Markets live chat transcript for the chat ending at 12:09 on 30 Oct 2009. Participants in this chat were: Neil Hume, FT (NH) Miles Johnson, FT (MJ)
NH:
hello
NH:
Good morning
NH:
and welcome
NH:
to Markets Live
NH:
FT Alphaville’s daily markets chat
NH:
Miles is here
MJ:
Morning all
NH:
and we have just been playing with our new toy
NH:
an iPhone with the City Index trading app on it
MJ:
have we decided on a trading strategy yet?
NH:
yes
NH:
but it is top secret at the moment
NH:
although I can reveal it will be quant driven
MJ:
you are joking right?
MJ:
you and Murph can’t even spell that
NH:
well, all will be revealed on Monday
NH:
assuming those higher up the food chain have no problem with us constructing, very scientifically, a fantasy portfolio
NH:
Anyway
NH:
let’s get to the market
NH:
quite a bit going on for a Friday in half term
11:05AM
MJ:
well, the market is pushing higher on the back of Wall Street’s strong overnight performance
NH:
(Sparts the phone must be returned to City Index)
MJ:
FTSE 100 up 12 points at 5150
MJ:
with WPP near the top of the pile at the moment
MJ:
Up 23p at 568p
NH:
good post on Martin Sorrell BTW
MJ:
Sir Martin to you
NH:
sorry Sir Martin
NH:
not sure I get this LUV thing though
NH:
and definitely not this Next 11 thing
NH:
You tell me why some of these markets are a buy
NH:
this is from Wiki
NH:
The Next Eleven (or N-11) are eleven countries—Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey, and Vietnam—identified by Goldman Sachs investment bank as having a high potential of becoming the world’s largest economies in the 21st century along with the BRICs. The bank chose these states, all with promising outlooks for investment and future growth, on December 12, 2005.
NH:
Goldman Sachs used macroeconomic stability, political maturity, openness of trade and investment policies, and the quality of education as criteria. The N-11 paper is a follow-up to the bank’s 2003 paper on the four emerging “BRIC” economies, Brazil, Russia, India, and China.[1]
NH:
Now, you tell me why how macroeconomic stability, political maturity, openness of trade apply to Bangladesh, Iran Pakistan
MJ:
Look
MJ:
its Goldman’s call not mine
MJ:
take up with them
MJ:
anyway that’s all a distraction from what’s a pretty good trading update from the advertising group
NH:
good as in, relief that no one has to downgrade forecasts
MJ:
Yep
MJ:
everything pretty much in line
MJ:
and that’s been rewarded with a rally in the share price
NH:
got any comment on the results
NH:
not on LUV
NH:
have had enough of his alphabet soup recovery explanations
MJ:
yes
MJ:
here’s Cazenove
MJ:
WPP – [WPP.L WPP LN] 545p Underperform, sector Neutral
The Q3 trading update reflect organic revenue trends in line with expectations and the H2 margin guidance is maintained (although Q3 margins are down 70bp). The outlook remains cautious but we do not expect to make any material changes to our forecasts at this stage.
Key points:
Underlying revenue decline of 8.7% in Q3 (Q2 -10.5%), in line with consensus forecasts of an 8.9% decline (source: Dow Jones).
The Q3 trading update reflect organic revenue trends in line with expectations and the H2 margin guidance is maintained (although Q3 margins are down 70bp). The outlook remains cautious but we do not expect to make any material changes to our forecasts at this stage.
Key points:
Underlying revenue decline of 8.7% in Q3 (Q2 -10.5%), in line with consensus forecasts of an 8.9% decline (source: Dow Jones).
By geography the US and Continental European markets both improved in Q3 vs. Q2 with the UK and RoW seeing slight worse trends.
By sector all improved versus Q2 with the most significant improvement seen in market research
Reported revenue grew 16.7% to £2,007m (Caz £2,009m) with FX adding 10% and acquisitions (mainly TNS) adding 15.4%
Q3 operating margin down 70bp y/y (H1 -450bp pro forma). Operating margin remains on track to meet guidance of last year’s level in H2 (15.5% incl. TNS).
MJ:
Average net debt of £3,482m against £3,507m reported at the interim stage. This is in line with our expectations.
Net new business wins of $1,132m in Q3, down 34% y/y. Year to date new business wins are down 29%
Outlook: margin guidance maintained for H2, still cautious on recovery for 2010: ‘even-Stevens remains a good bet for budgets in 2010′
We expect forecasts to remain broadly unchanged. Our EPS forecast for 2009E is 43.1p (consensus 43.2p, Reuters) and 43.1p for 2010E (consensus 46.8p, Reuters).
MJ:
and a little bit from Citigroup
MJ:
Cautious Outlook – Although the group is sticking with its “even Stevens” scenario
for revenue growth in 2010 and expects the sequential improvement to continue
in 4Q09 and into 2010, the statement remains cautious highlighting that
increased confidence is “still not transferring to cheque writing hands.” There is
also caution over potential for a reduction in demand when fiscal and monetary
support is withdrawn
for revenue growth in 2010 and expects the sequential improvement to continue
in 4Q09 and into 2010, the statement remains cautious highlighting that
increased confidence is “still not transferring to cheque writing hands.” There is
also caution over potential for a reduction in demand when fiscal and monetary
support is withdrawn
MJ: Solid Statement – The shares have been weak into results with disappointment
over limited improvement in growth at the other large agencies 3Q. WPP is the
only group to have seen an improvement in the underlying run-rate 3Q vs.2Q.
