Markets live chat transcript for the chat ending at 12:09 on 30 Jun 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH)
PM:
Welcome to Markets Live
PM:
FT Alphaville’s daily markets discussion
NH:
Emerged from his drug induced haze at Glastonbury.
NH:
This is his last week on AV.
PM:
Mentioning Sam taking drugs at Glastonbury – its actually true.
NH:
Over the counter drugs, of course.
PM:
Only way you can get thru the festival without having to use the toilets
PM:
I’m too old to deal with stuff like that.
NH:
Well Lucy kellaway managed – and she’s older than you.
PM:
Anyway, we’ll have to cook up something for Sam’s last day on Friday.
NH:
Maybe we could parade him on here?
NH:
The equivalent of getting an Alphaville “leaving page”
PM:
Yeah, good idea, put him up here and humiliate him.
NH:
we have some more problems with the comments
NH:
it seems people are logging in under different names
PM:
Not sure whether people are joking — but if you have been automatically logged in as someone else - can you jsut alert us to the fact
PM:
This is a serious issue obviously — so apologies
NH:
pls don’t reveal the persons name
NH:
otherwise the red card will have to come out
PM:
Not a ban (just a comment rejection)
NH:
Lorcan pls don’t mention the guys name you have logged on as pls
NH:
right let’s get down to business
NH:
A quick look at the wider market
NH:
and we can address ITV and these rumours of a bid from Philip Green and Simon Cowell
PM:
That’;; have the bulls salavating
NH:
yeah, but let’s not forget
PM:
Footsie stuck below 4300
NH:
today and yesterday’s move is all end of quarter window dressing
NH:
the rest of the week will be quiet
NH:
the US is closed for Independence day on Friday
NH:
before that we will have the non-farm numbers
NH:
no reason to close the short
PM:
Well, the non-farms could be quite up-lifting for those who think the worst is all behind up
NH:
what like today’s GDP number from the UK
PM:
Before we get to that to
PM:
You wanted to talk about Dana
PM:
the price is behaving very, very well
PM:
shares up 56p at £14.26
PM:
Been as high as 14.46
PM:
rise of 4% and good vol also
NH:
and from what brokers are telling me most of the buying is coming out of Germany
PM:
that’s interesting
NH:
yeah, particularly as we believe
NH:
sorry, I believe that RWE’s oil and gas division RWE DEA is running the numbers on Dana and could be close to making a move
NH:
now apparently there is a report in a German newspaper of newswire about RWE’s interest
NH:
so far I have not been able to find it and it probably doesn’t exist
NH:
but we do know the buying is coming from Europe
PM:
right and the German’s are saying nothing
PM:
they not even authorised one of those sources to tell Thomsonwire quietly that’s it all rubbish
PM:
RTRS-DANA PETROLEUM SHARES RISE 3.1 PCT ON MARKET TALK OF RWE BID INTEREST -TRADERS
08:58 30Jun09 RTRS-RWE DECLINES TO COMMENT ON MARKET TALK OF INTEREST IN DANA PETROLEUM
NH:
well, that’s pretty much what they didn’t say to us when we checked the story out
NH:
we don’t really have anything fresh here
NH:
I think RWE are looking and the could soon make a move
NH:
and they may have been spooked by all the leak
NH:
but the price action is telling us something I think
NH:
and finally Citi have upgraded their target price on Dana
NH:
actually they might have done it yesterday, but they reckon it is worth £15.80 a share
PM:
and the rumoured offer price is around £18
NH:
Upgrading oil price — ‘09e upgraded to $56/bbl ($47/bbl); ‘10e to $65/bbl
($55/bbl); mid-cycle view unchanged at $65/bbl. Long-term gas price assumption
down to 50p/therm (52p/therm). After adjusting our $/£ estimate to $1.55 ($1.45),
sector earnings rise c12% in ‘09e, c22% in ‘10e. Valuation changes are limited.
Sector view — Trading at a c15% discount to Risked NAV (ex Addax) we continue
to believe there is upside in the sector given our $65/bbl long-term oil price
assumption. Previous analysis has shown tentative signs that risked exploration is
creeping back into market valuations and whilst we choose to maintain our midcycle
oil price assumption, we estimate c35% upside across the sector when we
flex the forward curve through our models.
NH:
Top picks: Tullow Oil - Buy 1H, £11.80 PT (from £12.00) — With low financing
risk and near-term drilling newsflow expected in Uganda (Ngassa 60p risked,
+150p unrisked) and Ghana (M-4, Twenebo and Teak appr. wells, +150p risked,
+400p unrisked combined) Tullow remains one of our most preferred stocks .
Top picks: Dana Petroleum - Buy 1H, £15.80 PT (from £16.20) — Results from
the large onshore Tafejjart gas prospect in Morocco (16p risked, +150p unrisked)
are expected in mid-July with the remainder of the 12-month forward E&A
campaign in Egypt, Norway and West of Shetlands offering c20% risked, c80%
unrisked upside to the current share price. Dana is well financed and discounting
c$52/bbl at present. We believe Dana should prove relatively defensive if the
crude environment rolls over.
