Markets live chat transcript for the chat ending at 11:57 on 12 Aug 2009. Participants in this chat were: Paul Murphy (PM) Bryce Elder (BE)
PM:
Hi there
PM:
Sorry I’m a minute late
PM:
This is Markets Live
PM:
From FT Alphaville
PM:
We have to say FT Alphaville rather than just Alphaville
PM:
Cos there’s a vintage toy shop in NY called Alphaville
PM:
They have alphaville.com
PM:
Stupid name anyway
PM:
I’m back after one day off.
PM:
One day
PM:
Many thanks to Bryce and Miles keeping the show on the road yesterday.
PM:
Bryce is with me again, as it happens.
BE:
http://www.alphaville.de/ looks interesting.
BE:
Hello, by the way.
BE:
Murph’s just run off to get a can of Coke.
BE:
Back.
PM:
Sorry
PM:
I cant type quickly because my fingers hurt.
PM:
Whole body actually.
PM:
Too much DIY
PM:
Plumbers were in again yesterday evening. Finally got the bathroom finished.
PM:
They went off about 9pm.
PM:
Half an hour later discovered there was water coming thru the ceiling in the bedroom below.
PM:
So, got the plumbers back – who started raising floorboards etc in a panic.
PM:
Guess what.
BE:
What?
PM:
I’d put three nails thru a pipe while laying the floor.
BE:
Ha – idiot.
PM:
Bloody mess.
PM:
We were supposed to be moving out by tomorrow morning – pushed it back to Sunday, but the removals company are in today.
BE:
Have you told people where you are moving to?
PM:
Well, some people know
PM:
But look, we should talk about markets
PM:
This being Markets Live
PM:
Rather than Murphy’s House Live
BE:
Oh yeah
BE:
Well, the Footsie is up 17 at 4689.
PM:
rallying in the last few minutes I guess
BE:
This is something of a recovery
BE:
Wall Street off heavily overnight.
BE:
People rattled by this MBIA stuff, etc
BE:
Dow off 1%, S&P off 1.3%
BE:
So London opened lower – down in Monkey territory – but then clawed its way back.
PM:
Helped latterly by the Bank of England
PM:
Inflation report out today
PM:
Haven’t had a chance to read
BE:
Merv’s on every telly in the office at the moment
PM:
Just note the immediate market reaction, which seems to be that the Bank are saying rates will stay low for longer than most people think.
PM:
Saying inflation will remain below target
BE:
Key point is that if the Bank were to follow market rate projections then inflation would definitely undershoot.
BE:
With rates at 0.5 per cent and £175bn of QE, even chance of being above or below target rate.
BE:
Sees the economy growing again Q1 next year.
BE:
That’s rather at odds with Alistair Darling’s projections.
BE:
We’ve also had unemployment figs
BE:
Highest since 1996 – 7.8%. Higher than forecast
PM:
Okay — finally got the link
PM:
Inflation reprot
PM:
King’s remarks are here
PM:
Chart 2 (FIRST RED CHART) shows the Committee’s judgement about the implications
of that outlook for the path of CPI inflation. Inflation is likely to fall back sharply over
the next few months, as the impact of past increases in energy and food prices drops out
of the twelve-month comparison. Thereafter, the margin of spare capacity that is likely to
persist over the forecast period pushes down on CPI inflation. That is partially offset by
the upward pressure associated with the pass-through of sterling’s depreciation to
consumer prices. The relative magnitude of these opposing influences on inflation is
again highly uncertain, but on balance the Committee judges that, conditional on Bank
Rate following a path implied by market rates, inflation is more likely to be below the
target than above it for most of the forecast period.
Chart
of that outlook for the path of CPI inflation. Inflation is likely to fall back sharply over
the next few months, as the impact of past increases in energy and food prices drops out
of the twelve-month comparison. Thereafter, the margin of spare capacity that is likely to
persist over the forecast period pushes down on CPI inflation. That is partially offset by
the upward pressure associated with the pass-through of sterling’s depreciation to
consumer prices. The relative magnitude of these opposing influences on inflation is
again highly uncertain, but on balance the Committee judges that, conditional on Bank
Rate following a path implied by market rates, inflation is more likely to be below the
target than above it for most of the forecast period.
Chart
PM:
Chart 3 (SECOND RED CHART) shows an alternative view of the prospects for inflation
under the assumption that Bank Rate is constant over the next two years. As you can see,
the risks to the inflation outlook relative to the target become more evenly balanced
towards the two-year forecast horizon.
under the assumption that Bank Rate is constant over the next two years. As you can see,
the risks to the inflation outlook relative to the target become more evenly balanced
towards the two-year forecast horizon.
PM:
With this in mind, at its policy meeting last week the MPC voted to maintain Bank Rate
at 0.5%, and to increase the programme of asset purchases to £125 billion in total. Those
policy actions are aimed at boosting the supply of money and credit, thus helping to
restore a level of money spending in the economy consistent with meeting the inflation
target while spare capacity is gradually re-absorbed. The economy will eventually heal,
but the process may be slow.
at 0.5%, and to increase the programme of asset purchases to £125 billion in total. Those
policy actions are aimed at boosting the supply of money and credit, thus helping to
restore a level of money spending in the economy consistent with meeting the inflation
target while spare capacity is gradually re-absorbed. The economy will eventually heal,
but the process may be slow.