Alongside reiteration of margin guidance, the results are likely to be taken well.
We expect consensus numbers to remain unchanged, although the bottom of the
range may shift up. We stick with a Sell on WPP as we still see late cycle risks,
and prefer more cyclical stocks with greater operational leverage on an upturn.
11:10AM
NH:
thanks for that
NH:
Wurzel, seeing as you asked so nicely
NH:
we were just discussing Aviva before you came on air
NH:
for two reasons
NH:
one was an amusing broker push
NH:
which said that if Aviva were lifted in France
NH:
the recent boardroom scandal
NH:
would have been rewarded with a higher share price
MJ:
ha
NH:
- Not that we would exploit anybody’s pecadillo’s, but surely Aviva (-9.5% over 5 days) is bigger than its ceo’s seemingly mid life crisis? – ‘Mossy’ has left his wife & 4 kids of 25 years to be with Deidre Galvin, recently resigned from Aviva,a consultant to its HR Dept…. http://www.telegraph.co.uk/news/6409201/Aviva-boss-Andrew-Moss-admits-affair-with-colleagues-wife.html and since the story broke, so has the stock! – But surely this is an over reaction. In France, the stock would go to a premium, but we don’t condone that sort of behaviour… – So looked in the cold, post coital reality, AV/ LN is now the best of the peer group: 8.1% Yield, 7.6x next years (comnpare it to PRU’s 21x) & successors to the amorous Mossy lining up such as Mark Hodges…In short, like in most ‘domestics’, the price action here is an over-reaction/ BUY
NH:
but
NH:
I think the reason for the recent share price weakness
NH:
is some 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:
and that’s
NH:
the idea that Aviva might use some of the Delta Lloyds proceeds
NH:
to help fund a big acquisition in the US
NH:
they have one business there
NH:
called AmerUS
NH:
and it probably needs to bulk up
NH:
just a bit of RAW
NH:
but may explain the weakness
MJ:
Some breaking news coming in
11:13AM
MJ:
Cisco Said to Consider Dropping $3.1 Billion Tandberg Purchase
2009-10-30 11:03:09.899 GMT
2009-10-30 11:03:09.899 GMT
MJ:
By Edward Evans
Oct. 30 (Bloomberg) — Cisco Systems Inc. may drop its 17.2
billion-krone ($3.1 billion) offer for Tandberg ASA as
shareholders owning 24 percent of the Norwegian company press
for a higher offer, said a person familiar with the transaction.
Oct. 30 (Bloomberg) — Cisco Systems Inc. may drop its 17.2
billion-krone ($3.1 billion) offer for Tandberg ASA as
shareholders owning 24 percent of the Norwegian company press
for a higher offer, said a person familiar with the transaction.
NH:
what are the shares doing
MJ:
Not much right now
MJ:
Down0.2 per cent – still above the terms
NH:
but is that delayed. we don’t have live prices for all of Europe
NH:
hmmm
NH:
perhaps one should not overreact to this
NH:
it could just be bluff from Cicso
NH:
to get those refusnik sharesholders
NH:
to back the deal
NH:
I think 20% have come out and said the offer from Cisco was too low
NH:
against that
NH:
Cisco don’t overpay
NH:
never have
NH:
so they could walk
NH:
but this would be very embarassing
NH:
this is the company’s first big overseas acquisition
NH:
and I think they have been poorly advised on this
NH:
given that it is a Scandia stock
NH:
they should have locked up shareholders before
NH:
they did not
MJ:
Just checked Bloomberg – shares halted
NH:
and what does this mean
NH:
Oslo Bourse is investigating whether some participants
have access to different information in relation to evaluating
the value of the company’s shares,” the stock exchange said in
statement.
have access to different information in relation to evaluating
the value of the company’s shares,” the stock exchange said in
statement.
MJ:
Hmmm
MJ:
Just need to make some calls
MJ:
tandberg is of course a Norwegian video conferencing company
NH:
good point Ptolemy
MJ:
V. good point
NH:
this is the person familiar with the situation
NH:
which means PR in wire speak
NH:
more often that not
MJ:
I think Cisco are sabre rattling
NH:
me too
MJ:
They don’t want to look like they can be pushed around
NH:
wanna make a fantasy bet via the iPhone app
MJ:
This is its first overseas buy of course
MJ:
so would set a precident
MJ:
maybe we should leave of the bets for now
NH:
Right, we had better move on
MJ:
appols for the terrible spelling as well
NH:
but it does show how quiet things are that we are having a big discussion about a Norwegian tele-conferncing business
NH:
anyway
11:21AM
MJ:
So
MJ:
It has been a while, but it must now be time for…
MJ:
Dinner party live!
NH:
Yes folks, that’s right, the Nationwide house price index is out, and
NH:
UK house prices registered the first annual rise since March 08.
MJ:
allow me to reach for a celebratory crouton
NH:
From the FT’s Norma Cohen
NH:
UK house prices rose in October for the sixth consecutive month, but more slowly than the rapid pace seen over the summer, according to a closely watched index.
The Nationwide House Price Index rose by 0.4 per cent in October, down from the 0.9 per cent rate seen in September and the 1.4 per cent rate seen in July and August. The rise was the first year-on-year increase since March 2008.
The Nationwide House Price Index rose by 0.4 per cent in October, down from the 0.9 per cent rate seen in September and the 1.4 per cent rate seen in July and August. The rise was the first year-on-year increase since March 2008.
MJ:
so
MJ:
everything really is going to be ok Neil?
