Markets live chat transcript for the chat ending at 12:15 on 12 Mar 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Welcome to Markets Live
PM:
This is FT Alphaville’s daily markets related chat.
PM:
But hes just having a chat with Jamse Mackintosh
PM:
They’re plotting something
PM:
So what are we going to discuss, football
PM:
Actually — no not banks
PM:
We’ve had Neil suggesting we succumb to reader pressure this morning and avoid talking about the banking sector.
PM:
I’m not quite sure why that is. I’m guessing it has something to do with this
Lloyds Banking Group (LLOY:LSE): Last: 42.10, down 2.4 (-5.39%), High: 47.10, Low: 39.60, Volume: 24.47m
PM:
Tricky business this stock-picking malarkey, hey Neil?
PM:
Actually, for what it’s worth, I continue to think you are right. The gov bailout is hugely positive for Lloyds – crucially tipped the balance away from nationalisation.
PM:
What has knocked Lloyds — somethign about a 9p price target rumnour
NH:
well, there is no note
NH:
just comments made by their analyst earlier in the week
NH:
worst case NAV, assuming massive write downs etc is 9p
NH:
I could probably get a NAV of 0
NH:
if i was to go really bearish
NH:
just comments reflecting on the possible downside from JPM
PM:
this chatter was being linked with JPM
PM:
That doesn’t meld with this – a piece of JPM research on RBS that was doing the rounds earlier.
PM:
This was actually pubbed in late January – and RBS have been rubbish since.
PM:
But the read across to Lloyds is clear.
PM:
We think that the asset protection scheme is a positive development for the UK banks and one which will reduce the risk of outright nationalization, a key concern for deeply subordinated credit investors. We think that the scheme achieves two important objectives in that it draws a line under the maximum downside for RBS in terms of losses and also allows for a substantial, indirect capital subsidy by HM
Treasury without increasing the stake in RBS beyond the estimated 70% level. In our opinion, the measures would appear to be quite investor friendly, for both credit and equity investors.
We are positively surprised by the extent of the support which is being given to RBS, particularly with regard to the size of the asset pool of £325bn which will be covered by the asset protection scheme. According to the scheme RBS will bear a first-loss piece of £19.5bn after which the losses will be shared 90% by the Treasury and 10% by RBS. The terms of the asset protection scheme look particularly generous in terms of the actual cost with a £6.5bn participation fee resulting in a 200bp cost
which in the light of the assets being covered by the scheme looks particularly generous (leveraged loans, structured credit assets, monocline risk). In fact the fee that RBS is paying is tighter than where
we see most European banks trading in senior CDS, which is indicative of the capital subsidy that the institution is receiving. We do not think that the risk is being priced economically, but understand that this would not be a viable solution considering current circumstances.
PM:
In our opinion the first loss piece is merely an optical add-on to the transaction, given that on implementation of the scheme HM Treasury will subscribe to £13bn of B shares which will count towards core Tier I. In addition the Treasury will also commit to subscribing to an additional £6bn of B shares at RBS’s option. Effectively the first-loss piece which RBS should bear is being underwritten by the Treasury. We think that this is demonstrative of the fact that whatever solution is found for the
UK banks this cannot be in any way punitive and will have to be quite generous in order to re-establish market confidence in these institutions.
Obviously risk is a zero sum game and whatever risk is taken off RBS is being assumed by the Treasury and if it is considered material enough may effectively undermine sovereign risk pricing through CDS. While it is difficult to establish what the eventual risk will be for the Treasury with the risks that it has assumed, we think that with Lloyds and Barclays also participating, the eventual risk being underwritten by the Treasury could be material in the context of its other liabilities.
NH:
well, at least my racing tips were OK
NH:
1.30 can’t buy time ->4th
2.05 mikael d’haguenet ->FIRST !!!!
2.40 gone to lunch ->DOA
3.20 petit robin…. each way->3rd !!!!
4.00 ninetieth minute ->FIRST !!!!
PM:
I can also report that my personal bank balance is a bit healthy this morning.
PM:
Cooldine came in very nicely in the 14.40 yesterday.
PM:
I’ve got to say that that was the only one I backed in size yesterday.
PM:
Little flutter on Gone to Lunch, but that got stuck at the bar or something.
