FT Alphaville » Markets live transcript 10 Nov 2009

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Markets live transcript 10 Nov 2009

Posted by Neil Hume on Nov 10 11:03.

Markets live chat transcript for the chat ending at 12:11 on 10 Nov 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE)

NH:

good moaning

NH:

and welcome to Markets Live

NH:

FT Alphaville’s daily markets chat

NH:

Miles is being rested today

NH:

these young tyros needed to take a breather occasionally

NH:

and he is being replaced by an experience hand

NH:

Bryce

NH:

who has returned from a little sojourn to Canada

NH:

hello Bryce

BE:

Morning all.

BE:

good to be back in the squad

BE:

and with everything working for now

NH:

indeed, for now.

NH:

apologies for yesterday’s shambles we had a massive internet connectivity issue

NH:

which appears to have been fixed

BE:

Touch wood

NH:

so let’s get on with things

NH:

lots to get through

BE:

indeed

11:06AM

BE:

but we had better start with the wider market

NH:

small up at the moment

NH:

decent results from HSBC

NH:

Cancelling out disappointments from Vodafone and Barclays – just

BE:

battle of the mega caps then

NH:

yeah, something like that

NH:

which has left the FTSE 100 flailing around in the water

NH:

currently up 16.9 points at 5,252

BE:

I guess we should take a look at the banks first

NH:

although Gen wants to look at Afren

NH:

I was going to save that for later

NH:

but it is very interesting

NH:

and all is not quite what it appears

BE:

And with that teaser, let’s push on with the banks

NH:

before we do

NH:

yesterday’s LSE outage

NH:

do we have any more info

NH:

I saw you wrote a piece for the paper

NH:

you must have been in the office until 9.00pm doing that

BE:

Yup – bit of a rush job as well

BE:

Anyway, the best I could get out of the LSE duty press officer was that one of their servers died at 3pm

BE:

And they can’t tell us how many servers they have, although it knocked out a twelfth of stocks …

NH:

hmmm

BE:

So make your own conclusions

NH:

did this have anything to do with yesterday’s co-location news

NH:

did one of their clients pull the plug

NH:

on one of their servers??

BE:

Obviously, they’re not saying any such thing

BE:

Tad embarrasing to have both bits of news on the same day though

NH:

(Monkey – we knew you would go for that? Completely soiled. nice)

BE:

And a tad embarrasing also that LSE was among the stocks frozen

BE:

Didn’t seem to have any serious ructions at today’s open though, unless I’ve missed something

BE:

Which is fortunate for them.

BE:

Right – back to the banks.

11:11AM

NH:

BE:

Should we begin with readers’ favourite Barclays

NH:

why not

NH:

disappointing statement

NH:

shares down at the moment

NH:

off 10.55p at 332p

BE:

why

NH:

well two schools of thought

NH:

one is this

NH:

no upgrades

NH:

because Barc are always so bullish

NH:

expectations are high and when upgrades don’t come through

NH:

this is what happens

NH:

although some people

NH:

some heathens, who will be struck down

NH:

are saying growth at BarCap is slowing

BE:

well

BE:

they will be struck down

BE:

thou shalt not take the name of Bob Diamond in vain

NH:

indeed

NH:

I am plumping for the later

NH:

anyway

NH:

here are the key points, courtesy of Cazenove

NH:

Underlying pre-tax profit for the nine months was £4.4bn and includes a pension credit of £371m which was not in estimates.

NH:

Excluding this, the pre-tax profit was c.£300m better than our estimate of £3.7bn, which appears due to lower impairment in the quarter.

NH:

Reported pre-tax profit of £4.5bn for the nine months includes loss on fair value of own debt (£1,298m), acquisition/disposal gains (£178m) and debt buy-back gain (£1,249m).

NH:

As at 30th September, adjusted gross leverage and RWAs are broadly consistent with 30th June, which will allay fears over RWA growth from monoline rating downgrades. We had expected 6% RWA growth in H209; if Barclays can hold RWAs flat in Q4 and with the benefit of a higher gain on the BGI sale (the Blackrock share price is +29% since the announcement) then we expect the core tier 1 ratio can approach 9% by the year end compared with our existing estimate of 8.5%.

NH:

Barclays has declared a dividend of 1.0p for Q3 (Caz: 0.5p), which is well covered by basic EPS of 7.8p.

BE:

A bank dividend!

BE:

a rare species indeed

NH:

Confirming recent comments, management expects the 2009 impairment charge to be “around the bottom end” of the consensus range of £9.0bn to £9.6bn (Caz: £9.3bn, 2008: £5.4bn).

October trading is consistent with the overall trend for the first nine months.

BE:

thanks for that

BE:

and what about the performance Bob “bigger than Jesus” Diamond’s kingdom?

NH:

well, there was a slowdown, although this statement is pretty hard to read

NH:

here’s Caz again

NH:

Investment Banking & Investment Management income increased 32% YoY and profit fell 38% YoY.

Barclays Capital PBT was £1,416m or £2,714m excluding loss on fair value of own debt. This implies Q3 PBT pre FV of own debt of £774m, in line with our estimate (Caz: £735m).

NH:

We estimate underlying revenues of £3.7bn declined 30% versus Q2 (Caz: -18%), reflecting “the normal seasonal slowdown…and tighter spreads”.

Gross write-downs were lower than we expected (£1.0bn versus £1.4bn) and loan impairment was less than £100m (Caz: £475m, Q2: £704m).

BE:

spreads tightening then

NH:

looks that way

NH:

whatever the reason

NH:

BarCap came in well below expectations

NH:

and the numbers being banded around in the weekend press

NH:

here’s some more comment from JP Morgan

NH:

who think the statement is messy

NH:

Overall, this is an exceptionally – one might almost say unnecessarily – messy statement. The use of qualitative commentary for 9M periods is especially unhelpful, and the level of disclosure bears poor comparison with RBS last week. What seems to be emerging is that the big driver of Barclays’ performance in recent years, BarCap, has stalled, but, on a more positive note, the provisions are better. The stock has underperformed the European sector by 8% over the past month and 11% over the past quarter, and does not look expensive on 1.0x 10E P/NAV. However, the unclear message in the statement, together with the weakness at BarCap, will unsettle the market, and we also believe that Barclays has a material capital deficit (£11.8bn.) to address. We remain UW, target price 280p.

