Markets live chat transcript for the chat ending at 12:10 on 12 Jun 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE)
NH:
Good morning
NH:
and welcome to another session of Markets Live
NH:
FT Alphaville’s daily markets chat
NH:
and with Murph still away, I am joined once again by Bryce Elder from the London market’s desk
BE:
morning
BE:
apparently there was a sighting of PM yesterday in London
NH:
really
BE:
yeah, at a builders’ merchant
NH:
moonlighting again
BE:
ha!
BE:
“Tarmac your drive, madam.”
NH:
NH:
those Murphys
NH:
right, let’s get straight into it
11:06AM
NH:
and say well done to Barclays for getting such a fabulous price for BGI
NH:
and well done Dimante Bob for $26m windfall
BE:
I’ll second that
NH:
but the market reaction is slightly more muted
BE:
well, this deal has been extremely well trailed
BE:
and there is nothing in it that is much of surprise
BE:
so the shares have drifted a bit lower
NH:
yes, off 8.5p at 296p
NH:
better to travel than arrive and all that
BE:
Capital boost is about what we thought it would be
BE:
equity tier 1 to 8.3%
NH:
but cashflow less stable now
NH:
more dependent on BarCap
NH:
plenty of comment around this morning
NH:
but what is probably more interesting aresome of the transaction highlights
NH:
such as these
NH:
BlackRock will pay US$13.5bn, comprising US$6.6bn in cash and US$6.9bn in new BlackRock shares, which will result in Barclays having a 19.9% stake in the enlarged group. Barclays’ equity interest will be in the form of ordinary shares (4.9%) and non-voting participating preferred stock, which converts into equity if transferred. There is a lock-up provision: 100% for the first year and 50% for the second year, though BlackRock’s consent for a sale would “not be unreasonably withheld”.
NH:
The group will provide BlackRock with a 364-day credit facility of up to US$2.0bn, of which US$0.8bn has been committed by other banks. The impact on RWAs (+£363m) is immaterial.
NH:
Barclays is no longer able to solicit other proposals or to continue negotiations with other interested parties. CVC has until 18th June to submit a matching offer.
Barclays will receive two seats on the BlackRock board.
The disposal is expected to complete by the year end. It is contingent upon shareholder approval and BGI’s run-rate revenues at completion being at least 75% of the 30 April level. The consideration is subject to a downward-only price adjustment mechanism, based on changes in BGI’s annualised run-rate revenues between 30 April and completion, excluding the impact of market movements and subject to a cap of US$1.4bn.
Barclays will receive two seats on the BlackRock board.
The disposal is expected to complete by the year end. It is contingent upon shareholder approval and BGI’s run-rate revenues at completion being at least 75% of the 30 April level. The consideration is subject to a downward-only price adjustment mechanism, based on changes in BGI’s annualised run-rate revenues between 30 April and completion, excluding the impact of market movements and subject to a cap of US$1.4bn.
NH:
The sale price represents 90bp of Dec08 AUM and 12.1x 2009E earnings.
NH:
so a bit of vendor financing in there
NH:
plus some convert stock
NH:
oh, the above was from Caz
NH:
The transaction is substantially as reported in the press recently and therefore should not come as a surprise. The combined BlackRock/BGI is expected by management to generate new revenue opportunities over time, in addition to the income from the equity stake. The transaction is initially dilutive to earnings, but this has to be seen in the context of a material benefit to capital ratios and a meaningful increase to book value. However, in our view the valuation already reflects the transaction benefits (1.0x 2009E NTAV) and current trading appears consistent with our estimates. In-line.
NH:
as was that
BE:
Cheers
NH:
(Good point Taxloss)
BE:
Here’s the conclusion from JPMorgan
BE:
The deal has been structured to clearly maximize the
capital benefit at the expense of ongoing profitability. We note that
while the sale price is higher than expected the actual earnings
contribution was also 60% higher. On our estimates, the capital
deficit has been reduced to £8-9bn which is still approximately 2
years of Group earnings. Having recently upgraded significantly our
estimates for BarCap, the investment bank division now accounts for
90% of clean Group PBT in 09E, 60% in 10E and 50% in 11E. With
a RoNAV below COE and a more capital consuming earnings
profile, we remain UW.
capital benefit at the expense of ongoing profitability. We note that
while the sale price is higher than expected the actual earnings
contribution was also 60% higher. On our estimates, the capital
deficit has been reduced to £8-9bn which is still approximately 2
years of Group earnings. Having recently upgraded significantly our
estimates for BarCap, the investment bank division now accounts for
90% of clean Group PBT in 09E, 60% in 10E and 50% in 11E. With
a RoNAV below COE and a more capital consuming earnings
profile, we remain UW.
NH:
ta
NH:
and here’s something from Robert Law at Nomura
NH:
on the earnings impact
NH:
We calculate the initial earnings dilution at 3.5p per share taking into account the impact of the liquidity support provided by Barclays in respect of certain BGI funds and the potential dividends from the stake. Management indicated that it expected the deal to become earnings accretive as the proceeds are reinvested in the business which would be over a period of a few years.
NH:
We regard the sale as positive for Barclays even though we consider BGI to be an attractive franchise which under normal circumstances, the group would have been expected to retain. In our view, in the current environment the more important issues for the group are its leverage and ability to absorb further writedowns on legacy assets. The sale is likely to strengthen the case that Barclays can grow or manage its way out of issues around leverage and asset quality without further equity issuance.
BE:
And Sandy Chen, who’s always worth reading at times like this
NH:
is he still a seller?
BE:
What do you think?