PM:
S, Mr King is saying money will stay cheap for the foreseeable
PM:
Footsie moved head quite nicely now
PM:
Up 21 at 4693 — every sign the index will be through 4700 shortly
11:13AM
PM:
We have a rate decision in the US today, no.
BE:
We do
BE:
19.15
PM:
Thoughts?
BE:
Well, it will all be in the wording of the statement
BE:
Here’s some commentary from David Schnautz at Kleinwort
PM:
Kleinwort?
PM:
While since we saw anything out of them.
BE:
Commerzbank Dresdner Kleinwort, of course
PM:
Seedy Kleinworts
BE:
In today’s FOMC interest rate decision the crucial question is probably
how strongly the Fed statement reflects the latest clear signs of a
stabilisation of the US economy. Even if the FOMC is only less pessimistic
or, from the market’s perspective, somewhat more optimistic, US
Treasuries and Bunds should come under pressure. The auctions of
Bunds and US Treasuries in the ten-year sector could be adversely
affected by investors choosing to wait on the sidelines prior to the FOMC
decision.
how strongly the Fed statement reflects the latest clear signs of a
stabilisation of the US economy. Even if the FOMC is only less pessimistic
or, from the market’s perspective, somewhat more optimistic, US
Treasuries and Bunds should come under pressure. The auctions of
Bunds and US Treasuries in the ten-year sector could be adversely
affected by investors choosing to wait on the sidelines prior to the FOMC
decision.
BE:
Even on ‘normal’ days the German finance agency often has a lot to do with
regard to the retention rate to ensure that Bund auctions show an
oversubscription (see chart). In fact, in July 2008 it had to retain more than
one-third of the issue volume. Though the situation has clearly improved in the
last auctions, a setback may be threatening today. In all, the retention at today’s
€6bn tapping of Bund 3.5% July 2019 may amount to as much as €1.2-1.5bn.
Besides the burden from the $23bn in new ten-year US Treasuries that will also
be issued today, uncertainty about the wording of the FOMC statement should
prompt market participants to remain on the sidelines, putting even greater
pressure on the market than in other auctions.
regard to the retention rate to ensure that Bund auctions show an
oversubscription (see chart). In fact, in July 2008 it had to retain more than
one-third of the issue volume. Though the situation has clearly improved in the
last auctions, a setback may be threatening today. In all, the retention at today’s
€6bn tapping of Bund 3.5% July 2019 may amount to as much as €1.2-1.5bn.
Besides the burden from the $23bn in new ten-year US Treasuries that will also
be issued today, uncertainty about the wording of the FOMC statement should
prompt market participants to remain on the sidelines, putting even greater
pressure on the market than in other auctions.
BE:
Though with his 21 July testimony before the US Congress Fed Chairman
Bernanke reduced the waiting time for news from the Fed since the last interest
rate decision of 24 June, it remains highly uncertain – especially against the
backdrop of the recent US employment report having turned out much better
than expected – to what extent the Fed today takes account of the evidence
pointing to a stabilisation of the US economy. Chances that the Fed will succeed
in putting a damper on rate hike expectations that are in the market for the turn
of the year should be clearly exceeded by the risk of the Fed statement
providing fresh fuel for such expectations.
Bernanke reduced the waiting time for news from the Fed since the last interest
rate decision of 24 June, it remains highly uncertain – especially against the
backdrop of the recent US employment report having turned out much better
than expected – to what extent the Fed today takes account of the evidence
pointing to a stabilisation of the US economy. Chances that the Fed will succeed
in putting a damper on rate hike expectations that are in the market for the turn
of the year should be clearly exceeded by the risk of the Fed statement
providing fresh fuel for such expectations.
PM:
cheers for that
11:15AM
PM:
Just before we finish on formal stuff
PM:
Here’s the FSA’s rules on City pay
PM:
Just been published
11:15AM
PM:
Okay Bryce — where now?
BE:
Well, some stocks stuff would be good
BE:
Miles getting plenty of props to the right
BE:
For outing Sinochem as the bidder for Emerald Energy during yesterday’s ML session
PM:
Nice hit
BE:
Indeed
BE:
Emerald’s the peculiar Irish oil group with fields in Columbia and Syria
BE:
Deal announced this morning
BE:
£532m recommended bid
PM:
Very good hit — I will be out of a job soon
PM:
Hopefuly
BE:
That’s 750p per share, an 11% premium on yesterday’s close
BE:
And, even though the break fee’s only £3m, people seem to think this one’s a done deal
BE:
Am told there’s no approvals needed from the Chinese goverment or Syria
BE:
And Sinochem’s got the backing of Michael Kroupeev, who had just under 30%
BE:
As noted by Ikonvark, he’s the rather formidable Anglo-Russian chap who also engineered a sale of First Calgary
BE:
To break that irrevocable, the counter offer would have to be pitched at 862.5p
PM:
Shares this morning?
BE:
Emerald is up 61p at 736p
BE:
So, still at a discount to the bid
PM:
very good
BE:
Bohemia – that was the price Kroupeev obvously wanted
BE:
In fact, he said as much to Reuters immediately after the bid approach
BE:
And, of course, there’s a readthrough for Gulfsands Petroleum
BE:
Which operates the Khurbet East field in Syria with Emerald
BE:
And has been the constant subject of bid rumours, most likely because the Sinochem guys were doing DD on the site
BE:
Gulfsands up 9p at 203p.
