Markets live chat transcript for the chat ending at 12:11 on 16 Mar 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
NH:
beautifilly observed.
PM:
Welcome
PM:
This is ML
PM:
From AV
PM:
Markets live – FT Alphaville’s daily markets chat featuring Neil hume and stuff
PM:
It’s 11.04
PM:
And before anyone accuses us of being late, I can tell you that the reason is that we’ve had a minute’s silence.
NH:
All very quiet here at AV HQ as we all thought for moment about ….
NH:
Bear Stearns.
PM:
Yes, year ago today, Bear slipped under the waves – well actually it was acquired by JP Morgan, but same difference.
PM:
bet everyone below had forgotten that.
PM:
We thought about having a public minute of silence with the chat open, but decided some readers couldn’t be trusted to show enough respect.
NH:
Don’t know where you got that idea from
PM:
We can try it – let’s have a public minute of no commenting – in memory of Bear Stearns.
PM:
See whether people can do it
PM:
I’ll give you something to read – Jim Reid’s Early Morning Reid – and the minute starts…
PM:
Now
PM:
12 months ago today, on an historic Sunday, JP Morgan acquired Bear Stearns for $2/share (later increased to $10) and less than 10% of its previous closing price. A year later and these dramatic events have subsequently been repeated trumped by even more extreme events. The crisis is still deeply embedded into the financial world/industry, but is now also creating the worst economic backdrop since perhaps
the 1930s.
12 months ago today, on an historic Sunday, JP Morgan acquired Bear Stearns for $2/share (later increased to $10) and less than 10% of its previous closing price. A year later and these dramatic events have subsequently been repeated trumped by even more extreme events. The crisis is still deeply embedded into the financial world/industry, but is now also creating the worst economic backdrop since perhaps
the 1930s.
PM:
Over the last few weeks it’s becoming clear to us that things are so bad across the world that we at last have some slim hope in this crisis. This perverse statement is based on the fact that it’s now in everyone’s interest across the world to try to reach some kind of co-ordinated response to this crisis. When the crisis was confined to the Anglo-Saxon world 3-6 months ago the incentive for a co-ordinated response was fairly limited. The rapid deterioration in economic activity in the Anglo-Saxon world has not surprised us in the slightest, however the speed at which this has spread to what we thought might be relative out-performers (or safe havens) has surprised us. All in all this surely should encourage more radical (and hopefully co-ordinated) policies.
Our “Ivory Tower” suggestion over the last few weeks has been that the G-20 embark on a co-ordinated Quantitative Easing program. Clearly this is still highly unlikely as not all will agree that this is the correct policy. Germany (and others at the core of Europe) in particular are clearly uncomfortable with some of the more aggressive Governmental responses so far. However the more we see unilateral actions like that seen from the UK, the US and last week from the Swiss, the more likely that this eventually leads to Global tensions and the worst case scenario of protectionism in some form or another. Last week’s move from the Swiss is probably not going to have huge international repercussions in its own right but if it encourages retaliatory responses then it could be the start of a slippery slope. On a similar vein if the US act independently and
aggressively, then the long standing worry remains that China starts to reverse its policy of recycling its surplus into Treasuries. So the stakes are high. The rhetoric coming out of the weekend’s G-20 finance meeting was encouraging overall but we’ll have to see if anything more substantial comes out of the April 2nd leaders summit. Before that we should have Geithner’s proposals concerning US toxic bank assets, and
this week we see the slightly delayed launch of the TALF. These could be a crucial few weeks in this crisis.
Our “Ivory Tower” suggestion over the last few weeks has been that the G-20 embark on a co-ordinated Quantitative Easing program. Clearly this is still highly unlikely as not all will agree that this is the correct policy. Germany (and others at the core of Europe) in particular are clearly uncomfortable with some of the more aggressive Governmental responses so far. However the more we see unilateral actions like that seen from the UK, the US and last week from the Swiss, the more likely that this eventually leads to Global tensions and the worst case scenario of protectionism in some form or another. Last week’s move from the Swiss is probably not going to have huge international repercussions in its own right but if it encourages retaliatory responses then it could be the start of a slippery slope. On a similar vein if the US act independently and
aggressively, then the long standing worry remains that China starts to reverse its policy of recycling its surplus into Treasuries. So the stakes are high. The rhetoric coming out of the weekend’s G-20 finance meeting was encouraging overall but we’ll have to see if anything more substantial comes out of the April 2nd leaders summit. Before that we should have Geithner’s proposals concerning US toxic bank assets, and
this week we see the slightly delayed launch of the TALF. These could be a crucial few weeks in this crisis.
PM:
In terms of data we have a busy week but the market is starting to get slightly immune to bad news at the moment. Of more importance to markets at the moment are the policy responses and their potential for success. Nevertheless the highlights are Industrial Production, Empire Manufacturing and the latest NAHB survey today, PPI and Housing starts tomorrow, CPI on Wednesday and the Phili Fed and the ever important
jobless claims number on Thursday. At least it looks set to be a calmer Monday than that seen 52 weeks ago.
jobless claims number on Thursday. At least it looks set to be a calmer Monday than that seen 52 weeks ago.
NH:
thanks everyone.
NH:
we can move on now
PM:
that’s was pretty good actually
NH:
Bear – RIP
PM:
you can comment again now
11:07AM
NH:
on to more pressing matters
NH:
and this rally
PM:
NH:
which is still going on
NH:
FTSE 100 up 75 points at 3,828
NH:
could be a big run up into the expiry on Friday?
NH:
because I have not seen an eco data to justify it
NH:
only a few comments from some banks that they have had a good start to the year
NH:
surely no one is buying on the back of that
PM:
I have no idea what is driving it
PM:
Just this sense that the bad news has reached saturation point
PM:
As reid suggests above
NH:
(Good point Barbican)
PM:
Problems so widespread, co ordinated action becomes inevitable
NH:
but
NH:
Roubini is not convinced
PM:
He’s not
PM:
here’s a shortened version of a very long rant
PM:
Calculated Risk
PM:
Roubini
PM:
It is déjà vu all over again. We have already seen this Groundhog Day movie at least six times over and over again in the last year or so: the market starts to rally – this time around about 8% in a week – and the chorus of optimists starts to say that this is the bottom of the economic and financial crisis and that we are at the beginning of a sustained stock market rally that signals the true end of this bear market.
