Markets live chat transcript for the chat ending at 12:18 on 26 Nov 2009. Participants in this chat were: Neil Hume, FT (NH) Bryce Elder (BE)
NH:
hola
NH:
it’s 11.03am
NH:
and time for Markets Live
NH:
FT Alphaville’s daily stroll around the market
NH:
actually it is more of a mad dash this morning
NH:
loads going on
NH:
which to be honest we were not expecting with it being Thanksgiving
NH:
and Eid in the middle east
NH:
anyway, the sad thing is the prospect of a sovereign default in the middle east has got us very excited
NH:
who says we glory in bad news??
NH:
anyway Bryce is here with me today
NH:
as Miles has been called into cover on the markets desk
NH:
because all our grad helpers have for a day of work experience
NH:
at a big bank we had better not mention
NH:
but we have a love hate relationship with
NH:
Right
NH:
Bryce
NH:
any news on the outage at the LSE
11:05AM
BE:
well, everything went into an auction
BE:
Which is where everything remains
BE:
traders pretty furious about it
NH:
everything appears to be frozen
BE:
why do these things always happen on days when there is loads of newsflow?
NH:
not sure
NH:
but there could be a link
NH:
any idea what the problem is this time?
BE:
“connectivity”
BE:
the various systems traders use Fidessa etc
BE:
can’t connect to the LSE gateway
BE:
which means traders can’t enter orders/report trades etc
NH:
hmmm
NH:
I make this the make the 3rd technical issue at the LSE in the past couple of months
BE:
Third major one, certainly.
BE:
Actually, we have an update
BE:
At 10.33 the Exchange placed all order-driven securities in to an auction call period. The length of this period has not yet been decided however a minimum of 30 minutes notice will be provided ahead of the scheduled uncrossing time.
All quote driven securities should be considered indicative at this time.
The Exchange continues to investigate the root cause and will publish an update once further information is available.
All quote driven securities should be considered indicative at this time.
The Exchange continues to investigate the root cause and will publish an update once further information is available.
NH:
30 min auction
NH:
wow
NH:
what a mess
NH:
so as the Hoof says
NH:
this is Markets indicative only
NH:
none of the prices are real
BE:
And, as he rightly observes, “connectivity provlem” isn’t really an explanation that’ll keep anyone happy
NH:
no
NH:
so what are the indicative prices?
11:08AM
BE:
We think the FTSE’s down a tonne at 5264
BE:
But, to be honest, who knows?
NH:
the biggest fallers
NH:
we think are the banks
NH:
and there are lots of lists doing the rounds this morning
NH:
looking at the various exposures to Dubai
BE:
There is a list in circulation
BE:
I can’t swear by its accuracy though
NH:
go on
BE:
HSBC 17.0
STAN 7.8
BARC 3.6
RBS 2.2
Citi 1.9
BNP 1.7
LLOYD 1.6
STAN 7.8
BARC 3.6
RBS 2.2
Citi 1.9
BNP 1.7
LLOYD 1.6
NH:
they are in billions right?
BE:
Yeah
BE:
That’s from a broker, who’s citing the Emirates Banks Association
NH:
and the top three on that list
NH:
are the hardest hit in the banking sector this morning
NH:
and apart from their exposures
NH:
would do the most business out there
BE:
Yup
BE:
The prices, for what it’s worth ………..
BE:
HSBC down 32p at 730p.
BE:
Barclays off 12.3p at 314p.
BE:
Standard C down 60p at 1585p
NH:
hmmm
NH:
another flash just popped up
NH:
SAUDI-OWNED GULF INTERNATIONAL BANK’S DOLLAR BOND SALE PULLED AFTER DUBAI RESTRUCTURING-SOURCES
NH:
the fall out from the events in Dubai
NH:
is gathering pace
NH:
of course this morning’s other big faller
NH:
is the LSE
NH:
but this has nothing to do with the trading trouble
11:13AM
BE:
This is all to do with the Boerse Dubai stake, of course.
NH:
shares currently down (we think) 34.5p at 802p
NH:
yeah
NH:
they own 20%
NH:
worried that it will dumped in the market
NH:
although
NH:
might a predator buy it?
