Markets live chat transcript for the chat ending at 12:14 on 24 Nov 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE)
NH:
hola
NH:
it’s 11.03
NH:
actually 11.02
NH:
we’re early
NH:
and time from Markets Live
NH:
FT Alphaville’s daily whiz around the markets
NH:
right
NH:
Bryce is helping me try and make sense of things today
BE:
morning all
NH:
right
NH:
what’s this market doing?
NH:
last time I looked it was down
NH:
on the back of the pounding China took overnight
BE:
Er – well we’ve rallied a bit now
BE:
FTSE up 8 at 5363
NH:
er, why
BE:
Dunno. Miners, dollar, blah blah blah.
NH:
as usual we are confused
NH:
anyway
NH:
the price action in China overnight was interesting
NH:
if you missed what went on out there
NH:
here’s a quick round-up
NH:
from someone on the ground
NH:
China’s A-share market has never been short of surprises – today’s 3-4%
drop isn’t particularly remarkable but its daily trading volume made the
historical new high of RMB470bn (US$70bn). The previous two daily
trading volume highs were recorded on 30 May 2007 (RMB410bn) when SHCOMP was on its way climbing to the peak of 6000 from 4000, and as late as 29 July 2009
(RMB430bn) when SHCOMP dropped over 20% in the following August.
drop isn’t particularly remarkable but its daily trading volume made the
historical new high of RMB470bn (US$70bn). The previous two daily
trading volume highs were recorded on 30 May 2007 (RMB410bn) when SHCOMP was on its way climbing to the peak of 6000 from 4000, and as late as 29 July 2009
(RMB430bn) when SHCOMP dropped over 20% in the following August.
NH:
Beijing’s officials are clearly alerted on today’s A-share performance.
We also talked to a few domestic A-share public and private fund mangers,
trying to figure out what are the likely triggers:
We also talked to a few domestic A-share public and private fund mangers,
trying to figure out what are the likely triggers:
NH:
- B-share market led the decline today by roughly one hour at around
11am, as the hope of merging with the upcoming “Global Board” in Shanghai
dimmed. The same speculation has driven up Shanghai’s B-share market by 118%
y-t-d, even after today’s 7%+ drop and far outperformed Shanghai’s A-share
market (up 77% y-t-d);
11am, as the hope of merging with the upcoming “Global Board” in Shanghai
dimmed. The same speculation has driven up Shanghai’s B-share market by 118%
y-t-d, even after today’s 7%+ drop and far outperformed Shanghai’s A-share
market (up 77% y-t-d);
- The long-talked about “National Economic Working Conference” appears
To have been postponed to early December, rather than at the end of
November as the market was guided by local media. As a reference, the NEWC
usually held in early December for previous years;
NH:
- Market talk in Hong Kong that Chinese banks are rushing to the equity
market raising funds to replenish capitals in order to meet higher
requirements set by the CBRC (HK Economic Journal headline – “BOC
discusses with investment banks on financing plan of hundred billions). CBRC
officials have denied there is near-term plan to raise CAR requirements
and our own analysis suggests that Chinese banks should still have
sufficient capitals to meet with regulatory and lending requirements until 2H2010;
and
market raising funds to replenish capitals in order to meet higher
requirements set by the CBRC (HK Economic Journal headline – “BOC
discusses with investment banks on financing plan of hundred billions). CBRC
officials have denied there is near-term plan to raise CAR requirements
and our own analysis suggests that Chinese banks should still have
sufficient capitals to meet with regulatory and lending requirements until 2H2010;
and
NH:
- Last but not least, our conversation with domestic mutual funds
Suggest that stock allocation for stock mutual funds are at very high level,
approximately over 90% while the maximum in theory is 95%. Moreover,
A-share markets, both Shanghai and Shenzhen, have almost reached
Previous high level at the end of July. So profit-taking, coupled with herding
behavior, should also have contributed to today’s huge market turnover.
Suggest that stock allocation for stock mutual funds are at very high level,
approximately over 90% while the maximum in theory is 95%. Moreover,
A-share markets, both Shanghai and Shenzhen, have almost reached
Previous high level at the end of July. So profit-taking, coupled with herding
behavior, should also have contributed to today’s huge market turnover.
So what to do now? We won’t suggest bottom-finishing for the next couple
Of trading days. That said, we don’t think the correction this time will be
deeper than the August one. Hence, should SHCOMP correct to around 3000
level, investors may consider buying on dips. Our end-year SHCOMP target
remains 3,300 for 2009 and 3,500 for 2010.
NH:
sorry that’s a bit long
BE:
fascinating though
NH:
indeed
BE:
especially given Albert Edwards’ latest note
BE:
if you missed that
BE:
Deep 2010 downturn could yet trigger trade war and yuan devaluation
BE:
I think the next 18 months will see major ructions in the financial markets.The consequences of a double-dip back into recession next year require some lateral thinking. If the carry trade unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be doubly destructive to commodity prices. A surging dollar, coupled with China moving into sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?
NH:
good read that. perfect antidote to all this bullishness
BE:
anyway
BE:
back to the market
BE:
(And, while your comments are appreciated Mr Cheung ….
BE:
You’re not getting universal agreement on this side of the screen.)
NH:
I reckon the answer must be that risk appetite has returned
BE:
Ah yes. Of course. After going MIA earlier in the morning.
NH:
(Monkey. That’s actually funny. No yellow card for you
)
)NH:
actually that’s probably as good as explanation as any
11:09AM
BE:
Miners seem to be leading the way again
NH:
hmmm
NH:
what about Rio
NH:
are they are up
NH:
lots of rumours around earlier
NH:
about Chinalco selling out
BE:
Not true though, right?
NH:
well it seems unlikely
NH:
they would be selling at a loss
NH:
if they exited now
BE:
What’s the average in price?
NH:
not sure, because they backed the rights issue
NH:
and in anycase
NH:
would it be smart to sell ahead of the iron ore price negotitations
NH:
I think not
NH:
anyway
NH:
the rumours knocked Rio earlier
NH:
traded as low as £31.80
NH:
rallied since
NH:
currently down 4.5p at £32.60
BE:
No-one we’ve spoken to has said there’s any truth in this theory.
NH:
hmm
NH:
wonder where it came from
NH:
anyway
NH:
more RAW later
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.
11:12AM
NH:
but first
NH:
some banks
NH:
could we have a look at UBS
NH:
seems that something of a row has broken out with S&P
BE:
What – over yesterday’s report?
NH:
yep
NH:
the one that launched its new risk adjusted capital measure
BE:
so what’s happening now
NH:
this, according to brokers
NH:
UBS & S&P have had a big spat over S&P’s methodology. At UBS request, S&P will rework its numbers switching UBS’s score from 2.2 to 7.1%, miraculously moving them up from 5th quintile to 3rd quintile…well you know, its important for them. Yet again, showing that the rating agencies know absolutely **** all!
NH:
oh
NH:
and this
NH:
UBS: hearing S&P report from yesterday to be corrected…stock has had a
decent move off the lows. UNCONFIRMED
- {UBSN VX Equity GIP}
- Reportedly UBS and S&P have had a discussion over the S&P methodology.
- S&P has excluded the government MCN (which has converted) and most of the
other CHF 13 bn mandatory convertible from its original calculation.
- UBS has reportedly asked S&P to send out a correction which would change
it’s score from 2.2 to 7.1% moving it from 5th quintile to 3rd quintile.
decent move off the lows. UNCONFIRMED
- {UBSN VX Equity GIP
- Reportedly UBS and S&P have had a discussion over the S&P methodology.
- S&P has excluded the government MCN (which has converted) and most of the
other CHF 13 bn mandatory convertible from its original calculation.
- UBS has reportedly asked S&P to send out a correction which would change
it’s score from 2.2 to 7.1% moving it from 5th quintile to 3rd quintile.
NH:
Now, I should stress that I have not checked that
NH:
so it might be wrong
BE:
but very interesting, if true
BE:
and S&P have backed down
NH:
yeah
NH:
I note
NH:
that a number of analysts are sympathetic to UBS
NH:
on the MCNs
BE:
really?
BE:
Why?
