Markets live chat transcript for the chat ending at 12:15 on 17 Feb 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Okay
PM:
It’s 11.03
PM:
It’s Markets Live
PM:
FT Alphaville daily markets chat
PM:
Neil is back from his extended weekend break
PM:
Nice time?
NH:
Half term stuff
PM:
Jolly good. Bryce was very helpful in your absence.
NH:
Good
NH:
sorry a few tech probs
NH:
which are solved now
PM:
Sort of — i can see all the comments that Neil can see
PM:
Anyway
PM:
Now, given the statement out from Legal & General this morning a lot of people will be expecting us to go straight into the matter.
NH:
They will
PM:
But I’m rather worried that we’re being seen as L&G obsessed – beating up on the insurer as well.
PM:
And if we go straight in today that will confirm as much.
NH:
It will.
PM:
So what should we do?
NH:
Well, let’s go straight in on L&G, of course
PM:
Off we go!
PM:
PM:
Here’s some good up todate back ground – Spratley’s column from the Guardian.
PM:
L&G’s vow of silence
Legal & General is an uncommunicative company at the best of times – but now would be a good moment to open up. The market is in a panic about rights issues, dividend cuts and credit losses.
As L&G’s shares plunged a further 10% yesterday, the historic yield hit 13%, which is the market saying it doesn’t believe the dividend payout will be maintained. The shares now trade below levels seen in the dark days of 2002 and 2003, when the FSA had to change the rules to pull the life insurance sector out of a spiral of decline caused by forced selling of equities.
The FSA is also at the centre of the current drama. It has asked the life companies to stress-test their businesses to see how they would cope with a further plunge by stock markets and a further deterioration in the market for corporate bonds. In fact, plunge is an understatement. The FSA’s most extreme test imagines a fall in the FTSE 100 index to a level of 2000, from 4135 today. If that happens, we really are in depression.
The FSA is playing a dangerous game here. Life insurers are not banks. They tend to hold assets such as corporate bonds to maturity. If they were ordered to organise their affairs to prepare for a 60% fall in stock markets, we’d have chaos. There would be a rush out of equities and corporate bonds into 30-year gilts, where the size of the market is not big enough to cope with a stampede.
It is unlikely (despite appearances) that the FSA will be that dumb. But something is clearly afoot and the market senses that L&G will be the big loser. The company is perceived as having under-provided for defaults in its corporate bond portfolio. If the FSA intends to harden the rules, investors worry that L&G will have to turn to shareholders.
L&G, sensing the market’s glare, yesterday said that “there are no conversations (with the FSA) beyond the usual year-end process.” That’s fine as far as it goes, but it’s not the same as a formal management statement on regulatory capital. Aviva and Prudential spoke last month but L&G chose not to. The current timetable imagines L&G staying silent until 25 March. We’ll see. If the shares don’t bounce soon, the company will have to swallow its pride and publish before then.
Mind you, the FSA could do everybody a favour by saying what the stress-testing exercise is meant to achieve. At the moment, it is succeeding only in spreading fear.
Legal & General is an uncommunicative company at the best of times – but now would be a good moment to open up. The market is in a panic about rights issues, dividend cuts and credit losses.
As L&G’s shares plunged a further 10% yesterday, the historic yield hit 13%, which is the market saying it doesn’t believe the dividend payout will be maintained. The shares now trade below levels seen in the dark days of 2002 and 2003, when the FSA had to change the rules to pull the life insurance sector out of a spiral of decline caused by forced selling of equities.
The FSA is also at the centre of the current drama. It has asked the life companies to stress-test their businesses to see how they would cope with a further plunge by stock markets and a further deterioration in the market for corporate bonds. In fact, plunge is an understatement. The FSA’s most extreme test imagines a fall in the FTSE 100 index to a level of 2000, from 4135 today. If that happens, we really are in depression.
The FSA is playing a dangerous game here. Life insurers are not banks. They tend to hold assets such as corporate bonds to maturity. If they were ordered to organise their affairs to prepare for a 60% fall in stock markets, we’d have chaos. There would be a rush out of equities and corporate bonds into 30-year gilts, where the size of the market is not big enough to cope with a stampede.
It is unlikely (despite appearances) that the FSA will be that dumb. But something is clearly afoot and the market senses that L&G will be the big loser. The company is perceived as having under-provided for defaults in its corporate bond portfolio. If the FSA intends to harden the rules, investors worry that L&G will have to turn to shareholders.
L&G, sensing the market’s glare, yesterday said that “there are no conversations (with the FSA) beyond the usual year-end process.” That’s fine as far as it goes, but it’s not the same as a formal management statement on regulatory capital. Aviva and Prudential spoke last month but L&G chose not to. The current timetable imagines L&G staying silent until 25 March. We’ll see. If the shares don’t bounce soon, the company will have to swallow its pride and publish before then.
Mind you, the FSA could do everybody a favour by saying what the stress-testing exercise is meant to achieve. At the moment, it is succeeding only in spreading fear.
PM:
And here’s L&G following Nils’ advice – statement this morning
PM:
Legal & General Group Plc: IGD Capital surplus as at 31 Dec 2008 is in excess of £1.6bn, even after more than doubling credit default reserves to £1.2bn.
In the light of market speculation about the strength of Legal & General’s capital and cash positions, the Company is now issuing clarification on capital strength and reserving.
Capital Strength
As at December 31st 2008, we estimate our IGD* capital surplus was in excess of £1.6bn.
This reflects falls in equity markets to 31st December 2008, the credit default reserving detailed below, and our current view of other year-end adjustments (an assessment of which is ongoing), but is before accrual of the final dividend.
Credit Default Reserving
In 2008 Legal & General’s default experience was broadly in line with long term assumptions. However, in the light of the current economic environment, the Company believes it is appropriate to reserve on a more prudent basis. As part of its year-end process, Legal & General has therefore decided it is appropriate to take additional reserves against the anticipated risk of a short term rise in credit defaults.
The planned additional reserves, which are before tax, follow a thorough sector-by-sector review of our portfolio, and default experiences from the 1930s and subsequent recessions. On the basis of this analysis, we have decided to increase credit default assumptions for the next four years from our long term assumption of 30bps per annum for corporate bonds to approximately 130bps per annum, again before tax. This is equivalent to a further £650m (before tax) in credit default reserves, taking total reserves for defaults in our annuity portfolio to £1.2bn.
In our judgement these increased reserves are both prudent and appropriate to cover all reasonably foreseeable circumstances. We have worked closely with the Financial Services Authority and have kept them fully informed of our approach.
* EU Insurance Groups Directive. Unaudited, management estimate
PM:
So what do we make of that.??
NH:
Well it’s a strong statement – and the accompanying analyst call was similarly re-assuring.
NH:
Specifically, analysts came away with the distinct impression that the dividend is safe – putting the stock on pretty chunky yield – north of 10% I think.
PM:
So the share price has gone thru the roof, yeah?
NH:
Well not quite.
PM:
What do you mean??!? I thought this stock was being manipulated lower by Mayfair’s finest and other baddies.
PM:
Surely the bears have had their proverbials cooked.
NH:
Well the stock is up – just
NH:
up just 0.6p at 44.9p
NH:
some people are calling this a profits warning
PM:
NH:
but we should quickly say that that looks good against the overall market – which pretty sick.
NH:
But it is the way the price has moved – moved back above 50p a the opening, but then ran in to fresh selling.
PM:
Hang on – the bears were saying L&G had to reset its expectations on defaults on corporate bonds.
NH:
correct
PM:
And people said it might have to move these assumptions from 30bps to 130bp
NH:
Correct.
PM:
And so its done that and the balance sheet is fine – and the FSA has been kept in the loop, et etc.
NH:
Yes yes – this is all correct – but there’s still something niggling here.
