Markets live chat transcript for the chat ending at 12:09 on 2 Sep 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE) Miles Johnson, FT (MJ)
NH:
Good morning and welcome to Markets Live
NH:
FT Alphaville’s daily markets chat
NH:
our attempt at trying to understand what is going on and why in various markets
NH:
today I am joined by Byrce
NH:
because Miles is still have some IT issues
NH:
although he does appear to have a screen now
NH:
and is putting together the Lunch Wrap
NH:
So I reckon he will be joining us tomorrow
NH:
Morning Bryce
BE:
Hi.
NH:
Monkey, today’s special guest is Bryce
NH:
Right
NH:
a lot to get through this morning
NH:
and it has been a while since we have been able to say that
BE:
True
NH:
and we had better start with BP
11:04AM
BE:
Top of the leaderboard at the moment
BE:
Up 2.2% at 530
NH:
and this is why
NH:
BP ANNOUNCES GIANT OIL DISCOVERY
IN THE GULF OF MEXICO
IN THE GULF OF MEXICO
NH:
BP announced today a giant oil discovery at its Tiber Prospect in the deepwater Gulf of Mexico. The well, located in Keathley Canyon block 102, approximately 250 miles (400 kilometres) south east of Houston, is in 4,132 feet (1,259 metres) of water. The Tiber well was drilled to a total depth of approximately 35,055 feet (10,685 metres) making it one of the deepest wells ever drilled by the oil and gas industry. The well found oil in multiple Lower Tertiary reservoirs. Appraisal will be required to determine the size and commerciality of the discovery.
‘Tiber represents BP’s second material discovery in the emerging Lower Tertiary play in the Gulf of Mexico, following our earlier Kaskida discovery,’ said Andy Inglis, chief executive, Exploration and Production. ‘These material discoveries together with our industry leading acreage position support the continuing growth of our deepwater Gulf of Mexico business into the second half of the next decade.’
Tiber is operated by BP (NYSE: BP), with a 62 per cent working interest with co-owners Petrobras (NYSE: PBR/PBRA, 20 per cent) and ConocoPhillips (NYSE: COP, 18 per cent).
BE:
So what’s “giant”?
NH:
well, there is some debate
NH:
the most bullish comment I have seen is 4-6bn barrels
NH:
have a look at this
NH:
BP – industry talk is that this field ‘Tiber’ could hold recoverable reserves of 4-6bn bbls. BP operates with 62%, Petrobras 20% and Conoco 18%. Taking mid recoverable of 5bn bbls and assuming 30% recoverable valuaed at $10/bbl – would give a net valuation enhancement of $9.3bn – or +6% of current market cap. Clearly bullish for the stock.
NH:
but others are less excitable
NH:
UBS on BP (Buy, PT 600p): Announces ‘giant’ oil discovery at Tiber prospect in deepwater GoM. Any announcement of a discovery by a major means its important. Using the word ‘giant’ is almost unprecendented. From memory the last time something like this was announced it was Thunder Horse which is >1bn bbls. The previous discovery in the Lower Tertiary Kaskida was >3bn bbls in place and >300-500m bbls recoverable with significant upside. So this sounds like a 500m-1bn bbls discovery and with Kaskida the opening up of a whole new geological play. Company saying technologically ‘within the envelope’ and big advantages of critical mass. GoM oil discoveries are the highest value globally so this is a big positive – probably worth at least 3% even to a company the size of BP.
NH:
and
NH:
GOLDMAN on BP: We don’t have a size yet for the discovery, but we can assume c1 bn bls of recoverable reserves. This discovery will be very challenging to develop due to its complex geology (Lower tertiary) and water depth (almost 11 km) and is unlikely to be producing before 2014. We value these reserves at c$3/bl. BP owns a 62% stake (Petrobras 20%, ConocoPhillips 18%) and therefore this discovery could be worth c$1.9 bn net to them (1.1% of market cap). Good news for BP, but it is hardly transformational and does not provide a solution to their thin pipeline of new projects in the 2010-13 period.
NH:
and the Goldman note above is a good one
NH:
this is a very deep well
NH:
a very challenging well
NH:
and I would like to know the oil price at which it is really profitable for the company
BE:
Yeah – but it’s not every day an oil major finds oil.
NH:
NH:
that is certainly true
NH:
oil major in shock giant discovery
BE:
The E of E&P not really their speciality.
NH:
sadly that’s true
BE:
Incidentally, did you see the mention BP got in Businessweek yesterday?
NH:
no missed that
BE:
Think we all did
BE:
But – well, it’s quite interesting from the perspective of today’s RNS
BE:
BP’s chief of exploration, Michael Daly, terms the Tiber find “a very significant discovery” and says it is even “better” than the Kaskida field, another huge BP property in the Gulf of Mexico, with an estimated 4 billion to 6 billion barrels of oil in place.
NH:
what? and this was out yesterday?
BE:
So it seems.
NH:
very interesting
BE:
Datestamped last night.
NH:
not picked up by the market
NH:
anyway
NH:
the move in the BP share price has certainly helped the London market
11:10AM
NH:
in the wake of Wall Street’s poor overnight performance
NH:
we were down to 4,781
NH:
at one point
NH:
but thanks to BP have rallied
NH:
now off just 15.4 points at 4,804
NH:
because of its size BP has big effect on the London market
NH:
I thinnk every penny move shifts the index by a 2 points
NH:
or something like
NH:
actually Bryce is just going to check that
BE:
8.5 points on the Footsie
NH:
ta for that
NH:
so 14.75p move in BP adds almost 9 points to the FTSE
11:13AM
NH:
of course there is one question I have in relation to BP
BE:
What’s that?
NH:
well if this find is giant
NH:
what does that makes Gulf Keystone’s?
BE:
BE:
A behemoth.
NH:
ha
NH:
and a reader on the right also mentions a little company called Amerisur
NH:
which has announced a 900m barrell find in Paraguay this morning
NH:
interesting company this
NH:
chaired by Giles Clarke of ECB
NH:
that’s the England and Wales Cricket Board
BE:
Amerisur Resources unchanged, 4.895p at the middle.
BE:
Market cap less than £40m
NH:
unfortunately for Mr Clarke and Amerisur there big discovery has been rather spoiled by this news from the FSA
NH:
The Financial Services Authority (FSA) has fined Mark Lockwood, a former trading desk manager at a retail stockbroking firm, £20,000 for failing to observe proper standards of market conduct. Lockwood failed to identify and act on a suspicious client order that allowed the firm to be used to facilitate insider dealing. As a result of his failings the firm failed to identify the trade as suspicious and report it to the FSA.
Lockwood’s misconduct related to his dealings with a client who sold shares in oil and gas exploration company Amerisur on 23 May 2007 – ahead of an announcement by the company of a placing of shares the next day. The client has been subject to separate FSA enforcement action for market abuse in relation to Amerisur shares.
Lockwood’s misconduct related to his dealings with a client who sold shares in oil and gas exploration company Amerisur on 23 May 2007 – ahead of an announcement by the company of a placing of shares the next day. The client has been subject to separate FSA enforcement action for market abuse in relation to Amerisur shares.
