Markets live chat transcript for the chat ending at 12:07 on 9 Sep 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ)
NH:
Hello
NH:
Good morning
NH:
and welcome
NH:
to Markets Live
NH:
FT Alphaville’s daily trip round the markets
NH:
and it is 09/09/09
NH:
the day the world could end
NH:
according to some
NH:
thus far
NH:
nothing much has happened
NH:
FTSE small up
NH:
but the new Beatles rock star game has been announced
NH:
which could be good for HMV
NH:
as could the 5m CD’s EMI has shifted
NH:
anyway
NH:
Miles come out from under the desk
NH:
everything is fine
NH:
the world is not ending
NH:
unless you are short of Yell that is
MJ:
I am scared.
MJ:
As Swiss Swatch points out
MJ:
09/09/09 with Gold @ 999.99 the FTSE > 5,000
MJ:
Ominous stuff if you ask me
MJ:
Any way should we move on to the wider market?
NH:
before we do, someone asking about NH Hotels in Spain
NH:
lots of rumours flying around this morning
NH:
here’s some of the stuff we have been getting
NH:
hang on
NH:
Lotus Notes has crashed again
MJ:
Wonderful
NH:
right, here we go
NH:
NH HOTELES/ACCOR
The RUMOUR: NHH SM…ACCOR COULD BE STALKING
THE FACTS:
- NH HOTELES IS ADDED TO RECOMMENDED MIDCAPS LIST AT EXANE
- NH HOTELES: EXANE UPGRADES TO OUTPERFORM FROM UNDERPERFORM
- Exane sees NH Hoteles as a play on recovery and thinks it could be a potential M&A target.
- Also being told..M.Stanley has a note on potential M&A (i confirmed there is nothing out like that!). A dodgy Spanish paper — neg-ocio.com — is reporting about it today. Accor/NH Hoteles is mentioned in it
- Accor’s decision to sell M6 & its Sofitel brand clears the way for bigger better margin improvement aquisitions & the drums are suggesting NHH SM.
- NH Hotels is actually in a crunch of its own. Despite its €222m Rights Issue, its balance sheet is perilously weak & its price, a 30% discount to book & gradually getting worse could be the catalyst for Accor to pounce.
The RUMOUR: NHH SM…ACCOR COULD BE STALKING
THE FACTS:
- NH HOTELES IS ADDED TO RECOMMENDED MIDCAPS LIST AT EXANE
- NH HOTELES: EXANE UPGRADES TO OUTPERFORM FROM UNDERPERFORM
- Exane sees NH Hoteles as a play on recovery and thinks it could be a potential M&A target.
- Also being told..M.Stanley has a note on potential M&A (i confirmed there is nothing out like that!). A dodgy Spanish paper — neg-ocio.com — is reporting about it today. Accor/NH Hoteles is mentioned in it
- Accor’s decision to sell M6 & its Sofitel brand clears the way for bigger better margin improvement aquisitions & the drums are suggesting NHH SM.
- NH Hotels is actually in a crunch of its own. Despite its €222m Rights Issue, its balance sheet is perilously weak & its price, a 30% discount to book & gradually getting worse could be the catalyst for Accor to pounce.
NH:
that should help seperate the rumours form the fact
MJ:
They are up 12 per cent at EUR3.80
NH:
looks to be the work of an upgrade
NH:
and remember InterCon were flying in the UK yesterday after a Credit Suisse upgrade
NH:
and Whitbread had somoe good numbers the day before
NH:
which took them up 18% and help them win back their place in the FTSE 100
11:09AM
NH:
Right
NH:
wider market
NH:
what’s happening Miles?
MJ:
We are up
MJ:
Up 26.9 at 4974
MJ:
The Footsie that is
NH:
almost at 5,000
NH:
miners leading the way again this morning
NH:
but with one exception
NH:
Lonmin
Lonmin (LMI:LSE): Last: 1,666, down 46 (-2.69%), High: 1,707, Low: 1,619, Volume: 729.81k
MJ:
Ah yes
NH:
Looks like people are starting to see this Xstrata bid idea for what it is.
MJ:
Exactly. Not many people about who are willing to fully throw their weight behind that idea
MJ:
Merrill Lynch have also put out a note throwing cold water over the idea that Xstrata are set to pounce as soon as the Takeover Panel time limit is reached on October 2nd.
NH:
It does look like the market has got a bit ahead of itself on that one
MJ:
Financing that deal would be the question. The Merrill note seems to represent somthing like consensus opinion
NH:
Got some to put up?
NH:
let’s kill this rumour
MJ:
Here we go
NH:
(KP trash is rising, across the board)
MJ:
M&A spec drives stock higher
Our Buy rating on Lonmin was premised on the successful restructuring of the
business and a positive outlook for PGM prices. While this restructuring is still
ongoing, LMI has reached our PO sooner than expected on recent M&A
speculation. In our view, the outcome of this situation is less than certain and
given recent price movement (over 20% in 4 days) we downgrade our
recommendation to Neutral.
New PO of GBP1,900
Our PO of GBp1,900 implies a target P/NPV multiple of approximately 2x DCF
within the typical trading range of 1-3x NPV. While we see upside risk to our
target if Xstrata does bid for Lonmin or if the platinum price spikes suddenly, we
also see downside risk if October 2nd arrives and a bid does not eventuate.
