Markets live chat transcript for the chat ending at 12:17 on 22 Oct 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ)
NH:
it’s 11.03am
NH:
Good morning
NH:
and welcome to Markets Live
NH:
FT Alphaville’s daily thrash round the market
NH:
Right, Miles
NH:
are they hear yet
MJ:
can’t see them
MJ:
but Will sits round the corner
MJ:
and the meeting rooms on the river side of the building
MJ:
anyway what does he look like?
NH:
heavily tanned American guy
NH:
looks a bit like John Travolta
NH:
a bit plumper maybe
MJ:
no sign yet
MJ:
I’m getting a bit scared
NH:
damn
NH:
was going to doorstep him with my notepad
MJ:
Neil
MJ:
the readers probably have no idea what we are on about
NH:
oh, sorry
NH:
we have a visitor
NH:
a very important one
NH:
from an emerging oil company
NH:
yep, you guessed it Gulf Keystone
NH:
here’s a pic
NH:
chairman and chief executive Todd F Kozel
MJ:
Has he come to educate us about the company?
NH:
is in the building this morning
NH:
actually no
NH:
he’s come to see Will MacNamara
NH:
one of the commodity reporters
NH:
for some reason Todd does not want to come by and say hello
MJ:
I wonder why?
NH:
anyway
NH:
Todd will doubtless be telling Will about today’s independent report
NH:
which cofirms the find
MJ:
The market doesn’t seem too impressed
Gulf Keystone Petroleum (GKP:LSE): Last: 104.50, down 9.5 (-8.33%), High: 116.00, Low: 102.00, Volume: 4.43m
NH:
well, it’s probably a massive disappointment if you were expecting the reserve to be upwards of 10bn barrels of oil by now
NH:
anyway I don’t want to bang on about this too much
NH:
but here’s are a few bits of comment
NH:
that sum up today’s news
NH:
And so we begin to see the first independent assessment of this significant find in Kurdistan – and the numbers aren’t going to blow your socks off. STOIIP P90 of 956mmbbl, P50 of 2.2bn and P10 of 5.26bn for the Jurassic really means you’re going to need to believe well through P50 to justify the current price. No mention of recovery factors, which will be key to value, and let’s not forget this is 18 API oil, so reasonably heavy with a low GoR. Yes, we’ve still got the Triassic to come, which looks a lot more attractive at 40 API, but either you are a True Believer here or not. I would still suggest running your own numbers here, and using an appropriate discount rate – we’ve seen some people use 10%, but that seems very aggressive to us given political risk in the region. Rumours continue to abound of ‘strategic investors’ looking to take a stake, but I would have thought that this is difficult to value right now for industry as much as anyone else.
NH:
that’s from a secotr watcher
NH:
and this is from Evo Securities
NH:
EVO TAKE – Gulf Keystone has provided a preliminary independent evaluation of the Shaikan-1 well. The in–place resource estimates are not radically different from those supplied by the company over recent weeks. It is still early days in the well evaluation, so therefore we have no reason to change our assessment of the potential value for Shaikan which remains more cautious than the market.
DETAILS – The experts, Dynamic Global Advisors, have confirmed that the well has found a significant resource of low gravity oil in the Jurassic formations in the Shaikan-1 well. The range of in place resource is 1-5.3 bn barrels with a mean of 2.8bn barrels. Additional data from lower horizons continue to be evaluated and resource estimates should increase.
VALUATION AND RECOMMENDATION –We retain our 82p price target based on a 4bn barrel resource in place and a 33% recovery factor risked at 50%.
MJ:
good comment
MJ:
and what about the independent consultants?
MJ:
Dynamic Global Advisors
MJ:
have we found a website for them?
NH:
nope
MJ:
but they are an “independently-owned E&P consultancy, providing advice and services to national, institutional, and corporate clients worldwide”
MJ:
do we have anything on them?
NH:
yes
NH:
lots in the Long Room now
NH:
including the independent report
NH:
if people are interested
NH:
Market cap of company was $1bn earlier this week
MJ:
Anyway, I think we should officially declare this a GKP-free zone now
MJ:
We just couldn’t pass up the opportunity of Todd being in the same building as us
NH:
Okay
NH:
let’s head to the wider market
NH:
because the FTSE 100 has suffered a nasty fall this morning
11:10AM
MJ:
It has
MJ:
Index currently off 70 points at 5,188
MJ:
mining sector doing the damage
NH:
wow
NH:
it is
NH:
what caused that?
MJ:
well the dollar is a bit stronger
MJ:
but I think it is the Chinese GDP figures
NH:
hang on a moment
NH:
I thought they were good
MJ:
They were
MJ:
8.9% year on year
MJ:
but some people were expecting more
MJ:
and when they look at what’s fuelled the growth
MJ:
well that has spooked people too
MJ:
hang on a moment
MJ:
have a look at this
MJ:
it’s from Standard Chartered
MJ:
and a good round up of why the market has reacted badly to the number
MJ:
China.s Q3 growth in line with our forecast
Yet, this may disappoint market which has positioned for upside surprises
USD-AXJ is consolidating for now but the down-trend remains in place
Yet, this may disappoint market which has positioned for upside surprises
USD-AXJ is consolidating for now but the down-trend remains in place
The Chinese economy continues to go from strength to strength. In Q3, it expanded 8.9% y/y, after registering 7.9% growth in Q2-2009. This is broadly in line our forecast of 9%, which is also the market consensus according to Bloomberg. Industrial production growth accelerated to 13.9% y/y in September from 12.3% in August. The pace of recovery is clearly encouraging, and the expectation of a strong recovery in China has prompted the market to step up its expectations of Chinese yuan (CNY) revaluation (more on this later) and bullish commodity demand going forward.
MJ:
Strong Chinese import data was one factor that has helped copper to break above the USD 6,000-6,500/tonne range this week. We see China.s recovery story as the anchor of the Asian recovery story, and the latest set of data underpins this view. The State Council.s comments on ¡°the need to better manage inflationary expectations¡± are important since this is the first time that inflation risk is mentioned by the top government body. The consumer price index declined by -0.8% y/y in September, and the producer price index fell by -7.0% in the same month, both has modestly picked up from previous month.
