Markets live chat transcript for the chat ending at 11:44 on 10 Aug 2009. Participants in this chat were: Paul Murphy (PM) Miles Johnson, FT (MJ)
PM:
Hi
PM:
Welcome to ML
PM:
At AV
PM:
Gonna be really short this am
PM:
Real short
PM:
I’ve got a load of household crap to sort
PM:
DIY nightmare – squared.
PM:
So this will be a short session
PM:
Count on 30 mins
PM:
Maybe
PM:
So let’s get on
PM:
Miles is here
PM:
Seems we didn’t scare him off last week.
PM:
Or rather, you didn’t scare him off
PM:
Johnson not intimidated by the Rabble on the Right
MJ:
Hi there
MJ:
Why do you call them the Rabble, Murph?
MJ:
It’s not very respectful
MJ:
They are readers and commenters – and they are valuable
MJ:
Without readers and commenters, Alphaville would not exist
PM:
Ah, don’t come on here with yer soft, cuddly, let’s be nice to the readers.
PM:
nonsense
PM:
Give that lot half a chance and they’ll be cursing and libelling left right and centre.
PM:
Mark my words.
PM:
Anyway, what’s going on?
11:04AM
MJ:
Funny morning – quite divergent
MJ:
We’ve got the odd bid story, such as Friends Provident being back on
MJ:
And then we’ve got wacky stuff, such as the Chinese suggesting Rio has cost the country $100bn
MJ:
We had the rally at the end of last week – and Wall St continued that on Friday evening
MJ:
Dow fast closing in on 10,000
MJ:
But the effect here in London has seen the Footsie come back from its highs
PM:
Index??
MJ:
4704 presently – down 27
MJ:
But the footsie was off a good deal more earlier
MJ:
Plumbed 4688 at one stage
PM:
So basically, the market’s all over the shop. 
MJ:
Technically – yes
MJ:
Not much fresh data around –and we’re deep into august now
MJ:
Commods down, oil a bit lower
MJ:
So we have seen a few falls amongst the miners
MJ:
That needs to be balanced against the fact that the insurance sector is
MJ:
up
MJ:
And there’s a bit of speculative money looking at the odd second liner
MJ:
People trying to find things that have been overlooked in the recent rally
PM:
Okay, so stocks are going up and down.
11:08AM
PM:
Let’s have a look at this Friends Provident thing.
PM:
STRNS was it?
MJ:
Certainly was – came out in the Sunday papers, who all seem to have simultaneously discovered that Friends had quietly re-opened takeover discussions with Resolution
MJ:
There’s been another statement from Friends this morning confirming it
PM:
Why do they put a statement out when they’ve already issued an STRNS?
PM:
Isn’t that just a senseless waste of pixels?
MJ:
Well not completely. We’ve got extra detail
MJ:
The revised proposal is an exchange ratio of 0.9 new Resolution shares for each Friends Provident share. It also includes a partial cash alternative subject to the maximum cash available not exceeding £500 million
PM:
So that’s worth what?
MJ:
Fraction over 80p
PM:
And the market price?
MJ:
75.5p
PM:
Seems quite a wide discount –
PM:
Suppose all the bid arbitragers are in St Tropez this time of year
PM:
Also, many have just shut up shop – no bids to play with.
MJ:
Difficulty of trading in resolution also, I think
PM:
So what are people saying about this?
MJ:
Very little, actually – just seen as a done deal
PM:
Yeah, don’t like the insurance sector
PM:
Let’s more on
11:11AM
PM:
Rio
PM:
That’s mroe fun
PM:
How about this story
PM:
China says Rio spying has cost it $100bn
PM:
Comes from an an editorial in the magazine of the National Administration for the Protection of State Secrets
MJ:
Why don’t we have a National Administration for the Protection of State Secrets???
PM:
How do you know we don’t?
MJ:
Anyway, this is showing the OFT and the Competition Commission how to do it
PM:
Yeah, bug a load of phones, arrest a few people – and then tell the company concerned that you are looking for $100 billion in reparations.
MJ:
None of this nonsense about fines being related to turnover etc
MJ:
Give us a 100 billion
PM:
So have Rio collapsed.??