PM:
Then Master Minded came in – tho I hadn’t backed her.
PM:
So I’ve got to say our Shrewdette did rather well on her first day – can’t complain with two out of four.
NH:
Anymore from your shrewdette for today.
PM:
I’m going to re-invest my winnings on the following
PM:
Can’t escape the favourites at Chelters it would seem, but I’ve found one longish priced one in the 1.30 Novice Hcap Chase. Paul Nicholls’ beautiful grey Chapoturgeon (Timmy Murphy) joint favourite, but at 7/1 hardly feels like it at those odds.
2:40 Ryanair Chase. Nothing’s going to go better than the favourite Voy Por Ustedes, but at 11/10 it’s hardly worth the trip to the bookies unless you are a very high roller. So am going for a forecast to get some value: VPE/Gwanako.
3:20 World Hurdle. Again the favourite Kasbah Bliss looks unbeatable, but such short odds (11/10). I’m fluttering each way Big Buck’s (14/1) in the hope that Ruby Walsh will work some more magic.
NH:
er, I am giving up on tipping
NH:
retiring hurt after Lloyds
NH:
will leave it you and Sam
PM:
I’m already an ex-mystic
NH:
in spite of the Dow managing to chalk up a two session winning streak for the first time since Feb
NH:
off 58 points at 3,635
NH:
a mixture of stocks leading us lower
NH:
a few miners, due to the slide in the copper price
NH:
big, bearish note out from Citigroup
NH:
all pressuring the index
PM:
How about some Thomas Cook stuff?
NH:
caused a lot of traders to bang their heads on a desk in frustration
NH:
we have commented on this previously
NH:
but a lot of traders have suffered burnt fingers shorting Thomas Cook and its rival Tui
NH:
their reasoning for shorting was pretty simply – tour operator – rising unemployment – falling consumer confident – and the plunging GBK
NH:
should equal lower demand for foreign holidays
NH:
but both companies said no, it hadn’t
NH:
the last thing people would give up was their holidays
NH:
along with the Sky subscribers, new carpets, extensions, eating out etc
NH:
and in any case recent consolidation had taken lots of capacity out of the industry
NH:
so there would not be thousands of rooms empty on the Costa Del Sol
NH:
reality looks to have finally caught up with Thomas Cook
NH:
In an interview with Bloomberg
NH:
the head of its German division Peter Fankhauser fessed up to the new economic reality
NH:
March 12 (Bloomberg) — Thomas Cook Group Plc, Europe’s second-biggest travel company, is reducing capacity as the head of its German business forecast the tourism market will worsen through 2010. The shares declined the most in four months.
Next year “will be even more difficult than this year,” Peter Fankhauser said in an interview yesterday at the International Tourism Fair in Berlin. The tour operator wants to cut costs as bookings decline, he added. Thomas Cook fell as much as 8.6 percent, and dropped 15.75 pence, or 6.9 percent, to 214 pence as of 8:27 a.m. in London trading.
NH:
The company may still meet its sales targets this summer if last-minute bookings come through, Fankhauser said. Bookings recovered after a “very bad” January, the most-important month for summer holiday reservations, he said. Thomas Cook shares had gained 30 percent this year, resisting the bear market and slumping consumer demand after rivals’ bankruptcies last year reduced capacity and discounts in the industry
NH:
Thomas Cook and larger competitor TUI Travel Plc last month extended the discount period for early package-tour bookings in Germany. Thomas Cook prolonged its offering of discounts of as much as 30 percent until the end of March.
In Germany, Thomas Cook also allows customers of its main local brand, Neckermann, to cancel bookings as late as six weeks before travel time if they lose their jobs or have their hours reduced.
Fankhauser said the tour operator has no plans to cut its workforce or to introduce shortened working hours for its 2,600 German employees.
Thomas Cook is controlled by Arcandor AG, Germany’s largest department-store owner. The company was formed in 2007 when Arcandor combined its tourism unit with MyTravel Group Plc to fend off competition from budget airlines and Web travel agents.
PM:
er, none of that sounds very good
PM:
we will meet our sales targets if last-minute bookings come through
PM:
we have had a very bad January
PM:
and the share up 30% this year???
PM:
why?