PM:
You can read thru the long post yourself — before getting to this great little conclusion
PM:
So, in conclusion and caveat emptor for investors: Dear investors, do enjoy this dead cat bounce and bear market sucker’s rally … don’t wait too long until you jump ship while the financial Titanic hits the next financial iceberg: you may get squeezed and crashed in the rush to the lifeboats.
NH:
I presume he means crushed
NH:
but he obviously has crashes on the brain
PM:
Roubini’s post come from thumping the keyboard — so bound to be a few literals
PM:
As we get here, from time to time
11:14AM
PM:
Should we have a look at Barclays — or have sulk?
NH:
no need. I am very relaxed
NH:
they led the market astray
NH:
so what’s new about that?
NH:
not even newsworthy really
NH:
I mean they have plenty of previous
PM:
NH:
nonetheless shares up
NH:
15.8p at 90p
PM:
amazing
NH:
I can’t so how on earth ishares will fetch £5bn
NH:
£3bn looks heroric
PM:
Should mention here quickly — i suggested in earlier post that Sunday tel might have taken on the story from the Sunday Times — I am now informed that Louise A got the Ishars story herself.
PM:
That is what i am told
PM:
Whatever 
PM:
seriously though
PM:
do we have anything to say on Barclays?
NH:
no, not really
NH:
but
NH:
two of the best notes on the subject come from Sandy Chen at Panmure and Jonathan Pierce at Credit Suisse
NH:
I could put them up
PM:
sure
PM:
go for it
NH:
here goes
NH:
Chen is a seller and remains so
NH:
iShares potential disposal comment
The contemplated disposal of iShares, the continued wrangling over the APS,
and the disclosure of significant credit derivatives-related payouts from
troubled counterparties all reinforce our view that BARC’s risk profile is high.
The contemplated disposal of iShares, the continued wrangling over the APS,
and the disclosure of significant credit derivatives-related payouts from
troubled counterparties all reinforce our view that BARC’s risk profile is high.
In a brief RNS this morning, BARC has confirmed discussions on the potential disposal of iShares, with the weekend press reporting that it wants to raise £5bn from its sale. BARC has also said it has had a strong start to 2009, and that it is continuing a dialogue with the UK government on participation in the asset protection scheme.
NH:
In 2008, the BGI business as a whole contributed 10% of the Group’s PBT (£595m of
£1,040m) whilst requiring only 1% of the Group risk-weighted assets (£4bn of £433bn). In our view, contemplating the sale of one of strongest, most capital-efficient parts of the Group seems risky, especially given the focus on BARC’s relatively weak capital ratios.
£1,040m) whilst requiring only 1% of the Group risk-weighted assets (£4bn of £433bn). In our view, contemplating the sale of one of strongest, most capital-efficient parts of the Group seems risky, especially given the focus on BARC’s relatively weak capital ratios.
Also, the iShares business is a relatively small part of BGI, accounting for £226bn of the £1,040bn of AUM as at end-2008. iShares probably accounts for over half of the BGI profit contribution, given that its margins are much better than those at the traditional indexed funds (our estimates are 25-30bp versus 5-7bp), but even with the assumption of solid profitability a £5bn price tag for iShares seems quite steep. There is also the issue of the shares and share options in BGI held by BGI employees; this would seem to make a disposal of BGI as a whole more likely.
NH:
As for the strong start to 2009, it is worth noting that AIG listed BARC as one of the main beneficiaries of its US government bailout; according to a recent statement, AIG paid BARC $7.9bn as collateral settlements on credit derivatives in the last four months of 2008. These seems to us a lot like the monoline exposures that we highlighted in our recent note.
In summary, the contemplated disposal of iShares, the continued wrangling over the
APS, and the disclosure of significant credit derivatives-related payouts from troubled
counterparties all reinforce our view that BARC’s risk profile is high. Maintain Sell.
NH:
and here’s Mr Pierce
NH:
he is slightly more positive
NH:
in fact he upgraded Barc last week I think
NH:
he has an outperform rating
NH:
More press speculation on a potential sale of parts or all of BGI over the weekend and today. Specifically, The Telegraph suggests that iShares might be sold to US investors for around £4bn, although it also suggests that the entire BGI business might be sold to Middle Eastern investors, who would then sell iShares on. The figure put on iShares looks high to us. This business accounts for about 22% of BGI AuM and if we assume it generates twice the commission level of BGI as a whole (i.e. 36bps – compared to a weighted average of 40bps if you use data on http://uk.ishares.com/fund/overview.do) we estimate it would generate something like £200-300m profit after tax. A £4bn price tag is not out of the question, but it would imply a multiple in the teens.
NH:
Regardless, the most important point is that Barclays seems to be entertaining the idea of selling this business. The basis of our upgrade last week was that Barclays had options to raise capital other than a huge placing at a depressed level, which would in turn have triggered anti-dilution clauses in the MCN. A sale of BGI would be an ideal solution, in our view. Combined with the potential to submit the riskiest portion of its balance sheet into the APS, we believe there remains material upside in the shares from here. For example sake only:
NH:
1. Sale of BGI at 6x 2010E earnings = £4.5bn, £80bn submitted to APS @ 6% fee
This would see the 2008 pro-forma NAV at 274p and the equity tier 1 ratio at 7.7%, on our estimates. More relevant, excluding the fee we’d see NAV at 230p and the equity tier 1 ratio at 6.4% respectively. The market might still question the equity tier 1 ratio at this level, given LBG and RBS are at 9.4% on an equivalent basis. But if Barclays could demonstrate strong internal capital generation in 2009, that might ease concerns notably. For example, we forecast just £420m of net profit this year compared to over £4bn in the last few years. Every extra £400m adds 10bps to the equity tier 1 ratio, on our numbers.