MJ:
Nah – hardly made it onto the major fallers board
MJ:
Price is off 56p at 23.65p – weakened in the last few minutes actually
MJ:
But all this china stuff is assumed to be in the price
MJ:
Rio and China need each other – so it is assumed some sort of deal will be fixed in a smoked filled room
PM:
Ah, smoke filled rooms – I miss smoke filled rooms.
MJ:
Well, there are plenty of them still in China
11:15AM
PM:
People asking for RAW over on the right
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
PM:
So let’s talk about banks
PM:
Lloyds
MJ:
Well shares are getting hit at the moment. Off 4p at 98p
PM:
And just when it looked like it could stay north of a pound
MJ:
Its because of a Sunday Times story about Lloyds weighing up yet another share issue
PM:
Another one?
PM:
PM:
I thought they only just asked shareholders for £4bn this year, and did a £4bn rights issue in June last year. That is on top of the £11bn from the government.
MJ:
Yup, it’s the bank that just keeps on taking. Here is the piece from STRNS
MJ:
LLOYDS BANKING GROUP is weighing up plans for a multi-billion pound share issue to cut its dependency on the taxpayer.
The bank is considering a partial withdrawal from the government’s asset protection scheme – a taxpayer-backed insurance policy designed to shelter banks from the worst losses on their bad loans.
Eric Daniels, the chief executive of Lloyds, is said to believe the fees attached to the scheme – £16 billion – are too high, and pass too much control to the government. Its 43% stake in Lloyds would rise to more than 60% if the deal went ahead as originally drafted.
The bank is considering a partial withdrawal from the government’s asset protection scheme – a taxpayer-backed insurance policy designed to shelter banks from the worst losses on their bad loans.
Eric Daniels, the chief executive of Lloyds, is said to believe the fees attached to the scheme – £16 billion – are too high, and pass too much control to the government. Its 43% stake in Lloyds would rise to more than 60% if the deal went ahead as originally drafted.
MJ:
And this morning the Times is saying this is all Sir Win’s doing
MJ:
The new chairman is apparently balking at the cost Lloyds will have to fork out to the government to insure all that toxic rubbish on its balance sheet
MJ:
and so wants raise up to £15bn
MJ:
There were mumblings of large bank recapitalisations in the second quarter going round the equity capital markets circuit over the past couple of weeks
MJ:
The idea among that bunch seems to be that while you used to be able to pull of one rights issue at best before being lynched by shareholders
MJ:
now people are willing to support even two in one year
MJ:
And while six months ago most European bank’s share prices were so low that it would have been structurally impossible to pull of a rights issue
MJ:
now they think they can do it
PM:
bankers are using the “double dip” recession argument to scare clients into grabbing the opportunity to push the button while they still can
MJ:
But some might still choose to raise it some other way – Like Santander IPOing 15 per cent of its Brazilian unit
MJ:
I’ve been advised to keep my eyes peeled for more bank capital raisings
MJ:
But I suppose that is like being told to look out for the sun rising
PM:
indeed
PM:
Got any analyst comment on Lloyds?
MJ:
Here is RBS
MJ:
Lloyds (Hold): weekend and today’s press running with the possibility that they choose to raise GBP 10-15bn in order to replace or reduce the Government Asset Protection Scheme which will otherwise dilute existing shareholders
MJ:
One point to add is that the UKFI, which controls 43%, will not vote at the APS EGM which we anticipate should be sometime in October. Also, it is fair to acknowledge that the risks of getting it wrong by voting against the GAPS would be huge, both economically and politically. We estimate something like a GBP 5bn buffer, only 2% of assets to be insured and only a fraction of the losses booked with Lloyds H1 results.
MJ:
And Mike Trippitt at Oriel seems to like the idea
MJ:
Questions were raised at last week’s analysts’ meeting as to whether Lloyds Banking
Group’s participation in the Government Asset Protection Scheme (GAPS) remained
viable.
• The question is particularly relevant as LLOY announced a £200bn run-off of non-core
assets over 5 years.
• Such a run-off may appease the EU over market concentration risk in addition to
reducing funding and capital requirements.