NH:
the story is that Simon Cowell and Philip Green are interested in bidding
NH:
we think they could raise the money
NH:
although others don’t
NH:
he took billions in divis out of Bhs
NH:
at the moment ITV is valued at £1.35bn
NH:
obviously debt on top of that
PM:
Hang on — this story was given wings by Media Guardian on Monday
PM:
But they were just speculating
NH:
and the deal Cowell and Simon recently agreed
PM:
Yeah — on the back of that
PM:
But while Green could certainly borrow the money to bid, do they really want to own a clapped out broadcaster
PM:
Isnt this really abotu Cowell and Sir Philip controlling content, in the form of performance rights etc
NH:
that’s true. Cowell doesn’t think he made enough money out of his content
PM:
Als, on the money front, if Green couldnt borrow from the banks he could go to his wife, Tina.
PM:
She’s a billionnaire you know — retailing
NH:
I heard that. Britain’s most succesful retailer
ITV (ITV:LSE): Last: 34.75, no change, High: 35.25, Low: 34.50, Volume: 2.18m
PM:
Right — people asking about UK GDP
PM:
Glass half full / half empty.
NH:
We msut sound like something of a scratched record on this.
NH:
But we see no reason to be bullish.
PM:
GDP during the first quarter has been revised down.
PM:
We now learn, somewhat belatedly, the GDP shrank 2.4 per cent during the first three months of the year.
NH:
Where’s Graham Cox when you want to taunt him?
NH:
not heard from him in weeks
NH:
which is both a blessing
NH:
and somewhat troubling
PM:
That was a revision from a 1.9 per cent drop.
PM:
So, if you want to be positive you can hope that the drop off in economic activity at the beginning of the year was SOOO shocking, that the bounce higher will be higher on the upside
PM:
Indeed, the treasury and the bank of England have been wheeling people out this morning to say that forecasts of gdp growth later this year remain intact.
PM:
The drop on the quarter was the biggest since the year that Michael Jackson was born, when Harold Macmillan was prime minister and Jerry Lee Lewis released “Great Balls of Fire.'’
NH:
What caught my eye was that the construction sector fell 6.9 percent, compared with an estimate of 2.4 per cent in May.
NH:
Why is construction sector so difficult to get stats out of?
NH:
Cant they just count cranes or trucks on the road or something?
PM:
Here’s an FT story on the GDP figs
NH:
and here’s some comment
NH:
Andrew Goodwin, Senior Economic Advisor to the Ernst & Young ITEM Club
NH:
We had expected a downward revision to GDP, given the plunge in construction output since the last quarter, but the scale of revision comes as a real shock and highlights the extreme weakness of the economy in the early months of the year.
n All of the evidence points to a much smaller contraction in Q2 as firms stop running down their stocks, but we remain concerned about the sustainability of the recovery once this boost has worn off.
NH:
The weak pound appears to be having some positive impact on the trade in goods deficit, but the fallout from the banking crisis is harming the UK’s ability to export financial services
NH:
Howard Archer at IHS Global Insight
NH:
The revised GDP data are pretty shocking, showing that the recession has been significantly deeper than previously thought and also started earlier. The downward revision to GDP in the first quarter was even worse than feared, while there were also downward revisions to earlier quarters with the result that GDP started contracting in the second quarter of 2008 rather than the third. This not only reflected the expected sharp downward revisions to construction output but also to service sector activity. Consequently, the quarter-on-quarter drop in GDP in the first quarter at 2.4% was the largest for 50 years, while the year-on-year drop of 4.9% was the largest since records began in 1948.
NH:
The weakness in the first-quarter was broad-based across both the output and the expenditure side. The dominant service sector contracted by 1.6% quarter-on-quarter, while industrial production nosedived by 5.1% quarter-on-quarter and construction output plunged by 6.9%. On the expenditure side, consumer spending, investment, exports and imports all fell sharply, while inventories were run down substantially further. Only government spending expanded in the first quarter.
NH:
The household savings ratio fell back to 3.0% in the first quarter of trending up to 4.0% in the fourth quarter of 2008 from -0.8% in the first quarter of last year. This was due to a sharp fall in household’s disposable income in the first quarter. We expect the savings ratio to trend upwards over the coming months as consumers in general need to improve their balance sheets in the face of heightened debt levels, while many people are looking to retrench due to ongoing serious concerns about the economy and jobs.
NH:
Even deeper contraction in GDP in the first quarter is obviously unwelcome news, but it is also old news and matters have moved on appreciably since then. The good news is that the economy probably at worst contracted only modestly in the second quarter and it is not inconceivable that it managed to eke out marginal growth. Economic activity is currently benefiting from inventory correction being well advanced, while the substantial monetary and fiscal stimulus that has been enacted is increasingly feeding through to help matters along with lower inflation and a sharply weaker pound.