This would see the 2008 pro-forma NAV at 274p and the equity tier 1 ratio at 7.7%, on our estimates. More relevant, excluding the fee we’d see NAV at 230p and the equity tier 1 ratio at 6.4% respectively. The market might still question the equity tier 1 ratio at this level, given LBG and RBS are at 9.4% on an equivalent basis. But if Barclays could demonstrate strong internal capital generation in 2009, that might ease concerns notably. For example, we forecast just £420m of net profit this year compared to over £4bn in the last few years. Every extra £400m adds 10bps to the equity tier 1 ratio, on our numbers.
NH:
2. Sale of BGI at 6x 2010E earnings = £4.5bn, £30bn submitted to APS @ 6% fee
This would see 2008 pro-forma NAV at 257p and the equity tier 1 ratio at 7.0% excluding the APS fee. But of course, there would be less protection against asset deterioration moving forwards with less assets in the APS.
This would see 2008 pro-forma NAV at 257p and the equity tier 1 ratio at 7.0% excluding the APS fee. But of course, there would be less protection against asset deterioration moving forwards with less assets in the APS.
NH:
3. Sale of BGI at 10x 2010E earnings = £7.0bn, £30bn submitted to APS @ 6% fee
This is more inline with a view that iShares might be worth around £4bn. This would see 2008 pro-forma NAV at 280p and the equity tier 1 ratio at 7.6% excluding the APS fee.
This is more inline with a view that iShares might be worth around £4bn. This would see 2008 pro-forma NAV at 280p and the equity tier 1 ratio at 7.6% excluding the APS fee.
Of course, there is also the potential for Barclays to issue B shares to Government, and we’d see upside potential in the shares on this basis as well. However, we suspect the desire to keep HMT out of the shareholding structure is behind the latest suggestions and is, in our view, far more preferable.
NH:
In summary, given that LBG and RBS are trading at around 0.5 to 0.6 times 2008 pro-forma NAV, our scenarios above would imply Barclays shares at around 120-150p per share. Of course, more important is the tangible NAV two to three years out. On that basis, we remain completely comfortable with our 110p target price. Outperform.
NH:
oh, this is also useful
NH:
short interest in Barclays
NH:
HT friendly broker
NH:
6.22 percent of Barclays shares are short. This has decreased by 2 percent over the previous week. 5.51 days are required to cover this position.
NH:
Barclays have 8376.2 million shares out, so the 6.22 percent share shorted equates to 521 million shares.
PM:
thanks for that
11:20AM
NH:
Still no sign of Zoomy then?
PM:
Zoomy who?
NH:
PM:
cold hearted, arent we?
PM:
Neil – I want to show you and everyone else this
PM:
ZAP
Warning to rude and abusive commenters – you’re ability to comment will be terminated immediately and permanently, without warning. Henceforth, FTAlphaville has instituted a One Strike and You Are Out policy. We’ve had enough. We are going to clean up these pixels once and for all.
NH:
Jeepers, that’s a bit heavy Murph
PM:
Well it might be heavy, but I think that’s what we need to so.
NH:
gonna clean up this town
NH:
Sheriff Murphy
NH:
You know people will just go off and re-register
PM:
Yes, but it takes me just three clicks — moderate, ban for life, reject comment.
PM:
Done
PM:
Idiots who want to try and circumvent have to have a fresh email account for each registration. That will quickly become a pain.
PM:
Also, we have the option of phoning their parents.
NH:
Why the heavy handed stuff. Slept badly or something?
PM:
No no. I just don’t think we can spend our lives speed reading things for abuse. Zero tolerance will reduce our work load.
PM:
Dosen’t stop people being funny and informative.
PM:
I’m not gunning for taxloss or something
PM:
Just want to wack muppetts
NH:
muppett whacking season has started
NH:
official
PM:
Actually — no muppets on this morning as far as i can see
PM:
Andrew Slade : “Other than you two”
PM:
PM:
AS — FT.com news editor
PM:
Just paid us a visit
11:24AM
11:24AM
PM:
okay
PM:
any RAW
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
none this morning
PM:
NH:
very, very quiet out there
NH:
typical of the Mondays we have been having at the moment
NH:
that said, there was some stuff around on Rio that was interesting
NH:
the Australian FIRB has extended the review period into the deal with Chinalco for up to a further 90 days from today.
NH:
on top of that there is our report that RIO is facing shareholder calls to table a special resolution for the Chinalco transaction.
NH:
“The fact that this has been structured as an ordinary resolution rather than a special resolution is unwelcome to many shareholders,” said Peter Montagnon, director of investment affairs at the ABI.
NH:
and then there is this
NH:
which I think is really interesting
PM:
bear with us a mo — Neil just on the phone
PM:
And i’m trying to find out what the hell the Australian Foundation Investment company is
PM:
When its at home
NH:
the largest local shareholder in BHP and RIO – Australian Foundation Investment Company – have expressed serious concerns about RIO’s proposed investment deal with Chinalco. BHP’s chairman, Don Argus, is on the AFIC board and also sits on the board of its investment committee. The AFIC said that “significant influence has been given to Chinalco with no premium paid” under the deal with RIO. We are deeply concerned about Chinalco becoming involved with the running of the business,” AFIC said, citing issues such as the involvement of a sovereign government/customer/competitor, corporate governance issues and potential conflicts of interest over investment decisions.
NH:
sorry
NH:
we got out of synch there
PM:
AFIC — Straight forward asset manager — medium to llong term
PM:
About AFIC
AFIC is a company which seeks to invest in a variety of companies listed on the Australian Securities Exchange with the goal of providing shareholders with investment returns through access to a steady stream of fully franked dividends and increases in the value of capital invested.
AFIC is a company which seeks to invest in a variety of companies listed on the Australian Securities Exchange with the goal of providing shareholders with investment returns through access to a steady stream of fully franked dividends and increases in the value of capital invested.
AFIC’s shares are listed on the Australian and New Zealand securities exchanges. There are no entry and exit fees associated with shareholders acquiring or disposing of their shares, other than the transaction costs of your stockbroker.