• Under GAPS, LLOY would transfer £260bn of assets into the scheme, comprising
£243bn of loans and £17bn of Treasury Assets. Around 82% of assets would be HBOS
legacy assets.
• The current GAPS terms are a participation fee of £15bn, with Lloyds standing the first
loss of £25bn and 10% of second losses.
• H109 impairment losses were £13.4bn and management guided to lower impairment in
H209, driven by lower corporate impairments.
Group’s participation in the Government Asset Protection Scheme (GAPS) remained
viable.
• The question is particularly relevant as LLOY announced a £200bn run-off of non-core
assets over 5 years.
• Such a run-off may appease the EU over market concentration risk in addition to
reducing funding and capital requirements.
• Under GAPS, LLOY would transfer £260bn of assets into the scheme, comprising
£243bn of loans and £17bn of Treasury Assets. Around 82% of assets would be HBOS
legacy assets.
• The current GAPS terms are a participation fee of £15bn, with Lloyds standing the first
loss of £25bn and 10% of second losses.
• H109 impairment losses were £13.4bn and management guided to lower impairment in
H209, driven by lower corporate impairments.
MJ:
• The question as to whether it is appropriate to proceed with GAPS is now firmly in the
markets’ mind.
• The H109 core equity ratio was 6.3% and LLOY would need to raise £10bn to increase
the ratio by 2% and provide a cushion against potential further impairments – note LLOY
is unlikely to return to profitability until 2011.
• Weekend press suggests LLOY is evaluating its options, one of which may be an equity
placing in conjunction with a smaller GAPS participation.
• A lower GAPS participation (and therefore lower Government ownership) in conjunction
with an equity placing into what now appears to be a well underpinned market for banks
shares should be well received.
• We remain positive on the shares and are reviewing our target price (100p) after last week’s results.
markets’ mind.
• The H109 core equity ratio was 6.3% and LLOY would need to raise £10bn to increase
the ratio by 2% and provide a cushion against potential further impairments – note LLOY
is unlikely to return to profitability until 2011.
• Weekend press suggests LLOY is evaluating its options, one of which may be an equity
placing in conjunction with a smaller GAPS participation.
• A lower GAPS participation (and therefore lower Government ownership) in conjunction
with an equity placing into what now appears to be a well underpinned market for banks
shares should be well received.
• We remain positive on the shares and are reviewing our target price (100p) after last week’s results.
PM:
Cheers for that
PM:
Didn’t Bryce send over a spreadsheet
MJ:
He did, from RBS – but I don’t think we can publish that on this chat
PM:
No — will have to put it in the long room
PM:
Various comparisons between options of the GAPS and/or raising fresh cash
PM:
Actually — ive just got some stuff from Caz
PM:
Simon Pilkington
PM:
By way of a very helpful broker
MJ:
What are they saying?
PM:
If the article is correct, the plan appears to involve issuing more equity and shareholders accepting more risk than under the terms of the original APS proposal. An alternative can work only if the FSA allows Lloyds to operate with lower capital ratios and therefore agree with Lloyds’ view that the peak of impairment is passed. This seems unlikely.
PM:
Lloyds believes the terms of APS are too onerous, according to the article. The first loss (£25bn less £8bn fair value adjustments) and the fee (£15.6bn) total £33bn on £260bn of assets.
With less protection from APS the question is what capital ratios would the FSA require. The scheme will lift the equity tier 1 ratio to over 11%. It seems doubtful that the FSA would allow lower ratios if Lloyds has less protection from the government’s insurance, more likely it may require more capital to reflect the additional risk retained by Lloyds. We note RBS stated that it would fail the FSA stress test if it did not raise its capital ratios through the APS scheme.
If Lloyds raises £15bn it would lift its equity tier 1 ratio to 9.4% from 6.3% at 30 June. Through a smaller APS scheme, Lloyds would reach 11% if the scheme removed some £80-100bn of risk assets compared to £194bn under the current proposal.
We highlight that Lloyds equity tier 1 capital includes £9bn of fair value gains from the revaluation of HBOS debt, which equates to 200bp, and is transitory unless redeemed at current prices.
