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Markets live transcript 19 Oct 2009

Posted by Neil Hume on Oct 19 11:02.

Markets live chat transcript for the chat ending at 12:13 on 19 Oct 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ) Paul Murphy (PM)

NH:

Hi there
NH:

it’s 11.03am
NH:

Welcome to Markets Live
NH:

60 minutes of high quality discussion about the markets
NH:

or a glorified IM session, depending on your POV
NH:

Miles is here
MJ:

Hello everyone
NH:

and in a tribute to Pineapple who left FT Alpha to join ADVFN on Friday
NH:

we are going to get straight down to business this morning
NH:

and that means no discussion about out lunching activities
NH:

Murph’s escapades in NY
NH:

GKP
NH:

or any sort of levity at all
NH:

so without further ado
NH:

Miles, what’s the market doing? oh and also don’t forget to tune in for this chat: http://www.ft.com/cms/s/0/77cc5346-b8b6-11de-809b-00144feab49a.html.The dollar has been on a downward trajectory since March and the prospects of a near-term reversal of this trend does not look promising as signs of global economic recovery tempt investors into taking on more risk.

it’s withBilal Hafeez, global head of foreign exchange research at Deutsche Bank answers readers’ questions on Monday October 19.

11:04AM
MJ:

well, it is another one of those quiet morning’s when the market moves higher
NH:

(Monkey – )
MJ:

FTSE currently up 60 points to 5250
MJ:

Miners taking the lead, helped by a weaker dollar
MJ:

banks and insurers lagging behind
NH:

hmmm
NH:

Lloyds
NH:

the price action sort of suggest that the cash call is coming sooner rather than later
MJ:

Yes
MJ:

Currently off 1.1p at 91
NH:

now, the weekend press did not have too much fresh on this
NH:

but
NH:

analysts have been crunching the numbers and seeing what leaving the APS means for the Lloyds share price
NH:

whether it is the easy win that everyone seems to think it might be
MJ:

and?
NH:

well, there isn’t really a satisfactory answer and it all depends on whether Lloyds very bullish call on loan losses plays out
MJ:

I see
NH:

and Eric Daniels is pretty bullish
NH:

have a look at this from Cazenove
NH:

it’s by Simon Pilkington
NH:

Lloyds Banking – costing APS against alternatives (LLOY.L LLOY LN 93p INLINE/NEUTRAL)
Potentially withdrawing from APS would benefit Lloyds by £9bn but the outcome is clearly dependent on future loan losses. Some of that potential benefit is lost to the dilution from issuing equity below the 115p effective price under APS, the additional coupon on the convertible and if Lloyds has to pay a fee to HMT for the insurance cover provided year to date.
We consider Lloyds raising between £10-£15bn of equity.
Once impairment normalises and the APS fee is fully amortised, there is little difference in the earnings of the group whether participating in the APS or not.
NH:

Depending on possible EC sanctions and the sustainable level of net interest margin, we estimate earnings normalise between 15p-20p.
NH:

Clearly with any long term forecast, a number of assumptions are required. We assume that the loan book contracts by around a tenth and customer deposits grow by a quarter to allow a
sustained recovery in the net interest margin as the loan deposit ratio reaches a more acceptable
level, though at 130% still substantially above parity. Also we estimate Lloyds achieves £1.7bn of cost savings, above its target of £1.5bn. The other major risk is the impact of possible European Commission sanctions for state aid. Therefore looking to the downside risk to our estimates, for reasons independent of the economic backdrop, we deduct from EPS for a 15bp reduction in the net interest margin, £0.75bn reduction in earnings for EC sanctions and the disposal of Scottish Widows. The result is a range for normalised EPS at around 15p and return on tangible equity generally in the range of 1012%.
MJ:

hmmm
NH:

here’s a bit more from RBS
NH:

w/e press speculates that UK Gvt and Treasury was deciding this weekend whether to allow the proposed £24bn new capital issuance to replace GAPS to proceed or not. Short positions outstanding have grown sharply over the last week or so in anticipation of potentially substantial equity flow back from the £24bn new capital issuance, on the assumption that the UK Gvt might sell their rights (43%) and that debt-equity conversion may not be able to hold pure equity. We see this as a highly risky strategy, and advise longer term investors take advantage of near term weakness a) shares are fundamentally misvalued if you believe our rising net interest margin / falling bad debt analysis b) If the UK Gvt does not allow Lloyds to escape GAPS then there will be no equity flow back pressure c) The debt/equity version may be into convertible equity rather than pure equity, which again would mean no flowback.
MJ:

As you said, no new details in the weekend press
MJ:

Telegraph noted a sharp jump in short interest
NH:

really
MJ:

Short-selling in Lloyds Banking Group doubled last week in a sign that traders and hedge funds expect shares in the 43.5pc state-owned bank to collapse when it launches a £25bn fund-raising in order to escape the Government’s asset protection scheme.
MJ:

Etc
MJ:

Stock-lending, a key indicator of short-selling, doubled to 3.5pc of Lloyds’ total share capital in just four days last week, according to Data Explorers, as concern mounts about the bank’s ability to raise £25bn through a combination of debt for equity swaps, assets sales and a rights issue of up to £11bn.