However, it is also argued that this improvement is led by public spending and infrastructure investment, and that the broad recovery is uneven across sectors. While fixed asset investment expanded by 33.3% during the first nine months of the year and retail sales grew by 15.5% y/y in September after rising 15.4% y/y in August, exports are still contracting. They fell by 15.2% y/y in September, following a 23.4% drop in August. The trade surplus is also significantly lower this year compared with the past . the USD 39.2bn trade surplus for Q3-2009 was the lowest recorded in Q3 since 2005 and less than half that of Q3-2008. This .hot inside, cool outside. recovery justifies the authorities. cautious approach to economic policy, in our view, but there could be more caution over inflation down the road.
MJ:
While the growth data is in line with our view, this may disappoint some investors in the market as they position for upside surprises in the data. Nonetheless, this enforces our view that USD-CNY is likely to trade in a narrow range until H2-2010. The pace of contraction exports slowed by more than expected to 15.2% y/y in September from 23.4% y/y in August. The current trend suggests that China could return to positive y/y export growth by November, though activity will still fall short of the peak observed in 2008. Despite improving export data, Chinese exporters still face uncertainty about the order outlook for 2010 following the Christmas/New Year period. This implies that the authorities are likely to continue erring on the side on caution and keep the CNY stable against the USD, while the CNY NEER will likely continue to weaken. Thus, the recent down-move in USD-CNY NDF outright, which is currently forecasting that USD-CNY will reach 6.60 in 12 months, is looking increasingly stretched relative to our forecast. Near-term, we expect the CNY to underperform other Asia ex-Japan (AXJ) currencies such as the Korean won (KRW), Indonesian rupiah (IDR), Indian rupee (INR), Philippine peso (PHP), and Malaysian ringgit (MYR).
NH:
hmmm
NH:
so it’s mainly driven by the huge stimulus programme
MJ:
yep
MJ:
and I don’t know if you saw Tracy’s excellent post earlier
MJ:
but that is starting to worry a few senior people in China
NH:
yep
NH:
worth reading that
NH:
here’s a taster
NH:
Qin Xiao, chairman of China Merchants Group and of the Asia Business Council, is worried.
He is worried about China — and specifically whether the Chinese authorities will be able to extricate themselves from their loose and stimulus-heavy monetary and fiscal policies of recent months. Here are some excerpts from his Thursday FT op-ed:
He is worried about China — and specifically whether the Chinese authorities will be able to extricate themselves from their loose and stimulus-heavy monetary and fiscal policies of recent months. Here are some excerpts from his Thursday FT op-ed:
From a macro point of view, we still have an unbalanced global economy. The US consumes too much and saves too little. China’s problem is the opposite. Despite years of encouragement from government to spend more, many Chinese consumers continue to be more comfortable saving than spending. As Wen Jiabao, the Chinese premier, said just last month at the World Economic Forum in Dalian, China’s economic recovery “is not yet steady, solid and balanced”.
11:15AM
MJ:
Thanks for that
MJ:
and just back to the miners for a minute
MJ:
John Kemp at Reuters sent this over earlier this morning
MJ:
seems pretty interesting
MJ:
The number of vessels queued in the roads waiting to enter Australia’s massive Newcastle coal loading terminal has fallen to the lowest level for more than three years
NH:
Now, that’s very interesting
NH:
very interesting
NH:
not sure what it means yet
NH:
does it mean
NH:
China has completed its restocking
NH:
and it running down reserves
NH:
or has the load-management systems at Newcastle have finally proved successful, or a combination of both?
NH:
I don’t know
NH:
but we can put up some share prices
NH:
of the miners today
Fresnillo (FRES:LSE): Last: 793.00, down 25 (-3.06%), High: 802.00, Low: 761.50, Volume: 890.26k
Kazakhmys (KAZ:LSE): Last: 1,253, down 30 (-2.34%), High: 1,266, Low: 1,234, Volume: 711.14k
Ferrexpo (FXPO:LSE): Last: 160.00, down 8.1 (-4.82%), High: 165.20, Low: 158.60, Volume: 286.74k
11:18AM
NH:
Movinig on
MJ:
There was a bit of funny business going on the forex markets this morning
MJ:
FT currency correspondent Peter Garnham has been looking at it
NH:
What happened?
MJ:
Well
MJ:
The South African rand got smacked
MJ:
after a news wire reported that the SA government was going to “freeze” the currency. Hit a three week low against the dollar
NH:
Which news wire was it? Reuters, Dow Jones?
NH:
Bloomie??
MJ:
Sake 24
NH:
Who?
MJ:
Its South African I think
MJ:
Website looks to be in Afrikans
MJ:
Here is a BB pick up
MJ:
Oct. 22 (Bloomberg) — The rand tumbled the most of any major or emerging-market currency after the Sake24 financial news service reported the government planned to “freeze” the currency. The government denied any such plan.
The rand fell 1.2 percent to 7.5045 per dollar, its weakest intraday level since Oct. 5 and the biggest slide among 26 emerging-market and 16 major currencies tracked by Bloomberg, as of 10:27 a.m. in Johannesburg.
Sake24 said Economic Development Minister Ebrahim Patel was preparing “radical” economic policy adjustments that include fixing the exchange rate to stabilize the currency in a report that didn’t cite anyone.
The report has “absolutely no basis,” Zubeida Jaffer, Patel’s spokeswoman, said in a telephone interview from Cape Town today. “I have spoken to the minister and as far as we’re concerned, it’s without any foundation. It’s a mischief-making exercise.”
The rand fell 1.2 percent to 7.5045 per dollar, its weakest intraday level since Oct. 5 and the biggest slide among 26 emerging-market and 16 major currencies tracked by Bloomberg, as of 10:27 a.m. in Johannesburg.
Sake24 said Economic Development Minister Ebrahim Patel was preparing “radical” economic policy adjustments that include fixing the exchange rate to stabilize the currency in a report that didn’t cite anyone.
The report has “absolutely no basis,” Zubeida Jaffer, Patel’s spokeswoman, said in a telephone interview from Cape Town today. “I have spoken to the minister and as far as we’re concerned, it’s without any foundation. It’s a mischief-making exercise.”
NH:
Looks like that tale must have been inspired by events from Brazil earlier in the week.
NH:
Some South African stocks were weak this morning too.