MJ:
The whole massive global speculative property bubble
MJ:
and subsequent decade of painful deleveraging was a bit overdone
NH:
Well people do appear to be buying again.
MJ:
and estate agents are coming out of hiding
MJ:
I saw one on the street the other day
NH:
MJ:
But house prices still look expensive on basic historical valuation multiples
MJ:
like average national wages vs average residential property prices
MJ:
you know
MJ:
all that jazz
NH:
Well, this could of course be a small upward bump on the way down.
NH:
Howard Archer of HIS Global Insight is of that opinion.
NH:
While the Nationwide data indicate that house prices are still on an upward track from their February low, October’s significantly reduced month-on-month increase fuels our suspicion that the recent rally in house prices is unsustainable and will fizzle out before long. Obviously though, it is premature to read too much into one month’s data, especially as house prices are notoriously volatile.
NH:
Our scepticism over the sustainability of the house price rally since early-2009 rests on the fact that while interest rates are likely to remain very low for an extended period, the fundamentals for the housing market are largely unfavourable – housing market activity is still at a low level compared to long-term norms despite improving in recent months, unemployment is high and still rising, earnings growth is low and still falling, and house price/earnings ratios are currently moving back up. A relapse in house prices will be even more likely if the recent firming trend leads to more properties coming onto the market, thereby moving the supply/demand balance away from vendors towards buyers.
NH:
Consequently, while house prices may well rise further in the near term from their early-2009 lows, we suspect that they they will be prone to significant relapses further out. Indeed, we believe house prices will be at least 5% lower at the end of 2010 compared to now, and the slippage could very well be greater still. Much will clearly depend on whether the economy finally returns to growth in the fourth quarter and then can sustain recovery, how much further unemployment rises, how quickly and to what extent credit conditions ease, and how many properties come on to the market over the coming months. On the positive side for the housing market, interest rates seem unlikely to rise for some considerable time to come and will then probably increase only gradually
NH:
Miles
NH:
what are the housebuilders doing on the back of today’s news
MJ:
Ill have a look
Barratt Developments (BDEV:LSE): Last: 140.30, up 1.2 (+0.86%), High: 143.00, Low: 140.10, Volume: 2.08m
Persimmon (PSN:LSE): Last: 415.50, down 0.3 (-0.07%), High: 422.80, Low: 413.00, Volume: 166.54k
Taylor Wimpey (TW:LSE): Last: 39.38, up 0.47 (+1.21%), High: 39.75, Low: 38.60, Volume: 8.90m
NH:
hmmm
NH:
interesting
NH:
no response really
NH:
in fact housebuilders have been moving lower for a few weeks now
NH:
in spite of the improving indicators
NH:
actually I have a note on this subject from Cazenove
NH:
and also something on Taylor Wimpey
NH:
and those rumours
NH:
about the sale of its North American division
MJ:
paste away
NH:
here’s the Caz note
NH:
UK Housing Market Briefing – Value opportunities re-emerge as share prices disconnected from improving lead indicators
The share prices of the housebuilders appear to be moving in the opposite direction to the underlying UK housing market, where the lead indicators continue to improve. Having hit a price to book ceiling of around 1.0x this summer, the housebuilders have underperformed the FTSE100 since the start of the current quarter. Historically housebuilders underperform around 60% of the time in Q4. However, in our view, the recent share price falls are at odds with the underlying market conditions. We believe that asset write-backs are more likely than further write-downs and with most housebuilders trading at below last reported asset value we believe the housebuilders once again offer significant attractions to the value investor.
NH:
Earlier this month the FSA published its UK Mortgage Market Review. At first glance it may appear that the proposals may lead to a contraction in mortgage supply as mortgages may be based on an applicant’s debt capacity after discretionary and non-discretionary spending patterns rather than the more traditional loan-to-value (LTV) and loan-to-income (LTI) ratios. However, our analysis suggests the FSA approach delivers the same result as the Cazenove Affordability Index (CAFI) indicating that homes are affordable when the mortgage secured on them represents up to 30% of take home pay. We believe that applying the FSA guidelines to the mortgage market would lead to a significant increase in mortgage demand. Whether mortgage lenders will have the capacity to fufill this demand is more questionable. With the sector currently in retreat we believe the outlook is more positive than current share prices suggest and today’s mortgage approval numbers give us further confidence that we are at the early stages of a UK housing market recovery.
NH:
Our favoured stocks:
Persimmon (OUTPERFORM, 395p): the blue chip volume housebuilder, trading, in our view, at an unjustified discount to book value.
Redrow (OUTPERFORM, 133p): The management re-rating story. In our view Redrow has yet to re-rate appropriately following the return of Steve Morgan and the re-focus of the group on traditional family homes.
Taylor Wimpey (OUTPERFORM, 36p): The fundamental value opportunity. With land, in our view, appropriately valued the group is trading at a 39% discount to NAV, which we believe offers significant value attractions.
Persimmon (OUTPERFORM, 395p): the blue chip volume housebuilder, trading, in our view, at an unjustified discount to book value.
Redrow (OUTPERFORM, 133p): The management re-rating story. In our view Redrow has yet to re-rate appropriately following the return of Steve Morgan and the re-focus of the group on traditional family homes.
Taylor Wimpey (OUTPERFORM, 36p): The fundamental value opportunity. With land, in our view, appropriately valued the group is trading at a 39% discount to NAV, which we believe offers significant value attractions.