The Financial Services Authority (FSA) and the Government are understood to have expressed grave concern that Lloyds may not be able to raise enough cash to extradite itself from the scheme.

NH:

Miles
NH:

thanks for that
NH:

but you know what
NH:

this banks stuff is boring
NH:

I’d rather talk about Murph
NH:

his lunches
NH:

GPK
NH:

Frank Timis
NH:

and that big insider trading case
MJ:

Me too
NH:

where shall we start?
MJ:

Well, you know I love hearing about the antics of Frank TImis
MJ:

What is this is latest caper?
NH:

yes, the latest news is as follows.
NH:

Frank
NH:

has been stake building
NH:

in a company called Sound Oil
NH:

hang on
NH:

let me get the statement
NH:

Sound Oil, the upstream oil and gas company with assets in Indonesia, notes the recent movements in its share price and the relatively high volumes of shares traded. The Company has noted an increase in the registered shareholding of Lynchwood Nominees Limited from 79,253,235 shares (representing 11.4% of the Company’s issued share capital) on 29 September 2009 to 156,762,581 shares (representing 22.6% of the Company’s issued share capital) on 14 October 2009. The Company was informed on 15 October 2009 that these shares are held as sub-custodian for SIS Omnibus Ordinary Account.
NH:

Now
NH:

Lynchwood is said to be Frank
NH:

and he likes the look of sound oil
NH:

because it has a listing and cash
NH:

and he could reverse something in
NH:

needless to say
NH:

the company are worried
MJ:

MJ:

Shares are up up 17 per cent to 3.3p
NH:

so that’s Frank’s latest plaything
NH:

Sound Oil
NH:

worth watching
11:12AM
NH:

Miles
NH:

I guess we should have a look at this insider trading case
NH:

and then
NH:

a Kuridish oil story
MJ:

Ah, we are back to normal
NH:

indeed
11:13AM
MJ:

Well
MJ:

The Rajaratnam case has been followed by inevitable headlines warning of a wave of action against nefarious New York hedgies
NH:

Clearly the authorities over there are very keen to show they are cracking down in the wake of Madoff.
NH:

Meaning we have sources close to the matter briefing Bloomberg like this
NH:

Federal investigators are gearing up to file charges against a wider array of insider-trading networks, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said.
MJ:

Bandits certainly take the US authorities more seriously than many other financial regulators
NH:

The FSA of course only goes after the really big guys.
MJ:

Like these two master criminals
MJ:

using a highly complex code system to avoid detection
NH:

like Enigma?
MJ:

Even better
NH:

go on
MJ:

A work experience student at a City bank is alleged to have sent coded messages to his father telling him to buy Chinese food hours before the father bought shares in three companies that were about to make major announcements, a court heard today.
NH:

MJ:

And while we are on that case
MJ:

I loved the work experience guy’s appraisal from Hoare Govett
MJ:

The court heard how, frustrated by a lack of feedback on his work, Matthew hacked into a Hoare Govett computer to access a recent appraisal. Mr Kelsey-Fry said part of the appraisal read that Matthew “does not have the je ne sais quoi” to excel at Hoare Govett.
NH:

“je ne sais quoi”?
MJ:

Yes… Probably should leave that one there
MJ:

Anyway, not wanting to look slack the FSA have been putting it about that they can be scary too
MJ:

This from the Sunday Times
MJ:

BRITAIN’s financial authorities pledged to use “all the tools available” to catch market fraudsters after a landmark case in which investigators in America used wiretaps to bring down a multi-million dollar insider-trading ring.
MJ:

The Financial Services Authority and the Serious Fraud Office have both increased efforts to stamp out market abuse, though they have yet to uncover any cases of the magnitude of recent American scams.
NH:

bit harder for them to be as scary. In the UK for example wire tap evidence isn’t admissible in court.
MJ:

There was of course the case of the Essex printer leaking deals
MJ:

and MI5 busting them through wire taps, but such tactics are no longer permitted
NH:

(very good Wibble )
MJ:

There are certainly interesting jurisdictional issues raised by this case
MJ:

There is an asymmetry in the powers different countries have to investigate this sort of thing. A sort of regulatory arbitrage is claerly possible.
NH:

however, there has been some great reporting on this
NH:

over the weekend
NH:

the details of the case are fascinating
NH:

and most of it seems to have been short tech stocks
NH:

ahead of earnings, announcements no?
MJ:

And getting good “colour” ahead of deals
NH:

isn’t that what hedgies are supposed to do? get an informational edge?
MJ:

Hmm
NH:

anyway, it has rocked the Sri Lankan stock market
MJ:

What?
NH:

have a look at this
NH:

Oct. 19 (Bloomberg) — Sri Lanka’s benchmark stock index dropped, set for its biggest decline in four months, after Raj Rajaratnam, one of the south Asian island’s largest investors, was detained in the U.S. on insider trading charges.

The Colombo All-Share Index slumped 1.9 percent to 3,071.92 at 12:09 p.m. local time, the most among benchmark indexes worldwide. John Keells Holdings Plc, the country’s largest listed company that counts Rajaratnam as its second-biggest shareholder, fell the most since March.