PM:
Cheers for all that
11:21AM
PM:
While we are in the sector
PM:
Dana Petroleum?
PM:
Price
BE:
DNX is up 3p at £13.69
PM:
Neil was pretty convinced we were going to see some bid action with this
PM:
RWE thought to be interested
BE:
And RWE have results this week I think
BE:
But while we are waiting for those
BE:
Here’s Deutsche with some supportive words
BE:
Supportive of the price – not the bid story
BE:
Value and opportunity at its core
Dana’s H1-09 was characterized by low drilling materiality and mixed results.
However, the opportunity to year-end stands in stark contrast: Dana is set to spud
a range of high impact wells, principle amongst which is Trolla. At the same time,
greater detail on the Rinnes and WEB developments materially underpins Dana’s
core NAV, considerably increasing investors’ downside protection. Buy.
Dana’s H1-09 was characterized by low drilling materiality and mixed results.
However, the opportunity to year-end stands in stark contrast: Dana is set to spud
a range of high impact wells, principle amongst which is Trolla. At the same time,
greater detail on the Rinnes and WEB developments materially underpins Dana’s
core NAV, considerably increasing investors’ downside protection. Buy.
BE:
Revisiting core value and upside
Dana provides the most comprehensive prospect/lead inventory of any of its E&P
peers. However, a recent update has its largest impact in core NAV, Dana detailing
for the first time development economics for Rinnes and West El Berullus. We
also revisit Dana’s exploration, noting a marked rebalancing toward NW Europe.
Dana provides the most comprehensive prospect/lead inventory of any of its E&P
peers. However, a recent update has its largest impact in core NAV, Dana detailing
for the first time development economics for Rinnes and West El Berullus. We
also revisit Dana’s exploration, noting a marked rebalancing toward NW Europe.
BE:
Cementing core value… ahead of major exploration potential
Rinnes and WEB boosted 2P reserves at end-08, but it is only now that we have
enough detail to fully cash flow model the assets, triggering their promotion to
core NAV (up 66% to 1304p). Beyond core, Dana’s wide-ranging exploration
portfolio, focused mainly in proven basins, exposes investors to 3.3 bln boe of net
resource potential. This portfolio is now more weighted toward opportunities in
NW Europe, Dana aiming to test c882 Mln boe of upside by end-12. For NAV, we
only value Dana’s activity out to end-10. Although Dana has completed 60% of its
FY-09 exploration programme, materiality is heavily back-end-loaded. 6 wells in H2-
09 target 206 Mln boe of net resource, accounting for 236p of risked NAV, 1047p
de-risked. This figure includes Trolla (102p risked, 613p de-risked), a well with
fundamentally transformational potential. In FY-10 15 further wells test 176p of
risked NPV, rising to 881p de-risked. With core value substantially strengthened,
and near-term upside potential considerable, we reiterate our Buy rating but raise
our TP from 1350p to 1640p.
Rinnes and WEB boosted 2P reserves at end-08, but it is only now that we have
enough detail to fully cash flow model the assets, triggering their promotion to
core NAV (up 66% to 1304p). Beyond core, Dana’s wide-ranging exploration
portfolio, focused mainly in proven basins, exposes investors to 3.3 bln boe of net
resource potential. This portfolio is now more weighted toward opportunities in
NW Europe, Dana aiming to test c882 Mln boe of upside by end-12. For NAV, we
only value Dana’s activity out to end-10. Although Dana has completed 60% of its
FY-09 exploration programme, materiality is heavily back-end-loaded. 6 wells in H2-
09 target 206 Mln boe of net resource, accounting for 236p of risked NAV, 1047p
de-risked. This figure includes Trolla (102p risked, 613p de-risked), a well with
fundamentally transformational potential. In FY-10 15 further wells test 176p of
risked NPV, rising to 881p de-risked. With core value substantially strengthened,
and near-term upside potential considerable, we reiterate our Buy rating but raise
our TP from 1350p to 1640p.
BE:
Valuation, risk and reward
Our 1930p risked total NAV is our view of Dana’s NPV-10 value, based on current
technical data, DB energy forecasts, and a detailed risk review. We set our target
at a 15% discount to risked total NAV (the average mid-point of the sector trading
range since Nov-96). On the basis of this mechanism, and reflecting the
adjustments to NAV detailed in this note, we lift our Dana TP by 22% to 1640p.
Key risks include oil/gas price weakness (against which Dana has no hedge
protection), exploration failure, and delays and/or cost overruns.
Our 1930p risked total NAV is our view of Dana’s NPV-10 value, based on current
technical data, DB energy forecasts, and a detailed risk review. We set our target
at a 15% discount to risked total NAV (the average mid-point of the sector trading
range since Nov-96). On the basis of this mechanism, and reflecting the
adjustments to NAV detailed in this note, we lift our Dana TP by 22% to 1640p.
Key risks include oil/gas price weakness (against which Dana has no hedge
protection), exploration failure, and delays and/or cost overruns.
BE:
That’s from Jonathan Copus
BE:
Very detailed note actually – runs to 30 pages or so
PM:
ta
PM:
Afraid we dont have anything fresh on Bowleven
PM:
Nor Ramco
PM:
Aptly named Ramco
BE:
Nope
BE:
Lots of interest in the sector, without too many specifics on the stories.
BE:
Although ….