NH:
Right
NH:
and the stuff on Taylor Wimpey
NH:
and its North American business comes frmo MOST
NH:
Our detailed analysis of the US market suggests
that Taylor Wimpey’s US business is well placed.
We reiterate our view that a divestment of the North
American business would be welcomed by investors.
We acknowledge this means forgoing the potentially
significant recovery in the North American business but
there is a strong case for considering disposal options to
reduce group debt and enable a refinancing. Compared
with US-listed peers trading on 1.6x NAV, we are
comfortable with a 1.4x disposal multiple, which implies
a value of ~£600mn (in line with the £560mn figure
quoted in The Sunday Times, October 4).
that Taylor Wimpey’s US business is well placed.
We reiterate our view that a divestment of the North
American business would be welcomed by investors.
We acknowledge this means forgoing the potentially
significant recovery in the North American business but
there is a strong case for considering disposal options to
reduce group debt and enable a refinancing. Compared
with US-listed peers trading on 1.6x NAV, we are
comfortable with a 1.4x disposal multiple, which implies
a value of ~£600mn (in line with the £560mn figure
quoted in The Sunday Times, October 4).
NH:
Based on our analysis of major listed US players,
we believe that a private equity buyer could be more
interested in the business than a trade buyer. Our
analysis of the major listed US players suggests that
there are still issues around balance sheet strength for
some of the peers, while others have no immediate
requirement to extend their land holdings. This leaves
private equity as a potential source of interest, in our view.
we believe that a private equity buyer could be more
interested in the business than a trade buyer. Our
analysis of the major listed US players suggests that
there are still issues around balance sheet strength for
some of the peers, while others have no immediate
requirement to extend their land holdings. This leaves
private equity as a potential source of interest, in our view.
NH:
Although we think a deal is feasible, the fragile state
of the US market does make timing uncertain. The
US housing market is only tentatively stabilising with
early signs of recovery. House prices, sales volumes and
builder confidence have all improved from their lows in
recent months; however, rising mortgage delinquencies
and foreclosure activity still pose a threat to any
sustainable recovery. In the near term, the expiration of
the $8,000 home buyer tax credit also presents a
potential source of uncertainty. We think this uncertainty
risks deterring buyers interested in TW’s assets until
further signs of sustained recovery are observed.
of the US market does make timing uncertain. The
US housing market is only tentatively stabilising with
early signs of recovery. House prices, sales volumes and
builder confidence have all improved from their lows in
recent months; however, rising mortgage delinquencies
and foreclosure activity still pose a threat to any
sustainable recovery. In the near term, the expiration of
the $8,000 home buyer tax credit also presents a
potential source of uncertainty. We think this uncertainty
risks deterring buyers interested in TW’s assets until
further signs of sustained recovery are observed.
IMS and analyst day on November 4 should provide
further insight into the UK business. A trading update
will be followed with an analyst event to provide further
details on the UK strategy.
MJ:
interesting that
NH:
I didn’t realise their NA business was that good
NH:
but a disposal would certainly help the debt position
NH:
at what used to be called, in the melt down days
NH:
Taylor Wipeout
NH:
those were the days
NH:
when bears ruled the world
MJ:
not like now eh?
11:31AM
NH:
What’s Tandberg doing
NH:
has it started trading again
MJ:
Looks like its still suspended
NH:
Okay
MJ:
from one possible dealbreak to another
NH:
go on
MJ:
Well there was this Oracle-Sun antitrust thing I was looking at last night
NH:
Interesting that. So Oracle yesterday withdrew its antitrust application for the Sun deal in Russia.
NH:
Got some of the arbs playing the deal very worried.
MJ:
For a little while for sure
MJ:
Everything of course hangs on what the EU competition commission will do
MJ:
but some people started speculating that the Russian filing
MJ:
was a signal of some intent for Oracle to walk.
MJ:
Was lucky we had Courtney, a new graduate trainee, on hand to translate
NH:
Very impressive, she did it in about ten seconds flat and then was on the phone to the FAS to check it was genuine.
MJ:
The filing struck us as suspicious as it was approved on Oct 30
MJ:
which was the future at the time
NH:
frightening these grad trainees
NH:
So, after this got around people started to panic and the deal spread widened a bit, but came back in.
MJ:
yeah
MJ:
Richard Waters, the FTs San Francisco head honcho, thinks it is a local issue which wont have much impact on the wider deal
MJ:
More likely that Oracle have withdrawn the antitrust filing to rejig things and then refile it
MJ:
Maybe
MJ:
Oracle thought it would be rejected so withdrew and will wait till it gets accepted elsewhere
NH:
People are obviously nervous about the EU antitrust.
MJ:
Spread currently sits at around 14 per cent
MJ:
Widened to about 17 per cent yesterday for a bit
11:37AM
MJ:
So anyway
MJ:
Surely it is time for a bit of Friday RAW?
MJ:
hearing much today Neil?
NH:
well you have had one bit
NH:
Aviva
NH:
and a US acquisition
NH:
I have one little oily one
NH:
but it has been around for some time
NH:
and could be stale
NH:
so it needs to be handled with care
NH:
MJ:
go on
NH:
A thing called Dragon Oil
NH:
has oil assets in Turkmenistan
NH:
which its pipes to the world
NH:
via Iran
NH:
anyway
NH:
the company has been in talks with its biggest shareholder for a while
MJ:
Who is that again?