NH:
Lockwood failed to identify that the transaction was being conducted on the basis of inside information, despite his own knowledge of the impending transaction and clear warning signals from the client. He failed to prevent the trade or alert his firm to the possibility that the trade was being conducted on the basis of inside information. As a result no Suspicious Transaction Report (STR) was submitted to the FSA and the trading only came to light because of a report submitted by another broker.
BE:
That’s unfortunate timing.
NH:
it is
NH:
I was just looking at the brokerage involved
NH:
something called City Capital Markets I think
BE:
Who?
NH:
exactly
NH:
their website is quite amusing though
NH:
check this
NH:
6)Research – City Capital use `Bloomberg Terminals` widely regarded as one of the best systems to obtain information in relation to financial markets this helps to ensure we stay ahead of our competitors.
BE:
That’s brilliant.
NH:
stay ahead of the oppo with a Bloomie screen
BE:
Because Bloomberg boxes are so rare in the square mile.
NH:
indeed
NH:
a real competitive edge
NH:
enough oil
NH:
let’s move on
11:18AM
BE:
So
BE:
what do we make of this Guardian story in Lloyds?
BE:
Shares down a bit
BE:
off 4.5% at 101.2p
NH:
well
NH:
we don’t make a lot of it
NH:
and nor does Reuters
NH:
RTRS-LLOYDS HAS NOT BEEN IN CONTACT WITH MAJOR SHAREHOLDERS OVER POTENTIAL RIGHTS ISSUE-TOP 15 INVESTOR
BE:
ah right
BE:
for those of you who missed the Guardian scoop here it is
BE:
and it is very pro Eric Daniels
BE:
City backs Lloyds’ cash call to save bank from more state intervention
BE:
: Lloyds Banking Group has won backing from its investors to raise £10bn as it fights to reduce its dependence on the taxpayer.
The bank, which is 43% owned by the UK government after merging with HBOS at the height of the banking crisis last year, is looking at plans to reduce its exposure to the government scheme set up to shelter banks from the worst losses on their bad debts
The bank, which is 43% owned by the UK government after merging with HBOS at the height of the banking crisis last year, is looking at plans to reduce its exposure to the government scheme set up to shelter banks from the worst losses on their bad debts
BE:
Lloyds has faced weeks of speculation about its future with thousands of jobs cut this year, the decision to close 160 branches of Cheltenham and Gloucester controversially reversed last month and that move followed by reports that Halifax branches face mass closure.
BE:
Eric Daniels, the chief executive who took on the takeover of HBOS after the former chairman, Victor Blank, brokered a deal with the prime minister, Gordon Brown, is also under pressure to make the deal work as the group struggles with £260bn of toxic loans.
NH:
actually Tracy has just done a good post on this
NH:
now
NH:
it seems inevitable that Lloyds is going to reduce its involvement in the APS
NH:
and will need a cash call to do that
BE:
Yup
NH:
but what everyone seems to overlook
NH:
is that the govt is the biggest shareholder
NH:
and they have been insurer their topxic assets since pretty much the start of the year
NH:
surely they are going to want something in return for that
BE:
You’d have thought so, yes.
NH:
they won’t just be allowed to rip up the APS and start again
NH:
it can’t be that simple
NH:
and in anycase
NH:
after the run they have had
NH:
surely any upside from a renegoitation is in the price
BE:
It does seem quite obvious we’re only really hearing one side of the Lloyds story at the moment.
BE:
The state angle is quieter, but its significance can’t really be overlooked.
BE:
At the moment, it does seem like all the Lloyds rights issue stories are basically just a Planglossian take on what might happen.
11:24AM
NH:
BP still moving higher
NH:
up 20p at 540p now
NH:
in spite of some very considered thoughts from the rabble on the right
NH:
what is 20p worth on BP’s share price?
NH:
how many billion?
BE:
£3.7bn or thereabouts
NH:
hmmm
NH:
it has got to be a seriously profitable well then
11:26AM
NH:
Right
NH:
what else is moving this morning??
BE:
retailers bucking the weak market trend
BE:
Which won’t be weak for too much longer if BP keeps adding the billions
BE:
Anyway, we have William Morrison up
BE:
Tesco up
BE:
Sainsbury up
BE:
and Next as well
NH:
defensive buying?
BE:
I suspect there is a bit of that
BE:
a bit of sector rotation
BE:
but there are also a couple of big broker notes out
BE:
Merrill has restarted coverage of the food and general retailers in a monster of a note
NH:
yes they have
NH:
posted in the LR earlier
BE:
and ML’s top retailer picks are Marks & Spencer, Kingfisher,
Morrison, Ahold; avoid Inditex, Kesa, Casino
Morrison, Ahold; avoid Inditex, Kesa, Casino
BE:
and they are pretty bullish on the sector
BE:
actually this call seems pretty similar to the one Cit have been pushing for a while
BE:
the idea is that higher disposable income because of lower mortgage payments and lots of companies going to the wall means that earnings upgrades will come through in the second half of the year
BE:
here’s a few pars from the note
BE:
Launch of combined retail coverage
We launch combined coverage of the food and general
retail sector and reinstate coverage on ten general retail
stocks. Our top picks are: Marks & Spencer, Kingfisher,
Morrison, Ahold; avoid Inditex, Kesa, Casino.
We launch combined coverage of the food and general
retail sector and reinstate coverage on ten general retail
stocks. Our top picks are: Marks & Spencer, Kingfisher,
Morrison, Ahold; avoid Inditex, Kesa, Casino.
BE:
Cyclical bias but stock selection key
Our ratings distribution has a cyclical bias but having
rallied >40% in the last six months we believe the easy
cyclical call on general retail has already passed. Interest
rates remain low and stable and sales momentum should
pick up again against easy comparisons from late
September, but 2010 looks like being a year of only
modest consumption growth, as our lead indicator shows.
Our ratings distribution has a cyclical bias but having
rallied >40% in the last six months we believe the easy
cyclical call on general retail has already passed. Interest
rates remain low and stable and sales momentum should
pick up again against easy comparisons from late
September, but 2010 looks like being a year of only
modest consumption growth, as our lead indicator shows.
BE:
Better non-food margins = EPS upgrades
General retail sales forecasts ‘know’ this but we think there
is a margin story as surplus capacity and retailer flexibility
has reduced the $ sourcing drag; and as cost-cutting,
lower rent costs and extra volume have leveraged P&Ls.
General retail sales forecasts ‘know’ this but we think there
is a margin story as surplus capacity and retailer flexibility
has reduced the $ sourcing drag; and as cost-cutting,
lower rent costs and extra volume have leveraged P&Ls.
BE:
Home is where our heart is
We think ‘home’ is the best play for this margin theme: with
property sales modestly picking-up and with ‘improve not
move’ and DIY capturing those who cannot afford to
relocate, we think the operationally leveraged P&Ls of
Kingfisher (Buy) and Home Retail Group (Buy) are set to
benefit and this is still not fully captured in consensus EPS.