NH:
it seems investors did buy this line about people not giving up their package hols
NH:
and barring some sort of economic miracle I can’t see a rush of late bookings happening
NH:
shares currently off 26.5p at 203.25p
NH:
second biggest faller in the FTSE 100 behind Aviva
NH:
while we are talking about the new economic reality
PM:
before that, we should deal with the Zoomy issue
PM:
I will now offer a public apology to Zoomy
PM:
We tested out a new weapon on him yesterday — not no-ing the full side effects
PM:
And it blocked him commenting
PM:
We’ve tried to reverse the damage — but we are not sure whether that has worked
PM:
We don’t know whether Zoomy is lurking out there, laughing at us
PM:
Or whether he is frustrated — muted forever
NH:
or perhaps he is away
NH:
is that the real Zoomy?
NH:
if not, you will be banned
NH:
Tuna, naughty, naughty
NH:
right a bit of breaking news out of Hong Kong
PM:
Ah yes — jsut breaking
NH:
concerning the recent volatile move in the HSBC share price
NH:
HONG KONG, March 12 (Reuters) – The Hong Kong stock exchange will scrap its end-of-session settlement auction following complaints that rapid technical trading during Monday’s 10-minute post-market period pushed HSBC <0005.HK> shares to a 14-year low, Cable TV said on Thursday.
An exchange spokesman declined to confirm the report and said a statement would be issued shortly
NH:
and it looks like there is spat blowing up between the BoE and Mandy
PM:
Oh yeah – excellent row
NH:
11:24 12Mar09 RTRS-BOE SAYS PUZZLED BY UK BUSINESS MINISTER MANDELSON’S COMMENTS ON CAR FINANCING
11:24 12Mar09 RTRS-BOE SAYS NOT ROLE OF CENTRAL BANK TO PROVIDE TO SECTOR SPECIFIC SUPPORT
PM:
Boe puzzled – for a change
PM:
Actually,,, that reminds me
PM:
Bank of England’s got a PR problem.
NH:
didn’t they hire a business reporter from the BBC for the top job
PM:
They did — but still got a problem
PM:
I was jut looking at this bank of England opinion survey on inflation.
PM:
As people about inflation expectations etc. regular thing.
PM:
But q 14 caught my eye
PM:
Question 14: Respondents were asked to assess the way the Bank of England is ‘doing its job to set interest rates to control inflation’. The net satisfaction index – the proportion satisfied minus the proportion dissatisfied – was 10%, compared with 19% in November. This was the lowest net satisfaction index outturn since the survey began.
PM:
Mervyn King’s lucky he’s not subject to popular vote.
PM:
Still no sign of zoomy
NH:
shall we have a look at Morrison’s
NH:
lot of support below for Sir Ken
NH:
and Morrison has produced another set of solid figures this morning
NH:
but more people seem to be shopping there
NH:
and check this – the company has raised its dividend by 21%
NH:
among the biggest risers in the FTSE 100 at the moment
Morrison WM Supermarkets (MRW:LSE): Last: 250.50, up 4.75 (+1.93%), High: 254.50, Low: 239.00, Volume: 5.09m
PM:
Points below about Sir Ken taking it in the neck 3/4 years ago very true. He held firm in terms of refusing to gear up the business any further.
NH:
CEO Marc Bolland reckons punters like the cheap offerings and the Morrison Market Place offering
NH:
he didn’t mention the Richard Hammond ads
PM:
do they still have a pie counter? There arent any Morrisons near me
NH:
i think so, and a greengrocers stall
NH:
and apparently they have the best fresh fish counter outside of the luxury end of the market
PM:
I’m trying to work out what’s going on below
PM:
is a strike brewing over Zoomy
NH:
look Zoomy was never banned, he was experimented on
NH:
the test was a success
NH:
and he emerged unscathed
NH:
sure there could be some physcological damage
PM:
Dinker – Vegitable pie
NH:
right, back to these Morrison numbers
NH:
profits in line with expectations, debt lower than expected
NH:
buyback has been scrapped but the company is going to use the cash to expand
NH:
already identified 100 sites where it would like to build at store
PM:
Anything on current trading?
NH:
but I have dug out a few analyst notes
NH:
Morrison has released its preliminary results covering the 52 weeks ended 1 February.
Underlying profits were in line with expectations (pre property PBT of £636m vs Caz £632m, consensus per Morrison of £627m). The full year dividend was raised by 21% to 5.8p, in line with expectations.