BE:
Whilst the exclusion of these cash fund assets helps BlackRock by bringing down the
acquisition multiple from 11.9x to 8.3x EBITDA, it doesn’t help BARC; the pbt
contribution of the disposed BGI was 15% of Group pbt, and the remaining Group will
be highly exposed to the risks of increased dependency on the volatile earnings stream
from BarCap and rising impairments on the lending businesses.
acquisition multiple from 11.9x to 8.3x EBITDA, it doesn’t help BARC; the pbt
contribution of the disposed BGI was 15% of Group pbt, and the remaining Group will
be highly exposed to the risks of increased dependency on the volatile earnings stream
from BarCap and rising impairments on the lending businesses.
BE:
And while BARC will have a 19.9% economic stake in BlackRock, it will be comprised
of a 4.9% stake in the form of common BlackRock shares and the remainder in Series B
Participating Preferred Stock. These will be held as AFS (available for sale) securities,
with changes in fair value reflected in shareholders’ equity. Thus, support for the P&L
from the future performance of the BlackRock stake won’t be available.
of a 4.9% stake in the form of common BlackRock shares and the remainder in Series B
Participating Preferred Stock. These will be held as AFS (available for sale) securities,
with changes in fair value reflected in shareholders’ equity. Thus, support for the P&L
from the future performance of the BlackRock stake won’t be available.
BE:
To be clear, we regard the BGI disposal as a long-signalled necessity, in order to boost
BARC’s Core Tier 1 ratios to within spitting distance of its peers. But our longer-term
concerns about earnings sustainability and balance sheet risks (see our 8 June sector
note, It Ain’t Over Yet, for details) remain.
BARC’s Core Tier 1 ratios to within spitting distance of its peers. But our longer-term
concerns about earnings sustainability and balance sheet risks (see our 8 June sector
note, It Ain’t Over Yet, for details) remain.
NH:
thanks
NH:
that’s enough on Barclays I think
NH:
let’s move on and have a look at the wider market
11:12AM
NH:
and…
BE:
We’re flat
NH:
exciting stuff
BE:
FTSE down 3 points at 4458
NH:
actually I heard an interesting theory about the market yesterday
NH:
and why it has been flatlining
BE:
Go on
NH:
The Gamma effect
NH:
apparently
BE:
Eh?
BE:
are you turning all hedge fund on us
NH:
no
NH:
that’s Sam’s beat
NH:
not going to tread on his toes
NH:
heard about it at lunchtime yesterday
NH:
all related to the expiry next week
NH:
which along with the December one is the most important of the year
NH:
now I don’t pretend to know all the ins and outs of this
NH:
but the idea seems to be that there is a large amount of hedging go on at the moment
NH:
and the idea of it is to hold things steady
NH:
have a look at this
NH:
it is from one of the big banks
NH:
Going into June 19th expiry, the Gamma hedging of the existing Open Interest on the Eurostoxx50 is becoming more and more important especially given the lack of clear positioning for institutions.
NH:
To give you a few numbers, we estimate (based on listed open interest and internal pricing models) that for every 1% move e4.25bn have to be rehedged and for every 1 daily volatility move it is e7bn. (1.5% at the moment)
NH:
This is assuming the street is long gamma and hedging it and whoever provided the gamma to the street is not rehedging.
NH:
This morning, we open up and staid there and have so far traded 225,000 VG1 contracts, i.e. e5.7bn. One way to look at the market is that despite so much selling gamma related, we are actually holding the rally and managing to go higher since the open.
NH:
We have been talking about the dampening effect on volatility of the coming expiry (June 19th) as gamma gets rehedged (1% = e5bn). The graphs below (put together by A TRADER) show that as it stands we are defying gravity and post expiry we are very likely to either retrace significantly or gap up significantly as important technical resistances get taken out.
NH:
Given the cash levels, the lack of beta positioning (still!) and the general scepticism about the last 3 month bounce… we would expect an up move to be more likely than down. For the faint hearted buy September gamma, for the more courageous buy delta and avoid spending the theta.
BE:
Hang on – that’s a lot to get my head around
BE:
But if I read it correctly
BE:
the market should be subdued going into the expiry
BE:
and then you buy for a bounce till September
NH:
yep
NH:
would explain why indices arent’t really moving at the moment
NH:
they might go up in the morning, but always come back
NH:
as the hedge is put on
NH:
reminds of the hedging of varience swaps a few years back
NH:
that used to cause mayhem from 4.00pm pm onwards
NH:
anyway, it is just a theory
NH:
it could easily be down to the fact that no one knows what to do next
BE:
talking of which
BE:
any decent strategy stuff around
BE:
Friday usually good for a pencil-chewing report or two
NH:
yeah
NH:
chin stroking time
NH:
as luck would have it
NH:
there is a decent report about
NH:
from Goldman
NH:
they have been looking at a question I have wanted answered
BE:
Which is?
NH:
well, how much cash is left on the sidelines after all of these fund raisings and share placings
BE:
Ok
BE:
sounds interesting
BE:
what’s their conclusion?
NH:
well
NH:
Sharon Bell reckons the shift out of money market funds into equities will provide enough cash to cover EUR200bn-400bn of issuance this year
BE:
blimey
NH:
Fears that the rally will be quashed by new equity supply are
overdone, in our view. More companies will raise funds, but
the past provides plenty of examples of equities rallying as
supply has risen. Moreover, a shift out of money market
funds back into equities could provide enough to cover
€200-400 bn of equity issuance this year, we believe.
overdone, in our view. More companies will raise funds, but
the past provides plenty of examples of equities rallying as
supply has risen. Moreover, a shift out of money market
funds back into equities could provide enough to cover
€200-400 bn of equity issuance this year, we believe.
NH:
Market performance and equity supply were negatively correlated through
most of 2008; investors were shifting money out of risky assets, avoiding
companies with stretched balance sheets. Year-to-date the correlation has
been positive however; the market has generally welcomed supply and
certainly not penalized it. The same holds at the stock level; companies
issuing new equity have generally outperformed their sector this year.
most of 2008; investors were shifting money out of risky assets, avoiding
companies with stretched balance sheets. Year-to-date the correlation has
been positive however; the market has generally welcomed supply and
certainly not penalized it. The same holds at the stock level; companies
issuing new equity have generally outperformed their sector this year.