We think ‘home’ is the best play for this margin theme: with
property sales modestly picking-up and with ‘improve not
move’ and DIY capturing those who cannot afford to
relocate, we think the operationally leveraged P&Ls of
Kingfisher (Buy) and Home Retail Group (Buy) are set to
benefit and this is still not fully captured in consensus EPS.
BE:
M&S: clothing top-pick, Inditex U/P
Of the big two international clothes retailers we favour
H&M with stronger growth potential; Inditex looks
expensive given the prospect of a sluggish recovery in
earnings. M&S looks most attractive, in our view, with a
clothing mark-down opportunity, renewed innovation in
food and leverage to the upside from tight cost control,
which to us, is not fully captured in the valuation.
Of the big two international clothes retailers we favour
H&M with stronger growth potential; Inditex looks
expensive given the prospect of a sluggish recovery in
earnings. M&S looks most attractive, in our view, with a
clothing mark-down opportunity, renewed innovation in
food and leverage to the upside from tight cost control,
which to us, is not fully captured in the valuation.
BE:
Food retail – stick to the volume drivers
Inelasticity of demand and concerns of falling food inflation
have weighed on the food retailers’ share performance.
This looks a little overdone with the sector trading slightly
below its long-run market-relative rating. However, with
negative differential inflation and the need for the industry
to wean itself of promotions, we’d stick to the proven
volume drivers, Morrison, Ahold and Jerónimo Martins;
and avoid Casino and Delhaize.
Inelasticity of demand and concerns of falling food inflation
have weighed on the food retailers’ share performance.
This looks a little overdone with the sector trading slightly
below its long-run market-relative rating. However, with
negative differential inflation and the need for the industry
to wean itself of promotions, we’d stick to the proven
volume drivers, Morrison, Ahold and Jerónimo Martins;
and avoid Casino and Delhaize.
BE:
Back Tesco over restructuring plays
Tesco also appeals: the Clubcard relaunch shows it has
regained its ability to keep things simple which should help
relative UK LFL growth. For all its underlying H1 profit
growth will be weak, trading below its long-term P/E range,
Tesco looks a better investment than the restructuring
Tesco also appeals: the Clubcard relaunch shows it has
regained its ability to keep things simple which should help
relative UK LFL growth. For all its underlying H1 profit
growth will be weak, trading below its long-term P/E range,
Tesco looks a better investment than the restructuring
NH:
thanks for that
NH:
time for some share prices I think
Tesco (TSCO:LSE): Last: 370.60, up 3.2 (+0.87%), High: 372.00, Low: 366.80, Volume: 5.07m
Sainsbury (J) (SBRY:LSE): Last: 327.40, up 2.8 (+0.86%), High: 327.90, Low: 323.50, Volume: 1.82m
Next (NXT:LSE): Last: 1,623, no change, High: 1,649, Low: 1,616, Volume: 260.05k
Marks and Spencer Group (MKS:LSE): Last: 337.30, down 0.5 (-0.15%), High: 342.90, Low: 335.90, Volume: 1.54m
NH:
we should also mention that Morrison has been upgraded by Deutsche Bank this morning
Morrison WM Supermarkets (MRW:LSE): Last: 282.50, up 6.5 (+2.36%), High: 285.40, Low: 275.40, Volume: 5.48m
NH:
increased target price to 300p ahead of results later this morning
NH:
will just quickly post the note
NH:
Morrisons will report H1 results on September 10th We expect underlying PBT of
£360m (including £20m of Co-Op related costs) and Q2 ex VAT instore LfL of 8% vs
Q1’s 8.2%. We also expect the results and meeting to be largely uneventful given the
recent trading update and the explanations behind the better-than-expected margin
and sales performance. We incorporate this in our forecasts and this drives our price
target increase to 300p from 260p. We retain a Hold; despite upside of just over 10%
inc dividend, we believe better investment opportunities exist within the sector
£360m (including £20m of Co-Op related costs) and Q2 ex VAT instore LfL of 8% vs
Q1’s 8.2%. We also expect the results and meeting to be largely uneventful given the
recent trading update and the explanations behind the better-than-expected margin
and sales performance. We incorporate this in our forecasts and this drives our price
target increase to 300p from 260p. We retain a Hold; despite upside of just over 10%
inc dividend, we believe better investment opportunities exist within the sector
NH:
The key focus of analysts and investors is likely to be forecast momentum…
…..specifically how conservative management assumptions have been for the second
half of the year and beyond. We believe there is a good chance of a modest upgrade
to forecasts towards the year end, driven by better-than-expected sales growth and
associated over-riders. Our belief here is based on the ongoing quality and hence
sustainability of Morrison’s industry outperformance but that further margin upside of
significance is unlikely before FY 2012, when distribution investments should start to
deliver efficiencies. Moreover, longer-term, we continue to believe that Morrison will
not return to its peak historical instore EBITDAR margins because of its now much
greater relative complexity.
…..specifically how conservative management assumptions have been for the second
half of the year and beyond. We believe there is a good chance of a modest upgrade
to forecasts towards the year end, driven by better-than-expected sales growth and
associated over-riders. Our belief here is based on the ongoing quality and hence
sustainability of Morrison’s industry outperformance but that further margin upside of
significance is unlikely before FY 2012, when distribution investments should start to
deliver efficiencies. Moreover, longer-term, we continue to believe that Morrison will
not return to its peak historical instore EBITDAR margins because of its now much
greater relative complexity.
NH:
Target Price 300p from 260p We continue to use our Tesco (Buy, 367.4p) price target
implied valuation for the UK business as a base. We roll forward one year to use the
implied EPS multiple for the year to February 2011 (12.9x) and no longer subtract a 5% discount as while we continue to recognise Tesco’s long-term structural advantages in the UK market, we feel Morrison is likely to have more upside to short-term earnings forecasts. This implies a price target for Morrison of 300p. Downside to our forecasts and earnings-driven price target lies in the risk that strong projected top-line growth is not sustained and upside in the potential for management to unlock
operating cost savings at a faster pace than our forecasts imply. Upside also risk lies in the potential for sales growth to continue to outperform the industry at its current rate despite toughening comparisons
implied valuation for the UK business as a base. We roll forward one year to use the
implied EPS multiple for the year to February 2011 (12.9x) and no longer subtract a 5% discount as while we continue to recognise Tesco’s long-term structural advantages in the UK market, we feel Morrison is likely to have more upside to short-term earnings forecasts. This implies a price target for Morrison of 300p. Downside to our forecasts and earnings-driven price target lies in the risk that strong projected top-line growth is not sustained and upside in the potential for management to unlock
operating cost savings at a faster pace than our forecasts imply. Upside also risk lies in the potential for sales growth to continue to outperform the industry at its current rate despite toughening comparisons
11:31AM
BE:
and sticking with the retailer we have had a trading update from DSG this morning
BE:
and they look to have beaten their well-massaged expectations
BE:
market was expecting a high single digit like for like decline
BE:
in the event we got 6%
BE:
so, in the most crude sense, it is ahead of expectations
NH:
hmmm
NH:
but I reckon it is still pretty disappointing
NH:
as this analyst noted today
NH:
It owes a lot to an incredibly strong +9% in the Nordics, offsetting very poor -14/15% declines in the UK for Currys and PC World. Despite the not unexpected fire sale of the loss making Polish business DSG will still fall short of 1p of EPS this year and it will need a huge lift from the UK store refits next year to get anywhere near the kind of profits it will need to create real shareholder value. Expect to see the shares drift back to 25p which is our TP. Maintain NEUTRAL Prefer KGF and Kesa.