Net debt at the year end was £642m, lower than the consensus expectation of £724m (source: Morrison).
There are no dramatic new strategic initiatives announced although the management is indicating a greater focus on space-driven top-line growth – in addition to the 500k sq ft purchased from the Co-Op/Somerfield there will be a further 350k sq ft of organic openings. In 2010/11 new space is targeted at 500k sq ft (c.4.5% of the current total).
NH:
As expected the previously signalled return of capital to shareholders (originally £1bn over 2 years) has been abandoned, reflecting the company’s recent purchase of stores from the Co-Op/Somerfield and to retain financing flexibility.
There is no specific guidance given although the outlook comments are relatively upbeat – “the Board views the both the short and the long term outlook for Morrisons positively”.
NH:
Summary:
Morrison had another good year in 2008/09, growing market share and delivering solid progress in underlying profits. It also continues to show impressive sales growth against the tougher comps created by the step change in consumer perception of the Morrison offer which was effected in late 2007. The shares enjoy a natural attraction in the current market environment given the relatively low volatility of food retail, Morrison’s defensive bias even within the sector (limited non-food offering, value proposition, high freehold participation) and the ‘self-help’ nature of Morrison’s progress of late.
NH:
These attractions, however, are already to some extent reflected in past performance (outperforming the FTSE by 30% in the past 12 months) and the shares are on a relatively full-looking rating relative to the sector (14.3x CY09E vs sector average 12.3x). To this end a positive stance is, in our view, reliant on either the delivery of a much higher EBIT margin – which we are sceptical of, especially in the context of the relatively limited progress on this front in the last year – or the development of a material new growth angle (e.g. new format development).
NH:
And here’s Panmure Gordon
NH:
Looking forward, we think that the hike in capital expenditure and the
promise to look for further acquisitions increases the risk profile, which is
already being affected by the outlook for the industry. Margins fell in 2008/9
and we expect further falls in the current year, which drives our well below
consensus earnings estimates.
Today’s preliminary results were slightly ahead of consensus at £636m, pre-tax. Despite the strong like-for-like sales increase (7.9%), EBITDA margins fell by 10 basis points for the year. In H1, EBITDA margins fell by 60 basis points and in H2 rose by 40 basis points, but this latter number is below expectations. We were also disappointed by the 21% dividend increase, but Morrison has now entered a significant investment phase in terms of both new stores and acquisitions. We think that the risk profile is therefore increased
NH:
Capital expenditure for the year was £678m and net debt rose by £100m, with a further outflow expected in the current year, as the Co-op acquisition comes onstream and more are actively sought. Not surprisingly, the share buyback programme has been shelved. As the Optimisation Programme ends, Morrison is joining the space race, just as industry conditions are set to tighten. Given its lack of non food, internet or international profile, then management will argue that it has little choice, but we don’t expect it to be good news for the valuation.
We certainly underestimated the recovery potential at Morrison’s, chiefly the opportunity to claw back lost supplier income as a consequence of the merger with Safeway, which had been squandered by previous management. However, we think that it is going to become a lot tougher, with food retail late cycle and we continue to expect industry sales and margins to fall this year. We simply don’t see why general retail profits can fall by over 70% from peak and food retail not be affected. This is why we remain sellers of the shares, although we think that some investors may worry more initially about the increased capital investment promise
NH:
and while we are on the stores
NH:
picked up a bit of RAW on Marks & Spencer this morning
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.
Marks and Spencer Group (MKS:LSE): Last: 236.25, down 8.5 (-3.47%), High: 247.75, Low: 232.75, Volume: 8.15m
NH:
Do you recall this, our core short, the jungle drums seem to be drumming again! No official announcement until 20th May, but we hear all is not well – Is Marks & Spencer really a quoted analogy for a bust Private Equity play?
With £3.1bn of debt, gearing at 143% and a 9.1% yield, something’s got to give, and its certainly not going to be the former 2.
As the mkt has now stress tested the banks, the insurers, its attention moves now towards those with hi debt, hi divi and NO COVER….
If you recall that special £2 divi based upon the property value back in the Philip Green days was put on at the mkt hi. Like all bust pe transactions, this is in the public domain and the mkt’s tolerance is no generous….