NH:
Fundementals not supply should dictate market direction
Will a build up in issues eventually end the rally? There is evidence that
the bull market of 2003/04 did not begin until all the new equity issued by
the tech and telecoms stocks was absorbed. The same was not true in the
early 1990s however; the market recovered even as rights issues
increased. Ultimately, economic fundamentals proved more important.
Will a build up in issues eventually end the rally? There is evidence that
the bull market of 2003/04 did not begin until all the new equity issued by
the tech and telecoms stocks was absorbed. The same was not true in the
early 1990s however; the market recovered even as rights issues
increased. Ultimately, economic fundamentals proved more important.
NH:
Money market funds should be able to absorb supply
A crucial determinate of the market’s ability to absorb new issues will be
the cash available to shift into equities. Assets in money market funds
increased sharply through 2008, and are now equal to 27% of Europe’s
equity market cap (versus a 5-year average of 17%). A return to the
historical average ratio would provide around €400 bn of cash, 10% of
Europe’s current market cap. This equates closely with the comparable
amount of equity supply after the early 1990s recession. It would also be
sufficient to allow non-financials to reduce gearing levels to average.
A crucial determinate of the market’s ability to absorb new issues will be
the cash available to shift into equities. Assets in money market funds
increased sharply through 2008, and are now equal to 27% of Europe’s
equity market cap (versus a 5-year average of 17%). A return to the
historical average ratio would provide around €400 bn of cash, 10% of
Europe’s current market cap. This equates closely with the comparable
amount of equity supply after the early 1990s recession. It would also be
sufficient to allow non-financials to reduce gearing levels to average.
NH:
Relative cost of debt and equity drives sentiment on capital raising
The relative cost of debt and equity seem to determine market reaction to
new equity supply; in 1999/2000 equity funding was cheap and the market
wanted more, in 2005/06 debt was cheap and equity withdrawal was
rewarded. Today, the cost of debt and equity are relatively high, but we
believe there is further scope for equity costs to fall.
The relative cost of debt and equity seem to determine market reaction to
new equity supply; in 1999/2000 equity funding was cheap and the market
wanted more, in 2005/06 debt was cheap and equity withdrawal was
rewarded. Today, the cost of debt and equity are relatively high, but we
believe there is further scope for equity costs to fall.
NH:
so there you have it
NH:
more companies like Regal Petroleum
NH:
will be able to get cash calls away
NH:
hell even Punch might try one
NH:
and Yell
BE:
NH:
why not
NH:
if there’s such demand
BE:
The flight of sh-te to rights.
BE:
Why not.
NH:
yeah
NH:
the dash for cash is dead
NH:
this is now called
NH:
the flight to sh*te
11:22AM
NH:
anyway enough of that
NH:
what’s moving out there?
BE:
BT leading the Ftse at the moment
BE:
BT up 4.7p at 97.7p
NH:
I’m assuming that’s on the back of this Merrill buy note.
BE:
I’d assume so as well.
NH:
there have been bears, righ?
BE:
Yeah
BE:
But when the house broker upgrades a fortnight before results
BE:
it tends to get a bit of attention.
NH:
What’s their argument?
BE:
Job cuts.
BE:
Loads of them.
BE:
Thirty thousand on the bru.
NH:
wow
BE:
Here’s how they phrase it
BE:
New era of cost control and pricing discipline
BE:
BT’s equity is highly geared to improving performance which we expect to come from the sizeable reductions in headcount now being implemented, other cost and capex reductions, more disciplined bid pricing and better contract management.
BE:
We estimate that target labour reductions of a net 30,000 should save £0.9bn in a full year and be fully reflected only in 2010/11 results.
BE:
Then there’s the “bad news is in the price” argument …
BE:
BT has taken hits on its Global Services contracts and pension scheme, news which we believe the market has now had time to absorb. From here, evidence of delivery of cost savings should be positive as should the impact of recent OFCOM reviews which have been favourable for pricing at Openreach and Wholesale and are set to enable bundling of services for Retail.
BE:
We upgrade our forecast EBITDA (pre-leaver costs) by 2.0% to £5,604m in 2010/11 and by 3.0% to £5,727m in 2011/12. Changes to forecast EPS are larger but relate mainly to noncash items – D&A in 2009/10 and the pension debit in 2010/11 and 2011/12.
BE:
And the conclusion …
BE:
Upgrade to Buy, price objective now 130p
BE:
We upgrade to Buy from Neutral and raise our PO to 130p (110p) mainly due to removing a discount for execution and funding risk which we believe is no longer a necessary adjunct to our forecasts and DCF assumptions. Downside risks include further pension deterioration and economic pressure on Retail impacting its EBITDA growth. Upside risks include a swifter turn around at Global Services.
NH:
When are BT’s results?
BE:
Q1 on July 30
BE:
Although they can’t tell you if they’ll be coming in the morning or afternoon.
BE:
… Sorry, old joke.
BE:
In the interests of balance, here’s a preview from Oddo Securities
BE:
Which stay on reduce.
BE:
We forecast a 3.7% fall in sales vs. a projected drop of 4.2% in the full year (and guidance for a decline of 4-5%) since the impact of currency fluctuations is set to become increasingly negative as the year progresses.
We forecast a 3.7% fall in sales vs. a projected drop of 4.2% in the full year (and guidance for a decline of 4-5%) since the impact of currency fluctuations is set to become increasingly negative as the year progresses.
BE:
Conversely, we forecast a 270bp drop in EBITDA margin in Q1 2009-10 vs. a projected fall of 25bp in the full year since: 1/ currency fluctuations should have a positive impact on the margin as the year progresses (sales mix impact); and 2/ the restructuring measures taken by the group should progressively reap dividends.
