weak this morning
NH:
biggest faller in the FTSE 250
NH:
off 9p at 67.25p
NH:
now, I was going to put this down to profit taking
NH:
I mean, what on earth was the TPC doing at 70p anyway
PM:
NH:
of course, the answer to that was some daft rumour which did the rounds last week
NH:
about decent Xmas trading at Punch
PM:
Neil is talking abotu Punch Taverns of course
PM:
Sorry — company formally known as Punch
NH:
TPC PLC
NH:
anyway, the talk about decent trading was shot down in the weekend paper
NH:
and the other reason for the move upwards, was David Einhorn of Greenlight Capital increasing his stake
NH:
which was something of an odd move because he halved it before Xmas
NH:
anyway
NH:
today’s damage has been done by a couple of broker notes
NH:
Both Cazenove and Citi are saying in sector pieces, don’t go near the TPC
NH:
now these sector pieces are scene setters, the majority of the pubcos – toxic and non toxic – report trading updates in the next couple of weeks
NH:
and Caz is forecasting a deterioration from the patterns reported at the end of November.
NH:
which is pretty gloomy for pub followers
NH:
here’s the note
NH:
The Morning Advertiser (a trade journal) reported that most operators enjoyed strong trading during Christmas week with the timing of the celebration away from weekends boosting trade. Furthermore the weather on the bank holidays (cold but bright with December being the second sunniest on record) would have been favourable for demand.
However, we believe that other weeks will show slowing demand. Indeed, this weekend’s Sunday Times suggests that Punch Taverns will report “tough trading” with “lfl sales down 5% across the bulk of its estate”.
NH:
Regent Inns reported on 17th Dec that trading had not improved from the -13% run rate for the 15 weeks to 12th October.
Restaurant Group reported a 5% decline in lfl sales for the last seven weeks of its financial year. This represented a step down in momentum from the 1% growth from September to mid-November.
NH:
Overall, the 6 percentage point step down in lfl growth at Restaurant Group looks high and we would be surprised to see a similar deterioration for the pubcos. Nonetheless we still expect a slowdown from the figures reported in November. We also expect further evidence of trading down to value brands and would expect JDW’s lfl to remain the strongest in the sector. In contrast, we expect operators that have been raising prices (such as Punch’s Spirit division) to witness a loss of market share due to the volume reaction. We believe this explains the apparent contradiction between the Morning Article and Sunday Times articles.
NH:
We believe Greene King represents the best value in the sector on a 2009E PER of 7.0x and FCF yield of 16.2%. Marston’s trades on similar multiples (6.0x, 18.1%) but in our opinion has additional earnings risk due to the higher exposure to leased and tenanted pubs. We believe Mitchells and Butlers looks increasingly attractive on a PER of 7.7x and FCF yield of 15.3% and would look to buy the stock on any weakness. We would continue to avoid stocks which are reliant on asset disposals to meet net debt reductions (ETI) or stocks which are likely to breach cash-trap covenants on securitised debt (PUB).
NH:
and here is the Citi note
NH:
and they cut Punch to sell
NH:
A poor year ahead for earnings — We lower sector earnings again by an average of
8%, and now assume that sector earnings fall by an average of 19% in 2009, (vs a
4% decline in 2008). Given the substantial bounce in some of these stocks
following the market lows, and our strategy team remaining underweight leveraged
stocks, we think the January trading statements could offer a reality check.
8%, and now assume that sector earnings fall by an average of 19% in 2009, (vs a
4% decline in 2008). Given the substantial bounce in some of these stocks
following the market lows, and our strategy team remaining underweight leveraged
stocks, we think the January trading statements could offer a reality check.
NH:
Buy Greene King, Hold Marston’s — Both of these companies are at the lower risk
end of the spectrum and are the furthest from covenants of all the pub stocks, in
our view. We prefer GNK due to a better track record, greater balance sheet
strength (albeit marginal), and as we believe Marston’s is over-distributing
dividend payments.
end of the spectrum and are the furthest from covenants of all the pub stocks, in
our view. We prefer GNK due to a better track record, greater balance sheet
strength (albeit marginal), and as we believe Marston’s is over-distributing
dividend payments.
NH:
Buy M&B, Sell JD Wetherspoon — These companies enjoy best in class assets and
we believe that replacement cost would be higher than current enterprise values.