BE:
There might be some happenings in Sterling Energy soon
PM:
BE:
Although not the bid some punters have been betting on
BE:
Talk is of a share placing
BE:
With about half the equity going to one person
PM:
Was this the firm linked with the Argie guy
PM:
??
PM:
Argentinian
BE:
That’s right
BE:
Just digging out the name
BE:
Aha – here we are
BE:
Sterling Energy bidder met the Taliban
BE:
Carlos Bulgheroni
BE:
According to STRNS
BE:
11:30AM
PM:
Let’s get away from oil
PM:
Notice we#’ve got some M&A action elsewhere
BE:
Bid for Birmingham City
BE:
Stock soars 16%
BE:
Up 6.5p at 47p.
PM:
I don’t know anything about Birmingham – the club or the city
PM:
Other than its part owned by Gold Brothers
PM:
And David Sullivan
PM:
The football club that is
PM:
Not the city.
PM:
But then they might own part of the city for all I know.
PM:
They are big into property
PM:
But anyway, who’s the bid from?
BE:
Grandtop International.
BE:
Grandtop already control 30%
PM:
????
BE:
This is Yeung Ka Sing Carson
BE:
Grand Top is a Hong Kong clothing firm
PM:
Well, who’s Yeung Ka Sing Carson, when he’s at home??
PM:
or she
BE:
Frank’s half brother
BE:
No – I kid. Chinese entrepreneur
BE:
This is a reheat of a takeover that dates back to 2007.
BE:
Two stage affair – where the second stage was delayed
PM:
ah, ok
BE:
Anyway, it’s the close season so let’s not waste too much time worrying about football.
11:33AM
BE:
Jumping back to Bowleven, since there’s so much interest in it …
PM:
Ah, well done Bryce
PM:
You will spoil the Rabble
BE:
I can’t say I’m personally that excited by the Etinde farm-out transaction with Vitol E&P …
BE:
But here’s some comment for those who are
BE:
This from RBS Amro …
BE:
Farm-out on Etinde could be a transformational event for BowLeven
BowLeven has announced a farm-out transaction with Vitol E&P (VEP) on its 100% owned Etinde
permit offshore Cameroon. The deal could see VEP eventually take a 50% stake in Etinde in return
for funding a gross work programme of US$200m and a cash payment to BowLeven of US$25m. The
IF-2 appraisal well planned for later this year and seismic activity form part of the initial work
programme agreed with VEP and will be covered by the initial US$100m carry.
BowLeven has announced a farm-out transaction with Vitol E&P (VEP) on its 100% owned Etinde
permit offshore Cameroon. The deal could see VEP eventually take a 50% stake in Etinde in return
for funding a gross work programme of US$200m and a cash payment to BowLeven of US$25m. The
IF-2 appraisal well planned for later this year and seismic activity form part of the initial work
programme agreed with VEP and will be covered by the initial US$100m carry.
BE:
First pass at a theoretical valuation implies read-through of c140-160p
The farm-out implies a gross value of US$400m for a 100% stake in Etinde. Adding in 1) the
companys existing cash resources of US$130m, 2) our existing valuation of the EOV field offshore
Gabon, 3) estimated PV of the back costs, implies a value of 138p – 162p per share for BowLeven
depending on the resulting stake in Etinde.
The farm-out implies a gross value of US$400m for a 100% stake in Etinde. Adding in 1) the
companys existing cash resources of US$130m, 2) our existing valuation of the EOV field offshore
Gabon, 3) estimated PV of the back costs, implies a value of 138p – 162p per share for BowLeven
depending on the resulting stake in Etinde.
BE:
Share price likely to be volatile although at the very least, a significant vote in confidence
We expect the shares to move sharply higher this morning (although there is likely to be some
volatility as the market digests the detail of the farm-out) but at the very least this is a big vote by VEP
in Etindes potential. In addition, while the forward work programme is necessarily fluid, we believe
the carry and cash resources can finance BowLevens theoretical share of an IF development/
appraisal/programme and Etinde exploration wells.
We expect the shares to move sharply higher this morning (although there is likely to be some
volatility as the market digests the detail of the farm-out) but at the very least this is a big vote by VEP
in Etindes potential. In addition, while the forward work programme is necessarily fluid, we believe
the carry and cash resources can finance BowLevens theoretical share of an IF development/
appraisal/programme and Etinde exploration wells.
BE:
I think they’re shop, as are Merrill. Who are coming up next.
BE:
Deal values Bowleven’s Cameroonian assets at US$560m
Bowleven has farmed out half of its Cameroon Etinde permit (blocks 5, 6 & 7 and
containing the IF discovery) to oil trader Vitol for US$225m. Vitol will pay
US$100m for a 25% stake in Etinde and will hold an option to buy a further 25%
stake for US$125m by Sep-2010. Considering the national oil company’s (SNH)
20% back in right into the project, the deal values Etinde at US$560m (or
US$9.4/boe using the IF field’s 2C recoverable resources). Importantly, BLVN will
retain the benefit for cost recovery and tax purposes of the all historical
expenditure in Etinde, effectively accelerating the cashflows for Bowleven.
Bowleven has farmed out half of its Cameroon Etinde permit (blocks 5, 6 & 7 and
containing the IF discovery) to oil trader Vitol for US$225m. Vitol will pay
US$100m for a 25% stake in Etinde and will hold an option to buy a further 25%
stake for US$125m by Sep-2010. Considering the national oil company’s (SNH)
20% back in right into the project, the deal values Etinde at US$560m (or
US$9.4/boe using the IF field’s 2C recoverable resources). Importantly, BLVN will
retain the benefit for cost recovery and tax purposes of the all historical
expenditure in Etinde, effectively accelerating the cashflows for Bowleven.