NH:
The Bank of England clearly continues to have serious concerns and uncertainties over the timing, strength and sustainability of any recovery. In addition, even deeper contraction in GDP than previously thought means that there will be even more spare capacity. Consequently, we expect the Bank of England to keep interest rates down at 0.50% for the rest of 2009 and probably deep into 2010. We also suspect that the amount being spent on Quantitative Easing will be raised by at least the final £25 billion of the £150 billion that the Bank of England is currently authorized by the Chancellor to use
NH:
so, rates remain at 0.5% for the rest of the year
NH:
and probably well into 2010
NH:
and a bit more QE on the way
NH:
reaction of the equity market, the GBK and gilts has also been very relaxed
NH:
yield is 3.649 on the 10-year gilt
PM:
We also had Nationwide house prices out this morning.
PM:
Smashed all forecasts.
PM:
Average prices ROSE 0.9 per cent in June
PM:
Third rise in four months – and the annual rate of decline has shrunk from 11.3% in May to 9.3% now.
PM:
So, you can take that as good news – good news that some people have been spooked into buying.
NH:
Operative word there is “some”
NH:
Volumes are still falling.
NH:
and that’s the key point
NH:
would we take a 10% move in a stock seriously if there was no volume
NH:
should be the same with these surveys
PM:
I would say it is actually dangerous and very bearish for house prices, because we haven’t had the crash that was needed to reset expectations.
PM:
At the nationwide website you can download a little excel file that gives you real house prices back to 1975.
PM:
Trend line for real house prices put at 2.9% per annum – and according to the Nationwide’s figure, prices have now fallen back to the long-term trend line,
PM:
Trouble with treating that as a positive
PM:
is that house prices undershoot on the downside just as they overshoot on the upside.
PM:
If this is a blip, which I believe it is, then we’ve quite possibly got another 2/3 years of declines/ stuttering/ stagnation.
PM:
Hard fact is that average house prices hit £184,131 in Q3 2007.
PM:
A peak to trough fall of 16 and a bit per cent is not a big enough correction.
PM:
Let’s go somewhere different
PM:
Somewhere even hotter than London
NH:
some big downgrades around
PM:
Of Dubai itself?!?!?!
NH:
no, the government related entities
NH:
S&P has concluded its review of Dubai based Government Related
Entities.
* This reappraisal is the result of increased uncertainty regarding
the government’s willingness to provide such support to Nakheel
(unrated), a key GRE with sizable repayments coming due at the end of
this year
* DP World (DPW DU) was cut 2 notches from ‘A’ to ‘BBB+’ with outlook
negative
* Jebel Ali Free Zone was cut 2 notches from ‘A’ to ‘BBB+’ with
outlook negative
* Dubai Multi Commodities Centre Authority was cut 5 notches from
‘A-’ to ‘BB’ with outlook stable. This is a company that will be folded
into being managed by Nakheel
* DIFC was affirmed but left with outlook negative
NH:
There will be a conference call at 12.30pm BST on +44 (0) 1452 569
114, Conference ID#: 17879670
PM:
Those are big important downgrades
NH:
Moody’s have also had a go
PM:
That will go down very badly locally
NH:
RTRS-MOODY’S DOWNGRADES DUBAI HOLDING TO A3 ON REVIEW; EMAAR’S BAA1 ON REVIEW
11:07 30Jun09 RTRS-RPT-MOODY’S LOWERS DUBAI HOLDING TO A3 FROM A2 ON REVIEW; MAY CUT EMAAR’S BAA1
11:10 30Jun09 RTRS-Moody’s lowers Dubai Holding to A3; Emaar’s Baa1 on review
NH:
here’s some text from the S&P report
PM:
Tryng to get on to The National website — see reaction
NH:
DUBAI (Standard & Poor’s) June 30, 2009–Standard & Poor’s Ratings Services
said today that it has revised its ratings on several Dubai-based
government-related entities (GREs) that had been on CreditWatch with negative
implications since April 30, 2009.
We have downgraded DP World Ltd., Jebel Ali Free Zone (FZE), and Dubai
Multi Commodities Centre Authority, and affirmed the ratings on DIFC
Investments LLC and Thor Asset Purchase (Cayman) Ltd. Please see “Ratings
List” below for full details of the rating actions.
NH:
The rating actions reflect Standard & Poor’s reappraisal of the
likelihood of extraordinary financial support by the Government of Dubai to
its GREs to ensure the timely repayment of their financial obligations. This
reappraisal is the result of increased uncertainty regarding the government’s
willingness to provide such support to Nakheel (unrated), a key GRE with
sizable repayments coming due at the end of this year (see “Ratings On Dubai
Government-Related Entities Put On Creditwatch Negative On Uncertainty Over
Support,” published on RatingsDirect on April 30, 2009).
NH:
Paul is checking the press in Dubai
NH:
to see if anyone has picked up this breaking news
NH:
he can’t find anything
PM:
Here’s Emireates 24/7 — they are concentrating on the fall in Dubai sov CDS spreads
PM:
Though the credit default swap (CDS) spreads of Dubai has fallen by about 50 per cent from the levels of 1000 basis points (bps) to about 500 basis points since February, indicating a substantial fall in the risk perception on the emirate, this has failed to reflect on Dubai bond yield so far.