NH:
the Emirates National Oil Company
NH:
I think
NH:
anyway the talk in the market is that they will soon offer 445p a share for the chunk of the company
NH:
they do not already own
NH:
but as I say
NH:
this story has been knocking around for some time
Dragon Oil (DGO:LSE): Last: 416.50, up 6.5 (+1.59%), High: 419.75, Low: 409.75, Volume: 520.65k
MJ:
Any talk of when this would happen?
NH:
next week
NH:
but I have heard that a few times with this stock
NH:
handle with care
NH:
is my advice
11:41AM
MJ:
Should we move on to a spot of banking stocks?
NH:
yes, even Bored of Bank is interested in that
NH:
(Monkey, that’s sad)
MJ:
Moneky is ramping films on the right
NH:
(Pakora – watch it)
NH:
right
NH:
banks
NH:
further positive reaction
NH:
or bear closing
NH:
to yesterday’s statement from Lloyds
MJ:
up 3.2 at 89p
MJ:
So, whats the latest?
NH:
well
NH:
a few upgrades
NH:
and relief
NH:
that Lloyds will only have to sell of IF
NH:
some Scottish Branches
NH:
and C&G
NH:
have a look at this
NH:
from one of my favourite sector followers
NH:
Buy case catalysts are coming into line; financial fundamentals continue to
improve and capital raising is at long last coming through. Biggest source of
near term volatility = sheer size of new equity issuance, and uncertainty over
convertible bond structure. If this contingent convertible as widely discussed
by BoE, FSA and the market, key issue for value split between equity & bond
holders is the conversion price mechanism: pre-determined on issue = good for
equity, bad for debt holders; if open to market price at time of conversion =
bad for equity, good for debt holders.
improve and capital raising is at long last coming through. Biggest source of
near term volatility = sheer size of new equity issuance, and uncertainty over
convertible bond structure. If this contingent convertible as widely discussed
by BoE, FSA and the market, key issue for value split between equity & bond
holders is the conversion price mechanism: pre-determined on issue = good for
equity, bad for debt holders; if open to market price at time of conversion =
bad for equity, good for debt holders.
NH:
According to FT: next Wed by latest; £21bn new capital (£13bn rights issue;
£7.5bn convertible bonds), FT reports that Gvt has agreed to GAPS alternative,
and will take up its rights; and that EC has agreed to Lloyds disposals of C&G,
Lloyds TSB Scotland (due to Bk of Scotland market share overlap) and IF, so
shrinking current a/c mkt share from 30% to 25%. This would be consistent with
co statement yesterday that EC remedies will not be financially material.
Telegraph reports issue price of 30p (a huge 65% discount, but biggest rights
issue ever implies a 1.6x new shares per existing share) We also suspect that
the penalty fee for exit could be as high as £1.5-2.0bn (£15.6 total fee: 9
mths of 7 yr contract, before any adjustment for risk).
£7.5bn convertible bonds), FT reports that Gvt has agreed to GAPS alternative,
and will take up its rights; and that EC has agreed to Lloyds disposals of C&G,
Lloyds TSB Scotland (due to Bk of Scotland market share overlap) and IF, so
shrinking current a/c mkt share from 30% to 25%. This would be consistent with
co statement yesterday that EC remedies will not be financially material.
Telegraph reports issue price of 30p (a huge 65% discount, but biggest rights
issue ever implies a 1.6x new shares per existing share) We also suspect that
the penalty fee for exit could be as high as £1.5-2.0bn (£15.6 total fee: 9
mths of 7 yr contract, before any adjustment for risk).
MJ:
Some interesting figures in there
NH:
I have some more on that
NH:
the type of discount we can expect
NH:
here it is
NH:
Financials: At 85p and assuming £13bn rights issue at 30p, TERP = 51p, value of
existing shareholder rights = 34p. Volume shares from 27bn to 70.5bn.
Conservative TCE settles at 40p, plus whatever benefit from value uplift as
cost of insurance > expected payback from Gvt. (We estimate at least £5bn, ie
7p per share.) Core tier 1 ratio 9.7%, 7.6% clean of life double count
(assuming convertibles count as core tier 1). Assuming 12% coupon on
convertibles but no conversion, normalised EPS falls from 20p to 12-13p,
implying 18-19% sustainable RoE. At 2.0x, 11x PE = 138p gross value. Discounted
back from 2013 implies NPV of 83p. Plus 7-14p of future book value uplift from
avoiding GAPS insurance fee = 90-97p TP. Cum rights is + 34p, ie 124-131p TP.
Bears will argue incremental capital gets reinvested at risk free rates, which
would reduce TP by c14p.
existing shareholder rights = 34p. Volume shares from 27bn to 70.5bn.
Conservative TCE settles at 40p, plus whatever benefit from value uplift as
cost of insurance > expected payback from Gvt. (We estimate at least £5bn, ie
7p per share.) Core tier 1 ratio 9.7%, 7.6% clean of life double count
(assuming convertibles count as core tier 1). Assuming 12% coupon on
convertibles but no conversion, normalised EPS falls from 20p to 12-13p,
implying 18-19% sustainable RoE. At 2.0x, 11x PE = 138p gross value. Discounted
back from 2013 implies NPV of 83p. Plus 7-14p of future book value uplift from
avoiding GAPS insurance fee = 90-97p TP. Cum rights is + 34p, ie 124-131p TP.
Bears will argue incremental capital gets reinvested at risk free rates, which
would reduce TP by c14p.
MJ:
70bn shares…
MJ:
I mean, really
NH:
the LSE won’t complain
NH:
kerching every time one is traded
MJ:
have you got some more comment on the latest?