NH:

Asia’s best-performing stock market this year is paring gains after Sri Lankan-born billionaire Rajaratnam, 52, was told he faces a decade in prison if convicted at trial. Rajaratnam’s funds also hold stakes in People’s Merchant Bank Plc, DFCC Bank Ltd., National Development Bank Ltd. and Commercial Bank of Ceylon Plc, according to data compiled by Bloomberg.

“This is bad news without a doubt,” Channa Amaratunga, who advises on stock and bond investments at Colombo-based C.T. Capital Pvt., said by phone. “He was one of the biggest foreign equity investors in Sri Lanka, both in his personal capacity and through Galleon,” Rajaratnam’s hedge fund firm.

MJ:

I didn’t realise he had such big holdings in that market
NH:

nor did I
NH:

actually
NH:

that’s a point
NH:

does Galleon own any UK tech stocks??
MJ:

Well
MJ:

I had a little dig around
MJ:

And RNS shows they held around 6 per cent of Raymarine not too long ago
NH:

hmm
NH:

and that’s in an offer period at the moment
NH:

although
NH:

I suspect shareholders won’t be offered much by the bidder
NH:

which I think is Garmin
NH:

taking on the Co’s debt will be enough
Raymarine (RAY:LSE): Last: 11.50, down 0.5 (-4.17%), High: 11.50, Low: 11.50, Volume: 200.15k
MJ:

Some readers got very upset by Paul calling the informers rats in his post on Friday
NH:

Yes, we had some very holier than thou comments on that thread.
MJ:

It hardly as if the informer(s) would have given themselves up because they simply wanted to clear their conscience
MJ:

The most likely thing is that they were busted and struck a plea bargain
NH:

What moral, upstanding citizens.
MJ:

Yeah. Not exactly heroic behaviour
MJ:

Rats escaping a sinking ship is surely apt in this regard
NH:

talking of ships
NH:

Miles
NH:

would you pls stop humming
NH:

the Galleon rap
NH:

very annoying
MJ:

But Neil, I just can’t get out of my head
MJ:

Its just too catchy
MJ:

Nah na nah na na
MJ:

There’s a rally on, better put ya money on Galleon!
MJ:

MJ:

So, why doesn’t H&M have a promotional rap?
NH:

er, good question
11:25AM
NH:

(Ando we are disputing the effectiveness of rating just the term as a noun).
NH:

and Taxloss
NH:

thanks for the GKP stuff
MJ:

Very intersting
NH:

is there any idea what date they dealt in GKP
NH:

I am guessing this was way back
NH:

before the discovery 10 trillion barrels of oil in Kurdistan
11:26AM
MJ:

Talking of Kurdistan, what is going on with Heritage this morning? Bit of noise in that one
NH:

yes
NH:

another delay to the merger with Genel
NH:

looks like it will be Xmas before the offer doc is out
MJ:

Hmm. Doesn’t smell to good really
NH:

I am with you.
NH:

How many times have when seen deals delayed and delayed
NH:

and then they fail
MJ:

Err, we saw one on Friday with National Express
MJ:

Some very unhappy people there
NH:

but
NH:

anyway
NH:

Heritage disagree
NH:

they say this is just do with the elections
NH:

and the deal remains firmly on track
NH:

but what with the news about exports
NH:

it is just
MJ:

There there just seems to be so much aunquantifiable political risk involved in these companies
NH:

that’s my view
NH:

anyway
NH:

supporters of the deal are saying things like this
NH:

You’ll notice that it actually only has one piece of new information in it, and even then…it is stating the obvious…… that the Kurdish elections, and more specifically waiting for the formation of a new government, and its oil and gas committees (which hasn’t happened yet)….is delaying formal approval of the proposed merger. You will probably recall that is the sole reason why the slight delay was announced at the end of August too.

To reassure….Heritage confirms that merger terms are nearing formal agreement and that both sides remain committed to successfully completing the proposed transaction. In short, everything is fine…but they simply have to wait for this governmental process.

NH:

and they want to stress that the delay
NH:

has nothing whatsoever
NH:

to do with the FSA investigation into those Genel executives
MJ:

Yeah, and do we know any more on that yet?
NH:

nope
NH:

there’s loads of gossip out there
NH:

none I can repeat unfortunately
NH:

but I do have some notes on this
NH:

here’s Arbuthnot
NH:

Heritage Oil has stated that all oil production from the Taq Taq field is now being diverted into the local market, rather than being exported. Oil production for the export market will not occur until a payment mechanism for the oil companies is brought into play. The field currently has production capacity of 35,000bopd which is being expanded to 60,000bopd by the end of 2009.

Although this is not an ideal situation, Genel is receiving revenues for its production although not at international market prices. We do not expect this situation to be resolved until post Iraqi elections in January 2010.