While Abu Dhabi bond is currently trading at about five per cent yield, the Dubai bond, launched in 2008 and maturing in 2013, is trading at yields as high as 8.5 per cent.
During the same period, the Abu Dhabi CDS has dropped from 450 bps to just about 230 bps.
“Taking into account, the five-year interest rate swap, we can infer that while the Abu Dhabi sovereign bond is trading in positive basis of about 50 bps (bond spread tighter than the CDS spreads), the Dubai sovereign bond is trading at negative basis of close to 100 bps,” explained Ram Mohan a Dubai-based fixed income consultant..
Given that the trading price of bond is inversely correlated to the yield it offers to the investors, it can be said that while the price of Abu Dhabi bond value has limited scope of growth both in terms of absolute yield levels and spreads, the Dubai sovereign (Dh6.5 billion issued in two tranches in 2008) has relatively larger room for growth.
NH:
they are out of the woods then
NH:
Another day, and another big bullish note on Barclays
NH:
this one’s from Deutsche Bank and comes with a 365p target price
NH:
and they think Barclays is very cheap
PM:
obviously given their target price
NH:
the advice of Jason Napier is feel the earnings power
PM:
and where is all this power coming from? Bar Cap??
NH:
yep, its coming from Diamante Bob
NH:
From capital relief to earnings recovery
We estimate Barclays’ pro-forma core tier 1 rose to 8.9% by end 1Q09, helped by
19bps of profit generation. Though market capital requirements will rise, we
believe Barclays can absorb this. We think the stock attractive at a 9% discount to
current TNAV of 302p. But the real story is around earnings: we think the stock
very cheap at 7x 2010 EPS, incl. recession-level loan losses, dented interest
margins and £2bn asset writeoffs. Current profitability plus cheap exposure to a
cyclical recovery makes Barclays attractive. Buy retained, TP to 365p from 220p.
NH:
Capital relief is not a real driver from here…
The rally in Barclays’ stock is significant and right, in our view, considering the
equity market’s revised view of the bank’s capital adequacy given an improving
environment, proceeds of the BGI sale and confirmation that management have
succeeded in significantly shrinking risk-weighted assets in 2009. All in, we have
1Q09 core tier 1 of 8.4% including 19bps of profits earned in the quarter, with
warrants on the RCI’s adding another 70bps in time. We expect trading regulatory
capital requirements will rise materially, but we do not expect another capital call
NH:
…but earnings power is…
But the real Barclays story must be around earnings. As Figure 1 shows we expect
adjusted earnings of 27p in 2009, rising to 39p in 2010, 49p in 2011 and 72p in
2012 as net interest margins, loan impairments and risk asset drags recede. The
stock is inexpensive on this basis, in our view. However, we expect the equity
market will increasingly look at Barclays’ underlying earnings power – excl. risk
inventory charges – now that capital adequacy is less an issue. On this measure,
the stock is even cheaper on around 5x earnings despite loan losses befitting a
serious recession and margin loss which goes with near-zero official rates.
NH:
…especially given the undemanding valuations
Our 2009 adjusted EPS forecasts are left largely unchanged, but 2010 forecasts
increase by 26%, despite the loss of BGI’s earnings. Our target price is therefore
increased from 220p to 365p, derived using the sum of the parts shown in Figure
32. We think the share is attractive on 0.9x current TNAV (growing by 10%-15%
p.a. from here) and 5x current underlying earnings. The key downside risks are a
fall in capital markets activity and an unexpected spike in corporate and wholesale
credit costs.
PM:
er, there’s no mention in there of BarCap earnings power
PM:
the readers want some detail
NH:
BarCap to do £16bn of revenue this year
NH:
and that’s before Diamante Bob’s plan for world domination really kicks in
NH:
We believe this revenue total will be exceeded, with the division achieving £16bn of pre-write down revenues in 2009, stable in 2010, before some revenue growth accrues on the new hires to the platform. Quite whether BarCap will generate the £5bn in top line revenues which top 3 status in Europe and Asia would imply is harder to judge: our forecasts are present do not envisage success in this area. The upside is, however, significant, at nearly a third of the record revenues we forecast for this year.
Note that each £1bn added to the BarCap top line, with a 50% cost of staff, infrastructure and risk, taxed, adds 3p to group earnings per share.
Our forecasts for BarCap, and the other operating divisions of the group, are shown in the back of this note.