Therefore, stock falls to £2, divi is cut, drama headlines
NH:
time for something different
NH:
RYANAIR PASSENGERS TO SUGGEST NEXT DISCRETIONARY CHARGE
€1,000 CASH PRIZE FOR BEST SUGGESTION
NH:
Charging for toilet paper – with O’Leary’s face on it,
· Charging €2.50 to read the safety cards,
· Charging €1 to use oxygen masks,
· Charging €25 to use the emergency exit,
· Charging €50 for bikini clad Cabin Crew.
NH:
“Since we confirmed that we are considering a toilet charge we have received a huge number of ancillary revenue suggestions from passengers and we want more. We are asking passengers to submit their ideas with the most creative winning €1,000 cash. Some of the best suggests to date are:
NH:
Right. some questions below about Aviva and the insurers
NH:
the main cause for weakness is the note penned by Andrew Crean at Citi
NH:
he says sell with a 160p target price
NH:
Re-Cap Risk — While insurers are incontrovertibly not banks (lower asset
leverage/ solid liquidity), there are market levels where even their more
defensive virtues are tested.
Three Lenses for Analysis — We screen our companies based on: 1) asset
leverage — the extent of the invested assets for shareholders relative to the
tangible equity, together with the downside sensitivities; 2) the current
regulatory and rating agency solvency; 3) the capacity to regenerate the capital
from operating earnings having financed the dividend.
NH:
Aviva looks Risky — Aviva has high asset leverage, not just to corporate bonds
(£30bn) and ABS (£8bn) that can ‘pull to par’, but to equities (£11bn), real
estate (£4bn) and loans (£22bn). Compared to the £8bn of tangible IFRS
equity and £2bn of IGD solvency surplus, there is risk notwithstanding the
£1.1bn reserve for defaults. Aviva’s IGD coverage ratio (available capital/
required) is the lowest in the sector and the current dividend policy allows no
capacity to regenerate the balance sheet from operating earnings.
NH:
Valuation Metrics — As re-cap risk becomes higher, EV based valuations fall
away and even yield becomes less dependable. We see the European banks
trading on 0.6x tangible equity and the US life companies on 1.1x. These are
the metrics that will likely dominate here. Our new target price (160p from
450p) is set at 0.8x our 2009E tangible IFRS equity per share.
Downgrade to Sell — If markets rally, Aviva could recover rapidly. But it has
put its share price in the hands of the market. We see it as one of the riskier
names in the sector and we lower to Sell to reflect this heightened risk profile.
NH:
on top of that, told this report in the WSJ also worrying the insurers
NH:
The Next Big Bailout Decision: Insurers
NH:
The tumbling financial markets are dragging down the life-insurance industry, an important cog in the U.S. economy, as mounting losses weaken the companies’ capital and erode investor confidence.
A dozen life insurers have pending applications for aid from the government’s $700 billion Troubled Asset Relief Program, and the industry is expecting an answer to its request for a bank-style bailout in the coming weeks. The government so far hasn’t said whether insurers will be eligible for the program.
Life insurers have taken a beating in recent weeks. The Dow Jones Wilshire U.S. Life Insurance Index has fallen 59% since the beginning of the year, leaving it down 82% since its May 2007 all-time high. The Dow Jones Industrial Average has lost 21% year to date, off 51% since its October 2007 record.
PM:
Aviva was 400p at the beginning of Feb
PM:
dead cat fading again at L&G
PM:
did a post on Albert Edwards earlier, blowing a basket over Greenspan pretending not to have been responsible for the housing bubble.
PM:
He wants Greenspan sectioned.
PM:
Should put up some of the other stuff Edwards was saying
PM:
he’s going on about the Great Unwind 2
PM:
Data continues to confirm that most of the developed world is heading into depression (GDP falling in excess of 10% peak to trough). But what stood out for me this week was the surprise move into deficit in the Japanese current account and the collapse in the Chinese trade surplus. The unwinding of massive global external imbalances is producing a major liquidity squeeze (The Great Unwind 2). Keep away from emerging markets (EM) and commodities.