BE:
Lastly, we now forecast negative FCF of £ 577m for Q1 (vs. full-year FCF guidance of £ 1bn), mainly because the change in the WCR is now expected to have a negative impact on FCF of £ 700m vs. our previous forecast of -£ 500m. As such, the cash generation profile in 2009-10 will probably remain extremely seasonal. We estimate that to reach the guidance of FCF of £ 1bn, change in BT’s WCR will have to be respectively -£ 250m, +£ 250m and +£ 600m in Q2, Q3 and Q4, which seems unlikely to us or, maybe possible but with a very strong improvement, on which we have very low visibility (among other things because of GS). For this reason, we feel there is considerable uncertainty about the group’s cash generation capacity, lending credence to our forecast of FCF (£ 895m) and to our belief that guidance for FCF is at risk.
BE:
All in all, we reiterate our Reduce (3) recommendation on BT since: 1/ it is impossible to rule out a downgrade to BT’s guidance and to dividend expectations in the event of a further deterioration in business trends or a slower than expected recovery by Global Services; 2/ in view of the stock’s rally in the last three months, the operator’s multiples do not show a discount to the sector; and 3/ our valuation reveals downside risk of 20%.
NH:
thanks for that
NH:
(Carlo, the figs should have just gone up on the site. They are not dud)
11:27AM
NH:
right
NH:
Ponzi alert
NH:
$1.2bn
BE:
Another one?
NH:
actually might be more of a straight forward fraud
NH:
promise of 200 percent annual returns linked to pharmaceutical imports
NH:
aids drugs
NH:
all looks pretty colourful
NH:
OHANNESBURG, June 11 (Reuters) – Hundreds of investors have been fleeced of up to 10 billion rand ($1.2 billion) in what could be South Africa’s biggest corporate fraud, a private investigator and lawyer representing investors said.
NH:
Barry Tannenbaum, a South African businessman living in Australia, was said to have lured investors with the promise of 200 percent annual returns linked to pharmaceutical imports, and forged AIDS drug orders to reassure its funders when money started to dry up.
NH:
The scheme is still unraveling, but lawyers and investigators believe hundreds of investors, including top businessmen from South Africa, the United States, Germany and Australia, were involved.
The case looks set to rank as South Africa’s biggest corporate fraud and has shocked the country’s business community, known for its conservative approach to risk and investment.
The case looks set to rank as South Africa’s biggest corporate fraud and has shocked the country’s business community, known for its conservative approach to risk and investment.
NH:
Peter Winer, a lawyer representing several investors, said details were still unclear, but likened the fraud to the Ponzi scheme used by New York money manager Bernard Madoff to cheat thousands of investors of $65 billion over more than 20 years.
BE:
O Tannenbaum …
BE:
Sounds like a hell of a story
NH:
it does
NH:
worth checking out
NH:
the full story is on the Reuters site
11:29AM
NH:
right
NH:
let’s have a look at the LSE
NH:
who some to have been fleeced with a bond issue
BE:
Yup – shares getting a bit of a kicking
London Stock Exchange Group (LSE:LSE): Last: 729.50, down 38.5 (-5.01%), High: 760.50, Low: 706.00, Volume: 705.99k
BE:
That’s after punting a £250m bond for bridge financing out to 2019
NH:
I thought everyone knew about that yesterday
BE:
They did
BE:
But the pricing was only confirmed after the close
BE:
And the rate is …
BE:
9.125%
NH:
Wow.
BE:
Yup.
BE:
A massive 525 bips over Gilts
BE:
That’s to replace its previous line that ran out in April 2010
BE:
Which was Libor +225 bp
BE:
So, 3.5%.
BE:
Oh, and the new bond apparently steps up by 125 bp in the event of a ratings downgrade
NH:
Why’s so expensive?
NH:
do people not like the new CEO
BE:
What’s not to like?
BE:
About the dashing Mr Rolet?
NH:
yes
NH:
quite a guy
BE:
But at this rate they may as well have gone to Ocean Finance
NH:
BE:
And it’s going to hurt
BE:
Here’s Citigroup
BE:
The difference between the funding rates we estimate is likely to raise LSE’s group net interest to ~£42m p.a. from £38m for FY09.
BE:
Net impact ~2% reduction in EPS – After the tax shield on the extra debt expense, we estimate this could cause a ~2% reduction in Mar 2010E EPS.
BE:
Citi’s repeating sell today, incidentally.
BE:
There’s a big sector piece out on IDBs
BE:
Which is probably better as long room material
BE:
But here’s what they think of trading
BE:
Market share losses continue in UK equities – Using BATS collated data, we estimate that on 9 June 09 LSE’s market share in UK equities value traded dipped below 70% (69.3%). The average for the past 5 days is ~71% vs 76% back in April. Chi-X and BATS both continue to make modest market share gains. For BATS it can only be a matter of time before they extend their inverted pricing policy to UK listed stocks (price promotion currently only applies to Euronext based equities), potentially taking further market share.
BE:
Gearing to Rights activity is weak – We dispute bullish arguments that the stock is positively geared to a recovery in rights issues. Due to fee caps, total admission revenues (rights issues and IPOs together) were only 4% of group revenues for FY09. The group result is therefore not very sensitive to a further pick up in this area, in our view.
NH:
interesting point on the rights issues and an interesting point from Taxloss
NH:
that sort of coupon implies the mighty LSE is junk
NH:
junk i say
NH:
shares down 43p at 725p at the moment
11:35AM
NH:
Right a litte bit of 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:
Saad Raw
NH:
and the liquidation continues
NH:
Nomura doing it today
NH:
they were trying to offload a further 4m Berekley Group shares
NH:
which means that there are a further 14m to go
NH:
and Saad liquidation in this stock is done
BE:
More Saad disorder.