NH:
because they say S&P has ignored the MCNs and the impact they will have
NH:
still the bigger point here
NH:
is if S&P have rolled over
NH:
after a compliant
NH:
it doesn’t say much
NH:
right
NH:
analysts
NH:
Nomura think UBS have been harshly treated
NH:
this is by John Peace
NH:
S&P has finally published its much anticipated RAC (risk adjusted capital) ratios for a sample of 45 global banks. This is meant to be a more consistent and conservative way of calculating the Basel II Tier 1 ratio.
NH:
The findings are on the front page of the FT today, but were actually released intraday yesterday (and we believe weighed on certain stocks such as UBS). It has caught the headlines because in the top tier is HSBC (9.2%, best capitalised globally), with other Europeans including Dexia (9.0%, #3), ING (8.9%, #4) and Nordea (8.8%, #5) while among the bottom Tier are UBS (2.2%, third worst), AIB (5.0%), Danske (5.4%) and BBVA (5.4%).
NH:
The reason UBS is so low is primarily because S&P doesn’t count the SFR 6bn (already converted) and SFR 13bn of mandatory convertibles (converting March 2010) as equity which the market and regulators rightly do, although it does also apply a much higher charge for IB operations than regulators. On conversion the ratio would rise to at least 5.0% for UBS, rather closer to investment banking peers.
NH:
The reason BBVA is low is that S&P also acknowledges that it does not differentiate between different bank underwriting standards and accepts that as a more conservative bank BBVA should benefit, but the ratios do not capture this.
Over time, as Basel II rules are tightened we would expect to see a convergence between the Basel II Tier 1 and the RAC ratios. Although perhaps overzealous treatment of certain instruments (mandatory convertibles) and a mechanical calculation (underwriting standards) mean that headline figures need to be carefully understood (as S&P will do when considering its rating), we do see the RAC ratio as a useful third-party check, benefiting as it does from confidential information, of the underlying capital strength of various banks.
BE:
thanks for that
NH:
while we are on the banks
NH:
I know that some of the ROTR appear to be long and wrong of Barclays
BE:
NH:
and have been asking us why the stock has been a bit of a dog lately
NH:
as luck would have it
NH:
Simon Pilkington the banks analyst at Caz has penned a rather good note
NH:
which sums up what has been happening to the Barclays share price and why
BE:
I am guessing he still remains positive
NH:
yep
NH:
on outperform rating still
NH:
here’s the note
NH:
Barclays – Peer group valuations imply 30% upside [BARC LN BARC.L], 315p, Outperform, sector – Neutral
Barclays has underperformed since its Q3 IMS and the market appears concerned by the 31% sequential decline in Barclays Capital’s underlying revenues in Q3, and the relatively high cost/net income guidance (70-75%). However, with both factors reflected in our estimates we believe the valuation of Barclays is attractive relative to other universal banks. A re-rating in-line with Deutsche Bank (1.3x NTAV) implies share price upside to c.400p. Outperform.
Barclays has underperformed since its Q3 IMS and the market appears concerned by the 31% sequential decline in Barclays Capital’s underlying revenues in Q3, and the relatively high cost/net income guidance (70-75%). However, with both factors reflected in our estimates we believe the valuation of Barclays is attractive relative to other universal banks. A re-rating in-line with Deutsche Bank (1.3x NTAV) implies share price upside to c.400p. Outperform.
NH:
Barclays Capital
In our view, Barclays Capital’s cost guidance has not changed. Management stated at the interim results in August that a period of investment and shift to higher C/I revenue streams (eg. M&A advisory) would increase the cost/net income ratio from its historic mid-60% level to c.75%.
Management expects Q4 underlying revenues higher than Q3 (we estimate £3.9bn after £3.7bn), taking the total for the year to £18.1bn. Our 2010E estimate assumes 3% YoY growth in underlying revenues, with broadly flat FICC revenues and growth in equities/prime services following investment this year.
Although credit spreads have narrowed, and activity may decline, one significant factor underpinning the outlook for revenues is the ongoing low cost of funding. For example 3-month Sterling LIBOR is currently 61bp but was 280bp entering 2009E and did not fall below 100bp until mid July. We expect the majority of Bar Cap’s £630bn adjusted balance sheet is funded in the short-term markets and so this represents a significant YoY tailwind in H1 2010E.
NH:
Balance sheet stronger than expected
The Q3 IMS reported a stronger than expected group balance sheet, with little change in gross leverage and stable RWAs. We subsequently increased our Dec09 core tier 1 ratio estimate by 30bp to 8.7%. This compares favourably with peers such as Deutsche Bank where we expect a core tier 1 ratio of 8.5% by year end.
Management is committed to higher capital ratios and we expect higher retained earnings can maintain the core tier 1 ratio in the range 8.5% to 9.5% over the next few years.
The risk of regulatory reform is arguably a factor for the medium term, as signalled by the FSA’s liquidity policy statement (PS09/16) which envisages a timetable of “some years” for adoption of the new rules, yet where outcomes can be reasonably estimated (eg. the impact of incremental risk capital against trading positions) we have factored them into our estimates.
The Q3 IMS reported a stronger than expected group balance sheet, with little change in gross leverage and stable RWAs. We subsequently increased our Dec09 core tier 1 ratio estimate by 30bp to 8.7%. This compares favourably with peers such as Deutsche Bank where we expect a core tier 1 ratio of 8.5% by year end.
Management is committed to higher capital ratios and we expect higher retained earnings can maintain the core tier 1 ratio in the range 8.5% to 9.5% over the next few years.
The risk of regulatory reform is arguably a factor for the medium term, as signalled by the FSA’s liquidity policy statement (PS09/16) which envisages a timetable of “some years” for adoption of the new rules, yet where outcomes can be reasonably estimated (eg. the impact of incremental risk capital against trading positions) we have factored them into our estimates.
NH:
Adjusting for the Blackrock investment
The BGI sale to Blackrock is expected to close before the year end, and will be accretive to book value. Since announcement, the value of Blackrock has increased by 24%.
Adjusting for the value of the Blackrock stake (41p per share, 13% of market cap, but only 1% of earnings) reduces the group’s P/E rating from 13.3x to 12.0x (2010E) and 8.1x to 7.6x (2011E). The adjustment results in only a minor increase in the P/NTAV rating (1.03x to 1.10x 2009E).
The BGI sale to Blackrock is expected to close before the year end, and will be accretive to book value. Since announcement, the value of Blackrock has increased by 24%.
Adjusting for the value of the Blackrock stake (41p per share, 13% of market cap, but only 1% of earnings) reduces the group’s P/E rating from 13.3x to 12.0x (2010E) and 8.1x to 7.6x (2011E). The adjustment results in only a minor increase in the P/NTAV rating (1.03x to 1.10x 2009E).
NH:
Valuation
Barclays trades on 1.0x 2009E NTAV, a significant discount to many other European/US universal banks which trade in a range from 1.3x (Deutsche) to 1.6x (Goldman Sachs).
We acknowledge the wide range of balance sheet characteristics in this group, but see Deutsche Bank as a close peer in Europe. On this basis, we see little reason why Barclays can not re-rate by up to 30%, implying a share price closer to 400p (n.b. the recent high was 384p a month ago).
Barclays trades on 1.0x 2009E NTAV, a significant discount to many other European/US universal banks which trade in a range from 1.3x (Deutsche) to 1.6x (Goldman Sachs).
We acknowledge the wide range of balance sheet characteristics in this group, but see Deutsche Bank as a close peer in Europe. On this basis, we see little reason why Barclays can not re-rate by up to 30%, implying a share price closer to 400p (n.b. the recent high was 384p a month ago).
BE:
very good
BE:
Barclays price ….
Barclays PLC (BARC:LSE): Last: 316.25, up 1.75 (+0.56%), High: 316.65, Low: 309.35, Volume: 15.26m
11:18AM
BE:
Right – Neil’s just gone off to find the results to this Footsie competition
NH:
Right I have the winners
NH:
thanks to the efforts of Rain
NH:
and they are
NH:
Data Muppet 5211
rugrat 5212
Pi 5221
rossfromcross 5228
NH:
congrats
NH:
the FTSE finished at 5,251.4 on Friday
NH:
sorry
NH:
they are wrong
NH:
hang on
BE:
Go have another shot, Neil ………..
BE:
This is why they don’t let us loose with real money.