BE:

“unnecessarily messy statement”

BE:

Ouch

BE:

that’s aggressive

NH:

hang on

NH:

let me go back into the note

NH:

doesn’t really say

NH:

BarCap clean revenues of £3.7bn. were significantly lower than press speculation (£4.6bn.) and JPMe (£4.4bn.), and down significantly on Q2 (£5489m.). Barclays highlights both a seasonal slowdown and tighter spreads, but this looks poor compared with international peers, and suggests that our Q4 forecast (£3.6bn.) may be generous.

BE:

“looks poor compared with international peers” ?

NH:

presumably that menas the Squid

BE:

Presumably.

NH:

an interesting point

NH:

has Bob taken his eye off the ball with all this empire building

BE:

well perhaps this explains why Barc are pushing the corp bank into Barcap

BE:

they need to cross-sell more

BE:

to keep up the growth

NH:

anyway, in the interests of balance here’s a Barclays bull – Jonathon Pierce of Credit Suisse

NH:

who is slightly worried about costs at BarCap

NH:

which as well all know

NH:

have gone through the roof

NH:

with their massive hiring spree

NH:

Conclusion and valuation
There are some negatives in this statement. There’s the fact that Barclays isn’t pushing up full year guidance despite a decent Q3, although we suspect its building in a buffer here. There’s also Barclays Capital costs, that are up about 20% in Q3 versus the H1 run-rate pushing the cost : net income ratio in the division to about 78% in the 9 months to September and about 85% in Q3. However, this partly reflects the cost revenue lag of recent investments. Furthermore, cost deferral policies could place downward pressure on this in due course. We still think a figure of about 70% is appropriate in the medium term, particularly as credit-market writedowns fall away, but this has been one of our concerns on Barclays and it is evident in these numbers.

NH:

That said, we still think this is a decent performance with good balance across the divisions, and the capital and dividend prospects – we think at least 15p is achievable on a 2-3 year view – providing little to grumble about. We don’t have a tangible NAV number here, but fully diluted for the warrants we think it could be around 300-310p putting the shares on around 1.1 times equity. This is a 30% discount to the sector, and we believe these numbers remind us that Barclays is not a one-trick pony deserving of a lowly multiple. It remains our favourite UK bank.

NH:

actually a pattern is developing

NH:

people really are worried about slowing growth at BarCAp

NH:

here’s some more comment

NH:

from another sector watcher

NH:

By division, all the shortfall came from BarCap – attributed to “normal seasonality and tighter spreads”. This significantly reduces our enthusiasm for the buy case, which is now simply predicated on it being cheap vs normalised earnings / profitability (55-60p EPS); it appears that the positive earnings revision angle has peaked. Other points: 1) total impairments/write downs of GBP2.4bn vs our forecast GBP2.5bn 2) DPS of 1p vs our H209F 2p but good for sentiment 3) October trading in line with rest of year 4) Pro forma core tier 1 ratio (co definition) of 8.9%, in line with forecasts.

BE:

Thanks

BE:

shall we move on from Bank of Bob

BE:

to Smug Bank?

NH:

one moment, I have some banking 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.

BE:

Go on

NH:

rumours of Deutsche Bank about to launch a convertible

NH:

and also

NH:

an email has just landed about Ladbrokes

Ladbrokes (LAD:LSE): Last: 118.30, down 6.2 (-4.98%), High: 125.00, Low: 116.40, Volume: 7.96m

BE:

Aha

NH:

we have been trying to find out why there are so weak

NH:

and the answer seems to be

NH:

that they might be coming out of a big MSCI index

BE:

That’s normally a November event, isn’t it?

NH:

it is

BE:

Don’t have the exact date handy.

NH:

normally creates a lot of interest

NH:

and buying and selling

BE:

Even though we hacks tend to ignore MSCI indices.

BE:

In favour of FTSE, for obvious reasons.

NH:

Need to get on to the website

NH:

trouble the MSCI

NH:

one is really difficult to use

BE:

Thanks Dempsdog for the info that it’s the 30th

NH:

and I have a bit more on this rumoured DB CB

NH:

DBK GY – SPEC OF A JUMBO CONVERT….

NH:

- Seeing as the Cap Increase, Secondary etc etc, has been rumoured for months, a jumbo convert seems to be the issue of choice at the moment, hence, a higher likelihood of it being true….

NH:

and

NH:

also this

NH:

- DBK: UNCONFIRMED market chatter (out of Germany) co wants to issue a
convertible bond

11:23AM

NH:

Right

NH:

we need to have a quick look at Smug Bank

BE:

shares are motoring in the wake of results

BE:

Up 29p at 721p

NH:

hmmm

NH:

not had the time to go through the figures in full

NH:

because of barclays

NH:

and Yell, which we can talk about a bit later

NH:

but there is a beat at the underlying level

NH:

well that’s what Goldman are telling their clients

NH:

HSBC (HSBA.L, Buy, 860p) released its 3Q 2009 interim management
statement this morning.

The release strikes a positive tone, highlighting a number of the trends
that we believe will drive outperformance in the stock over the coming
periods. Specifically:

NH:

General
* Underlying PBT (ex-movement in value of own debt) stronger than
expected by the company with PBT up both 9M on 9M and QoQ
* Revenues moderately higher driven by broadly stable net interest
income and a rise in fee income
* Costs lower due to US restructuring and cost control elsewhere
* Loan impairments declined to lowest level since 2Q 2008
* Credit spread tightening led to negative movement on value of own debt
of $3.5 bn ($1.9 bn of cumulative gains remain)
* 4Q 2009 has so far seen a continuation of 3Q 2009 trends; Group
expects a ‘two-speed recovery’ with emerging markets leading the
turn-around

NH:

also it seems the performance of HFC – that’s the US sub prime business – has been ok

NH:

HSBC Finance Corporation (HFC)

* Run-off portfolio (mortgages, auto, personal non credit card) loan
impairments fell for the first time since early 2006

* Overall, loan impairments declined to $3.0 bn (the lowest level in
more than a year) vs our expectation of $3.2 bn and 1Q of $4.0 bn and 2Q
of $3.4 bn

* Charge-offs (realised losses) stabilised for the overall portfolio and
came in significantly better than expected for the core credit card book
(18.8% vs 20.8% during 2Q 2009 and our forecast of 23.0%)

* Receivables shrinking by around $5 bn (4.9%) during quarter with

declining balances in both the core and non-core portfolio
* HFC will sell vehicle servicing business and $1 bn of receivables to
Santander on November 10 for $904 mn, further accelerating portfolio
run-off

* Importantly, there were no further capital injection from the group
during 3Q ending a string of capital transfers including $2 bn during 1H
2009

NH:

right

NH:

and to put all those numbers into a bit of context for you

NH:

here’s summary from the sales desk of a leading bank

NH:

Q3 trading update pretty much as expected as best we can tell, though lack of numbers makes it dependent on semantics rather than quantification.