NH:
shares down 7.5p at 794p
NH:
certainly a lack of sunlight for SAAD at the moment
11:38AM
NH:
right a few people asking about the drug stocks which are having a good
NH:
day
GlaxoSmithKline (GSK:LSE): Last: 1,109, up 50 (+4.72%), High: 1,111, Low: 1,053, Volume: 11.04m
AstraZeneca (AZN:LSE): Last: 2,614, up 97 (+3.85%), High: 2,614, Low: 2,517, Volume: 2.93m
NH:
a combination of factors we think
NH:
people switching into cheap defensive stocks
NH:
swine flu
NH:
that’s good for Glaxo
BE:
MOST was pushing Glaxo yesterday of course
NH:
yeah, closing out there underweight
BE:
Although the actual note was kind of dull
NH:
was it just on valuation then?
BE:
Yup
BE:
Not half as interesting as some of the pandemic estimates …
NH:
for what it is worth
NH:
here’s the note
NH:
underperformance year-to-date vs. the EU
pharmaceutical sector – driven by gross-margin
pressure and pipeline delays (namely Cervarix, for
cervical cancer) – we can no longer justify an
Underweight rating on the stock. Our target price is
unchanged at GBp 1320. While a weaker US dollar
provides FX headwinds, the year-on-year comparisons
ease into 2H 2009 due to the timing of generic
introductions in 2008. Longer-term, we continue to
strongly endorse the chief executive’s dynamic strategy
in moving towards a diversified healthcare model (akin
to our own Pharma 2.0), which we believe will create
significant shareholder value long-term. In the near term,
the recent US government order for H1N1 pandemic flu
vaccine with a novel adjuvant may suggest there is
some hope for approval of GSK’s Cervarix in 2H.
pharmaceutical sector – driven by gross-margin
pressure and pipeline delays (namely Cervarix, for
cervical cancer) – we can no longer justify an
Underweight rating on the stock. Our target price is
unchanged at GBp 1320. While a weaker US dollar
provides FX headwinds, the year-on-year comparisons
ease into 2H 2009 due to the timing of generic
introductions in 2008. Longer-term, we continue to
strongly endorse the chief executive’s dynamic strategy
in moving towards a diversified healthcare model (akin
to our own Pharma 2.0), which we believe will create
significant shareholder value long-term. In the near term,
the recent US government order for H1N1 pandemic flu
vaccine with a novel adjuvant may suggest there is
some hope for approval of GSK’s Cervarix in 2H.
NH:
What’s new: GSK trades at 8.8 times core 2010e EPS
with a robust 6.2% dividend yield with a 2010e-2015e
EPS CAGR of 5%. This compares favorably with the
sector. Our reticence to become more positive on the
name is driven by our concern about the risk to Advair
estimates from generic entrants under development
(Novartis, Teva). Advair accounts for an estimated
25-30% of current operating profit for the Group.
with a robust 6.2% dividend yield with a 2010e-2015e
EPS CAGR of 5%. This compares favorably with the
sector. Our reticence to become more positive on the
name is driven by our concern about the risk to Advair
estimates from generic entrants under development
(Novartis, Teva). Advair accounts for an estimated
25-30% of current operating profit for the Group.
BE:
For AstraZeneca there’s a UBS note in circulation
BE:
Catalyst Paths: Adding to Key Calls on Possible 20% Outperformance by Year-End
We add AstraZeneca to our European Key Calls On upcoming catalysts through end-2009, we now add AZN to our European Key Calls, a list of our
highest conviction ideas within Europe.
5 opportunities together could more than double AZN’s out-year earnings We believe 5 pipeline opportunities (Brilinta, dapagliflozin, Onglyza,
Iressa, Crestor JUPITER) could cause >100% earnings accretion for consensus 2014-16 forecasts. Just one blue sky success could lead to AZN
performance for years to come. We expect AZN’s newsflow in 2009 to increase the visibility on these opportunities and see the likelihood of 20%
outperformance for AZN by year end.
We add AstraZeneca to our European Key Calls On upcoming catalysts through end-2009, we now add AZN to our European Key Calls, a list of our
highest conviction ideas within Europe.
5 opportunities together could more than double AZN’s out-year earnings We believe 5 pipeline opportunities (Brilinta, dapagliflozin, Onglyza,
Iressa, Crestor JUPITER) could cause >100% earnings accretion for consensus 2014-16 forecasts. Just one blue sky success could lead to AZN
performance for years to come. We expect AZN’s newsflow in 2009 to increase the visibility on these opportunities and see the likelihood of 20%
outperformance for AZN by year end.
BE:
Brilinta, dapagliflozin, and Crestor JUPITER with important catalysts Of a number of important catalysts for AZN in 2009, we see risk-reward
dynamics as particularly favourable around (1) the Brilinta (heart attacks, strokes) PLATO presentation and publication at ESC 2009 (30-Aug), (2) the
dapagliflozin (diabetes) phase III data at EASD 2009 (27-Sep-01-Oct), and (3) the emergence of draft cholesterol guidelines on Crestor JUPITER at
AHA 2009 (14-18-Nov).
Valuation: Reiterate Buy; adding to Key Call list; PT to 3,100p We value AZN using blended P/E, EV/E, and DCF factors. We now reduce our 12%-
14% discount to the blend of our factors given our view that the potential for pipeline upside on our numbers offsets the potential for downside on
patent risks. We reduce our discount to 3%, which takes our PT from 2800p to 3100p.
dynamics as particularly favourable around (1) the Brilinta (heart attacks, strokes) PLATO presentation and publication at ESC 2009 (30-Aug), (2) the
dapagliflozin (diabetes) phase III data at EASD 2009 (27-Sep-01-Oct), and (3) the emergence of draft cholesterol guidelines on Crestor JUPITER at
AHA 2009 (14-18-Nov).
