Markets live chat transcript for the chat ending at 12:12 on 9 Jun 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE)
NH:
Good morning
NH:
It is 11.03
NH:
and that’s means it is time for another session of Markets Live
NH:
FT Alphaville’s daily markets commentary
NH:
Paul is still swanning around Manhattan
NH:
but Bryce is hear this morning
NH:
so I am not completely alone
NH:
he is just logging into Murph’s PC
NH:
tallking of which
NH:
PM is still swanning around Manhattan
NH:
and all I have heard from him is this
NH:
Can you plug this in ML if poss…
NH:
consider it done
NH:
it is the latest news letter from good folk at Capital Chronicle
NH:
The June Academic Research Monitor edition is out. Some highlights include:
• The impact of corporate governance styles on profits in the current crisis
• Re-tooling bankers’ variable pay
• The current under use of the US bankruptcy reorganisation procedure
• The Great Depression vs the crisis of 2007-?
• The effects of subprime fallout on retail lending levels
• The common trait of recent asset bubbles
• Price impact of foreclosures and distressed sales on the US house market
• Time for gold, surely?
• The impact of corporate governance styles on profits in the current crisis
• Re-tooling bankers’ variable pay
• The current under use of the US bankruptcy reorganisation procedure
• The Great Depression vs the crisis of 2007-?
• The effects of subprime fallout on retail lending levels
• The common trait of recent asset bubbles
• Price impact of foreclosures and distressed sales on the US house market
• Time for gold, surely?
NH:
if you want a trial go to
11:05AM
NH:
anyway
NH:
in Murph’s absence
NH:
Bryce is joining me
NH:
after a day of baby sitting
BE:
Hello
BE:
have we got the comments fixed?
NH:
I think so
NH:
span filter went mental yesterday
NH:
blocked everyone
NH:
even Zoomy
BE:
So it wasn’t you zapping people
NH:
well, in the confusion, I might have carded a few people
NH:
but, Andy Betts at Assanke assures us the problem is fixed
NH:
we moved to a new filter yesterday
NH:
so we should be back to normal
BE:
SNAFU
NH:
indeed
NH:
OK, where shall we start?
NH:
wider market
BE:
well, there’s nothing for PM to worry about
BE:
no need to close the bear
BE:
FTSE 100 up just 6.4 points at 4,411
NH:
and Pearson one of the biggest fallers
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
NH:
as several readers have noted
NH:
what’s that all about?
NH:
shares down 17p at 620.5p
BE:
Arnie.
NH:
The Terminator?
BE:
yeah
BE:
the governor of California wants to do away with school textbooks
BE:
because they cost too much and are too heavy
BE:
and give all the kiddies laptops instead
NH:
you’re joking
NH:
I knew things were desperate in Cali, but that bad?
BE:
Seems they are
BE:
California Governor Arnold Schwarzenegger has unveiled a plan to save money by phasing out school textbooks in favour of internet aids.
BE:
Gov Schwarzenegger wants to cut hundreds of millions of dollars in state spending each year.
He says converting to online study will also help keep pupils more up-to-date.
California is facing a state budget gap of $24.3bn and Gov Schwarzenegger on Monday scrapped funding for contracts entered into after 1 March.
NH:
hmmm
NH:
clearly that’s not great news for Pearson – a publisher of school textbooks
NH:
but t
NH:
the Pearson schools business is not just about publishing on dead wood
NH:
is it?
BE:
No. And that point has been made by a number of brokers this morning
BE:
such as
BE:
Citigroup
BE:
There are really two issues here from a publisher (Pearson within our universe) perspective. The first is the practicalities of Swchwarzenegger’s plan, the second the financial implications.
BE:
The main practicality is that until students have full and equal access to computers, this would be very difficult to phase in. Under the Williams legal ruling a few years ago, the principal of equal access to materials was established and this will apply to digital as well as analogue standards. In addition, technology architecture will have to be upgraded to ensure that speed of response in testing etc is equal for all students. The financial investment in this current economic environment would be a heavy burden.
BE:
For certain subjects like maths and science, this will come over time (we would guess several years’ time). Standards across states are both complex and need to be moving up rather than down in quality as the US’s standing in the global education league is too low. Therefore, this will have to be an efficiency / quality upgrade rather than purely a cost exercise. The focus for educators will be using software to better engage students and to improve diagnostics, testing and improvement. Pearson’s focus over the last ten years has been in these areas as the shift in the value chain moves away from pure content to content in this context. Therefore Pearson should benefit from market share at the hands of its rivals and we do not see a move to ‘free content’ like Wikipaedia for learning.
BE:
From a financial perspective, the charging mechanism will gradually shift from book sales (particularly residuals) to a subscription – overall revenues to the industry will shift to diagnostics and testing and we would expect market share benefit for Pearson. There should be less in the way of peaks and troughs and more steady income. There should over time also be net cost savings – physical paper, warehousing and book returns costs falling sharply with data warehousing and electronic investment costs rising.