NH:
Deutsche Borse for example
BE:
Want to buy a broken exchange?
BE:
Great bargain much cheapness.
NH:
indeed
NH:
I guess it’s unlikely
NH:
but this asset may well have to liqudated
NH:
actually lets move on and look at the situation in Dubai
NH:
which the equity market took 18 hours to respond to
BE:
Yeah – incredible news lag
NH:
efficent markets eh?
BE:
“Nah mate, not interested” yesterday.
NH:
yeah Dubai = one thing for City traders
NH:
holiday
BE:
Now it’s suddenly “all risk assets are mispriced! Catastrophes can happen!”
BE:
Bi-polar trading.
NH:
and markets plunge
NH:
dollar rallies
NH:
yen rallies
NH:
risk appetite disappears
11:17AM
NH:
Right
NH:
this Nakheel bond
NH:
that triggered all the fuss
NH:
has traded this morning
NH:
at 70
NH:
it hit 110 yesterday after the Govt of Dubai bond issue
NH:
the quote is now 65-70
BE:
There’s apparently a conference call for Nakheel bondholders this afternoon
NH:
really
NH:
what time?
BE:
3pm GMT, apparently
BE:
Although that’s not first-hand confirmed yet.
BE:
So probably needs a raw disclaimer
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH:
actually just got hold of a list on all of the bonds issued by Dubai World
NH:
Nakheel sukuk $3.52 bln Dec 14 2009
NH:
Nakheel 3.6 bln AED May 13 2010
NH:
Nakheel $750 mln Jan 1 2011
NH:
Jebel Ali zone 1.5 bln AED Nov 2012
NH:
Dubai World $2.1 bln June 19 2011
NH:
Dubai World $450 mln June 19 2011
NH:
Dubai Ports World, another subsidiary of Dubai World, is unaffected by the restructuring. It has the following bonds outstanding.
NH:
DP World $1.5 bln July 2 2017
NH:
DP World $1.75 bln July 2 2037
BE:
Ta for that.
NH:
have we got any comment on this?
BE:
Hang on
BE:
This is from HSBC
BE:
Dubai World, a large government-owned conglomerate, and its real estate subsidiary, Nakheel,
announced today that they had requested a six-month standstill agreement with all creditors.
The brief statement announcing the request to creditors included few details, but has been read by the
market as applying to all creditors, including holders of the Nakheel bonds. It is not yet clear if the
‘request’ is voluntary – a condition that Moody’s said would determine if the credit event constituted
default or not. The largest of those bonds, a USD4bn convertible sukuk, is due to mature in
mid-December and is guaranteed by the 100% state-owned parent company. Dubai sovereign CDS levels
widened 150 points to 450bp in less than an hour. The price of the Nakheel-09 bond fell 30 points over
the same period; 12m dirham swaps moved 50bp to the right.
announced today that they had requested a six-month standstill agreement with all creditors.
The brief statement announcing the request to creditors included few details, but has been read by the
market as applying to all creditors, including holders of the Nakheel bonds. It is not yet clear if the
‘request’ is voluntary – a condition that Moody’s said would determine if the credit event constituted
default or not. The largest of those bonds, a USD4bn convertible sukuk, is due to mature in
mid-December and is guaranteed by the 100% state-owned parent company. Dubai sovereign CDS levels
widened 150 points to 450bp in less than an hour. The price of the Nakheel-09 bond fell 30 points over
the same period; 12m dirham swaps moved 50bp to the right.
BE:
Although Dubai’s heavy debt stock and its demanding debt maturity profile have been a widespread
concern this year, the announcement today has caused widespread shock. Its liquidity has improved
considerably over the past three months, with the sale of a new sovereign paper on to the market
appearing to have enhanced its ability to meet its payment obligations.
In particular, there had been clear evidence of support from Dubai’s wealthy neighbour, Abu Dhabi that
had agreed just over an hour before the standstill was announced that its banks would buy a further
USD5bn in Dubai government bonds on concessional terms. Because Nakheel’s 2009 bond was widely
held and guaranteed by the parent, it had seemed far less likely than other paper to be restructured.