Valuation: Reiterate Buy; adding to Key Call list; PT to 3,100p We value AZN using blended P/E, EV/E, and DCF factors. We now reduce our 12%-
14% discount to the blend of our factors given our view that the potential for pipeline upside on our numbers offsets the potential for downside on
patent risks. We reduce our discount to 3%, which takes our PT from 2800p to 3100p.
11:42AM
NH:
Right
NH:
readers asking about a US ML
NH:
the plan is to start those in Sept
NH:
although I imagine things will drift and it will be more like Oct
NH:
we need our new US correspondent to bed in
NH:
and then
NH:
we should be up and away
NH:
the idea is to do it from 3.00pm
NH:
or perhaps a bit later
NH:
and combine the end of day stuff from the UK session
NH:
which will mean more RAW
NH:
hopefull
NH:
y
BE:
(Mj J – I’ll see what can be done)
NH:
there are no plans for Asian ML
11:44AM
NH:
Questions also about Regal Pets
NH:
trying to fnd about pricing now
NH:
company trying to raise $100m
NH:
shares off 7.25p at 67.25p
NH:
and pls forgive us it we are too bearish on Regal
NH:
but we have been scared so many times
NH:
all one can hope is that Frank Timis is diluted out of sight
NH:
and this can become a proper company
BE:
I’d really rather leave the discussion about this one to III and ADVFN, frankly
NH:
well, here is what Matrix has to say about the placing
NH:
Proposed placing to raise approximately US$100m
• Proceeds will be used to fund the phased development in Ukraine
• Expected to be cash flow positive by the end of 2011
• Proceeds will be used to fund the phased development in Ukraine
• Expected to be cash flow positive by the end of 2011
NH:
Regal Petroleum has announced proposed placing to raise approximately US$100m to fund the phased development of its
primary GOL-MEX-SV asset in Ukraine. The company expects to be cash flow positive by the end of 2011.
The announced placing doesn’t come as a surprise to us. Regal still has sufficient cash resources (US$79m at 30/04/2009);
however, with two full-time rigs drilling in Ukraine, Regal needs to strengthen the balance sheet and continue funding its
drilling programme until sufficient production is built.
primary GOL-MEX-SV asset in Ukraine. The company expects to be cash flow positive by the end of 2011.
The announced placing doesn’t come as a surprise to us. Regal still has sufficient cash resources (US$79m at 30/04/2009);
however, with two full-time rigs drilling in Ukraine, Regal needs to strengthen the balance sheet and continue funding its
drilling programme until sufficient production is built.
BE:
Right. Hopefully that’s useful to someone.
NH:
some breaking news
NH:
rump of the Travis Perkins rights issue placed at 550p
BE:
And has the 3i one been done yet?
NH:
yep, that has been done too
NH:
at 277p
NH:
and back to Regal for a mo
NH:
books closed at 11am
NH:
so demand must have been pretty good
11:49AM
NH:
Right
NH:
we need to pause for a second
NH:
because Izy has brought round a very nice fresh fruit platter
NH:
strawberries
NH:
raspberries
NH:
and some grapes
NH:
just tucking in
NH:
beats Graze
11:51AM
NH:
Right am back
NH:
and its seems JP Morgan are lowering forecasts for the US banks
NH:
which is odds what the other calls I have seen
NH:
most folk going for a repeat of Q1
NH:
stellar fixed income gains
NH:
*JPMORGAN 2Q EARNINGS ESTIMATE CUT AT BANK OF AMERICA :
*MORGAN STANLEY MAY POST 2Q LOSS, BANK OF AMERICA SAYS :
*MORGAN STANLEY 2Q EARNINGS ESTIMATE CUT AT BANK OF AMERICA
*GOLDMAN SACHS 2Q EARNINGS ESTIMATE CUT AT BANK OF AMERICA
*MORGAN STANLEY MAY POST 2Q LOSS, BANK OF AMERICA SAYS :
*MORGAN STANLEY 2Q EARNINGS ESTIMATE CUT AT BANK OF AMERICA
*GOLDMAN SACHS 2Q EARNINGS ESTIMATE CUT AT BANK OF AMERICA
NH:
sorry that BoA lowering forecasts for US banks
NH:
have we got the note?
NH:
interesting counter point
BE:
Yeah … hang on
BE:
It’s quite noodlish
BE:
TARP repayment will drive hit to earnings for common
When TARP pfds were issued in Oct, related warrants caused a portion of the
investment to be allocated to paid-in-capital (“PIC”) with this balance set to slowly
accrete to preferred stock over 20 quarters. Repayment of TARP by GS, JPM and
MS will force a reversal of remaining warrant value (through pfd dividend line).
When TARP pfds were issued in Oct, related warrants caused a portion of the
investment to be allocated to paid-in-capital (“PIC”) with this balance set to slowly
accrete to preferred stock over 20 quarters. Repayment of TARP by GS, JPM and
MS will force a reversal of remaining warrant value (through pfd dividend line).
BE:
Warrant repay will drive Equity hit, but likely 3Q event
We also expect each Co. will pay the government to extinguish attached warrants,
but uncertainty remains as to valuation (e.g. what volatility will be used in
valuing?). Whatever the value, we expect it to be a hit to common equity (without
going through the P&L) sometime in 3Q. The numbers are significant (anywhere
from $700mn to $1bn+, by our calculation), but given the strong capital cushion at
these firms, T-1 common ratio hit should be no more than 50bps. Also, it is not
clear that the full amount will be charged (logically, we’d expect the charge to be
just the amount over the aforementioned 2Q hit).
We also expect each Co. will pay the government to extinguish attached warrants,
but uncertainty remains as to valuation (e.g. what volatility will be used in
valuing?). Whatever the value, we expect it to be a hit to common equity (without
going through the P&L) sometime in 3Q. The numbers are significant (anywhere
from $700mn to $1bn+, by our calculation), but given the strong capital cushion at
these firms, T-1 common ratio hit should be no more than 50bps. Also, it is not
clear that the full amount will be charged (logically, we’d expect the charge to be
just the amount over the aforementioned 2Q hit).