BE:
Bottom line, there will be uncertainty as a result of technology change and whether less money spent on instructional materials means less money overall in the areas where Pearson operates. Our view is that Pearson has been preparing for this shift for ten years, while the highly leveraged state of the competition and lack of investment suggests competitors are in a worse state. We would expect Pearson’s FCF to improve as these shifts materialise. However none of this will happen quickly.
NH:
that’s a very good note
NH:
we like that
NH:
And I am not even in the share save scheme
BE:
Neither am I
NH:
in that respect we are both objective
BE:
If you ignore who signs our paycheques, certainly.
11:11AM
BE:
So I see HSBC is under a bit of pressure this morning
NH:
Yeah
NH:
been spooked by Saad selling its stake in Berkeley Homes
BE:
Down 72p at 753p
BE:
Saad is a Saudi conglomerate that recently had its assets frozen by the Saudi central bank and its debt cut to junk by Moodys and S&P
NH:
well, a large chunk of it
NH:
offloaded 16.1m shares at 701p via Citigroup
NH:
lobbed out another 4.4m shares at 715p via Credit Suisee
NH:
which leaves another 17m shares to go
BE:
the stake was pretty big, right?
NH:
yeah, almost 29%
NH:
and the word in the market is that buyers are being lined up for Saad’s stake in HSBC
NH:
although there is some confusion as to the size of it
NH:
I reckon it is non disclosable
BE:
what, below 3%?
NH:
yeah
NH:
don’t think Saad had the cash to take up his rights in the jumbo HSBC cash call
NH:
so it is probably around 2%
NH:
but it could be lower
NH:
they could have been dribbling it out into the market for weeks
NH:
we just don’t know
BE:
(For the avoidance of confusion, HSBC is down 9p at 514p)
NH:
thanks for that
NH:
anyway here’s a bit of comment from Caz on the holding
NH:
it is a week old
NH:
but still relevant
NH:
We estimate Mr Al Sanea owns 2.1% of HSBC (359m shares) primarily through Singularis Holdings, and worth £1.9bn currently. The stake was originally acquired in April 2007, but we believe the % ownership reduced from 3.1% through not participating in the rights issue. There is speculation (eg. FT) that financial difficulties at other entities owned or controlled by Al Sanea (eg. Saad Group) will lead to the HSBC stake being placed in the market. The overhang is notable but not significant, in our view, representing 3.5 days’ combined trading volume in London and Hong Kong (based on the 30-day moving average, so post the rights issue).
BE:
and Saad’s other UK holdings
NH:
they are, in no particular order
NH:
Imagination Technologies – 20%
NH:
Petra Diamonds – 44%
NH:
Reneuron – 10.7%
NH:
Acccsys Technologies 10%
BE:
a real motley crew
NH:
indeed
NH:
not sure how liquid some of those names are
NH:
they could be difficult to sell
NH:
not so Berkeley
NH:
lots of buyers around for the stock at 700p
BE:
not surprised by that
BE:
quality play in the sector and run by a proper housebuilder not some executive from British Gas
NH:
you must be thinking of Barratt Developments
BE:
yep
11:16AM
NH:
Good comment from Ptolemy above
NH:
Saad is part of a much bigger story in Saudi
NH:
seems to be some contagion spreading
NH:
we have not heard the last of this
NH:
I think
BE:
Indeed
11:17AM
NH:
right
NH:
what next?
NH:
Heritage Oil?
BE:
Sure
NH:
several readers interested
NH:
details of the reverse takeover of Turkey’s Genel Energy are out
NH:
and ….
BE:
the market likes it
BE:
Share are up 22p at 608p
BE:
FTSE 100 company in the making
BE:
will have a market cap of more than £3bn once the deal goes through
BE:
almost as big Cairn Energy
BE:
and what’s been created here is Kurdish consolidation play
BE:
HeritaGE as the new company will be known
BE:
get it ?
NH:
yeah, great play on words
NH:
obviously some creative types at HeritaGE
NH:
hang on
NH:
bit of breaking RAW in the oil sector
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:
Bowleven announced $100m placing this morning
NH:
and we hear
NH:
Bowleven closing in 10mins, well covered price 65-67p
NH:
shares down 4.75p at 69p at the moment
BE:
Tight discount, given the size of the placing
NH:
yeah
NH:
raised more than the market cap last night
NH:
which was $100m
BE:
Focused on Cameroon this thing, right?
NH:
it is
NH:
but back to Heritage
NH:
some pretty punch price targets coming out
NH:
800p
NH:
that sort of range
BE:
hmmm
BE:
Kurdistan is clearly the hot area at the moment
BE:
first Heritage
BE:
and then yesterday we got confirmation of a bid approach for Addax
BE:
which we think has come from the Koreans
BE:
Korea National Oil Company, the state-owned South Korean group, is considering a possible takeover or asset deal with Addax Petroleum, the oil exploration and production company active in west Africa and the Kurdistan region of Iraq, sources with knowledge of the situation said.