NH:
I have something from Jonathan Pierce at Credit Suisse
NH:
he is upgrading
NH:
but only yo neutral
NH:
he’s a big barclays fan
NH:
We move from Underperform to Neutral: Our target price moves from 55p to 95p reflecting a move to a non-APS earnings based valuation;
Shares have underperformed European banks: While we’re not particularly proud of the 45% rise in LBG’ share price since our downgrade in April, the European banks sector – our benchmark – has risen over 60% and our favourite UK bank Barclays has risen over 90%;
Comment on EC remedies surprising: The EC threat has worried us for a while, but LBG says that remedies will not have a material impact. Media reports suggest that IF, C&G and LTSB Scotland are the focus, and if so this would indeed be a good result for LBG. We believe these businesses account for just £25bn (6%) of group’s deposits, and earnings dilution would be limited to a few hundred million pounds, on our numbers;
Shares have underperformed European banks: While we’re not particularly proud of the 45% rise in LBG’ share price since our downgrade in April, the European banks sector – our benchmark – has risen over 60% and our favourite UK bank Barclays has risen over 90%;
Comment on EC remedies surprising: The EC threat has worried us for a while, but LBG says that remedies will not have a material impact. Media reports suggest that IF, C&G and LTSB Scotland are the focus, and if so this would indeed be a good result for LBG. We believe these businesses account for just £25bn (6%) of group’s deposits, and earnings dilution would be limited to a few hundred million pounds, on our numbers;
NH:
But our enthusiasm remains tempered: Structurally we remain concerned by LBG’s liability structure and think the market is underestimating this. It’s core funding ratio is sub-standard, in our view, and it is overly reliant on SLS and CGS bonds, the majority of which matures in 2011 and 2012. Indeed, we wonder whether this is where the EC / Authorities are more focused. That LBG has issued very little new term funding since June, providing a short-term boost to the margin trend, is of little relevance to us;
NH:
Clean EPS of 10-11p: We remain at the cautious end of market estimates, a function of margin. In the absence of APS, we see 2013E EPS falling further to just 10-11p. That said, we forecast a 12% equity tier 1 ratio in 2013E on the “new” plan, giving a capital adjusted EPS of 13p, a ROTE of 13%;
Far from cheap, but no longer expensive: This would leave the shares trading on around 9 times the PV of our 2013E EPS, and 1.2 times trough TNAV, a reasonably fair level in our view.
Far from cheap, but no longer expensive: This would leave the shares trading on around 9 times the PV of our 2013E EPS, and 1.2 times trough TNAV, a reasonably fair level in our view.
NH:
and while we are talking about Lloyds
NH:
I have a request to mention this
NH:
Is Lloyds the new Enron?
NH:
by Ian Fraser
NH:
if interested
NH:
go here
11:48AM
MJ:
Right, where next?
NH:
let’s have a look at National Express
MJ:
why?
NH:
big boardroom bust up
NH:
the company and their biggest shareholder
NH:
trading insults via RNS
NH:
very amusing
MJ:
Oh yes
NH:
The Board of National Express (the “Board”) notes the statement from the Cosmen family today.
As announced on 28 October 2009, the Board believes that the best course action for the Group and all shareholders is to proceed with an equity fundraising to secure funds before year end.
The Board, together with its independent advisers, has carefully explored a range of strategic options during the course of 2009. In relation to the recent Stagecoach proposal the Board concluded that there was significant uncertainty that a combination with Stagecoach could be successfully executed in 2009.
Non-compliance with 31 December 2009 banking covenants would require the Group to seek further concessions from its banking partners, incurring additional cost and creating significant uncertainty for National Express shareholders.
NH:
and that response
NH:
was prompted by this
NH:
The Company is facing short-term issues that need to be addressed but we have serious concerns about the absence of a well-defined strategy to address the Company’s broader and longer-term issues. We are concerned that there has not been a sufficiently full and thorough assessment of all the available options to address the Company’s short and longer-term challenges, and, in particular, of Stagecoach Group plc’s merger proposal, an option that could have addressed the fundamental financial and strategic issues facing the Company.
The board of the Company (the “Board”) should ensure it makes its best efforts to evaluate all the Company’s options with the benefit of independent advice. We are greatly concerned that the Board risks losing further value for all shareholders by not keeping the Company’s options open and we would urge the Board to seek independent financial and legal advice to assist it in this review process.
MJ:
So where does all this leave the cash call?
NH:
not sure
NH:
the Cosmen’s say they are supportive
NH:
but only if it meets cerrtain criteria
NH:
which they won’t specify
NH:
but I guess that means size
MJ:
So why are the shares up then?
National Express (NEX:LSE): Last: 328.00, up 7 (+2.18%), High: 340.60, Low: 315.00, Volume: 1.13m
NH:
I gues people think
NH:
the Cosemn’s will put pressure on the board
NH:
to get Stagecoach back to the negotiating table
NH:
looks a long shot to me
NH:
that said
NH:
and if you look at the advisors on the Cosmen letter you will see that they have hired a boutique started up by some ex-Lehman heavy hitters
MJ:
ah yes
MJ:
Michael Tory
MJ:
and Ondana Partners
MJ:
have any comment for the ROTR?
NH:
Well, I have some colour
NH:
from someone who has spoken to the Cosmen’s people
NH:
Claims there are a plethora of problems at NEX. Not just a covenant
issue – also relates to the performance of certain divisions, DfT issue,
operational issues, management issues. Co is in a tricky position. Other
transport groups have fared better in the recession.
issue – also relates to the performance of certain divisions, DfT issue,
operational issues, management issues. Co is in a tricky position. Other
transport groups have fared better in the recession.