BE:
GS: 2QE cut to $2.92 from $3.59 on TARP hit offset by
stronger FICC, but ‘10E up on repayment
GS credited $490mn of its TARP payment to PIC upon accepting its $10bn of
government capital; we est. a cost of about $430mn from repayment (after 2.75
qtrs. of accretion). We are also adding a FDIC assessment of $70mn. This cuts
2QE to $2.69 from $3.59. However, it is increasingly clear that GS FICC business
continue to operate solidly, offsetting cut with better Trading brings 2Q to $2.92.
Adjusting forward ests for repayment of TARP as we did last week for JPM and
MS (remove dividend, offset by lower Trading from $10bn lower allocated capital),
which raises our 2H09 forecast by $0.10 and our ‘10E to $17.63 from $17.45.
stronger FICC, but ‘10E up on repayment
GS credited $490mn of its TARP payment to PIC upon accepting its $10bn of
government capital; we est. a cost of about $430mn from repayment (after 2.75
qtrs. of accretion). We are also adding a FDIC assessment of $70mn. This cuts
2QE to $2.69 from $3.59. However, it is increasingly clear that GS FICC business
continue to operate solidly, offsetting cut with better Trading brings 2Q to $2.92.
Adjusting forward ests for repayment of TARP as we did last week for JPM and
MS (remove dividend, offset by lower Trading from $10bn lower allocated capital),
which raises our 2H09 forecast by $0.10 and our ‘10E to $17.63 from $17.45.
BE:
JPM: 2QE cut to $0.01 from $0.30 on TARP mark
JPM credited $1.3bn of its TARP funds to Retained Earnings upon accepting its
$25bn of capital, so we estimate a loss of about $1.1bn from repayment. This
cuts our 2QE forecast by $0.29 to $0.01. Note that we have already accounted for
a $750mn FDIC assessment fee.
JPM credited $1.3bn of its TARP funds to Retained Earnings upon accepting its
$25bn of capital, so we estimate a loss of about $1.1bn from repayment. This
cuts our 2QE forecast by $0.29 to $0.01. Note that we have already accounted for
a $750mn FDIC assessment fee.
BE:
MS: 2QE to -$0.23 from $0.70: TARP hit, more DVA
MS credited $1bn+ of TARP funds to PIC upon accepting $10bn of capital; we
estimate a loss of about $900mn from repayment. Also adding FDIC assessment
of $30mn. This cuts 2QE to $0.10 from $0.70. MS spreads have continued to
tighten; we now believe MS could post DVA loss of at least 1Q’s $1.5bn, which
cuts 2Q to a loss of -$0.14. An est. $70mn charge from the Mitsubishi pfd. to
Common exchange cuts another $0.04. Finally, the move to Basic From Diluted
shares (because of loss) cuts 2QE another -$0.05 to -$0.23.
MS credited $1bn+ of TARP funds to PIC upon accepting $10bn of capital; we
estimate a loss of about $900mn from repayment. Also adding FDIC assessment
of $30mn. This cuts 2QE to $0.10 from $0.70. MS spreads have continued to
tighten; we now believe MS could post DVA loss of at least 1Q’s $1.5bn, which
cuts 2Q to a loss of -$0.14. An est. $70mn charge from the Mitsubishi pfd. to
Common exchange cuts another $0.04. Finally, the move to Basic From Diluted
shares (because of loss) cuts 2QE another -$0.05 to -$0.23.
NH:
I wonder how the street will take that later
BE:
Lead analyst is Guy Moszkowski
BE:
Who I think is quite well followed
NH:
thanks for that
11:55AM
NH:
Right time to wind things up
BE:
Hang on
BE:
We should really take a quick look at Vedanta
NH:
ah yes
NH:
almost forgot
NH:
now
NH:
we were picking up rumours yesterday of educated selling of Ved but just could not figure out why
NH:
a fund raising had crossed our mind
BE:
Indeed
NH:
but the company buying back stock and a director recently selling stock, we thought it could not happen
BE:
we were wrong
BE:
Shares down 122p at 1625p
BE:
and that follows news of a $1bn convertible bond offering
BE:
the cash is going to be used to finance takeovers and boost ownership of its myriad subsidiaries
NH:
hmmm
NH:
complex company Vedanta
NH:
a web of cross holdings
BE:
indeed
BE:
these bonds are expected to have a coupon of around 4.5 to 5.5% and the conversion price is expected to be at a premium of 35-45%
BE:
interestingly the founder, biggest shareholder and executive chairman – Agarwal is not taking up any convertibles
BE:
but I seem to remember he has been lifting his stake in recent weeks
BE:
on June 8 bought 1.2m shares through his Volcan investment vehicle
NH:
and who was the director selling stock?
NH:
that all looks very
BE:
Dilip Golani, he sold 3,000 shares earlier this month
NH:
er, how can I put this
NH:
odd
NH:
price rose really sharply ahead of this issue
NH:
any comment on the bond though?
BE:
a few bits
BE:
well there are more observations from the market really
NH:
go on
BE:
price looks good vs the recent issued fro Anglo and Rio
BE:
well supported by top investors
BE:
and the acquisition announced by one of its subsidiaries today looks to be a sensible move
BE:
and I do have a bit of comment on that
NH:
OK
NH:
paste away
BE:
it’s from Morgan Stanley
BE:
Quick comment – what’s new?: Vedanta’s 51%
owned subsidiary Sesa Goa has announced that it has
agreed to acquire VS Dempo Ltd for $368mn on a
debt-free and cash-free basis. This will be funded out of
Sesa’s cash balance of $872mn. Dempo produced c4mt
of iron ore (sales were higher at c4.4mt) in FY ‘08/09.