NH:
interesting that Argus is on the board of the AFIC
NH:
no wonder he doesn’t want the deal to go through
NH:
as it happens
NH:
the miners are all under pressure this morning
NH:
well underperforming this bear market rally
Kazakhmys (KAZ:LSE): Last: 315.25, down 8.25 (-2.55%), High: 330.00, Low: 309.75, Volume: 1.13m
RIO TINTO (RIO:LSE): Last: 2,034, down 43 (-2.07%), High: 2,061, Low: 2,012, Volume: 1.79m
BHP Billiton (BLT:LSE): Last: 1,325, down 13 (-0.97%), High: 1,335, Low: 1,290, Volume: 4.17m
NH:
and one more RAW related thing
NH:
last week, we heard rumours that a rights issue could be coming from National Grid
NH:
the idea was that the company had a lot of foreign debt and the collapse of the GBK had left them in a spot of bother
NH:
well
NH:
Morgan Stanley have come out this morning and said it is all nonsense
NH:
Nat Grid does not need a rights issue
NH:
got that?
NH:
no cash call at Nat Grid
NH:
Quick comment: No rights issue coming! Grid shares have been weak recently on
widespread investor concerns about the possibility of a rights issue. The CEO has consistently stated that a rights issue is not planned. Moreover, we met the Group Treasurer on Friday and came away very relaxed about any rights issue risk. Put simply, we feel this is not on the cards, and thus the concerns are misplaced and share price weakness overdone.
widespread investor concerns about the possibility of a rights issue. The CEO has consistently stated that a rights issue is not planned. Moreover, we met the Group Treasurer on Friday and came away very relaxed about any rights issue risk. Put simply, we feel this is not on the cards, and thus the concerns are misplaced and share price weakness overdone.
NH:
2009/10 financing looks relatively easy: Much is made of Grid’s £2.5bn annual financing needs. However, it is worth noting that Grid has already pre-funded £1.5bn of its 2009/10 financing requirement (£2.4bn in total). The challenge over the next 12 months will thus only be to issue £900m of debt, which looks pretty straightforward to us.
NH:
Grid issued ~£6bn debt in last year: Since January 2008, Grid has issued over £5.8bn of debt, and has issued over £2.5bn in the last three months alone. In this context, the funding needs for 2009/10, and for later years, look very manageable.
Grid has over £2 billion of credit lines: At present Grid has in excess of £3 billion available credit lines. This reduces slightly over time, but the company still has over £2 billion of credit lines available for H1 2010. Again this seems to de-risk the funding issue.
NH:
Valuation looks attractive: We think that the weakness in the shares is overdone. Although there are cheaper shares in our sector, they mostly carry much greater risk. Grid trades at a zero premium to its UK RAV and its US rate base, which seems unsustainable in the medium term, especially since there are green shoots of optimism for its US regulated business. The dividend
yield of 6.5%, with committed dividend growth of 8%, also looks attractive.
yield of 6.5%, with committed dividend growth of 8%, also looks attractive.
PM:
thanks for that
PM:
and a Nat Grid share price
National Grid (NG:LSE): Last: 574.50, up 20.5 (+3.70%), High: 576.50, Low: 560.00, Volume: 2.37m
11:31AM
NH:
sorry, forgot to come back on my phone call
NH:
a bit of RAW
NH:
apparently a chunk rights issue coming this week in London
NH:
people being sounded out, all the normal stuff
NH:
source also reckons that a lot of mid cap companies will try and raise money this week
NH:
but it is a struggle
PM:
How interesting
NH:
Inchcape for example are really twisting arms
NH:
SIG trying to raise some money too
PM:
Hmm — how abotu Brixton estates
PM:
They havent got one away
PM:
results out
PM:
no cash call
NH:
but curiously the shares are up
NH:
biggest riser in the FTSE 250 in fact
NH:
up 20%
NH:
up 3p at 17.75p
NH:
which does not sound as impressive does it?
PM:
er, no
PM:
Penny punt
NH:
but anyway
NH:
I think the market is relieved that while the figs are pretty poor
NH:
the new CEO has improved transparency
NH:
this was a key gripe with the previous incumbent
NH:
and perhaps this might pave the way for a rights issue
NH:
and we get confirmation that the company is exploring all options to strengthen its balance sheet
NH:
and other highlights
NH:
Brixton was compliant with all covenants
NH:
43% of on-balance sheet debt is repayable in 1-2 years. This includes a £275m
bond due in 2010. All JV debt needs to be refinanced this year (£105m Brixton share).
bond due in 2010. All JV debt needs to be refinanced this year (£105m Brixton share).
NH:
so things still look pretty tough
NH:
the financial position is still uncertain and hanging over the company
NH:
anyway
NH:
Cazenove have liked a little of what they have seen because they have upgraded
NH:
to neutral from underperform
NH:
While the results came in line with our expectation (290p NAV vs our forecast of 289p) the numbers given today are largely irrelevant because we believe investors will consider a 5.6% topped up net initial yield as extremely optimistic in today’s market (especially considering the Dec net initial yields of companies such as
SEGRO 7.2% for UK industrials). We estimate that using an 8.25% net initial yield (ie a further fall of c.32%) would result in an NAV of c.78p and an overall net debt to equity ratio of the group on the adjusted net assets of 405% (way in excess of the covenants of 175%) before sales.
SEGRO 7.2% for UK industrials). We estimate that using an 8.25% net initial yield (ie a further fall of c.32%) would result in an NAV of c.78p and an overall net debt to equity ratio of the group on the adjusted net assets of 405% (way in excess of the covenants of 175%) before sales.
NH:
The company states that it is considering all options to strengthen flexibility including disposals (we believe the company has c.£200m on the market which in our view is likely to provide some interesting evidence for the
5.6% yield), debt renegotiations (sales need to repay the £275m of 2010 bonds and the corporate facility headroom needs to be renegotiated) or equity raising (difficult given share price and rights issue indigestion in the sector).