* Confirms Cosmen has agreed to support a rights issue within certain
parameters but will not say if they will subscribe to any rights issue.
Says Cosmen has been a supportive shareholder for four years and
naturally does not want to put the company under more stress than it is
already due to management.
MJ:
Some “colour” eh?
NH:
that’s not Raj type colour
NH:
anyway
NH:
I also have some broker comment too
NH:
here’s Collins Stewart
NH:
Cosmens issue an unprecedented statement expressing concern
The Cosmens have issued a highly unprecedented statement this morning setting out their views on the current situation at National Express. The Cosmens are NEX’s largest shareholder, owning over 17% of the company, and run the Spanish bus operations (est. 43% of EBIT). In the statement they note ‘the company is facing short term issues … they have concerns about the absence of a well-defined strategy’. They express concern that ‘there has not been a full and thorough assessment of all available options, and in particular the Stagecoach proposal … an option that could have addressed the fundamental issues.’ They go on to say ‘the Board should evaluate all options with the benefit of independent advice. It risks losing further value by not keeping its options open’.
The Cosmens have issued a highly unprecedented statement this morning setting out their views on the current situation at National Express. The Cosmens are NEX’s largest shareholder, owning over 17% of the company, and run the Spanish bus operations (est. 43% of EBIT). In the statement they note ‘the company is facing short term issues … they have concerns about the absence of a well-defined strategy’. They express concern that ‘there has not been a full and thorough assessment of all available options, and in particular the Stagecoach proposal … an option that could have addressed the fundamental issues.’ They go on to say ‘the Board should evaluate all options with the benefit of independent advice. It risks losing further value by not keeping its options open’.
NH:
¦ In whose interests is the Board acting?
The most telling element in today’s the statement is the call for independent advice! Clearly the Cosmens are not convinced all parties are acting in the best interest of shareholders. Cynically, one could argue that the company’s brokers and advisors would be best served by generating fees through an equity raise. And the executives will keep their jobs if they pursue an independent future … turkeys don’t vote for Christmas!
The most telling element in today’s the statement is the call for independent advice! Clearly the Cosmens are not convinced all parties are acting in the best interest of shareholders. Cynically, one could argue that the company’s brokers and advisors would be best served by generating fees through an equity raise. And the executives will keep their jobs if they pursue an independent future … turkeys don’t vote for Christmas!
NH:
What next … is a rights issue feasible?
Given such a high profile statement, is it feasible to push ahead with a rights issue? It was always going to be a tough one – £300-400m to be raised against a market cap of £482m. At the very least, the Cosmen’s issues need to be addressed and this will take time. We can’t understand why the NEX board dismissed the stagecoach proposal; it would have made sense to run a dual-track process. Perhaps there will be a rethink?
¦ Can value be unlocked from NEX?
Our sum-of-the-parts points to 479p as the intrinsic value of NEX. However, as the Cosmens point out, further value could be destroyed in the short term. Stagecoach’s preliminary proposal had offered the potential for NEX shareholders to capture a value of up to 500p/share, through an all-share merger. Given the issues, it looks unlikely that this value could be realised, but a value of 400p+ might be achievable, through a merger. In the absence of this it is difficult to predict how much value will be destroyed and hence where the shares will go to.
¦ If you want to play this … Stagecoach is the best way in
At the current level, Stagecoach shares are fair value. If they were to be invited back to make a proposal to merge with National Express, there is scope for substantial value creation (we calculated 20-30% earnings accretion based on the initial proposal). SGC offers limited downside and potentially substantial upside, if this happens.
Given such a high profile statement, is it feasible to push ahead with a rights issue? It was always going to be a tough one – £300-400m to be raised against a market cap of £482m. At the very least, the Cosmen’s issues need to be addressed and this will take time. We can’t understand why the NEX board dismissed the stagecoach proposal; it would have made sense to run a dual-track process. Perhaps there will be a rethink?
¦ Can value be unlocked from NEX?
Our sum-of-the-parts points to 479p as the intrinsic value of NEX. However, as the Cosmens point out, further value could be destroyed in the short term. Stagecoach’s preliminary proposal had offered the potential for NEX shareholders to capture a value of up to 500p/share, through an all-share merger. Given the issues, it looks unlikely that this value could be realised, but a value of 400p+ might be achievable, through a merger. In the absence of this it is difficult to predict how much value will be destroyed and hence where the shares will go to.
¦ If you want to play this … Stagecoach is the best way in
At the current level, Stagecoach shares are fair value. If they were to be invited back to make a proposal to merge with National Express, there is scope for substantial value creation (we calculated 20-30% earnings accretion based on the initial proposal). SGC offers limited downside and potentially substantial upside, if this happens.
11:55AM
MJ:
Right – market update
MJ:
FTSE trading water – up 6 points at 5144
NH:
welcome back Simon Corkswill
MJ:
glad to have you back
NH:
not sure we have anything to add on GKP at the moment
NH:
and they only small cap I have been looking at today
NH:
is a Chinese gold play
NH:
called Leyshon Resources
MJ:
Whats going on there?
NH:
nothing really
NH:
it has 13p a share of cash on its balance sheet
NH:
and trading at 9p
NH:
seems odd
NH:
given the way some of the other small cap gold plays have been moving
11:59AM
NH:
On Lloyds debt
NH:
just looking at note out of RBS
NH:
on the subject oF CCNs
NH:
or what could be CCNs once the Lloyds restructuring has been announced
MJ:
and?