NH:
as Sam’s post noted earlier this morning
NH:
and the point here is that L&G’s IGD surplus has fallen from £2.9bn to £1.6bn
NH:
and not all of it can be accounted for by the decline in equity markets and the CB provisioning
PM:
Hmmmmmmmmm
NH:
there is £500m unaccounted for
PM:
Well what are the analysts saying.
NH:
I’ve just got the early takes. But will chuck em up.
NH:
Oriel
NH:
Having watched its share price nearly halve in 2009, L&G has finally issued clarification of its reserving position.
• L&G has increased its provision for defaults from 30bps in perpetuity, to 130bps for the next 4 years followed by 30bps thereafter.
• This extra 4% on £18bn of reserves equates to a £650m pre tax hit and takes total reserves for defaults to £1.2bn. This would in our opinion be adequate.
• The result of this is that the year end IGD surplus is now in excess of £1.6bn, previous guidance was £2.6bn, pre dividend cost of roughly £260m so implicit in this announcement is that they plan to pay the final dividend.
• The share price moves of the last few days look excessive and could relate to a short squeeze. Expect this to unwind rapidly as shorts get taken off.
• This is also a poor showing by IR. They were aware of these criticisms in November and could have done something about this sooner.
• L&G has increased its provision for defaults from 30bps in perpetuity, to 130bps for the next 4 years followed by 30bps thereafter.
• This extra 4% on £18bn of reserves equates to a £650m pre tax hit and takes total reserves for defaults to £1.2bn. This would in our opinion be adequate.
• The result of this is that the year end IGD surplus is now in excess of £1.6bn, previous guidance was £2.6bn, pre dividend cost of roughly £260m so implicit in this announcement is that they plan to pay the final dividend.
• The share price moves of the last few days look excessive and could relate to a short squeeze. Expect this to unwind rapidly as shorts get taken off.
• This is also a poor showing by IR. They were aware of these criticisms in November and could have done something about this sooner.
NH:
and here’s Cazenove
NH:
L&G – statement reassuring on capital, DPS policy unchanged [LGEN.L, LGEN LN, 44p] OUTEPRFORM, sector – neutral
After yesterday’s volatility, L&G has brought forward the announcement of its capital position.
The group has decided to more than quadruple its default allowance for corporate bonds from 30b.p. per annum to 130b.p., resulting in a higher than expected £650m charge, albeit some in the market were looking for larger amounts. This figure appears to have been agreed with the FSA..
Even after this, the EUIGD surplus was £1.6bn at December, considerably more than The Pru’s September figure of £1.2bn. However, the last disclosed figure for L&G was £2.9bn. Given c10% equity falls in Q4, and the £650m pretax default reserve additionm, we would have expected a December figure of c£2.1bn given the Q3 IMS sensitivities (30% equity falls = £900m lower surplus), and the £500m of further capital erosion will be a theme on the conference call.
The solvency figure is stated before dividend accrual, and although the statement is silent on dividend policy, the company is briefing that the policy is unchanged. The cost of a 4.26p final dividend is £253m, which is comfortably affordable in the context of the £1.6bn surplus.
L&G clearly does not need to raise capital at this point, and we continue to believe that the executive management of the company intend the dividend will be paid. This should at least partly allay the fears expressed by the current share price, although we would welcome further clarity on the dividend on the conference call, which commences at 7.30. (dial 01452 565 124, ID 8632 6230).
After yesterday’s volatility, L&G has brought forward the announcement of its capital position.
The group has decided to more than quadruple its default allowance for corporate bonds from 30b.p. per annum to 130b.p., resulting in a higher than expected £650m charge, albeit some in the market were looking for larger amounts. This figure appears to have been agreed with the FSA..
Even after this, the EUIGD surplus was £1.6bn at December, considerably more than The Pru’s September figure of £1.2bn. However, the last disclosed figure for L&G was £2.9bn. Given c10% equity falls in Q4, and the £650m pretax default reserve additionm, we would have expected a December figure of c£2.1bn given the Q3 IMS sensitivities (30% equity falls = £900m lower surplus), and the £500m of further capital erosion will be a theme on the conference call.
The solvency figure is stated before dividend accrual, and although the statement is silent on dividend policy, the company is briefing that the policy is unchanged. The cost of a 4.26p final dividend is £253m, which is comfortably affordable in the context of the £1.6bn surplus.
L&G clearly does not need to raise capital at this point, and we continue to believe that the executive management of the company intend the dividend will be paid. This should at least partly allay the fears expressed by the current share price, although we would welcome further clarity on the dividend on the conference call, which commences at 7.30. (dial 01452 565 124, ID 8632 6230).
NH:
and here is Panmure
NH:
Legal & General
Better late than never?
L&G have responded to the pressure on its share price over the last week or
so but announcing its 2008 year end IGD surplus, and increasing the level of
prudence in its credit default reserving. The move brings it in line with others
in the sector, and the cost of achieving it at £650m pre-tax is less than had
been feared. The move should be taken well in that it has not necessitated a
capital raise, but we are less certain on the outlook for the final dividend,
which we view as highly vulnerable.
Better late than never?
L&G have responded to the pressure on its share price over the last week or
so but announcing its 2008 year end IGD surplus, and increasing the level of
prudence in its credit default reserving. The move brings it in line with others
in the sector, and the cost of achieving it at £650m pre-tax is less than had
been feared. The move should be taken well in that it has not necessitated a
capital raise, but we are less certain on the outlook for the final dividend,
which we view as highly vulnerable.
NH:
In response to its falling share price and uncertainty created by its less than prudent
reserving position (compared to others in the sector), L&G has responded by finally
advising the market of its IGD surplus at 31 December 2008. The figure was
conspicuous by its absence in the Q4 life new business figures, compared with others in
the sector, which all gave an updated figure. The IGD surplus at 31 December is “in
excess of £1.6bn” pre-accrual of the final dividend, but after a £650m (pre-tax)
additional credit default reserving.
reserving position (compared to others in the sector), L&G has responded by finally
advising the market of its IGD surplus at 31 December 2008. The figure was
conspicuous by its absence in the Q4 life new business figures, compared with others in
the sector, which all gave an updated figure. The IGD surplus at 31 December is “in
excess of £1.6bn” pre-accrual of the final dividend, but after a £650m (pre-tax)
additional credit default reserving.
NH:
Credit default reserves have consequently more than doubled to £1.2bn with the
additional reserving. The short-term risk of a rise in credit defaults has led L&G to
increase its default assumptions for the next four years, from its previous long term
assumption of 30bp to approx 130bp per annum. This brings L&G into line with others
in the sector, that range from Prudential 80bp (our 2008 year end estimate) to 225bp at
Friends Provident.
additional reserving. The short-term risk of a rise in credit defaults has led L&G to
increase its default assumptions for the next four years, from its previous long term
assumption of 30bp to approx 130bp per annum. This brings L&G into line with others
in the sector, that range from Prudential 80bp (our 2008 year end estimate) to 225bp at
Friends Provident.
NH:
The £650m pre-tax impact will go through the IFRS P&L, and we understand that
around half (£325m) will impact the 2008 EV P&L. We will need to adjust our 2008
IFRS and EV earnings accordingly. We estimate that the impact to L&G’s Embedded
Value will be to reduce it by approx 4.0p/share. The 2008E dividend will not be covered
based on our forecasts, and we believe that the final dividend is in danger of being cut or
even passed.
around half (£325m) will impact the 2008 EV P&L. We will need to adjust our 2008
IFRS and EV earnings accordingly. We estimate that the impact to L&G’s Embedded
Value will be to reduce it by approx 4.0p/share. The 2008E dividend will not be covered
based on our forecasts, and we believe that the final dividend is in danger of being cut or
even passed.