Our Buy rating on Lonmin was premised on the successful restructuring of the
business and a positive outlook for PGM prices. While this restructuring is still
ongoing, LMI has reached our PO sooner than expected on recent M&A
speculation. In our view, the outcome of this situation is less than certain and
given recent price movement (over 20% in 4 days) we downgrade our
recommendation to Neutral.
New PO of GBP1,900
Our PO of GBp1,900 implies a target P/NPV multiple of approximately 2x DCF
within the typical trading range of 1-3x NPV. While we see upside risk to our
target if Xstrata does bid for Lonmin or if the platinum price spikes suddenly, we
also see downside risk if October 2nd arrives and a bid does not eventuate.
MJ:
Lonmin shares rallying on expectation of Xstrata bid
LMI shares are rallying on speculation that Xstrata will return to bid for the
remaining 75% it does not already own (a “bolt on” transaction) as the time limit
on the takeover panel bid conditions is reached on October 2nd. While we don’t
discount this completely, neither do we view this as “sure thing”. We believe
Xstrata would still prefer a transformational merger with Anglo American.
Transaction looks challenging on a NPV basis
We have analyzed a hypothetical bid for the remaining 75% of Lonmin. On our
estimates with a GBp2000 bid (i.e. 20% premium) we estimate 4% earnings
dilution in 2010 and 6.6% earnings accretion in 2011. On an NPV basis, the
transaction doesn’t stack up quite as well. We estimate that at GBp2000, Xstrata
would be paying about 1.6x the NPV of Lonmin + synergies + tax benefit;
LMI shares are rallying on speculation that Xstrata will return to bid for the
remaining 75% it does not already own (a “bolt on” transaction) as the time limit
on the takeover panel bid conditions is reached on October 2nd. While we don’t
discount this completely, neither do we view this as “sure thing”. We believe
Xstrata would still prefer a transformational merger with Anglo American.
Transaction looks challenging on a NPV basis
We have analyzed a hypothetical bid for the remaining 75% of Lonmin. On our
estimates with a GBp2000 bid (i.e. 20% premium) we estimate 4% earnings
dilution in 2010 and 6.6% earnings accretion in 2011. On an NPV basis, the
transaction doesn’t stack up quite as well. We estimate that at GBp2000, Xstrata
would be paying about 1.6x the NPV of Lonmin + synergies + tax benefit;
NH:
thanks for that
11:13AM
NH:
Some questions as to why BA are moving higher
NH:
we guess it is the dash for trash – part II
NH:
because we can’t see any other reason
NH:
actually we were looking at their pension deficit yesterday
NH:
with the help of some whizzy database
NH:
and playing around with the discount rates
MJ:
Brutal stuff
NH:
it was
NH:
shareholders funds wiped out
NH:
in theory
NH:
because in practice, BA does not recognise the losses
NH:
they just get pushed to one side
NH:
not sure how they get away with that
NH:
perhaps some of out CFA readers can help
MJ:
Tracy suggests that BA might be reacting to the Air France figures
MJ:
and a slight improvment in premium traffic
British Airways (BAY:LSE): Last: 208.30, up 7.3 (+3.63%), High: 209.00, Low: 199.00, Volume: 5.16m
MJ:
(@FatDaz: That is a good point)
11:16AM
NH:
Right
NH:
let’s move on
NH:
and have a look at BG
MJ:
Yeah – big oil find of the coast of Brazil
MJ:
The question is
MJ:
Is is “giant”?
MJ:
“massive”?
NH:
well, compared to the BP find of last week
NH:
it must be massive
NH:
enormous even
MJ:
ginormous
NH:
have a look at this
NH:
BG – Santos basin BMS 9 reserves 1.1 to 2bn BOE gross (30% BG, Repsol 25%) which is 330 to 600m BOE for BG, double what we are holding in our SOTPs at the moment. Given there are only 2 discoveries that have been quantified so far this suggests there’s plenty of upside in the region. 20p a share was what we had in, this adds 20p and there could be more to come.
NH:
that was from a sector specialist
MJ:
So the recoverable reserves have nearly doubled then?
NH:
yep and they aren’t drilling 20,000 leagues under the sea
NH:
although Santos is quite deep
MJ:
Shares have reacted pretty well
MJ:
Up 3.3 per cent at 1089p
MJ:
Have you got any comment?
NH:
yep
NH:
something from Caz
NH:
a bit technical
NH:
but some good points in there
NH:
Overnight, Petrobras has announced positive results from the formation test at well 1-SPS-55
(1-BRSA-594) in block BM-S-9 at a water depth of 2,141m, 310 km off the coast of Sao
Paolo. This well has tested the Guara discovery and showed a very high productivity oil-bearing
reservoir. The well flowed c.7 kbopd, but this flow rate was limited by testing capacity (as is often
the case). Petrobras estimates initial well productivity of 50 kbopd. As a result, the Guara area will
be prioritised to receive the production system which is currently up for tender. Petrobras
estimates recoverable reserves of 1.1 – 2.0 bn boe, with light oil (30 degrees API) – the gas : oil
split is not indicated. Petrobras operates (45%) and its two partners are BG Group (30%) and
Repsol YPF (25%).