PM:
As a 43% shareholder the government, through UKFI, would probably have to subscribe for its share or at least underwrite its share of a new issue. Therefore the level of government influence will, in practical terms, remain unaffected, even if it does not lift its shareholding through 60% as under the APS Scheme.
Total equity issuance looks likely to be greater than the £15.6bn under the current proposal, and with an issue price likely to be lower than the 115p conversion price
Shareholders would be exposed to more risk and implicitly would have to share management’s confidence that the peak of impairment has passed.
Less government support may reduce the grounds for intervention from the European Commission. Though the risk is downplayed by management the EC believes action needs to be taken to address the substantial market share in retail banking from the combination of Lloyds and HBOS.
11:26AM
PM:
Have we done enough banks?
MJ:
Well I have a bit on RBS from Nomura
MJ:
We remain negative towards RBS. The shares currently trade at 1.3x our projection of trough book value at end 2011. However, the
valuation rises to 1.7x the minimum trough book value of 28p implied by the company’s estimate of future tax losses. We regard this
valuation as demanding and as the most important valuation tool. Valuations on the basis of normalised earnings projections are much
more uncertain. As we show below, the shares can be argued to trade on EPS multiples as low as 6.4x annualised normalised EPS as
high as 7.4p. However, GWeBM generated some 60% of these normalised earnings. Assuming GBM halves from the level we calculate for the
current year, we estimate the PE multiple of normalised earnings would rise to 14x. We would argue that the restructuring of the RBS
operations is a more complicated task than at Lloyds and in particular, poses threats to the sustainability of GBM franchise, which currently
generates the majority of the normalised earnings. Management guidance was more negative than at Lloyds particularly with reference to
GBM profits in H2. Results were below our expectations and we have downgraded our future earnings estimates.
valuation rises to 1.7x the minimum trough book value of 28p implied by the company’s estimate of future tax losses. We regard this
valuation as demanding and as the most important valuation tool. Valuations on the basis of normalised earnings projections are much
more uncertain. As we show below, the shares can be argued to trade on EPS multiples as low as 6.4x annualised normalised EPS as
high as 7.4p. However, GWeBM generated some 60% of these normalised earnings. Assuming GBM halves from the level we calculate for the
current year, we estimate the PE multiple of normalised earnings would rise to 14x. We would argue that the restructuring of the RBS
operations is a more complicated task than at Lloyds and in particular, poses threats to the sustainability of GBM franchise, which currently
generates the majority of the normalised earnings. Management guidance was more negative than at Lloyds particularly with reference to
GBM profits in H2. Results were below our expectations and we have downgraded our future earnings estimates.
PM:
Robert Law
MJ:
There is a significant implied loss forecast in the revised estimated cost of the APS. We estimate this could be £16bn, which would reduce
our pro forma trough TBVPS estimate by 15p per share to 28p. This compares with our previous trough estimate of 38p. We have
downgraded this to 35p with these numbers. However, we would argue that the guidance and these figures illustrate that there is significant
uncertainty over earnings and book value projections at the group. The company lists the estimated cost of the APS from giving up tax
losses as £9-11bn. Tax loss carry forwards are currently £5.7bn. Taking the midpoint of the guidance therefore implies loss of £4.3bn in
future tax losses, which grossed up is £16bn. The loss guidance implication may be lower than we calculate, due to an inability to
transfer tax losses between subsidiaries and also an incentive for RBS to maximise the potential APS cost, until negotiations are
finalised.
our pro forma trough TBVPS estimate by 15p per share to 28p. This compares with our previous trough estimate of 38p. We have
downgraded this to 35p with these numbers. However, we would argue that the guidance and these figures illustrate that there is significant
uncertainty over earnings and book value projections at the group. The company lists the estimated cost of the APS from giving up tax
losses as £9-11bn. Tax loss carry forwards are currently £5.7bn. Taking the midpoint of the guidance therefore implies loss of £4.3bn in
future tax losses, which grossed up is £16bn. The loss guidance implication may be lower than we calculate, due to an inability to
transfer tax losses between subsidiaries and also an incentive for RBS to maximise the potential APS cost, until negotiations are
finalised.
PM:
Cheers for that
11:27AM
PM:
Where now?
MJ:
How about ITV?