BE:
Addax, dual-listed in London and Toronto with a market capitalisation of C$5.6bn, (£3.1bn) revealed on Monday that it had held “preliminary discussions” about a deal.
BE:
KNOC’s move is another sign of the growing corporate interest in Kurdistan, as hopes rise that the political deadlock obstructing oil exports from the area is being broken.
BE:
The Kurdish regional government said oil exports of 40,000 barrels per day from Addax’s Taq Taq field and 60,000 b/d from the Tawke field operated by DNO of Norway began on June 1.
NH:
thanks for that
NH:
so what have the analysts made of all this??
NH:
Heritage that is?
BE:
well Panmure loves it
BE:
Heritage Oil has today announced the proposed acquisition of Genel Energy.
This is deemed a reverse take-over and will retain the London listing, potentially moving the enlarged entity into the FTSE 100 index. We maintain our BUY recommendation with a revised target price of 700 pence per share.
This should be taken as good news by the market. The deal gives Heritage Oil a significant boost to its Kurdistan asset base creating a company with a leading position in this region. The recently started production from its fields will give the group significant cash flow which will be used to accelerate the growth of the company. However, we believe that the group might want to raise some additional equity on the back of this deal in order to further this already impressive growth. The size of the company will make this the second largest UK E & P company and should see it moved up to the FTSE100 index, which would require many funds to build up index weightings.
BE:
There is one area of concern for us in this deal in that it increases the assets held within Kurdistan where there appear to still be a few arguments between the KRG and the main Iraqi government in Baghdad over the legitimacy of these licences. However, we believe that this appears to be gradually getting resolved with the start of exports from Tawke and Taq Taq fields and that issues over the payment of revenues to the contractors will also be resolved in due course.
On the valuation side, we believe that this is accretive to our asset valuation of the group and as such we are raising our price target to 700 pence from 500 pence. This could prove to be conservative given the uncertainties over the Miran West discovery. This will shortly undergo a second testing operation and we have assumed the low end of estimates of 1.1 billion barrels.
BE:
and here’s Evo
BE:
EVO TAKE – Heritage is set to merger with Genel Energy, a privately held Turkish company, that should see consolidate its position in Kurdistan and have sufficient cash flows from production to fund the Ugandan project.
BE:
DETAILS – Under an MOU Heritage is to issue 260m new shares to Genel Energy in exchange for Genel injecting its assets in Kurdistan into Heritage. Genel’s primary producing assets are the Taq Taq (44%) and Tawke (25%) fields with a further 25% in the Miran West licence. The combined enlarged group has an estimated 300m boe of proved and probable reserves. Production from these assets is currently averaging 30,000bbl/d and should reach 43,000bbl/d by YE. The cash flow generated should enable expansion of operations both in Kurdistan and Uganda.
VALUATION AND RECOMMENDATION – Based on the CPR report for Addax and other industry sources we estimate that in Kurdistan the 2P reserves for the new company are worth around US$8.5/bbl. Applying this figure to our model and adjusting for the news shares gives a fair value of 913p. We set our new target price at 900p.
NH:
thanks for that
11:24AM
NH:
right some breaking news
NH:
and this does not look good for Thomas Cook
NH:
RTRS-GERMAN GOVERNMENT SOURCE SAYS ARCANDOR DOES NOT PLAN TO FILE NEW STATE AID REQUEST
11:23 09Jun09 RTRS-GERMAN GOVERNMENT SOURCE-ARCANDOR HAS TOLD CHANCELLOR’S OFFICE WILL FILE FOR INSOLVENCY
11:23 09Jun09 RTRS-GERMAN GOVERNMENT SOURCE-ARCANDOR
NH:
Arcandor owns 53% of TC
NH:
Arcandor shares have been suspended
NH:
looks like the block will be hitting the market soon
NH:
shaers biggest faller in the FTSE 100 at the moment
NH:
down 5p at 209p
BE:
Remains unclear, I think, how much of Arcandor’s T Cook stake was being used as loan collateral
NH:
OMG
NH:
that does not sound good
BE:
It could be a big chunk ends up held by RBS.
BE:
Which I think was their main creditor
NH:
aka the British taxpayer
NH:
nice
BE:
Indeed.
NH:
is there anyone who might take the whole block on ?
BE:
Well, REWE has said they’d be interested
BE:
No idea if the maths makes sense though.
NH:
Bryce is just checking their market cap
NH:
it is not listed
BE:
Yup
BE:
REWE Group is one of the leaders in German and European trading and travel. Since it was founded in 1927, REWE Group has evolved from a co-operative purchasing association into a multinational corporation. In this process, REWE Group has repeatedly been reconceived to this very day. Most recently, the Management Board responded to the challenges of increasingly internationalised trade by introducing the most far-reaching restructuring in the history of the company. A uniform strategy was developed and the new umbrella brand logo “REWE Group” was introduced to link the more than 80-year traditions of REWE to the modern demands of an international company.