(1-BRSA-594) in block BM-S-9 at a water depth of 2,141m, 310 km off the coast of Sao
Paolo. This well has tested the Guara discovery and showed a very high productivity oil-bearing
reservoir. The well flowed c.7 kbopd, but this flow rate was limited by testing capacity (as is often
the case). Petrobras estimates initial well productivity of 50 kbopd. As a result, the Guara area will
be prioritised to receive the production system which is currently up for tender. Petrobras
estimates recoverable reserves of 1.1 – 2.0 bn boe, with light oil (30 degrees API) – the gas : oil
split is not indicated. Petrobras operates (45%) and its two partners are BG Group (30%) and
Repsol YPF (25%).
NH:
This is the highest potential well productivity that we have seen reference to; hitherto Brazilian
sub-salt well flow rates have been indicated in the 20-30 kbopd range. 50 kbopd ranks
alongside some of the most prolific deep water wells in the world (Gulf of Mexico & Angola).
This is especially important given the costs of drilling these wells ($100m – $200m) and has a
naturally positive implication on potential development costs (fewer wells required) and thus the
unit value of reserves.
sub-salt well flow rates have been indicated in the 20-30 kbopd range. 50 kbopd ranks
alongside some of the most prolific deep water wells in the world (Gulf of Mexico & Angola).
This is especially important given the costs of drilling these wells ($100m – $200m) and has a
naturally positive implication on potential development costs (fewer wells required) and thus the
unit value of reserves.
NH:
This news will help this project’s momentum. Indeed, the announcement indicates that Guara
will use the second FPSO in the sub-salt – the first is under construction for use on the Tupi
pilot. The second is under tender with a view to first production from Guara in 2012. Partners
recently raised the design capacity of these FPSOs to 120 kbopd – suggesting that as few as
3 producing wells may be required to fill the vessel, based on today’s flow rate indication. We
are further encouraged by yesterday’s news that the Tupi extended well test has re-started
sooner than expected following some precautionary modifications to the sub-sea Xmas tree.
will use the second FPSO in the sub-salt – the first is under construction for use on the Tupi
pilot. The second is under tender with a view to first production from Guara in 2012. Partners
recently raised the design capacity of these FPSOs to 120 kbopd – suggesting that as few as
3 producing wells may be required to fill the vessel, based on today’s flow rate indication. We
are further encouraged by yesterday’s news that the Tupi extended well test has re-started
sooner than expected following some precautionary modifications to the sub-sea Xmas tree.
NH:
Unfortunately, we sense that the market has recently developed a tendency to under-react to
positive news from the Brazilian sub-salt and over-react to any negative news. Simultaneously,
some investors may have become more focussed on BG Group’s share price than the underlying
performance of the business. We stay focused on the fundamental value impact of events – the
stock market should catch up eventually. We note that BG Group is currently testing the Iguacu
discovery (BM-S-9), is re-entering the Corcovado-1 well (BM-S-52) and is also drilling Tupi
NE – so news flow potential remains attractive. We stay OUTPERFORM on BG Group [BG/ LN
1055p] and IN-LINE on Repsol YPF [REP SM €17.1], Sector OVERWEIGHT
positive news from the Brazilian sub-salt and over-react to any negative news. Simultaneously,
some investors may have become more focussed on BG Group’s share price than the underlying
performance of the business. We stay focused on the fundamental value impact of events – the
stock market should catch up eventually. We note that BG Group is currently testing the Iguacu
discovery (BM-S-9), is re-entering the Corcovado-1 well (BM-S-52) and is also drilling Tupi
NE – so news flow potential remains attractive. We stay OUTPERFORM on BG Group [BG/ LN
1055p] and IN-LINE on Repsol YPF [REP SM €17.1], Sector OVERWEIGHT
MJ:
Thanks for that
MJ:
Very technical stuff
NH:
yes, but it does put the BP find in perspective
11:21AM
MJ:
Come on
MJ:
We cant ignore it for much longer
MJ:
It is in the elephant in the room
MJ:
Yell
NH:
OK
NH:
then
NH:
what’s the price now?
MJ:
Just craxy
MJ:
Up 15.3p to 80.4p
NH:
ha
NH:
that’s funny
NH:
because last week we were laughing at the note from Exane
MJ:
what the one from Exane, where the analyst increased his target price from 1p to 80p
MJ:
NH:
yep
NH:
well, Exane were right
NH:
not for the right reasons
NH:
but the price is 80p
MJ:
amazing
MJ:
and it’s all down to a short squeeze
NH:
and the new found appetite for risk
NH:
that Caz note which came out yesterday was interesting because the analyst said the company could support a debt/ebitda ration of 4.2
NH:
4.2 times!
MJ:
Just like the good old days
NH:
I know
NH:
seems strange that analysts can talk about Yell in such a way
NH:
especially as it is just a year after Lehman
MJ:
Well there we are
NH:
yes, we live in interesting times
NH:
actually Yell is not the only media stock on the move this morning
NH:
Mecom is flying as well
Mecom Group (MEC:LSE): Last: 197.50, up 58.25 (+41.83%), High: 207.75, Low: 136.00, Volume: 4.07m
NH:
dash for trash – the second coming
NH:
anyway
NH:
citigroup have had enough of these media stocks rising
MJ:
These companies are like zombies which keep getting blasted but never die
NH:
well, Citi has tried to zap Trinity this morning
Warning to rude and abusive commenters – your ability to comment will be terminated immediately and permanently, without warning. Henceforth, FTAlphaville has instituted a One Strike and You Are Out policy. We’ve had enough. We are going to clean up these pixels once and for all.