NH:

Heritage also notes that the FSA investigation is continuing and has yet to be resolved. The merger process is proceeding, but is taking longer than expected. Previously, the company had stated that the prospectus was expected to be published this month, but now Heritage is saying that this may not occur until the end of the year. This is a considerable delay as we had hoped to see the deal closed in late-November.
NH:

here’s Ambrian
NH:

Heritage Oil has provided the market with information in relation to the Taq Taq oil field in the Kurdistan Region of Iraq (Kurdistan) and an update on the proposed acquisition of Genel Energy International Ltd (Genel).
Heritage understands that, since 14 October 2009, all production from the Taq Taq oil field has been diverted into the local market. Production for export has ceased, in coordination with the other operators in the region, and export production is not expected to recommence until a payment mechanism is in place.
Exports commenced on 1 June 2009, so no revenue has been received for any exported production and none is expected until there is an agreement on the payment mechanism between the Federal Government of Iraq and the Kurdistan Regional Government.
Heritage also understands that the (previously disclosed) FSA investigation in continuing, and that the parties concerned are assisting the FSA with its enquiries. Heritage confirmed that discussions with Genel are ongoing, with the terms of the merger nearing formal agreement.
Both sides remain committed to completing the proposed transaction successfully; however, the transaction is taking longer to conclude than had originally been estimated. We hope the implementation agreement can be signed and the prospectus published before the end of the year.
NH:

Comment
The confirmation that all export production from the Taq Taq field in Kurdistan has ceased is important to Heritage as it is in the process of carrying out a reverse takeover with Genel and, subject to the signing of the implementation agreement and publishing of the deal prospectus, the proposed combined entity of HeritaGE Oil will derive almost 100% of its production and cashflow from Genel’s Kurdish production assets.
As initially highlighted in our note Heritage Oil — Regional Politics — the Payment Bottleneck, 26 August 2009, we continue to anticipate the lack of clarity with respect to regional politics will mean the situation for the various contractors is likely to take several more twists and turns before they are able to reach stable and consistent export production and, with it, regular and timely payment for oil sales.
We maintain our HOLD recommendation.
NH:

and something from Caz
NH:

Jessica Sadaat
NH:

“Today’s announcement does not contain any material new information. The Kurdistan Regional Government had already flagged that exports from the region (Tawke and Taq Taq) were being suspended until a payment mechanism is put in place. Given the capacity to sell c30 kbopd from Tawke and c30-60 kbopd from Taq Taq locally, our core NAV is not materially affected by the temporary cessation of exports. In the meantime, we remain with our OUTPERFORM recommendation, ahead of high impact exploration and appraisal drilling in Uganda and Kurdistan, due to commence in December.”
MJ:

Heritage off 7p at 527.5p
NH:

hmmm
NH:

thought it would be weaker
NH:

than that
NH:

it just seems to me that this deal is getting pushed further and further back
NH:

and it may never complete
NH:

and thanks Taxloss
NH:

that was the BG deal that GKP has been trying to get out of
NH:

interesting
11:34AM
MJ:

So, must move on
MJ:

National Express?
NH:

yes
NH:

let’s have a look at that
NH:

another surprising twist over the weekend
MJ:

that’s right Brian Souter of Stagecoach has popped up with an offer
MJ:

although it is an offer in loosest sense of the word
MJ:

highly conditional, no price mentioned
NH:

it sure is
NH:

brokers have spend all morning trying to come up with a price SGC might based on the fact that SGC will offer UP to 40% of the merger company to NEX shareholders
MJ:

and?
NH:

anywhere between 450p (that’s based on the market caps) to 490p (that’s based on the shares in issues)
MJ:

well, whatever the offer price
MJ:

they are trading at a big discount
NH:

(noted Tuna – will flash in a mo)
MJ:

National Express up 32p at 393p
NH:

Not surprised by that
NH:

and if I were one of these left long on wrong on Friday I would be using the get of jail card to sell
MJ:

so you don’t think this one is a runner?
NH:

no
MJ:

whys that?
NH:

well I don’t think NEX shareholders want SGC paper
NH:

remember even when the Cosmen’s offered 450p a shares in cash they were all prepared to back a cash call
NH:

and SGC if it takes on NEX would probably have to tap its investors for cash
MJ:

Why?
NH:

because of the NEX debt pile
MJ:

Ah
NH:

then there is the competition angle to consider
NH:

would this deal be allowed through??
NH:

and they are being offered just 40% of the company when they would deliver 50% of the earnings
NH:

next year
NH:

you tell me why shareholders are going to back that
MJ:

A very fair point
MJ:

But can’t blame Souter for trying though
NH:

I guess not
NH:

right I have some comment on this
NH:

here’s Cazenove (again)
NH:

Another bid emerges
Annoucements today confirm that Stagecoach has submitted a letter to National Express, apparently at its invitation, setting out the terms under which it woud be prepared to merge with National Express. According to National Express, this is “highly preliminary proposal” whereby its shareholders will own “no more than 40% of the enlarged group.”
We attach a report that looked at a Stagecoach – National Express combination in September. We would emphasise that our analysis was designed to determine the maximum price that the group could pay before the deal failed to generate value. We estimated that this was in the region of 509p; given the collapse of recent bid interest, in this scenario Stagecoach could plausibly offer less than the mooted 500p considered by the CVC/Cosmen consortium. Moreover we estimate that under most likely scenarios Stagecoach could generate returns in excess of its cost of capital from the second year of acquisition. We estimate that a scenario in which the Spanish business was sold to the Cosmen family would generate the greatest returns, and offer scope for a return of capital to shareholders.
NH:

and something on FirstGroup
NH:

which chimes with what we here
NH:

It seems unlikely in our view that FirstGroup will reconsider its earlier tentative approach and National Express has confirmed that it has not received any propopsal.
NH:

Conclusion
Looking through a £350m rights issue we estimate that there is some upside to the National Express share price, relative to a TERP of perhaps 266p using our most conservative sum of the parts valuation, which assumes cross default (see table above). Longer term we believe that shareholders could see the stock generate value based on a strengthened balance sheet and a defensive cash generative portfolio of assets.