NH:
Whilst valuations in the life sector have been driven by general fear and uncertainty on
the outlook for assets, additionally L&G’s valuation has been hammered by the lack of
clarity over its IGD surplus and fears of a deeply discounted rights issue and/or cuts to
its dividend, as a result of coming into line with its credit default reserving. Today’s
announcement has removed the uncertainty and we do not anticipate a capital raising
unless the FSA forces the issue with the sector. In theory, the shares should bounce in
the short term given some of the huge (£2.5bn+) estimates that some thought would be
needed to take a more cautious approach to reserving. That said, we also believe that
L&G’s final dividend is under threat given that it is not covered by IFRS profits. We
consequently maintain our Hold recommendation and 65p target price. We will review
our EPS forecasts later today to take account of the changes
the outlook for assets, additionally L&G’s valuation has been hammered by the lack of
clarity over its IGD surplus and fears of a deeply discounted rights issue and/or cuts to
its dividend, as a result of coming into line with its credit default reserving. Today’s
announcement has removed the uncertainty and we do not anticipate a capital raising
unless the FSA forces the issue with the sector. In theory, the shares should bounce in
the short term given some of the huge (£2.5bn+) estimates that some thought would be
needed to take a more cautious approach to reserving. That said, we also believe that
L&G’s final dividend is under threat given that it is not covered by IFRS profits. We
consequently maintain our Hold recommendation and 65p target price. We will review
our EPS forecasts later today to take account of the changes
NH:
Oh and this is from Merrill
PM:
Ive got that
PM:
L&G has reacted to worries over its credit reserving policy by announcing it will
increase its short term provision to 130bp for the next four years and then revert
to its long term 30bp p.a loss assumption. This should cost the company £650m.
This leaves the company with an IGD surplus at the end of the year in excess of
£1.6bn.
This is all broadly in line with our expectations – we had stress tested a move to a
uniform 100bp p.a loss assumption, which arrived at a £750m estimate. Our
estimate of the IGD surplus net of our credit reserve assumption was ballpark
£1.6bn. Overall, we think this is a sensible move, which will likely reassure the
market – the bears had been suggesting a figure of £2bn increase in reserves.
increase its short term provision to 130bp for the next four years and then revert
to its long term 30bp p.a loss assumption. This should cost the company £650m.
This leaves the company with an IGD surplus at the end of the year in excess of
£1.6bn.
This is all broadly in line with our expectations – we had stress tested a move to a
uniform 100bp p.a loss assumption, which arrived at a £750m estimate. Our
estimate of the IGD surplus net of our credit reserve assumption was ballpark
£1.6bn. Overall, we think this is a sensible move, which will likely reassure the
market – the bears had been suggesting a figure of £2bn increase in reserves.
PM:
But look — all thsoe are pretty positive
PM:
so why’s L&G suddenly looking like a dead cat????
NH:
Well this might help explain.
Well this might help explain.
NH:
Odey Asset Management
Short selling disclosure
RNS Number : 4261N
Odey Asset Management LLP
17 February 2009
Form TR-4. FSA Version 2.0 September 2008
Disclosure of Short Position relating to UK Financial Sector Company
Full name of person(s) holding the disclosable short position:
Odey Asset Management LLP
2: Name of the issuer of the relevant securities
Legal & General Group plc
3: Disclosable short position -0.35%
4. Date that disclosable short position was held -13 February 2009
PM:
PM:
Oh
PM:
Right
PM:
Crispin Odey is a shrewdie, no?
NH:
he is
NH:
although, he is dipping a toe back into the banking sector
NH:
but yes
NH:
he has made some good calls
NH:
and Lansdowne, which has made even better calls on the banks, is also short of L&G
PM:
right
PM:
Got any research out of Deutsche or JPM
NH:
Not as yet.
PM:
I’d like to see what they have to say before we form a firmer judgement on all this.
PM:
With all due respect to the analysts above, it is Deutsche and JPM who have been taking the most aggressive line on L&G
PM:
And there’s one more thing.
PM:
The various market snouts that forced us to look at this are STILL suggesting that something more is going to emerge.
NH:
Snouts?
PM:
Bandits.
PM:
Just thought I’d try out the word.
NH:
You been watching The Sweeney or something.
PM:
I have actually!
PM:
Just thought it was a nice word. “My insurance snout reckons there could be a “structured finance” angle to this story.
NH:
Case remains open. Investigations into L&G are on going.
NH:
and L&G has quite a portfolio of this stuff as Friday’s – Sell, Insurers post noted
PM:
Let’s more on.
11:19AM
NH:
just got a bit of RAW pizza for you
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
PM:
PM:
Feed me
NH:
Dominos Pizza
NH:
Rumour of placing in dominos by numis…directors selling
PM:
Hmm — had results out this morning
PM:
Quite good figs we think — at a glance
NH:
staying in is the new going out
PM:
Obviously those would give directors the opportunity to raise some cash
NH:
sales totalled £350m in the year
Domino’s Pizza UK and IRL (DOM:LSE): Last: 219.75, down 6.25 (-2.77%), High: 237.75, Low: 214.75, Volume: 507.95k
PM:
okay
NH:
time to move on to the wider market
11:22AM
11:23AM
PM:
Before we look at the Footsie – lots of comments below about gold
NH:
which looks pretty strong this morning
PM:
Spot price trading around 963
PM:
All of a sudden that 1000 dollar level does not look so outlandish
NH:
indeed not
PM:
Driven higher by the russians saying they are buying more gold — adn the general East European situation
PM:
Think Izzy is doing more on that today
NH:
actually the equity market is looking none too healthy
NH:
London is on course for six straight sessions of losses
PM:
really
PM:
Old rule about six or more losses in a row…
NH:
rule? more like a myth.
NH:
it never works
PM:
PM:
Rule used to be taht 6 days of losses meant 300 points within the next 3 months — in the days when 300 ponits was a lot
PM:
Rule worked every time for readers — until I placed 500 quid on it
PM:
Circa 95
PM:
And promptly lost the lot
PM:
NH:
anyway, the rot in London started after the Geithner speech
NH:
and we have not risen since
PM:
so how far have we fallen
NH:
a couple of hundred points
NH:
plus this morning’s damage
PM:
which is??
NH:
down 72 points at 4,062
PM:
oh dear
NH:
and the market is really spooked by the fact that the S&P futures hve been flirting with the 800 level
PM:
That’s come off even more in the last few mins
NH:
in fact there are only half a dozen or so risers at the moment
NH:
including the very unconvincing dead cat bounce from L&G
NH:
Property stocks being hit hardest this morning
NH:
in particular Land Securities
NH:
biggest faller in the FTSE 100
Land Securities Group (LAND:LSE): Last: 565.00, down 56.5 (-9.09%), High: 620.50, Low: 558.00, Volume: 2.21m
NH:
market not happy with management indecision
NH:
with everyone else in the property world raising capital
NH:
traders thought Land might have had it ducks in a row
NH:
but no
NH:
it is still dithering
NH:
and there has to be a risk
NH:
if they wait much longer all the cash will be gone
NH:
that said
NH:
the rest of the sector is flat
Hammerson (HMSO:LSE): Last: 355.25, down 32 (-8.26%), High: 381.25, Low: 352.75, Volume: 1.07m
SEGRO (SGRO:LSE): Last: 122.00, down 12.75 (-9.46%), High: 134.25, Low: 119.25, Volume: 1.43m
Great Portland Estates (GPOR:LSE): Last: 209.25, down 20 (-8.72%), High: 229.50, Low: 209.25, Volume: 445.14k
Brixton (BXTN:LSE): Last: 59.25, down 7.75 (-11.57%), High: 66.00, Low: 59.00, Volume: 638.21k
PM:
okay — ta
11:32AM
PM:
I miss banks
NH:
me too
NH:
I love em
PM:
So do I
NH:
give me more banks
PM:
How about Lloyds — how thaey doing today??
NH:
excellent question
PM:
NH:
down 3p at 53.4p
NH:
lots more negative comment this morning on Friday’s profits warning
NH:
perhaps the most damning is the one from Citigroup
NH:
which I think was around yesterday
NH:
was it mentioned on ML?