BE:
Next steps: other farm out in the portfolio?
In our view, the deal is a key step forward in the development of Bowleven and
solid proof of the management team’s ability to create shareholder value. The
Etinde deal brings extra financial flexibility to Bowleven whilst still offering
leverage to the exploration upside potential of the assets. As a result, we see the
company in a strong position to continue to pursue its strategy to monetise its
asset base. We believe that the next steps Bowleven could centre around the
disposal/farm out of its EOV and Epanemo assets in Gabon, to which the market
is attaching limited value at present.
In our view, the deal is a key step forward in the development of Bowleven and
solid proof of the management team’s ability to create shareholder value. The
Etinde deal brings extra financial flexibility to Bowleven whilst still offering
leverage to the exploration upside potential of the assets. As a result, we see the
company in a strong position to continue to pursue its strategy to monetise its
asset base. We believe that the next steps Bowleven could centre around the
disposal/farm out of its EOV and Epanemo assets in Gabon, to which the market
is attaching limited value at present.
BE:
Raising NAV by 33% to 147p – Buy
Reflecting the Etinde transaction, we are raising our NAV by 33% to 147p/sh. The
stock trades at a 45% discount to our new NAV, which we view as unwarranted
given the significant exploration/transaction upside potential that Bowleven offers.
We believe that today’s deal will bring extra comfort to investors, potentially
helping to reduce the valuation gap near term. We re-iterate our Buy
recommendation and set a new PO of 147p (from 116p) to reflect the NAV uplift
that the Etinde farm out provides.
Reflecting the Etinde transaction, we are raising our NAV by 33% to 147p/sh. The
stock trades at a 45% discount to our new NAV, which we view as unwarranted
given the significant exploration/transaction upside potential that Bowleven offers.
We believe that today’s deal will bring extra comfort to investors, potentially
helping to reduce the valuation gap near term. We re-iterate our Buy
recommendation and set a new PO of 147p (from 116p) to reflect the NAV uplift
that the Etinde farm out provides.
PM:
cheers for all that
11:37AM
PM:
lord persie – Tolstoi definitely your man
PM:
Note the debate over whether Birmingham in in the north
BE:
South to me
BE:
But everything’s south to me, more or less
PM:
Bryce is a professional Scot
11:38AM
PM:
Okay — off somewehre different
BE:
How about Bove on the US banks?
BE:
Richard X. Bove from Rochdale Securities
PM:
I used to live in Rochdale.
PM:
Which is up north
BE:
And grim
PM:
It’s a rubbish place – ive got to say
PM:
It is said that watching Rochdale Athletic was like walking around all day with a stone in yer boot
PM:
Home of ecki thump
PM:
Anyway, what’s Bove saying?
PM:
Rochdale securities actually US broker, of course
BE:
Well it’s a bit confusing really.
BE:
He’s saying the banking sector is a long-term buy – but it has rallied to far in the short term.
BE:
I think
BE:
See what you think.
BE:
It’s just a one pager
BE:
Psychology Wins Again
In February 2007, the Keefe Bruyette banking index hit a high of 121.16. By March 2009, it had dropped 85.3% to 17.75. In August
2009, the index made it back to a high of 46.46, recovering 161.7% from its low. There is no question but that the decline in bank
stocks mirrored a severe decline in industry earnings. The net income of the industry (based on the FDIC numbers) in the 1st quarter
of 2007 was $35.6 billion. In the first quarter of 2009, it had fallen to $7.6 billion (the industry lost $36.9 billion in the fourth quarter
of 2008).
Psychology Wins Again
In February 2007, the Keefe Bruyette banking index hit a high of 121.16. By March 2009, it had dropped 85.3% to 17.75. In August
2009, the index made it back to a high of 46.46, recovering 161.7% from its low. There is no question but that the decline in bank
stocks mirrored a severe decline in industry earnings. The net income of the industry (based on the FDIC numbers) in the 1st quarter
of 2007 was $35.6 billion. In the first quarter of 2009, it had fallen to $7.6 billion (the industry lost $36.9 billion in the fourth quarter
of 2008).
BE:
There was another factor at hand, however, in the movement of the stocks. Psychology toward the banking group had moved
dramatically along with the earnings. Each shift in psychology carried with it a change in how investors believed they should value
banks. The recent rise in the stocks does not appear to be driven by a change in the near‐term earnings outlook. It has been driven
by a change in psychology. Thus, it is our belief that these stocks are trading on “fumes” and not reality.
dramatically along with the earnings. Each shift in psychology carried with it a change in how investors believed they should value
banks. The recent rise in the stocks does not appear to be driven by a change in the near‐term earnings outlook. It has been driven
by a change in psychology. Thus, it is our belief that these stocks are trading on “fumes” and not reality.
BE:
Therefore, we expect a short‐term pullback in prices. Our long‐term view that this industry is attractive remains unchanged.
BE:
Valuation Techniques
Shifts in psychology meant shifts in valuation:
• In the fall of 2008, it was widely being speculated that the banking industry was insolvent and that the stocks should be
valued on a liquidation basis. At the time, this meant valuing them on their tangible common equity. On this basis, the
banking industry was worth $860 billion.