For Stagecoach, the absence of an acquisition of the bus and rail assets of National Express removes a potentially positive catalyst for the shares in our view, but we estimate that fair value, using a DCF lies in the region of 197p (26% upside). The uncertainty about the timing of the SWT revenue support however is likely to remain a constraint on share price performance until it is settled. On the other hand a full merger with National Express could generate value, we estimate, albeit that there would be substantial execution risks in our view

NH:

RBS
NH:

Although Stagecoach is attempting to revive its bid interest, our initial thoughts are that a
rights issue is the more probable path forward for National Express, with its management not
wanting to get bogged down further, given the challenges facing the business.
NH:

Approach “highly preliminary”
The “highly preliminary” nature of Stagecoach’s latest approach is at odds to NEX’s needs at this point to
now get on with things, having been held back by the various approaches since the summer (of which SGC
played a part within the consortium bid). NEX has to resolve its balance sheet, resolve the future of its rail
unit and find a new CEO – all sooner rather than later. Stagecoach (Hold) will need board approval to
progress since it is less than 6 months since it gave a commitment (on September 3) not to pursue an
independent bid for NEX. Stagecoach’s proposal requires it to complete further “work and analysis.”
NH:

All share terms may not be enough
The reported terms, to give NEX shareholders up to 40% of the combined group suggests a value for
NEX shares of up to 492p at Friday’s close (before any reaction to this latest news). NEX appeared to
have wide support for a rights issue when the previous consortium bid was at 450p in cash, so given
the value of SGC’s interest will be subject to market movements, this all share version may not be
enough on the reported terms. The Times is reporting “insiders” as saying NEX is likely to rebuff
SGC’s interest on the 60/40 split terms. On FY10 EV/EBITDA, National Express trades at 5.8x our
forecasts (excluding rail contributions that we assume will be cross defaulted). Stagecoach is at 6.6x
(excluding the 1-year impact of potential SWT losses that are subject to the outcome of the revenue
support dispute). We believe the sector average is 6.2x.
NH:

Perhaps a hard sell to Stagecoach shareholders
When we looked at funding the acquisitions SGC was planning to make out of the consortium, it was
the use of debt that was key to drive the eps enhancement of the proposed deal. Whilst we are yet to
do the work on an all share offer for the entire NEX group, we suspect SGC management may have
to work hard to convince its own shareholders to support such a deal.
NH:

want some more?
MJ:

Why not
NH:

Investec
NH:

Statements from National Express and Stagecoach confirm press reports
about a possible merger. However, with Stagecoach needing time to confirm
terms of any deal and National Express requiring a rights issue by the year
end, time appears to be counting against such a transaction and we are
sceptical that it will occur. Although we keep our HOLD recommendation for
now, we still see valuation attraction in NEX as a standalone refinanced entity.
NH:

Our view. While we think it unlikely that a bid will emerge, we do see clear
attractions to NEX ‘s shares, especially if the company is successful in fighting
off cross default on its East Anglia and c2c rail franchises and launches a
£340m rights issue; on a pro forma basis, we think the shares would then trade
on c.7x P/E, 5x EV/EBITDA – the bottom end of the peer group range.
MJ:

So, basically eveyone is skeptical on this
NH:

yep, including me. Opportunistic by Souter
NH:

but I think it will fail
NH:

burned hedgies been given get out of jail card
MJ:

A pretty limp one though
MJ:

Shares have a fair bit to go up before their fingers start to feel better
NH:

true
11:43AM
NH:

Right, I am going to flash
NH:

look away
NH:

RTRS-YELL GROUP PLC – EXTENDING THE DEADLINE FOR RESPONSES FOR A SHORT PERIOD TO 5:00PM
11:36 19Oct09 RTRS-YELL GROUP PLC – PLEASED TO ANNOUNCE THAT PROPOSALS HAVE FOUND FAVOUR WITH A HIGH PERCENTAGE BY VALUE OF ITS LENDERS
11:37 19Oct09 RTRS-YELL GROUP PLC – EXTENDING THE DEADLINE FOR RESPONSES FOR A SHORT PERIOD TO 5:00PM (LONDON TIME) ON MON, 26 OCT
NH:

and the price reaction is
NH:

down 1.65p at 59.5p
NH:

Now, I don’t think there will be a problem getting this through
NH:

the delay will probably be down to the fact
NH:

that the syndicate is go big
NH:

the rights issue is still coming on this
11:46AM
NH:

Miles
NH:

have we got any RAW?
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.
MJ:

Well
MJ:

This morning has been quite quiet
MJ:

but a dash of psuedo RAW
MJ:

has been this Merrills note on BHP
MJ:

Dredging up the Potash Corp rumours again
NH:

(QLD – could u keep the comments a bit smaller or use a URL pls. I really don’t want to use the zapper – thanks)
MJ:

Potash, as many will know, has been a particularly popular subject on the rumour mill this year
NH:

have you got any of that
MJ:

Coming right up
MJ:

We believe BHP can bid for Potash Corp (POT)
We estimate that an all-cash bid for POT at a 30% premium could be 13% EPS
accretive in years 1 and 2. From discussions with clients during recent marketing
we believe the market is receptive to BHP acquiring potash assets and accepts
the logic that, if acquired, Potash would be a sensible addition to BHP’s portfolio.
Why is POT the right deal for BHP?
1) BHP has an interest in being a world-scale producer of potash. This deal
provides instant scale. 2) BHP wants to own world class long life, large scale, low
cost assets. We think POT ticks all these boxes. 3) POT dovetails nicely with
BHP’s existing land position and Greenfield project in Canada. 4) BHP’s balance
sheet is ungeared and the company generates huge cashflow. An all cash
acquisition regears the company and adds an appropriate, complementary asset.
MJ:

Kudos for being ungeared into downturn but missed bottom
BHP Billiton was widely admired by investors for entering into the downturn with
little/no debt having walked away from its bid for Rio Tinto. However, whether
because it couldn’t move quickly enough or because its bids for available assets
were too low, in our view BHP did not use its balance sheet to its advantage
during the downturn. To be fair, the high quality assets that BHP wants to acquire
are rarely going to be distressed and the downturn was relatively short lived.
Why now? Sentiment regarding potash nearing a low
We believe that negative sentiment regarding Potash gives BHP a second chance
at acquiring assets at a cycle low. Ag chemical companies have issued profit
warnings and the potash price has dropped below our estimate of long term price
for the first time in years. We think that bearishness is likely to persist up until
China settles which could be 2-3 months out and could be a powerful catalyst.
Distributor inventory levels in the Americas are low and will need to be restocked.
In our view if there ever was a time to buy a big potash producer, this is it.
NH:

thanks for that
NH:

I have a little bit of RAW
NH:

on ENRC
MJ:

(@old mudcrab – we will have to zap that I’m afraid)
MJ:

Bit too long for here
MJ:

Sorry Neil, you were saying…
NH:

apparently they are looking at something called IMR
NH:

hang on
NH:

there’s a bit of comment from Liberum on this
NH:

(QLD has not been zapped – just the post)
NH:

We note talk in the weekend press about ENRC planning to buy out its founders’ African assets (in a vehicle called International Mineral Resources, IMR) during the first quarter next year. Samancor, as far as we are aware of, is the only African asset owned by IMR. The Samancor Chrome business is the third largest chrome producer in the world and was recently acquired by IMR. The combination with ENRC’s Kazakh assets would make it a materially larger producer than the next largest producer, Xstrata-Merafe. Samancor produces c. 1mt of charge chrome, which at a 10c/lb operating margin (assuming cash costs of 90c/lb and 3c/lb in discounts from the spot settlement of 103c/lb) generates operating earnings of $110m. While we don’t have accurate and up to date cost info for Samancor, with reference to other South African producers position on the cost curve we believe that Rand strength could well be squeezing this margin into the red at the moment. We think that the potential acquisition could dilute ENRC’s asset quality and may raise valuation (given the related party transaction) and free float issues. Apart from volume synergies on ferrochrome marketing, we don’t see any other material synergies from this potential acquisition. However, we believe that ENRC is unlikely to overpay for the assets given the founders control less than 50% of the ownership of ENRC.
NH:

The company and its JV partner, Ben Stein Group Resources (BSGR), have sold their interest in Luanshya Copper Mines (Baluba mine in Zambia & Muliashi project in DR Congo) and Chambishi Metals (Zambian Cobalt) to China Non-Ferrous Metals Mining Corp (CNMC) for $50mn in May 2009.
MJ:

A few interesting names in that
NH:

Given this would be a related party transaction, the required independent valuation on these assets will be key to how the transaction is perceived by the market. If they overpay in shares, minorities will feel very unhappy. Until a deal is announced it is probably a reason to be cautious on the shares. Rightly or wrongly, we would expect the market to connect these press reports regarding founding shareholders involvement in the company with recent large scale board departures (the FD, Chairman and one NED have left in the last six months). Unlike other shareholder controlled companies such as Kazakhmys, Antofagasta and Vedanta, none of ENRC’s key shareholders have direct board positions – making potential conflicts with management/NEDs more likely.

Assuming the company pays $2bn for IMR’s assets (as rumoured in the press) in all-share deal at current share price, we believe that the company has to issue some 134mn of new shares to the founders for the acquisition which would dilute the free float from 21% to 19% and Kazakhmys’ stake from 26% to 23.6%, still above threshold stake of 20% which we believe is required for equity accounting of their ENRC interest.