The market continues to reward JDW for its top-line resilience but it is the only
pubco with a double-digit P/E (14x Dec09E) and we are convinced this premium
rating will eventually crack. MAB has to pay down debt but with the dividend
passed the possibility of financial distress has fallen dramatically.
we believe that replacement cost would be higher than current enterprise values.
The market continues to reward JDW for its top-line resilience but it is the only
pubco with a double-digit P/E (14x Dec09E) and we are convinced this premium
rating will eventually crack. MAB has to pay down debt but with the dividend
passed the possibility of financial distress has fallen dramatically.
NH:
Buy Enterprise, Sell Punch — With c7x 09E Debt/EBITDA and equity <10% of EV
it is tempting to write off these investment cases. The complexity and scale of the
debt means the shares may be only for die hard value investors. We prefer the ETI
investment case as we believe it has far greater ability to retain control of cash
flows. In extreme, even if covenants were broken, we believe that shareholders
would have a greater chance of having rights on future cash flows. We downgrade
Punch to Sell. We believe the proximity to restrictive cash flow tests means
shareholders may have no rights on some cash flows for years if trading
deteriorates, even if a covenant breach is averted.
it is tempting to write off these investment cases. The complexity and scale of the
debt means the shares may be only for die hard value investors. We prefer the ETI
investment case as we believe it has far greater ability to retain control of cash
flows. In extreme, even if covenants were broken, we believe that shareholders
would have a greater chance of having rights on future cash flows. We downgrade
Punch to Sell. We believe the proximity to restrictive cash flow tests means
shareholders may have no rights on some cash flows for years if trading
deteriorates, even if a covenant breach is averted.
PM:
I like that last bit
PM:
let’s have some more on Punch
NH:
why not
NH:
here you go
NH:
Tenanted pubs – Buy Enterprise Inns, Sell Punch Taverns
With highly leveraged balance sheets (c7x Debt/EBITDA, or equity at < 10% of the
EV) it may be tempting to write off the investment cases of these highly leveraged
companies. We think the complexity of the debt financing and concerns over
unsustainable rents leaves the stocks suitable only for value investors willing to
accept potentially binary outcomes. We rate Punch Sell/Speculative Risk (3S),
downgraded from Hold (2S) due to the proximity to restrictive cash flow tests that
could leave shareholders left with no control over some of the cash flows within
certain securitised vehicles.
With highly leveraged balance sheets (c7x Debt/EBITDA, or equity at < 10% of the
EV) it may be tempting to write off the investment cases of these highly leveraged
companies. We think the complexity of the debt financing and concerns over
unsustainable rents leaves the stocks suitable only for value investors willing to
accept potentially binary outcomes. We rate Punch Sell/Speculative Risk (3S),
downgraded from Hold (2S) due to the proximity to restrictive cash flow tests that
could leave shareholders left with no control over some of the cash flows within
certain securitised vehicles.
NH:
Although we believe that Enterprise will also suffer significant weakness in trading,
we believe it has greater ability to manage its debt profile, de-lever to more
tolerable levels, and generate cash flows that can ultimately be available to equity
holders. Enterprise needs to refinance £1bn of bank debt by 2011 (15 banks are
in the ‘club’), which has caused considerable concern, but Marstons’ refinancing
of its banking facility suggests that the banks have not totally written off this
sector. Marstons agreed to reduce its banking facility from £400m to £295m at the
end of 2008, and although terms have not been disclosed, we believe that the cost
of borrowing will have been substantially increased.
we believe it has greater ability to manage its debt profile, de-lever to more
tolerable levels, and generate cash flows that can ultimately be available to equity
holders. Enterprise needs to refinance £1bn of bank debt by 2011 (15 banks are
in the ‘club’), which has caused considerable concern, but Marstons’ refinancing
of its banking facility suggests that the banks have not totally written off this
sector. Marstons agreed to reduce its banking facility from £400m to £295m at the
end of 2008, and although terms have not been disclosed, we believe that the cost
of borrowing will have been substantially increased.
PM:
That’s on Enterprise — but no matter — get the picture
NH:
Our sell call on Punch may appear inconsistent with our Buy rating on
Enterprise, but our view is different as we believe there is much greater risk of
cash being unavailable to equity holders as it will likely either be used to
refinance the convertible (due in 2010), or cash will be trapped within the
securitised debt structures. We show Punch’s proximity to covenants later in
this report.