NH:
and the shares have indeed drifted back
NH:
they hit 29.5p in early trading
NH:
now flat on the day
DSG International (DSGI:LSE): Last: 27.04, up 0.05 (+0.19%), High: 29.50, Low: 26.71, Volume: 18.90m
11:34AM
NH:
Sorry Throg for the lack of jokes
NH:
I am the straight man
NH:
Murph was the gag man
NH:
will try harder to get a few amusing things up
NH:
in the meantime
BE:
Also, due to IT, I’m sat at the other side of the office trying to work on one screen
BE:
Which reduces my levity.
NH:
which means I have a headset on talking to Bryce
NH:
makes me look like I work in call centre
BE:
And I’m getting salesman’s shoulder.
NH:
BE:
Anyway, want some DSG comment?
NH:
go for it
NH:
and then Miles wants to join us
NH:
and talk about Maersk
NH:
and today’s unexpected cash call
BE:
“unexpected”
BE:
Right, here’s Credit Suisse on Dixons
BE:
The trading update at the group level has come in ahead of expectations thanks to a better than expected performance from
the Nordics region with group LFL sales -6% compared to our forecast of -9%. Gross margins are up 70bp across the group,
with significant improvements in gross margins across the UK Electricals and Computing. Whilst consensus PBT forecasts for
2009/10 are likely to remain unchanged at around £44m (ex-property), we believe that pressure is on the upside given today’s
better overall outcome.
• The main area of beat has come from the Nordics region where LFL sales of +9% (Credit Suisse E-11.0%) were driven by a
small level of discounting and weak competitor activity. We believe gross margins here are running down about 100bp, but is
more than offset by the strong sales performance. This division remains a key profitability driver for the group having
accounted for almost 44% of group EBIT historically.
• Within UK Electricals and UK Computing LFL sales were weaker than expected at -14% & -15% respectively, however this is
offset by the strong gross margin movement of +100bp in Electricals and almost +200bp in Computing. This reflects the
groups focus on maintaining full price sales and protecting margin. Southern Europe has seen some improvement driven by
weaker comparatives and a stabilising performance in Italy with divisional LFLs down 7.0%.
• Overall, despite a weaker UK performance, there are some signs of stabilisation in the group’s International markets such as
Italy and positive signals in Nordics. The transformation plan for the group also remains on track with the gross profit uplifts
being achieved in line with those previously announced.
the Nordics region with group LFL sales -6% compared to our forecast of -9%. Gross margins are up 70bp across the group,
with significant improvements in gross margins across the UK Electricals and Computing. Whilst consensus PBT forecasts for
2009/10 are likely to remain unchanged at around £44m (ex-property), we believe that pressure is on the upside given today’s
better overall outcome.
• The main area of beat has come from the Nordics region where LFL sales of +9% (Credit Suisse E-11.0%) were driven by a
small level of discounting and weak competitor activity. We believe gross margins here are running down about 100bp, but is
more than offset by the strong sales performance. This division remains a key profitability driver for the group having
accounted for almost 44% of group EBIT historically.
• Within UK Electricals and UK Computing LFL sales were weaker than expected at -14% & -15% respectively, however this is
offset by the strong gross margin movement of +100bp in Electricals and almost +200bp in Computing. This reflects the
groups focus on maintaining full price sales and protecting margin. Southern Europe has seen some improvement driven by
weaker comparatives and a stabilising performance in Italy with divisional LFLs down 7.0%.
• Overall, despite a weaker UK performance, there are some signs of stabilisation in the group’s International markets such as
Italy and positive signals in Nordics. The transformation plan for the group also remains on track with the gross profit uplifts
being achieved in line with those previously announced.
BE:
And here’s a line from Numis
BE:
While Currys/PC World LFLs -14%/-15% remain weak and in-line with expectations,
the early performance of the Nordic business leads us to upgrade our Apr-10 PBT
forecast to £60m, and beyond management guidance. However despite the early
positivity in 09/10 we remain neutral on the stock, wary of the challenging dynamics
of the UK electricals sector. HOLD.
the early performance of the Nordic business leads us to upgrade our Apr-10 PBT
forecast to £60m, and beyond management guidance. However despite the early
positivity in 09/10 we remain neutral on the stock, wary of the challenging dynamics
of the UK electricals sector. HOLD.
BE:
UK electricals remain weak…: Broadly replicating the 4Q08/09 trends Currys posted
LFLs of -14% (4Q -12%), with PC World returning a LFL of -15% (4Q -16%). While this
remains extremely weak, gross margins provided a partial offset (>100bps in Currys,
+200bps in PC World) with the UK operation opting not to chase share and benefiting
from improved stock turn.
n …And no update on the re-laid stores: As expected, DSG noted that the reformatted
stores have continued to show gap gross profit growth of between 11% and 65%.
Running slightly ahead of expectations, 108 stores have now been reformatted, with a
further 60-80 targeted in 09/10.
LFLs of -14% (4Q -12%), with PC World returning a LFL of -15% (4Q -16%). While this
remains extremely weak, gross margins provided a partial offset (>100bps in Currys,
+200bps in PC World) with the UK operation opting not to chase share and benefiting
from improved stock turn.
n …And no update on the re-laid stores: As expected, DSG noted that the reformatted
stores have continued to show gap gross profit growth of between 11% and 65%.
Running slightly ahead of expectations, 108 stores have now been reformatted, with a
further 60-80 targeted in 09/10.
BE:
But Nordic up +9%!: Elkjop took advantage of a weak market to compound the woes
of distressed competitors, investing 100bps of gross margin to post LFLs of 9%. While
acknowledging managements caution at this stage of the year, we presently see no
reason why Nordic EBIT should not move ahead in 09/10 (NSe £85m, PY £76m).
n Moving ahead of consensus with an Apr-10 PBT of £60m: With a £5m benefit from
the disposal of the Polish operation washing a £7/8m charge from pension accounting,
we factor in a more optimistic stance on the Nordics to target an 09/10 PBT of £60m
(1.1% group EBIT margin, 1p EPS).
of distressed competitors, investing 100bps of gross margin to post LFLs of 9%. While
acknowledging managements caution at this stage of the year, we presently see no
reason why Nordic EBIT should not move ahead in 09/10 (NSe £85m, PY £76m).
n Moving ahead of consensus with an Apr-10 PBT of £60m: With a £5m benefit from
the disposal of the Polish operation washing a £7/8m charge from pension accounting,
we factor in a more optimistic stance on the Nordics to target an 09/10 PBT of £60m
(1.1% group EBIT margin, 1p EPS).