PM:
er, might have been — but run it anyway
NH:
well, remember
NH:
they are house broker
NH:
and a couple of weeks back they upgraded to “buy”
NH:
they said LBG would only need a further £3bn to get through the downturn
NH:
and full nationalisation would be avoided
NH:
well, Citi analyst Tom Rayner has had a rethink in the wake of Friday’s statement
PM:
I did this as a separate post yesterday — but that’s fine — run with
NH:
which they say has changed everything
NH:
they now thinks Lloyds will require £11bn to get through
NH:
which means nationalisation is a real possibility
NH:
of course
NH:
that is by no means certain
NH:
because there are a number of things the government can do to help Lloyds
NH:
such as the asset protection scheme
NH:
but until that emerges, Rayner has removed his “buy” rating on Lloyds
NH:
and it is back at “hold”
NH:
Profit warning raises capital concerns — In previous research (Darkest Before
the Dawn – 27 January 2009) we estimated that Lloyds Banking Group (LBG)
could get through the economic downturn by raising as little as £3bn in equity
at 60p per share. Post the trading statement (13 February 2009) we have
revised this estimate to £11.2bn, which at 50p would dilute stressed tNAV per
share to 67p and potentially increase government ownership to 76%.
the Dawn – 27 January 2009) we estimated that Lloyds Banking Group (LBG)
could get through the economic downturn by raising as little as £3bn in equity
at 60p per share. Post the trading statement (13 February 2009) we have
revised this estimate to £11.2bn, which at 50p would dilute stressed tNAV per
share to 67p and potentially increase government ownership to 76%.
NH:
Rising corporate loan impairments at HBOS the key driver — LBG has preannouncedv its 2008 underlying pre-tax profit will be c£2.6bn for Lloyds TSB,
c£200m ahead of our forecast, but a loss of £8.5bn for HBOS, c£6bn worse.
This primarily reflects structured credit writedowns c£2bn higher than
expected and corporate loan impairments some £3bn higher. We believe this is
likely to reflect deteriorating credit quality rather than earlier recognition.
c£200m ahead of our forecast, but a loss of £8.5bn for HBOS, c£6bn worse.
This primarily reflects structured credit writedowns c£2bn higher than
expected and corporate loan impairments some £3bn higher. We believe this is
likely to reflect deteriorating credit quality rather than earlier recognition.
We expect underlying pre-tax losses of £14bn 2008-2010E — We assume
corporate credit quality continues to deteriorate in 2009, although at a slower
pace than in the latter part of 2008. We also update our margin estimates to
reflect lower interest rate expectations. The combined effect is to increase
cumulative underlying pre-tax losses 2008-2010E from £1.5bn to £14.0bn.
Downgrade to Hold (2H); TP 65p (from 120p) — Although the government’s
Asset Protection Scheme could provide relief, the scale of potential capital
issuance means the balance of risk has adversely shifted. We are cutting our
recommendation from Buy/High Risk (1H) to Hold/High Risk (2H) with a new
target price of 65p (from 120p), representing 1.0x diluted stressed tNAV per
NH:
also
NH:
Deutsche Bank have pubbed a note on Lloyds as well
NH:
they have lowered their target price to 55p
NH:
which has now been breached
NH:
Profit warning
Lloyds Banking Group (LBG) today published a trading update for the year
ended 31 Dec 2008 advising that Lloyds TSB was on course for a pre-tax
profit of £2.4bn for the year with the HBOS businesses expected to generate
a loss of £10bn. Pro-forma, therefore, the combined group would have
lost £7.6bn in the year just gone.
Lloyds Banking Group (LBG) today published a trading update for the year
ended 31 Dec 2008 advising that Lloyds TSB was on course for a pre-tax
profit of £2.4bn for the year with the HBOS businesses expected to generate
a loss of £10bn. Pro-forma, therefore, the combined group would have
lost £7.6bn in the year just gone.
NH:
Corporate loan losses are the ongoing concern
We believe that risk asset losses will fall for the UK banks in 2009 due to
provisions passed, assets sold and positioned reclassified to more capitalfriendly
accounting categories. However, we expect corporate loan losses
generally to worsen as the recession deepens and ages. Lloyds Banking
Group advises that HBOS’ corporate division loan losses for 2008 are expected
to reach £7bn or 599bps of average loans. The run rate of loan losses
in this division in 2008 were: 1H08 83bps, 3Q08 428bps, Oct-Nov 08
810bps, Dec 3798bps. We do not believe the December run rate of loan
losses will continue – some of the December charge is a re-provisioning of
loans to match LBG standards – but the bank concedes that loan losses for
2008 in this division will report around £1.6bn higher than LBG management
had expected in early November 2008.
We believe that risk asset losses will fall for the UK banks in 2009 due to
provisions passed, assets sold and positioned reclassified to more capitalfriendly
accounting categories. However, we expect corporate loan losses
generally to worsen as the recession deepens and ages. Lloyds Banking
Group advises that HBOS’ corporate division loan losses for 2008 are expected
to reach £7bn or 599bps of average loans. The run rate of loan losses
in this division in 2008 were: 1H08 83bps, 3Q08 428bps, Oct-Nov 08
810bps, Dec 3798bps. We do not believe the December run rate of loan
losses will continue – some of the December charge is a re-provisioning of
loans to match LBG standards – but the bank concedes that loan losses for
2008 in this division will report around £1.6bn higher than LBG management
had expected in early November 2008.
NH:
Too little capital?
LBG expects to end 2008 with pro-forma core tier 1 capital ratios of 6.0% -
6.5% and total tier 1 above 9%. Though we expect government asset
guarantees – to be finalised in late February 2009, we believe – will help
rather than harm shareholders, we believe LBG possesses too little core
capital confidently to address shareholder concerns in 2009, given the recent
performance of the acquired loan portfolio. Sell, target price 55p
LBG expects to end 2008 with pro-forma core tier 1 capital ratios of 6.0% -
6.5% and total tier 1 above 9%. Though we expect government asset
guarantees – to be finalised in late February 2009, we believe – will help
rather than harm shareholders, we believe LBG possesses too little core
capital confidently to address shareholder concerns in 2009, given the recent
performance of the acquired loan portfolio. Sell, target price 55p
NH:
crikey – FTSE 100 tanking
NH:
off 95 points now
PM:
Difficult to know waht is pushing this lower
NH:
only 40 more points and we are back below 4,000
PM:
Property being smashed further
PM:
And there is standard chartered as mentioned below
Standard Chartered (STAN:LSE): Last: 724.50, down 55 (-7.06%), High: 779.00, Low: 717.50, Volume: 5.01m
NH:
yeah, this looks to be related to emerging markets fears
NH:
I think
NH:
because there was a bullish note around on Stan earlier
NH:
from CLSA
NH:
who were also very bearish on HSBC
NH:
(Aberdeen will be EM exposure too)
PM:
That HSBC note — very interesting — given the lastest pop from MOST yesterday
PM:
That’s in the Long room for those who want to read it
NH:
yeah but what’s also interesting is the note out of CLSA
NH:
who reckon HSBC
NH:
needs to raise $15bn in a cash call
NH:
and cut its dividend
NH:
because of rising loan impairments
NH:
an interesting note
NH:
which you can also find in the LR
NH:
but here’s the executive summary
NH:
We are lowering our price target on HSBC to one more in line with US and
UK banks, where it has 62% of its loans. We adjust our US$9bn capital
raising to US$15bn and assume dividends are cut. Operationally UK banks
are showing tremendous NPL growth and this will be new for HSBC when
it reports on 2 March. Our key earnings adjustment is for full Household
goodwill write down, but also higher provisions in 10CL, 11CL. This has a
major impact on profit but also on book value per share. Our new price
target is at 0.7x tangible book value, which puts shares on HK$41.