Enterprise, but our view is different as we believe there is much greater risk of
cash being unavailable to equity holders as it will likely either be used to
refinance the convertible (due in 2010), or cash will be trapped within the
securitised debt structures. We show Punch’s proximity to covenants later in
this report.
11:56AM
PM:
Right — look at the time
PM:
If you want to do some RAW — now is the moment
NH:
not this morning
NH:
all quite on that front
PM:
However, I should say well done on Peter Hambro and Aricom
PM:
you smoked a statement out of them on Friday
PM:
and set a bunsen burner under the Aricom share price
PM:
which shot up 60%
PM:
even though we reckon this is a terrible deal for Aricom investors
NH:
well, on one level it is
NH:
Peter Hambro is raiding the company, which is run by his son, for its cash
NH:
and Aricom assets are valuable
NH:
well, they might be if the company could get financing to develop them
NH:
therefore, it stock price is where it is
NH:
I suppose a merged company might be in a better position to get access to funding
NH:
but then again
NH:
anyway here’s some broker comment I dug up
NH:
this is from Arbuthot Securities
NH:
Peter Hambro Mining (POG) announced on Friday evening that it is in preliminary talks with Aricom, which could lead to an all share offer being made for Aricom. The thinking behind this strategy would appear to be ensuring that POG has the cash required to continue with its development programs at Malomir and Pioneer. Aricom had $392m in cash at the end of June; POG had $82m in cash and $360m in debt.
This follows an injection of $19.25m of cash in November for general corporate purposes and refinancing of debt. This came in the form of Loans from two companies controlled by Mr Peter Hambro and Dr Pavel Maslovskiy, Chairman and Deputy Chairman respectively of POG.
NH:
We are reducing our target price on Peter Hambro to 500p from 700p; we are still not confident on the company delivering on production targets and we believe taking on Aricom for its cash, without continuing with Aricom’s commitments to its iron ore and titanium business, could damage the company’s standing with local
NH:
and this is from Citigroup
NH:
a note on each company
NH:
not sure why
NH:
surely it would be cheaper to do one
NH:
but there you are
NH:
Aricom first
NH:
Potential takeover — Today OREA announced that it is in preliminary takeover
discussions with POG (POG.L; £4.22; 2H) which may or may not lead to an all
share offer being made for OREA at a “substantial premium” to the current
share price (£11.25/sh at the open). Although no formal offer has been made
at this stage, given the historical relationship and crossholdings between POG
and OREA (OREA was spun out of POG in 03) we believe the deal is likely to be
successful.
discussions with POG (POG.L; £4.22; 2H) which may or may not lead to an all
share offer being made for OREA at a “substantial premium” to the current
share price (£11.25/sh at the open). Although no formal offer has been made
at this stage, given the historical relationship and crossholdings between POG
and OREA (OREA was spun out of POG in 03) we believe the deal is likely to be
successful.
NH:
Deal rationale — The key reasons for the deal, in our view, is for POG to access
OREA’s cash reserves of c$250m (c£0.14/sh) in order to address its balance
sheet concerns. If the deal proceeds it is likely that POG’s gold projects will be
favoured over OREA’s iron ore projects given the weak outlook for steel
demand. A takeover by POG may offer OREA investors greater liquidity in a
larger entity. However, there are no obvious operational reasons for the deal
from OREA’s perspective.
OREA’s cash reserves of c$250m (c£0.14/sh) in order to address its balance
sheet concerns. If the deal proceeds it is likely that POG’s gold projects will be
favoured over OREA’s iron ore projects given the weak outlook for steel
demand. A takeover by POG may offer OREA investors greater liquidity in a
larger entity. However, there are no obvious operational reasons for the deal
from OREA’s perspective.
NH:
Fair value — Our base case NPV for OREA is £0.16/sh, however this is highly
sensitive to the iron ore and capex assumptions. Moreover Our NPV is
substantially lower than the feasibility study numbers released by OREA on the
8th Oct 08, which valued K&S and Garinskoye operations at around £1.10/sh.
sensitive to the iron ore and capex assumptions. Moreover Our NPV is
substantially lower than the feasibility study numbers released by OREA on the
8th Oct 08, which valued K&S and Garinskoye operations at around £1.10/sh.