Headline comments = as bulls hoping for:
1) H1 positive trends continued into Q3, stronger than mgt expected at beginning of year;
2) GBM (Markets) remained strong;
3) HSBC Finance had first sequential decline in impairments since start 2006. Q3 impairment charge USD3.0bn vs our forecast USD3.5bn.
4) And recovery in unrealised losses on debt security portfolio.
5) Elsewhere, Asia “performed strongly” which reads across consistently with St Ch investment case; LatAm appears to have passed the worst of the bad debt cycle, whereas Middle East remains challenging. Europe is resilient.

NH:

Overall, trend to profitability normalisation is on track, and at slightly faster pace than in our numbers: good for relief, but doesn’t change end destination: we see “normal” EPS FY12 cUSD1.50, ie trades on 8.0x normal PE, 2.4x FY09F tangible common equity of USD5.00 (USD3.00). HSBC are just shy of their 12 month high, so the chartists will likely want to see this break out. While the tone of the statement is undeniably positive, we still prefer Standard Chartered given the likely upgrades to come through following the sell-side analyst visit this week.

NH:

right, that’s enough banks

BE:

the figures on the AFS reserve look good too

11:26AM

NH:

Where now?

BE:

Vodafone I guess

BE:

Headline numbers in line, guidance not

BE:

Although there are lots of moving parts in there

BE:

Most notably a £300m cut to depreciation, as they’re now keeping the Vodacom brand in South Africa

NH:

hang on

NH:

so that’s the only reason the figs are in line

NH:

because of depreciation?

BE:

The figs benefit from a tax break and a one-off in Italy as well

BE:

But the guidance is held based on the D&A change

BE:

The upshot is that while the company was able to keep full-year EBIT guidance, the operating margin will be down 2.1% against “”better than -1.8%” previously

BE:

And that suggests a downgrade of about 1.5% against the earnings steer given in May

NH:

And that’s what has hit the shares?

BE:

Looks that way, yeah.

BE:

We’re down 4p at 133.9p at the moment.

BE:

Much of the problem seems to be India, where – as we’ve reported ad infinitum – there’s a brutal price war

BE:

And the results there were even worse than expected. EBITDA missing by about 17%

BE:

But the company’s also having to chuck more cash at Europe to try and stay competitive

NH:

Any comment?

NH:

quickly

BE:

We can kick off with a rather bearish line from the rather bearish Saeed Baradar at SocGen

BE:

In essence Vodafone is an ex-growth company struggling to maintain margins with unachievable cost cuts, in an environment of increasing regulatory and competitive pressure , and where their engine of growth (India) looks like a liability.

Add to that management reluctance to accept current visible currency levels, a refusal to project cash-flows based on ongoing costs (i,e. including spectrum and license costs), and it is easy to see why questions might soon be raised on the viability of the dividends. SELL.

BE:

That is, needless to say, one extreme

BE:

But house broker Citi is not too impressed either

BE:

1H10 Beat — EPS 17% better on lower D&A, interest, tax. FCF beat by 7% post licences (better tax). Sales 1% better, EBITDA in line after margins 30bps light. Operating profit 2.4% ahead on lower D&A. Europe beat at last, with notable improvements in Spain and improving trends overall. Turkey also showed better. India missed on sales and margin: the focus of any concern.

Guidance Frustratingly Mixed — FCF is now guided to the top of the range (ie 5% above Citi). Operating profit is unchanged. We regret Vodafone has not narrowed the range: £11.4bn ±3.5%. Detail implies a 1.5% fall in guided EBITDA plus associates, offset by lower D&A. Lower interest then suggests single digit net income rises are possible: c3-5% vs Bloomberg consensus.

European Operational Trends — Spain stands out for improvement in both sales shrinkage and margin. Italian margins beat. Germany in line. UK worse. Organic revenue falls of -4.6% in 2Q were well ahead of Bloomberg consensus, close to -4.4% in 1Q despite MTR headwinds. Margins came in 70bps better.

BE:

Cost Savings — The £1bn 2011 target is now £1bn by 2010, £2bn by 2012. 75% is to offset inflation or be reinvested. We think this offers a good platform once cyclical factors allow growth. Indeed margin pressure of ~2ppt this year could be seen as a floor, in our view. We expect a sharp snapback in 2011.

A Passage to India — It is no surprise that Indian growth deteriorates but the quantum is worse than we thought. 18% growth in 2Q with 24% margins. This market needs consolidation but consolidation opportunities depend on licence conditions. Our 2011 forecasts are not necessarily at risk. However, these results will likely fuel market concern. Weaker India dampens group upgrades.

BE:

However, Deutsche are sticking with their buy advice

BE:

Weaker margin outlook but on improving growth
FY Op Profit guidance of £11.0-11.8bn reiterated on £0.3bn lower D&A and lighter EBITDA margins: -2.1pp vs “better than -1.8pp”. In isolation this appears disappointing but we believe corresponds to better top line growth which will see Vod shares rated much more highly. Europe growth slowed by just 20bps in Q2 vs 110bps in prev quarter and -100bp guidance. Spain growth improved by 1.2pp. Outgoing voice minutes growth stabilised for the first time in 8 quarters. This is the late cycle top line growth story coming through. Weaker than expected margins would be fully commensurate with a move back to cutsomers re-contracting, smartphones and mobile data take-off (growth stable in Q2).

