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Markets live transcript 28 May 2009

Posted by Paul Murphy on May 28 11:02.

Markets live chat transcript for the chat ending at 12:02 on 28 May 2009. Participants in this chat were: Paul Murphy, FT (PM) Bryce Elder (BE)

PM:

Welcome
PM:

This is Markets Live
PM:

FT Alphaville’s daily chat about how the penny finally dropped and we all had to go and live in the mountains.
PM:

Stocks are WAY down
PM:

E&M Capital Management is in fine fettle – we are already working out how many Webby drinks we can buy with the performance fees.
PM:

But Bryce is here.
BE:

Hello.
PM:

Let’s get down to some individual features.
PM:

Bryce, what’s moving?
BE:

Ahem
PM:

Why don’t you run through the biggest fallers.
BE:

Ahem, ahem
PM:

Wot?
BE:

Haven’t you got some explaining to do?
BE:

Like, issuing an apology?
PM:

Oh yeah – sorry about that supposed16 per cent GDP drop supposedly in the FSA stress tests. Read it wrong. Was 6% actually.
PM:

Okay, let’s go to Man Group
PM:

Off a whopping 9%
PM:

This’ll be people redeeming to put money into E&M I guess.
BE:

You can’t just give one line apology and think that that is it!
BE:

You have to offer a proper explanation. You misled the entire London market on this.
PM:

PM:

Well, I did say it was completely untested.
BE:

PM:

It was just what we were told by one of the banks that had been tested.
BE:

PM:

They were responding to what John Waples had written in the Sunset Times.
PM:

He’d said everything was rosy cos even the FSA’s view of the worst scenario was only 6-8%.
PM:

And they were saying it was much much much worse than that – think 16%
PM:

And actually, it seems Waples was right
PM:

and i was wrong
PM:

I’m sorry
PM:

BE:

Hmmm.
BE:

What are you going to do about the fact that the results from competition you ran at the time is now in disarray?
PM:

Well, will have to go back through the readers’ forecasts and see who got them really right – and send prizes to them as well.
BE:

Have you sent the first lot of prizes out yet?
PM:

No
PM:

I will do
PM:

Can we just move on. This is panning out as a really bad day.
BE:

Okay. For now.
11:09AM
BE:

For those interested, this is Sam’s new twitter pic
BE:

PM:

PM:

it’s Sam’s birthday today.
PM:

He’s made it into double figures.
BE:

Although also, there’s this bust of Caligula, which is an interesting likeness …
BE:

PM:

Acutally, Sam’s been irritating the hell out of me this morning.
PM:

Going on endlessly about bond convexity.
BE:

What school did he go to where he got taught about bond convexity?
PM:

He’s a weirdo – we’ve got to get rid.
PM:

I said before I’m gonna fob him off on the paper.
PM:

There’s the hedge fund job going – -James Mackintosh has moved over to be deputy comment editor – so we can probably chuck him in there.
BE:

Ah, the growing ranks of Alphaville cast-offs.
BE:

Is it true you made Helen Thomas go and live in Manhattan just because you were irritated by how much she knew about VAR calculation.
PM:

Yes, and?
PM:

Anyway, the hedge corr job on the paper will learn him. Can already hear the conversations with the news desk.
PM:

“Sam, can you put a paragraph in the story explaining what a hedge fund is and why it matters.”
PM:

“Sam, we need to remove this jargon about long/short strategy. What are you trying to say?”
PM:

“What does it do? It sells assets it doesn’t own??”
PM:

“Isn’t that illegal?”
BE:

11:13AM
PM:

Best get on
PM:

So what’s undermining things today Bryce
BE:

Well, the big story is US Treasuries
BE:

People can’t sell enough of them
BE:

There was intense selling overnight – all started in the MBS market.
BE:

That’s mortgage backed securities
PM:

er, yes i know that
BE:

US 10 year treasury yields jumped 20bp to around 3.74.
BE:

Basically yields are back where they were last autumn before we got any inkling of QE.
BE:

And we have seen a dramatic steepening of the yield curve.
BE:

Basically, everyone is belatedly worried by the avalanche of new US paper being issued – that and the threat of inflation.
PM:

But I thought people were supposedly moving out of treasuries cos of increased risk appetite.
PM:

Moving out of the safe haven
BE:

That was the story – but not anymore.
BE:

Now it’s fear.
PM:

And how about on the MBS side?
BE:

Knew you were going to ask me that.
BE:

BSB offered a useful link earlier
BE:

To Mortgage News Daily – their MBS commentary
BE:

Talking about a Black Wednesday in MBS
BE:

PM:

Think the point you have to bear in mind here is that the MBS market is HUGE – and can actually lead US treasuries.
BE:

There are all sorts of technical relationships as well – selling in one market triggers forced selling in the other.
PM:

Actually, this mortgage daily site is rather good.
PM:

They’re blaming Bill Gross. Here’s a par or two
PM:

Ever been to a public pool when someone notices something floating in the water that shouldn’t be? Basically, Bill Gross dropped one of the aforementioned last week with AAA credit concerns. This has sparked a now 4 day selling spree that is kicking into high gear before our eyes. EVERYONE, servicers, originators, banks, insurance funds, hedge funds, sovereign wealth is getting out of the pool for a water change and decontamination. This is “the great MBS reset.” Things will go back up, but not until every last seller gets their fill. Treasury prices are being pulled down almost exclusively as a function of MBS-incited duration shedding. It’s a black Wednesday for MBS to be sure, so if you HAVE NOT seen a reprice for the worse yet, probably best to lock ‘em up. If you’ve only seen ONE reprice for half a point or so, be advised another reprice is on the way, at least another half point. As far as “how long till it comes back?” It won’t be this week or next till we’re back in the previously high range. And perhaps it’s better to think in terms of months at this juncture. Treasuries are dependent on MBS today, but we’ll be dependent on them on the way back up. One huge mitigating factor is the naivete one must possess to think that the current state of the markets will not be addressed in a “Federal” manner. All we can do is watch and wait (and hope) for that…
PM:

PM:

here’s some more
PM:

There’s not much to say… Just as there’s not much to say whilst watching a catastrophic explosion. There is just awe, fear, and panic among other things. Beyond what’s already been said, the most accurate accounts of the explosion, it’s causes, severity, and future implications will–like any other conflagration–come after the dust settles and the ashes float away. For now, here is the latest picture of the explosion showing the technical analysis pattern of a “penant,” which is akin to a triangle. It forms in a directional up or down price movement and represents a pause in the trend movement where things consolidate sideways in narrowing range. It is most often a CONTINUATION pattern, meaning it hearkens further losses today as opposed to a reversal. Sadly, that has been the case so far… (hint: we added the vertical line so you could see why it’s called a penant)
PM:

So the knock on effect?
BE:

Well, the Dow sank 2% — and then shock waves over here
BE:

Gilt yields shot up – along with bunds
PM:

What’s the yield on 10 year gilts?
BE:

About 3.82
PM:

Goodness me – really?
PM:

Just pulling the chart up on that.
BE:

It’s spike above the point we saw in Feb. Now back at levels we saw in November.
PM:

This has got to be a disaster, no? How’s the british government going to shift all its paper?
BE:

Expensively, that’s how.
BE:

That said, they can always sell index linked paper – as they were this morning
BE:

Debt management office shifted £1.25bn of 1.25% index lined 2032
BE:

Covered 2x
PM:

Hmm – that’s not a big issue
PM:

And stocks?
BE:

Well, reaction there is less extreme – footsie currently down 50 at 4366
PM:

I know why that is.
BE:

Go on then
PM:

Well, increasingly the stock market is being seen as a safe haven.
PM:

A store of value in case the world goes Faberesque
BE:

What, hyper-inflation.
PM:

Exactly.
PM:

If the wheels really do come off, sterling genuinely collapses and prices spiral out of control
PM:

Then the place to protect your capital will be either property or the stock market.
PM:

Traditional stores of value.
BE:

And gold, of course.
PM:

And maybe even silver – for Zoomy
PM:

Actually on the subject of Zoomy — i think he has had problems with his log in
PM:

Mailed me to say he couldnt comment — and thought he’d been zapped
PM:

Which he hasn’t
PM:

His account looks fine from this end
PM:

Will mail him later
BE:

Right
BE:

And while we’re opening a dialogue with the right wing over there
BE:

Can I just thank Praxis22 for fixing my computer
BE:

(Or, at least, recommending a wireless card that worked, and cost £5 off ebay.)
PM:

Monkey — you are no doubt right — i was just thinking about the Zimbabwe example , where the stock market has risen at a greater rate than local inflation
11:23AM
11:23AM
BE:

Right, best have a look at Man Group.
BE:

As mentioned by several people over there.
BE:

Down 20p at 230p
BE:

Which looks bad, although it’s back to the level it was about a week ago
PM:

I thought the results are in line
BE:

They were – or at least in line with the March trading statement
BE:

Although assets under management were about 2% below the $47.7bn it guided for then, due to FX.
BE:

However, new business is the big problem
BE:

AUM of $44bn, down from $46.8bn at the end of March
BE:

With $3bn of institutional redemptions in two months
BE:

Resulting in a $2bn net outflow
BE:

Coupled with heavily-reported crappy performance of its momentum-driven stuff through the turnaround
BE:

AHL, the flagship, has fallen for five straight months and is down 10% against its high
BE:

And management still don’t see the trough, guiding for a further $2bn of institutional redemptions in the coming months.
PM:

But, if everyone knew the funds were suffering, why did the shares rally into the results?
BE:

I’d suggest it was partly to do with to a rumour that April fund launches for the retail punters in Japan and Australia had beaten expectations my a country mile
BE:

Which, as it turned out, was true
BE:

$2.6bn since year-end, compared with guidance of $1.0bn-$1.5bn
BE:

But any benefit must have been destroyed by redemptions and institutional outflows
BE:

Oh, and revenue margins fell from 429bp to 420bp in private investor and from 100bp to 90bp in institutional.
BE:

So the company’s relying on its new integrated business platform thing, which comes in on line in June, to stop the bleed
BE:

BE:

But sales are always a lagging indicator
BE:

Whereas the effects of poor fund performance usually begin to bite after six months or so
PM:

Is there any comment?
BE:

Here’s the new figures from Credit Suisse, who are joint shop
BE:

We are reducing our EPS forecast for the y/e March 2010E by 12% to 34.2 cents and are reducing our management fee and performance fee forecasts by 8% and 27%. We have reduced our AUM forecast for the y/e March 2010E by 7% to $47.6bn and assume net outflows of $1.7bn for the year. We continue to believe that Man group is an outstanding franchise but we would be relatively cautious before we see any evidence of a stabilisation in outflows and a bounce in AHL investment performance.
BE:

And Merrill, which you probably could have guessed is the other house broker
BE:

There is little to surprise in the disclosure on margins; retail margins are basically stable, mix shifts between open end and guaranteed products aside, and institutional is seeing fee pressure, hardly a surprise to anyone.
BE:


At the year-end, the company had net cash and surplus capital of $1.7bn. The dividend for the year, at 44c, was unchanged, as presaged by the preclose. Since the year-end the company has continued to sell well through the retail channel, with $2.6bn of sales so far, a good quarterly level of sales. The company hasn’t provided any commentary on retail outflows, which we presume means that there is nothing surprising to report here. Institutional sales have remained difficult and redemptions have remained elevated, as the company suggested in its preclose. AUM presently is around $44bn, consistent with our end September target of $45bn.
BE:

The outlook statement talks about a “period of significant opportunity in the hedge fund industry”, saying “Man is well positioned for growth in market share”.
BE:

We will review our estimates following the company’s analysts’ presentation, due at 8.30am today, but would not expect to make material changes to Dollar estimates. We view these numbers as helpful, underlining financial discipline as well as Man’s retail distribution power. Our view remains that the company’s products are excellently positioned to meet client demands for liquid, transparent, regulated, risk controlled investments; it is this which underpins our Buy recommendation, which we reiterate.
PM:

Ok. Thanks for that.
PM:

Should just note the cheek of Carlomagno to the right
BE:

Fair enough, quite frankly.
BE:

My old English teacher would lay an egg if he saw what I write for a living these days …
PM:

I actually think we should get some of the readers on this side of the screen — and we can see how they fair
PM:

11:28AM
BE:

First up, Sports Direct …
BE:

Still not sure who the buyer of Ashley’s stake is
BE:

The rumour yesterday was that JD Sports had picked it up
BE:

But some other people seemed to think Crystal Amber, the activist fund, may have been dealing
BE:

We were digging for ages on this one yesterday, without a great amount of success
BE:

And, on Segro / Brixton
BE:

The “bondholder revolt” is ….
BE:

how shall I put this?
BE:

… some might see it as a bit of stage management, quite frankly.
BE:

We’re hearing a lot of attempts by certain bondholders to attract another bidder to the table.
BE:

But it’s proving difficult to get anyone to put much of a price on the equity.
PM:

thanks for that
11:32AM
PM:

Where now?
BE:

I think we’d best look in on ITV again
PM:

Oh yeah. Saw it was up. Bid rumours again?
BE:

Needless to say. They’re perpetual.
PM:

Price up 1 penny at 32.5
BE:

But the better reason is another upgrade
PM:

Really? On ITV? The one with Ant and Dec and that singing woman?
BE:

Yeah. I’m as confused as you are.
BE:

However, here’s Merrill to explain itself
BE:

We upgrade ITV to a Buy with a 50p price target.
On our price target, ITV would be on 14x 2011E P/E.
BE:

Only broadcaster pricing in no advertising recovery
Our main argument is that ITV is the only broadcaster in Europe that is currently pricing in no recovery. On 2011E, the stock is on 6.7x P/E, a 39% discount to comps. To reach our price target of 50p and assuming that investors are willing to pay 14x 2011E P/E (ie mid-cycle multiples), ITV total advertising (ITV1 + digital channels) only needs to grow by 4.0% over the next two years. This is only 24% of the current downturn (ITV advertising should decline by 17% in 2008A and 2009E). All the other broadcasters, price in at least twice that level of recovery versus current fall. This ranking is explained by ITV’s above average cost cutting effort in the downturn.
BE:

Potential regulatory benefits
We have no impact of further regulatory benefits in our forecasts (further PSB easing for instance). This could add £30m to £70m to pre-tax and mitigate the risk of any cost creep in a recovery (especially with a new CEO).
BE:

Main risk is being early
The main risk to our Buy rating is that we are too early as investors need to focus on 2011E for ITV to appear cheap (Year 2 becomes the focus usually in January of the year before ie in January 2010E in this case). In the meantime, ITV is a geared play on the market and if the market corrects following its bounce because the recovery takes longer or is not as steep as expected then ITV underperform.
BE:

For investors fearing a market correction, the best strategy is a pair trade against another broadcaster (Mediaset for instance). The fact that ITV prices no recovery (unlike Mediaset) should protect on the downside.
PM:

ML think’s its main risk is being “too early”? I think their main risk is in being completely wrong.
BE:

BE:

Anyway, the Merrill argument’s strikingly similar to Goldman Sachs’s upgrade yesterday
BE:

… Although the suggestion of a Mediaset pair trade could raise a few eyebrows if recent rumourtrage proves to be even slightly true
PM:

indeed
PM:

Where are we on the search for a replacement for Michael Grade?
BE:

Did we have the runners and riders in the paper today?
BE:

I know there was an office discussion about it
PM:

cant see one immediately
11:37AM
PM:

Anything else you want to look at?
BE:

Wristwatches.
PM:

Er …. ok.
BE:

Bear with me … there is some logic here.
BE:

You know how luxury goods sectors have gone gangbusters as soon as we stopped pricing in the failure of the world economy?
PM:

Go on
BE:

And demand, while it was still pretty depressed, was at least supposed to have hit some kind of stability?
PM:

Where’s this going?
BE:

The ever-thrilling Swiss watch exports data, of course.
PM:

ah
BE:

April exports down 26% yoy. That’s against a 24% drop yoy in Q1
BE:

With high-end only down 22% in April
BE:

And with the dollar weaker as well, some are arguing that the flight to sh*** may have been too early for the fat watchmakers.
BE:

Here’s Credit Suisse with some lines on the theme
BE:

Sure we should focus on turning points and forward-looking metrics, but the fact is that the hard data we track still suggests that it may be too premature to assume that a real recovery in demand is round the corner for luxury goods beyond a moderation in the rate of decline driven by easier comps in
2H and a gradual convergence between sell-in and sell-out in wholesale (which we do not know when will happen, especially for watches).
BE:

Beyond this year of revenue “re-basing” (amplified at profit level by operating de-leverage effects), the biggest uncertainty remains whether luxury demand will eventually revert back to long-term historical levels or remain sluggish for several years to come, considering how badly key profit pools like Japan and the US have been impacted.
BE:

Sector themes: (a) favour stronger brands, which should particularly outperform in downturn periods, (b) favour exposure to Asia non-Japan, arguably the key source of growth in the near-term and certainly the main growth avenue for the industry in the long-term, (c) still prefer soft luxury (especially leather goods) to hard luxury (especially watches) given the latter’s greater top line risk amplified by bigger operating de-leverage risk.
BE:

Stock picking: Given our preference for more defensive stories (especially post recent rally), we still see LVMH as a relative sector outperformer while Bulgari remains our key Underperform idea in the near term.
BE:

And Izabella’s done a post on the subject, for fans of heavy wristmetal
BE:

PM:

cheers
PM:

Actually, this reminds me of an off-beat note got from Bernstein this morning
PM:

European Luxury Goods: Opportunities for “Responsible”
Made in Italy
PM:

Check this out for weird fact
PM:

The apparel & leather goods industry in Tuscany is quickly changing, as a new breed of Chinese
entrepreneurs is giving it a second lease on life. Tuscany hosts the largest European fashion and leather
goods manufacturing district in Europe, with c. 20,000 companies, c. 100,000 employees and € 18b sales.
Chinese companies in this area number today 6,500 and employ c.50,000 people, most of them
immigrant workersi.
BE:

Chinese in Italy?
PM:

yeah – third of the firms in Tuscany — employing half the workforce
BE:

Well I never.
PM:

The reason for the stellar success of the Chinese in Tuscany – we believe – is that they square the
circle with the closest thing to a “Made in Italy” with Chinese costs. As in the case of mainland
Chinese exports, Chinese companies in Tuscany started off c.20 years ago with entry price points and
entry level quality. This has changed fast; Chinese companies in Tuscany are now active at all price and
quality levels, including luxury products in apparel and leather goods.
• Squaring the circle, nevertheless, comes at a price. Most often this price is paid in the shape of
employment safety hazards, child labour, irregular employment, breech of work regulations, widespread
tax evasion, outright fraud involving fake “Made in Italy” and fake branding. Workers and their families,
end consumers and the broader tax paying population pay the price of the current state of affairs.
PM:

The point here is certainly not blaming the Chinese. They are just willing to provide a solution in the
current compromise. Rather, the opportunity here is to recognize the compromise and break it, by adding
responsibility and ethical compliance as key criteria side by side with legitimate profit optimization and
retail price containment. While not easy, we think this can be done – and to long term advantage.
• We imagine a high profile and industry wide initiative for “responsible” Made in Italy, where
“ethical codes” currently introduced on a voluntary basis by some of the most prominent brands could
become an industry standard and a trademark. This would highlight all the way down to the end
consumer that ethical and responsible standards are upheld all the way up in the supply chain.
PM:

Anyway — i’ll send to Tracy
PM:

she’s our resident fashion correspondent
BE:

Wow. I had no idea. Looks like the kind of thing the Independent gets excited about.
11:43AM
PM:

Elsewhere…
PM:

Some people were looking for a note on chemicals from Cazenove earlier
PM:

I now have it
PM:

Moved to neutral from udnerweight
PM:

underweight, even
PM:

The weak first quarter in 2009 revealed the negative
impact of customer destocking and lower demand on
volumes – with order books drying up in many cases.
However, we believe company earnings going forward,
while still very fragile, are likely to see the rate of decline
slow, with future results viewed against particularly weak
comps in Q4 2008 and Q1 2009. Equally there is a chance
that some major end markets for chemicals, such as
automotive and construction, may stabilise earlier than
expected. Best not to fight the Fed.
In addition, cashflow benefits should arise from improved
working capital (as inventory costs fall), and in turn margins
may be supported by lower raw materials that are likely in
the second half. Customers’ inventory levels are also low,
due to well documented destocking and although
fundamental demand may not rebound strongly yet, low
utilisation rates could result in a squeeze to pricing, and
tight supplies, if demand returns suddenly. In terms of
financials, in many cases company balance sheets and
cash flows also remain more robust than in previous cycles.
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:

(Obviously Caz don’t issue “raw” raw)
PM:

Planned new Middle East capacity in commodity chemicals,
which could add some 10% to new ethylene supplies by
2011 (up to c. 17m tonnes), is unlikely to disrupt the
chemicals market. In fact, a lowering in the ethylene price,
due to globally increased supplies, would benefit most
European producers who use ethylene and its by-products
as a raw material.
We have cut forecasts sharply over the last few months,
and are below consensus on almost all stocks. We raise our
Pan Europe sector recommendation to NEUTRAL, while
upgrading recommendations on Akzo, Arkema, BASF, Yule
Catto, and downgrade Air Liquide due to its more
defensive, late cycle, profile.
We retain an OUTPERFORM on Johnson Matthey,
Lanxess, K+S and Syngenta, and In-Line on Linde.
11:45AM
PM:

Also, some people interested in Ferrexpo — which has come off the top
PM:

Stock is down 5.75 at 160 this morning
PM:

There’s a note out from Renaissance capital
PM:

Ruskie bank
PM:

They are cautious after the recent rally
PM:

this is all CIS resource stocks
PM:

More visibility needed for further appreciation: The rally in the CIS ferrous
and carbon universe has been welcomed. However, without material visibility as to
whether any price as well as a sustained volume recovery is clearer (which it is not),
we believe the risk/reward ratio for the sector has turned from positive to negative in
the short term. Sector volatility will remain endemic and, in that regard, after the
strong rally from which we have benefitted, we would be more cautious into the
summer. We have adjusted our target prices to account for 1Q09 results, prevalent
pricing and shifts in multiples. We are now neutral on the sector.
PM:

Mechel replaces Evraz as top pick: Our downgrades reflect a concern that
too much has been priced in too soon. We still prefer domestic plays (MMK, Evraz
and Mechel) and export coal plays (Mechel). The overweight Evraz and underweight
Severstal stance that we took in early April has yielded a spread of 142%. We would
be less aggressive with this position. We keep Severstal on a SELL. We downgrade
our Evraz TP to $22/GDR from $26/GDR and from Buy to HOLD. We upgrade
Mechel primarily due to the Bluestone Coal deal to $13/share from $7.10 believing
that the share can re-rate leaving more upside potential in Mechel than Evraz, in our
view. Mechel remains a BUY. We believe MMK is well positioned and upgrade it to
$8/GDR from $7/GDR. MMK remains a BUY. Raspadskaya and NLMK remain on
HOLD with TPs of $1.5 and $16/GDR, respectively. We downgrade Ferrexpo to
GBP1.03/share from GBP1.10 and to a SELL from a Buy, having been the best
performer in the universe. Recent good news flow has been fully priced in.
BE:

Yeah, think Troika went cautious as well yesterday.
BE:

And, when the Russian brokers make a call on such companes, it’s often worth noting.
PM:

Indeed
11:47AM
PM:

We haven’t mentioned Wolseley
BE:

No.
PM:

Stock has been hammered this morning
PM:

Price down 170p at 10.59
BE:

That’s post the reverse stock split of course.
BE:

Or whatever Charlomango wants us to call share consolidations.
BE:

Anyway, I’ll just jump to a succinct summary from Collins Stewart.
BE:

Another disaster
BE:

Yet another grim trading update
Wolseley has put out an IMS for 9M ended April 2009. Sales are up 0.2%,
but EBITA is down 58% and PBT 80% down. In comparison, BSS yesterday
reported FY results with virtually stable sales and EBIT/PBT. We believe
Wolseley is losing market share
the turmoil of its debt problems and the
scale of Stock losses have left it poorly placed to navigate the downturn. For
the first 9M, Wolseley reported the following EBITA trends
US 32%, UK
down 75%, France 70%, Nordic 50%. We downgrade from Hold to Sell,
TP 1030p.
BE:

Stock losses wont disappear after all
Wolseley has put its loss-making US housing business Stock into a JV. It will
consolidate its 49% share of the post-tax losses going forward. This partial
exit near the bottom of the US housing cycle is unfortunate in our view.
BE:

How attractive is the rest of the business?
Post-Stock, Wolseley is left with the following sales split
US 38%, Canada
5%, UK 20%, France 15%, Nordic 15%, CEE 7% (CEE is under strategic
review). This split is far from ideal. The US business Ferguson is mainly
geared to commercial spend, which peaked in Q408 and faces a +30% fall
in the next two years, in our view. The group is losing market share in the
UK and France to the likes of Travis, BSS and St Gobain.
The Nordic
business DT also faces a sharp fall in underlying demand.
BE:

Very sharp rally cut to Sell
The shares have more than doubled from March lows. Short interest which
peaked at over 20% – now stands below 5%. Two long-awaited catalysts
the rights issue and Stock JV
are behind us. We cut our 09 EBITA by 16%
and from Hold to Sell, TP 1030p. This is based on DCF (WACC 9.3%,
growth 2%). CS Quest
default stands even lower, at 836p, with a Triangle
score of 2/10 and the CS Quest
value per share falling 26% pa over the
last three years. The stock trades on 17x PE, above the upper end of its
historical range. We are not convinced that Wolseley is at the trough of the
cycle and question a premium rating given its performance in this downturn.
BE:

And a line from HSBC
BE:

3Q trading update worse than expected
Wolseley’s trading update indicated a constant currency decline in revenues of c15% and
trading profit of c65%. This implies a c21% decline for Q3 on a constant currency basis, given
the c12% constant currency decline in H109a. Trading profit of GBP189m for the nine months
indicates a GBP7m trading profit in Q309e or a 0.2% trading margin (pre-restructuring costs
and amortisation).
BE:

Europe’s weakness expected, Ferguson will be a negative surprise for investors
We believe that weakness in Europe was anticipated, but weakness at the US plumbing
business, Ferguson, will be a surprise. Ferguson recorded a constant currency revenue decline
of c15% (H109a was -11%). Worse still, the trading margin for nine months in the division
was c5.1% (from c6.2% until H109a). This implies a strong margin decline in Q309. We were
modelling a margin improvement as a result of restructuring actions in H209 in the division,
which clearly did not happen. Wolseley claims that Ferguson continues to focus on high
margin activity. We believe the margin decline is likely to be a result of a mixture of pricing
pressure as well as supplier rebate losses (implied by a mild decline in gross margins).
BE:

In Europe, revenue and trading profit decline rates have accelerated in Q309e. UK and Ireland
recorded constant currency revenue declines for the nine months of FY09e of c15% (H109a -
14%), France of c10% (H109 -6%), and Nordic markets of c19% (H109 -13%). All these
numbers indicate that Q3 decline rates were much higher. Furthermore, the company has
announced an additional cost saving programme. We believe that until the bottom of the
downward trend is reached, cost reduction programmes are likely to remain in place. In terms
of the outlook, Wolseley indicates that it anticipates weak market conditions until early 2010e.
BE:

We believe it is too early to put Wolseley on mid-cycle multiple on the mid-term estimates as
(1) the extent of downturn and (2) the shape of recovery are two key risks. Wolseley trades at
PE multiple of c16.5x 2010e and on mid-cycle multiples on FY2011e. Given the risk of
margin declines due to supplier rebate losses, pricing pressure and the unknown extent of the
downturn, we reiterate our Underweight (V) rating on Wolseley with target price of 1,000p.
BE:

Wolseley really is a serial offender for this kind of thing.
PM:

indeed
PM:

thanks for that
11:52AM
BE:

It’s nearly midday
BE:

Just time for a quick visit to smallcap corner
BE:

Development Securites is apparently meeting investors at the moment
BE:

Talking about raising £30m.
BE:

Although this has been quite well flagged
BE:

And, as of last night, is apparently not imminent.
BE:

And, while we’re on the subject of half raw
BE:

Some people getting excited about some midcap company in Belgium
PM:

really?
BE:

Well, excited is probably too strong a word
BE:

Hang on – just hunting for the story at the moment
BE:

They’re a competitor of Spectris, with a very similar name …
BE:

There we go – Metris
BE:

Apparently Nikon and some other Japanese company are bidding
BE:

Huge premium
BE:

But shares are suspended
PM:

hmm — interesting
BE:

So, that’s why it’s only in the category of half raw.
PM:

fair enought
PM:

ta
11:59AM
PM:

Okay — we are done
PM:

Thanks for joining us today
PM:

And you let me off rather lightly on the FSA stress test front
PM:

Thanks for all the comments
PM:

We are now going to take Sam for lunch
PM:

Cos he’s not really irritating
PM:

And not at all weird
PM:

Well, maybe a little bit
PM:

See you tomorrow hopefully at 11am
BE:

Yup – bye.
PM:

Taxloss!
BE:

Worryingly close to the truth, T.

This entry was posted by Paul Murphy on Thursday, May 28th, 2009 at 11:02 and is filed under Uncategorised. Edit this entry.

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