Shifts in psychology meant shifts in valuation:
• In the fall of 2008, it was widely being speculated that the banking industry was insolvent and that the stocks should be
valued on a liquidation basis. At the time, this meant valuing them on their tangible common equity. On this basis, the
banking industry was worth $860 billion.
BE:
• In the spring of 2009, this view was discarded. It was thought that the banks would survive and that they should be valued
at some multiple of normalized earnings. This meant that the industry was now worth $2.0 trillion by my calculation.
at some multiple of normalized earnings. This meant that the industry was now worth $2.0 trillion by my calculation.
BE:
• This summer the valuation metric was changed once again. It was now believed that banks were worth 10 to 12 times
pretax, pre‐provision earnings. This suggests that the industry is worth $3.3 trillion, again, by my calculation.
In fact, many banks, like Bank of America (BAC/$16.75/Buy) and Citigroup (C/$3.86/Buy), did increase fivefold in price. Regional
banks also soared in value with some like Fifth Third (FITB/$9.65/NR) increasing 9‐fold in price.
pretax, pre‐provision earnings. This suggests that the industry is worth $3.3 trillion, again, by my calculation.
In fact, many banks, like Bank of America (BAC/$16.75/Buy) and Citigroup (C/$3.86/Buy), did increase fivefold in price. Regional
banks also soared in value with some like Fifth Third (FITB/$9.65/NR) increasing 9‐fold in price.
BE:
The Problem
The issue as I see it is that bank earnings will not improve in the third or even fourth quarter this year. Many of these companies will
show losses. The rational investor would step away from psychology at this point and take some profits. I suggest this even though I
am not changing the long‐term buy ratings on my favorite stocks.
The issue as I see it is that bank earnings will not improve in the third or even fourth quarter this year. Many of these companies will
show losses. The rational investor would step away from psychology at this point and take some profits. I suggest this even though I
am not changing the long‐term buy ratings on my favorite stocks.
PM:
Not sure what he means by “trading on fumes”
PM:
Is he saying the market’s stoned?
BE:
Seems that way.
BE:
Anyway, buy for the long term, but not yet.
BE:
Hope that’s clear.
PM:
11:43AM
BE:
A quick point of order, while we’re live
BE:
I mentioned a wee company called ITM Power in the paper this morning
BE:
There was a very keen note from Panmure that arrived to my inbox last night
BE:
Which I chucked in the report in spite of the price going the wrong way
BE:
Panmure’s rather keen to note that the research came out after hours
BE:
And the shares are motoring – excuse the pun – this morning
ITM Power (ITM:LSE): Last: 25.75, up 3.75 (+17.05%), High: 27.00, Low: 24.50, Volume: 553.60k
BE:
Will just grab the summary
BE:
This is the hydrogen fuel maker thing that doubled in value last week
BE:
Been under a bit of a cloud for about a year
BE:
You might remember there was an investor presentation we live-blogged here on ML, and its PR team departed shortly after
BE:
Soon to be followed by the CEO
BE:
Heree’s the Panmure note
BE:
ITM Power
Upgrading to Buy – report published
A renewed focus and CEO suggest that it is time for the market to re-engage
with ITM. This has already begun, but we think the shares could double
again after last week’s performance. ITM has resolved its short-term
technical issues and built upon its low-cost proposition. The target for
commercial deals is refreshing and a blue-chip announcement should have a
significant impact on perception and the share price. We have upgraded from
Hold to Buy, with a new price target of 50p.
Upgrading to Buy – report published
A renewed focus and CEO suggest that it is time for the market to re-engage
with ITM. This has already begun, but we think the shares could double
again after last week’s performance. ITM has resolved its short-term
technical issues and built upon its low-cost proposition. The target for
commercial deals is refreshing and a blue-chip announcement should have a
significant impact on perception and the share price. We have upgraded from
Hold to Buy, with a new price target of 50p.
BE:
Revitalised. ITM focuses on providing the materials and equipment for the creation,
storage and use of green hydrogen. The technology is robust, the electrolyser efficiency
issues are resolved in the lab, and the company has a strong IP platform. ITM is in much
better shape than it was in January.
Commercial focus. The company is now focusing on three markets: small electrolysers
for laboratory and industrial applications, a combined heat and power (CHP) system, and
a mobile hydrogen refuelling station for vehicle fleets. These will take time to come to
fruition, but the focus is welcomed.
Measured steps. Demonstrations of the technology should be the precursor of
partnerships and larger commercial deals over the next few years. This will coincide with
political lobbying and a general heightening of ITM’s profile. With four years worth of
cash, this seems like an interesting opportunity.
New CEO. Graham Cooley has a wealth of power industry, fuel cell and energy storage
expertise as well as commercial success with three small companies. His mind is set on
making significant deals for the company.
Opportunity. We have raised our 12-month price target from 20p to 50p, which is less
than half the value of some of ITM’s CHP peers. A blue-chip commercial deal could see
the shares propelled even higher over the long term. Clearly there is a lot to do, but the
company has a strong balance sheet and is now fully focused.
storage and use of green hydrogen. The technology is robust, the electrolyser efficiency
issues are resolved in the lab, and the company has a strong IP platform. ITM is in much
better shape than it was in January.