NH:
of course on thing that’s not in the Deutsche note is this little bit of breaking news
NH:
Michael Jackson’s 50 per cent stake in Sony/ATV Music Publishing has been used as a collateral for a £300m loan made by Barclays to him
NH:
the story is in the Journal
NH:
some Diamante Bob flashes coming over the Thomsonwire
NH:
he wants to rule the world
NH:
*BARCLAYS CAPITAL COMMENTS FROM GERMANY HEAD OMAR SELIM :BARC LN
*BARCLAYS CAPITAL AIMS TO BECOME TOP 3 IN 3 TO 5 YRS IN GERMANY
*BARCLAYS CAPITAL AIMS TO BECOME TOP 3 M&A, EQUITIES IN GERMANY
*BARCLAYS CAPITAL PLANS TO HIRE ABOUT 50 PEOPLE FOR GERMANY
NH:
and one final thing on Barc
NH:
there is also a re-weight happening or about to happen
NH:
all to do with those mandatory convertible notes that were issued last year
NH:
now Barclays’ friends in Abu Dhabi have already slotted thiers
NH:
at the first available opportunity
NH:
but that still approx 1.33.bn new shares are still waiting to be issued
NH:
here’s a note a friendly broker sent earlier detailing the impact the MCN’s will have on the weightings in the FTSE 100 and other inidices
NH:
FTSE have announced that they will increase BARC Shares-in-issue
> (SII) from approx. 9,675m to approx. 11,013m effective after the close
> on Friday 3 July
> * BARC weight in FTSE 100 and FTSE All-Share will increase by approx.
> 32.4bps and 27.9bps respectively, with combined tracker demand for
> approx. +GBP383m or +143m shares (+2.6 days)
> * MSCI are likely to announce a similar SII increase resulting in a
> +7.2bps weight increase in EAFE with demand for approx. +GBP162m or
> +60m shares (+1.1 days)
> * The timing of any weight increase will require a t+2 notification
> period, with implementation this week now seeming likely, perhaps also
> effective after the close on Friday 3 July
NH:
STOXX are also likely to increase SII by +14% and may also reduce
> Investability Weight Factor (IWF) from 100% to approx. 92.6%,
> resulting in a net +5.6% index shares increase
STOXX50 weight would then increase by approx. +8bps with tracker
demand for approx. +2.7m shares; if STOXX50 increase SII and leave IWF
unchanged at 100%, demand will be for +6.7m shares for a +21bps weight
increase
STOXX timing will also be t+2 with implementation not likely to
occur before the close on Friday 3 July
PM:
See that stuff from Albert Edwards?
NH:
what on Montier leavinig?
NH:
made me laugh because
NH:
on the letters page yesterday
NH:
someone said Montier should be prmoted for his attack on EMH
PM:
well, Albert is warning about the dangers of going to work on the buyside
NH:
now, this is frightening readers
NH:
forget bond vigilantes
NH:
it’s the OAP’s you have to be careful of
PM:
Consider the recent case of James Amburn. The UKs Daily Telegraph reports that the
56 year old German-American financial advisor was kidnapped and tortured by a group of
wealthy German pensioners - link. It appears two couples had entrusted Mr Amburns
investment company with 2.4m, which he ploughed into Floridas boom-and-bust property
market. As the properties became forfeit, the couples wanted their money back.
PM:
Amburn states that as I was letting myself into my front door I was assaulted from
behind and hit hard. Two of his kidnappers are said to have hit him with a Zimmer frame
before they bound me with masking tape until I looked like a mummy. I thought I was a
dead man. He was then bundled into a boot of a car.
PM:
During his semi-naked confinement in an unheated cellar Mr Amburn alleges he was
chained like an animal, burned with cigarettes and had two of his ribs broken while being
beaten with a chair leg. They threatened again and again to kill me, Mr Amburn said. He
told his attackers he could not return their money as due to market conditions,
unfortunately it was gone.
PM:
Eventually 40 armed police rescued Mr Amburn who was found naked apart from his
underwear. A physician had to be on hand to help his attackers into their police vans
because of their various infirmities. The pensioners now face up to 15 years each in jail for
illegal hostage taking, torture and grievous bodily harm
PM:
Be warned, Montier , get the call wrong an…
NH:
for those of you who don’t know Montier is leaving SG for GMO
NH:
GMO is a global investment management firm committed to providing sophisticated clients with superior asset management solutions and services. We offer a broad range of investment products, including equity and fixed income strategies across global developed and emerging markets, as well as absolute return strategies. Our client base includes endowments, pension funds, public funds, foundations and cultural institutions.
GMO is a private partnership that employs more than 400 people worldwide. Investment management is our only business. We manage more than $78 billion in client assets, $27 billion of which is in asset allocation strategies.
NH:
just imagine what would have happened if those pensioners had got hold of Madoff
PM:
Anotehr speech from Paul Tucker
NH:
He’s the deputy gov for financial stability
PM:
Taking about reshaping the social contract for banking.
PM:
Paul Tucker considers how the banking system should bear the cost of insuring retail depositors against loss. He explains the Bank of England’s reasons for preferring a risk-based, pre-funded system of deposit insurance. To head off risk-taking by banks on the back of de facto 100% deposit insurance for retail depositors, contributions to the deposit insurance system should be risk-based to offset the incentives otherwise created. And, he says, “….any such insurance scheme must be pre-funded; it is no good trying to collect levies from riskier banks after they have gone bust”.