US and UK banking
HSBC has US$380bn of loans in the UK and US$286bn in the US, accounting
for 62% of total loans. Banks in those countries are trading at 0.2-0.5x price
to tangible book. This is partly due to goodwill, but also due to the disbelief of
asset valuations and therefore, book value. HSBC is trading on 1.0x price to
tangible book. Doing a simple weighted adjustment based on its asset
exposure, we arrive at a 0.7x price to tangible book.
UK banks, where it has 62% of its loans. We adjust our US$9bn capital
raising to US$15bn and assume dividends are cut. Operationally UK banks
are showing tremendous NPL growth and this will be new for HSBC when
it reports on 2 March. Our key earnings adjustment is for full Household
goodwill write down, but also higher provisions in 10CL, 11CL. This has a
major impact on profit but also on book value per share. Our new price
target is at 0.7x tangible book value, which puts shares on HK$41.
US and UK banking
HSBC has US$380bn of loans in the UK and US$286bn in the US, accounting
for 62% of total loans. Banks in those countries are trading at 0.2-0.5x price
to tangible book. This is partly due to goodwill, but also due to the disbelief of
asset valuations and therefore, book value. HSBC is trading on 1.0x price to
tangible book. Doing a simple weighted adjustment based on its asset
exposure, we arrive at a 0.7x price to tangible book.
NH:
Capital raising
As we have indicated in the past, banks in Asia have raised capital at 13% of
pre-existing shareholders’ funds, which implies US$15bn for HSBC. A 1 for 4
share offering at a 35% discount would achieve this, thereby issuing 2.9bn
new shares. The adjusted share price would be HK$56.8 from HK$61.0 today,
holding all else equal. But unlike deals done by Stanchart or DBS, we do not
believe this would well received, as funds would go for provisioning.
UK operations
NAB reported its past due and impaired loans in the UK from 99bps of loans
to 164bps of loans from Sept 2008 to Dec 2008. This 70% increase over a
single quarter is worrisome but very much in line with HBOS results. During
its Nov 2008 trading update, HBOS indicated its 1H08 LLP/loans of 0.80%
rose to 209bps by Sept 2008 and yet further to 271bps by Nov 2008. HSBC
Bank Plc (UK) has reported flat LLP for years at 45bps.
As we have indicated in the past, banks in Asia have raised capital at 13% of
pre-existing shareholders’ funds, which implies US$15bn for HSBC. A 1 for 4
share offering at a 35% discount would achieve this, thereby issuing 2.9bn
new shares. The adjusted share price would be HK$56.8 from HK$61.0 today,
holding all else equal. But unlike deals done by Stanchart or DBS, we do not
believe this would well received, as funds would go for provisioning.
UK operations
NAB reported its past due and impaired loans in the UK from 99bps of loans
to 164bps of loans from Sept 2008 to Dec 2008. This 70% increase over a
single quarter is worrisome but very much in line with HBOS results. During
its Nov 2008 trading update, HBOS indicated its 1H08 LLP/loans of 0.80%
rose to 209bps by Sept 2008 and yet further to 271bps by Nov 2008. HSBC
Bank Plc (UK) has reported flat LLP for years at 45bps.
NH:
Valuations and goodwill
Indications from the bank’s last trading update were for a write-down on
Household goodwill, which we believe should have been done a year ago. We
now incorporate this at US$5bn this year and US$5bn next year, effectively
writing off the full amount. This causes stated PB to rise 17%, but is still
inflated with $30bn in other goodwill and undercapitalised.
Indications from the bank’s last trading update were for a write-down on
Household goodwill, which we believe should have been done a year ago. We
now incorporate this at US$5bn this year and US$5bn next year, effectively
writing off the full amount. This causes stated PB to rise 17%, but is still
inflated with $30bn in other goodwill and undercapitalised.
NH:
and here’s the CLSA take on Standard Chartered
NH:
Rising profitability, a newly capitalised balance sheet and secure dividends
put Standard Chartered in an enviable position. With gearing in corporate
Asia at just 20%, nonperforming-loan formation will be lower than in the
previous cycle. The bank’s focus on countries that will only feel the
secondary impact of the global slowdown; deeper client penetration;
enhanced product capabilities; and an upturn in Korean revenue will
protect earnings in 2009-10. The stock is cheap at less than 1x PB. BUY.
put Standard Chartered in an enviable position. With gearing in corporate
Asia at just 20%, nonperforming-loan formation will be lower than in the
previous cycle. The bank’s focus on countries that will only feel the
secondary impact of the global slowdown; deeper client penetration;
enhanced product capabilities; and an upturn in Korean revenue will
protect earnings in 2009-10. The stock is cheap at less than 1x PB. BUY.
NH:
Not all risk is equal
Standard Chartered (StanChart) faces limited concentration risk: Korea, Hong
Kong, Singapore, other Asia and India account for 60% of its asset base. In
these countries, we have seen little in the way of consumer leverage as in the
US, UK or Australia. At the same time, corporate gearing has fallen a long
way. This suggests that nonperforming-loan (NPL) formation will not be as
high as in recent downturns nor as high as in the US, UK or Australia.
Buying capabilities
The key to StanChart’s elevated profit growth over the past several years has
been its acquisition of companies and capabilities. This strategy has allowed
the bank to sell more products to its existing client base and to expand its
customer reach. The ability to do more with existing clients paves the way for
solid expansion and this benefit is accentuated now, as global peers are
distracted due to liquidity, capital or credit problems.
Standard Chartered (StanChart) faces limited concentration risk: Korea, Hong
Kong, Singapore, other Asia and India account for 60% of its asset base. In
these countries, we have seen little in the way of consumer leverage as in the
US, UK or Australia. At the same time, corporate gearing has fallen a long
way. This suggests that nonperforming-loan (NPL) formation will not be as
high as in recent downturns nor as high as in the US, UK or Australia.
Buying capabilities
The key to StanChart’s elevated profit growth over the past several years has
been its acquisition of companies and capabilities. This strategy has allowed
the bank to sell more products to its existing client base and to expand its
customer reach. The ability to do more with existing clients paves the way for
solid expansion and this benefit is accentuated now, as global peers are
distracted due to liquidity, capital or credit problems.
PM:
thanks for that
PM:
interesting that it is no longer just UK analysts talking about a cash call and divi cut
NH:
actually on that note
NH:
the banks team which kicked off the whole debate
NH:
Morgan Stanley
NH:
have re-worked some of their assumptions
NH:
presumably after a series of moans and groans from HSBC
NH:
anyway, they still think the company needs a cash call
NH:
but their new bear case assumption is a $20bn rights issue
NH:
here’s the note
NH:
Following investor debate, we wanted to refresh our
thesis regarding a possible capital increase at HSBC.
We have extended our analysis of the group capital
position and the AFS book, and provide clarification on
four issues. As a result of the additional work and
clarification, we are reducing our estimated gross capital
requirement to $20-35bn from $27-42bn. Over the last
few weeks we have become incrementally more bearish
on the outlook for profits and so continue to pencil in a
$20bn capital increase in our bear case. Stay U/W.
thesis regarding a possible capital increase at HSBC.
We have extended our analysis of the group capital
position and the AFS book, and provide clarification on
four issues. As a result of the additional work and
clarification, we are reducing our estimated gross capital
requirement to $20-35bn from $27-42bn. Over the last
few weeks we have become incrementally more bearish
on the outlook for profits and so continue to pencil in a
$20bn capital increase in our bear case. Stay U/W.
NH:
(1) Hong Kong capital: In our analysis we assumed a
$5.8bn capital requirement to remove the leverage in
HSBC’s Hong Kong subsidiary. We have now learnt that
HSBC Holdings is the owner of the preference shares
and if required could exchange the preference shares
for equity. We have therefore removed this requirement.
$5.8bn capital requirement to remove the leverage in
HSBC’s Hong Kong subsidiary. We have now learnt that
HSBC Holdings is the owner of the preference shares
and if required could exchange the preference shares
for equity. We have therefore removed this requirement.