PM:
How’s the stock doing?
MJ:
Off a tad at 42.7p
PM:
Rather aggressive note out of Charles Stanley this morning
PM:
Sam Hart
PM:
ITV has a unique ability amongst broadcasters to deliver mass audiences to advertisers, the world’s second largest English language programme archive and a world-class TV production business. The regulatory burden appears to be easing and should deliver significant cost savings in the medium term. We remain concerned, however, that the core advertiser-funded Broadcasting business will remain under pressure as a result of on-going structural change. The trend towards on-demand viewing on-line and the rise of Personal Video Recorders (makes advert-skipping much easier) appear particular threats. A significant proportion of the advertising revenue lost in the current downturn may never be regained. High operational gearing means upside potential to forecasts is material if an advertising recovery emerges, but we find the current valuation hard to justify. Near term balance sheet issues have been addressed, but we think a dilutive rights issue remains a material risk in the medium term, and could be one of the first actions undertaken by the new Chief Executive. The recommendation remains Reduce.
PM:
Right issue, eh?
MJ:
We’ve been expecting that for ages
PM:
true
11:29AM
PM:
Where else — i said this was going to be a short session
PM:
Poppy — no lunch today
PM:
Well, not “lunch”
PM:
I have some stuff to sort out — nightmare housing stuff
PM:
And we are on skeleton staffing etc
PM:
Bennettp — haven’t seen the HSBC note on VW..
MJ:
VW stuff is giving me a headache…
PM:
I know what you mean
11:32AM
PM:
Other than FP, have we talked about anything that is actually going up this morning?
MJ:
I don’t think so
PM:
Oh dear — we must trry and be more positive
MJ:
How about BT?
PM:
Ah yes, stock up 2.3p at 134p
PM:
Why?
MJ:
A note from JP Morgan I think
PM:
Actually ive got a copy of that now
PM:
Based on substantial revenue, EBITDA and FCF flow upgrades and resulting
valuation upside potential we upgrade BT to Overweight from Neutral and set
a new March 2010 price target of 175p.
Substantial upgrades: We rebuild our model following Q1 results, new
financial reporting and recent change in coverage. We upgrade FY10 revs
by 4%, pre leaver EBITDA by 5%, EPS by 30% and FCF by 42%. Our
medium-term upgrades are of similar magnitude. Based on this we believe
BT can continue to beat market expectations and guidance.
5% FY10 EBITDA upgrade: Q1 EBITDA was £95m ahead, of which
£57m was ‘underlying’. Our detailed revenue and cost analysis indicates
this underlying outperformance can be repeated, leading to a £275m preleaver
EBITDA upgrade (of which £95m is already ‘in the bag’) due to a
host of factors such as (1) further upside from the turnaround (eg, Q1
Global Services margin still only 3%), (2) the full impact of the wage
‘freeze’ (Q1 only one month), (3) and accretion from 1 July MTR cuts (not
yet passed on to retail customers).
valuation upside potential we upgrade BT to Overweight from Neutral and set
a new March 2010 price target of 175p.
Substantial upgrades: We rebuild our model following Q1 results, new
financial reporting and recent change in coverage. We upgrade FY10 revs
by 4%, pre leaver EBITDA by 5%, EPS by 30% and FCF by 42%. Our
medium-term upgrades are of similar magnitude. Based on this we believe
BT can continue to beat market expectations and guidance.
5% FY10 EBITDA upgrade: Q1 EBITDA was £95m ahead, of which
£57m was ‘underlying’. Our detailed revenue and cost analysis indicates
this underlying outperformance can be repeated, leading to a £275m preleaver
EBITDA upgrade (of which £95m is already ‘in the bag’) due to a
host of factors such as (1) further upside from the turnaround (eg, Q1
Global Services margin still only 3%), (2) the full impact of the wage
‘freeze’ (Q1 only one month), (3) and accretion from 1 July MTR cuts (not
yet passed on to retail customers).
PM:
42% FY10 FCF upgrade: This is based on our £275m EBITDA upgrade,
£30m lower leavers, £50m less interest, and guidance for a lower tax rate.
Also positively we note that low Q1 capex was achieved despite reduced
bookings for ‘own work capitalized’ than in Q108.