NH:
funny story
11:20AM
NH:
Okay
NH:
let’s pause
NH:
and answer a few questions from the ROTR
NH:
User4230502 – Findel. Not our story in the Daily Mail. Have heard nothing about a Findel from our sources
NH:
as for the Dick Bove downgrade of Wells Fargo
NH:
that was said to have knocked Wall Street overnight
NH:
we have that
MJ:
I can’t believe Bove could have rocked Wall Street on his own
NH:
nor me
NH:
but you know how it is with market reporting
NH:
you always have to a reason
NH:
for the market declining
NH:
even if it is post hoc
MJ:
The desperate quest for causation
NH:
indeed
NH:
anyway
NH:
here’s Bove
NH:
Wells Fargo reported earnings of $0.56 per share for the third quarter.
This was well above my estimate of $0.41 per share and in line with
second quarter results. The earnings forecast for 2009 has been
increased to $2.08 per share from $1.94 per share. The estimates for
2010 and 2011 remain unchanged at $1.93 per share and $2.67 per
share, respectively. The target price on the stock is being maintained at
$25 per share. The rating is reduced to Sell.
This was well above my estimate of $0.41 per share and in line with
second quarter results. The earnings forecast for 2009 has been
increased to $2.08 per share from $1.94 per share. The estimates for
2010 and 2011 remain unchanged at $1.93 per share and $2.67 per
share, respectively. The target price on the stock is being maintained at
$25 per share. The rating is reduced to Sell.
NH:
While the quarterly number was higher than the expected, the increase
seems to be due to two factors. The servicing fees on mortgages (MSR)
jumped by $1.1 billion or $0.15 per share, and the tax rate fell by 2.2%
adding another $0.02 per share to earnings.
The volatility in the mortgage servicing fee is impossible to explain. In
the past five quarters this fee has moved around as follows: $525 million,
negative $40 million, $843 million, $753 million, and $1.9 billion.
Mortgage rates in these five quarters have been as follows: 6.31%,
5.87%, 5.06%, 5.03%, and 5.15%. These rates would argue for a constant
decline in the value of mortgage servicing until the third quarter this
year.
seems to be due to two factors. The servicing fees on mortgages (MSR)
jumped by $1.1 billion or $0.15 per share, and the tax rate fell by 2.2%
adding another $0.02 per share to earnings.
The volatility in the mortgage servicing fee is impossible to explain. In
the past five quarters this fee has moved around as follows: $525 million,
negative $40 million, $843 million, $753 million, and $1.9 billion.
Mortgage rates in these five quarters have been as follows: 6.31%,
5.87%, 5.06%, 5.03%, and 5.15%. These rates would argue for a constant
decline in the value of mortgage servicing until the third quarter this
year.
NH:
This is not what is depicted in the Wells Fargo numbers. The reason is
that Wells hedges its servicing portfolio. These hedges are very large.
For example in the second quarter, the bank lost $1.3 billion on its MSR
hedges. In the third quarter, it made $3.6 billion on these hedges. The
swing from quarter to quarter was $4.9 billion. The earnings per share
impact was $0.68 per share. This is more money than the bank earned,
overall, including the hedge profit, in the third quarter.
Despite the fact that this is the most compelling earnings event in each
quarter, the bank never spends much more than 5 seconds discussing it.
It is an unsustainable profit but MSR hedges keep coming through for the
company when it needs to bolster earnings.
The remaining businesses of the bank were very mixed in the quarter.
Most disturbing is that loan losses seem to be accelerating on the
negative side.
that Wells hedges its servicing portfolio. These hedges are very large.
For example in the second quarter, the bank lost $1.3 billion on its MSR
hedges. In the third quarter, it made $3.6 billion on these hedges. The
swing from quarter to quarter was $4.9 billion. The earnings per share
impact was $0.68 per share. This is more money than the bank earned,
overall, including the hedge profit, in the third quarter.
Despite the fact that this is the most compelling earnings event in each
quarter, the bank never spends much more than 5 seconds discussing it.
It is an unsustainable profit but MSR hedges keep coming through for the
company when it needs to bolster earnings.
The remaining businesses of the bank were very mixed in the quarter.
Most disturbing is that loan losses seem to be accelerating on the
negative side.
11:23AM
NH:
and keepin gon the oil theme
NH:
because that’s all I seem to do at the moment
NH:
in fact I might apply for the junior oil reporting job
NH:
here’s something on Dragon Oil
NH:
from Merrioll Lynch
NH:
Key takeaways from the Dragon’s trading statement
l this morning provided an operational update with the key incremental newsflow
centering on:
(1) Q309 production averaging 46kb/d (+9%YoY) and a new 2009 production
growth guidance of +10% YoY, which is consistent with our expectation of
45.5kb/d average 2009 production (+11% YoY),
(2) Q309 capex at US$56mn (1H09 capex was US$155mn) – lower than
expected, due to the delays in the infrastructure projects (no implications on the
future production)- but 2009 capex guidance of US$400mn, in line with our
forecast.
(3) Q309 realised prices achieving an 0.8% premium to Brent (vs. BofAMLe 4%
discount and 0.7% discount in 3Q08), which could potentially have up to 3%
positive impact on our 2009E NI estimates
l this morning provided an operational update with the key incremental newsflow
centering on:
(1) Q309 production averaging 46kb/d (+9%YoY) and a new 2009 production
growth guidance of +10% YoY, which is consistent with our expectation of
45.5kb/d average 2009 production (+11% YoY),
(2) Q309 capex at US$56mn (1H09 capex was US$155mn) – lower than
expected, due to the delays in the infrastructure projects (no implications on the
future production)- but 2009 capex guidance of US$400mn, in line with our
forecast.
(3) Q309 realised prices achieving an 0.8% premium to Brent (vs. BofAMLe 4%
discount and 0.7% discount in 3Q08), which could potentially have up to 3%
positive impact on our 2009E NI estimates
NH:
Still waiting for the ENOC bid
NH:
Dragon confirmed that the negotiations with ENOC are in progress. We believe
that the M&A (ENOC’s approach) will be the main share price driver in the near
term and would not be surprised to see a “put up or shut up” notice being issued
to ENOC if no offer materialises in the near future. Although we understand that
in the absence of the material new information, Dragon is likely to underperform if
the sector rallies, in our view, the current situation provides defensive features to
the stock, while the potential upside (if Dragon receives an approach for a third
party) is significant.