NH:
cut it to sell
NH:
probably won’t make any difference
NH:
company likely to be promoted to the FTSE 250 today
NH:
abyway
NH:
the Citi note makes lots of sensible points
NH:
such as yes advertising is improving but only from a very low base
NH:
unfortuately, I suspect no one will listen
NH:
here’s a quick snippet from the note
NH:
Summer Themes —The results season produced a number of common themes. On
the whole, ad trends are improving thanks to easing comps (no underlying
improvement), cost cutting measures have come through more strongly than
expected and there is a focus on reducing debt. Furthermore, there are signs that
thoughts are starting to shift from more cost cutting, to re-investment, particularly in
digital, which could prevent a strong margin re-bound in a cyclical recovery. We
have updated our forecasts for the newspaper groups – see inside for details.
the whole, ad trends are improving thanks to easing comps (no underlying
improvement), cost cutting measures have come through more strongly than
expected and there is a focus on reducing debt. Furthermore, there are signs that
thoughts are starting to shift from more cost cutting, to re-investment, particularly in
digital, which could prevent a strong margin re-bound in a cyclical recovery. We
have updated our forecasts for the newspaper groups – see inside for details.
NH:
Double Downgrading Trinity To Sell — While we increase our forecasts after more
comfort on costs, we double downgrade to Sell (from Buy) and see fair value at
140p. We move our risk rating to Medium to reflect our relative comfort on leverage.
At our new 140p target price Trinity trades at 1.2x adjusted EV/sales, which we
think is reasonable for a business with 11% to 12% LT margins. At 190p, we
believe the market is pricing in a strong cyclical rebound in the next two years
(advertising +25%), and ignoring the structural risks (In regionals – significant
investment needed in online classifieds, in nationals – weak assets competing in
crowded UK tabloid market with volume and pricing pressure). Risks are to the
downside from here, in our view.
comfort on costs, we double downgrade to Sell (from Buy) and see fair value at
140p. We move our risk rating to Medium to reflect our relative comfort on leverage.
At our new 140p target price Trinity trades at 1.2x adjusted EV/sales, which we
think is reasonable for a business with 11% to 12% LT margins. At 190p, we
believe the market is pricing in a strong cyclical rebound in the next two years
(advertising +25%), and ignoring the structural risks (In regionals – significant
investment needed in online classifieds, in nationals – weak assets competing in
crowded UK tabloid market with volume and pricing pressure). Risks are to the
downside from here, in our view.
MJ:
Mecom is up 40 per cent now
NH:
wow
NH:
Yell up 23%
11:29AM
NH:
Right
NH:
let’s have a look at the banks
MJ:
Been reading over this massive note out of JP Morgan on banks
MJ:
Bit of a magnum opus from Kian Abouhossein and posse
NH:
the one mentioned in the paper this morning about regulatory changes spoiling the party for IBs right?
MJ:
Thats the one
MJ:
Massive note, about 300 pages or so
MJ:
Earlier this year they were bullish on investment bank earnings and were pretty much proven right
MJ:
But now they have switched
MJ:
Its all about boring old credit banks again over the whiz bang stuff. Idea is that higher capital requirements are going take the edge of profits
MJ:
JP Morgan also reckon that after the best fixed income year ever the only way is down
NH:
Not if Diamante Bob has his way.
MJ:
Well Bobby D must be pretty miffed. The note has Barclays at “underweight”
NH:
Underweight. The flaming cheek of it! Don’t they know who he is?
MJ:
To be fair they think Barclays are alright
MJ:
Here is the bit on Bobby and co
MJ:
We reiterate our UW recommendation on Barclays, with a Dec 09, SoP-based
target price of 220p, implying 37% downside. This is mainly a result of our
£13bn capital deficit, as from a business perspective we believe BarCap should
be able to achieve a 14-15% RoE in IBD. Within the UK domestics Barclays
would be our preferred stock
The acquisition of Lehman’s North American IB operations last year not only
generated a significant capital gain for the group, but elevated Barclays Capital’s
revenue-generating capacity to a new level in our view. In combination with the sale
of BGI, we expect this will lead to BarCap contributing 91% to group PBT in 2009E,
stabilising at 56% in 2011E.
We are not more positive however due to the incremental capital requirements we
expect to be implemented in 2010/2011E, which are discussed in this report and our
report ‘The Return of UK Investment Banking – A Review of Capital Requirements
and Profitability Outlook’, 21 July 2009. On our estimates, relative to a current
economic capital allocation of £8.5bn, we estimate BarCap will require £23.4bn,
leading to a capital deficit of c.£13bn.
target price of 220p, implying 37% downside. This is mainly a result of our
£13bn capital deficit, as from a business perspective we believe BarCap should
be able to achieve a 14-15% RoE in IBD. Within the UK domestics Barclays
would be our preferred stock
The acquisition of Lehman’s North American IB operations last year not only
generated a significant capital gain for the group, but elevated Barclays Capital’s
revenue-generating capacity to a new level in our view. In combination with the sale
of BGI, we expect this will lead to BarCap contributing 91% to group PBT in 2009E,
stabilising at 56% in 2011E.