BE:
And finally, a bit of Citi
BE:
1Q LFL -6% (Citi -7.5%), driven by strength in the Nordics — A weaker than
expected revenue performance in the UK (UK Electrical LFL -14%, despite
-700bp weaker comparative) has been offset by a material improvement in the
Nordics (+9% LFL vs. -11% in 4Q) driven by market share gains.
Gross margin +70bp — The group gross margin was up c70bp driven by
strength in UK Electricals and Computing (+100bp to +200bp) offset by margin
investment across the Nordics (-100bp). Stocks look to be very tightly
controlled in the period (-15% yoy).
1Q LFL revenue by division — Electricals: UK and Ireland -14% (Citi -6%),
Nordics +9% (Citi -4%), Southern Europe –7% (Citi -8%). UK Computing: -15%
(Citi -15%) and E-commerce +6% (Citi +10%).
2 year LFL: UK Electrical falls -900bp, Nordic improves +1500bp — 2-year
LFL by key operating division and versus the 4Q are: UK Electricals -21%
(-12% 4Q), UK Computing -27% (-23% 4Q), Nordics +5% (-10% 4Q) and
Southern & Central Europe –19% (-25% 4Q).
expected revenue performance in the UK (UK Electrical LFL -14%, despite
-700bp weaker comparative) has been offset by a material improvement in the
Nordics (+9% LFL vs. -11% in 4Q) driven by market share gains.
Gross margin +70bp — The group gross margin was up c70bp driven by
strength in UK Electricals and Computing (+100bp to +200bp) offset by margin
investment across the Nordics (-100bp). Stocks look to be very tightly
controlled in the period (-15% yoy).
1Q LFL revenue by division — Electricals: UK and Ireland -14% (Citi -6%),
Nordics +9% (Citi -4%), Southern Europe –7% (Citi -8%). UK Computing: -15%
(Citi -15%) and E-commerce +6% (Citi +10%).
2 year LFL: UK Electrical falls -900bp, Nordic improves +1500bp — 2-year
LFL by key operating division and versus the 4Q are: UK Electricals -21%
(-12% 4Q), UK Computing -27% (-23% 4Q), Nordics +5% (-10% 4Q) and
Southern & Central Europe –19% (-25% 4Q).
BE:
What does it all mean? — Blowout revenues in Nordics driven by market share
gains and margin investment have offset weakness in the UK. However notably,
within the UK, the anniversary of TV re-pricing, a very weak B2B PC market,
and store refurbishment disruption looks to have depressed recent LFL sales
patterns by -600bp. Ahead of peak trading, these themes offer hope of upside
earnings risk, albeit 1Q UK LFL gross profit trends remain -11% yoy.
We retain our £45m and £75m April 2010 and 2011 PBT forecasts — These
forecast assumptions drive 0.8p and 1.4p respective EPS forecasts and exclude
the recently disposed Hungarian losses, and are net of £10m and £4m
respective property losses.
Investment code and valuation — In valuing DSGi, we apply a 10x calendar
2011E recovery EV/EBIT multiple, driving a 29p target price. This equates to a
0.17x EV/sales multiple, and 14.5x PE for the same forecast year.
gains and margin investment have offset weakness in the UK. However notably,
within the UK, the anniversary of TV re-pricing, a very weak B2B PC market,
and store refurbishment disruption looks to have depressed recent LFL sales
patterns by -600bp. Ahead of peak trading, these themes offer hope of upside
earnings risk, albeit 1Q UK LFL gross profit trends remain -11% yoy.
We retain our £45m and £75m April 2010 and 2011 PBT forecasts — These
forecast assumptions drive 0.8p and 1.4p respective EPS forecasts and exclude
the recently disposed Hungarian losses, and are net of £10m and £4m
respective property losses.
Investment code and valuation — In valuing DSGi, we apply a 10x calendar
2011E recovery EV/EBIT multiple, driving a 29p target price. This equates to a
0.17x EV/sales multiple, and 14.5x PE for the same forecast year.
BE:
Hope that’s useful.
NH:
Monty according to Numis the beat in Nordic region due the oppposition being in tatters
11:38AM
NH:
Right
NH:
Miles wants to speak
MJ:
Hi – just been looking at this Moller Maersk deal
NH:
ah, you are there
MJ:
in the process placing a $1.8bn of Treasury B shares as we speak
NH:
wow
NH:
shares off 8% at the moment
NH:
that’s probably because they ruled out a cash call with results 10 days ago
NH:
and then this morning
NH:
bang – huge cash call
NH:
their first ever I believe
MJ:
Exactly, he company had played down any need to raise cash, rolling out the whole “our capital position is strong” routine
MJ:
So the question is, what is all this money for?
MJ:
Now, this could be pure opportunism
MJ:
the MM share price is up about 20 per cent since July and the markets are still relatively benign
MJ:
But, one interesting theory I am hearing is that the cash could be used for acquisitions for the company’s oil and gas division
NH:
hmmm
NH:
any thoughts on what that could be?
NH:
the Tui shipping biz?
MJ:
No names as yet.
MJ:
But with a bunch of distressed energy assets now semi-available on the market, this is the time to go snaffling them up
MJ:
That is the logic apparently
NH:
I guess so
NH:
even if you seriously annoy your shareholders in the process
NH:
anyway
NH:
we are just bitter
NH:
because we were chasing this story yesterday
NH:
and were unable to convert
MJ:
One to keep an eye on
MJ:
An interesting time for the sector, as Izy notes in her post.
MJ:
Here: http://ftalphaville.ft.com/blog/2009/09/02/69526/prepare-for-shipping-wars/
NH:
thanks for all that Miles. See you on tomorrow’s show
11:44AM
NH:
What else shall we take a look at
BE:
what about the insurers
BE:
on the back of our splash from this morning
BE:
New EU rules ‘will force up premiums’
BE:
UK insurers fear need for extra £50bn
NH:
Yeah, quite a headline that
NH:
will have had a few people spluttering into their cornflakes
BE:
although the share price reaction – with the exception of Legal & General – has been pretty muted
Legal and General Group (LGEN:LSE): Last: 70.40, down 2.94 (-4.01%), High: 73.85, Low: 69.85, Volume: 14.97m
Prudential (PRU:LSE): Last: 516.00, down 9.5 (-1.81%), High: 523.00, Low: 509.50, Volume: 5.44m
Lloyds Banking Group (LLOY:LSE): Last: 101.23, down 4.78 (-4.51%), High: 103.95, Low: 99.90, Volume: 90.00m
BE:
now the view in the market is that this is lobbying by the ABI
BE:
and remember these new rules are know about and don’t come into force until 2012?
NH:
so take it all with a pinch of salt
BE:
Yup.
NH:
any comment?
BE:
plenty
BE:
Here’s Oriel
BE:
The Financial Times reports that the proposed rules in the EU Solvency II Directive to create a single standard for solvency across Europe could lead to UK insurers having to raise an additional £50bn in equity. The biggest quoted players in UK annuities are L&G, Prudential and Aviva. This headline could cause some weakness in share prices.