Recommendation — OREA has been trading below £0.10/sh since mid-Nov.
Given the weak outlook for iron ore demand, the significant project funding
requirements and the likely friendly nature of the deal we do not see any
current upside to the share price. As a consequence we are reducing our target
price to £0.16/sh in line with our NPV and maintain our Hold rating.
NH:
and Aricom
NH:
Potential tie-up with Aricom — Today OREA announced that it is in preliminary
takeover discussions with POG, which may or may not lead to an all share offer
being made for OREA. POG is yet to make an official statement.
takeover discussions with POG, which may or may not lead to an all share offer
being made for OREA. POG is yet to make an official statement.
NH:
Deal rationale — There are no obvious operational synergies between the two
businesses, therefore, in our view, the deal rationale is to access the cash on
Aricom’s balance sheet in order to reduce concerns over POG’s potential
refinancing requirements in 2009/10. We estimate that Aricom has in the
region of $250m net cash on the balance sheet. POG had c. $278m in net debt
at June 08 (see body of note for details).
businesses, therefore, in our view, the deal rationale is to access the cash on
Aricom’s balance sheet in order to reduce concerns over POG’s potential
refinancing requirements in 2009/10. We estimate that Aricom has in the
region of $250m net cash on the balance sheet. POG had c. $278m in net debt
at June 08 (see body of note for details).
NH:
Fair value for Aricom — Our base case NPV for Aricom (OREA.L; £0.16; 2H) is
£0.16/sh; however this is highly sensitive to the iron ore and capex
assumptions. We also note that this valuation is far below Aricom
management’s own valuation of the company of c.$2bn (£1.10/sh). We expect
no earnings contribution from Aricom over the next two years, therefore any
share deal would be dilutive to POG shareholders.
£0.16/sh; however this is highly sensitive to the iron ore and capex
assumptions. We also note that this valuation is far below Aricom
management’s own valuation of the company of c.$2bn (£1.10/sh). We expect
no earnings contribution from Aricom over the next two years, therefore any
share deal would be dilutive to POG shareholders.
NH:
Recommendation — POG’s share price has had a strong run over the past
month driven by a rising gold price. If the potential deal goes ahead, it would
allay some fears over the balance sheet and project growth, although the deal
is far from a certainty. Concerns over refinancing remain and we see limited
upside in the near term. We therefore downgrade the stock from BUY to HOLD
and maintain our target price of £5/sh.
month driven by a rising gold price. If the potential deal goes ahead, it would
allay some fears over the balance sheet and project growth, although the deal
is far from a certainty. Concerns over refinancing remain and we see limited
upside in the near term. We therefore downgrade the stock from BUY to HOLD
and maintain our target price of £5/sh.
PM:
cheers for that
12:00PM
PM:
Anything to finish up on??
NH:
well, the share price of Taylor Wipeout is motoring
NH:
up almost 30%
NH:
jumped 6p to almost 28p
NH:
and that’s on the back of our report that Wipeout has agreed terms of a restructuring deal with its senior creditors
NH:
I think
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which means
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it is just the bondholders to go
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for those of you who may have missed it
NH:
here it is
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By Anousha Sakoui and John O’Doherty
Taylor Wimpey formally agreed key terms with its banks and other senior creditors for a restructuring of its finances, allowing it to move forward with negotiations with its bondholders.
The housebuilder and its leading senior lenders have agreed informally to a deal where the senior debt maturities are extended to 2012 from dates over the next three years.
Taylor Wimpey formally agreed key terms with its banks and other senior creditors for a restructuring of its finances, allowing it to move forward with negotiations with its bondholders.
The housebuilder and its leading senior lenders have agreed informally to a deal where the senior debt maturities are extended to 2012 from dates over the next three years.
NH:
Lenders would be compensated by having the interest on the loans increased to more than 500 basis points over Libor, a near 10-fold increase on the Libor margin Taylor Wimpey used to pay.
However, there is still significant work to be done with some elements of the new arrangements. The banks have yet to secure the approval of their credit committees, according to people familiar with the process.
However, there is still significant work to be done with some elements of the new arrangements. The banks have yet to secure the approval of their credit committees, according to people familiar with the process.
NH:
Taylor Wimpey lenders agreed on Christmas Eve to defer covenant testing until March while it negotiates new financing terms.