Commercial focus. The company is now focusing on three markets: small electrolysers
for laboratory and industrial applications, a combined heat and power (CHP) system, and
a mobile hydrogen refuelling station for vehicle fleets. These will take time to come to
fruition, but the focus is welcomed.
Measured steps. Demonstrations of the technology should be the precursor of
partnerships and larger commercial deals over the next few years. This will coincide with
political lobbying and a general heightening of ITM’s profile. With four years worth of
cash, this seems like an interesting opportunity.
New CEO. Graham Cooley has a wealth of power industry, fuel cell and energy storage
expertise as well as commercial success with three small companies. His mind is set on
making significant deals for the company.
Opportunity. We have raised our 12-month price target from 20p to 50p, which is less
than half the value of some of ITM’s CHP peers. A blue-chip commercial deal could see
the shares propelled even higher over the long term. Clearly there is a lot to do, but the
company has a strong balance sheet and is now fully focused.
BE:
Ok – moving on …
PM:
Cheers for all that
11:49AM
PM:
Sorry — was just looking round for other stuff
PM:
Big note out of Bernstein on M&S
PM:
Marks always popular subject
PM:
so i will share
PM:
Bit long tho
PM:
Highlights
Heading into 2H09 we expect trading momentum at M&S will continue to be more important than strategy
when it comes to ST share price performance, but we continue to have concerns about the business strategy
in the MT. 2Q trading results on 30 September will no doubt be a key date for ST momentum, but we also
note that the 13 October investor day could potentially turn us more positive on the stock should a more
aggressive cost efficiency plan be launched or a revised strategy that focuses on the UK/ROIC be unveiled.
In this research report we outline the potential ST positive catalysts that could further lift the M&S share
price as well as reiterate the strategic question marks that must be addressed before we turn more positive
on the stock MT.
Heading into 2H09 we expect trading momentum at M&S will continue to be more important than strategy
when it comes to ST share price performance, but we continue to have concerns about the business strategy
in the MT. 2Q trading results on 30 September will no doubt be a key date for ST momentum, but we also
note that the 13 October investor day could potentially turn us more positive on the stock should a more
aggressive cost efficiency plan be launched or a revised strategy that focuses on the UK/ROIC be unveiled.
In this research report we outline the potential ST positive catalysts that could further lift the M&S share
price as well as reiterate the strategic question marks that must be addressed before we turn more positive
on the stock MT.
PM:
In the short-term, we see several positive catalysts that could carry the stock higher and constitute
upside risk to our MP. Since the beginning of 2009, MKS has experienced strong share price
performance (+43%) and has recently begun to trade at its long-term average to the market – a very slight
premium – on a PEF basis (1.04x). Sector rotation and trading momentum helped boost MKS’ gains
YTD, and we see the latter factor as a continuing source for potential upside throughout 2H09.
−Going into 2H09, M&S will face easier LFL comparables vs. the previous 2008 period, which had
experienced negative LFL trends in both GM (3Q08: -8.9% / 4Q08: -4.8%) and Food (3Q08: -5.2% /
4Q08: -3.7%). Though growth in 2009 for the overall UK A&F market remains negative, the trend
seems to be stabilizing – even showing a slight deceleration in the 52 weeks ended June 2009 to -2.5%.
Furthermore, M&S has already surprised against weaker comps following its 1Q09 results, where
1Q09 LFL of -2.4% in GM and -0.5% in Food were well ahead of consensus estimates of -4.3% and -
2.8%, respectively.
upside risk to our MP. Since the beginning of 2009, MKS has experienced strong share price
performance (+43%) and has recently begun to trade at its long-term average to the market – a very slight
premium – on a PEF basis (1.04x). Sector rotation and trading momentum helped boost MKS’ gains
YTD, and we see the latter factor as a continuing source for potential upside throughout 2H09.
−Going into 2H09, M&S will face easier LFL comparables vs. the previous 2008 period, which had
experienced negative LFL trends in both GM (3Q08: -8.9% / 4Q08: -4.8%) and Food (3Q08: -5.2% /
4Q08: -3.7%). Though growth in 2009 for the overall UK A&F market remains negative, the trend
seems to be stabilizing – even showing a slight deceleration in the 52 weeks ended June 2009 to -2.5%.
Furthermore, M&S has already surprised against weaker comps following its 1Q09 results, where
1Q09 LFL of -2.4% in GM and -0.5% in Food were well ahead of consensus estimates of -4.3% and -
2.8%, respectively.
PM:
−GM% upside from a favorable Asian sourcing environment in FW09, which is likely to be sustained
in SS10. We expect that large players like M&S, must have had the opportunity to turn a favorable
sourcing environment to their advantage. We expect that supplier discounts should largely offset USD
appreciation and create potential COGS upside even for GBP retailers. This should be compounded by
what we expect to be a favorable pricing environment, conducive to better price realization vs. 2008.
These two effects combined should support, or even improve, GM% vs. LY.
−Lower interest payments on mortgages as a percentage of income has trended downwards since 4Q07
and could potentially provide a ST source of higher available income to the tune of c.£1,700 in 09E
to spend on consumer discretionary products.
in SS10. We expect that large players like M&S, must have had the opportunity to turn a favorable
sourcing environment to their advantage. We expect that supplier discounts should largely offset USD
appreciation and create potential COGS upside even for GBP retailers. This should be compounded by
what we expect to be a favorable pricing environment, conducive to better price realization vs. 2008.