BE:
This is not new news. The current solvency standard requires annuity type business to
hold a simple capital buffer of 4% of reserves for annuity type business. Under Solvency II, this increases depending upon the riskiness of the assets and as most annuities are backed by a mixture of high grade corporate bonds, this could lead to greater capital requirements. It is not clear that there is a need for higher capital requirements, as no annuity players have got into trouble. Even Equitable Life wrote guaranteed annuities, but got in trouble on bonus rates rather than capital per se. These rules wouldn’t have prevented Equitable Life going down.
hold a simple capital buffer of 4% of reserves for annuity type business. Under Solvency II, this increases depending upon the riskiness of the assets and as most annuities are backed by a mixture of high grade corporate bonds, this could lead to greater capital requirements. It is not clear that there is a need for higher capital requirements, as no annuity players have got into trouble. Even Equitable Life wrote guaranteed annuities, but got in trouble on bonus rates rather than capital per se. These rules wouldn’t have prevented Equitable Life going down.
BE:
Annuities are the cornerstone of the tax rules on private pension provision in the UK.
Without a functioning annuity market in the UK, it is likely that Government plans for
pension provision would be in tatters.
Without a functioning annuity market in the UK, it is likely that Government plans for
pension provision would be in tatters.
BE:
One alternative would be to drop the requirement to buy an annuity and draw down
savings, but this carries the risk of running out of savings before death, meaning state
dependency for elderly pensioners.
One alternative would be to drop the requirement to buy an annuity and draw down
savings, but this carries the risk of running out of savings before death, meaning state
dependency for elderly pensioners.
However annuities are very profitable and usually priced to achieve a 15% return on the capital committed. Insurers could respond by
BE:
1. Holding gilts and/or cutting returns to policyholders on new business to still achieve the
15% IRR, although existing business in force would present higher capital requirements)
2. Reinsuring Annuity liabilities into a non-EU reinsurer.
3. Release the general default provisions for corporate bonds and hold this as capital.
15% IRR, although existing business in force would present higher capital requirements)
2. Reinsuring Annuity liabilities into a non-EU reinsurer.
3. Release the general default provisions for corporate bonds and hold this as capital.
BE:
Conclusion
• While this may be seen as a short term problem for insurers, it is more a problem for the
Government.
• While this may be seen as a short term problem for insurers, it is more a problem for the
Government.
BE:
And Cazenove
BE:
Insurance sector – FT reports UK life insurers require £50bn cash call, sector – Neutral
The front page of the FT reports that the UK insurance industry requires £50bn of fresh capital. The timing of the story reflects the fact that ECOFIN (the committee of EU finance ministers) is due in October to decide whether to follow the advice of CEIOPS (Committee of European Insurance and Pension Scheme Supervisors) on how to implement Solvency 2 , following legislation by the European parliament earlier this year. This proposed new solvency framework as currently interpreted by CEIOPS would potentially be implemented by 2012, and would be very onerous for the UK life industry, particularly annuity providers, hence we would expect to see intense lobbying continue until ECOFIN has met, driving further negative headlines for the industry.
The front page of the FT reports that the UK insurance industry requires £50bn of fresh capital. The timing of the story reflects the fact that ECOFIN (the committee of EU finance ministers) is due in October to decide whether to follow the advice of CEIOPS (Committee of European Insurance and Pension Scheme Supervisors) on how to implement Solvency 2 , following legislation by the European parliament earlier this year. This proposed new solvency framework as currently interpreted by CEIOPS would potentially be implemented by 2012, and would be very onerous for the UK life industry, particularly annuity providers, hence we would expect to see intense lobbying continue until ECOFIN has met, driving further negative headlines for the industry.
BE:
At present, UK annuity writers’ solvency reflects the market value of assets, but claws back most of the unrealised bond losses by using a higher liability discount rate than risk-free. This is justified by the fact that credit market pricing reflects illiquidity as well as credit risk, and that the illiquid liabilities on an insurer’s balance sheet mean that they can confidently hold duration matched bonds to maturity, by which point the unrealised losses will have reversed. Solvency 2 would continue to bring unrealised losses into solvency computations, but without any clawback via liabilities, which would be discounted at risk-free rates.
BE:
CEIOPS got the insurers to road test the Solvency 2 framework at the 2007 year end in a project known as Quantitative Impact Study 4 (QIS 4). This showed that 29% of UK life companies would have failed to meet the new solvency tests at year end 2007, and the number would have been substantially higher at 2008, we suspect. In addition to forcing many UK life companies to raise capital, Solvency 2 would probably result in UK life companies buying far fewer corporate bonds. Given that the quoted companies had £53bn of corporate bonds at end 2008 this would presumably increase the cost of debt for UK corporates.
BE:
In addition, annuity providers are suggesting that reduced exposure to credit risk would necessitate a 10-20% reduction in pensioner incomes as the impact of lower investment returns would be passed on. This in turn would disincentivise pensions savings. At present there is also a risk that the principles of Solvency 2 could also be applied to occupational pension schemes, which are currently able to discount liabilities at AA bond yields rather than risk free rates. These consequences, and the tenuous benefits of solvency 2 seem so adverse that a compromise appears strongly desirable. Unfortunately, the legislation has already been passed and ECOFIN votes on a majority basis, so it is by no means certain that the industry will get what it wants.
BE:
In this context, we would expect the sector to give back some of the gains from the recent rally. Stocks most at risk from these concerns would tend to be those who have not adopted MCEV (which has a similar impact on reported EV as Solvency 2 would have) such as L&G (LGEN.L, LGEN LN, 74p, IN LINE), PRU (PRU.L, PRU LN, 529p, IN LINE), and Standard Life (SL.L, SL/ LN, 196p, UNDERPERFORM). L&G and the Pru both have large corporate bond portfolios backing annuity books of £17bn each.
NH:
thanks for all that
NH:
a bad day for Noumra to upgrade Legals though
NH:
as they have done on a big bullish note on the sector
NH:
UK INSURANCE (BULLISH, N. Holmes, +44 20 7102 1543/ K. Fear) UK INSURERS UNIQUELY POSITIONED TO BOOST EARNINGS VS. OTHER EUROPEAN AND US INSURERS; UPGRADE LEGAL & GENERAL TO BUY VS. NEUTRAL AND FRIENDS PROVIDENT TO NEUTRAL VS REDUCE
We argue that the UK insurers are uniquely positioned to boost their earnings over the next two years compared with other European and US insurers because they have already taken significant credit provisions for their UK annuity books. In contrast, other European and US insurers have no credit provisions.
NH:
We believe the market has largely missed this point because of its excessive concerns about the threat Solvency 2 may pose to UK annuity reserving. We upgrade Legal & General to Buy since we think it is the most exposed stock to this issue
We upgrade Legal & General to Buy and raise our PT by 6% to 106p & ‘10 earnings forecast by 10% to reflect our confidence that its credit provisions are sufficient to absorb all of its likely credit losses, putting the stock on an attractive P/E of 7x versus the sector on 9x.
Following Resolution’s bid for Friends Provident, we upgrade our recommendation to Neutral. We reduce our price target to 103p from 111p to reflect the demerger of F&C, completed on 3 July 2009.