The announcement was made as Dubai began a four-day religious holiday, which is likely to mean that
further details would emerge even more slowly than is often the case in the emirate. If the fears of the
market are realised, however, and Dubai is perceived to have defaulted, the short- and long-term
consequences could be severe for liquidity in the emirate as well as debt and equity assets. The effects
could also extend beyond Dubai World as the market fundamentally reassesses their view of the statedominated
economy.
concern this year, the announcement today has caused widespread shock. Its liquidity has improved
considerably over the past three months, with the sale of a new sovereign paper on to the market
appearing to have enhanced its ability to meet its payment obligations.
In particular, there had been clear evidence of support from Dubai’s wealthy neighbour, Abu Dhabi that
had agreed just over an hour before the standstill was announced that its banks would buy a further
USD5bn in Dubai government bonds on concessional terms. Because Nakheel’s 2009 bond was widely
held and guaranteed by the parent, it had seemed far less likely than other paper to be restructured.
The announcement was made as Dubai began a four-day religious holiday, which is likely to mean that
further details would emerge even more slowly than is often the case in the emirate. If the fears of the
market are realised, however, and Dubai is perceived to have defaulted, the short- and long-term
consequences could be severe for liquidity in the emirate as well as debt and equity assets. The effects
could also extend beyond Dubai World as the market fundamentally reassesses their view of the statedominated
economy.
BE:
Simon Williams the author.
NH:
cheers
NH:
I have something from UBS
NH:
WHAT HAPPENED IN DUBAI? BASICALLY, A REMINDER THAT MONEY’S NOT FREE FOREVER.
NH:
Specifically, Dubai World (Nakheel’s parent co.) asked investors to push
out the repayment of US$3.52B sukuk (i.e. > from mid Dec 2009 to May 2010).
out the repayment of US$3.52B sukuk (i.e. > from mid Dec 2009 to May 2010).
NH:
This could be a sign that Dubai’s fncl entities will be held more
accountable for their own obligations. We believe one of the main off-balance
sheet liabilities in Dubai’s property market is the funding gap to finish
properties that are already started and one which investors are defaulting.
* We est. this funding gap at roughly US$11B for an expected 40,000 residential
units by end of 2010. Systemic risk in Dubai has clearly risen, esp for
smaller developers, and this is reflected in its 5yr CDS rising by more than
110pt to 430bp.
accountable for their own obligations. We believe one of the main off-balance
sheet liabilities in Dubai’s property market is the funding gap to finish
properties that are already started and one which investors are defaulting.
* We est. this funding gap at roughly US$11B for an expected 40,000 residential
units by end of 2010. Systemic risk in Dubai has clearly risen, esp for
smaller developers, and this is reflected in its 5yr CDS rising by more than
110pt to 430bp.
BE:
“40k residential units by the end of 2010″?
NH:
i know, amazing
NH:
here’s some more
NH:
on the banks’ exposure
NH:
* DIRECT EXPOSURE LIMITED: Dubai represents ~1% of STAN CHTD’s loan book, <0.5%
of HSBC so direct exposure limited. Yes Dubai may not be a "growth engine"
for banks in the future but the second order effects of this will be much
more broadly spread. No "obvious" trade in Eurobanks here.
of HSBC so direct exposure limited. Yes Dubai may not be a "growth engine"
for banks in the future but the second order effects of this will be much
more broadly spread. No "obvious" trade in Eurobanks here.
NH:
Dubai yesterday, along with concerns in Greece
yesterday (on fears that a potential futher sovereign downgrade could results
in non-eligibility of Greek sovereigns at the ECB) is a stark reminder than
pumping liquidity into the financial system remains at best, a temporary way
to bide time, to restore health into the financial system. Economies which
are over-levered, and have failed to adopt clear measures to explicity raise
permanent capital, will need to do so. Attached are three notes from the
research team which address these issues – worth printing off.
yesterday (on fears that a potential futher sovereign downgrade could results
in non-eligibility of Greek sovereigns at the ECB) is a stark reminder than
pumping liquidity into the financial system remains at best, a temporary way
to bide time, to restore health into the financial system. Economies which
are over-levered, and have failed to adopt clear measures to explicity raise
permanent capital, will need to do so. Attached are three notes from the
research team which address these issues – worth printing off.