NH:
right
NH:
should also point out that Caz has downgraded TC and rival Tui Travel this morning
BE:
You got the note?
NH:
I have, let me dig it out.
NH:
here we go
NH:
Tour operators – Take a break [TCG.L TCG LN, 214p, IN-LINE (from Outperform)] [TT.L TT/ LN, 246p, IN-LINE (from Outperform] Sector Neutral
Thomas Cook and TUI Travel are both confident of meeting their expectations in 2009. We believe that the resilience of demand to date, together with the evident supply-side discipline, will support this. However, this is already reflected in their valuations in our view, with the two stocks trading on 2009E PERs of 8.3x and 10.7x, respectively.
Thomas Cook and TUI Travel are both confident of meeting their expectations in 2009. We believe that the resilience of demand to date, together with the evident supply-side discipline, will support this. However, this is already reflected in their valuations in our view, with the two stocks trading on 2009E PERs of 8.3x and 10.7x, respectively.
NH:
In contrast, the outlook for 2010 is uncertain. Rising unemployment in Europe, the weakness of Sterling in the UK, and cost-driven price increases could all impact demand. We are consequently factoring a 5% capacity reduction into our 2010E assumptions for both stocks, which generates a downgrade to our EPS estimates of 6% at Thomas Cook and 5% at TUI Travel. Our 2010E EPS forecasts are now, on average, 9% below Reuters consensus. Even taking this downgrade into account, we believe that earnings risk remains because further capacity cuts may be required. We also highlight that the delay of the UK summer 2010 brochure launch, from May to July 2009, and resulting lower load factors YoY in forthcoming trading updates, is likely to add to the level of uncertainty.
NH:
We therefore recommend taking profits in the tour operators and downgrade both stocks to IN-LINE. In addition, we highlight that a strategy of buying tour operators stocks in autumn and selling them in spring, when earnings risk for the summer is negative due to the possibility for ‘lates’ sales to disappoint, has tended to be successful in the past.
NH:
Notwithstanding this, we continue to believe that the margin growth potential of both operators is compelling on a longer term investment horizon. In the attached report we analyse this in detail and highlight that this can drive significant earnings growth for both Thomas Cook and TUI Travel. Thomas Cook has specified an EBIT margin target of 4.8% for 2010E. In fact, we believe that a margin of 5.5-6.0% is achievable in the medium-term, implying at least 20% upside to our forecast 2011E margin of 4.5%. TUI Travel has a margin target of 4.7% (based on 2008 revenues) compared with our forecast of 4.0% in 2011E.
NH:
In the next few days, we expect developments at Arcandor AG, the 53% shareholder of Thomas Cook, to have the most significant influence on Thomas Cook’s share price performance. Arcandor has significant debt maturities at the end of this week and has recently had its request for state guarantees from the German government rescue fund and a separate request for a loan from the state bank KfW rejected. The German Economy Ministry has now given it a final opportunity to submit an improved state aid request, which was rejected initially because existing shareholders’ role in the refinancing was not sufficient. Failure of this loan to be granted is likely to result in Arcandor filing for insolvency.
TUI Travel (TT:LSE): Last: 240.50, down 5.75 (-2.34%), High: 247.25, Low: 240.00, Volume: 727.98k
Thomas Cook Group (TCG:LSE): Last: 209.50, down 4.75 (-2.22%), High: 217.50, Low: 209.00, Volume: 2.15m
BE:
Arcandor reopened – down 21.7%
NH:
thanks for that
11:30AM
NH:
Moving on
NH:
The quarterly index review is upon us
NH:
well, it’s announced tomorrow based on today’s closing prices
NH:
So Bryce, who is in and who is out?
BE:
well, based on prices from earlier this morning
BE:
this lot are heading in the FTSE 100
BE:
Wolseley, 3i and the LSE
NH:
that will please Xavier Rolet – the urbane CEO of the LSE
BE:
Yup.
BE:
and heading out are Drax Group, Balfour Beatty and Whitbread
BE:
but things are close
BE:
Amlin, Friends Prov and Foreign & Colonial are all very much in the danger zone
BE:
lower down the market
BE:
Some real trash looks to be heading back in the FTSE 250
BE:
Lancashire Holdings, SIG, Punch Taverns, St Modwen Props, BPP and Yell
NH:
WTF, the Toxic Pub Company and Yell
NH:
in the FTSE 250
BE:
I know.
NH:
the only good thing to say about that is their share prices will probably fall
BE:
Why’s that?