NH:
anyway, we could here most about this tomorrow, when Wipeout issues a trading statement
NH:
the Wipeout price is also being helped by a feeling that housebuilder could be involved in some of the govt plans to help larger business
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anyway, here’s a quick scene setting note from Panmure
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Trading statement – due 13 January
Trading at Taylor Wimpey will undoubtedly be weak in the wake of the
significantly depressed market conditions. We believe that the key focus of
the statement will be on its refinancing progress and, whilst we do not expect
a new package to be announced before March, news that it is nearing
conclusion would be welcome. That said, in our view, there is a high
possibility that refinancing could be dependent on a debt-for-equity swap or
a fundraising, both of which would be significantly dilutive. We therefore
maintain our Sell recommendation.
NH:
2008E trading. Trading will undoubtedly be weak given the significantly depressed
market conditions across all of its operating regions. In the UK on a pro-forma basis, we expect units to decline by 30% and prices to fall by 10%. Given a mix of price weakness and lower overhead recovery, we forecast a 1020bp reduction in the net margin to 5.0%.
market conditions across all of its operating regions. In the UK on a pro-forma basis, we expect units to decline by 30% and prices to fall by 10%. Given a mix of price weakness and lower overhead recovery, we forecast a 1020bp reduction in the net margin to 5.0%.
NH:
In summary, we expect PBT of £39.0m and asset & goodwill write-downs of £1,852m, resulting in a reported pre-tax loss of £1,813.0m. Pre-exceptional EPS is 2.6p, whilst our NAV forecast (post write-down) is 185p.
Write-downs. Taylor Wimpey has already announced land write-downs of £690m (11% of GAV). Of that, £585m was a provision against its UK land value. It has also
announced that further provisions are likely at the end of the year, as a result of the
weakening pricing environment in the UK. Our forecasts factor in an additional £1.2bn of land write-downs over the next few years: £200m for the year to December 2008E, £500m for 2009E and £500m for 2010E. This totals 45% GAV (2007 gross assets) write-downs throughout the cycle.
NH:
Debt and financing. We expect debt of £1.6bn by the year end, implying gearing of
82%, the highest in the sector by some way. This is the key area of focus for the group, and news that refinancing was progressing well would be positive. Lenders recently agreed to suspend the covenant testing point (1 January, when we believe Taylor Wimpey would have breached covenants) whilst discussions are ongoing. We do not expect news of a confirmed package before the results in March, and we remain concerned that a refinancing package will be dependent on either a debt-for-equity swap or the need for a rights issue/equity fundraising – either of which would be significantly dilutive for current shareholders.
82%, the highest in the sector by some way. This is the key area of focus for the group, and news that refinancing was progressing well would be positive. Lenders recently agreed to suspend the covenant testing point (1 January, when we believe Taylor Wimpey would have breached covenants) whilst discussions are ongoing. We do not expect news of a confirmed package before the results in March, and we remain concerned that a refinancing package will be dependent on either a debt-for-equity swap or the need for a rights issue/equity fundraising – either of which would be significantly dilutive for current shareholders.
Recommendation and target price. The share price has performed strongly of late, on
rumours of positive progress in its refinancing talks. Given that we believe it is highly
likely that the group will have to undertake a significantly dilutive process to secure
refinancing, we continue to believe that the risk remains on the downside and we
therefore maintain our Sell recommendation.
PM:
ta for that
PM:
Good to see something has woken the commenters up below
PM:
Wall Vienetta
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One slice is never enough
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and while we are on the subject on 80′s food
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seen this sad news
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could soon be a national shortage of Findus crispy pancakes
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from the Times
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The global credit crunch has taken its toll on the humble fish finger with the financial collapse of a factory in Newcastle-upon-Tyne that made frozen products under the Findus brand.
Administrators have been called in to take charge of Newcastle Productions, which has an exclusive license to make Findus food in the UK, after the company fell into cashflow troubles.
NH:
The factory at Longbenton makes Findus the Fisherman fish pies, tuna pasta bakes and fish fingers as well as other frozen products, including Crispy Pancakes and traditional English meals, such as cottage pie and toad in the hole.
The troubles at the Findus plant, which employs 420 people, will be a further blow to jobs in the North East, which is already under the cosh after the announcement of heavy redundancies at Nissan.
NH:
The Findus plant has been shut since Tuesday, when a fire of unknown origin broke out in a Crispy Pancake unit and a large section of the factory was destroyed.