Broadband improving story: Broadband and cost cutting are taking centre
stage from global IT growth, in our view adding visibility to the BT story.
We believe BT’s broadband case benefits from recent market repair and
more favorable unbundling, PayTV, and fibre regulation.
Fibre driving longer term upside: In this report we incorporate a fully
fledged fibre business case into our projections, substantiating longer term
revenue and EBITDA upgrades.
New price target 175p: Our DCF-based March 2010 price target increases
from 110p to 175p and we see scope for substantial dividend hikes medium
term. We upgrade from Neutral to Overweight.
£30m lower leavers, £50m less interest, and guidance for a lower tax rate.
Also positively we note that low Q1 capex was achieved despite reduced
bookings for ‘own work capitalized’ than in Q108.
Broadband improving story: Broadband and cost cutting are taking centre
stage from global IT growth, in our view adding visibility to the BT story.
We believe BT’s broadband case benefits from recent market repair and
more favorable unbundling, PayTV, and fibre regulation.
Fibre driving longer term upside: In this report we incorporate a fully
fledged fibre business case into our projections, substantiating longer term
revenue and EBITDA upgrades.
New price target 175p: Our DCF-based March 2010 price target increases
from 110p to 175p and we see scope for substantial dividend hikes medium
term. We upgrade from Neutral to Overweight.
11:34AM
MJ:
Is this the time Neil would normally mention David Schwartz?
PM:
It is
PM:
You’ve been paying attention
PM:
So what is this week’s Schwartz effect??
PM:
Schwartz watch
MJ:
Well
MJ:
Havelock Europa, a “fully-listed educational and retail interiors and point of sale printing group”
MJ:
It was tipped on Saturday
PM:
(Bennettp — paul.murphy@ft.com)
MJ:
And is now up 7.5p at 59p
PM:
Jeepers
PM:
That guy has some price moving effect
PM:
What was he saying about Havelock?
PM:
Ive got it
PM:
Why I side with lateral thinking
PM:
This strategy led me to open a position in Havelock Europa. The company was once mainly a shopfitter but has diversified into educational furniture and equipment and point-of-sale printing. Havelock shares were marked down by more than 80 per cent from their 2007 peak. To my way of thinking, this was a massive overreaction. The City still thinks this company is a one-trick pony with heavy exposure to shopfitting. It forgets that Havelock now has two other revenue streams.
In common with other companies that are rallying these days, Havelock will probably show a small loss when it reports first-half results later this month. But it expects to return to profit in the second half.
And while new shopfitting contracts by major retailers are likely to lag in the months ahead, revenues in Havelock’s point-of-sale printing division are expected to improve in the second half. Meanwhile, the education division appears to be recession-proof. Much of the spending is financed via Public Finance Initiatives (PFI). The government likes PFI because it can pass today’s costs on to future generations. For this reason, PFI is likely to survive budget cutting in the months ahead.
PM:
Havelock’s price chart provides further good news. The shares appear to have bottomed out. A gentle uptrend has been in place for several months. If my lateral thinking works, these shares are ripe for a healthy bounce. A dividend of more than 9 per cent provides some downside protection should the earnings report disappoint.
Another thing that I like about Havelock Europa is its low daily trading volume. These shares are off the City’s radar screen. As a result, once the shares start to move, they might move strongly.
MJ:
They certainly have
11:39AM
PM:
bullsvsbears saying VW v volatile
MJ:
Often is
PM:
ive now got this HSBC note on the matter
PM:
From v helpful reader…
PM:
Downgrade to UW (V): Significant share price decline likely
Back to reality: After Porsche sells its VW options, the
squeeze on the free float will end, driving VW’s valuation
towards fundamentals
Main downside catalyst: the stock could fall out of the
German DAX and Eurostoxx50 in H2 2009
Downgrade to Underweight (V) from Neutral (V); cut target
price to EUR95 from EUR205 after switching to SOTP
Back to reality: After Porsche sells its VW options, the
squeeze on the free float will end, driving VW’s valuation
towards fundamentals
Main downside catalyst: the stock could fall out of the
German DAX and Eurostoxx50 in H2 2009
Downgrade to Underweight (V) from Neutral (V); cut target
price to EUR95 from EUR205 after switching to SOTP
PM:
Free float squeeze will end soon: According to recent statements by Porsche, it is no
longer considering a domination agreement and no longer has any intention of buying
more VW shares. As we have being pointing out for some time, the options held by
Porsche have been the only factor preventing a larger share price decline for VW ordinary
shares. If Qatar Holdings takes them over (talks are at an advanced stage) and executes the
option rights to buy a 17% stake in VW, we believe the free float squeeze will finally
come to an end. We expect the free float to end up slightly below 10% if this happens.