BE:
Unfortunate
BE:
Timing’s everything in this game.
NH:
it is
NH:
especially when you mention Solvency 2 in your report
11:49AM
NH:
Okay
NH:
a few more things to get through
NH:
before we bring today’s session to a close
NH:
seen this note on Yell
BE:
no, which one?
NH:
from Exane
NH:
very bullish
NH:
80p target price
BE:
What?
BE:
that’s around double the current share price
Yell Group (YELL:LSE): Last: 41.99, down 2.78 (-6.21%), High: 45.12, Low: 41.61, Volume: 18.82m
NH:
they seem pretty convinced this refinancing will be done
NH:
but with risk assets out of favour
NH:
not helping the share price today
BE:
Ok – give us this note then.
NH:
OK
NH:
it is quite amusing
NH:
downside of 100%
NH:
and upside of 200%
NH:
how’s that for a punt
NH:
We upgrade our rating from Underperform to Outperform
We have raised our target price from 1p to 80p, suggesting some 80% upside. Our
risk/reward scenario suggests a downside risk of 100% in the case of default and
upside of some 200% in the event of successful refinancing and a stabilisation of
EBITDA trends.
We have raised our target price from 1p to 80p, suggesting some 80% upside. Our
risk/reward scenario suggests a downside risk of 100% in the case of default and
upside of some 200% in the event of successful refinancing and a stabilisation of
EBITDA trends.
NH:
Signs of stabilisation
We believe that cyclical pressure accounts for half the rate of the print revenue
decline projected in 2009/2010e. While structural challenges remain severe, we
believe Yell should benefit from some cyclical improvement as well as from the
reduction in the oversupply of directories. The Google reselling agreement should
also have a positive impact on revenue growth in FY11e.
We believe that cyclical pressure accounts for half the rate of the print revenue
decline projected in 2009/2010e. While structural challenges remain severe, we
believe Yell should benefit from some cyclical improvement as well as from the
reduction in the oversupply of directories. The Google reselling agreement should
also have a positive impact on revenue growth in FY11e.
NH:
Addressing balance sheet concerns
In our view, the most likely outcome of Yell’s current debt refinancing discussions
includes an extension of its debt maturity of 2 to 3 years. Increasing risk appetite
coupled with signs of stabilising operating trends lead us to believe that Yell should be able to raise capital. We estimate that the reduction in the Asset Liabilities
Refinancing Gap in the event of a GBP350m rights issue would reach GBP1bn, of
which half would accrue to shareholders. This analysis drives our new target price.
In our view, the most likely outcome of Yell’s current debt refinancing discussions
includes an extension of its debt maturity of 2 to 3 years. Increasing risk appetite
coupled with signs of stabilising operating trends lead us to believe that Yell should be able to raise capital. We estimate that the reduction in the Asset Liabilities
Refinancing Gap in the event of a GBP350m rights issue would reach GBP1bn, of
which half would accrue to shareholders. This analysis drives our new target price.
NH:
Yell trades on a 12% discount to its European directories peers on consensus forward
EV/EBITDA. It has a FCF yield of over 50%, falling to 25% after a likely capital
increase. Yell is a high-risk investment case, with potentially a high-reward profile. We expect the shares to continue to rerate on the back of balance sheet measures likely to be announced this autumn.
EV/EBITDA. It has a FCF yield of over 50%, falling to 25% after a likely capital
increase. Yell is a high-risk investment case, with potentially a high-reward profile. We expect the shares to continue to rerate on the back of balance sheet measures likely to be announced this autumn.
BE:
“likely to be announced this autumn”?
NH:
I know
NH:
they sound very confident
NH:
Bob Wigley, chairman at Yell, must be working his magic
BE:
And the investment case is double or quits.
BE:
Exactly the kind of risk-reward you want your pension fund to punt on.
NH:
indeed
NH:
Invesco owns 20% of this I think
11:54AM
BE:
Almost midday.
BE:
Any RAW this morning?
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
not really
NH:
we did some digging on SprintNextel/Deutsche Telekom bid story yesterday and no one we talked to could figure out why they would want to buy it
NH:
some people said they would not go near it with a barge pole
BE:
Why?
NH:
the technology apparently
NH:
now, I am no expert on mobile phone base stations
NH:
or network technology
NH:
but here goes
NH:
actually I will just paste something that was sent through yesterday
NH:
will make things a lot easier
NH:
sprint nextel is still in trouble…it is losing valuable contract customers and appears to be focusing on the high growth but low margin pre-paid market …it has outsourced the running of its networks to Ericsson and the betting is that Clearwire in which it holds a 65% stake) has missed the Wimax/4g boat and will also need adduitional funding.
NH:
In terms of technology, in adition to Wimax the company is still operating two entirely distinct networks – one based on CDMA the other on Motorola;s iDen….no plans for LTE apparently.
BE:
Remember an identical technology argument ahead of France Telecom buying Orange.
NH:
really, this need not be a deal breaker
BE:
Dunno.
BE:
Would have to look at more detail on the US network tech overlap.
BE:
Haven’t done that subject for ages.
NH:
but market bandits still believe this story
NH:
they are adamant something is going on
BE:
well, T-Mobile US position is pretty fraught as well
BE:
they are caught in a sandwich between aggressive regional players and the big two.
BE:
and need to do something and I would have though the technology risks are not insurmountable
BE:
and Deutsche Telekom do have a tech wizard on the board
BE:
Hamid Akhavan
NH:
hmmmm
NH:
interesting
NH:
and of course Sprint is much cheaper than it was
BE:
was worth about $25bn, or E17bn when this story did the rounds a year ago
BE:
now its worth $10.3bn / E7.2bn
NH:
thanks for that
11:58AM
NH:
I have a few more bits of RAW
NH:
one is a real small cap corner one
NH:
Concerns Lupus
BE:
the Greg Hutchings comeback vehicle?
NH:
well, the ex-comeback vehicle
NH:
Greg was ousted in July after the company renegotiated its debts
NH:
I think the company is currently in the middle of a strategic review
BE:
I think it is.
NH:
anyway
NH:
about an hour after the market closed last night and an interesting little statement popped on RNS
NH:
it said the Greg has increased his stake from around 4% to almost 11%
BE:
Really?
NH:
yep
NH:
now, Greg might have done that because he thinks Lupus is cheap
NH:
but then again he might be stakebuilding
NH:
and with 10% he has the power to call an EGM
NH:
and block things he does not like
NH:
or even try and get himself on the board
NH:
if he can find the support
NH:
and I am told he still has supported on the board
BE:
if so he will need to buy more stock
NH:
not sure
NH:
he could have enough support
NH:
we will have to wait and see if any more large lumps of stock
NH:
go through the ticker
12:01PM
NH:
Right
NH:
a few bits to end on
NH:
Cape
NH:
picking up some bid rumours
BE:
Really? 
BE:
I remember Cape
BE:
years and years of asbestos problems
BE:
think they have gone away now
NH:
they have
NH:
Cape is an international market leader in the provision of essential industrial services to the energy and natural resources sectors.