Dempo acquisition would increase the size of Sesa
Goa’s 16mt production during the same period by c25%.
BE:
c$90/t of production looks like a very attractive
price: This compares to global average of over c$250/t
of production of the major iron ore producers (and
c$200/t for Sesa Goa itself).On the negative side, c70mt
of reserves and resources (18 year mine life at current
production rate) looks slightly light to us, but there could
be further exploration upside in the properties owned.
BE:
Potential synergy and growth upside, but too early
to quantify: Dempo has contiguous operations to Sesa
Goa and associated infrastructure including processing
plants, barges, jetties, transhippers and loading
capacities at Mormugoa port. Though no synergy
numbers have been given, we think investors will be
positive on the scope for benefits in the current
environment.
BE:
Platform for consolidation in the Indian iron ore
exporters: Indian iron ore mining (esp. export-oriented)
is extremely fragmented and there are over 70 iron ore
mining companies in India, on our estimates. Once the
Dempo acquisition is completed, Vedanta (with c20mt
pro forma of iron ore production) would clearly be the
largest exporter by far and starts catching up with
state-owned NMDC, which has around 30mt of
production. Iron ore mining and exports is a business
with considerable economies of scale and hence
consolidation here could be further value enhancing, in
our view.
NH:
hmmm
NH:
so more deals to come by the looks of it
BE:
yes
NH:
but
NH:
brokers tell me the balance sheet looks quite strong and this is all a bit, er, opportunistic
BE:
can’t disagree with that
NH:
and the shares are down because of hedging, right
BE:
yeah
BE:
If you assume a 60% delta and a 50% allocation to hedge funds, we think that the delta hedge if c. 7.4m shares.
NH:
7.4m is quite a few Vedanta
BE:
It is
12:02PM
NH:
let’s start to wind things up
NH:
first
NH:
some more stuff I don’t fully understand
NH:
concerns Legal & General
NH:
which means by default it is worth mentioning
NH:
it is from Caznove
NH:
looking at the introduction of some new reporting rules for the sector
NH:
and if adopted they could hit L&G hard
NH:
see if you can make head or tail of this
NH:
L&G – short tem help from spread tightening, but long term concerns [LGEN.L, LGEN LN] 64p, IN-LINE, Sector – Neutral
NH:
L&G has been helped by the recovery in corporate bond markets, and if spreads continue to tighten it should support the stock. However, if Solvency 2 is adopted in the current proposed form of QIS4 (Quantitative Impact Study 4), then unrealised losses could be brought fully into account for solvency purposes. The consequences of this would be more painful for L&G than for UK peers, given its focus on annuities. Although QIS4’s adoption is by no means certain, we believe this is a significant medium-term concern for both capital adequacy and margins. Management’s dividend cut suggests that it may share such concerns, in our view.
NH:
L&G’s valuation, while cheap by historic standards, is not outstanding compared to peers. Post-cut, the 2009E yield of 4.9% is actually a little below the 5.4% sector average. Price/EV of 55% is in line with Friends Provident (55%), but below Standard Life (64%). The stock is trading at a mere 10% premium to the IFRS NAV of 56p, but then FP is at 99% and SL 126%. Bulls of corporate bonds may wish to trade the stock, but long-term regulatory risk, a limited valuation story, and a confusing message on the dividend suggest no change to our rating. IN-LINE.
Legal and General Group (LGEN:LSE): Last: 63.50, down 0.6 (-0.94%), High: 63.90, Low: 62.30, Volume: 6.02m
BE:
er
BE:
Right
BE:
That’s a proper three-pipe note that one.
BE:
Will give it some thought over lunch
BE:
What are shares doing?
NH:
er it is above
BE:
Ah – right.
BE:
Blindsinded
12:05PM
NH:
Right, people asking about this bizzare bond story
NH:
taly’s financial police (Guardia italiana di Finanza) has seized US bonds worth US 134.5 billion from two Japanese nationals at Chiasso (40 km from Milan) on the border between Italy and Switzerland. They include 249 US Federal Reserve bonds worth US$ 500 million each, plus ten Kennedy bonds and other US government securities worth a billion dollar each.
NH:
WTF!
NH:
this is from Business Insider
NH:
he question now is whether the bonds are real or counterfeit
Karl Denninger, who discovered the story, notes that either way, this is wild:
If they’re real, what government (the only entity that would have such a cache) is trying to unload them?
If they’re fake, this is arguably the biggest counterfeiting operation ever, by a factor of many times. I’ve seen news about various counterfeiting operations over the years that have made me chuckle, but this one, if that’s what it is, is absolutely jaw-dropping.
The cute part of this is that if the certificates are real Italy just got a hell of a bonanza – their money laundering laws provide for a statutory 40% penalty for failure to declare instruments and cash in excess of $10,000 Euros, which means they’d garner a close-to-$40 billion dollar windfall.
We’re leaning towards counterfeit on this one. Either way, we wanna know more!
12:06PM
NH:
and finally some sad news
NH:
yesterday saw one of the City’s more colourful brokers pass away
NH:
Martyn Purnell
NH:
he had been in hospital for a while after suffering a stroke
NH:
his last job was a Madoff in London
NH:
but fortunately he got out before it all imploded
NH:
he will be much missed
NH:
very good company, particularly at lunch
NH:
and he always had a story
NH:
although one thing won’t be missed – the tie he wore every day to work for 2 years
NH:
it was horrible
NH:
anyway Martyn you will be missed
BE:
Very sad news.
12:08PM
NH:
and that’s if for today and this week
NH:
thanks for helping out this week Bryce
BE:
Pleasure
NH:
our glorious leader is back on Monday
NH:
at the helm
NH:
hopefully with some weird and wonderful tales from NY
NH:
see u all on Monday
BE:
Have a good weekend, y’all.
NH:
bye