We are not more positive however due to the incremental capital requirements we
expect to be implemented in 2010/2011E, which are discussed in this report and our
report ‘The Return of UK Investment Banking – A Review of Capital Requirements
and Profitability Outlook’, 21 July 2009. On our estimates, relative to a current
economic capital allocation of £8.5bn, we estimate BarCap will require £23.4bn,
leading to a capital deficit of c.£13bn.
NH:
Can you put some of the rest up?
MJ:
Well, if I put the whole lot up the FT server would probably explode
MJ:
But here is a little taster. Rest is up in the Long Room I think
MJ:
We switch our preference to quality traditional credit-exposed banks from Global Investment Banks on a 12-month view – even with strong fixed income in 2H 09, due to:
•1. Regulatory proposals, structurally reducing IB ROEs from 15% to 11%, and group 2011E EPS by -7% on average, as discussed in our report “Regulatory Proposal Analysis: Structural IB profitability decline”, published today. We analyse the IB restructuring necessary to generate 15% ROE. We account for the uncertainty in the IB sector through a continuously low av. SOP PE multiple of 8.6x in 2011E, implying 12% cost of equity.
•2. Long-term earnings dynamic until 2011E in favour of quality traditional credit banks over IB geared banks, with Fixed Income flow revenues declining -25%, leading to IB overall revenue reduction of -9% 011E/09E, even with Equities flow revenue growth of +22%. In comparison, we expect traditional credit to be the largest earnings delta over the next 2 years, with US delinquency stabilisation the trigger for re-rating. Our focus is on quality, credit-geared banks, excluding UK, Irish and German Banks.
Bottom-up within Wholesale & IBs, we base our stock criteria on 4 themes:
•1. Wealth Management gearing undervalued within IBs, i) high cash flow generation growth as equity market improves, and ii) limited regulatory impact: CSG, MS and UBS.
•2. Excess capital buyback re-leverage undiscounted, as we assume only 3 IBs will be in a position to buy back shares: GS ($12bn), MS ($8bn), and CSG (SF6.4bn) we expect to re-leverage in 2010E-011E.
•1. Regulatory proposals, structurally reducing IB ROEs from 15% to 11%, and group 2011E EPS by -7% on average, as discussed in our report “Regulatory Proposal Analysis: Structural IB profitability decline”, published today. We analyse the IB restructuring necessary to generate 15% ROE. We account for the uncertainty in the IB sector through a continuously low av. SOP PE multiple of 8.6x in 2011E, implying 12% cost of equity.
•2. Long-term earnings dynamic until 2011E in favour of quality traditional credit banks over IB geared banks, with Fixed Income flow revenues declining -25%, leading to IB overall revenue reduction of -9% 011E/09E, even with Equities flow revenue growth of +22%. In comparison, we expect traditional credit to be the largest earnings delta over the next 2 years, with US delinquency stabilisation the trigger for re-rating. Our focus is on quality, credit-geared banks, excluding UK, Irish and German Banks.
Bottom-up within Wholesale & IBs, we base our stock criteria on 4 themes:
•1. Wealth Management gearing undervalued within IBs, i) high cash flow generation growth as equity market improves, and ii) limited regulatory impact: CSG, MS and UBS.
•2. Excess capital buyback re-leverage undiscounted, as we assume only 3 IBs will be in a position to buy back shares: GS ($12bn), MS ($8bn), and CSG (SF6.4bn) we expect to re-leverage in 2010E-011E.
MJ:
•3. Gearing to improving traditional credit with SG and BNPP trading at av. 3.2x 2011E pre-provision profits. In a normalised provision scenario, we see 17% EPS upside for SG and 7% for BNPP, trading at av. 6.5x earnings.
•4. Limit downside risk through low tangible BV ex own debt exposure – such as SG, BNPP, MS and CSG ex WM trading at av. 1.1x NAV in 2011E.
Our stock pecking order is 1) CSG (30% upside, OW), 2) MS (30% upside, upgrade from N to OW), 3) SG (25% upside, OW), 4) BNPP (23% upside, upgrade from N to OW), 5) UBS (7% upside, downgrade from OW to N), 6) DB (13% upside, N), 7) GS (11% upside, N) and
BARC (-37% downside, UW).
•4. Limit downside risk through low tangible BV ex own debt exposure – such as SG, BNPP, MS and CSG ex WM trading at av. 1.1x NAV in 2011E.
Our stock pecking order is 1) CSG (30% upside, OW), 2) MS (30% upside, upgrade from N to OW), 3) SG (25% upside, OW), 4) BNPP (23% upside, upgrade from N to OW), 5) UBS (7% upside, downgrade from OW to N), 6) DB (13% upside, N), 7) GS (11% upside, N) and
BARC (-37% downside, UW).NH:
Good stuff that.