NH:
rugrat 5249
mimeticdesire 5250.31
NH:
they are deffo winders
NH:
as is
NH:
Googly 5253
NH:
Corkran 5275
BE:
Right – that’s it.
BE:
Judge’s decision final.
BE:
No appeals or replays.
NH:
right in order to collect the prize could the winners mail me pls
NH:
and will arrange a drop off for the tickets or sent them
NH:
well done
BE:
Congratulations Rugrat, MimeticDesire, Googly and Corkan.
NH:
yep
NH:
congrats
11:23AM
NH:
ROTR
NH:
asking about National Express
BE:
Yup.
BE:
Sliding again after Cosmen bought stock for the third time in as many days
National Express (NEX:LSE): Last: 358.60, down 3.5 (-0.97%), High: 362.90, Low: 354.40, Volume: 150.29k
NH:
(Monkey we will have to check if he had two entries)
BE:
Today we got the news that he’d bought 400k at 358.85p to take his stake to 19.7%
NH:
So this vote’s going to be close then?
BE:
That’s certainly how it’s looking
BE:
EGM’s Friday, of course.
BE:
He only needs a simple majority
NH:
And today’s the record date for entitlements, isn’t it?
BE:
Yeah.
BE:
With tomorrow the deadline for proxy votes, so we’re likely to see some hedge funds converting to the underlying over the next couple of days
BE:
Now, National Express have been adamant that no other shareholder is opposed to to the rights issue
NH:
But the CFD holders are a different matter entirely, of course
BE:
Indeed.
BE:
And there’s said to be about 18% out on loan to the hedge funds at the moment
BE:
Here’s a line from a merger arb house, which agrees it’s likely to be a very close call
BE:
Effectively the Cosmen family has votes matching M&G, Newton and Schroders (active managers)
An additional 10% support to the Cosmen family by hedge funds would match passive funds (Barclays and L&G) who may vote with management
BE:
For this reason we see the outcome of the EGM hard to predict and attach an equal probability to the two scenarios
We believe that NEX shares would spike at or above 380p per share if the rights issue is aborted or delayed and a plan B has been worked through by the Cosmen family
BE:
We target 380p per share at NEX as a standalone entity if uncertainty regarding the UK and US operations is removed
We target 470p per share in the event of a full merger with Stagecoach at the proposed terms (40% and 60% of the combined entity to NEX and Stagecoach shareholders)
BE:
The worst case scenario (to which we attach conservatively a 10% probability) is the rights issue not going through and lenders to NEX playing hardball and not renegotiating NEX’s debt
This scenario would cause uncertainty regarding NEX’s viability as a going concern and therefore trigger a drop in NEX’s share price
BE:
In this respect we would flag that the Cosmen family is a long term owner of NEX shares and could afford a temporary fall in NEX share price if it has a view on how to restructure NEX’s debt regardless of potential opposition from NEX’s lenders
While short term investors may not afford to carry losses for a 2 to 3 months (i.e. until a debt package is renegotiated)
BE:
However we would be highly surprised if the Cosmen family and the investors believed to back them have not taken appropriate steps to lower this risk (having held talks with lenders and potential buyers of assets or the whole of NEX)
BE:
Although
BE:
there remains the possibility that he’s just trying to avoid getting diluted below 8%, which would cost him his place on the board
NH:
Then why not just tail swallow?
BE:
Indeed
BE:
And dunno.
11:28AM
NH:
Right
NH:
looks as if there might have to be a stewards into the Varisty Comp
NH:
some dodgy maths
NH:
and we have no idea if people have entered both comps
NH:
so instead of being arbitary this time
NH:
I will redo it
NH:
after ML
NH:
perhaps we could get five pairs of tickets and Ross can have one
BE:
Ok – so the final decision wasn’t final.
NH:
no
NH:
oh
NH:
forgot to put in a NEX share price
National Express (NEX:LSE): Last: 358.70, down 3.4 (-0.94%), High: 362.90, Low: 354.40, Volume: 154.04k
11:30AM
NH:
Some of the ROTR
NH:
asking about Lloyds
NH:
and well
NH:
what is there to say?
BE:
Not a lot really
BE:
Rights issue priced at 37p
BE:
Discount to TERP within the guidance range, as expected.
NH:
yeah, all pretty dull and as expected.
NH:
and today’s statement
BE:
Nothing to see here.
NH:
has no update on trading, bad loands etc
NH:
shares up small
NH:
but there really is nothing here
NH:
stock on loan might be interesting
NH:
I will ask dataexplorers
BE:
Hang on – will grab some research on this nonevent.
NH:
have mailed DataExplorers
NH:
if I get a reply by the end of the show
NH:
will put up
BE:
Meanwhile, here’s WestLB, which has seen fit to upgrade.
BE:
We change our rating on Lloyds Banking Group (LBG) from Neutral to Add,
and set our target price at 105p (cum-rights). We have revised our estimates
following the announcement of the new restructuring plan, the rights issue
and the Q3 interim management statement (IMS) on 3 November. We have
now also taken into account the rights price of 37p announced this morning.
LBG´s share price has underperformed the sector by c.20% since the end of
August. We believe that a significant layer of uncertainty has been removed
now that the rights price and the nature of the EC restructuring plan are
known. Nevertheless we acknowledge that certain risks remain, especially for
banks undergoing an EC restructuring plan, and in which the government
owns a significant stake. We therefore set our target price at a 10% discount
to the intrinsic value (IV). As the 105p target price is more than 10% above the
current share price, we change our rating from Neutral to Add.
and set our target price at 105p (cum-rights). We have revised our estimates
following the announcement of the new restructuring plan, the rights issue
and the Q3 interim management statement (IMS) on 3 November. We have
now also taken into account the rights price of 37p announced this morning.
LBG´s share price has underperformed the sector by c.20% since the end of
August. We believe that a significant layer of uncertainty has been removed
now that the rights price and the nature of the EC restructuring plan are
known. Nevertheless we acknowledge that certain risks remain, especially for
banks undergoing an EC restructuring plan, and in which the government
owns a significant stake. We therefore set our target price at a 10% discount
to the intrinsic value (IV). As the 105p target price is more than 10% above the
current share price, we change our rating from Neutral to Add.
BE:
And Execution remain on “buy”
BE:
LLOY is becoming a cleaner investment proposition. Our
analysis reveals that LLOY might be over-capitalised in 2011
and we see share price appreciation potential to a fair value
of 100p (67% upside to TERP) as investors re-rate a lesslevered
balance sheet. Reiterate BUY.
analysis reveals that LLOY might be over-capitalised in 2011
and we see share price appreciation potential to a fair value
of 100p (67% upside to TERP) as investors re-rate a lesslevered
balance sheet. Reiterate BUY.
NH:
(Monkey – Nomura may handle that for us)
BE:
Lloyds looks over-capitalised in 2011E
Lloyds will see its tangible equity base improve by a net £12.7bn, following
its £13.5bn rights issue and £1.5bn equity component of the recently
concluded debt exchange. With an 8.9% core T1 ratio today and an
estimated 10.6% by 2011, we view the bank as moderately overcapitalised
in 2011E, particularly factoring in a £21bn balance sheet loan
loss provision. Should impairment trends continue to improve into 2011,
£12bn of reserves could prospectively be released, based on conservative
assumptions. This would benefit the core T1 ratio by a cumulative 189bps
and could lead to potential earnings upgrades of c30% assuming the
capital is re-deployed at a 14% ROTE. Given macroeconomic uncertainty
in the UK as well as the high risk nature of parts of the HBOS loan book,
our estimates do not factor in any releases of loan loss reserves by 2011,
but we do see a potential coiled spring effect developing should the
impairments backdrop continue to improve. A strong capital position
should contribute to a decline in LLOY’s cost of funding (funding costs are
already improving) and supports our case for net interest margin expansion
to 2.16% in 2011 (from 1.80% today).