5.6% yield), debt renegotiations (sales need to repay the £275m of 2010 bonds and the corporate facility headroom needs to be renegotiated) or equity raising (difficult given share price and rights issue indigestion in the sector).
NH:
Whichever way you look at it, we believe Brixton has got itself into a mess, largely a result of the company ignoring its own cautious predictions. As such while the shares might look cheap, and could well see significant upside for existing shareholders if it can sort itself out, there is little reason to buy the shares at present given
the group’s current uncertainties relative to its peers and therefore we downgrade our relative recommendation to UNDERPERFORM from In Line.
the group’s current uncertainties relative to its peers and therefore we downgrade our relative recommendation to UNDERPERFORM from In Line.
NH:
sorry got that wrong
NH:
Caz have downgraded
NH:
here’s a bit of comment from Nomura
NH:
The immediate challenge for the new CEO is to run the business for cash flow. Brixton is currently covenant compliant and the accounts are not qualified, but the portfolio has little headroom and a further 10% fall in the valuation would breach bank covenants when next tested in June. We believe that the operating results show there is considerable value in the business with a high but relatively stable vacancy rate. We calculate that the shares are pricing in a forced debt-for-equity swap or halving of property values from here, either of which is possible but we do not think probable. There is scope for asset sales and renegotiating covenants but a £250m equity injection would preserve the value of the business at what may be close to the bottom of the cycle.
NH:
Peter Dawson appointed CEO
Portfolio -27%: 2H08; -19%
NAV -47% to 290p
Gearing 110% (2007: 55%)
Vacancy rate 21% (2007: 15%)
Initial yield 5.2% (6.8% on let buildings)
10% bank debt headroom
No final dividend, 4.9p interim c.f. min PID 3.4p
Our TP is reduced to 30p
Portfolio -27%: 2H08; -19%
NAV -47% to 290p
Gearing 110% (2007: 55%)
Vacancy rate 21% (2007: 15%)
Initial yield 5.2% (6.8% on let buildings)
10% bank debt headroom
No final dividend, 4.9p interim c.f. min PID 3.4p
Our TP is reduced to 30p
11:37AM
NH:
just going back to bear markets for a minute
NH:
just got an email from Draaisma at MOST
NH:
on dead cats
PM:
Very timely
PM:
Especially when Teun has been so quiet recently
NH:
it is, here’s his thinking
NH:
Bear market rallies are part and parcel of bear markets. No new research today. Instead we send you a piece we published last year (4 February 2008, The Nature of Bear Market Rallies, attached)
NH:
In the piece from Feb-08 we calculated that bear market rallies have averaged 21% over 4 months. The current bear market rally measured by the S&P 500 is now 4 trading days old and +12% in size. 20% up on the S&P from its closing low of 676 from last Monday would mean 811
NH:
The current bullish case would be something like this (to be sure, we are not making this bullish case): 1) equities are cheap (shiller PE hit single-digit 9.8 in Europe, now back on 11x); 2) sentiment is bearish (aaii one week ago had the 2nd lowest reading in its history, lowest was oct-90); 3) there are some signs of fundamentals improving (larger IMF funding, TALF, quantitative easing, swiss franc initiative, China); 4) there are some early positive cyclical signs from commodity prices and auto sales.
NH:
However, in line with last week’s piece, we do not believe that this bear market rally will morph into the next bull market. We continue to think that fundamentals are bad and we expect earnings and US house prices to trough by the middle of 2010, while banks balance sheet quality is not sorted out either. Patience and capital preservation are key. Valuations are not rock bottom (we have been as low as a Shiller PE of 4x in the US in 1932, 6x in Europe in the 1970s). We remain strategically cautious and would view significant strength to sell into.
NH:
sell into further strength
NH:
that’s the call from Teun
11:40AM
NH:
some more RAW related stuff
NH:
Tullow Oil down 12.5p at 762p
NH:
some people are pinning this on a story that was in the Irish papers over the weekend
NH:
this said, that Chinese bidders were no longer interested in Tullow
NH:
I think this could be a rehash of a Reuters story from last week
NH:
anyway, here it is
NH:
hang on
NH:
here it comes
NH:
By Nick Webb
Sunday March 15 2009
AIDAN Heavey’s €10bn oil firm Tullow Oil is understood to have snubbed an offer from the Chinese State Oil behemoth in recent weeks.
Tullow, which has seen its share price double since October last year, is thought to have dismissed an informal approach from the vast government-owned oil major, according to sources. Tullow said that it does not comment on “market speculation”.
China’s oil exploration and production empire is split into three entities: China National Petroleum Corporation, Sinopec and CNOOC. The state-owned oil firms are thought to be desperate to expand their presence in oil rich sub-Saharan Africa. Traditionally, China’s state-backed oil firms link up in the search for acquisitions and buyout targets with the Chinese government ultimately deciding which company will be the preferred bidder.
NH:
After years of reverses in Asia, Tullow has had spectacular success in finding oil in Africa. Tullow has discovered a series of world-class oilfields in Africa in the past three years.
The Jubilee and Tweneboa oilfields in Ghana and the Kingfisher and Buffalo-Giraffe oilfields in Uganda are hugely valuable, with combined potential reserves of about 3.8 billion barrels. Even with lowish oil prices of $40 per barrel, Tullow’s African assets make it hugely attractive to larger companies as the era of peak oil approaches. Royal Dutch Shell and other majors are thought to be keen on expanding in the region.
PM:
thanks for that
11:43AM
PM:
Anything else we should be keeping an eye on?
NH:
someone earlier asked about the LSE
NH:
I reckon it is just a dead cat bounce
NH:
shares up 38p at 450p
NH:
a gain of almost 10%
NH:
but perhaps also, people are realising the new CEO is superhuman
NH:
he worked 22 hours a day for three years
PM:
fresh celebration at the new turbo charged ceo
NH:
apparently
PM:
Action man
PM:
By Louise Armitstead
PM:
Sunday Telegraph
NH:
hang on, he is also a bee keeper
PM:
After a couple of hours with him, I came away with a working knowledge of French newspapers (grands problèmes), how to equalise ear pressure when diving at 60m (before you get wet) and the best route down the Vallée Blanche glacier in Chamonix.