MJ:
Not to be outdone UBS have put out a big note on European banks
NH:
I’m sure the rabble on the right would be keen to see a bit of that as well
MJ:
Drowning in research on banks this morning. Here goes…
MJ:
Tomorrow, not yesterday
Robust near-term prospects
Zero short rates, unlimited central bank liquidity, deficit spending and QE: we
shouldn’t be surprised that Banking profitability is better than could have been
imagined a few months ago; nor that GDP is rising in most countries once more.
The balance of 2009 looks robust.
NPLs and impairment peaks a long-dated issue
However, we sketch a challenging medium-term picture for eurozone banks. NPL
formation has been delayed by low rates and regulatory forbearance. Provision
coverage has fallen. This may reflect a miracle avoidance of the usual path of P&L
losses from a sharp economic downturn. More likely, in our view, is that losses
have been delayed and that the worst lies ahead.
Robust near-term prospects
Zero short rates, unlimited central bank liquidity, deficit spending and QE: we
shouldn’t be surprised that Banking profitability is better than could have been
imagined a few months ago; nor that GDP is rising in most countries once more.
The balance of 2009 looks robust.
NPLs and impairment peaks a long-dated issue
However, we sketch a challenging medium-term picture for eurozone banks. NPL
formation has been delayed by low rates and regulatory forbearance. Provision
coverage has fallen. This may reflect a miracle avoidance of the usual path of P&L
losses from a sharp economic downturn. More likely, in our view, is that losses
have been delayed and that the worst lies ahead.
MJ:
Permanent capital yet to be addressed in the eurozone
Temporary capital has been provided cheaply by governments. We believe it will
become increasingly clear that permanent capital is required for banks to properly
recognise their existing problem assets; and more still to put them in a position to
lend sufficiently to support eurozone growth in the medium term. The experience
of shareholders in permanent government capital injections has not been pleasant.
Buy Lloyds, HSBC, Intesa. Sell Santander, BBVA, Danske
Our Buy list is post-recap banks or those for which dilution risk is moderate:
HSBC, Lloyds, SHB, Dexia, SocGen and Intesa. Sells are concentrated in prerecap
banks and those with assets in markets still in structural decline: Santander,
BBVA, Popular, Danske, Commerzbank, AIB and Bank of Ireland.
Temporary capital has been provided cheaply by governments. We believe it will
become increasingly clear that permanent capital is required for banks to properly
recognise their existing problem assets; and more still to put them in a position to
lend sufficiently to support eurozone growth in the medium term. The experience
of shareholders in permanent government capital injections has not been pleasant.
Buy Lloyds, HSBC, Intesa. Sell Santander, BBVA, Danske
Our Buy list is post-recap banks or those for which dilution risk is moderate:
HSBC, Lloyds, SHB, Dexia, SocGen and Intesa. Sells are concentrated in prerecap
banks and those with assets in markets still in structural decline: Santander,
BBVA, Popular, Danske, Commerzbank, AIB and Bank of Ireland.
NH:
hang on, this the guy who reckons Lloyds are worth 200p
MJ:
I think so
NH:
and yet he is talking about NPL’s
NH:
very odd
11:35AM
MJ:
OK
NH:
Arby – we are working on that. Scheduled for tomorrow.
NH:
we have been making calls this morning
NH:
feeling seems to be they will get it away fine in this market
NH:
no idea on pricing
NH:
we were hearing a discount of 7%
NH:
but we shall see
NH:
there has been no sounding out this morning
NH:
as far as we can tell
11:36AM
MJ:
what else should we have a look at?
NH:
what about Micro Focus
MJ:
Hmmm. not followed that company
MJ:
what is it?
NH:
it is quite big
NH:
FTSE 250 company with a market cap of around £200m
MJ:
what does it do?
NH:
damn, I knew you would ask that
NH:
provides software that helps companies update legacy computer systems
NH:
stuff like Cobol
NH:
and other languages
NH:
praxis has probably heard of them
NH:
and it has been very acquisitive, snapping up lots of rivals
NH:
buying something called Borland at the moment
MJ:
Right
MJ:
So whats going on?
NH:
well, this news broke today
NH:
Micro Focus International plc (‘Micro Focus’ or ‘the Group’, LSE: MCRO.L), the Enterprise Application Modernisation and Testing software company, announces that Stephen Kelly has informed the Board that he wishes to step down as Chief Executive Officer for personal reasons. A search for a successor will commence immediately. Mr Kelly will work with the Board and the broader management team to ensure a smooth and well managed transition of his responsibilities.
NH:
now Kelly is their hotshot CEO
MJ:
He must be
MJ:
look at the share price reaction
MJ:
down 46.2p at 340p
MJ:
11%
MJ:
that values his at about £20m based on the market cap
NH:
NH:
£20m man
MJ:
Almost as much as Adebayor
MJ:
actually I am always a bit suspicious when a CEO says he is leaving for personal reasons
NH:
particularly from an acquisitive company
NH:
that said the word in the market is that Kelly is leaving to spend more time with his three teenage daughters
MJ:
Hmmm
NH:
my thoughts exactly
NH:
and those of one company follower
NH:
have a look at this
NH:
Micro-focus-looks like it was a family he has three teenage daughters growing rapidly and mfocus is full on-he doesn’t spend too much time with them-there are no other job offers-movng to Bosham(by the by he is not a sailor but the kids are).