Gazprom to resume the Turkmen gas purchases – positive for Dragon
We view Gazprom’s plans to resume the purchases of the Turkmen gas in the
near future as a positive catalyst for Dragon. Given that Russia accounts for
c.85% of the Turkmen gas exports, a suspension of the gas supplies from
Turkmenistan to Russia in April 2009 created a huge spare capacity – a negative
newsflow for the independent gas producers, including Dragon. However,
following the Russian president’s visit to Turkmenistan several weeks ago,
Gazprom resumed negotiation with the Turkmen government, which is likely to
result in the resumption of the Turkmen gas supplies to Russia and most likely at
the European netback prices, in our view. This has two major positive implications
for Dragon
that the M&A (ENOC’s approach) will be the main share price driver in the near
term and would not be surprised to see a “put up or shut up” notice being issued
to ENOC if no offer materialises in the near future. Although we understand that
in the absence of the material new information, Dragon is likely to underperform if
the sector rallies, in our view, the current situation provides defensive features to
the stock, while the potential upside (if Dragon receives an approach for a third
party) is significant.
Gazprom to resume the Turkmen gas purchases – positive for Dragon
We view Gazprom’s plans to resume the purchases of the Turkmen gas in the
near future as a positive catalyst for Dragon. Given that Russia accounts for
c.85% of the Turkmen gas exports, a suspension of the gas supplies from
Turkmenistan to Russia in April 2009 created a huge spare capacity – a negative
newsflow for the independent gas producers, including Dragon. However,
following the Russian president’s visit to Turkmenistan several weeks ago,
Gazprom resumed negotiation with the Turkmen government, which is likely to
result in the resumption of the Turkmen gas supplies to Russia and most likely at
the European netback prices, in our view. This has two major positive implications
for Dragon
NH:
First, given that 10Bcm of the Turkmen gas will start flowing to China in 2010,
while Iran is planning to increase its purchases of the Turkmen gas next year, in
our opinion, the Turkmen government is highly incentivised to sign commercial
gas contracts with the producers, such as Dragon. Second, similar to the Uzbek
model (eg Lukoil), we believe that the Turkmen government is highly likely to pay
only a modest discount to the European netback price for Dragon’s gas.
BUY: M&A play with the multiple catalysts
We reiterate our Buy recommendation and 450p/sh PO set at our NAV. We view
Dragon as a compelling M&A play suggesting 10-100% upside (see A compelling
M&A play, 450p/sh PO) with the strong growth potential (15% production CAGR
over 2009E-2014E) and a further upside from the monetisation of 3.2Tcf of gas
resources. Multiple catalysts we see for the stock are: (1) M&A, (2) drilling results,
(3) signing of the gas contract with the Turkmen government, (4) reserve upside,
(5) potential acquisitions and (6) primary LSE listing.
while Iran is planning to increase its purchases of the Turkmen gas next year, in
our opinion, the Turkmen government is highly incentivised to sign commercial
gas contracts with the producers, such as Dragon. Second, similar to the Uzbek
model (eg Lukoil), we believe that the Turkmen government is highly likely to pay
only a modest discount to the European netback price for Dragon’s gas.
BUY: M&A play with the multiple catalysts
We reiterate our Buy recommendation and 450p/sh PO set at our NAV. We view
Dragon as a compelling M&A play suggesting 10-100% upside (see A compelling
M&A play, 450p/sh PO) with the strong growth potential (15% production CAGR
over 2009E-2014E) and a further upside from the monetisation of 3.2Tcf of gas
resources. Multiple catalysts we see for the stock are: (1) M&A, (2) drilling results,
(3) signing of the gas contract with the Turkmen government, (4) reserve upside,
(5) potential acquisitions and (6) primary LSE listing.
11:25AM
NH:
With all that out of the way
NH:
where now Miles?
NH:
what about Aviva
MJ:
Oh yes
MJ:
big presentation on its European operations today
MJ:
pulling all their businesses more tightly together
NH:
(sorry, just zapped an ADVFN reader – the one talking about Findel).
NH:
hmmm
NH:
I am sure that is fascinating
NH:
and well worth further discussion
NH:
but I was more interested in the fact that Andrew Moss
NH:
has been given the dreaded vote of confidence by his Chairman
NH:
in what City wags have dubbed the Aviva Triangle
MJ:
???
NH:
if you’re not an industry insider you might not get that joke
NH:
so here’s a little background
NH:
The Aviva triangle has been developed to explain the purpose, vision, targets and strategic priorities of the group in a simple and straightforward way. …
NH:
Aviva’s purpose is to deliver prosperity and peace of mind to our customers. We will achieve this by realising our vision: “One Aviva, twice the value”. By working together across our businesses, we will optimise our performance in the global marketplace and maximise the value we can generate for our stakeholders.
MJ:
what a load of guff
NH:
yes
NH:
that’s a picture of the Aviva triangle
MJ:
oh
MJ:
I see
MJ:
I get the joke now
MJ:
This is about all that mess with the CEO, the HR director and his wife
NH:
yep
NH:
the full grisly details of the affair were revealed in the Times this morning
NH:
News that details of the affair were beginning to leak prompted Lord Sharman, the Aviva chairman, to make a statement to The Times last night.
He said that Mr Moss, promoted to the top job from finance director 2½ years ago, had behaved appropriately over the affair, which is now a firm relationship. He said he was happy that Mr Moss had broken no company rules on conduct over internal relationships.
Lord Sharman said: “Andrew has been very open with me and I am clear that there has been no breach of company rules.
“I am completely satisfied that this has in no way impacted his role as chief executive and he retains my full confidence.”
He said that Mr Moss, promoted to the top job from finance director 2½ years ago, had behaved appropriately over the affair, which is now a firm relationship. He said he was happy that Mr Moss had broken no company rules on conduct over internal relationships.
Lord Sharman said: “Andrew has been very open with me and I am clear that there has been no breach of company rules.
“I am completely satisfied that this has in no way impacted his role as chief executive and he retains my full confidence.”
MJ:
I never realised insurance was so racy
NH:
nor me
NH:
and if you have the stomach for some more
NH:
go here
MJ:
hmmm
MJ:
To be honest, I am surprised a broadsheet published this
NH:
me too
NH:
the News of the World maybe
MJ:
is there a public interest angle in any of this coming out?