PM:
Behind the cheery and suave disposition, Mr Rolet has proven mettle. The eldest of three children born to military parents, he describes his up-bringing as ‘modest’.After early life in Algeria, he was brought up in the notorious Sarcelles suburb of Paris. He says: “When I was at Lehman’s I taught French once a week in Tower Hamlets [east London] and it reminded me of my childhood − the awful concrete blocks. The kids there are tough but actually phenomenally open and interested in new things.”
PM:
oH, HERE WE GO
PM:
Mr Rolet used education to pull himself up. “I was very single-minded − I had lots of dreams, like the Dakar race for example, I could remember the dunes from Algeria when I was young.” he says. “But my real driver was America. I loved the idea of opportunity and making something of yourself and I put all my energy in trying to get there.”
PM:
He moved into a cramped apartment in Harlem with several other students. “It was pretty rough sometimes and the area had a bad reputation but there’s some wonderful architecture in Harlem and, at $80 a month, I loved it.”
NH:
this is very funny
NH:
PM:
His introduction to working on Wall Street was less smooth. “I was terrified for weeks. I was this fresh-faced college guy with big ideas who pretended to have a grasp on English. It was sink or swim. I worked 22 hours a day for three years.”
PM:
22 hours a day for three years
PM:
NH:
is he for real?
PM:
What’s he doing at the LSE?
PM:
Expected to sleep 22 hours a day
NH:
he has just come back from the Paris/Dakar rally right??
PM:
Buzz lightyear or something
PM:
Running the LSE
NH:
a real renaissance man
NH:
then, this Mr Rolet
NH:
bee keeping, architecture, rally driving
NH:
is there no end to this man’s talents?
PM:
I dont think there is, actually
NH:
The Talented Mr Rolet
11:49AM
PM:
lets move on
PM:
Anything else moving?
NH:
Rexam
NH:
that’s a big drinks can maker, for those of you who have not followed the company before
NH:
shares up 30.5p at 270p
NH:
obviously been helped by the dead cat bounce
NH:
and Rexam is one stock that has been hammered into the ground since the start of the year
NH:
but also an upgrade from Credit Suisse
NH:
who seems to be quite big in the stock
NH:
unsurprisingly they reckon the sell off is overdone
NH:
and recent share weakness has presented a good buying opp blah, blah, blah
NH:
• View: The share is down 35% (-40% in US$) since the start of the year, a sell off that accelerated post the company’s record
full year results (PBT GBP 328m) 19 Feb. We believe the sell-off is overdone and unjustified and give investors an opportunity
to buy into a stable cash generative business at an attractive level.
full year results (PBT GBP 328m) 19 Feb. We believe the sell-off is overdone and unjustified and give investors an opportunity
to buy into a stable cash generative business at an attractive level.
• North American demand is holding up better than expected with preliminary January – February statistics showing flat volume year-on-year vs -5% in 2008. While Jan-Feb are slow months we believe the data gives support to the notion that beverage
can demand is resilient in economic downturns.
NH:
• Threat of obesity tax has been removed. The proposal to introduce a 18% obesity tax on soft drinks in NY State was removed from the budget 11 March, removing a potential threat to beverage (can) consumption.
• Debt is manageable – Net debt/EBITDA covenant is 3.5x. On our 2009 estimates using year-end 2008 spot exchange rates
Net debt/EBITDA is 2.8x up a tad from covenant calculation of 2.7x at year-end 2008. EBITDA interest coverage is 5.4x and
EBIT interest coverage 3.6.
NH:
• Rexam has underperformed its rivals, US based Ball and Crown by 40% since the start of 2009 in spite of a similar product mix and the benefit of currency tailwind from the weaker GBP against the US dollar and Euro. Ball and Crown sees currency
headwinds.
headwinds.
• Valuation looks attractive both in absolute and relative terms. On 2009E Rexam trades at P/E of 6.8x vs. Reuters’ consensus
2009E P/E of 10.1x and 11.4x for Ball and Crown respectively. The dividend yield on unchanged 2008A dividend, which we
believe is sustainable, is 8.8%. 2009E FCF-yield is 16.3%.
• Catalyst: interim management statement 7 May.
PM:
thanks for that
PM:
very good service neil
PM:
Anything else??
NH:
De La Rue
NH:
been looking at that
NH:
only because of stories over the weekend that chancellor Darling is thinking of selling the Royal Mint
PM:
Ah yes
PM:
ive got a copy
PM:
The Royal Mint, which manufactures coins for the UK and over 50 other countries, has moved to the top of the government’s privatisation list as it looks for ways to ease the huge pressure on public finances in the wake of the banking crisis.
In November’s pre-Budget report the Mint – a trading fund of the Treasury – was added to a list of eight other government assets to be considered for “alternatives to public ownership”.
However, the Royal Mint is now the main target for a sell-off, according to a person close to the negotiations.
While only one of the three operations – UK, overseas and commemorative coin production – could be targeted for privatisation, it is more likely that the entire Mint will be moved out of the public sector.
In November’s pre-Budget report the Mint – a trading fund of the Treasury – was added to a list of eight other government assets to be considered for “alternatives to public ownership”.
However, the Royal Mint is now the main target for a sell-off, according to a person close to the negotiations.
While only one of the three operations – UK, overseas and commemorative coin production – could be targeted for privatisation, it is more likely that the entire Mint will be moved out of the public sector.
NH:
actually, that’s our follow up but never mind.
PM:
so, you reckon De La Rue might be interested?
NH:
well, that’s what I am hearing from brokers
NH:
shars up 19p at £10.40
PM:
over £10, jeez
PM:
just bringing up the chart
PM:
very impressive recent performance
PM:
shares started the year around 880p
PM:
so, would this be a good deal for DLR?