Chairman says that business fine and no change there-While Im happy with the business being okay as I have 2 teenager daughters anyone who wants to spend more time with them is a crazy person”
MJ:
ha ha
MJ:
too true
NH:
if the kids were young it might be a little more understandable
NH:
been teenagers
NH:
they won’t want dad around
NH:
they will want him earning mega bucks surely
NH:
anyone
NH:
all the analysts reckon this is negative
NH:
here’s Merrill Lynch
NH:
CEO to step down for personal reasons
Micro Focus has announced CEO Stephen Kelly wishes to step down for personal
reasons. He will work with the Board and ensure a smooth transition of
responsibilities. The company will commence a search for a successor
immediately. The company says that trading remains in-line with comments
made in the Q1 IMS last month, and the investor day scheduled for 28th
September will go ahead as planned.
Micro Focus has announced CEO Stephen Kelly wishes to step down for personal
reasons. He will work with the Board and ensure a smooth transition of
responsibilities. The company will commence a search for a successor
immediately. The company says that trading remains in-line with comments
made in the Q1 IMS last month, and the investor day scheduled for 28th
September will go ahead as planned.
NH:
Negative for the stock
We believe Kelly was a driving force behind the company and a key point manfor
the strategy. His departure just as the company goes into the integration process
for Borland and Compuware is a loss, in our view. The impact on the stock will be
compounded by the fact this move is unexpected – management were speaking
at our San Francisco investor conference only a couple of weeks ago.
We believe Kelly was a driving force behind the company and a key point manfor
the strategy. His departure just as the company goes into the integration process
for Borland and Compuware is a loss, in our view. The impact on the stock will be
compounded by the fact this move is unexpected – management were speaking
at our San Francisco investor conference only a couple of weeks ago.
NH:
Why is he stepping down?
We see three potential reasons for the sudden departure: 1) This is a genuine
personal decision, 2) the CEO is moving to another job, 3) there is another
explanation and/or the CEO has been forced out. Having spoken to the company
it sounds like it is 1) and he genuinely wishes to step back and take stock. We
don’t think he’s going to another job. Although we can’t rule out that he’s been
forced out for reasons unknown, the fact he is staying with the company to
manage a transition and the CFO (whom he is very close to) is remaining in place
would be arguments against that.
We see three potential reasons for the sudden departure: 1) This is a genuine
personal decision, 2) the CEO is moving to another job, 3) there is another
explanation and/or the CEO has been forced out. Having spoken to the company
it sounds like it is 1) and he genuinely wishes to step back and take stock. We
don’t think he’s going to another job. Although we can’t rule out that he’s been
forced out for reasons unknown, the fact he is staying with the company to
manage a transition and the CFO (whom he is very close to) is remaining in place
would be arguments against that.
NH:
(well said Lemmy, KP chill)
MJ:
thanks for that
11:43AM
NH:
Right
NH:
shall we head down to small cap corner
NH:
for a moment
MJ:
My favourite
NH:
and let’s have a look at a thing called Pursuit Dynamics
NH:
a real punters favourite this one
NH:
never actually been able to figure out what it does
MJ:
something to do with using high pressure steam to put out fires, clean things by the looks of thing
NH:
right
NH:
anyway this company has always promised a lot and never really delivered
NH:
deals with Tyco
NH:
big brewers etc
NH:
as result it has seen a lot of short selling activity
NH:
but to bring the story up to date
NH:
, the company has just appointed a new CEO
NH:
Dutch guy called Roel Pieper
MJ:
he looks like a bit of a corporate high flyer – Philips, AT&T and the like
NH:
yeah
NH:
but I don’t remember him for that
NH:
I remember him
NH:
as the chairman of dot.comedy stocks that blew up
NH:
now this is probably before your time Miles
NH:
once upon a time there was this speech recognition company called Lernout & Hauspie
NH:
it went to the moon
MJ:
NH:
and then it all turned out to be a load of hot air
NH:
; and the company eventually filed for bankruptcy protection
NH:
anyway Pieper played a key part in discovering a lot of what Lernout claimed to do it couldn’t
MJ:
Nice
MJ:
So whats the relevance of this?
NH:
nothing really, just a nice story. Lernout was a classic dot.com stock
NH:
so
NH:
Pieper is now on board
NH:
and the first thing he has done is raise cash
NH:
£4m in a share placing that went very quickly
NH:
it was announced this morning
NH:
and the bears are squealing because they thought Pursuit was doomed
NH:
and with the company now on a firmer financial footing, Pieper is now going to turn his attention to completing some of the contracts that Pursuit has been working on
NH:
according to the bulls
MJ:
looks to be very tightly held Pursuit
MJ:
I am not surprised the shares are up this morning
MJ:
Gained 15 per cent to 126.5p
NH:
thanks
11:49AM
NH:
Right
NH:
few questions from the ROTR
NH:
Regal
NH:
we covered that yesterday
NH:
as well as Kopane
NH:
and the diamond market
NH:
which is apparently recovering
MJ:
Any RAW then?