BE:

Share price weakness unjustified
FCF guidance has moved up and evidence is strong that recent top line growth deterioration has stabilised. We believe economic recovery will see further progress on voice and data appears set for an improvement. Maintain Buy on VOD shares based on European growth and confidence in core FCF, which we think are not reflected in market. TP 185p.

NH:

thanks for that

11:30AM

NH:

just back to the MSCI reshuffle

NH:

looks like it will be announced tomorrow

NH:

but people are already speculating on who will be in or out

NH:

however

NH:

that’s the methodology is so opaque

NH:

not like the FTSE

NH:

where you can make an educated guess

BE:

Yup – MSCI’s a nightmare to predict.

NH:

MSCI NOVEMBER INDEX REVIEW ANNOUNCEMENT SCHEDULED FOR NOVEMBER 11, 2009

BE:

Often seems totally arbitary.

NH:

Geneva – November 4, 2009 – On November 11, 2009, MSCI Inc. (NYSE: MXB), a leading provider of investment
decision support tools worldwide, including indices and portfolio risk and performance analytics, will announce the
results of the November 2009 Semi-Annual Index Review for the MSCI Equity Indices – including the MSCI Global
Standard and MSCI Global Small Cap Indices as well as the MSCI Global Value and Growth Indices, MSCI Frontier
Markets Indices, the MSCI Global Islamic and MSCI Global Islamic Small Cap Indices, the MSCI High Dividend
Yield Indices, the MSCI Pan-Euro and MSCI Euro Indices, the MSCI US Equity Indices, the MSCI US REIT Index,
the MSCI Asia APEX 50 Index as well as the MSCI China A Indices. All changes will be implemented as of the
close of November 30, 2009.

NH:

and it looks like

NH:

readers should go here

NH:

for the results

NH:

BE:

Hang on – echo post.

NH:

sorry problem with the copy paste on my computer

NH:

prolly coz it gets used so much

NH:

MSCI will post the list of additions to and deletions from the indices for the November 2009 Semi-Annual Index
Review on its web site, www.mscibarra.com, shortly after 11:00 p.m. Central European Time (CET) on November
11, 2009.
A summary of the announcement will be made available shortly thereafter on Bloomberg page MSCN, and Reuters
public pages MSCIA. MSCI will make detailed information available to clients beginning immediately after the
summary announcement appears on Bloomberg and/or Reuters.

BE:

Cheers. Will keep an eye on that tomorrow.

NH:

me too

11:33AM

NH:

I know it is a bit early

NH:

but shall we head to small cap corner

NH:

and have a look at Afren

BE:

Right

NH:

bit cynical this

BE:

Apologies – I have been away for a week

BE:

Can you bring me up to speed?

NH:

sure

NH:

last week Afren announce plans to switch their listing from Aim to the main market

NH:

cue lots of press coverage about how tracker funds will need to buy stock because the company could end up in the FTSE 250 by Christmas

NH:

which it could

NH:

because its market cap is now £645m

NH:

and this morning we get this news

NH:

Proposed fundraising to raise approximately US$200 million
through issue of new shares and exercise of existing warrants

NH:

The number of Placing Shares and the price at which the Placing Shares are to be placed (the “Placing Price”) will be agreed by Afren with the Joint Bookrunners at the close of the book-building process. Details of the number of Placing Shares and the Placing Price will be announced as soon as practicable after the close of the book-building process.

BE:

Oh.

NH:

but that’s not all

NH:

have a look at this

NH:

Exercise of Founder Warrants

NH:

Afren also announces the exercise, by certain shareholders including some of the Directors (the “Founder Shareholders”), of 40,000,000 warrants over Ordinary Shares (the “Founder Shares”) issued pursuant to the Company’s Founders’ Investment and Warrant Scheme, which are due to expire on 11 December 2009, raising approximately £15 million (US$25 million) (before expenses) for the Company. The proceeds from the exercise of the warrants do not form part of the proceeds of the Placing but will be used in conjunction with the net proceeds of the Placing as described above.

NH:

In order to finance the exercise of these warrants and to pay tax obligations arising from the exercise, the Founder Shareholders have agreed to sell some of the Founder Shares in the Placing at the Placing Price (the exact number of which will be calculated following determination of the Placing Price).

BE:

Crikey.

BE:

That is a bit cynical

NH:

indeed

NH:

I reckon existing shareholders

NH:

are facing 25% dilution

NH:

and there won’t be a vote on this

NH:

Afren looks to have timed this all very well

NH:

the shares were 13p in March

NH:

and look at them now

NH:

82.5p at the moment

NH:

that’s down 8% on the day

NH:

actually if anyone out there is thinking about getting involved with this cash call

NH:

they should have a look at this note

NH:

which came out last week

BE:

what does it say?

NH:

it is about the company’s reserves

NH:

or more precisely they way it accounts for reserves

NH:

I can’t say who it is from

NH:

but worth looking at

BE:

Go on

NH:

Afren announced this morning that it will cancel its AIM listing to move to the LSE. Management had been talking about this move for quite some time and the new listing should give higher visibility to the company. However, valuation is still not attractive and going back to our point that management overestimates reserves, if you go on Afren’s website and download the latest analyst presentation you will find evidence of what we’ve been saying

NH:

Slide 28 shows the CPR from N&S that attributes 19.1 mmbbls 2P for Ebok and 18.9 mmbbls 2P for Okoro vs. management talking about respective 2P of 52 and 32 mmbbls… Going back to the press release, AFR farmed into OPL 310, offshore Nigeria, I don’t know anything about this block so I’ll have to do a bit of work before getting back to you on this one.

NH:

We sought clarification from Afren on the reserves gap between NSAI and their own estimate and we were not convinced by the answers that were provided. On Okoro, according to AFR, the annual report referred to the upper and lower sands containing 28.9 mmbbl and this constituted their announcement that there had been a downgrade. On CI-11, the company concedes that its current reserves number represents a small downgrade from that published at the time of acquisition

NH:

It says NSAI is another 40% below that because it has yet to incorporate some of Afren’s more recent work. No explanation was offered for the difference between the NSAI number and the original number. On the OPL 310, we got clarification on the price they paid: $3 m signature bonus + $10m upon going from OPL to OML + $4 m on first oil. Bottom line: we still have no comfort in AFR’s internal estimates, in that regard we’ll use NSAI’s numbers which lead us to SELL. SELL AFR

BE:

Interesting.