PM:
de la rue — not docklands light railway
PM:
tho that is better than it used to be
NH:
Panmure Gordon seems to think so
NH:
An article in yesterday’s Sunday Times speculated that the Royal Mint may
be up for sale. As the past buyer of Royal Mint note printing operations, we
suspect DLR is in pole position should it be interested – especially given the
strength of its Balance Sheet & its cash generation. With a client base that
would also enable considerable cross-selling and a clear focus on Currency
operations, this looks like a logical and opportune time to make a purchase
be up for sale. As the past buyer of Royal Mint note printing operations, we
suspect DLR is in pole position should it be interested – especially given the
strength of its Balance Sheet & its cash generation. With a client base that
would also enable considerable cross-selling and a clear focus on Currency
operations, this looks like a logical and opportune time to make a purchase
NH:
For Sale: Manufacturer & supplier of UK coins for over 1000 years, with an additional 15% market share in world coin supply market through the supply of coins to 60 overseas territories. Operating profit of £10m in 2008. One previous owner.
Background: Given DLR previously purchased the banknote printing operations of
Royal Mint we suspect it will be well placed here, and no doubt the political need to sell to a UK company ensures a limited level of other potential buyers. Following disposals DLR has a clear focus on Currency, and we suspect this may be a timely opportunity given the lack of opportunities in this area despite the fact that it has never been involved in coins before. With 15% of the world coin market and 60 additional clients worldwide, there will also be a number of cross-selling opportunities to the existing client base and possibly a number of synergy opportunities on central costs.
NH:
Forecasts & Recommendation: We believe Royal Mint made £10m of operating profit
in 2008, suggesting a purchase price somewhere between £100-150m depending on
other factors, which given our estimate for £58m of debt at 31/3/09 would not be
onerous in the light of £50m of cash generated per annum and the opportunity to grow
the business with external markets for the first time. At current levels the shares stand
within a whisker of our 1032p price target, with a pre-close IMS expected on Tuesday
24th March. We believe this potential acquisition could be good news, though at present remain Holders of the shares until confirmation of a deal and more information
in 2008, suggesting a purchase price somewhere between £100-150m depending on
other factors, which given our estimate for £58m of debt at 31/3/09 would not be
onerous in the light of £50m of cash generated per annum and the opportunity to grow
the business with external markets for the first time. At current levels the shares stand
within a whisker of our 1032p price target, with a pre-close IMS expected on Tuesday
24th March. We believe this potential acquisition could be good news, though at present remain Holders of the shares until confirmation of a deal and more information
11:54AM
NH:
time for some LIBOR?
NH:
11:45 16Mar09 RTRS-THREE-MONTH DOLLAR LIBOR 1.30875 PCT VS 1.31563 PCT FRIDAY – BBA
11:46 16Mar09 RTRS-THREE-MONTH STERLING LIBOR FIXES AT 1.83813 PCT VS 1.86875 PCT FRIDAY
11:46 16Mar09 RTRS-THREE-MONTH DOLLAR LIBOR/OIS SPREAD 108 VS 109 BPS ON FRIDAY
11:47 16Mar09 RTRS-THREE-MONTH EURO LIBOR/OIS SPREAD 94 BPS VS 92 BPS, STERLING 138 BPS VS 142 BPS
11:48 16Mar09 RTRS-THREE-MONTH EURO LIBOR FIXED AT FRESH EMU LOW OF 1.62500 PCT VS 1.64250 PCT
11:52 16Mar09 RTRS-THREE-MONTH EURO LIBOR/OIS SPREAD TIGHTENS TO 91 BPS, STERLING LAST TRADES AT 140 BPS
11:46 16Mar09 RTRS-THREE-MONTH STERLING LIBOR FIXES AT 1.83813 PCT
11:46 16Mar09 RTRS-THREE-MONTH DOLLAR LIBOR/OIS SPREAD 108 VS 109 BPS ON FRIDAY
11:47 16Mar09 RTRS-THREE-MONTH EURO LIBOR/OIS SPREAD 94 BPS VS 92 BPS, STERLING 138 BPS VS 142 BPS
11:48 16Mar09 RTRS-THREE-MONTH EURO LIBOR FIXED AT FRESH EMU LOW OF 1.62500 PCT
11:52 16Mar09 RTRS-THREE-MONTH EURO LIBOR/OIS SPREAD TIGHTENS TO 91 BPS, STERLING LAST TRADES AT 140 BPS
PM:
Slight tightening
PM:
Marches the generalised “up” feeling in marekts
NH:
and the rally continues
NH:
neither ML or Draaisma have been able to knock it
NH:
FTSE 100 up 85 points at 3,838
PM:
11:57AM
PM:
We must be almost done
PM:
Thought we could have a new feature here – at the end of the session
PM:
Lunch time reading
NH:
what like further reading, which is dead popular
PM:
yeah
PM:
So to kick it off, here’s our first Lunch time reading list
NH:
You are kidding Murphy
PM:
Wot?
NH:
This article provides a brief review of issues relating to deflation. It explains what is meant by deflation, examines the historical experience and investigates what costs might be associated with deflationary episodes. It suggests that the adverse effects of deflation can be exaggerated by confusing the effects of the underlying shock with the effects of deflation per se. The costs of deflation itself are most likely to be associated with debt deflation and downward rigidities in money wages. By learning from previous episodes, it argues that deflationary episodes can be short-lived and less costly if policy responds promptly and decisively, employing the full range of conventional and unconventional monetary policy instruments.
NH:
There’s eight pages of it?
PM:
NH:
(Cabin Fever – don’t impersonate Zoomy. That’s just sick and shows a huge lack of respect)
PM:
Good questions from taxloss — is impersonating Zoomy a cardabel offence
PM:
We’ll let that one go for now — co we like Cabin Fever
PM:
But…
PM:
Anyway — other LUnchtime reading
NH:
LOLfed – that’s more like it
PM:
How about Slackbelly
PM:
Yeah, definitely – good lunchtime reading
PM:
Oh and this
NH:
What’s that?
PM:
Whats that. It’s a one and a half hour video presentation by Richard Koo – chief ecenomist at the Nomura research Institute.
PM:
And has nothing to so with all the fantastic Nomura branded items we have to give away to readers
NH:
of course not
PM:
Here’s the blurb.