Eurasian Natural Resources Corp (ENRC:LSE): Last: 949.00, up 14 (+1.50%), High: 957.00, Low: 937.50, Volume: 372.97k
11:51AM
MJ:

ROTR was baying for blood with Old mudcrab
NH:

it’s like Rome
NH:

zap him, zap him, zap him
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.
MJ:

Then you have to give the thumbs up or down
NH:

yeah, it’s just like Gladitor
11:52AM
NH:

Right
NH:

let’s change asset classes for a moment
NH:

what’s the GBK doing?
MJ:

Down against the dollar and euro this morning
NH:

hmm
NH:

that’s probably on the back of that Adam Posen interview at the weekend
NH:

more mixed messages from the MPC
NH:

he wants more QE not less
MJ:

After last weeks heavy hints that QE was coming to a close
NH:

indeed
NH:

good interview
NH:

and Posen is very interesting
NH:

some great views on the banks
NH:

basically they are all too big
NH:

annd should be broken up
NH:

here’s the piece
NH:

NH:

Posen, who joined the MPC at the beginning of last month, said the decision on whether to extend quantitative easing, mainly the purchase by the Bank of gilts, would depend on the outcome of the Bank’s forecasting round, which is now under way.

He suggested, however, that the process probably needed to go farther. “It goes back to how much you think there is real overshooting and inflation risk, and how much you think the financial system has recovered,” he said.

MJ:

Cable at $1.6310
NH:

My answer to the first is that I’m not worried about overshooting inflation right now. The answer to the second is that we’ll have a forecasting round and we’ll decide. My personal view is that if you look at the things we’re looking at … we’re not there yet.”
NH:

and on the banks
NH:

here’s what Posen, a noted bank hater, thinks
NH:

His criticism of the banks does not stop there. Even a brief immersion in Britain’s banking system has convinced him the structure is wrong. The problem of “too big to fail” is not just about big global banks — it starts right here in Britain.

“There were some fundamental problems in the system that were exposed by the crisis, including the behaviour of ‘too big to fail’ institutions and the severe concentration of the banking sector in the UK, and I think those two things compound each other,” he said. “There may be a case for limiting bank size, full stop.”

What might that mean in practical terms? If he had his way, it would mean the break-up of some of Britain’s banks.

“We have to think about restructuring the banking system, especially where the government already has huge stakes, and that’s not just in the UK, but obviously starting in the UK,” he said. “That’s where the debate has to move.”

NH:

Both Royal Bank of Scotland and Lloyds Banking Group are big, and the government has large stakes in both. “There’s no reason we shouldn’t be able to say, if we decide: ‘Sorry, super big banks don’t make any sense — the costs are too great’,” he said. “You don’t necessarily return the banks in government hands to the private sector in the form and size that you started with.”
MJ:

Thats some rather radical stuff no?
NH:

it is
NH:

and also
NH:

a shot across the Bows of Cameron
NH:

who wants to end QE
NH:

and other unsual measures
11:57AM
NH:

Right
NH:

Wellstream
NH:

here’s the UBS note
NH:

that has caused the share price fall today
MJ:

have you got any of that?
NH:

Wellstream’s 1H results were a profit warning
1H results announced on 20 August were in our view a profit warning, citing weak production,
low margin product mix, lower prices, and lower utilisation. Brazilian demand in our view
remains strong in the medium term but with less activity in the short term, particularly in the
Santos basin. Although the shares have under-performed since results – off 6% vs. the market
–.we believe there is further to go. If the company is a target, acquirers and value are hard to identify

As we highlighted in our February initiation, Wellstream is a small independent company with nocontrolling shareholder, currently subject to a cyclical down-swing in demand, and additionally
about to make a major investment in installation capacity, a strategic change. We note the COO
sold half of his shares on 29 September. We believe none of its direct competitors is a likely
buyer.

NH:

Investment in installation capacity highlights strategic challenge
Wellstream has been seeking to control installation capacity since its IPO, initially through the
Seastream JV and now with a proposed JV for a new build high capacity vessel to a
Wellstream-approved design. This change to a manufacture + install strategy means more
capital employed, more operating risk, and most likely greater volatility – which we doubt is
priced in.

Valuation: Downgrade to Sell, raise 12-month price target to 520p
We base our valuation on a mix of DCF and replacement cost. At our price target the stock
would trade at 8.9x 2010 EV/EBIT and 11.4x 2010 P/E, roughly a 20% discount to the sector’s current multiples. We make no changes to our EPS estimates.

11:58AM
NH:

Okay
NH:

it is almost midday
NH:

anything to round up on?
MJ:

Well its a big week for Cadbury this week
MJ:

last trading statment before the kraft deadline
MJ:

Andrew Wood of Bernstein, top analyst in the sector, has put out a note this morning
NH:

ah
MJ:

Curtain raiser
NH:

what will Cadbury say then?
MJ:

Well, according to Wood
MJ:

equally as important will be Cadbury’s guidance for FY 2009. This should be Cadbury’s last
operating update to the market before the expiration of the Takeover Panel’s “put up or shut up” clause to
Kraft on 9th November. We believe that under Takeover Panel rules, an increase in short-term guidance
(i.e. 2009) is allowed as long as it can be verified by the auditors. Therefore, if the rationale for the
increased guidance is well-founded and documented, Cadbury should be able to increase 2009 guidance.
Over the past 2 years, management has been very cautious with guidance, often frustratingly so.
Management would be very prudent in initial guidance, then take guidance up throughout the year…then
over-deliver.
MJ:

This was most dramatic with H1 margin growth guidance, which in April was below FY
guidance (+70bps), then in June was above…and then Cadbury reported +145bps in August. However, it
now behooves Cadbury management to give “realistic” and reasonably specific guidance on 2009 organic
growth, margins, FX and earnings…the time for prudence is in the past. We expect that Cadbury has the
ability to take up guidance which will serve as i) a way to maximise the price Kraft is prepared/required
to pay for Cadbury, thereby enhancing shareholder value, or ii) a defence to the Kraft bid, by highlighting
that there is still significant potential for the business as a stand-alone and so making it less attractive for
Cadbury shareholders to sell out (at a low price) to Kraft.
NH:

hmmm
MJ:

Certainly will be one of the more interetsing Cadburys trading statements
NH:

yes
NH:

there’s is their last chance before the deadline
NH:

to save themselves
12:01PM
NH:

Okay then
NH:

I think we are done
NH:

other than to reflect on William Hill
NH:

while Ladbrooks was hit by unfavourable footie results
NH:

it does not seem to have affected Hill’s
NH:

look at the shares up
NH:

up 15.6p at 176.6p following the a Q3 trading statement
NH:

which is rather good
MJ:

We could round off with a spot of comment on that
NH:

good idea
NH:

Here’s Investec
NH:

The recycling effect of customer winnings and further cost savings in retail
has largely mitigated the impact of unfavourable sporting results on gross
margins. Machines continue to perform well and, with the Storm rollout, we
expect further positive results next year. PTEC integration remains on-track,
although sports results reduce our Online/group FY09E estimates by c.3.5%.
FY10E is unchanged. Better than expected, after LAD’s recent warning.
NH:

Our view. After the much publicised weakness in sports margins and profits
warning from Ladbrokes, this statement is much better than we had anticipated.
William Hill has momentum in Online, which we expect to gather pace into
FY10E as the benefits of the PTEC deal are delivered, and machine growth will
be supported by the Storm rollout. We believe the weakness in sports margins is
a temporary phenomenon and that this is a good opportunity to buy into a cash
generative, strongly positioned UK leisure retailer, with an attractive forecast
yield, valuation and medium term online growth story. We will review our PT, but
retain our Buy recommendation.
NH:

and Collins Stewart
NH:

William Hill’s IMS demonstrates resilient trading during a period of exceptionally difficult sporting results. Group net revenue is still up year to date (+3%), and down only 3% in Q3, compared to -15% at Ladbrokes (clear outperformance notwithstanding minority impact). Machines continue to grow despite more challenging comps (+4% vs. -2% for Ladbrokes) and OTC volumes remain robust. Moreover, William Hill’s retail gross margin continues to outperform (15.4% vs. 14%), which is also mitigating downside. Online progress is highly encouraging on two levels. First, sportsbook volumes up 40% (Q3) and new accounts up 23% (YTD) demonstrate that improved product is regaining market share. Second, Playtech integration is on track and the williamhill.com casino should be launched this month.
NH:

We continue to believe that William Hill’s difficulties during 2009E have been sports results and Online timing related rather than anything more structural. We see the underlying evidence provided in the Q3 IMS as bearing this out and making growth in 2010E highly visible. If our bullish (but by no means outlandish) forecasts for next year prove correct, the stock is trading on 6.5x earnings. Even on a more cautious ‘trough’ view, the stock is now on less than 10x, representing excellent value, in our view. We reiterate BUY
MJ:

Thanks for that
MJ:

Brings things to a close
MJ:

Thanks for all the comments
NH:

yep thanks
NH:

and my is quiet today
NH:

FTSE 100 vol on the LSE is just 281m shares
NH:

it is a public holiday State side?
MJ:

Don’t think so
NH:

very light volume
NH:

London market volume is just 600m
NH:

not good at the half way point
NH:

that’s like Xmas Eve
PM:

No public holiday over here
MJ:

Hi Paul
NH:

no one wants to sell
PM:

Hi there
NH:

and then again
NH:

no one wants to chase the market
NH:

dead lock
NH:

in that sense
NH:

although the market drifts higher
NH:

Hello Murph
PM:

Hi Neil
NH:

How’s things?
NH:

seen any rats?
PM:

Oh fine
PM:

Just a bit cold over here
MJ:

PM:

Just getting light
PM:

But its winter already in NY
NH:

same here
PM:

I need to buy a hat
NH:

v cold this morning
NH:

what sort of hat?
MJ:

What style Paul?
PM:

hat wise?
PM:

Dunno — what do you suggest
PM:

Peruvian?
NH:

a press hat
PM:

Gangsa?
NH:

with a card in it
PM:

gansta
MJ:

A bowler would suit as well I think
PM:

Will have a look at the Wire
PM:

Got to be some style hints in there
NH:

NH:

are we done?
PM:

Yeah
NH:

what about one of these Murph
PM:

catch up later
NH:

NH:

got a spare one in London
PM:

Lovely
MJ:

Might be coming back into fashion soon those
PM:

Have a good lunch
PM:

I miss lunch
NH:

NH:

so 2008
NH:

that’s the problem
NH:

not cool anymore
MJ:

Ok guys – I must run
MJ:

Bye everyone
PM:

seeya
NH:

bye

This entry was posted by Neil Hume on Monday, October 19th, 2009 at 11:02 and is filed under Uncategorised. Edit this entry.

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