NH:
I don’t think so
NH:
but Aviva aren’t exactly denying it are they
NH:
So I guess it’s fair
NH:
but it doesn’t help Mr Moss
NH:
at all
MJ:
Also, does this in any way affect his ability to do his job? I don’t think so
NH:
no
MJ:
Anyway. what are Aviva shares doing?
NH:
down 10p at 430p
NH:
But I am sure that has more to do with the performance of the wider market
NH:
than it does with the Aviva Triangle
NH:
and in fact
NH:
the rest of the assurers are down this morning
Old Mutual (OML:LSE): Last: 109.70, down 4.3 (-3.77%), High: 112.00, Low: 109.10, Volume: 10.98m
Standard Life (SL:LSE): Last: 227.50, down 6.5 (-2.78%), High: 232.30, Low: 225.10, Volume: 1.76m
Prudential (PRU:LSE): Last: 604.00, down 19 (-3.05%), High: 612.00, Low: 595.00, Volume: 3.14m
11:32AM
MJ:
Right – ragarding rumour on Vodafone and SFO – we heard that one the other day
MJ:
and didn’t make much of it
NH:
we checked it out
NH:
and got nothing back
NH:
odd rumour
NH:
anyway
NH:
Vod are outperforming today
NH:
one of just six FTSE 100′s risers at the moment
MJ:
Any particular reason?
NH:
Citigroup are giving them a push today
NH:
telling clients about the five reasons to buy
MJ:
Which are?
NH:
hang on, will pull up the note
NH:
Surprisingly resilient? — Much of the bad news is in the market. We argue
results could focus the market’s mind on a return to growth and firm trading.
What’s here? — Five reasons to buy. We sketch the eight issues we’d like
Vodafone to address at its results. 1H10 preview and guidance expectations
results could focus the market’s mind on a return to growth and firm trading.
What’s here? — Five reasons to buy. We sketch the eight issues we’d like
Vodafone to address at its results. 1H10 preview and guidance expectations
NH:
Eight Issues Sketched Inside —
1) European snapback in calendar 2010?
2) Regulation getting easier despite the bill-and-keep noise?
3) Cost saving targets to rise by 50-100%?
4) Is India the next Turkey or is its strategy viable?
5) South Africa: a story of external pressure or can Vodafone add value?
6) Can Vodafone escape the capex increase we expect for the industry?
7) Can Vodafone mitigate interest rate hikes next year?
Any chance of cashflow from the US?
1) European snapback in calendar 2010?
2) Regulation getting easier despite the bill-and-keep noise?
3) Cost saving targets to rise by 50-100%?
4) Is India the next Turkey or is its strategy viable?
5) South Africa: a story of external pressure or can Vodafone add value?
6) Can Vodafone escape the capex increase we expect for the industry?
7) Can Vodafone mitigate interest rate hikes next year?
Any chance of cashflow from the US?NH:
Guidance Expectations — We think Vodafone may keep the ±£400m/3.5%
range it gives on operating profit, but hope it will raise guidance to £11.2-
11.7bn (from £11-11.8bn), based on £1=$1.50, or £11-11.5bn based on spot.
range it gives on operating profit, but hope it will raise guidance to £11.2-
11.7bn (from £11-11.8bn), based on £1=$1.50, or £11-11.5bn based on spot.
NH:
Focus on India — The Indian market, 15% of Vodafone’s mid-term profit growth,
is undergoing a substantial structural change in regulation, capital allocation
and consumer pricing. We need to understand that Vodafone can emerge as a
winner with a positive return on capital, not a survivor in a Pyrrhic victory.
is undergoing a substantial structural change in regulation, capital allocation
and consumer pricing. We need to understand that Vodafone can emerge as a
winner with a positive return on capital, not a survivor in a Pyrrhic victory.
NH:
hope that helps
11:35AM
NH:
Right
NH:
the FSA have just published another paper on
NH:
wait for it
NH:
further analysis on systemically important banks and the cumulative impact of capital and liquidity reform
MJ:
aha
MJ:
and?
NH:
Tracy has been looking at it
NH:
and she says the FSA are leaning this way
NH:
There is a strong case for applying some form of capital (and perhaps liquidity) surcharge internationally for systemically important banks; surcharges could be proportional to continuous and increasing measures of systemic importance, avoiding the dangers created by specific thresholds of systemic importance.
NH:
A capital surcharge could be combined with an approach to global banking groups which places greater emphasis on the standalone sustainability of national subsidiaries, with overt understanding that home country authorities will not be responsible for the rescue of entire groups. The more that groups are organised on this basis, the less the required surcharge at group level might need to be.
NH:
Action should be taken to reduce inter-connectedness in wholesale trading markets, with much over-the-counter (OTC) derivative trading moved to central counterparties (CCPs), and with effective collateral and margin call arrangements for bilateral trades which reduce the dangers of strongly pro-cyclical margin call effects.
NH:
Reform to trading book capital should significantly increase capital requirements and differentiate more strongly between basic market making functions which support customer service and riskier trading activities, with a bias for conservatism in relation to the latter.
NH:
actually
NH:
that’s more than enough on that
NH:
if you want more
NH:
go to Tracy’s post
11:38AM
MJ:
Right – some intersting developments in publand this morning
MJ:
Which some readers have been mentioning
NH:
yes
NH:
the OFT say Toxic Pub
NH:
and Enterprise Inns
NH:
can continue with the beer tie
MJ:
Meaning they can keep floggin overpriced beer to their tennents
NH:
indeed
NH:
and that’s has put a rocket
NH:
under the share price of Punch
NH:
and Enterprise
Punch Taverns (PUB:LSE): Last: 95.45, up 10.7 (+12.63%), High: 99.00, Low: 93.35, Volume: 15.30m
Enterprise Inns (ETI:LSE): Last: 139.00, up 19.9 (+16.71%), High: 143.60, Low: 134.10, Volume: 13.43m
MJ:
Interesting that Enterprise is ourtperforming Punch
NH:
well, it does not surprise me
NH:
anyway
NH:
this was about the best outcome the industry could have hoped for
NH:
but TFT1
NH:
points out
NH:
it won’t help the landlord
NH:
and it won’t do anything to improve sales
MJ:
Exactly
MJ:
As you have pointed out before Neil
MJ:
The business model of screwing over your tennants, who at some point have to pay you back doesn’t really work
NH:
I know, there seems to be a contridiction at the heart of this business model
NH:
anyway
MJ:
It would be good to see some of the notes out on that this morning
NH:
OK
NH:
here’s Merrill
NH:
who love Punch Taverns
NH:
on the grounds that the trade at a big discount to their stated NAV
NH:
which is around 240p
NH:
in the fantasy world of accounting
NH:
No Competition Commission referral and no further action
The Office of Fair Trading has released its response to Camra’s super complaint
on the beer tie this morning. The OFT has not found evidence of competition
problems that are having a significant impact on consumers and has said further
investigation is not warranted. Of the three outcomes (clearance, further
investigation by the OFT, a referral to the CC) this was, in our view, the best
case for the pub companies.