Lloyds will see its tangible equity base improve by a net £12.7bn, following
its £13.5bn rights issue and £1.5bn equity component of the recently
concluded debt exchange. With an 8.9% core T1 ratio today and an
estimated 10.6% by 2011, we view the bank as moderately overcapitalised
in 2011E, particularly factoring in a £21bn balance sheet loan
loss provision. Should impairment trends continue to improve into 2011,
£12bn of reserves could prospectively be released, based on conservative
assumptions. This would benefit the core T1 ratio by a cumulative 189bps
and could lead to potential earnings upgrades of c30% assuming the
capital is re-deployed at a 14% ROTE. Given macroeconomic uncertainty
in the UK as well as the high risk nature of parts of the HBOS loan book,
our estimates do not factor in any releases of loan loss reserves by 2011,
but we do see a potential coiled spring effect developing should the
impairments backdrop continue to improve. A strong capital position
should contribute to a decline in LLOY’s cost of funding (funding costs are
already improving) and supports our case for net interest margin expansion
to 2.16% in 2011 (from 1.80% today).
NH:
thanks for that
11:34AM
NH:
Right
NH:
time for some RAW
BE:
What do you have?
NH:
International Power – bit of buzz around this morning
NH:
and there has been some activity in the options market
NH:
which has excited a few people expecting a bid
NH:
however, the reason for today’s move
International Power (IPR:LSE): Last: 276.30, up 4.3 (+1.58%), High: 280.00, Low: 268.80, Volume: 4.43m
NH:
is actually a bit dull
NH:
not that I would rule out a bid at some point
BE:
You mean this Aussie thing?
NH:
yeah
NH:
compensation for coal fired power stations
NH:
down under
NH:
the market was expecting something harsh
NH:
the outcome was actually rather benign
NH:
here’s a little summary
NH:
Australian Govt unveiled revised carbon trading scheme. We had factored in a
45p penalty for this in our IPR price target but revised proposals suggest this
can be reduced by approx 15p
45p penalty for this in our IPR price target but revised proposals suggest this
can be reduced by approx 15p
NH:
The Australian Department of Climate Change yesterday published proposals to improve compensation for Australian coal plant. The additional free allocation would give a 10-15p benefit. Moreover it would allow higher levels of debt for longer when refinancing becomes due: Hazelwood bullet, A$445m, due 2010; Hazelwood amortising debt, A$ 0.4bn, due 2014; Loy Yang B, A$1.1bn (70%), due 2012. Our 320p value target currently contains 45p penalty for CO2 trading.
NH:
The original proposals were for 130.7m free permits over 5 years for coal generators. We estimated that this would allow Hazelwood and Loy Yang B (IPR’s two brown coal plants in Victoria) to wash their face on EBIT while free allocation was available, with a penalty of 45p in our value target. The new proposals are for a 75% increase to 228.7m free permits for coal generators over 10 years. We do not know yet whether these will be spread evenly, diluting the benefit (and reducing EBIT in the first five years), or the extra tacked onto the second 5 year period. The Senate is due to vote on the package later in the week. Additionally we are seeing some upward pressure on 2010 baseload Victoria electricity prices.
NH:
Positive news reinforcing our Buy recommendation. The current market view of IPR is an EPS momentum, growth play with 40% payout. The recent price weakness has been caused by faltering EPS expectations (significantly down in 2010 due to Czech assets sales) and poor US performance. As we have stated previously, we believe IPR is no longer a growth play, with limited opportunities in merchant markets. We believe IPR needs to reposition itself as a yield play. It needs to say it has no further merchant growth aspirations, boost DPS payout to 50% in 2010, maintaining DPS growth, which it can easily do, due to its strong cash flow. We believe that the company will be drawn inexorably to the same conclusions as us (at least on payout), and have (previously) boosted our payout ratio assumption to 50%, despite current policy being 40%.
BE:
Ok – cheers for that.
BE:
Got a line from JPMorgan on the same subject.
NH:
paste away
BE:
Preliminary valuation impact 9p/share. Integrating the more generous
proposals in our model would provide 9p/share upside to our valuation -
this is assuming the generators are compensated for emissions over and
above the national average (0.86t/MWh vs. c1.5t/MWh for Hazelwood) as
per previous proposals, therefore leaving a c9m t shortfall per annum
between 2011 and 2021 for Hazelwood (so CPRS would still reduce
achieved spreads by c10% vs. current levels, assuming a A$25/t carbon
price from the outset on our numbers).
proposals in our model would provide 9p/share upside to our valuation -
this is assuming the generators are compensated for emissions over and
above the national average (0.86t/MWh vs. c1.5t/MWh for Hazelwood) as
per previous proposals, therefore leaving a c9m t shortfall per annum
between 2011 and 2021 for Hazelwood (so CPRS would still reduce
achieved spreads by c10% vs. current levels, assuming a A$25/t carbon
price from the outset on our numbers).
BE:
Uncertain vote ahead. There is still uncertainty as to whether the bill can
pass the Senate before Copenhagen given internal divisions within the
opposition. However a successful passage would be very supportive for
IPR sentiment-wise as it would provide visibility over the refinancing of
Hazelwood (A$445m tranche maturing in February 2010). Should the bill
not pass and a vote be postponed to early 2010, we think the company is
likely to bridge the loan into 2011, with a renegotiation clause applicable
when the legislation is finalized.
pass the Senate before Copenhagen given internal divisions within the
opposition. However a successful passage would be very supportive for
IPR sentiment-wise as it would provide visibility over the refinancing of
Hazelwood (A$445m tranche maturing in February 2010). Should the bill
not pass and a vote be postponed to early 2010, we think the company is
likely to bridge the loan into 2011, with a renegotiation clause applicable
when the legislation is finalized.
BE:
Reiterate trading buy. We’d advocate a trading buy here for the potential
upside into the vote this week.
upside into the vote this week.
NH:
Taxloss, I think the reason for the move in F’expo
NH:
is the lack of free float
BE:
Squeezy
NH:
on a mental day for the miners that can happen
NH:
also there was an big analyst dinner last week
BE:
And iron ore data out of China has been very strong for five or so weeks, I think
BE:
While on the subject of miners
BE:
This note out of Barcap caught my eye
BE:
XSTRATA PLC
Built for the Bull Market
Built for the Bull Market
BE:
Share buyback announcement may be coming – Our analysis indicates that Glencore
is likely to exercise its call option to repurchase the Prodeco coal operations from
Xstrata for approximately $2.5bn before this option expires on 4 March 2010. We
believe Xstrata may then announce a $3bn share buyback as the company’s balance
sheet is no longer overgeared, in our view. As we discuss herein, we estimate that a
buyback of this size would be up to 3% EPS accretive for Xstrata (net of lost earnings
from Prodeco) and would catch the market by surprise and push the Xstrata share price
higher.
is likely to exercise its call option to repurchase the Prodeco coal operations from
Xstrata for approximately $2.5bn before this option expires on 4 March 2010. We
believe Xstrata may then announce a $3bn share buyback as the company’s balance
sheet is no longer overgeared, in our view. As we discuss herein, we estimate that a
buyback of this size would be up to 3% EPS accretive for Xstrata (net of lost earnings
from Prodeco) and would catch the market by surprise and push the Xstrata share price
higher.
NH:
oh, that’s interesting
NH:
buy back on the way
BE:
Yup – would certainly fit into the recent talk that Xstrata was going to pull in its horns
BE:
No more acquisitions.
NH:
(rugrat neil.hume@ft.com)
NH:
It will break Mick’s heart to buy back stock
NH:
when he could be buying
NH:
mind you
BE:
Not his style, certainly.
NH:
after the run the sector has had
NH:
talking of overpriced mining stocks
NH:
I missed this yesterday
NH:
from the mining team at Citi
NH:
Nightmare on Commodity Street
NH:
interesting piece I thought
NH:
here’s some highlights
NH:
So here’s the nightmare scenario, which we hope will not happen:
Thousands of very smart speculators have accumulated the biggest ever
speculative physical raw material positions ever witnessed in the belief that
either the dollar will collapse or an ongoing global ‘Supercycle’ will shake off
the effects of the credit crunch and resume business as usual. They are
funded in this venture by some of the lowest interest rates on record. What are
the threats to their thesis?. They are as follows :
Thousands of very smart speculators have accumulated the biggest ever
speculative physical raw material positions ever witnessed in the belief that
either the dollar will collapse or an ongoing global ‘Supercycle’ will shake off
the effects of the credit crunch and resume business as usual. They are
funded in this venture by some of the lowest interest rates on record. What are
the threats to their thesis?. They are as follows :
NH:
1. Governments, having pumped huge amounts of money into the global
system, find they are running our of fire-power even while economies are
still at the incubation-stage of recovery (i.e. the kind of stage we saw
displayed last week in the poor USA housing starts data). Some
governments find that suddenly their bonds are considered to be ‘toxic’
and a far higher interest rate is demanded for ongoing participation.
system, find they are running our of fire-power even while economies are
still at the incubation-stage of recovery (i.e. the kind of stage we saw
displayed last week in the poor USA housing starts data). Some
governments find that suddenly their bonds are considered to be ‘toxic’
and a far higher interest rate is demanded for ongoing participation.