Selling pressure could arise from the risk that Volkswagen may exit the German DAX and
maybe even the Eurostoxx50 during H2 2009.
Change of estimates: Our fair value is no longer determined by the strike price of the
VW options held by Porsche, which makes our earnings estimates more important again.
After reporting solid profitability in Q2, we increase our earnings estimates for 2009 but
lower them for 2010 and 2011.
longer considering a domination agreement and no longer has any intention of buying
more VW shares. As we have being pointing out for some time, the options held by
Porsche have been the only factor preventing a larger share price decline for VW ordinary
shares. If Qatar Holdings takes them over (talks are at an advanced stage) and executes the
option rights to buy a 17% stake in VW, we believe the free float squeeze will finally
come to an end. We expect the free float to end up slightly below 10% if this happens.
Selling pressure could arise from the risk that Volkswagen may exit the German DAX and
maybe even the Eurostoxx50 during H2 2009.
Change of estimates: Our fair value is no longer determined by the strike price of the
VW options held by Porsche, which makes our earnings estimates more important again.
After reporting solid profitability in Q2, we increase our earnings estimates for 2009 but
lower them for 2010 and 2011.
PM:
Valuation: We now value the Volkswagen ordinary shares based on our 2010 sum-of-the
parts valuation model, which yields a fair value of EUR95 (core value drivers: VW brand:
22.5% EV/sales, 4.5x EV/EBIT; Audi: 40% EV/sales, 6x EV/EBIT; Scania: 130%
EV/sales, 13x EV/EBIT based on 2010 estimates). At our new target price, we value the
VW ords at a 2011e PE of around 12x PE, which is in line with the 10-year average
12-month forward consensus PE for the stock (source: Factset). This implies a potential
negative total return of around 61% to the current share price and we therefore downgrade
the stock to Underweight (V) from Neutral (V).
Catalysts and risks: Once Qatar Holdings (or another investor) has acquired the 17%
stake in VW, we believe the valuation will normalise since index funds would have to sell
the stock if it leaves major indices such as the German DAX and the Eurostoxx 50. The
most important upside risk is that Qatar Holdings recalls borrowed VW shares when it
exercises its options, leading to a temporary squeeze and share price increase.
parts valuation model, which yields a fair value of EUR95 (core value drivers: VW brand:
22.5% EV/sales, 4.5x EV/EBIT; Audi: 40% EV/sales, 6x EV/EBIT; Scania: 130%
EV/sales, 13x EV/EBIT based on 2010 estimates). At our new target price, we value the
VW ords at a 2011e PE of around 12x PE, which is in line with the 10-year average
12-month forward consensus PE for the stock (source: Factset). This implies a potential
negative total return of around 61% to the current share price and we therefore downgrade
the stock to Underweight (V) from Neutral (V).
Catalysts and risks: Once Qatar Holdings (or another investor) has acquired the 17%
stake in VW, we believe the valuation will normalise since index funds would have to sell
the stock if it leaves major indices such as the German DAX and the Eurostoxx 50. The
most important upside risk is that Qatar Holdings recalls borrowed VW shares when it
exercises its options, leading to a temporary squeeze and share price increase.
MJ:
61 per cent decline forecast!
PM:
PM:
We need to have a proper read of that
11:42AM
PM:
Right — apologies but ive got to run
PM:
We will be back tomorrow at 11am
PM:
Thanks for the commetns — and a number of good jokes
PM:
But got to go..
PM:
Miles — thanks for stepping in
PM:
You’ve almost got the hang of its
PM:
it
MJ:
Seeya