(2) Treatment of AFS reserves: Previously we noted
that HSBC would have an estimated $15bn AFS reserve
(~130bp) added back to capital end 08e. The UK is not
unique in this treatment as this is followed in the US and
Benelux, though within our European coverage universe
the AFS contribution to capital is much greater at HSBC.
NH:
(3) Treatment of $34bn US FV deficit: We were not
saying that HSBC needed capital to plug the $34bn FV
deficit within its US loan book, rather that investors
should not ignore it. That said, emerging legislation on
Cram downs poses a material threat to US capital, over
and above the $5bn we identified, in our view.
saying that HSBC needed capital to plug the $34bn FV
deficit within its US loan book, rather that investors
should not ignore it. That said, emerging legislation on
Cram downs poses a material threat to US capital, over
and above the $5bn we identified, in our view.
4) Capital at the Holding company: We estimated that
over the last 9 years HSBC carried an average of 120bp
of surplus capital at the “top”. HSBC claims that its aim is
to carry a benchmark 5% of capital centrally and this
ranges between 5% and 7%, suggesting $6-9bn at end
07. We have adjusted our analysis and extended it to
consider likely dividend distributions from subs. As a
result, we have reduced the capital earmarked to
strengthen the Holding company position by $1bn.
11:44AM
NH:
right, that’s enough on banks
NH:
FTSE update
NH:
down 106 points
NH:
not looking to good
NH:
GBK holding up
NH:
cable at $1.4259
NH:
and a Euro buys 0.8845p
NH:
probably helped by the inflation data
NH:
as it expected it fell in January
NH:
but not as much as expected
NH:
CPI edged down to a nine-month low of 3.0% in January,
NH:
although, retail price inflation fell more sharply – to a near 49-year low of just 0.1% in January from 0.9% in December
NH:
that was down to lower mortgage interest payments and house price depreciation.
NH:
Now, economists are saying the smaller-than-expected drop in consumer price inflation in January was primarily the consequence of heavier than usual discounting in December diluting the impact of the January sales.
NH:
as such they are expected further, marked declines
NH:
here’s Howard Archer of IHS Global Insight
NH:
Despite the smaller-than-expected drop in January, consumer price inflation is still poised to fall sharply further over the coming months. Inflation will be brought down by muted oil and commodity prices as well as rapidly diminishing underlying price pressures as the economy contracts substantially and unemployment rises sharply. Favourable base effects will also bring down the annual inflation during the first three quarters of this year as the impact of 2008′s sharp rises in oil prices drops out of the calculation. Some utility prices are now being cut, whereas they rose markedly through much of 2008.
NH:
Latest surveys largely indicate that companies’ pricing power is being undermined by sharply weakening demand and intensifying competition, while consumers’ inflation expectations have retreated markedly and wage moderation is continuing and likely to deepen. These factors seem certain to markedly outweigh the inflationary impact of the very weak pound. Consequently, consumer price inflation is likely to turn negative for a time in the second half of 2009 and we expect it to average only 0.8% over the year. Headline retail price inflation is likely to turn negative as soon as February and could become quite deeply negative for a time as lower mortgage interest rates impact further.
NH:
Will the smaller-than-expected drop in consumer price inflation in January deter the Bank of England from taking further near-term action to boost the economy? No. It will not fundamentally alter the bank’s view that consumer price inflation is likely to substantially undershoot its 2.0% target level over the medium tern due to the extreme weakness of the economy. We still expect the Bank of England to cut interest rates further in March, most likely by a further 50 basis points which will take them down to a new record low of just 0.50%. While MPC members have sympathized with the hit that savers are taking from very low interest rates, it appears that the committee takes the view that that lower interest rates are beneficial overall to the economy. Further out, we expect interest rate to come down to a low of 0.25% in the second quarter, and we certainly would not rule out them coming down all the way to zero.
NH:
In addition, it very much seems a question of when will – rather than will – the Bank of England engage in quantitative easing as it clearly believes that interest rates at or near zero are insufficient to generate recovery given the economy’s deep problems and the ongoing serious dislocations in the credit markets.
PM:
cheers for that
PM:
Must say i find this general sell of in the Footsie a little puzzling
NH:
as do the wires
PM:
Continental europe off by a similar margin
NH:
clutching at straws
PM:
Vol?
NH:
alright
NH:
fairly average
11:49AM
11:49AM
PM:
let’s move on
PM:
what this company?
PM:
Spice
PM:
PM:
shares taking a real beating this morning
PM:
Down 18% at 61p
PM:
company says annual trading is line with expectations
PM:
Who/what is it???????
NH:
must admit I have not followed this company too closely
NH:
to my shame I did not even know it was in the FTSE 250
NH:
for those in the dark like Paul and I
PM:
NH:
Spice is another one of these support services companies
NH:
yep
NH:
and this one is an infrastructure specialist, apparently
NH:
was spun out of Yorkshire Electricity back in the 90’s
NH:
here’s a bit of blurb from their website
NH:
Spice was founded in 1996 through a management buy out from Yorkshire Electricity. From a single contract worth £3 million per annum, Spice has grown principally organically and by acquisition to in excess of £300 million turnover per annum. Spice is now recognised as a leading provider of support services across its seven divisions and works in partnership with a large number of commercial, public and utility organisations. Spice operates from more than 30 locations across the United Kingdom and from these sites we provide bespoke and added value solutions to our clients and customers.
NH: Spice has adopted an ambitious strategy for growth and was admitted to the official list of the London Stock Exchange in July 2008, having first been admitted to AIM back in August 2004. Our underlying mission is to deliver value added services to our customers and thereby create sustainable returns for our shareholders.
We recognise that our greatest asset is our people and we actively encourage all of our staff to participate in our business both as employees and shareholders, recognising that our future depends on the quality and commitment of our people.
NH:
and here are its main business areas
NH:
Spice is now recognised as a leading provider of support services across its seven divisions and works in partnership with a large number of commercial, public and utility organisations.
- Billing
- Electricity
- Energy
- Facilities
- Gas
- Telecoms
- Water
- Corporate Functions
- Billing
- Electricity
- Energy
- Facilities
- Gas
- Telecoms
- Water
- Corporate Functions
PM:
so what’s gone wrong now??
NH:
well, I had a chat with a few brokers earlier
PM:
and?
NH:
it seems there is some disappointment
NH:
over the performance gas and facilities business
NH:
now this will upset those investors who took stock in a £50m share placing back in December
PM:
what price was that done at?
NH:
102p
PM:
ouch!
NH:
well, to be fair the market has fallen a long way since the
PM:
but even so, pretty painful
NH:
the cash was needed for acquisitions apparently
NH:
and Spice has made two small ones since then
NH:
so that could be a further source of disappointment
NH:
anyway, the funny thing here is that almost every analyst I can find has a buy recommendation on this stock
PM:
and still it falls
PM:
NH:
yep
NH:
here’s one
NH:
from Arbuthnot Securities
NH:
IMS reaffirms management’s confidence
Spice’s IMS confirms continued confidence in meeting market expectations, with some continued weakness in facilities and gas offset by strength in billing, energy and electricity. We make no change to our forecasts and reiterate our Buy recommendation.
Spice’s IMS confirms continued confidence in meeting market expectations, with some continued weakness in facilities and gas offset by strength in billing, energy and electricity. We make no change to our forecasts and reiterate our Buy recommendation.
Strength in billing, energy and electricity offsets weakness in facilities and gas
Within the group’s Supply division (billing and energy services; representing approximately one-third of group profit) trading has been strong, with the pilot imbalance project with Eon Electricity progressing well, and the group optimistic that it will be converted into a longer-term contract.
NH:
Within Distribution (electricity, facilities, gas, telecoms and water services; representing two-thirds of group profit), the group has agreed extensions with AT&T and National Grid, as well as terms with Thames Water for imbalance services. Facilities and gas services has weakened further since the interim results, although cost has been reduced in line with activity levels. Following the migration of common IT systems to the gas division last year, there has also been some downward assessment of contract margins. However, strength in billing, energy and electricity continues to offset weakness in facilities and gas.