BE:

A bit technical for the layman, but worth having a dig I suspect.

NH:

as is this exercise of warrants

NH:

this looks to have been repriced

NH:

because

NH:

they were well out of the money

NH:

have a look at this

NH:

and please note Lorcan

NH:

As presented to the AGM in June 2007, a Founders’ Scheme has been introduced. Under this scheme the Founders of Afren undertook to invest a total of US$5.0
million equivalent in Afren shares prior to 30 September 2008 and were granted a total of 40 million warrants at an exercise price of £1.60 per share but only if the
share price has reached £2.50 for at least 30 days (an increase of 56% above the exercise price). The warrants expire in December 2009. The shares were purchased at
an average price of £1.28 and the agreements were finalised in January 2009. The warrants were subject to certain anti-dilution clauses and as such will be repriced in
the recently announced private placement to the lower of the share price of the financing over the five days prior to the issue of the shares or the issue price of the new
shares plus 20%. The performance criteria is similarly repriced to 56% above the warrant price.

NH:

Basically, it looks like they put in their own money, share price dropped and shareholders are now getting to bail them out at a huge discount.

BE:

Yuck.

NH:

Afren page 54 of 2008 annual report

BE:

That doesn’t look very good at all.

NH:

needs checking

NH:

but very odd to say the least

NH:

if true

11:40AM

NH:

while we are on the miners

NH:

Randgold

NH:

shares are down

Randgold Resources (RRS:LSE): Last: 4,559, down 220 (-4.60%), High: 4,714, Low: 4,530, Volume: 241.27k

NH:

the bears are blaming costs

NH:

but the bulls say they are missing the point

NH:

The Gounkoto results are excellent

BE:

Well, that’s as maybe

BE:

But they’re up 21% in six days

BE:

Record high yet again on Monday

NH:

fair point

NH:

who can blame shareholders for locking in some profits

NH:

although if these gold price forecasts are correct

NH:

RRS couild go higher

BE:

Just grabbing some sellside comment

NH:

BE:

First up, JPMorgan

BE:

Disappointing 3Q But… what an outlook! RRS: The
golden iceberg. – ALERT

BE:

3QFY2009 HEPS of 14USc (-16%, 19USc) missed our forecast of
22c by 36%. This was on the back of production of 119koz (122koz, -
2%) – we were looking for 134koz. Meanwhile cash costs came in at
$573/oz ($477/oz, +20%). We had expected them to come in 6%
lower than those reported for the June quarter at $488/oz. The big
miss on costs was a function of higher open pit mining volumes (and
lower grades) at Loulo than we’d factored in our model – higher grade
underground sources (which are in the midst of ramp-up) did not
deliver as management (or we) had hoped. Added to this, Morila
reported a 13% costs increase on the back of a $174/oz stockpile
adjustment ($88/oz, +98%), which we had not expected. Loulo’s cash
operating costs at $542/oz were up 25% q-on-q, while those of Morila
rose 14% to $467/oz (its first quarter treating stockpiled ore
exclusively). At the bottom line, the group made an attributable profit
of $11.3m ($14.9m, -24%), with cash generated from operations at
$10.5m, down 40% q-on-q. We expect a better performance to emerge
from Loulo, as the ramp-up progresses at high grade, Yalea, reducing
the need for supplementary lower margin surface ore. At Morila, we
expect the economics to stabilise from here as the mine settles into its
regime of feeding the mills with stockpiled ore.

BE:

Powerful balance sheet. The group saw major investing activity
during the quarter, with a successful equity capital raising through the
placement of 5.75m new shares for proceeds of $341m. This combined
with capex flows of some $48.4m during the quarter, saw the group’s
cash balance grow from $220m at end-June to $521m at end-Sep (Net
cash of $519m). Post balance sheet, on 15 October, as a result of the
first part of the Moto acquisition (with partner Anglogold Ashanti), the
group saw an inflow of some $171m from AngloGold to compensate
Randgold for its issuing 6.63m new shares in terms of the pair’s cash
and shares offer for a 70% stake. On 31 October, the partners signed a
definitive agreement to stump up a further $114m to increase their
combined interest in Moto from 70% to 90% (the balance held
OKIMO, the DRC state-owned mining company). On closure this will
lead to an outflow of $57m from RRS.

BE:

Hedging. The group’s remaining hedges (connected to bank finance
for the Loulo build) amount to some 19koz to be delivered by end-2009
at a price of $428/oz, and 42koz to be delivered during 2010 at a price
of $500/oz. According to management this represents about 11% of
Loulo’s and 8% of the group’s production during this period.

NH:

(one moment Taxloss)

BE:

Actually, I’ll just cut to the conclusion …

BE:

In our view, the honeymoon may only just be beginning. By using
conventional DCF-based and most other valuation measure the
shares cannot be described as cheap because it is always hard to
value “what you can’t see” – for us Rangold epitomizes a golden
“iceberg”; the biggest part of it remains yet to be discovered,
below the surface. Good things are rarely cheap – we stay
steadfastly Overweight.

BE:

That’ll do it I think.

11:44AM

NH:

and especially for Taxloss some comment on Babcock

NH:

which is some sort of support services company these days

NH:

at least I think it is

NH:

Citi are saying the results are a mixed bag

NH:

Mixed bag: H110 revenues at £923m (-2% Yoy) were slightly light due to Rail
and Plant but profitability was 5% ahead of Citi estimates (+13% YoY) due to a
strong Marine performance.
 Marine profitability biggest surprise: The biggest surprise in the H110 results
was Marine operating profit £54m (+28% YoY) and 10% ahead of Citi
estimates. The key driver being a strong performance from the Integrated
Technology business.

NH:

but note the pension

NH:

Pension deficit: The pension surplus of £50m has become a deficit of £287m
due to lower discount rates but also a £102m charge for the new longevity
hedge.

NH:

however, the remain a buyer

NH:

Upside to valuation on 12m view: These results serve to emphasise the quality
of the Marine business and while Babcock has performed strongly recently, it
continues to trade at a discount to our 683p target price and a 7% and 10%
discount on 2010-11E P/E to its nearest peer, VT.