Paul Tucker goes on to discuss the need for banks to structure themselves to permit their orderly resolution should that be required. He highlights the need for better information from banks, to facilitate rapid payout to retail depositors by the Financial Sector Compensation Scheme, to aid the Bank of England’s choice of resolution tools under the UK’s Special Resolution Regime, and for potential bidders for part of or all a failed bank. He emphasises the extent of the Bank’s need for information from banks getting into distress. He says, “In delivering its resolution responsibilities under the 2009 Banking Act, the Bank is ready to work with banks and the FSA in helping to specify in more detail what is needed in practice… we need to engage together constructively on what information the authorities need to handle incipient or actual distress.”
PM:
For the full speech go here
PM:
Some lunchtime reading for people
PM:
yes lets have a look - you did a post earlier
PM:
The company has finally taken its head out of the sand and realised that it needs to do something about its huge debt pile
NH:
started talks with its debt holders with a view to extending its facilities and changing the maturity that sort of thing
NH:
there is also a trading statement tacked on to that announcements, which has triggered a flurry of downgrades
NH:
Cazenove, for example, has hacked 20% off its forecasts for this year and 19% for next
NH:
Trading does not look too hot
NH:
While the Q1 performance is in line with previous guidance (revenue 11% and EBITDA 20%) underlying revenue trends have deteriorated further in Q2 to a 17% decline. Although Q2 historically has been weaker than Q1 the scale of the change between the quarters is larger than we expected. Given the operational gearing this is expected to lower Q2 EBITDA by 30% y/y at constant currency although cash flow remains strong. We understand that the decline rates are fairly similar
across the group’s geographies.
NH:
To reflect the weakening Q2 trends we have downgraded our forecasts to reflect a constant currency decline of 13.0% (8.5%) for 2010E. We have also adjusted our forecasts to reflect recent FX changes and we are now using an average £/$ rate of 1.62 and a £/€ rate of 1.16. The net effect of the changes is a 20% downgrade to 2010E EPS to 27.1p and 19% in
2011E EPS to 25.3p.
NH:
Importantly covenant headroom is still expected to be 7% at the end of September although we now expect a breach by
December 2009.
The statement also highlights that the group has now initiated talks with its lenders with a view to extend debt maturities and change the terms of the facilities. The re-financing is expected to complete by late Autumn.
PM:
so things not looking good for Yell
NH:
even if it manages to reach an agreement with debt holders
NH:
the new facilities are going to cost Yell more, lots more
NH:
I picked up a note from Citigroup earlier that said the blended cost of Yell’s debt is 7% at the moment
NH:
but based on where it’s debt is trading – ie 50p in the pound – the new facility could cost 14%
NH:
and with earnings under pressure, how can it afford that?
PM:
the bottom line is, it can’t
PM:
there has to be debt of equity swap – there’s no way round it
PM:
Yell, even if it is outperforming its rivals, can’t trade its way out of £4.2bn of debt
NH:
that’s £3.8bn on a constant currency basis
NH:
so the Yell
told me earlier
PM:
its stock price is not high enough to get a meaningful rights issue away
NH:
they missed their chance during the dash for cash
NH:
shares down this morning
NH:
and most of the comment is negative
NH:
have a look at this from Panmure
NH:
they have placed the rating on review pending the denounment
NH:
Refinancing - shafts of lights?
Q2 EBITDA guidance weak, though not unexpected. Refinancing process
now commences, key variable is revised interest rate (8% at present). Equity
valued at almost zero now, so likely to be even more volatile now an end is
more clearly in sight.
Refinancing discussed: More encouragingly, Yell now reveals it is in a process ‘to
comprehensively refinance the Group’. Initially, this is focused on debt, rather than
equity. Some resolution is expected later in the year.
NH:
Debt: Yell has c£3.5bn debt, maturing in 2011. The blended rate on its interest is c8% at present. The key variable is the revised rate from 2011 onwards. A step change upwards is likely. This could further penalise equity, even assuming EBITDA is not wasting away.
Investment comment: Equity is valued at almost zero. Conventional rights issues are
highly unlikely, and would have little impact. More certainty over debt costs is a clear
positive, so at least an end is now in sight. Highly speculative.
NH:
Numis Securities are telling clients to sell
NH:
Yell has released a trading update for Q1, year to March 2010, alongside an
announcement that the group has started a process to ‘comprehensively refinance’
the group. The company is seeking to extend the maturity and change the terms of
its current debt facilities (which expire in April 2011) and will hold discussion with
its principal shareholders. Meanwhile, Q2 trading is worse than our current
forecasts, and although reported figures will benefit from fx movements, this
deterioration will inevitably put pressure on the refinancing process. We remain of
the view that Yell’s balance sheet poses serious risk to equity shareholders and the
risk’s to the group’s investment case are disproportionately to the downside, we
therefore retain our Sell recommendation.
NH:
Refinancing: Yell’s current debt facilities exposure in April 2011. The group has started a process to restructure its debt and as such is seeking to change the maturity and terms of its debt facilities. The company will also have ‘discussions with principal
shareholders’ suggesting that a refinancing may take place alongside a rights issue.