NH:
2. The global economy not only experiences a slower upturn than the
consensus view, but after the recent inventory-restocking phase is over, it
relapses into a W-shaped recession. More jobs are lost and people who
have been unemployed but still able to keep up their mortgage payments
(because of near-zero interest rates) are suddenly defaulting. Banks finally
have to write down the value of these assets and housing markets around
the world are flooded with new inventory. New-build is out of the question.
Orders for new fridges, washing machines, stoves, taps and other items
that metals so depend on for demand, simply freeze.
consensus view, but after the recent inventory-restocking phase is over, it
relapses into a W-shaped recession. More jobs are lost and people who
have been unemployed but still able to keep up their mortgage payments
(because of near-zero interest rates) are suddenly defaulting. Banks finally
have to write down the value of these assets and housing markets around
the world are flooded with new inventory. New-build is out of the question.
Orders for new fridges, washing machines, stoves, taps and other items
that metals so depend on for demand, simply freeze.
NH:
3. The global commercial property market finally grinds to a halt. High-rise
buildings that began to be built 18 months ago, before the credit crisis, are
finally completed. Their last copper wiring and plumbing has been
installed (always the last phase), their aluminium windows all in place. Few
new high-rise buildings are started, awaiting the glut of space to be used
up
buildings that began to be built 18 months ago, before the credit crisis, are
finally completed. Their last copper wiring and plumbing has been
installed (always the last phase), their aluminium windows all in place. Few
new high-rise buildings are started, awaiting the glut of space to be used
up
NH:
4. China. A real conundrum. This is either a really vibrant economy that will
keep going from strength to strength or it is an economy in which overinvestment
was constantly rewarded because underlying demand was
always growing at a pace that subsequently justified that investment. There
has been substantial over-investment in recent times and the question now
is whether domestic demand and export demand will step up to the plate
to belatedly justify that over-investment. Demand has done this with
monotonous regularity in the past 10 years. The question is whether the
global credit crisis has changed that demand profile forever such that
over-investment results in ongoing medium-term overcapacity and sends a
shock wave that freezes new investment. We will have to wait patiently to
see if this threat comes to the fore.
keep going from strength to strength or it is an economy in which overinvestment
was constantly rewarded because underlying demand was
always growing at a pace that subsequently justified that investment. There
has been substantial over-investment in recent times and the question now
is whether domestic demand and export demand will step up to the plate
to belatedly justify that over-investment. Demand has done this with
monotonous regularity in the past 10 years. The question is whether the
global credit crisis has changed that demand profile forever such that
over-investment results in ongoing medium-term overcapacity and sends a
shock wave that freezes new investment. We will have to wait patiently to
see if this threat comes to the fore.
NH:
If these threats come to pass, we will truly have a ‘Nightmare on Commodity
Street’. The commodity space could resemble ‘Sub-Prime II’ and would
demonstrate that investors never learned anything from the shock waves that
descended on global investment in 2H 08. This is not a new feature of human
nature. There’s a simple principle that operates at times like this: investors
experience a huge bull market that takes asset classes from a value of 100 to
say 300. A crash comes and investors find those assets trading at 150 and
simply by virtue of the 50% fall, the assets are deemed to be cheap. Investors
pile in and the inevitable funds-flow-fuelled price rise to 230 justifies the
optimism, even while the fundamentals are not playing ball and supporting that
230 level.
Street’. The commodity space could resemble ‘Sub-Prime II’ and would
demonstrate that investors never learned anything from the shock waves that
descended on global investment in 2H 08. This is not a new feature of human
nature. There’s a simple principle that operates at times like this: investors
experience a huge bull market that takes asset classes from a value of 100 to
say 300. A crash comes and investors find those assets trading at 150 and
simply by virtue of the 50% fall, the assets are deemed to be cheap. Investors
pile in and the inevitable funds-flow-fuelled price rise to 230 justifies the
optimism, even while the fundamentals are not playing ball and supporting that
230 level.
BE:
Very good, that.
BE:
Anticonsensus argument.
BE:
We should put up some prices.
Xstrata (XTA:LSE): Last: 1,101, up 1 (+0.09%), High: 1,111, Low: 1,060, Volume: 3.28m
NH:
good idea
Anglo American PLC (AAL:LSE): Last: 2,662, up 67 (+2.58%), High: 2,673, Low: 2,557, Volume: 2.34m
Lonmin (LMI:LSE): Last: 1,789, up 29 (+1.65%), High: 1,799, Low: 1,735, Volume: 523.80k
Eurasian Natural Resources Corp (ENRC:LSE): Last: 900.00, up 17 (+1.93%), High: 906.00, Low: 861.00, Volume: 883.72k
BE:
And that’ll do.
11:44AM
NH:
back to RAW
NH:
some chatter around in Rentokil
NH:
that it might be a bid target
BE:
NH:
don’t see it myself
NH:
I guess they could make a disposal though
BE:
Who’d buy Rentokil?
NH:
good question
Rentokil Initial (RTO:LSE): Last: 103.80, up 1.4 (+1.37%), High: 104.60, Low: 102.60, Volume: 2.68m
NH:
also in the small cap world
NH:
told the Borders & Southern placing is nearly done
NH:
at around 50p
NH:
which I find amazing
NH:
there are raising $180m
NH:
I think the deal should be announced Thursday
BE:
This is a Falklands play, isn’t it?
NH:
it is
NH:
shares up 0.25p at 52.5p
NH:
at the moment
NH:
apparently Lansdowne backing the cash call
NH:
in a big way
BE:
So – doubling up after their disaster with Aero Inventory?
NH:
NH:
and finally
NH:
Minerva
NH:
the offer doc is out
NH:
and it runs to all of 14 pages
NH:
Kirsh
NH:
still has not PR people
NH:
I don’t really think this is a serious bid
NH:
just an attempt to flush out another buyer
BE:
So he’s a stalking horse.
BE:
He doesn’t seem the ideal profile to run a City office developer.
NH:
anyway, here are the most interesting points from the doc
NH:
KiFin announced last night that it posted its cash offer document to Minerva shareholders. Says investors have until 1 pm GMT on Dec. 14 to accept the offer, which represents “an opportunity for Minerva shareholders to realise value now at a premium to the market price”. Notes that the only condition to the Offer is 50% acceptance, including the 29.9% already held by KiFin.
Minerva (MNR:LSE): Last: 58.50, no change, Volume: 220.28k
11:48AM
NH:
Right Izy has just sent over something interesting
NH:
from today’s Treasury Select Committee meeting
NH:
The Bank of England has just released details of the help given to two British banks a year ago. The figures – too sensitive to be released at the time – show just how close RBS and HBOS were to collapse. Rumour has it that HBOS didn’t have enough cash to fill its cash machines, and that Mervyn King considered the banks an hour from collapse. The emergency liquidity assistance was given before the banks were semi-nationalised. More soon on ft.com.
NH:
here’s the link
NH:
BE:
Got any figures?
NH:
yep
NH:
From 1 October 2008 the Bank provided ELA to HBOS and from 7 October also provided ELA to
RBS. The RBS facility was repaid by 16 December 2008, and the HBOS facility by 16 January
2009.
Use of the facilities peaked at £36.6bn for RBS (on 17 October) and at £25.4bn for HBOS (on 13
November). Total use of ELA across both banks peaked at £61.6bn on 17 October. At this point
the two banks provided the Bank with collateral (residential mortgages, personal and commercial
loans and UK government issued debt) with a total value in excess of £100bn. The banks were
charged fees for the use of the facilities.
RBS. The RBS facility was repaid by 16 December 2008, and the HBOS facility by 16 January
2009.
Use of the facilities peaked at £36.6bn for RBS (on 17 October) and at £25.4bn for HBOS (on 13
November). Total use of ELA across both banks peaked at £61.6bn on 17 October. At this point
the two banks provided the Bank with collateral (residential mortgages, personal and commercial
loans and UK government issued debt) with a total value in excess of £100bn. The banks were
charged fees for the use of the facilities.