NH:

Caz

NH:

they say good results

NH:

Babcock delivered interim results slightly ahead of expectations, driven by good growth in Marine and
Defence. Babcock delivered PBT of £71.8m against our forecast of £68.0m and last year’s £57.8m. The group
achieved adjusted EPS of 25.0p against our estimate of 22.7p and last year’s 20.1p.
We are upgrading our EPS estimates for 2010E and 2011E by 3% to account for lower interest costs. The
shares have performed well in recent weeks, closing the gap on the VT rating. On our new estimates, the
shares are trading on 12.0x PER for March 2011E vs. VT on 12.3x for the same period [VTG.L, 565p,
OUTPERFORM]. At this level, the shares remain attractive offering further growth in estimates as well as re
rating potential if market uncertainty increases

NH:

but

NH:

by the looks of it were expecting a bit of profit taking

NH:

and finally

NH:

a bit of Merrill Lynch

NH:

The order book has risen to £6bn, with the pipeline stable at £3.3bn.
Numbers overally are ahead of our top of the range expectations at the EPS
level, although revenues look a little light compared to our forecast. This is due to
the SA construction equipment business, which fell more than we had anticipated
(-28% revenues), despite help from the SA Rand.

NH:

The key outperformer was the Marine division. EBITA came in at £54.3m, against
our forecast of £46.5m. Revenues were actually a touch lighter than expected
(6% vs our 7.5%). Margins of 12% are towards the top end of management’s
indicated range. The aircraft carrier programme is progressing well, total project
revenues are now expected to be around £1bn (previously c £845m).
Pensions are a constant issue with this company and the DB schemes have
swung in to an IAS 19 deficit of £287.3m from a surplus of £51m. This may be a
concern for the market today, although it does not affect payments for now.
On current BofAML forecasts, Babcock trades on CY10E

Babcock International (BAB:LSE): Last: 612.00, down 30 (-4.67%), High: 660.50, Low: 604.50, Volume: 1.16m

NH:

hope that helps

11:47AM

BE:

Any more raw?

NH:

well, there is one bit

NH:

but I almost hesitate to mention it

BE:

Why?

NH:

because this it the ultimate dark glass story

NH:

literally

BE:

Eh?

NH:

well

NH:

the company in question makes dark glasses

BE:

What’s it called?

NH:

FGX International

NH:

makes Foster Grant sunglasses

BE:

Cool

NH:

http://www.fgxi.com/pages/company/index.html

NH:

FGX International is a leading designer and marketer of non-prescription reading glasses and sunglasses in North America. We have a collection of established and well-recognized brands, including Foster Grant® and Magnivision®. Our market leadership is driven by a collection of fashionable, high-quality eyewear sold in over 57,000 retail locations worldwide.

NH:

Foster Grant is the domestic leader in the popular-priced sunglass market. The Foster Grant brand has a long, rich heritage, which was embodied by the iconic “Who’s That Behind Those Foster Grants?” campaign featuring various celebrities of the time. Launched in the 1960s, the campaign influenced not only the industry but popular culture as well. Its influence remained so notable that it was named by Advertising Age magazine one of the Top 100 Ad Campaigns of the past century. “Who’s That Behind Those Foster Grants?” has evolved into the “Who Could You Be?” campaign, and stems from the fact that Foster Grant sunglasses are both stylish and affordable, allowing consumers to buy several pairs for whatever mood of occasion.

BE:

Aha – celebrities like Woody Allen.

BE:

http://stumptownblogger.typepad.com/.a/6a010536b86d36970c0120a5bf7d3d970c-800wi

NH:

more of an Oakley man myself

BE:

Superdrug £4.99 range, personally.

NH:

BE:

So what’s the story?

NH:

well, this is extremely RAW

NH:

Untested

NH:

etc

NH:

in fact it is still mooing in a field

NH:

but

NH:

the talk in the market is that the company might be being looked at by Essilor in France

NH:

not sure how seriously to take this because there has been big management change at Essilor

NH:

see last week’s paper

NH:

so they may not be in a position to do this

NH:

anyway

NH:

that’s the rumour, such as it is

BE:

Let’s bring up a chart of this thing

BE:

Closed at $15.19 last night

BE:

Risen in a straight line from about $12 at the start of the month

BE:

And were $9.50 back in July …

NH:

(Ptolemy

)

BE:

Because …. er …. people buy sunglasses in Autumn?

NH:

well

NH:

they go skiing

NH:

in the winter

NH:

and go on holiday to Oz

NH:

look

NH:

this is very, very raw

NH:

but worth keeping tabs on

NH:

we are hearing a bit of chatter on it

NH:

and here’s a bit of background on the French buyer

NH:

if anyone is interested

NH:

http://www.ft.com/cms/s/0/c7454ae0-ca31-11de-a3a3-00144feabdc0.html

NH:

The management changes at Essilor have been carefully prepared with Mr Seigneres groomed for the top job during the past years. “We tend to operate in 20-year cycles,” explains Mr Fontanet. This long-term approach has been part of the French company’s secret of success. The company not only prepares its successions well in advance but is also pretty unusual in directly involving its employees in the choice of their future boss.

Indeed, Essilor employees voted last year overwhelmingly in favour of Mr Sagnieres appointment. The new CEO won 82 per cent of the staff vote. This intricate system of employee participation in the affairs of the company – employees are also informed and vote on strategic and industrial decisions – reflect the company’s unique history and evolution.

NH:

Essilor was formed in 1972 following the merger of two French optical products companies – Essel and Silor. Essel was established as an eyeglass makers’ guild in 1849. It combined capitalism with progressive labour policies forging a reputation for professionalism and employee involvement continued to this day. In the 1980s, the French company started becoming an international player. Under Mr Fontanet’s watch it has grown into a global enterprise focused on innovative optical products. It is the global leader today with more than 400 business units spread around the globe as well as research and development centres.

Mr Sagnieres says his task is to sustain Essilor’s global growth momentum and he has earmarked emerging markets as the company’s next big challenge. He argues that there is a huge demand and need for affordable optical products in emerging regions. In the world there are about 7bn people and around 5bn have sight difficulties. But only one fifth of the world population wears glasses and the proportion is even smaller in emerging countries.