The company anticipates headroom on its banking covenants of 7% at September
2009, on our current forecasts (to which there is downside risk) we have the group in
breach of its March 2010 covenant at the year end.
NH:
Rights issue: We believe any refinancing in absence of a stabilisation in trading would be on very onerous terms and highlight that a +200bps increase in the group’s interest rate on c.£4bn of debt would increase our interest charge by c.£80m p/a. Although the level of gearing makes a traditional rights issue difficult to structure, we think the group could raise through a combination of a firm placing and open offer.
However any upside would be heavily dependent on the level of post raise rerating which given trading is still deteriorating, and the group is already trading on c.6x EV/EBITDA is, in our opinion, far from guaranteed.
Recommendation: Given the risk posed to equity shareholders by Yell’s balance sheet we are retaining our Sell recommendation.
PM:
Now, before we wind up…
PM:
You stayed up late to watch the tennis last night, no?
NH:
yeah, I did and feel awful as a result
PM:
Burning the candle at both ends — not like you Neil
PM:
But look — what was he like
PM:
ie — do i reload my bet against him
PM:
I’m a tenner down from the first round — but was fine with that since i was on a 16/1 long shot
NH:
(Lorcan - the kids wake me at 5.00am)
NH:
let’s lay Murray again
NH:
let’s have some of that
PM:
Okay, we wil invest another tenner of the webby drinks fund
NH:
while we are the subject of betting
NH:
have you had a flutter on the next business editor of the Sunday Tel
NH:
some of the spread betters are making prices
PM:
er, they are on Slackbelly, no?
PM:
Maggie Pagano - Independent on Sunday 4/1
Louise Armitstead – Daily Telegraph 4/1
Danny Fortson – Sunday Times 5/1
Jenny Davey – Sunday Times 6/1
Richard Wachman – Observer 7/1
PM:
I’d lay the lot (in a betting sense). Not one has made the Telegraph’s short list.
PM:
You know years back i ran a live real money book on the next city editor of the Sun Tel with Andrew Cornelius
PM:
now a felt, then news editor a the daily tel
PM:
We made abotu 500 quid on it
PM:
cos we had direct inside information from Neil Collins
PM:
Even though he didnt realise he was disclosing it
NH:
another sideline for H&M Capital Management then?
NH:
have we any inside info on this?
PM:
Hmm — there was loads of hot (and ill advised) money on Peston at the time
PM:
But he was asking too much money — so Neil Bennett got the job
PM:
Peston eventually did it some years later
NH:
looks like Slackbelly might have a line into the Tel
PM:
It does — so who is it going to be?
PM:
The pause is cos we are thinking at this end
NH:
and Biz journalist of the year
PM:
Nope can’t think of anyone who could fill Kleinman’s not inconsiderable shoes
NH:
but a few people would like the salary that goes with the job
NH:
a few thinks to finish up on
PM:
(Beefer — Ms Tett would not stoop so low)
NH:
their CEO resigned with immediate effect this morning
NH:
and the shares are up
Wolseley (WOS:LSE): Last: 1,156, up 30 (+2.66%), High: 1,195, Low: 1,140, Volume: 1.36m
NH:
analysts seems fairly relaxed about the fact a guy who ran bureau de change is taking the helm
NH:
Management change
After all the recent events at Wolseley, management change is not a major
surprise. An external replacement is likely to be well received as it should
ensure that no stones are left unturned. But, while the market gets to know
the new man and his plan, we do not expect it to influence the share price.
After a good run in the shares, post the placing, we maintain our Sell
recommendation.
Management change. After all the recent events at Wolseley it is probably not a major
surprise that Chip Hornsby, CEO, is stepping down. His replacement, Ian Meakins,
most recently at Travelex and previously CEO of Alliance Unichem, comes with good
international and distribution experience.
NH:
Impact on forecasts. This news does not change our forecasts. Our FY 2009E PTP is
£193m, EPS 66.6p and FY 2010E PTP is £200m, EPS 50p.
Valuation. With dilution from the recent share placing, the P/E is 19x. A more sensible measure is the EV/EBITA, which is 10.7x, and is at a small premium to its peers.
Recommendation. The shares have had a strong run post the placing and we turned Sellers on the shares at the end of May. While management change is not a major surprise, an external replacement will probably be seen as better news as it should mean that no stone isleft unturned, if indeed it hasn’t already been turned! Until the market gets to know the new
man, we do not expect much reaction in the share price, so we stay cautious.
NH:
Chip Hornsby has stepped down as CEO at Wolseley.
• To be replaced by Ian Meakins from 13 July 2009.
• Meakins was previously CEO of Travelex Holdings and before that CEO of Alliance
Unichem until the Boots merger.
• Wolseley has serially underperformed the peer group for some time and it’s rather
surprising that management change has taken so long to come.
• This is a business that is designed for a macro environment that no longer exists. It’s
going to take real skill, as well as not inconsiderable time, to reconfigure Wolseley to the
world it now finds itself in.