PM:
Actually, this is a key par
PM:
A large part of the Global Credit Bubble was leveraged off ever-expanding global external imbalances (with the US the lead deficit country and China the lead surplus). Essentially a vendor finance scheme kept the global economy in major disequilibrium and very few commentators saw any prospect that this ‘Vortex of Debility’ would be disturbed – mainly because it was in almost everybody’s interest to keep it going (a good explanation of this Faustian pact was given by Stephen Roach in the FT recently – link). As these external imbalances now rapidly unwind, so too are global foreign exchange reserves. One of the most important (and overlooked) engines of global credit that drove EM growth and commodities is now suffering a massive contraction (see chart below).
PM:
Edwards really does make you want to secure a few cases of good wine and go and live in a cave.
PM:
Quick mention of the competition
PM:
For those of you who hvaent read it — on the home page you will find our little competition to find a name for Reuters new comment service
PM:
Felxis Salmon is moving there from Portfolio
PM:
We should be fun for us to watch
PM:
Who is a pst colleague from the telegraph
PM:
Actually — on the compeittion front i shold mention that we have got a consignment of wonderful prizes – -came in this morning
PM:
Lots of goodies from a certain bank
PM:
that we keep getting the name wrong
NH:
Hi – back again. just been trying to get hold of some really bearish note Numis have published on the UK economy.
PM:
So to remind us of their new identity will will be running a series of competitions over teh coming days
NH:
(POLICE INVESTIGATNG ALLEGATION OF ASSAULT VS JOSE MOURINHO: SKY)
PM:
Neil — you got the stuff??
NH:
not yet. apparently brokers have been told not to send it round.
NH:
which is annoying, but am working on it
NH:
hopefully it might appear by the end of the show
PM:
Right — while neil can hang around here — i have to go off to a meeting
PM:
Internal, but i have to go …
PM:
Am already 20 mins late
PM:
So i am going to leave you in Neil’s warm hands
NH:
OK, shoot off. important that you go
PM:
As a precaution, i will take the zapper with me
NH:
take the temptation away
PM:
See you tomorrow — 11am etc
NH:
right, just looking around for Libor quotes
NH:
can’t see them as yet
NH:
we do have a bit of comment on the Standard Life figures which came out this morning
NH:
and were taken quite well
NH:
which is still better than most of its peers
NH:
Merrill has removed its underperform rating
NH:
Results in line; upgrading our opinion to Neutral
Standard Life has announced 2008 FY results broadly in line with expectations.
And after a 40% drop in the shares over the last 3 months, we are upgrading our
recommendation from Underperform to Neutral.
EEV results ahead of forecast
EEV pre-tax operating profits of £933m (+6% YoY) were marginally ahead of our
£922m forecast and 6% ahead of consensus of £881m. On a per share basis, the
EEV operating result was 29.8p (+5% YoY) vs our 30.2p forecast.
The embedded value itself came in at 286p per share (flat YoY) vs our 266p
forecast. This gives an ROEV of 10.9% vs 11.5% in 2007. The company flagged
at the end of January that the ROE on an embedded value basis would be around
11.5%. Since then, £100m has been lost to compensation payments to Pension
Sterling Fund customers, accounting for just over 1 ROEV point. Given this, the
result is slightly above guidance.
NH:
IFRS result less impressive, but core cash generation and
TBV per share remain solid
The IFRS result is less impressive, in our view. The IFRS operating profit before
tax dropped from £714m in 2007 to £154m in 2008 vs our £205m forecast. There
were a number of one-offs that affected the result (compensation payment, ABS
losses, asset mark to market movements in Canada). Nevertheless, normalising
the result still shows a 20% YoY reduction.
Cash generation remains solid.
The operating cash and capital generation in
2008 was £423m or 19.2p per share. Within this, the core cash and capital
generation was £303m (-9% YoY) or 13.8p per share (core FCF yield of 8.6%)
The tangible IFRS book value has come in at 151p per share, 2p above our
forecast and 3p above last year.
SL has held the final dividend flat YoY and overall has announced a DPS of
11.77p for 2008 (+2% YoY, dividend yield of 7.3%).