NH:
GREECE: Whilst we remain pragmatic about Greece (as the ECB does not have a
rating floor for Eurozone sovereigns and would implicitly always accept
Eurozone collateral), Greece has been a persistent offender in running high
deficits to GDP.
rating floor for Eurozone sovereigns and would implicitly always accept
Eurozone collateral), Greece has been a persistent offender in running high
deficits to GDP.
NH:
and here’s some stuff from an strategist
NH:
Make no mistake, this looks ugly. Our “near-term upside” for MENA
argument was premised on the assumption of easing ST macro risk, and
specifically that Dubai receives the remaining $10b from Abu Dhabi, and
the Nakheel bond gets repaid. The news that this is apparently not
happening throws any near-term bullishness to the wayside. UAE bond and
CDS markets are being hit hard (120bps higher for Dubai so far, enough
to push UAE almost below Egypt in our country ranking model). The stock
market reaction, once markets reopen next Monday for a short week and in
absence of new (positive) developments, promises to be messy.
argument was premised on the assumption of easing ST macro risk, and
specifically that Dubai receives the remaining $10b from Abu Dhabi, and
the Nakheel bond gets repaid. The news that this is apparently not
happening throws any near-term bullishness to the wayside. UAE bond and
CDS markets are being hit hard (120bps higher for Dubai so far, enough
to push UAE almost below Egypt in our country ranking model). The stock
market reaction, once markets reopen next Monday for a short week and in
absence of new (positive) developments, promises to be messy.
NH:
The situation is however very much in flux. What happened today, as
far as we can tell, boils down to two main news items: First, that Dubai
has received $5b from Abu Dhabi, rather than the $10b expected, and has
only drawn down $1b of it; and Second, that Dubai World is seeking to
delay payment on all its current obligations (including Nakheel) until
next May. Both raise many more questions than they answer, foremost of
which: what is the UAE leadership thinking? Abu Dhabi clearly has the
extra $5b, it is hard to see why they do not just pay it and sort
everything else out behind the scenes. And why has Dubai only drawn down
part of the fresh $5b raised? It this some high profile game of
brinksmanship (as Nadia has suggested)? Another question is whether the
Dubai World announcement is a negotiating tactic or a done deal, whether
it will apply to all creditors, and whether a technical default can be
avoided.
far as we can tell, boils down to two main news items: First, that Dubai
has received $5b from Abu Dhabi, rather than the $10b expected, and has
only drawn down $1b of it; and Second, that Dubai World is seeking to
delay payment on all its current obligations (including Nakheel) until
next May. Both raise many more questions than they answer, foremost of
which: what is the UAE leadership thinking? Abu Dhabi clearly has the
extra $5b, it is hard to see why they do not just pay it and sort
everything else out behind the scenes. And why has Dubai only drawn down
part of the fresh $5b raised? It this some high profile game of
brinksmanship (as Nadia has suggested)? Another question is whether the
Dubai World announcement is a negotiating tactic or a done deal, whether
it will apply to all creditors, and whether a technical default can be
avoided.
NH:
The timing is terrible/bewildering. With many locals on Eid holiday
for the next two weeks, trading volumes were expected to be light
anyway. But with investors now whipped into a frenzy over a potential
default you can expect an overreaction to the downside on those few days
when the markets will be open (see Rahil’s calendar below). One would
think that non-dedicated investors/hedge funds would be willing to take
a chunky loss just to get out when they can, while the dedicated MENA
money may be more willing to buy on weakness (although as Nadia
mentioned, many of these poor souls are now contemplating the loss of
all of the modest gains they have managed to achieve so far this year –
in a year in which EM has doubled!).
for the next two weeks, trading volumes were expected to be light
anyway. But with investors now whipped into a frenzy over a potential
default you can expect an overreaction to the downside on those few days
when the markets will be open (see Rahil’s calendar below). One would
think that non-dedicated investors/hedge funds would be willing to take
a chunky loss just to get out when they can, while the dedicated MENA
money may be more willing to buy on weakness (although as Nadia
mentioned, many of these poor souls are now contemplating the loss of
all of the modest gains they have managed to achieve so far this year –
in a year in which EM has doubled!).