• We’ll be looking for evidence of a strategy that can stem the decline.
• The stock is trading on 8.8x CY2009E EV/EBITDA.
NH:
just been sent a note through on Dana
NH:
from a merger/arb broker called Pali
NH:
At the moment we still regard Dana as a fundamental play, albeit an attractive one, due to the high degree of uncertainty regarding the timing of a potential bid
NH:
We believe that any bidder for Dana would have to offer a material premium to its current share price (i.e. materially more than 30%) to engage the Board in discussions
NH:
Dana has a good track record on discoveries and its exploration program is expected to unlock large reserves in the next 2 years
● In this respect we tend to agree with Dana’s CEO when he says that it may be too early to put Dana up for sale
■ On this basis due diligence is fairly critical to assess the value of the exploration assets as the bidder would have to pay a premium for them and be prepared to take exploration risk if it bids now
At the current price we regard the takeover premium attached to Dana share price as small/negligible
■ Dana trades broadly in line with peers like Lundin or Venture in terms of EV/2P reserves
● Although in line with all of the oil stocks Dana, is highly sensitive to oil price movements
NH:
RWE is the obvious bidder for Dana as it has been rumoured as a bidder for Venture, it is struggling to replace its reserves and operates in the same regions where Dana continues to make successful discoveries
NH:
In our opinion RWE is in a position to understand the likely value of Dana’s reserves and prospects (as it operates both in the North Sea and in Egypt where the core of Dana’s assets are) and could also be prepared to pay a premium for the exploration skills of Dana
■ Other entities could look at Dana with interest although players not lacking reserves may regard Dana as a partner rather than a target because in several projects Dana hands over the production phase to large oil companies
NH:
We regard Dana as different in nature from Venture (target for Centrica)
■ Dana is more an exploration play in our opinion while Venture appears to have its core skills in purchasing and revamping stranded fields
■ Dana product mix is also skewed towards oil relative to Venture, although substantial new projects for Dana are related to gas assets
NH:
and Paul has some notes on Carpetright
NH:
which we never knew were so popular
PM:
Prometheus! Patience!
NH:
we are not your broker
NH:
and there are others to think about
NH:
not everyone loves lino
PM:
Prelims in line with expectations FY 2009 results appear to be broadly as expected.
Adjusted PBT of £17.2m was £0.2m ahead of our forecast. However, underlying EPS
is reported as 18.2p, well ahead of the 16.6p we anticipated. Nevertheless the final
dividend of 4p takes the annual total to only 8p, whereas we were expecting 10p. Net
debt of £97.1m compared to our forecast of £95.2m.
§ Management cautious on short-term prospects Lord Harris is quoted as saying,
“Our principal markets of UK & RoI are in recession and the likelihood is that with
unemployment set to rise, the housing market will remain weak. Although there have
been a significant number of actions taken by the Government to improve the
economy, we do not expect a return to more normal trading conditions for at least 12
months.” CPR, in its outlook statement, remains “cautious about short-term prospects”.
§ Remains expensive There appears to be no pressure for forecast upgrades. Despite
CPR’s undoubted strategic strengths, we continue to believe that its shares are
expensive. This reflects, in part, a view that house prices have further to fall and that
this will have a knock-on impact on transactions. We also view valuations based on
peak or normalised earnings as inappropriate in what we regard as far from normal
times. We therefore remain SELLers.
NH:
and here’s Arden Partners
NH:
Final Results are slightly worse than we had been expecting with adjusted PBT of £17.2m against our forecast of £18.7m and down 72.3%. EPS of 18.2p fell 71.3%
NH:
A Final Dividend of 4.0p (30.0p) is also worse than we were expecting and we anticipate changing our forecast for FY10 - probably to 8.0p for the full year.
NH:
Net debt was also slightly worse than anticipated at £97.1m - a big increase from last year’s figure of £57.5m - mainly impacted by the lower operating cash inflows and also an increased working capital outflow of £18.6m.
u On a divisional basis it was the UK and ROI that caused the damage with sales down 13.5% on a LFL basis. Gross margin fell 70bp impacted by the € and operating profit fell 73.1% to £15.6m (£58.0m).
u Europe was far more resilient with sales up 28.9% (10% on a local currency basis) with the Ben de Graaf acquisition accounting for around 7.3% (local currency). Operating profit rose to £7.2m (£5.4m) with gross margins up 80bp.
u There was no current trading update (Q1 due early August) - however management commented that they do not expect a return to normal trading conditions for at least 12 months - we believe that reflects a more pessimistic view than previously espoused and may have been a major contributory reason for the lower than expected Final Dividend.
NH:
No change in numbers ahead of the analyst meeting - but recommendation is under review.
NH:
off 3 points at 4,290
NH:
our work here is done
PM:
Thanks for jjoiing us today
PM:
thanks for all your comments
PM:
apols about weird identity stuff earlier
PM:
we are getting that looked into
PM:
Otherwise we will be back at 11 am tomorrow