NH:
In addition, both institutions had access to the Bank’s normal market operations and to other
facilities including the Special Liquidity Scheme. From 13 October both institutions were also
eligible to issue securities under the Credit Guarantee Scheme.
facilities including the Special Liquidity Scheme. From 13 October both institutions were also
eligible to issue securities under the Credit Guarantee Scheme.
BE:
Izzy’s doing a post on this as we speak.
NH:
the secret BoE fund
NH:
and let’s look at how this compared
NH:
with the treasury said at the times
NH:
Treasury statement on financial support to the banking industry
Posted by Sam Jones on Oct 13 07:26.
Posted by Sam Jones on Oct 13 07:26.
Highlights:
* Total capital to underwrite: £37bn.
* Target tier-1 capital ratio of 9%.
* Madness: “maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels.”
* Govt to agree appointment of all new non-execs.
* Govt to agree dividend policy.
* No cash bonuses for board members for rest of 2008.
* Creation of a new “arms-length” office to oversee holdings.
NH:
interesting stuff
11:52AM
NH:
Where now?
BE:
You wanted to give Autonomy a hard time, didn’t you?
NH:
Yes. For continued abuses against RNS.
BE:
What’s the statement this time?
BE:
Contract win?
NH:
Nope.
BE:
Product launch?
NH:
Nope.
NH:
They were mentioned in a magazine poll.
BE:
BE:
Go on then – let’s take a look.
NH:
OK, in full
NH:
RNS Number : 9489C
Autonomy Corporation PLC
24 November 2009
Autonomy Corporation PLC
24 November 2009
AUTONOMY NAMED TO ECONTENT MAGAZINE’S TOP 100 ‘COMPANIES THAT MATTER MOST’
Recognized As One of the Most Important Companies in the Digital Content Arena For The Seventh Consecutive Year
Cambridge, UK and San Francisco, Calif. – Nov. 24, 2009 – Autonomy Corporation plc (LSE: AU. or AU.L), a global leader in infrastructure software for the enterprise, today announced that it was named one of the top 100 companies in the digital content industry by EContent Magazine. This marks the seventh consecutive year that the company has been recognized by the publication. EContent is a monthly leading IT business publication that focuses on the development and implementation of digital content strategies and resources.
A global panel of judges selected the ‘EContent 100′ award nominees based on their recent business performance, activities over the past year and respective impact on the digital content industry. The panel consisted of editors and specialists from EContent, as well as other Information Today, Inc. editors. Having selected the nominees, judges spent a month voting, debating and collaborating to determine the top 100 successful companies that matter most in the digital content industry. The ‘EContent 100′ list will be published in the December 2009 issue of the magazine and available online at www.econtentmag.com.
NH:
In selecting Autonomy for the 2010 ‘EContent 100′, the panel of judges noted that the company has demonstrated leading market share, thought leadership, and technology innovation.
“Every year, the ‘EContent 100′ list recognizes outstanding companies that have demonstrated winning strategies and solutions in the digital content industry,” said Michelle Manafy, EContent’s editor. “Autonomy has consistently shown its significant impact on the quality, breadth and depth of our industry. We are pleased to acknowledge it.”
“We are honored to be recognized by EContent for the seventh consecutive year,” said Mike Lynch, CEO of Autonomy. “Autonomy has also been recognized by leading analysts as the leader in search and e-Discovery. With the continued increase in enterprise data and the need to meet increasing government regulations in eDiscovery, it is critical for global enterprises to understand the meaning of their data and be able to access it quickly and accurately.”
BE:
OK. I’ll give you, that’s silly.
BE:
Can’t say I’m a subscriber to EContent.
BE:
Website looks clunky though
BE:
Hang on – I’ll just get the full 100 list
BE:
Seems to be a fair few UK companies on there …
BE:
SDL, Reed Elsevier
BE:
Informa
We don’t know what’s going on. The original source that detailed the Providence approach for Informa will not talk to us at present. If you own the shares and are worried that the bid will fail, sell the shares and stop worrying.
BE:
And, while we’re triggering the boilerplates ….
BE:
Some company called Pearson
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
BE:
None of which saw the event as price sensitive information worthy of an RNS
NH:
Because it’s not
BE:
Indeed
NH:
And Autonomy is a serial offender with this kind of stuff
NH:
Clogging up RNS with this worthless puffery
BE:
It’s not alone though.
BE:
Did you catch the Emblaze release today?
NH:
Oh no. Have they launched their new handset thing?
BE:
They have. And apparently …
BE:
The First ELSE™ is the realization of a comprehensive concept developed by Emblaze Mobile to define the differentiating factor of its product: user experience.
NH:
Er … What does that mean?
BE:
Wait, there’s more.
BE:
The First ELSE™ combines a unique user experience with fully-functioning device capabilities that are tightly integrated yet capable of autonomous functioning, thus giving the end-user a completely coherent and flawless experience. Users can interact with the various functions of the device – such as phone, GPS navigation or camera – in the same way they interact with the equivalent stand-alone devices used on a daily basis outside of the mobile experience.
NH:
Enough.
NH:
Enough.
NH:
This is not news. It doesn’t even make sense.
BE:
Should we move on to something that does?
NH:
yep
NH:
what about Informa
NH:
a real blast from the past
11:57AM
BE:
So – shares down
Informa (INF:LSE): Last: 289.30, down 22.7 (-7.28%), High: 308.00, Low: 289.30, Volume: 833.33k
NH:
yep
NH:
they are going to need a large rights issue
NH:
to pull off this Springer deal
NH:
and then they will still have quite a bit of leverage
BE:
This Springer thing’s already geared up to the hilt
NH:
yep
NH:
eur2.16bn of debt
NH:
plus the £1bn odd that informa has
BE:
versus €285m of EBITDA in 2008
BE:
That’s for Springer ……
NH:
hmmm
NH:
in spite of the whacking cash call coming down the slip
NH:
way and the debt
NH:
most analysts are positive on the deal
NH:
here’s Citi
NH:
Informa Confirms Interest In Springer Science + Business Media — Informa has
confirmed press reports that it is in talks with Cinven and Candover over a
potential acquisition of Springer Science + Business Media (Springer). Informa
notes there is no certainty that a deal will be reached but highlights the potential
advantages of combining Springer’s STM and HSS academic journals with its own.
It says that on the right terms (not indicated) it would be an “important strategic
step for Informa” and “would generate significant value for Informa shareholders”.
Synergies are expected to come from cost efficiencies and improved marketing/
operating efficiencies. Informa points out that Springer has strong cash generation
which would help enhance earnings visibility and says that it is committed to a
strong financial structure for the Informa group.
confirmed press reports that it is in talks with Cinven and Candover over a
potential acquisition of Springer Science + Business Media (Springer). Informa
notes there is no certainty that a deal will be reached but highlights the potential
advantages of combining Springer’s STM and HSS academic journals with its own.
It says that on the right terms (not indicated) it would be an “important strategic
step for Informa” and “would generate significant value for Informa shareholders”.
Synergies are expected to come from cost efficiencies and improved marketing/
operating efficiencies. Informa points out that Springer has strong cash generation
which would help enhance earnings visibility and says that it is committed to a
strong financial structure for the Informa group.
NH:
Reported Valuation 9x EV/EBITDA — The Times suggests that interested buyers in
Springer have been looking to spend under €400m for 100% of the equity, as
impending debt maturities have forced valuation down. According to the article,
Springer has debt of c.€2.16bn. In 2008, Springer had revenues of €892m and
adjusted EBITDA of €285m (compared to Informa’s 2008 revenues of £1286m
and adjusted EBITDA of £321m). At €2.6bn (€2.2bn debt and €400m equity) this
implies a valuation of c.2.9x sales and 9x EBITDA.
Debt High; £1-£1.5bn Equity Issuance Needed — The issue here is the significant
amount of debt that Informa would have to take on from Springer. On a pro-forma
basis, if the group were 3x levered (net debt/EBITDA), it would mean Informa
would need to raise £1bn-£1.5bn in equity (55% to 85% its current market cap).