NH:
well, there are not as many FTSE 250 index trackers as there are FTSE Small Cap trackers and funds
NH:
and when companies go into the mid cap index
NH:
they are usually offloaded
NH:
so prepare for some weakness
BE:
actually we should look at Punch a little later on this morning – sold another batch of their best pubs
NH:
really, there can’t be many left
NH:
what’s left must be real trash
BE:
right and heading out of the FTSE 250 are this bunch
BE:
ALTERNATIVE INV.STGIS.
FINSBURY WWD.PHARM.
INTERNATIONAL PSNL.FIN.
BARING EMERGING EUROPE
TELECOM PLUS
HANSARD GLOBAL
FINSBURY WWD.PHARM.
INTERNATIONAL PSNL.FIN.
BARING EMERGING EUROPE
TELECOM PLUS
HANSARD GLOBAL
NH:
OK, thanks
11:33AM
NH:
and what about moves from Fledging to Small Cap/ All-Share
NH:
that can generate some big moves
NH:
in fact I heard a funny story yesterday about a FTSE Fledging company called Alterian
BE:
Go on.
NH:
apparently there is a huge, huge short position in this little software company
NH:
and the bears are desperate that it does not go into the FTSE All shares because they could face a seriously painful short sqeeze if it does
NH:
one broker I talked to reckoned the trackers would have to buy 9m shares if Alterian is promoted
NH:
and this thing never ever trades 9m shares
BE:
I’m not surprised it is 13% of the company
BE:
anyway here are the other companies that could make it into the All Share
BE:
PENDRAGON
JJB SPORTS
FIBERWEB
INNOVATION GROUP
ALPHAMERIC
JJB SPORTS
FIBERWEB
INNOVATION GROUP
ALPHAMERIC
NH:
jeez, more trash – JJB, Pendragon and
NH:
Innovation
NH:
Imagine being forced to buy that lot
NH:
right
NH:
just been looking at the share price of Alterian
NH:
jumped this moring
NH:
up 11p to 116p
NH:
i reckon that makes it big enough to go
NH:
although, what price a couple of big sell orders hitting the market late in the day
11:36AM
NH:
OK
NH:
the Toxic Pub Co was mentioned earlier
NH:
as a FTSE 250 promotion candidate
BE:
God help us
NH:
shares up 2p to 158.75p
BE:
The news flagged earlier is that it has sold 11 Toxic taverns to Greene King for £30m
BE:
and they are some decent boozers
BE:
not the sort of thing any pub operator would want to sell unless they had to
BE:
For example …
NH:
indeed
NH:
ah this is funny
NH:
typical Punch this
NH:
they don’t reveal what the pubs they are selling are in their press release
NH:
you have to go to the Greene King statement to get some detail
NH:
I mean what is the point of that?
BE:
dunno, its just dumb
BE:
makes it look like Punch has something to hide
NH:
poor, poor, PR
BE:
anyway the pubs include
BE:
Seven in London and include the Bunch of Grapes in Knightsbridge and St. Margaret’s in Twickenham, whilst four are in Scotland including the Burnbrae in Bearsden, near Glasgow.
NH:
hmmm
NH:
Bunch of Grapes eh
NH:
nice boozer that
NH:
not a Toxic Tavern
NH:
just looking at the financials
NH:
GK paying £30.4m for pubs which made ebit of £3.55m
NH:
pretty clear who got the best end of this deal
BE:
and also
BE:
the pubs were sold at a discount to their March asset value
NH:
really
NH:
what happened to Punch’s selling pubs above book value
BE:
er, the market has figured out they are a forced seller
NH:
NH:
some share prices
Greene King (GNK:LSE): Last: 420.75, up 5 (+1.20%), High: 424.75, Low: 418.75, Volume: 504.69k
Punch Taverns (PUB:LSE): Last: 158.75, up 2 (+1.28%), High: 165.25, Low: 155.75, Volume: 565.45k
NH:
got any analyst comment?
BE:
I have
BE:
here’s Numis
BE:
Douglas Jack is a big fan of Toxic Taverns
BE:
Punch has sold 11 pubs to Greene King for £30.4m (£2.8m per outlet). This is an
good transaction for both companies. For Punch, it should be instantly earnings
enhancing after using proceeds to pay down debt at significant discount. For
Greene King, it should also be earnings enhancing, putting to work £30.4m of spare
cash at an acquisition multiple of 8.6x EBIT (7.9x EBITDA).
BE:
For Punch, the disposal is taking place at a slight discount to book value of £32.7m.
The disposal multiple of 8.6x EBIT (7.9x EBITDA) does not appear high for good
quality, freehold assets (seven sites are in central London; four in Scotland).
BE:
However, the impact on debt reduction and its positive impact on DSCRs is far
more relevant. If recent debt retirement prices (below) are repeated, then this
transaction could simultaneously pay down over £50m of debt and enhance earnings.