Acquisitions to remain a feature of the investment case
Following the group’s recent placing to raise c.£50m we still expect acquisitions to remain a focus for the group, although believe that a larger deal is unlikely to materialise imminently (as some have speculated). During February 2009, the group made two small acquisitions, Treewise and Stow Land Control, for a combined consideration totalling £1.6m (£0.4m of which is contingent consideration). We estimate the group has now spent c.£14.8m of the net funds raised on acquisitions, and expect full-year net debt of £100.1m, representing gearing of 52%. We note Spice’s £170m facility, which provides c.£70m headroom, is in place until March 2012.
Forecasts unchanged
We make no change to our forecasts. For the year to April 2009 we expect PBT growth of 48% to £33.0m, EPS growth of 14% to 6.6p and a DPS of 1.4p. For the year to April 2010, we expect PBT growth of 19% to £39.4m, EPS growth of 16% to 7.7p and a DPS of 1.6p.
Buy recommendation reiterated
Over the past three months, Spice’s shares have declined by 21%, which compares to the FTSE All Share up 1% and our Managed Services sub-sector up 6%. We believe Spice is a well-managed business, largely exposed to non-cyclical markets with an attractive growth outlook. The stock trades on an April 2009E P/E of 11.2x, vs. our managed service peer group 16.2x. When this is considered against compound annual forecast earnings growth of 12.7%, we believe the group’s valuation is too low. We reiterate our Buy recommendation.
NH:
And here’s Citi
NH:
another big supporter
NH:
Spice (SPI.L; £0.74; 2H)
H2 09 IMS: Reassuring Statement
H2 09 IMS: Reassuring Statement
Reassuring statement — Statement guides to ‘in-line’ – weakness in Gas and
Facilities off-set by strength elsewhere. Extensions for AT&T and National
Grid. New water imbalance contract with Thames Water.
Largely defensive… — DPCR5 is shaping up well for Electricity and EDF
(50% of sales) seems well funded. The EON contract in Billings continues to
progress well and management is optimistic about a full contract. Gas EBITA
could be £1m lower due to more competition from construction and
accounting change.
Facilities weak — Facilities remains tough with continued margin pressure.
40% of facilities relates to retail, 20% compliance and 40% insurance.
Facilities accounts for c. 5% group EBITA but less than 2.5% of our
valuation. Progress of cost reduction (target £0.75-1m annual cost savings).
NH:
NIFES acquisition — Unsurprisingly, management indicate that the Nifes
acquisition is integrating well. Two small Electricity acquisitions announced.
acquisition is integrating well. Two small Electricity acquisitions announced.
LIBOR winner — With net debt / EBITDA below 2.5x we would expect Spice
to pay 85bp above LIBOR on its debt. Our current forecasts assume an
interest rate of 5.9%. 200bp off LIBOR would result in a 5% EPS upgrade for
FY 10E. We estimate y/e net debt of £99.7m (significant headroom vs.
£170m facility).
Hold / High Risk — Double digit growth is attractive when our top-down
estimate is for a 30% decline in market earnings. Spice is primarily exposed
to regulated utility spend which should prove defensive. Spice is trading on a
CY 09E P/E of 9.6x and an EV/EBIT of 8.1x and looks cheap relative to
peers.
11:54AM
NH:
Paul
NH:
have you got Monkey’s mobile number
PM:
I think so — why
NH:
got to stop him making a big mistake
PM:
eh?
NH:
and buying anything from Topps Tiles
NH:
he might not be able to take it back
NH:
if the wall tile is the wrong colour or shape
PM:
He was leaving early to go there — yeah
NH:
we presume it was to get some tiles
PM:
Might hve been for a job
PM:
But why shouldnt he buy tiles there?
NH:
because of this – just hit the tape
NH:
Following a review of its exposure to the retail sector in light of the uncertain outlook for the UK economy, one of the providers of credit insurance to the Company’s suppliers has informed the Company that it is to withdraw credit insurance cover for the Company’s suppliers.
NH:
Topps’ key suppliers have indicated that they remain supportive of the business and therefore the Board do not consider there will be a material impact on the business as a result of the withdrawal of credit insurance. The well documented deterioration in the credit insurance market has led to the retrenchment of the availability of credit insurance by a number of providers. The Board do not believe a material number of the Company’s other suppliers rely on credit insurance and hence the Board do not believe any further withdrawal by providers in relation to Topps will have a material impact upon the Company.
NH:
Topps’ lending banks also remain supportive of the business. Topps is continuing to maintain its cash balances, has undrawn overdraft facilities and continues to generate cash at the operating level.
The Board remains confident in the Company’s resilient business model and continues to manage the business with a prudent focus on cash and costs. Furthermore, the withdrawal of credit insurance in relation to Topps has not had an impact on the Board’s expectations for the trading performance of the business in the current financial period.
PM:
oh dear
NH:
this can quickly turn into a problem
NH:
when one suppliers pulls other follow
PM:
Shares down?
NH:
off 3p at 18.25p
NH:
think the management of Topps geared up the balance sheet at the height of the great moderation
NH:
to buy back shares or pay a special divi
NH:
that looks to be their main problem
NH:
I think the board are big Spurs fans
PM:
Hmm
11:59AM
NH:
talking of Topps, also keeping a close watch on Clinton Cards
PM:
Ferret has put our mind at rest below
NH:
another Essex based company in a spot of bother
PM:
re Monkey and Topps Tiles
NH:
Ferret has not put my mind to rest
NH:
why has Monkey gone to Topps
NH:
has he reinvented himself as a handy man?
12:01PM
PM:
Anything to finish up on?
NH:
yes
NH:
there could be trouble brewing at a small cap cash shell
NH:
company in question is called GNE
NH:
it recently sold its petrol stations
NH:
and said it would return the cash to shareholders
NH:
it has £32m in the bank
NH:
anyway, a month or so ago a guy called Martyn Racliffe
NH:
raided the market and picked up a large stake in the company
NH:
around 16% I think
NH:
and he has joined forces with another big shareholder – JO Hambro
NH:
which own13% of the company
NH:
they are planning to turn GNE into an investment trust
NH:
which will take stakes in small tech companies
NH:
Mr Ratcliffe’s background is that he is chairman of Microgen
NH:
and former Dell Europe bigwig
PM:
PM:
What’s the angle?
NH:
well, Ratcliffe’s pay really
NH:
now this guy has no experience of running an investment fund
NH:
yet he wants £275,00 a year for doing so
NH:
and on top of that, he wants to take 0.75% of any gains above £32m
PM:
Nice work!
NH:
now this has upset a lot of small shareholders
NH:
and GNE has quite a few of these
NH:
this company used to be called Middlesex Holdings
PM:
Ahhh — Phil Edmonds of White Nile fame
PM:
And Lord Owen – he ws involved also
NH:
anyway, there could be a revolt on the cards here
PM:
right — time we sign off
PM:
Can we go Neil??
NH:
just time to mention some management changes at Barclays
NH:
seems the head of IR is moving on
PM:
Who is that?
NH:
a guy called Mark Merson
NH:
and he is moving to a new role
NH:
working for Diamond Bob
PM:
Lucky guy
NH:
and before anyone says this is because Barc’s IR department has been a failure during the recent market melt down
NH:
they are wrong
NH:
analysts say that he did a good job
NH:
and in any case the new role at Bar Cap and BGI looks to be a promotion
PM:
yeah right — and who is the lucky person to take the IR hotseat??