Springer have been looking to spend under €400m for 100% of the equity, as
impending debt maturities have forced valuation down. According to the article,
Springer has debt of c.€2.16bn. In 2008, Springer had revenues of €892m and
adjusted EBITDA of €285m (compared to Informa’s 2008 revenues of £1286m
and adjusted EBITDA of £321m). At €2.6bn (€2.2bn debt and €400m equity) this
implies a valuation of c.2.9x sales and 9x EBITDA.
Debt High; £1-£1.5bn Equity Issuance Needed — The issue here is the significant
amount of debt that Informa would have to take on from Springer. On a pro-forma
basis, if the group were 3x levered (net debt/EBITDA), it would mean Informa
would need to raise £1bn-£1.5bn in equity (55% to 85% its current market cap).
NH:
Strategically Makes Sense; Uncertainty in Valuation and Financing — While we
await further details on price / funding and uncertainty could continue to drag on
the shares, Informa seems confident that the deal will generate value for
shareholders and improve the group structure. We agree that strategically this
would make sense and would weight the business more towards the more resilient
academic publishing business (currently Informa is 20% Academic Publishing,
30% Professional & Commercial B2B Information, 50% Events and Training by
revenue and split 1/3 each way on operating profit). We rate Informa Buy/High
Risk.
await further details on price / funding and uncertainty could continue to drag on
the shares, Informa seems confident that the deal will generate value for
shareholders and improve the group structure. We agree that strategically this
would make sense and would weight the business more towards the more resilient
academic publishing business (currently Informa is 20% Academic Publishing,
30% Professional & Commercial B2B Information, 50% Events and Training by
revenue and split 1/3 each way on operating profit). We rate Informa Buy/High
Risk.
NH:
Numis
NH:
come to much the same conclusion
NH:
Informa has confirmed that it is in talks with Candover and Cinven about the potential acquisition of Academic & Scientific Publisher Springer. Press reports suggest that Informa could pay c.€400m for the business as the private equity groups face impending debt maturities on the €2.16bn of debt in the business. We would be highly supportive of the acquisition and believe that the assets are very complementary with good opportunities for cost synergies. Valuing Springer at an EV of c.€2.6bn equates to c.9x EBITDA which, given the quality of the assets and potential synergies, looks good value. Informa is still highly leveraged (NSe FY09 -£926m) and we think it would likely raise c.£1.3bn by way of a rights issue (possibly supported by Cinven/Candover) to maintain gearing at an appropriate level. We think the prospect of buying high quality assets at a good price to create a FTSE 100 leading academic and scientific publisher is a very attractive one and would be supportive of a rights issue. Informa remains one of our key picks and we retain a Buy recommendation with a 436p target price.
BE:
Spicy.
NH:
ambitious bid at the moment
NH:
but if investors want to back another cash call at Informa
NH:
and who is to say they won’t
NH:
then this will probably happen
12:02PM
NH:
Right
NH:
anything else to mention
NH:
or are we done?
BE:
Yeah – think so
BE:
Might just chuck in a line on the retailers
BE:
Looking quite strong this morning
NH:
Thank you Monty – fascinating as ever
BE:
There’s a Nomura note out late yesterday puffing Marks, Kesa, Home Retail, and HMV
NH:
ah
Marks and Spencer Group (MKS:LSE): Last: 388.50, up 6.8 (+1.78%), High: 389.90, Low: 380.10, Volume: 3.14m
NH:
a good market today
BE:
Here’s the gist of it
BE:
Almost all datapoints suggest an improvement in trading across the retail sector,
including electricals and other big-ticket items. Although the fashion category also
saw a significant uplift during the period, we continue to notice a discrepancy
between large and small clothing retailer sales, with the larger gaining share. The
significance of online trade in all categories is also coming to the forefront, with
retailers focused on driving online platforms. Below we highlight four stocks to
focus on through peak season:
including electricals and other big-ticket items. Although the fashion category also
saw a significant uplift during the period, we continue to notice a discrepancy
between large and small clothing retailer sales, with the larger gaining share. The
significance of online trade in all categories is also coming to the forefront, with
retailers focused on driving online platforms. Below we highlight four stocks to
focus on through peak season:
BE:
M&S: With uncertainty around the new CEO removed, M&S is positioned to
benefit from weaker comps, market share gains, reduced sales at markdown
levels, and innovation. The introduction of branded foods will allow peak footfall
to experience the new offer. M&S trades at a 23% discount to the sector average
on a PE basis (FY2009/10E). We reiterate our Buy recommendation.
KESA: Strong improvement in the trading environment for electricals, high
operating leverage, easy comps in both LFL and gross margin (-300bp in Q3),
recent improvement in French electrical data, stock underperformance relative to
the sector and relative discount to the sector on an EV/EBITDA basis, highlight an
opportunity ahead of 1H on 16 December.
benefit from weaker comps, market share gains, reduced sales at markdown
levels, and innovation. The introduction of branded foods will allow peak footfall
to experience the new offer. M&S trades at a 23% discount to the sector average
on a PE basis (FY2009/10E). We reiterate our Buy recommendation.
KESA: Strong improvement in the trading environment for electricals, high
operating leverage, easy comps in both LFL and gross margin (-300bp in Q3),
recent improvement in French electrical data, stock underperformance relative to
the sector and relative discount to the sector on an EV/EBITDA basis, highlight an
opportunity ahead of 1H on 16 December.
BE:
Home Retail: Easier Christmas comps at both Argos and Home Retail,
improvement in market environment for toys, electricals and furniture, stock
underperformance relative to the market and relative valuation discount to the
sector are likely to support stock performance in the short term, in our view.
HMV: Bookseller data improving in October, capacity withdrawal and new
space leaves HMV well positioned to drive market share this Christmas. Although
some expectations are factored in to earnings, the attractive valuation and 6.5%
dividend yield gives upside to the stock through peak trading, in our view.
Sector: The General Retail sector outperformed the market over the past month,
posting gains of 5.2% vs. FTSE 100 +1.2% and FTSE All-Share +0.8%. The
sector is trading at a P/E premium of 8% vs. the UK market (vs. 45% in April this
year). Despite a challenging outlook for 2010, we continue to see the sector
driven by earnings and momentum in the short term.
improvement in market environment for toys, electricals and furniture, stock
underperformance relative to the market and relative valuation discount to the
sector are likely to support stock performance in the short term, in our view.
HMV: Bookseller data improving in October, capacity withdrawal and new
space leaves HMV well positioned to drive market share this Christmas. Although
some expectations are factored in to earnings, the attractive valuation and 6.5%
dividend yield gives upside to the stock through peak trading, in our view.
Sector: The General Retail sector outperformed the market over the past month,
posting gains of 5.2% vs. FTSE 100 +1.2% and FTSE All-Share +0.8%. The
sector is trading at a P/E premium of 8% vs. the UK market (vs. 45% in April this
year). Despite a challenging outlook for 2010, we continue to see the sector
driven by earnings and momentum in the short term.
BE:
Anything you want to add, Neil?
NH:
one thing
12:05PM
NH:
was going to put this up yesterday afternoon
NH:
but ran out of time
NH:
Goldman Sachs’ Hedge Fund Trend Monitor this week
NH:
Net long exposure rises to 40%, highest since December 2007
Net weighting in cyclical sectors rises to 72%, up from 65% in the second quarter
Hedge fund long portfolios saw a shift from macro to micro (6% ETF position in March to 3% Q3 2009 ETF position)
Hedge funds re-risk but also diversify portfolios
Hedge funds continue to gain share of he US equity market
Top 5 hedge fund VIP list: Pfizer, Apple, Bank of America, Schering-Plough and JP Morgan
Short interest for the S&P 500 rebounded off October lows but has since declined
Hedge fund exposure to consumer discretionary and financials rose during the third quarter by 90 basis points each, to 14.5% and 15.9%, respectively
Top 5 stocks with largest positive changes in popularity: Citigroup, Perot Systems, BJ Services, Cadbury and Xerox
Top 5 negative changes in popularity: Bank of America, Pulte Homes, Alpha Natural Resources, Validus Holdings and Centurtytel
12:05PM
NH:
And thanks Monty
NH:
clearly worth doing some work on Informa
NH:
this does look a heroic deal to be taking on
NH:
and the cash call would be a be a biggie vs market cap
NH:
and this isn’t a rescue deal
NH:
like Yell etc
BE:
Monte also notes Lex on Cadbury in today’s paper
BE:
Worth pointing out that the Penn attorney-general has made his reputation on a platform of prudential lending and has been quite vocal on applying higher standards of care on balance sheet leverage. He is not instinctively in favour of taking Hershey north of 5x leverage, leaving aside the fraught dilution issues surrounding any equity-raising.