NH:
- Every client I have spoken with today is bearish/in shock. Is there a
risk of overreaction to the downside from all this? It would not be the
first time in emerging markets that investors assumed the worst (Brazil
in 2002, Turkey in 2003 and Russia in 2008 all come to mind) and then
events have taken a different turn. Kay Turner has argued with her usual
eloquence that a DW default is actually positive for Abu Dhabi credit,
and possibly even for Dubai. I find it hard to imagine equity investors
seeing things that way initially… however if the Dubai market were to
sell off sharply, say 20%, in the context of the rest of EM remaining
firm, then valuation arguments may start to come to the fore (partially
offset by a higher cost of capital). But any such buying opportunity is,
even in a positive scenario, still at least a few painful trading
sessions away. And it is difficult for me to shake the lingering feeling
that a Dubai World default or partial default, if it happens, could end
up being seen as an important turning point in the evolution of the
Dubai story: the day the world discovered the emperor (the sheikh?) had
no clothes.
risk of overreaction to the downside from all this? It would not be the
first time in emerging markets that investors assumed the worst (Brazil
in 2002, Turkey in 2003 and Russia in 2008 all come to mind) and then
events have taken a different turn. Kay Turner has argued with her usual
eloquence that a DW default is actually positive for Abu Dhabi credit,
and possibly even for Dubai. I find it hard to imagine equity investors
seeing things that way initially… however if the Dubai market were to
sell off sharply, say 20%, in the context of the rest of EM remaining
firm, then valuation arguments may start to come to the fore (partially
offset by a higher cost of capital). But any such buying opportunity is,
even in a positive scenario, still at least a few painful trading
sessions away. And it is difficult for me to shake the lingering feeling
that a Dubai World default or partial default, if it happens, could end
up being seen as an important turning point in the evolution of the
Dubai story: the day the world discovered the emperor (the sheikh?) had
no clothes.
NH:
- Key question: contagion. Have had some discussions on whether we need
to worry about contagion to other MENA markets or EM more broadly. (The
credit guys are reporting a bit of the former and not much of the
latter.) We would be surprised to see other markets, even the shakier
credit stories, show too much of a negative reaction at this point,
given the very specific political nature of the Dubai problems. On the
equity side, as we argued in our report, most MENA markets have been a
no-fly zone for EM investors for the past year anyway. Within MENA, the
non-UAE equity markets will be influenced by two opposing forces: a)
broad risk aversion across the region and a flight to cash, hurting
everyone; and 2) potentially some rotation out of UAE into the non-UAE
markets. In the near term, the first is probably more potent; in the
medium term, we would stick with our pro-Qatar (and Egypt) bias. And
telecoms, telecoms, telecoms.
to worry about contagion to other MENA markets or EM more broadly. (The
credit guys are reporting a bit of the former and not much of the
latter.) We would be surprised to see other markets, even the shakier
credit stories, show too much of a negative reaction at this point,
given the very specific political nature of the Dubai problems. On the
equity side, as we argued in our report, most MENA markets have been a
no-fly zone for EM investors for the past year anyway. Within MENA, the
non-UAE equity markets will be influenced by two opposing forces: a)
broad risk aversion across the region and a flight to cash, hurting
everyone; and 2) potentially some rotation out of UAE into the non-UAE
markets. In the near term, the first is probably more potent; in the
medium term, we would stick with our pro-Qatar (and Egypt) bias. And
telecoms, telecoms, telecoms.
NH:
and I also have something really bearish from Goldman
NH:
anyone want to see it?
BE:
Van_farik – we will of course have extensive Dubai coverage in the LR
BE:
Meanwhile, Neil, go right ahead with the Squid.
NH:
right here it is
NH:
a note from the financials desk
NH:
It hasn’t really paid all year to look at the glass half empty, largely because of exceptional measures taken to restore stability in financial markets and the hundreds of billions of liquidity schemes and facilities which have helped asset prices reflate. But the newsflow / price action in the last week calls for some caution. Greece was the first sovereign in a while to show signs of stress, and the move in CDS and government bonds has sent banks stocks tumbling again, and in significant volumes, unlike what we have seen in the rest of Europe.