Pub industry given the all clear
Camras concerns seem to have all been thrown out. The OFT has said that “Pub
companies’ commercial interests would appear to be aligned with the interests of
their lessees”.
The Office of Fair Trading has released its response to Camra’s super complaint
on the beer tie this morning. The OFT has not found evidence of competition
problems that are having a significant impact on consumers and has said further
investigation is not warranted. Of the three outcomes (clearance, further
investigation by the OFT, a referral to the CC) this was, in our view, the best
case for the pub companies.
Pub industry given the all clear
Camras concerns seem to have all been thrown out. The OFT has said that “Pub
companies’ commercial interests would appear to be aligned with the interests of
their lessees”.
NH:
Consumer at no disadvantage
Regarding choice and price of beer for the consumer, the OFT “do not consider
that tied lease agreements prevent pubs offering a wide choice to consumers.
Generally, large pub companies source from a number of suppliers.” Regarding
prices it does “not consider that issues relating to the negotiation process
between pub companies and lessees can generally be expected to result in
consumer detriment”.
Regarding choice and price of beer for the consumer, the OFT “do not consider
that tied lease agreements prevent pubs offering a wide choice to consumers.
Generally, large pub companies source from a number of suppliers.” Regarding
prices it does “not consider that issues relating to the negotiation process
between pub companies and lessees can generally be expected to result in
consumer detriment”.
NH:
Even restrictive covenants are ok
The OFT is of the view that any potential adverse effects on competition from
restrictive covenants “are not likely to be significant”.
We remain buyers of Enterprise Inns and Punch Taverns
The shares look too cheap on c4-5x P/E and a 60% discount to NAV. This news
should help investors to focus again on the fundamentals as regulation risk is no
longer an issue in our view. This is also positive news for the two integrated
operators, Marstons and Greene King. At c8-9x 2011e P/E and with a c6%
dividend yield, we also rate these as buys.
The OFT is of the view that any potential adverse effects on competition from
restrictive covenants “are not likely to be significant”.
We remain buyers of Enterprise Inns and Punch Taverns
The shares look too cheap on c4-5x P/E and a 60% discount to NAV. This news
should help investors to focus again on the fundamentals as regulation risk is no
longer an issue in our view. This is also positive news for the two integrated
operators, Marstons and Greene King. At c8-9x 2011e P/E and with a c6%
dividend yield, we also rate these as buys.
NH:
Citi
NH:
The OFT’s response to the CAMRA super-complaint says they found no evidence
that the tenanted pub industry is creating competition problems that are having an
adverse impact on consumers. ETI and PUB may rally today on relief that this
review has been benign but it does not change our negative view on the likely
downward pressure on rents and profits going forward.
Competitive end market. The OFT was interested in how the structure of the
market impacts competition and choice to the consumer. Although there is some
evidence that tenanted pubs are charging higher prices than managed pubs the
OFT felt that that this was not indicative of a lack of competition and choice for
the consumer.
that the tenanted pub industry is creating competition problems that are having an
adverse impact on consumers. ETI and PUB may rally today on relief that this
review has been benign but it does not change our negative view on the likely
downward pressure on rents and profits going forward.
Competitive end market. The OFT was interested in how the structure of the
market impacts competition and choice to the consumer. Although there is some
evidence that tenanted pubs are charging higher prices than managed pubs the
OFT felt that that this was not indicative of a lack of competition and choice for
the consumer.
NH:
Ongoing concerns on rents. Our concerns continue to be around the weak
performance of the tenants and the ongoing downward pressure on rents as a
result. The OFT acknowledges the concerns from lessees about the rent
assessment process but says that this is outside its remit. This is in line with
previous comments from the OFT about the pub industry
performance of the tenants and the ongoing downward pressure on rents as a
result. The OFT acknowledges the concerns from lessees about the rent
assessment process but says that this is outside its remit. This is in line with
previous comments from the OFT about the pub industry
NH:
Govt response to BEC still awaited. The Government still has to respond to the
Business and Enterprise Select Committee, which more specifically looked at the
fairness and transparency of the tie and the rent setting process. We are overdue
a response to this but it is likely to have been delayed so that the govt can take
account of the OFT’s findings and the results of an industry mediation process.
Business and Enterprise Select Committee, which more specifically looked at the
fairness and transparency of the tie and the rent setting process. We are overdue
a response to this but it is likely to have been delayed so that the govt can take
account of the OFT’s findings and the results of an industry mediation process.
NH:
Relief rally likely. There may be a relief rally today given the benign outcome.
These reviews are not likely to change our negative view on the tenanted pub
companies given ongoing pressure on tenant profitability. In our view this is
driving rents lower as the operators are forced to given rent concessions and
special discounts to support tenants who might otherwise walk away. Given the
wide disparity in the split of returns between landlord and tenant we think this
process will continue to impact profitability at ETI and PUB. We continue to prefer
managed Pubcos which are not affected by this process.
These reviews are not likely to change our negative view on the tenanted pub
companies given ongoing pressure on tenant profitability. In our view this is
driving rents lower as the operators are forced to given rent concessions and
special discounts to support tenants who might otherwise walk away. Given the
wide disparity in the split of returns between landlord and tenant we think this
process will continue to impact profitability at ETI and PUB. We continue to prefer
managed Pubcos which are not affected by this process.
NH:
And that Citi note makes a good point
NH:
there is still another challenge to the industry
NH:
from the Business and Enterprise Select Committee
NH:
we still don’t know what the govt makes of all that
11:45AM
NH:
Miles
NH:
was that Todd?
MJ:
Im not sure – someone who looked alot like him just whizzed past
MJ:
heads down Neil
NH:
right
NH:
an apology
MJ:
Yes. The 6am cut was a bit late this morning
MJ:
Technical issue we are told
NH:
yeah
NH:
the postal strike
NH:
damn posties
NH:
sorry about that
NH:
hopefully
MJ:
Will be fixed for tomorrow
11:47AM
NH:
Right
NH:
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.