At the end of April, we increased our full-year disposal estimate to £145m (assuming
£54m of disposal proceeds in the four months to August). That revised forecast has
been surpassed after just six weeks. With disposals enhancing earnings after debt
reduction and DSCR forecasts assuming that early-amortising bonds are not
repurchased, the short-term risk to PBT and DSCR forecasts is on the upside.
NH:
thanks for that
NH:
anymore
NH:
something a bit more critical perhaps
BE:
Hang on
BE:
Credit Suisse
BE:
Greene King has acquired 11 managed pubs from Punch Taverns for a
consideration of £30.4m, at 8.6x outlet EBIT and at a 7% discount to book value.
Seven of the pubs are in London and four in Scotland. The deal means Greene
King has used approximately 20% of its rights issue proceeds in acquisitions and
debt re-purchases, with the multiple at the mid point of the acquisition price range
discussed at the time of the rights issue (6-9x EBITDA). For Punch the disposal is
consistent with its stated strategy of reducing debt.
• We believe the pace of disposals by Punch since the interims could surprise the
market positively when it issues the Q3 IMS (date TBC) given the valuation impact
of using disposal proceeds to pay down debt.
• Our analysis of the opportunity for debt buybacks is included within our recent
initiation note, UK Pubs – Paying the right price for risk dated 20 May 2009, where
we point to 100% equity upside on our blue sky assumptions.
• Disposals since the interims on 29 April have included those to Shepherd Neame
(10 leased; 3 managed; £15m proceeds), Charles Wells (17 leased), Adnams (3
managed), Frederic Robinson (1 managed; 7 leased), Fuller’s (7 managed;
£24.4m proceeds), JW Lees (6 managed; 4 leased) and now Greene King (11
managed; £30.4m proceeds).
• If we assume disposal prices of £750,000 for leased pubs and £2.5m for managed
pubs where the prices have not been disclosed, the total disposal proceeds would
be £116m. If we then assume debt is repurchased at 50% of par – the value
capture for the Punch equity would be £83m (assuming a 28% tax rate) equal to
18% of the current market cap.
consideration of £30.4m, at 8.6x outlet EBIT and at a 7% discount to book value.
Seven of the pubs are in London and four in Scotland. The deal means Greene
King has used approximately 20% of its rights issue proceeds in acquisitions and
debt re-purchases, with the multiple at the mid point of the acquisition price range
discussed at the time of the rights issue (6-9x EBITDA). For Punch the disposal is
consistent with its stated strategy of reducing debt.
• We believe the pace of disposals by Punch since the interims could surprise the
market positively when it issues the Q3 IMS (date TBC) given the valuation impact
of using disposal proceeds to pay down debt.
• Our analysis of the opportunity for debt buybacks is included within our recent
initiation note, UK Pubs – Paying the right price for risk dated 20 May 2009, where
we point to 100% equity upside on our blue sky assumptions.
• Disposals since the interims on 29 April have included those to Shepherd Neame
(10 leased; 3 managed; £15m proceeds), Charles Wells (17 leased), Adnams (3
managed), Frederic Robinson (1 managed; 7 leased), Fuller’s (7 managed;
£24.4m proceeds), JW Lees (6 managed; 4 leased) and now Greene King (11
managed; £30.4m proceeds).
• If we assume disposal prices of £750,000 for leased pubs and £2.5m for managed
pubs where the prices have not been disclosed, the total disposal proceeds would
be £116m. If we then assume debt is repurchased at 50% of par – the value
capture for the Punch equity would be £83m (assuming a 28% tax rate) equal to
18% of the current market cap.
BE:
Actually, that’s remarkably upbeat as well.
BE:
Looks like we’re counter consensus on this one.
NH:
aren’t we always
NH:
was chatting to analyst yesterday who suggested someone puts prozac in the air conditioning system here at FT Towers
BE:
Well, what do you expect.
BE:
They keep us in the basement.
NH:
we never see the light
11:45AM
NH:
right, back to Thomas Cook for a moment
NH:
which has completely reversed
NH:
shares now biggest riser in the FTSE 100
NH:
up 7p to 221p
NH:
any thoughts Bryce
BE:
Nope.
BE:
None.
NH:
the main news desk hearing that a statement is due imminemently from Arcandor
BE:
Baffled.
NH:
very odd
NH:
perhaps a buyer has been lined up
NH:
most analysts seem to think the stake could be offloaded down here
NH:
there would be buyers down here
BE:
Nately – we also mentioned REWE above.
BE:
No idea if it’s a reason to buy today though.
BE:
Seems spectacularly risky to assume a deal could be sewn up so effortlessly.
NH:
indeed
11:49AM
NH:
where now?
BE:
Well, there’s an apology from Sandy Chen
NH:
that’s funny
NH:
a couple of weeks back there a reader posting as Sandy Chien
NH:
saying he had turned buyer of Barclays the day before Abu Dhabi sold out
NH:
but he remains bearish, no?