NH:
FGD surplus remains strong
FGD surplus after the payment of the final dividend was £3.3bn – this is in line
with guidance. The surplus is largely insensitive to a 30% drop in equity markets,
implying it is no lower today; and a 40% drop in equity markets would knock the
surplus down to an estimated £2.9bn
The WP estate has fallen by £1.0bn over 2008 to close the year at £0.5bn; and is
around £0.3bn today. Much of the fall is due to the mark to market effect of
corporate debt on the value of the policyholder assets and therefore is arguably
exaggerated. SL has a number of protection mechanisms in place and we
believe any capital injection into the WP fund is a long way off (there would need
to be a deficit on the regulatory basis, and the value of future shareholder
cashflows from the fund needs to be exhausted first). We expect the company to
iterate this point in today’s analysts meeting.
Moving up to Neutral
The shares have rallied 20% from the historic low of 133p earlier this month and
currently trade on 9x 2010E IFRS EPS; 1.1x tangible book; and 0.6x embedded
value. Getting the IFRS EPS multiple is a major challenge for the company, in
our view and this will not happen quickly in the face of further market related
pressure on the asset base.
NH:
Although we think the IFRS PE can limit the upside, SL’s balance sheet resilience
should limit the downside from these levels, in our view. Asset side risks on the
balance sheet are low in comparison to peers and the company has established a
very good track record in risk management, in our view. SL’s management team
is one of the few within the financial sector who will have boosted their
reputations in 2008, in our opinion.
We do not expect to make significant changes to our 220p PO (a modest
downwards adjustment is most likely) and as such we have decided to upgrade
our opinion from Underperform to Neutral
NH:
oh, and paul also left something from KBW
NH:
Standard Life’s FY08 results produced something for the bulls and for the bears. On the bull side, the balance sheet per share numbers were ahead of consensus. However, as flagged in our preview, IFRS/share was predictably ahead (21% beat). Embedded value at 286p was 8% ahead – however, once we strip out what we see as low quality operating assumption changes and a large unexplained beat on the pension fund, we see the result as 3% ahead. For the bears, the value of new business was 10% light, which speaks to our view that the group is most exposed to the worst UK demographic as far as the credit crisis is concerned. In addition, for a company with a “clean balance” sheet, a flat final dividend, together with material misses on both IFRS operating earnings (21% miss) and group cash flow (12% miss), could disappoint. After this week’s run, with a price to KBWe market-consistent fair value
NH:
Cost-cutting signals sales weakness. Management announced £75mn new cost-cutting targets for 2010, which according to recent press articles (Money Marketing) is partially in the form of reduced distribution – that is, a 20% cut in sales staff. While this is good for sales margins, we believe this signals management’s concern on the outlook.
Expense assumption doesn’t appear consistent. The company made £71mn of positive assumption changes for “maintenance expenses”, but during that year it had -£7mn of negative variances in this area.
NH:
EV operating profit below if low quality assumptions removed. The embedded value operating profit at £933mn was 5% ahead of consensus and KBWe of £888mn. However, within, there was a beat of c£90mn due to tax and c£50m due to annuitant mortality, the former being low quality and the latter controversial. A £22mn beat for persistency is good – however, the quality is questioned due to the existence of a short-term provision that buffers some experience here
NH:
Margin was light. New business contribution of £264mn was 10% light of consensus of £294mn (KBWe £280mn). A driver here was the strengthening of the default assumption on their UK annuity sales.
EV ahead, but some low quality assumption changes. The EV per share at 286p was 8% ahead of consensus of £266 and KBWe of £267. There was an 8p beat from pension fund, which could include some assumption changes that we need to investigate further. There were 5p of low quality operating assumption changes. The beat would have been 3% if these were removed, largely explained by a significant beat in the foreign exchange areas, possibly explained by some unflagged currency hedging.
NH:
IFRS per share was predictably ahead. As mentioned in our preview, we believe accounting changes were unlikely to be picked up by some analysts, leading predictably to a 21% beat in this area to 151p.
Low IFRS dividend cover a concern. The dividend cover of 1.0x was disappointing, driven by a 20% miss versus consensus for the underlying profit. The “operating capital and cash generation” was 12% light of consensus, reinforcing this theme. The final dividend was flat, leading to a 2% increase in the FY08 dividend to 11.8p versus consensus of 12.1p (KBWe 11.9p).