PM:
Richard C. Koo, the world-renowned chief economist of Nomura Research Institute, discussed the lessons learned from Japan’s “lost decade” during a presentation at CSIS. During his discussion, Koo suggested that government stimulus can play a key role in alleviating the problems of a balance sheet recession. Koo’s recent book, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession, discusses these issues in greater detail.
Richard C. Koo, a U.S. citizen and World-Renowned Chief Economist of Nomura Research Institute, has been an economist with the Federal Reserve Bank of New York (1981-84) and a doctoral fellow of the Board of Governors of the Federal Reserve System (1979-81). He also has been appointed by several Japanese prime ministers to a number of key committee positions to study the future designs for the Japanese economy. Koo, a recipient of the Abramson Award from the National Association for Business Economics, is the author of the recent book, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.
NH:
1:24:15 of video from the CSIS – to watch over Monday lunchtime????
PM:
Well – it’s important – what was learned from Japan’s lost decade.
PM:
PM:
I should offer a hat tip to Tim Price for that – who is ALSO worth reading.
PM:
This is from Friday – but should catch up on
12:02PM
PM:
You got lunch today?
NH:
no, supposed to be seeing some of my superiors here for a chat
PM:
Ah
PM:
Higher ups eh
PM:
Ive got lunch
NH:
where
PM:
Club Gascon
NH:
ah, very nice
NH:
in Smithfield
PM:
Actually, actually
PM:
The guy said “We can meet at the bar — like last time”
PM:
That is code for — “Let’s eat in the bar cos its cheaper”
NH:
so, you are not going in the main bit.
PM:
Which is fine by me
Which is fine by mePM:
More relaxed
PM:
And the food is the same
PM:
price
NH:
wine is good too
PM:
Maybe a glass
PM:
Got too much work to day
PM:
NH:
OK, reflections on the Arsenal match
NH:
our little Russian has great awareness
NH:
and actually looks and passes forward
NH:
as for Bendtner, I won’t be giving him stick
NH:
I think the finishing will come
NH:
bring on Hull
NH:
in fact, I might even go
NH:
with Cesc and a few others waiting in the wings
NH:
it could be a good end to the season and Villa’s next two games are Moan Utd and Liverpool
PM:
Actually — on that Koo stuff for Praxis22 — here’s the presentation to save watching the vid
PM:
Moan Utd — wots that ?
PM:
NH:
Man Utd
12:08PM
PM:
Anuything eslse — can i go
PM:
?
NH:
one thing
NH:
it’s on shipping
NH:
not something I follow too much
NH:
but an interesting note came out of Deutsche Bank this morning on Maersk
NH:
and it’s pretty bearish
NH:
sell – due to a severity never experienced before, such that
oversupply makes it difficult to anticipate when we will see some light at the end of
the tunnel
oversupply makes it difficult to anticipate when we will see some light at the end of
the tunnel
NH:
not sure that ships do tunnels
NH:
but you get the idea
NH:
here’s some more
NH:
Initiating coverage with Sell and DKK19,940 target price. We initiate coverage of A.P.
Moller-Maersk with a Sell rating due to the exceptionally bad conditions for the
container shipping business, of a severity never experienced before, such that
oversupply makes it difficult to anticipate when we will see some light at the end of
the tunnel. The company’s presence in other business areas such as oil & gas and
retail protects it in relative terms versus some of its competitors, making it a probable
long-term winner. However, we see no obvious trigger for the stock or the sector over
the next twelve months.
NH:
Container shipping: Oversupply will likely delay recovery. The collapse of demand
since Q4 2008 was too abrupt to have been anticipated. An excess of optimism in the
sector until a few quarters ago means fleets are likely to grow by more than 10% in
2009E and 2010E. Scrapping and order cancellations might mitigate the problem
slightly, and freight rates have fallen to unsustainable levels, meaning that businesses
with high operational gearing will take a major hit. The very low rates at present are
irrational in some cases, and although we will likely see some peaks of recovery in Q2
2009, this does not change the overall gloomy picture.
since Q4 2008 was too abrupt to have been anticipated. An excess of optimism in the
sector until a few quarters ago means fleets are likely to grow by more than 10% in
2009E and 2010E. Scrapping and order cancellations might mitigate the problem
slightly, and freight rates have fallen to unsustainable levels, meaning that businesses
with high operational gearing will take a major hit. The very low rates at present are
irrational in some cases, and although we will likely see some peaks of recovery in Q2
2009, this does not change the overall gloomy picture.
Supported by other business areas. We expect the group to avoid losses this year
thanks to the contribution of areas such as oil & gas, terminals, tankers, offshore and
retail. However, prospects are also not encouraging for these businesses, especially
considering the likely drop in earnings for all the divisions negatively affected by the
current low oil price as compared with the 2008 average. The solid balance sheet
should be a relative advantage for A.P. Moller-Maersk in the current environment.
NH:
SOTP-based TP; oil prices, macro and forex key risks. We have based our target price
of DKK19,940 on a sum-of-the-parts model. Given the group’s holding profile, we
believe this is the most appropriate and widely-used valuation approach. For each
business unit we have calculated our valuation with multiples comparison or
discounted cash flow models. The main risks are: 1) oil prices significantly above our
assumptions, 2) a faster-than expected macro recovery, and 3) a significant
appreciation of the US dollar.
of DKK19,940 on a sum-of-the-parts model. Given the group’s holding profile, we
believe this is the most appropriate and widely-used valuation approach. For each
business unit we have calculated our valuation with multiples comparison or
discounted cash flow models. The main risks are: 1) oil prices significantly above our
assumptions, 2) a faster-than expected macro recovery, and 3) a significant
appreciation of the US dollar.
PM:
ta
12:10PM
PM:
we aer done
PM:
thanks for joining
PM:
thanks for the comments
PM:
Sorry for the heavy threats earlier
PM:
I got a sense after last week that we were going to come under muppet attack
PM:
didnt materialise
NH:
I am done
PM:
We will be back tomorrow at 11am — seeya
NH:
byeeeeeeeeee