BE:
Ish.
BE:
It ain’t over yet
BE:
Proponents of a V-shaped recovery are underestimating how much rising
unemployment and an unstable structure of indebtedness can lengthen and
deepen this recession. And there is growing tension between the private and
government segments of the economy. Post-crisis, we think the UK banks
will be far less profitable than what current valuations are implying.
BE:
First, a belated apology: remaining a Seller of the UK banks has been a terrible call since mid-March. And with the exception of LBG, all the UK banks should book strong H1 2009 results, fuelled by trading income, debt swaps and disposal gains.
BE:
But…
BE:
we remain unconvinced that a V-shaped macro recovery is taking shape. We think that UK and US unemployment rates will soon exceed 10% with a much broader pattern of unemployment than in recent recessions. We expect this, combined with an especially weak structure of UK household indebtedness and companies focusing on restructuring balance sheets (ie not investing), will keep private consumption weak for several years.
BE:
We also think that the US and UK economies have in effect split in two: private economies where consumption and investment continue to fall, and government economies funding bailouts with sovereign debt issuance (ie higher taxes later). This, in our opinion, is unsustainable – and recent sharp increases in forex and gilt yield volatility highlight the increased risks.
BE:
So what does all this macro mean for the UK banks? We expect that banks will find it difficult to grow good loans in weak economies, and bad debt charges will remain high through 2011. Current share prices seem to be discounting a return to pre-crisis levels of profitability; our post-crisis forecasts point to much lower levels.
BE:
We remain firmly underweight on the UK banks, and since our valuations and price targets remain well below current share prices, we retain Sells on them all. That said, we see less downside risk in STAN and HSBC, on the view that their RORWAs (riskadjusted returns per RWA) should suffer less through this global recession, and their post-crisis ROICs (returns on invested capital) should be the highest. As for the others, we remain concerned about higher balance sheet risks at BARC, and lower post-crisis ROICs at RBS and LBG
NH:
that’s a relief
NH:
another bear out there
NH:
was starting to get lonley
BE:
How’s the sector doing today?
NH:
Lloyds has recovered some of yesterday’s losses
Lloyds Banking Group (LLOY:LSE): Last: 62.80, up 1.7 (+2.78%), High: 64.40, Low: 62.50, Volume: 92.46m
NH:
as for barclays
Barclays PLC (BARC:LSE): Last: 287.00, up 3.25 (+1.15%), High: 290.00, Low: 285.50, Volume: 16.90m
NH:
we think the BGI deal will be announced tomorrow
NH:
unless there is a counter bid which looks unlikely
NH:
even with a 50:50 cash stock offer
NH:
should still bump Barclays’ tier 1 (equity) up to 8%
NH:
that should keep the FSA happy
NH:
elsewhere
Royal Bank of Scotland Group (RBS:LSE): Last: 35.90, up 0.6 (+1.70%), High: 36.50, Low: 35.70, Volume: 20.18m
NH:
and HSBC which we covered earlier
HSBC Hldgs (HSBA:LSE): Last: 517.50, down 6 (-1.15%), High: 522.00, Low: 510.50, Volume: 20.62m
11:54AM
NH:
right
NH:
a couple of things to round up on
NH:
GKN put in a decent performance this morning
NH:
up 12p at 134.75p
NH:
biggest riser in the FTSE 250
NH:
on the back of a Merrill upgrade I think
BE:
It is
BE:
Upgrade to Buy, price objective 155p, 24% upside potential
BE:
We are upgrading GKN from Neutral to Buy and raising our PO from 110p to
155p. We now value GKN on mid-cycle EV/Sales, rather than on 2009-10 peer
multiples. We think investors should be more inclined to look at the through-cycle
potential as GKN’s major end-market, automotive, is showing the first signs of
stabilisation. Last week JD Power revised up its Western European car sales
expectations from -10% to -4.1%. We believe that 67% of GKN sales are exposed
to end-markets likely to bottom in 2009 (automotive/ industrials/ construction).
BE:
Balance sheet – rights issue the best of various options
BE:
We believe market concerns on the balance sheet are one reason for recent
share price volatility, as GKN seeks to refinance a £350mn revolving facility due in
Jul-10. We think that GKN is unlikely to breach its covenant. Management is
committed to addressing the refinancing by the H1 results on 8 August. We run
through some possible options from a high-yield bond to an equity issue. We see
a rights issue as probably the best solution, allowing GKN to reduce its high level
of financial gearing, improve its credit rating and its appeal to equity shareholders.
BE:
Mid-cycle EV/Sales valuation
BE:
We have lowered our 2009-10 forecasts to reflect what we believe is a worse
case scenario particularly in 2009. We forecast GKN’s adjusted EPS (excl.
restructuring and pension interest charge) for 2009 of 6.8p, 13.1p in 2010 and are
now in line with consensus. GKN is trading at 0.54x 2010E EV/Sales. We believe
that 0.6x EV/Sales is a fair mid-cycle multiple assumption based on 2.3% longterm
growth and a 6.3% long-term margin assumption. At 155p GKN is on 2010E
0.6x EV/Sales.