NH:
This is only really germane in the Lloyds
case, in the first instance at least. But as has been pointed out, rather than
participating at full pro-rata in the rights issue which could be underwritten by
major banks, the government could instead somehow underwrite or backstop the
CNNs in the secondary market maybe through the BoE’s APF, thus moving the
taxpayer to a supposedly more senior part of the capital structure and with an
equity-like return they would otherwise not receive. At the same time it supports a
new instrument that it wants to succeed. Ultimately this seems unlikely to happen
case, in the first instance at least. But as has been pointed out, rather than
participating at full pro-rata in the rights issue which could be underwritten by
major banks, the government could instead somehow underwrite or backstop the
CNNs in the secondary market maybe through the BoE’s APF, thus moving the
taxpayer to a supposedly more senior part of the capital structure and with an
equity-like return they would otherwise not receive. At the same time it supports a
new instrument that it wants to succeed. Ultimately this seems unlikely to happen
NH:
given the govt is still out-of-the-money on its equity investment (the average price
was 101p) and the potential/probable sub-par secondary price of CCNs But I
like the rationale.
For all the above investors, I strongly believe that owning CCNs will be an
unhedged/unhedgeable position. CCNs will not be deliverable into sub CDS and
the cost of hedging the equity option will almost certainly be too punitive.
was 101p) and the potential/probable sub-par secondary price of CCNs But I
like the rationale.
For all the above investors, I strongly believe that owning CCNs will be an
unhedged/unhedgeable position. CCNs will not be deliverable into sub CDS and
the cost of hedging the equity option will almost certainly be too punitive.
NH:
What will the coupon price be?
Consensus for anything less than an equity-style return has been overwhelming.
It will have to be double-digit, and consensus seems to be settling on 12%
minimum, which is very much where I came out a week ago for Lloyds.
I am aware that there is a powerful school of thought that is looking at CCNs
relative to T1 pricing, which is perceived as having a putative 10% coupon on
the basis that these are safer than T1 because you are guaranteed a coupon
when T1s may be switched off, in a jump-to-liquidation scenario your
option/recovery value would be higher, if you are converted to equity then T1
coupons would have been switched off (not necessarily so, but a reasonable
assumption) and the CCN space will be more liquid than the remnants of Lloyds
T1 market.
Consensus for anything less than an equity-style return has been overwhelming.
It will have to be double-digit, and consensus seems to be settling on 12%
minimum, which is very much where I came out a week ago for Lloyds.
I am aware that there is a powerful school of thought that is looking at CCNs
relative to T1 pricing, which is perceived as having a putative 10% coupon on
the basis that these are safer than T1 because you are guaranteed a coupon
when T1s may be switched off, in a jump-to-liquidation scenario your
option/recovery value would be higher, if you are converted to equity then T1
coupons would have been switched off (not necessarily so, but a reasonable
assumption) and the CCN space will be more liquid than the remnants of Lloyds
T1 market.
MJ:
Thanks for that
MJ:
Right we should probably get going
MJ:
Neil has a very busy day on Fridays
NH:
I do
NH:
but before I go
NH:
just been sent something from interesting
NH:
which might explain some of the recent price action in the mid caps
NH:
regards IG index
NH:
and changes to margin rules
MJ:
do share
NH:
you guys aware of the ig margin issue that hit this week…..explains a lot of the mid cap disaster action…..so makes tthe likes of all destroyed stocks like HOIL worth a look……porbably even worth just buying a whole basket of all those detroyed stocks and hedge with short ftse….
NH:
worse….only for the big boys….changed entire margin system…bigger your position higher the margin…bigger the unrealized profit bigger the margin….mainly for extreme big positon players and insto style clients….i could run through all the stocks which have been destroyed….but i’m sure you know which ones….rights stocks…rumoured deal stocks and small mid cap oil took the brunt of the unwind…..all completed yesterday am….mostly executed tuesady and wednesday open and close
MJ:
hmmm
NH:
(Simon pls. I will not leave the building today, until I go hom)
NH:
OKay
NH:
we are done
NH:
starting to get some abuse from the GKP nutters
MJ:
Have a good weekend everyone
NH:
and come on the Arsenal
NH:
destroy the Scum tomorrow
MJ:
That result will most likely set the tone come Monday
NH:
it will set the tone for the rest of the weekend
NH:
and
NH:
guess what
NH:
we are going away for the weekend
MJ:
Where to?
NH:
to the house of SCUM supporter. meh.
MJ:
ha
NH:
imagine if we lose
NH:
for the first time in two decades
MJ:
Don’t get into any fights now
NH:
I’ll have to catch a train home
NH:
Poppy
NH:
say it isn’t so
NH:
Jamie Redknapp
NH:
and his shiny silver suit
NH:
skin tight
NH:
and with that pencil thin black tie
NH:
can’t we ban him again
MJ:
now now
MJ:
Right – thanks for the comments
MJ:
Its lunch time
NH:
cya
NH:
thanks for logging in this week
MJ:
thanks
MJ:
bye
NH:
and finally
NH:
on Cisco
NH:
complete silence from Cisco
NH:
not saying anything at all
NH:
No comment on speculation
NH:
but
NH:
the company is in its quiet period ahead of results
NH:
and they have always said there offer is fair and recommended
NH:
I guess that means it will be down to Mr Source close to the situation to get to the bottom of this one
NH:
ok bye
MJ:
Happy Halloween as well
NH:
cya