These two effects combined should support, or even improve, GM% vs. LY.
−Lower interest payments on mortgages as a percentage of income has trended downwards since 4Q07
and could potentially provide a ST source of higher available income to the tune of c.£1,700 in 09E
to spend on consumer discretionary products.
PM:
−Higher likelihood that consumers will want to “treat themselves” and spend on small ticket items in
2H09 – effectively turning the page on the doom and gloom. This should benefit M&S due to its
positioning as a retailer of choice when UK consumers want to “treat” themselves. In fact, M&S
typically enjoys relatively higher market share (1.25x) in the Christmas quarter relative to the rest of
the year. In contrast, other grocers do not see this bump, experiencing a negligible 1.02x relative
market share increase in data dating back to 1999.
2H09 – effectively turning the page on the doom and gloom. This should benefit M&S due to its
positioning as a retailer of choice when UK consumers want to “treat” themselves. In fact, M&S
typically enjoys relatively higher market share (1.25x) in the Christmas quarter relative to the rest of
the year. In contrast, other grocers do not see this bump, experiencing a negligible 1.02x relative
market share increase in data dating back to 1999.
PM:
However, at this stage we have no new elements to be more positive medium-term than when we
downgraded the stock in May. As we addressed in the spring, three major concerns still linger: 1) the
overall strategy and ROIC focus has yet to change; 2) the issue of senior management transition has yet
to be resolved; 3) the governance issue has not been addressed. A key question investors should ask
themselves is – when is management at M&S going to look at ROIC as the primary and most appropriate
performance parameter of a mature business? More specifically:
−Why risk wasted time and money with direct international expansion that is bound to lower ROIC
rather than increase it? M&S is a mature format through which gaining inroads into competitive
foreign markets is unlikely. Moreover, the M&S brand is much less recognized and appreciated abroad
than in the UK. These factors would hence make the chances of gaining critical mass abroad –
indispensable to run a profitable business – slim.
downgraded the stock in May. As we addressed in the spring, three major concerns still linger: 1) the
overall strategy and ROIC focus has yet to change; 2) the issue of senior management transition has yet
to be resolved; 3) the governance issue has not been addressed. A key question investors should ask
themselves is – when is management at M&S going to look at ROIC as the primary and most appropriate
performance parameter of a mature business? More specifically:
−Why risk wasted time and money with direct international expansion that is bound to lower ROIC
rather than increase it? M&S is a mature format through which gaining inroads into competitive
foreign markets is unlikely. Moreover, the M&S brand is much less recognized and appreciated abroad
than in the UK. These factors would hence make the chances of gaining critical mass abroad –
indispensable to run a profitable business – slim.
PM:
−M&S has to address the issue of a structurally higher IC and cost base to support its value retailer
appeal in the UK. This means: 1) making sourcing more efficient by having a higher portion directly
managed in Asia; 2) driving further efficiencies in operations; 3) progressively churning its store
portfolio to unlock cash from its High Street owned locations – which when real market space costs
and space productivity are taken into account – seems to clash with M&S’ ambition to be a credible
value player in A&F.
−When are the opportunities to expand the brand in the UK going to be tackled – e.g. fragrances,
costmetics, etc.? A program of category extension into the UK Health & Beauty market could provide
uplift to NOPAT, and consequently ROIC, for example. Branded products with good growth potential
such as skincare, haircare, cosmetics, mass fragrances and men’s toiletries would be potential fits – all
of which could help drive traffic and boost average sales densities and margins.
appeal in the UK. This means: 1) making sourcing more efficient by having a higher portion directly
managed in Asia; 2) driving further efficiencies in operations; 3) progressively churning its store
portfolio to unlock cash from its High Street owned locations – which when real market space costs
and space productivity are taken into account – seems to clash with M&S’ ambition to be a credible
value player in A&F.
−When are the opportunities to expand the brand in the UK going to be tackled – e.g. fragrances,
costmetics, etc.? A program of category extension into the UK Health & Beauty market could provide
uplift to NOPAT, and consequently ROIC, for example. Branded products with good growth potential
such as skincare, haircare, cosmetics, mass fragrances and men’s toiletries would be potential fits – all
of which could help drive traffic and boost average sales densities and margins.
PM:
We rate MKS and NXT Market-perform with a price target of GBp 410 and GBp 1,850, respectively.
PM:
Sorry, too much to digest there
BE:
Do like the Bernstein scribbler team myself.
BE:
Have a habit of putting up interesting ideas.
11:52AM
PM:
We should mention Northgate
PM:
on the H&M side
on the H&M sideBE:
Neil’s short of the year
PM:
What’s happened today?
BE:
97.5% take-up of the rights issue
BE:
Rump placed at 16.5p
BE:
Had a spectacular run since Neil went short
PM:
BE:
Up from 11p since the start of the month
BE:
Which underlines why we just talk about these things, rather than punt.
PM:
Indeed!
11:54AM
PM:
I think we are done
PM:
Keep trying to make these sessions shorter for August
PM:
But well…
PM:
Taxloss – bernstein M&S stuff by Luca Solca
PM:
Quality scribbler
BE:
Yup
BE:
Ok – we’re finished?
PM:
We are
PM:
Thanks again Bryce
BE:
Pleasure.
PM:
And regards to the Rabble on the Right
PM:
We wil lbe back tomorrow at 11am
PM:
Seeya
BE:
Bye