NH:
have we got any??
MJ:
It is anoyingly quiet again
MJ:
But the Lloyds rumour mill has started whirring a bit more quickly
MJ:
Some people on the right were asking
MJ:
Well, no one now doubts the rights issue is coming
MJ:
its more a question of size and pricing
NH:
There was chatter of a ₤15bn quid total in the market yesterday, which appears to be corroborated by this mornings papers.
NH:
we heard
NH:
the terms could be 6 for 10 at 38p
MJ:
hmm
MJ:
Certainly looks like it will be a whopper
MJ:
If it is ₤15bn that will be the biggest ever UK rights issue I think. Even bigger than HSBC
NH:
I would guess they are just waiting to get the government to sign off on it now.
MJ:
We should put up a Lloyds price
NH:
yes
Lloyds Banking Group (LLOY:LSE): Last: 91.55, up 0.05 (+0.05%), High: 92.37, Low: 89.01, Volume: 48.05m
NH:
and we don’t tink the govt will underwrite
NH:
but they will take up their allocation in full
NH:
we were hearing rumours
NH:
that Qatar Holdings
NH:
want to be involved
NH:
and that’s the real reason that sold Barclays this week
NH:
not
NH:
so they can stake build or acquire Sainsbury
MJ:
hmmm
MJ:
Switching out of one UK bank to buy into another
NH:
yes
NH:
that’s the idea
11:53AM
MJ:
Cadbury’s watch
NH:
Anything interesting this morning?
MJ:
Well, no actually
MJ:
Bit of a yawn-fest this story
MJ:
No real action, just set pieces
NH:
weren’t the Nestle numbers out this morning
MJ:
They were, and people were watching to see if they gave any hints about Cadbury
NH:
and
MJ:
Well
MJ:
Obviously haven’t said anything definitive
MJ:
but the company has been telling Reuters Nestle usually looks at “bolt on acquisitions”
MJ:
that sort of thing
MJ:
Followed by the usual ‘we are always open to acquisitions which fit our strategy ‘ routine
NH:
Yesterday’s Cadbury presentation turned out to be a bit of a damp squib didn’t it?
MJ:
Yes, lets leave it there
11:55AM
NH:
So, what should we talk about next?
MJ:
Well there have been some interesting developments in the Galleon story overnight
NH:
Sam Jones (remember him) is of course over in the NY office on Galleon watch. Sitting next to John Authers.
MJ:
Galleon of course liquidated yesterday
MJ:
confirming Sam’s scoop that they were “moving into cash”
NH:
You do have to love that as a euphemism.
NH:
So the informer has now been named by the WSJ?
MJ:
yup
MJ:
Apparently it was a former employee of the fund who was trying to get reemployed
MJ:
I was thinking
MJ:
Surely the Feds must be a bit annoyed about that?
MJ:
It sends a message to future informers in cases like this
MJ:
cooperate and you will be named in the Journal
MJ:
Or, if the sources on the story were Feds
MJ:
then they have shot themselves in the foot.
NH:
hmmmmm
NH:
and look what happened the whistleblower
NH:
in the UBS tax case
NH:
they did not seem to cut him any slack at all
NH:
the opposite to what he was expecting, I bet
NH:
anyway
NH:
Didn’t Galleon sell its Raymarine stake yesterday?
MJ:
Yeah, I only noticed that this morning
MJ:
Here is a link to the statement
MJ:
Shares were off 10 per cent for the week up till Tuesday
MJ:
but came back a bit yesterday
Raymarine (RAY:LSE): Last: 10.50, no change, High: 10.75, Low: 10.00, Volume: 173.37k
NH:
just looking if Galleon
NH:
has any more holding over here
NH:
our database
NH:
isn’t very good
NH:
and can’t tell us
NH:
all i get is Galleon Holdings
NH:
nothing on Raymarine
12:01PM
NH:
Okay
NH:
it is almost midday
MJ:
We should mention events in Japan before we go
NH:
yeah
NH:
interesting development overnight
NH:
the FSA over there
NH:
have announced proposals to limit leverage on CFD’s
MJ:
now that is interesting
MJ:
what are the limits?
NH:
for individual stocks 5 times
NH:
equity indices 10 times
NH:
and 50 times for bonds
MJ:
jeez
MJ:
what were they before?
MJ:
and 10 times on an equity index
MJ:
is still enough to blow yourself up
NH:
NH:
MJ:
Is anyone affected by this in the UK?
NH:
well, IG have a Japanese business
NH:
but it is mainly a ForEx business
NH:
and as far as I can see
NH:
these proposals don’t mention FX
NH:
because they have already introduced some legislation
NH:
or the following
NH:
These proposals do not affect CFDs on commodities or precious metals or binary options. During the consultation period the Group will lobby the FSA directly as well as via industry channels.
Revenue in September from the products affected represented approximately 0.5% of Group revenue.
Revenue in September from the products affected represented approximately 0.5% of Group revenue.
MJ:
Who is that from?
NH:
IG of course
NH:
they put out an RNS statement
NH:
just in case anyone was worried by the news
NH:
and here’s a bit more comment
NH:
from Panmure
NH:
Japanese regulators are looking to restrict leverage limits on CFDs for shares,
equity indices and bonds. Restrictions likely to come into effect in about a
year’s time. In itself, this news is not material for numbers, affecting only a
very small part of the overall business. But it is likely to weigh on sentiment
and puts in question the long-term prospects of the Japanese business. Our
target price moves from 400p to 385p.
equity indices and bonds. Restrictions likely to come into effect in about a
year’s time. In itself, this news is not material for numbers, affecting only a
very small part of the overall business. But it is likely to weigh on sentiment
and puts in question the long-term prospects of the Japanese business. Our
target price moves from 400p to 385p.
Leverage limits. The FSAJ (Financial Services Agency in Japan) is proposing to restrictmleverage limits on CFDs to 5x for shares, 10x for equity indices and 50x for bonds. A period of public consultation will run until 16 November with any restrictions coming into force around a year later. This follows discussion back in May of lowering leverage limits in FX dealing.