NH:
whatever that means
NH:
anyway some bid rumours around
NH:
although
NH:
it could also be down to a Collins Stewart upgrade
NH:
Interims due 16th September
The recent pre-close statement (7/7) highlighted that Cape was trading in
line with management expectations and debt continues to fall.
Rebound in energy prices from their Q1 lows is good news
This is useful
for securing Cape s medium term order flow, as it provides
customers with the cash flow and confidence to invest. Additionally, Cape is
building a strategic position in the LNG market which offers significant long
term growth opportunities through both build and ongoing support. The main
weak spot remains the Australian domestic market, and any recovery here
would be an unexpected positive
The recent pre-close statement (7/7) highlighted that Cape was trading in
line with management expectations and debt continues to fall.
Rebound in energy prices from their Q1 lows is good news
This is useful
for securing Cape s medium term order flow, as it provides
customers with the cash flow and confidence to invest. Additionally, Cape is
building a strategic position in the LNG market which offers significant long
term growth opportunities through both build and ongoing support. The main
weak spot remains the Australian domestic market, and any recovery here
would be an unexpected positive
NH:
CS Quest valuation of 200p per share small premium to price
CS Quest
highlights a step change in Group returns over the last 5 years,
driven by a tidying up of the Group s structure and a focus on the energy
sector. Maintaining returns at this year s level of 7.2% (below that achieved
between 2006 and 2008) implies a CS Quest valuation of 271p per share.
CS Quest
highlights a step change in Group returns over the last 5 years,
driven by a tidying up of the Group s structure and a focus on the energy
sector. Maintaining returns at this year s level of 7.2% (below that achieved
between 2006 and 2008) implies a CS Quest valuation of 271p per share.
NH:
Although debt will be down vs. Y/E 08 (as flagged in the pre-close update),
we anticipate that this will be modest, with H2 seeing the
most significant
fall. This is due to a combination of working capital timing (summer
maintenance programme, especially in the UK power generation sector) and
also location- Middle Eastern trading is robust, but it also has the longest
payment profile. We retain our view that year end net debt will be c. £130m
we anticipate that this will be modest, with H2 seeing the
most significant
fall. This is due to a combination of working capital timing (summer
maintenance programme, especially in the UK power generation sector) and
also location- Middle Eastern trading is robust, but it also has the longest
payment profile. We retain our view that year end net debt will be c. £130m
NH:
Recommendation and TP unchanged but upgrades harder to find?
We believe that there are significant organic growth opportunities to be
exploited by the Group. The recent strengthening of sterling from Q4 08
lows will start producing a degree of headwind on the earnings upgrade
momentum front, and in our view this, and continued worry about whether
the Group will issue equity (we believe that it has no need to do so) has led
to the recent share price weakness. We reiterate our BUY recommendation
and 242p target price (8x current year earnings).
We believe that there are significant organic growth opportunities to be
exploited by the Group. The recent strengthening of sterling from Q4 08
lows will start producing a degree of headwind on the earnings upgrade
momentum front, and in our view this, and continued worry about whether
the Group will issue equity (we believe that it has no need to do so) has led
to the recent share price weakness. We reiterate our BUY recommendation
and 242p target price (8x current year earnings).
BE:
Cape up 2.6% at 186.5p in the middle.
NH:
ta
NH:
for that
NH:
and finally
NH:
one more thing
NH:
National Express
NH:
I know we have had a few people following this
BE:
Does this relate to our story this morning?
NH:
sort of
BE:
if you missed that it said the Cosman consortium was considering its next move and had not ruled out making a higher offer
BE:
the thinking in the market is that 500p might get it
NH:
well
NH:
Caz have pubbed a note this morning looking at whether Stagecoach could bid
NH:
I thought that was unlikely because all Caz could offer is paper
NH:
and Caz seemingly agrees
NH:
Now that the National Express board has rejected the conditional 450p offer from the CVC/Cosmen consortium, investor attention is switching to the intentions of Stagecoach, which is also covered by the put up or shut up deadline of September 11th. We believe that a bid from
Stagecoach is plausible but not a foregone conclusion. The purpose of this note is to look at some sensitivities as they affect Stagecoach. Rather than identify the optimum price for Stagecoach to pay our very preliminary analysis focuses on the amount that Stagecoach could theoretically pay under various scenarios, focusing on the point at which a transaction would become earnings dilutive. Our provisional and broad brush findings, using pro-forma combined FY1 estimates, are summarised below.
Stagecoach is plausible but not a foregone conclusion. The purpose of this note is to look at some sensitivities as they affect Stagecoach. Rather than identify the optimum price for Stagecoach to pay our very preliminary analysis focuses on the amount that Stagecoach could theoretically pay under various scenarios, focusing on the point at which a transaction would become earnings dilutive. Our provisional and broad brush findings, using pro-forma combined FY1 estimates, are summarised below.
NH:
We estimate that a bid of 509p per share financed by an all share offer would have a neutral impact on Stagecoach 2010E EPS of 15.1p. This would value National Express on a prospective EV/EBITDA multiple of 6.5x or 8.0x non rail EBITDA (assuming cross default on the remaining rail franchises).
NH:
At this point we estimate that paying 509p but with cross default would dilute EPS by 10%. However, this impact is offset by a plausible medium term synergy benefit of £26.5m.
A sale of the Spanish Bus operations for 8.5x EBITDA, raising £960m, assuming a back to back transaction would, we estimate, reduce the required issue of shares to 135m from 597m and would be EPS neutral assuming cross default.
In conclusion, we do not believe that a bid from Stagecoach is a foregone conclusion, but it is plausible in our view that Stagecoach management can generate value from a bid in the region of 500p a share
BE:
hmm, that is interesting
BE:
but I guess the question is whether Nat Express shareholders would want Stagecoach paper
NH:
anyway we are picking up rumours that there could be a deadline to the put-up shut-up deadline
NH:
to allow the Cosman’s to increase their offer
NH:
NEX small up at the moment
National Express (NEX:LSE): Last: 408.00, up 3 (+0.74%), High: 412.00, Low: 400.20, Volume: 446.91k
12:05PM
NH:
Right
NH:
that is it for today
NH:
lots of stuff covered today
NH:
so thanks Bryce
NH:
sorry for the lack of gags
NH:
we are working on it
BE:
(And – just to prove I can spell Panglossian: http://ftalphaville.ft.com/blog/2009/05/19/56014/markets-live-138/ )
NH:
Miles will be here tomorrow – IT permitting of course
NH:
thanks for all your comments
NH:
especially on BP
NH:
will be interesting to see what happens to the share price
NH:
currently up 19p at 538p
NH:
apears to be a bit stuck there
NH:
FTSE 100 down 5.4 points at 4,814
NH:
no Taxloss
NH:
Miles is on his best behaviour at the moment
BE:
Probation period
NH:
and I will second that
NH:
thanks Monty
BE:
Ok – we done?
NH:
we are
NH:
and good point FatDaz
BE:
Right – thanks all. Bye.
NH:
see you all tomorrow