No one was injured in the blaze, which happened at night, but the factory is expected to be out of action for several weeks.
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and here is some more doom and gloom
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The Joint Administrators of Josiah Wedgwood & Sons Ltd and Royal Doulton UK Ltd (both subsidiaries of Waterford Wedgwood UK Plc) have today announced 367 redundancies, the majority of which are at the company’s site in Barlaston, UK. These employees comprise of 245 from manufacturing and operations and 106 from administration and back office functions. In addition 8 employees have been declared redundant from the Visitor Centre and shop (out of a total of 39), as well as 8 from two store concessions in Southport and Worthing (4 staff at each).
PM:
Right — thanks for all that cheery stuff
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and one more thing
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another notice out of the FSA
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concerns the timetable for rights issues
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FSA proposes to reduce rights issue subscription periods
The Financial Services Authority (FSA) is proposing to reduce the minimum subscription period for companies undertaking a rights issue to either 14 calendar days or 10 business days. Reducing the minimum subscription period from 21 calendar days will help make capital raising more efficient.
These proposals follow recommendations made in the Rights Issue Review Group (RIRG) report to the Chancellor of the Exchequer on 24 November 2008
The Financial Services Authority (FSA) is proposing to reduce the minimum subscription period for companies undertaking a rights issue to either 14 calendar days or 10 business days. Reducing the minimum subscription period from 21 calendar days will help make capital raising more efficient.
These proposals follow recommendations made in the Rights Issue Review Group (RIRG) report to the Chancellor of the Exchequer on 24 November 2008
NH:
During a rights issue subscription period, existing shareholders of the company have the right to buy new shares in proportion to their existing holdings. These rights can also be bought and sold in the market. The proposed rule change will only apply to the minimum subscription period. Issuers and their advisers can still conduct their rights issues over a longer period, if required.
Sally Dewar, managing director of wholesale and institutional markets at the FSA, said:
“Reducing the subscription period will enable companies to raise capital much more quickly from the markets, when they need it most. Taking these steps will help limit the potential for rights issues to be disrupted by market instability, which could potentially damage investors’ confidence.”
The FSA, as part of the RIRG, has extensively sought market views on these proposals. Consultation on other recommendations of the RIRG that require changes to FSA rules will take place later in the year.
Sally Dewar, managing director of wholesale and institutional markets at the FSA, said:
“Reducing the subscription period will enable companies to raise capital much more quickly from the markets, when they need it most. Taking these steps will help limit the potential for rights issues to be disrupted by market instability, which could potentially damage investors’ confidence.”
The FSA, as part of the RIRG, has extensively sought market views on these proposals. Consultation on other recommendations of the RIRG that require changes to FSA rules will take place later in the year.
PM:
Oh yes
PM:
Tuna mentions this City series on the BBC
PM:
Million dollar traders
PM:
Reality tv meets the money
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Eight ordinary people are given a million dollars, a fortnight of intensive training and two months to run their own hedge fund. Can they make a killing?
The experiment reveals the inner workings of a City trading floor. The money is supplied by hedge fund manager Lex van Dam: he wants to see if ordinary people can beat the professionals, and he expects a return on his investment too. Yet no-one foresees the financial crisis that lies ahead.
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The traders were selected in spring 2008, before the US credit crisis gathered pace. The successful candidates were chosen, trained and dispatched to their specially created trading room in the heart of the Square Mile. Among them are an environmentalist, a soldier, a boxing promoter, an entrepreneur, a retired IT consultant, a vet, a student and a shopkeeper.
As the novices learn the dark art of trading stocks and shares, the financial markets start to buckle. Making money takes second place to basic survival as the brutal realities of global economics take their toll on the traders. How do they cope? Will they secure themselves a bonus, or walk away with nothing?
NH:
Lex van Dam
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surely that’s been made up
PM:
Ex Goldman, apparently
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actually I know some people in this programme
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not the traders
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but the market makers in the background
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Of course, this is all part of Beeb’s City Season
12:12PM
PM:
Hey — are we done?
NH:
think so
PM:
am hungry
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just got a Draaisma, but we might put that up later
PM:
Fair enough
PM:
Okay — thanks for joining us today
PM:
We will be back at 11am tomorrow
PM:
Reggie — paul.murphy@ft.com
NH:
cya