NH:
In context. For FY 2010E, its first full year, we expect FX Online to contribute £30m
of revenues or 11% of Group revenues. CFDs for shares, equity indices and bonds are relatively new to IG’s product offering in Japan and as such represent only 0.5% of revenues. The long-term story was supported by roll-out of the CFD platform across other asset classes, an area in which IG faces limit competition unlike in the FX market.
Today’s news affects the long-term outlook of the Japanese business.
of revenues or 11% of Group revenues. CFDs for shares, equity indices and bonds are relatively new to IG’s product offering in Japan and as such represent only 0.5% of revenues. The long-term story was supported by roll-out of the CFD platform across other asset classes, an area in which IG faces limit competition unlike in the FX market.
Today’s news affects the long-term outlook of the Japanese business.
IG’s history with FX Online. Further potential issues for this ill-fated business. IG
spent £112m on acquiring an 87.5% stake in this business in September last year, giving it an important strategic position in a key retail market. Initial price changes led to a loss of FX clients. In May, the FSAJ discussed lowering leverage limits in a highly competitive retail FX market.
Forecasts. We have tweaked our forecasts down on the back of this news and lower our target price from 400p to 385p.
MJ:
Do you recon the FSA over here could follow suit?
MJ:
To stop punters blowing off their own limbs
NH:
dunno. not sure why they would. not as if CFD puting is a really big problem
NH:
but then again
NH:
does anyone have sympathy for the industry?
NH:
they don’t pay stamp
NH:
(TB stop trying to rile Mr Fowke)
MJ:
Hmmm. If the Tories get in, we should remeber that Michael Spencer owns City Index
NH:
oh yes he does
MJ:
he is, of course, their treasurer
12:07PM
MJ:
(phone break – bare with us)
NH:
sorry
NH:
calls on Lloyds
NH:
our 6-10 at 38p
NH:
looks wrong
NH:
would not raise enough cash
NH:
the latest in the market
NH:
is that £10-12bn is underwriten
NH:
and the govt
NH:
will look to sell their rights into the market
NH:
or let them lapse
NH:
all of this is just speculation
MJ:
Hmmm
MJ:
Sounds odd to me
NH:
me too
NH:
anyway
NH:
couple of things to finish on
NH:
we did not mention National Express
NH:
which have issued a pretty week trading update today
NH:
here’s RBS on that
NH:
The financial performance perhaps strengthens the case to listen to Stagecoach but negatives
for that scenario in this IMS update are the North America performance and tone of the
statement that looks like the group wants to press ahead with an equity raising. On balance,
we expect the shares to give back some of the recent gains.
FY09F slightly below group expectations
The group guides FY PBT slightly below prior expectations following a 1% step up in interest
margin due to delays from the M&A interest and steers North America profits down yoy in sterling
terms. Whilst revenues across the group look slightly on the softer side, profit performance in the UK
and Spain appears resilient on cost control (operated mileage down 9% in Spain during 3Q). On a
preliminary basis, our £134m FY09 PBT may come down to c£125m.
for that scenario in this IMS update are the North America performance and tone of the
statement that looks like the group wants to press ahead with an equity raising. On balance,
we expect the shares to give back some of the recent gains.
FY09F slightly below group expectations
The group guides FY PBT slightly below prior expectations following a 1% step up in interest
margin due to delays from the M&A interest and steers North America profits down yoy in sterling
terms. Whilst revenues across the group look slightly on the softer side, profit performance in the UK
and Spain appears resilient on cost control (operated mileage down 9% in Spain during 3Q). On a
preliminary basis, our £134m FY09 PBT may come down to c£125m.
NH:
Emphasising the planned equity fundraising
There are about four references to the boards focus being to strengthen the balance sheet. The only
reference to Stagecoach (Hold) is that the group continues to evaluate its proposal for value, risk and
certainty whilst not putting at risk the Groups ability to execute a fundraising to strengthen its
balance sheet by year-end. The window for Stagecoach to put together something credible looks
small. Perhaps of further concern to the Stagecoach scenario are the North America trends.
Stagecoach wasnt involved in the due diligence in that division and the question will remain whether
CVC (as part of the failed consortium approach) got cold due to something they saw during their due
diligence process.
There are about four references to the boards focus being to strengthen the balance sheet. The only
reference to Stagecoach (Hold) is that the group continues to evaluate its proposal for value, risk and
certainty whilst not putting at risk the Groups ability to execute a fundraising to strengthen its
balance sheet by year-end. The window for Stagecoach to put together something credible looks
small. Perhaps of further concern to the Stagecoach scenario are the North America trends.
Stagecoach wasnt involved in the due diligence in that division and the question will remain whether
CVC (as part of the failed consortium approach) got cold due to something they saw during their due
diligence process.
NH:
Looking for a new CEO
The group claims to have made good progress in its search for a new CEO. Clearly this remains a
missing link for any vision of an independent future.
The group claims to have made good progress in its search for a new CEO. Clearly this remains a
missing link for any vision of an independent future.
12:10PM
NH:
And thanks Mr Fowke
NH:
for that link
NH:
I don’t think that is Sam
NH:
it’s an actor
NH:
he looks nothing like that
NH:
in the flesh
MJ:
Right, on that note
MJ:
Should we call things to a close?
NH:
yes
NH:
FTSE 100 rallying
NH:
now off 53 points at 5,204
NH:
and someone was asking about Solo Oil earlier
NH:
another David Lenigas production this one
NH:
as I understand it
NH:
first acquisition
NH:
will be a small producing well in Columbia
NH:
around 700 barrels a day
NH:
and then
NH:
before Xmas
NH:
a big deal
NH:
well a biggest one
NH:
the idea appears to be that they will take a 50% stake in a very exciting prospect
NH:
that’s all RAW
NH:
but Dave does have a big fanclub
MJ:
@Chopper Bear – whose mob number are you refering to?
12:13PM
MJ:
TB I hope you feel a bit better
MJ:
Thanks for the comments
NH:
thanks for logging on
NH:
and Chopper Bear
NH:
Todd was here to talk to our oil reporter
NH:
and tell him about the find
NH:
I don’t think there is a big profile piece on the way
MJ:
Maybe you can read about it tomorrow’s paper
MJ:
Or maybe not
MJ:
we will see
NH:
and sorry for all the typos this morning
NH:
think I am coming down with swine flu
NH:
caught from neighbour
MJ:
Bye everyone
NH:
cya