NH:
Tuna,
Tracy is busy at the moment
NH:
someone has sent her a picture of Monkey
NH:
at his desk, watching AV
NH:
and it is very amusing, I must say
NH:
Monkey – looks like you could be at home
NH:
a couple of things to round up on
NH:
Paul, wanted to note that Roche have eventually offered $95 a share for Genentech
NH:
as we originally predicted
NH:
took a while to get there, but
NH:
and I wanted to mention this email
NH:
from a market expert who has defied the downturn
NH:
up 20% since the end of October
NH:
Despite the FTSE hitting a six year low last week, one investor is still smiling. Author and stock market professional Stephen Sutherland says the stock market could be ready to erupt, stating that “Even though the FTSE 100 recently hit a six year low, things are not as bad as they seem. In fact, the market right now is presenting people with a massive opportunity to profit.”
In his popular Daily Market Update of 11th March he sent a very clear message to his investors, saying:
“Since the 28th of October last year, our portfolio has gained a healthy 20.3%. That means in the last 19 weeks, we’ve made a tax-free gain of over 20%. That’s not bad considering that almost all of the global market indexes have been falling over that same period. For example, in that time frame, the FTSE 100 has dropped 5.4% and the Nasdaq has fallen a hefty 17.6%.”
NH:
He later went on to say:
“When you are beating the world’s strongest stock index(The Nasdaq composite), it’s a huge clue of underlying strength. In other words, right nowsomething good is happening under the cloak of the market, even though the media would have you believe the complete opposite.”
Sutherland is a renowned stock market investor and first hit the headlines in 2003 when he made a gain of £107,543 and used the profits to buy his dad his dream car, a Bentley Continental.
Sutherland recently launched his much awaited second book Liquid Millionaire (£21.97 AuthorHouse) in which he shares with the reader how he turned $31,409 into $1.28 million in just 38 months.
To coincide with the publication of Liquid Millionaire, Sutherland has also launched a blog ( www.stephensutherland.com ) where visitors can read his secrets on how the stock market really works – and how people can personally profit from that knowledge.
“Despite the current climate, it is entirely possible to make millions of pounds in tax-free income, and generate enough ‘liquid’ wealth to enable you to retire rich – and live a truly amazing, dream lifestyle, providing you can learn how to read the trend of the market,” says Sutherland.
NH:
so there you have it, don’t listen to out tips. Try Mr Sutherland instead
NH:
nothing on Minerve, for those asking below
NH:
OK, I think that is it for today
NH:
is to urge Zoomy to get in touch
NH:
it has all been a big misunderstanding
NH:
and to mention a few snippets from the speech Hector Sants gave at the Reuters Newsmaker event
NH:
Historically, the FSA characterised its approach as evidence-based, risk-based and principles-based. We remain, and must remain, evidence- and risk-based but the phrase ‘principles-based’ has, I think, been misunderstood. To suggest that we can operate on principles alone is illusory particularly because the policy-making framework does not allow it. Europe, in particular, has a particular penchant for rules and in any case in a number of key areas such as prudential they are indeed necessary.
Furthermore, the limitations of a pure principles-based regime have to be recognised. I continue to believe the majority of market participants are decent people; however, a principles-based approach does not work with individuals who have no principles.
NH:
What principles-based regulation does mean and should mean, is moving away from prescriptive rules to a higher level articulation of what the FSA expects firms to do. In other words, it helps emphasise that what really matters is not that any particular box has been ticked but rather that when making decisions, executives know they will be judged on the consequences – the results of those actions.
NH:
As for last night’s match
NH:
sorry just had a major internet outage
NH:
as for last night’s match
NH:
i went to bed as soon as the pens arrived
NH:
That I just didn’t care what happened
NH:
RVP a disaster upfront on his own
NH:
6 touches every time, slowed every attack down
NH:
Why was Theo not put through the middle in ET
NH:
Even Wenger looked like he had given up
NH:
Let’s hope we don’t get a Premier League side in the next round
NH:
Not an enjoyable match or evening
NH:
have two lunches to go to
NH:
one in the City, then over to the Wharf
NH:
actually the second one is more of a meeting
NH:
and no sighting of Zoomy at FT towers yet
NH:
and no sackings from the meeting Paul has gone to
NH:
carb loading for the 1/2 marathon you see
NH:
sorry another mini outage
NH:
thanks for all the comments
NH:
when hpefully Z Boy will join us
NH:
now, where’s the Reuters building at Canary Wharf?