BE:
The Lex quoted an Investec note from yesterday.
NH:
it did
NH:
and worth repeating that
NH:
for all those people who believe in the counter bid
Cadbury (CBRY:LSE): Last: 806.50, down 7.5 (-0.92%), High: 812.50, Low: 806.50, Volume: 2.26m
BE:
There’s not much slack being priced in here, is there?
NH:
Our long-standing view (see our note
Hershey/Cadbury: Merger or Mirage?, 12 October 2007) has been that the hard
synergies realisable from any Hershey/Cadbury combination are fairly limited.
This is because the geographic overlap between the two companies is limited to
North America, which is only 20% of Cadbury’s sales and where Cadbury has
only a very small chocolate business.
Hershey/Cadbury: Merger or Mirage?, 12 October 2007) has been that the hard
synergies realisable from any Hershey/Cadbury combination are fairly limited.
This is because the geographic overlap between the two companies is limited to
North America, which is only 20% of Cadbury’s sales and where Cadbury has
only a very small chocolate business.
NH:
So for Hershey, we think the deal would need to be predicated on the conviction
that there are: (i) cost and revenue synergies with Cadbury’s gum in North
America; and (ii) further revenue synergies from selling the Hershey range via
Cadbury’s sales and distribution network outside North America. We remain
sceptical on this point as we think that chocolate brands tend not to travel
particularly well.
that there are: (i) cost and revenue synergies with Cadbury’s gum in North
America; and (ii) further revenue synergies from selling the Hershey range via
Cadbury’s sales and distribution network outside North America. We remain
sceptical on this point as we think that chocolate brands tend not to travel
particularly well.
NH:
Our scepticism increases when we contemplate the financing of such a deal.
Exhibit 1 lays out the key metrics and relativities. For illustrative purposes we
assume that Hershey would target $500m annual synergies from the
combination. This is less than Kraft’s target of $625m and reflects what we see
as the lower degree of overlap. We assume that transaction and integration
costs would account for a further $1bn (relative to Kraft’s $1.2bn)
Exhibit 1 lays out the key metrics and relativities. For illustrative purposes we
assume that Hershey would target $500m annual synergies from the
combination. This is less than Kraft’s target of $625m and reflects what we see
as the lower degree of overlap. We assume that transaction and integration
costs would account for a further $1bn (relative to Kraft’s $1.2bn)
NH:
Able to pay only c.300p in cash? We estimate that Hershey/Cadbury’s postdeal
debt capacity would be limited to c.$12bn, being 3.6x the combined
EBITDA of the businesses plus the synergies. We see this as the threshold for
Hershey to maintain an investment grade rating. After deduction of both
Cadbury and Hershey’s existing debt and the funding of the integration costs,
we think this would afford the equivalent of 300p in cash per Cadbury share.
debt capacity would be limited to c.$12bn, being 3.6x the combined
EBITDA of the businesses plus the synergies. We see this as the threshold for
Hershey to maintain an investment grade rating. After deduction of both
Cadbury and Hershey’s existing debt and the funding of the integration costs,
we think this would afford the equivalent of 300p in cash per Cadbury share.
NH:
Dilution would, therefore, be the big complication for Hershey. If Hershey’s
debt capacity limits it to 300p cash per Cadbury share, then c.550p ($12bn) is
going to have to come from equity sources, broadly defined
debt capacity limits it to 300p cash per Cadbury share, then c.550p ($12bn) is
going to have to come from equity sources, broadly defined
NH:
The Milton Hershey Trust currently control c.80% of the voting rights over the
Hershey Company via their ownership of c.61m ‘Class B’ Hershey shares, which
have 10 votes for every one vote attaching to the c.167m shares of common
stock. On a strict interpretation of the arrangements, it looks to us as if Hershey
could offer a lot of new equity without the Trust losing control (c.440m new
shares to be precise.) Thus, an all-paper deal for the remaining 550p per share
of Cadbury looks to us to be technically possible. However, we doubt that
Hershey’s existing common stockholders would be happy with their resultant
c.30% share of the new company, any more than Cadbury shareholders are
likely to accept only 300p in cash.
Hershey Company via their ownership of c.61m ‘Class B’ Hershey shares, which
have 10 votes for every one vote attaching to the c.167m shares of common
stock. On a strict interpretation of the arrangements, it looks to us as if Hershey
could offer a lot of new equity without the Trust losing control (c.440m new
shares to be precise.) Thus, an all-paper deal for the remaining 550p per share
of Cadbury looks to us to be technically possible. However, we doubt that
Hershey’s existing common stockholders would be happy with their resultant
c.30% share of the new company, any more than Cadbury shareholders are
likely to accept only 300p in cash.
NH:
Hershey, therefore, need outside funding, which doesn’t look straightforward to
us. Our analysis, therefore, supports the Sunday newspaper reports that
Hershey are looking for billions of dollars of new outside equity to fund the deal.
But, if existing Hershey shareholders are not to be diluted excessively, this is
going to have to be in the form of preference equity or some other subordinate
instrument. While Private Equity investors have been rumoured to be
considering such arrangements (notably during the Premier Foods re-financing
saga), we are unaware of any material fundings being concluded on this basis
and are sceptical in this instance.
us. Our analysis, therefore, supports the Sunday newspaper reports that
Hershey are looking for billions of dollars of new outside equity to fund the deal.
But, if existing Hershey shareholders are not to be diluted excessively, this is
going to have to be in the form of preference equity or some other subordinate
instrument. While Private Equity investors have been rumoured to be
considering such arrangements (notably during the Premier Foods re-financing
saga), we are unaware of any material fundings being concluded on this basis
and are sceptical in this instance.
NH:
So we remain cautious overall, but the evolving landscape argues for an
upgrade to our target price. Despite our scepticism on Hershey, the possibility
of a competitive auction for Cadbury seems to be increasing. We are, therefore,
raising our target price to 810p (from 785p), which is the rounded weighted
average of a 30% probability (was 10%) of a competitive auction at an exit price
of 850p, a 30% probability (was 40%) of Cadbury maintaining its independence
at a near-term fair value of 750p and a 40% probability (was 50%) of Kraft
acquiring Cadbury for 820p. We are simultaneously raising our estimate of the
Kraft take-out value from 800p to 820p to reflect lower than previous net debt
forecasts for Kraft and rising Cadbury consensus forecasts.
upgrade to our target price. Despite our scepticism on Hershey, the possibility
of a competitive auction for Cadbury seems to be increasing. We are, therefore,
raising our target price to 810p (from 785p), which is the rounded weighted
average of a 30% probability (was 10%) of a competitive auction at an exit price
of 850p, a 30% probability (was 40%) of Cadbury maintaining its independence
at a near-term fair value of 750p and a 40% probability (was 50%) of Kraft
acquiring Cadbury for 820p. We are simultaneously raising our estimate of the
Kraft take-out value from 800p to 820p to reflect lower than previous net debt
forecasts for Kraft and rising Cadbury consensus forecasts.
NH:
nice summary that
NH:
on the complications at Hershey
BE:
before we go
BE:
Did you ever get that Lloyds short data Neil?
NH:
yes
NH:
just in
NH:
snazzy spreadsheet today
NH:
Active Utilisation 26.8 26.7 0.1% 34.3 -21.9% 23-Oct-09 08-Aug-08 -999 54.53063202 96.23000336 6.7 15 181,576,416
NH:
doesn’t copy at all well though
NH:
so active utilisation is 26.8%
NH:
shares outstanding on loan is 3.1%
NH:
days to cover 9
NH:
not sure what the active
NH:
in utilisation is
NH:
that’s a new one from DataExplorers
BE:
Neil’s just hunring around the DataExplorers website …………
NH:
no glossary I can find
BE:
Google’s not that helpful either
NH:
anyway I think TL knows the answer
NH:
right
NH:
we had better end this
BE:
Yup
NH:
Izy needs to send the lunch wrap
NH:
Comp update later