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:
yep a few bits
NH:
Quintain Estates and Development
MJ:
That property company which owns land near the O2 and Wembley
NH:
announced a seriously heavy hitter chairman this morning
NH:
William Rucker
NH:
the CEO of Lazard London
NH:
that has helped the price this morning
NH:
but we also here a deal is coming
NH:
either an equity issue backed by an overseas investor
NH:
or said overseas investors
NH:
will inject equity into one of the projects
NH:
probably the Dome
Quintain Estates and Development (QED:LSE): Last: 238.50, up 44.5 (+22.94%), High: 243.75, Low: 190.00, Volume: 606.94k
MJ:
MJ:
Right
NH:
elsewhere, Renewable Energy
NH:
big Scandia solar play
NH:
shares up 7.6% this morning
NH:
talk of a big convertible coming
MJ:
There was some chatter about Bauer
MJ:
Rumours of a placing of about 2mln shares
MJ:
Price mentioned was 27-27.45 euros a share
MJ:
Shares are off a bit – down 1.6 per cent to EUR29.31
NH:
also being told to keep an eye on Soco International as last year’s bidder could return
Soco International (SIA:LSE): Last: 1,356, up 26 (+1.95%), High: 1,359, Low: 1,329, Volume: 38.58k
NH:
quite RAW that one
NH:
so be careful
11:55AM
MJ:
Any more thoughts on Kradburys Neil?
NH:
A couple of things
NH:
One
NH:
a lot of people don’t think Kraft will go hostile
NH:
thats because they need to look at the contracts Cadbury has with Hershey
NH:
what the clauses, triggers are etc
NH:
and two
NH:
some of Cadbury’s US shareholders have been selling
NH:
some Rule 8.3 disclosures out this morning
NH:
Capital
NH:
and Franklin
NH:
both sold stock
NH:
not a lot
NH:
but it could be a signal
MJ:
Cadbury price holding up
MJ:
Up 3p at 789.15p
NH:
perhaps an increased offer of 850p might get it after all
NH:
and
NH:
Kraft could probably just afford that
NH:
even after yesterdya’s 6% drop
MJ:
There was also this overnight
MJ:
NEW YORK (Reuters) – Moody’s Investors Service on Tuesday said it may cut the debt rating on Kraft Foods Inc, citing its $16.7 billion takeover bid for Cadbury Plc.
Cadbury, known for its chocolate bars, has rejected the cash and stock bid.
“Given Cadbury’s rejection of Kraft’s initial proposal on valuation concerns, we expect that any follow-up offer by Kraft would likely involve a higher price,” Moody’s said in a statement.
Moody’s said it is also concerned that Kraft will need to increase its use of leverage for the deal as it raises its offer. Kraft’s credit measures are already weak for its Baa2 rating, Moody’s said. A Baa2 rating is two steps above junk status.
MJ:
That is something to consider for Kraft
NH:
Kraft has been put on watch by all the big agencies
NH:
but I think they could just about afford to raise the cash component of their offer to 450p
NH:
just
NH:
but will that be enough
12:00PM
MJ:
Are we done?
NH:
almost
NH:
but beefore we sign off
NH:
there is some news about Pestowire
Top News from Top Sources. The BBC’s Business Editor, Robert Peston, has played in important role keeping the British public fully informed during these difficult times.
MJ:
What?
NH:
it is being dismantled
NH:
THE BBC has begun dismantling Robert Peston in the clearest signal so far that the recession is over.
Peston’s bits will be stacked in section 27cAs Kraft launched a £10bn bid for Cadbury and GDP rose slightly, the corporation’s business editor was strapped to a trolley and taken to a garage in Deptford where he will be broken down into his 498 constituent parts, which will then be scrubbed with sandpaper and covered in grease.
NH:
spokesman said: “Business news is only interesting when it’s absolutely terrifying. Once things start to return to their normal levels of tedium there’s really no need for a large, complicated Peston.
“It will also give us a chance to make some essential modifications so that by the time of the next recession in April 2014 we can wheel out a fully upgraded Peston but without such an unbelievably annoying voice.”
NH:
Engineers have already removed the arms, knees and feet and are expected to begin unscrewing the buttocks later today.
Bill McKay, the corporation’s chief dismantler, said: “The buttocks are always the hardest part. They get all gummed up so you need to get right in there with some turps and a chisel.
“The head, on the other hand, is a doddle. It’s attached to his neck by a couple of brass clips and just pops right off.”
He added: “We’ll number all the different parts and store them in a vast warehouse where we keep what’s left of Keith Chegwin and Lesley Judd.”
MJ:
V. funny. Where is that from?
NH:
actually I heard Pesto on the Today programme this morning
NH:
forecasting an M&A boom
NH:
no names
NH:
but lots of deal
NH:
right time in the cycle apparently
MJ:
Good times Rob, eh?
NH:
yep
NH:
Bid em up Pesto
NH:
deal mania
NH:
the bid is back
MJ:
Right
MJ:
Time to call things to a close I think
NH:
yes
MJ:
It is 12.04 after all
NH:
thanks for joining us this morning
NH:
Shrewdette
NH:
see you this evening
NH:
hope to be there by 7.30pm
NH:
but I have a lot on this week
NH:
no Bryce
NH:
means Miles and I are picking up all the back page markets stuff
MJ:
Thanks for all the comments
NH:
yep
NH:
things are picking, Lorcan
NH:
there’s a future post Murphy
NH:
and the credit crunch
MJ:
Bye
NH:
cya
NH:
I will Taxloss
NH:
come on Engerland