11:53AM

BE:

Oh – nearly midday …

BE:

We should check on how Autonomy’s doing.

NH:

er, they are up at the moment. 14p higher at £14.19.

BE:

Ah. Of course.

BE:

That must be on the basis of another blistering product announcement.

BE:

AUTONOMY UNVEILS NEW COLLECTION-TO-THE-CLOUD SOLUTION FOR EDISCOVERY AND COMPLIANCE

NH:

A what?

BE:

A collection to the cloud solution, of course.

BE:

It enables global organizations to intelligently analyze and collect content directly Into the cloud, significantly reducing eDiscovery risk, time, and cost

BE:

Or, to quote the RNS …

BE:

Enables Global Organizations to Intelligently Analyze and Collect Content Directly Into the Cloud, Significantly Reducing eDiscovery Risk, Time, and Cost

NH:

What does that mean? And why on earth does it need to be announced on RNS?

BE:

Er – I’m sure the ROTR will be able to explain it better

BE:

but I think it’s a search thingmy that scours a whole bunch of computers then drops the information found into a central server

NH:

(Fatdaz

)

BE:

As to why it’s price sensitive, I’ve no idea.

NH:

I think the LSE

NH:

has got to clean up RNS

NH:

things are getting silly

NH:

I saw some small cap company

NH:

announced a new PR advisor on RNS yesterday

BE:

Yes – noticed that

BE:

Anthough the name of the company currently escapes me

NH:

amazing

NH:

here it is

NH:

Strategic Natural Resources plc (AIM: SNRP)

Appointment of Blythe Weigh Communications as Financial PR

AIM quoted Strategic Natural Resources PLC (“SNR” or the “Company”) announces
today that it has appointed Blythe Weigh Communications to handle its financial
PR.

Jeremy Metcalfe, Chief Executive of SNR, said, “The Company is now poised to
enter a very exciting stage in its development and I am delighted that we have
appointed a highly professional PR team to help us manage our reputation and
keep shareholders informed of developments.”

For further information contact;

NH:

For further information contact;

The Company
Jeremy Metcalfe, Chief Executive Officer
+44 1303 872453

Blythe Weigh Communications
Tim Blythe tim.blythe@blytheweigh.com
Ana Ribeiro ana.ribeiro@blytheweigh.com
+44 207 138 3204

BE:

A waste of pixels. A waste of energy. A waste of everyone’s time.

NH:

but look

NH:

it is price sensitive

NH:

anyway

NH:

we need to have a look at Yell

NH:

and then quickly DSG

NH:

before we leave

BE:

And thanks to the ROTR for the explanations about Autonomy – but to clarify: I DON’T CARE.

11:59AM

BE:

Ok – Yell then?

NH:

shares still up, but off their highs

Yell Group (YELL:LSE): Last: 47.75, down 0.25 (-0.52%), High: 52.25, Low: 46.75, Volume: 24.69m

NH:

the company raising more than expected

NH:

£660m vs £500m

NH:

and even after that

NH:

net debt/edbitda

NH:

will be 5 times

BE:

NH:

which doesn’t strike me as particularly conservative

NH:

anyway

NH:

the shares are up

NH:

because

NH:

a) they have gone ex already

NH:

and

NH:

b) there is a big short

NH:

over 17% of stock out on borrow

NH:

I can’t find anything particularly positive to say

NH:

it will need further equity injections to survive

NH:

unless it sells a business

BE:

Any comment on this deeply ex-growth print advertising company?

NH:

yep

NH:

Here’s Lorna Tilbian at Numus

NH:

Yell produced Q2 results which were slightly ahead of guidance and confirmed its equity issue. Q2 revenues/EBITDA fell -16/%/-30%, slightly better than guidance of -17%/-30%. H1 PBT/EPS were in line at £101m/8.8p vs NSe £100m/9.3p. Yell expects a similar Q3 revenue decline and, despite sharply easier comparatives, does not anticipate a Q4 improvement. The group has announced a 1:1 placing and 1:1 open offer at 42p, to raise £660m gross. We expect equity/refinancing fees of c.£75m, which will reduce the net raise to £585m. Yell had -£3.8bn debt at 30/9, equal to 6.5x FY EBITDA. The equity raise will reduce this to -£3.2bn/5.3x EBITDA. We do not expect to change our EBITDA forecasts, but adjusting for the equity issue moves our March 2011 EPS from 15.8p to 6.7p. We value Yell at 12x on an ungeared basis, and adjusting the capital structure to 5.3x debt/EBITDA indicates a target p/e of 6.2x. On our new 2011 EPS forecast of 6.8p this gives a target price of 42p, which compares with the TEEP of 45p. On a cum entitlement basis, our target price would be 47p and we therefore raise our recommendation from Reduce to Hold although Yell remains our least preferred stock in the sector.

BE:

So Q2′s only down 16%?

BE:

Great news.

NH:

don’t worry about that Bryce – they are going to stablise in Q3

BE:

When it hits zero, I assume.

BE:

Stabilise by hitting the bottom.

NH:

here’s Canaccord

NH:

A relatively positive set of results from Yell to coincide with the launch of its long-awaited equity raise. Sept-Q revenues were slightly ahead of expectations, down 15.6% at constant currencies, versus -16%, whilst EBITDA was down 24% against down 30%, indicating a better than expected outturn for cost management, and potential for upgrades to full-year EBITDA estimates.

NH:

However, management said it was “too early to declare that confidence has definitively returned to the core target customer base”, reiterating guidance for the December quarter, seeing revenues down a further 16% at constant currencies (although making no comment on profitability). Management said the rate of decline was “stabilising”.

NH:

At the same time, the company announced a fully underwritten placing/open offer of 1,571.8 million new shares at 42p/share, a 12.5% discount to last night’s close. This is larger than the original expectation of “over £500 million”, and at a smaller than expected discount, and will go a long way to strengthen the company’s balance sheet, as well as ensuring the success of the debt restructuring proposals already agreed. We estimate net debt/EBITDA will fall from 5.7 times to 4.7 times as a result of the raise.