NH:
thanks for that
11:56AM
NH:
before we leave
NH:
just have to an issue a correction
NH:
I said yesterday that rising bond yields could or were holding back property stocks
NH:
apparently I was wrong
NH:
and a top sector analyst got in touch to explain why
BE:
Oh.
NH:
Corporate bond yields are far more important (more similar to real
estate, with bond default risk a proxy for tenant risk), and those
haven’t been budging, with corporate bonds spreads coming in nicely as
risk free has moved out
estate, with bond default risk a proxy for tenant risk), and those
haven’t been budging, with corporate bonds spreads coming in nicely as
risk free has moved out
NH:
it is all about corporate bond yields
BE:
I see.
NH:
that said
NH:
the analyst went on to say
NH:
they were seeing real interest in the sector
NH:
post the Hammerson/Qatar sale last week
BE:
Right.
BE:
I thought that price looked awful, but then I know nowt about the sector
BE:
(As demonstrated regularly.)
BE:
T Cook 
now
nowNH:
actually lets just have a quick look at gilts and FX
NH:
10-year giltat 3.854%
NH:
come back a bit
NH:
as for FX
NH:
the news that Gordie is saying has gone down OK
NH:
cable is $1.6094
NH:
and against the euro it is 0.8621p
12:01PM
NH:
Wow
NH:
TC are flying now
NH:
up 21.5p to 235.75p
NH:
a gain of 10%
NH:
from the wires
NH:
it looks like Arcandor
BE:
Arcandor’s suspended again
NH:
is being broken up before our eyes
NH:
buyers appearing for differenet bits of the biz
BE:
“Foreign, domestic investors interested in Primondo unit”
BE:
That’s the home shopping bit I think
BE:
And an altogether more digestible business than T Cook
BE:
Given taking the lot means making a mandatory bid.
NH:
back to property for a moment, picking up rumours of big share placing in the sector
NH:
working on it now
NH:
might have something for tomorrow’s paper
BE:
Yup.
12:04PM
NH:
Right
NH:
we are almost done
NH:
but I have some exciting news
NH:
there is a date for the Webby drinks
BE:
You’re kidding, right?
NH:
nope
NH:
but
NH:
in order to find out
NH:
you must tune into Murph’s acceptance speech
NH:
which will be available on YouTube very soon
NH:
I know the date
NH:
and it is in 2009
NH:
that’s all I can say at the moment
NH:
you will have to find the YouTube link
NH:
obviously this will be put on the site
NH:
and I think the Webby drinks will be something of a celebration
NH:
for lots of things
NH:
that’s a bit of a clue
NH:
no correct guesses yet
NH:
keep going
NH:
a Friday night by the looks of things
NH:
could be messy
NH:
very messy
NH:
on to the Ivy club
NH:
all will be revealed later on
NH:
thank you Ozbird
NH:
who is the source of the news
BE:
Ok – this is getting cliquey.
BE:
We should probably wrap things up now.
NH:
before we do
NH:
someone has very helpfully sent a note over on Arcandor
NH:
and four options for the TC stake
NH:
which is 53%
NH:
it is from Citi
NH:
annd here it is
NH:
Four Options Outlined – We outline 4 possible scenarios for the 52% stake Arcandor holds in Thomas Cook. This includes, full listing, private equity acquisition, sale to Rewe (German tour operator) and no sale.
NH:
Full Listing Most Likely – A full listing seems the most likely outcome; we would expect the shares to be placed at a discount to the current share price. This would provide a good buying opportunity as we see long term value in the stock.
NH:
Some Short Term Risk Remains – Uncertainty remains over what strategy Arcandor intends to pursue. There is a risk that this uncertainty lasts right up to the deadline for refinancing (12 June) and that an emergency sale is required.
NH:
Trigger Point – Arcandor reports 2Q09 results on 29 May. We anticipate that an announcement will come at this time. If no announcement is forthcoming we’d expect the uncertainty to affect share prices.
NH:
Earnings Increased, TP & Rating Retained – Earnings forecasts have been revised post the 1H09 results. Underlying EBIT for FY09E is now £402m, from £390m with a 4.4% margin. Resultant EPS is reduced from 33.2p to 25.6p as a result of higher interest costs. We retain our Buy/High Risk (1H) rating and reiterate our 335p target price.
BE:
Old note that.
BE:
But still worth dredging up.
NH:
can’t believe no one has guessed the date
NH:
oh well
NH:
all we be revealed in tomorrow’s session
NH:
thanks for joining us today
NH:
and thanks Bryce
BE:
Pleasure.
NH:
for keeping me company
NH:
until tomorrow
NH:
cya