NH:
a chap called Stephen Jones
NH:
who was the co-head of corporate origination at BarCap
NH:
right I think I am done
NH:
although I have found the reason for the weakness in Spice
NH:
and a negative analyst
NH:
from Cazenove
NH:
Trading within Gas and Facilities has deteriorated as a result of softening market conditions. As
outlined by management at the time of the interims, the group is facing some challenges within its
Facilities business (c. 5% FY2009E operating profit) as a result of the weaker economic
environment. The statement notes that this ‘has weakened further since December’ and, with high
street spend not anticipated to pick up in the near term, the group has taken action to reduce its
cost base. In addition, in the division’s insurance related activities there has been some softening
in volumes as insurers have increased their proportion of cash settlements with claimants. This
deterioration is in line with both our expectations and commentary from the rest of the peer
group.
outlined by management at the time of the interims, the group is facing some challenges within its
Facilities business (c. 5% FY2009E operating profit) as a result of the weaker economic
environment. The statement notes that this ‘has weakened further since December’ and, with high
street spend not anticipated to pick up in the near term, the group has taken action to reduce its
cost base. In addition, in the division’s insurance related activities there has been some softening
in volumes as insurers have increased their proportion of cash settlements with claimants. This
deterioration is in line with both our expectations and commentary from the rest of the peer
group.
NH:
In addition, the gas market (c. 12% FY2009E operating profit) has also become more challenging.
At the time of the interims, management noted that there had been some softening in the gas
market place in the South of England. However, this now appears to be affecting the group’s
operations in the North also. Management states that ‘we expect the performance of the gas
business to fall short of the Board’s expectations’ as a result of softer markets and reduced
margin expectations.
At the time of the interims, management noted that there had been some softening in the gas
market place in the South of England. However, this now appears to be affecting the group’s
operations in the North also. Management states that ‘we expect the performance of the gas
business to fall short of the Board’s expectations’ as a result of softer markets and reduced
margin expectations.
NH:
During the conference call, management also outlined that trading within its Telecoms division (9%
FY2009E operating profit) continues to be tough but is on track to meet expectations for FY09E.
FY2009E operating profit) continues to be tough but is on track to meet expectations for FY09E.
NH:
Overall, there were no major surprises in the statement. We believe that Spice should manage to
avoid the worst effects of the macro economic downturn although the mix of the business may
change slightly. We look for PBT of £32.1m (2008A: £22.4m) and EPS of 6.9p (2008A: 5.8p) for
FY2009E. The shares have fallen back c. 28% over the last month (including this morning’s 15%
fall) and are now trading on a PER of 8.5x for CY2009E vs. the rest of our support services
coverage on 7.2x and the Facilities Management peer group on 9.3x. We are therefore upgrading
our recommendation to INLINE from Underperform.
avoid the worst effects of the macro economic downturn although the mix of the business may
change slightly. We look for PBT of £32.1m (2008A: £22.4m) and EPS of 6.9p (2008A: 5.8p) for
FY2009E. The shares have fallen back c. 28% over the last month (including this morning’s 15%
fall) and are now trading on a PER of 8.5x for CY2009E vs. the rest of our support services
coverage on 7.2x and the Facilities Management peer group on 9.3x. We are therefore upgrading
our recommendation to INLINE from Underperform.
NH:
sorry
NH:
they have upgraded
NH:
but only after this morning’s fall
NH:
interestingly Spice up for a couple of awards at this year’s PLC awards
NH:
I am done
12:12PM
PM:
Right we are done!
PM:
Thanks for all the lively comments below
NH:
and finally
NH:
a KBW note on L&G
NH:
Legal & General has announced the strengthening of its default reserves for the
c£18bn UK annuity book by £650m, reflecting impairments of 520bps over the
next four years, which it believes reflects a “1929″ event for this average single-A
asset portfolio. We concur with this assessment and now believe that, with an
IGD surplus greater than £1.6bn, the capital position reinforces management’s
comment that it will not have a rights issue in the short term.
c£18bn UK annuity book by £650m, reflecting impairments of 520bps over the
next four years, which it believes reflects a “1929″ event for this average single-A
asset portfolio. We concur with this assessment and now believe that, with an
IGD surplus greater than £1.6bn, the capital position reinforces management’s
comment that it will not have a rights issue in the short term.
NH:
After the
conference call, we have, however, cut our final dividend by 30%. We now
believe that, given L&G’s lower valuation, a dividend announcement along these
lines is unlikely to too negatively impact the share price. However, we are also of
the view that, despite bullish comments from management, a likely rating
downgrade, pricing changes following today’s announcement and less available
capital should put the brakes on future bulk annuity sales. This is not necessarily
a bad thing for sentiment given investors’ current distaste for the geared credit
risk exposure that bulk annuities represent. Despite a very poor outlook for sales
in 2009-10, with the stock underperforming its peer group and the market by
30% and 40% since mid 2008, respectively, the stock is now trading at near an
appropriate relative value. We consequently upgrade our recommendation to
Market Perform, with an unchanged price target of 75p.
conference call, we have, however, cut our final dividend by 30%. We now
believe that, given L&G’s lower valuation, a dividend announcement along these
lines is unlikely to too negatively impact the share price. However, we are also of
the view that, despite bullish comments from management, a likely rating
downgrade, pricing changes following today’s announcement and less available
capital should put the brakes on future bulk annuity sales. This is not necessarily
a bad thing for sentiment given investors’ current distaste for the geared credit
risk exposure that bulk annuities represent. Despite a very poor outlook for sales
in 2009-10, with the stock underperforming its peer group and the market by
30% and 40% since mid 2008, respectively, the stock is now trading at near an
appropriate relative value. We consequently upgrade our recommendation to
Market Perform, with an unchanged price target of 75p.
NH:
Now more fairly valued. The stock is trading at a price to KBWe market-consistent
fair value of 35%, which is near the bottom of the peer group range and close to
reflecting the poor outlook for 2009, in our view. Unlike for Prudential and Aviva,
which have slightly lower valuations, we have not upgraded the stock to a buy as we
do not expect the same level of positive newsflow.
Dividend cut now in the price. We have cut our 2008E final dividend by 30% to
reflect the tightening capital situation. This represents 19% and 12% cuts to the total
dividend paid in 2008-09E, respectively. We have a 2009 dividend of 4.3p, which is
below Bloomberg consensus of 6.5p, but we believe that the latter does not reflect true
investor sentiment. KBWe 2009 dividend yield of 9.7% is also attractive.
fair value of 35%, which is near the bottom of the peer group range and close to
reflecting the poor outlook for 2009, in our view. Unlike for Prudential and Aviva,
which have slightly lower valuations, we have not upgraded the stock to a buy as we
do not expect the same level of positive newsflow.
Dividend cut now in the price. We have cut our 2008E final dividend by 30% to
reflect the tightening capital situation. This represents 19% and 12% cuts to the total
dividend paid in 2008-09E, respectively. We have a 2009 dividend of 4.3p, which is
below Bloomberg consensus of 6.5p, but we believe that the latter does not reflect true
investor sentiment. KBWe 2009 dividend yield of 9.7% is also attractive.
NH:
and here’s the stuff on ratings. very interesting this
PM:
Thanks for that Neil — but gotta run now
NH:
Rating agency downgrade likely. The loss of income on the £650mn of capital that
will be injected into the annuity book is likely to push the fixed-charge cover further
into the BBB range. Given that the current financial strength rating is AA+, we think a
downgrade is likely in the short term. The group is currently on a “negative watch” at
S&P. We only expect a one-notch downgrade at this stage.
Impact on embedded value. Management stated that this would be less than the
£650mn pre-tax IFRS impact, but still material. We assume 65% of this impact for the
EEV income statement.
will be injected into the annuity book is likely to push the fixed-charge cover further
into the BBB range. Given that the current financial strength rating is AA+, we think a
downgrade is likely in the short term. The group is currently on a “negative watch” at
S&P. We only expect a one-notch downgrade at this stage.
Impact on embedded value. Management stated that this would be less than the
£650mn pre-tax IFRS impact, but still material. We assume 65% of this impact for the
EEV income statement.
PM:
We will be back tomorrow at 11am
PM:
cheers!