NH:

Our SELL recommendation was based on the inherent volatility of the stock given the high level of financial gearing and the uncertainty around current trading. Although there is as yet little sign of light at the end of the tunnel on trading, a stronger balance sheet will ensure that investors can make a more confident assessment of the stock’s value. Assuming an EV/EBITDA range of 6.0-7.0 times, this would translate into a share price range of 35-63p post the placing. We are placing our recommendation UNDER REVIEW.

BE:

“Relatively” positive ….

NH:

relative for Yell that is

NH:

and here is Caz

NH:

they like it too

NH:

to stabilise in Q3. Although leverage will remain relatively high at around 5x EBITDA, we estimate the new debt
terms and the announced £660m equity raising will be sufficient to take the group through the current
downturn.
At a March 2011E valuation of 5.7x P/E (6.5x EBITDA) dropping to 3.9x P/E (6.0x EBITDA) in FY 2012E (both
post new equity) we continue to see significant rerating potential as the trading outlook gradually improves.

NH:

£660m equity issue
Post the lender approval of the group’s new debt terms, Yell has also announced a firm placing of £330m and a placing and
open offer of £330m. The shares are being placed at 42p (a 12.5% discount to yesterday’s closing price). As a reminder
Yell had committed to raise ‘not less’ than £500m as part of the refinancing package announced on 23 September.
The group had previously announced its intention to reduce senior debt by a total of £800m within 18 months, by way of a
receivables securitisation, high yield bond, a larger than £500m initial equity issue, or other means. As the equity raise is
above £650m, the interest rate margin on the group’s new facilities will be lowered by 25bp on both facility A (375bp to
350bp) and B (400bp to 375bp) respectively.

NH:

The refinancing is expected to complete on Monday 30 November.
Although the group’s leverage will remain relatively high post the equity raising (we estimate c5.2x at the end of FY 2010E)
the covenant headroom is very material going forward at an estimated 56% by March 2011 and 33% by March 2012. In
addition the group does not have any debt maturities before April 2014 post the refinancing, should it be successful.

NH:

In light of the expected deleveraging over the coming years, should the rights issue prove successful, we believe it is
worth highlighting that the group could reintroduce dividend payments over the next 1218 months. In that respect we
believe the interim results next year would be the most likely timing.
Recommendation and valuation
While we expect the shares to remain volatile, we continue to see scope for

NH:

and with all that

NH:

debt

NH:

guess what

NH:

they are thinking about paying a divi

NH:

have we gone back in time to 2007

NH:

were the last couple of years a bad dream?

NH:

Recommendation and valuation
While we expect the shares to remain volatile, we continue to see scope for a rerating of the shares post a successfully
executed refinancing, should that be the case. On our forecasts, post the interim results and the equity raising the shares
trade on 5.7x P/E and 6.5x EBITDA in the year to March 2011E. As the group’s interest swaps unwind and revenue trends
stabilise we forecast the valuation to drop further to just 3.9x P/E and 6.0x EBITDA in the year to March 2012E.

BE:

So Bob can jump ship to ITV now this nasty little ordeal is out of the way?

NH:

Bob Wigley

NH:

yep

NH:

his work here is done

NH:

Yell kept alive for a while longer

BE:

http://www.bobwigley.co.uk/

NH:

nive

NH:

nice

NH:

that’s very funny

BE:

Detailing all his charitable exploits.

BE:

He seems to look very young in that photo.

NH:

Bob Wigley Bsc, DBA (Hon), FCA

BE:

Reverse Dorian Gray effect perhaps.

NH:

and he does a lot of good work for charidee

NH:

Ambassador, Whizz-Kidz

Role: Business Ambassador

whizzWhizz-Kidz is a charity that is all about giving disabled children and young people the independence to enjoy an active childhood – at home, at school and at play.

By providing them with customised mobility equipment, training, advice and life skills, they actually give them something much more important; the independence to be themselves. They make an immediate and life changing difference to kids lives and their families.

Bob Wigley is an Ambassador to the charity. For more information on Whizz-kidz please visit their website

NH:

anyway

NH:

enough of that

NH:

let’s have a quick look at DSGi

NH:

becuase I think UBS

NH:

are giving them a push

BE:

Sure

NH:

Raising FY10E PBT to £54m from £50m
We update our FY numbers to reflect our expectation that Nordic sales will remain strong, potentially showing double digit LFL in Q2. There is a partial offset from lower UK LFL (FY -10% from -7.5%). This builds a greater comfort factor into the forecast, especially as UK comps do not improve until H2. We forecast +100bps gross margin and lower operating expenses partially offset by a higher interest.

NH:

Interims on 26/11, UBSe loss £30m (last year £21m loss)
We expect the Nordics to continue to underwrite DSG profitability with 10% H1 LFL and a 35% increase in EBIT. Even if UK Retail LFL improves in Q2 to -11% from -15% in Q1, UK losses will rise, although cost savings will limit the damage. Overall the group Retail EBIT loss is expected to decline but the interest charge rises sharply to reflect more onerous seasonal funding costs and pension charges.

Christmas to be more promotional, especially given VAT change
Last peak DSGI focused more on margin than sales and comps are 4-5% easier. This year could be more promotional, especially in the UK, which could pull sales forward from Q4. There may be upside risk from Italy, where comps are weak and Media Markt reported double digit L.FL in Q3 helped by digital switchover. Valuation:

NH:

Remain Buy, PT 37p (from 35p)
Our price target is based on a 10% discount to our SOP and reflects a 20% EV/sales for UK Electricals, 16x PE for UK Computing and 14x PE for the Nordics. Our forecasts assume a 2.3% EBIT margin in FY12E compared to the group’s medium target of 3-4% following store refits.

DSG International (DSGI:LSE): Last: 33.99, up 1.39 (+4.26%), High: 34.00, Low: 32.60, Volume: 8.00m

NH:

right

NH:

we are done for today

NH:

thanks for joining us

BE:

Yes – busy session today, so sorry if we didn’t reach your comment

NH:

reporting season

NH:

leave us with some many things to cover

NH:

until the morrow

NH:

goodbye

BE:

Bye

This entry was posted by Neil Hume on Tuesday, November 10th, 2009 at 11:03 and is filed under Uncategorised. Edit this entry.

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Markets live transcript 10 Nov 2009

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