NH:
Gold, as highlighted by one of my colleagues yesterday has now printed a 14day RSI of 85 – this thing has never been so overbought in a very long time (ever?)… And this is not constructive G3 sovereigns and equities by extension. $/¥ broke 87.1 overnight, a 14 year low… Where and when does this end? I genuinely believe that this is no longer just a US rates story – for people to pile into yen at these levels given the fundamentals of the Japanese economy (or puke the $ and not know what to do with it?) There must be more and more stress building around….
NH:
And there certainly is in the Middle East. As highlighted yesterday by a bank’s CFO, the crisis started due to the over-indebtedness of individuals and now governments are taking over this indebtedness. How governments deal with this fiscal issue is going to be important. Government’s ability to cope with this will essentially depend on the ability to levy taxes on the population to pay for this increased fiscal burden
NH:
In some countries this is an acute problem. After tensions in Greece, Dubai World, with $59 billion of liabilities, said yday it was seeking to delay debt payments, sending contracts to protect the emirate against default surging by the most since they began trading in January. The state-controlled company will ask creditors for a “standstill” agreement as it negotiates to extend maturities, including $3.52 billion of Islamic bonds due Dec. 14 from its property unit Nakheel. The timing of the announcement, in the middle of a religious holiday, has taken many by surprise and markets in the region are likely to tumble when they reopen on Monday. Think a bigger correction is just behind the corner.
BE:
Ooooooooh!
BE:
“Think a bigger correction is just behind the corner.”
BE:
Surprised that got through compliance.
NH:
indeed
NH:
but is this
NH:
what us bears have been waiting for
NH:
or are we just overreacting?
BE:
Journalists heart bad news
NH:
oh and one final thing on Dubai
NH:
from today’s Gartman letter
NH:
Finally, and perhaps most importantly, we fear that this
news might be the news that tends to push equities
around the world over the edge; that brings on a trend
toward global protectionism and that pushes the US
dollar materially higher… and perhaps violently so. We
hope we are wrong; indeed, we pray that we are
terribly so, but we fear that we are not. The long
Thanksgiving holiday will give everyone the chance to
collectively breathe and consider what has happened
in the Gulf. Perhaps cooler heads shall prevail as the
next several days pass, and perhaps this situation will
simply devolve into memory and into nothing; but we
fear that this is a far larger story than it appears even
this morning and if it is we may be surprised by how
strong the dollar becomes…and how swiftly it does so:
news might be the news that tends to push equities
around the world over the edge; that brings on a trend
toward global protectionism and that pushes the US
dollar materially higher… and perhaps violently so. We
hope we are wrong; indeed, we pray that we are
terribly so, but we fear that we are not. The long
Thanksgiving holiday will give everyone the chance to
collectively breathe and consider what has happened
in the Gulf. Perhaps cooler heads shall prevail as the
next several days pass, and perhaps this situation will
simply devolve into memory and into nothing; but we
fear that this is a far larger story than it appears even
this morning and if it is we may be surprised by how
strong the dollar becomes…and how swiftly it does so:
BE:
The LSE’s borkage is also giving people a change to “collectively breathe and consider what has happened” I guess
BE:
But I for one don’t feel much calmer.
BE:
Should we move on to matters domestic now?
11:28AM
NH:
Meanwhile in the UK…
NH:
some breaking newsin the media sector
NH:
Will Lewis becomes Telegraph MD. Tony Gallagher is editor, Ben Brogan dept editor
Will Lewis becomes Telegraph MD. Tony Gallagher is editor, Ben Brogan dept editor
NH:
and
NH:
right
NH:
we had some of the ROTR asking about the Ofwat
NH:
final price determination announcement
BE:
Judging by the share price moves (usual caveats still apply ……..)
BE:
It’s benign, right?
NH:
I think it is more than that
NH:
a bit better than expected
NH:
Slightly higher revenues (the k factor) all round for UU, Severn Trent and Pennon
NH:
and
NH:
Bills are coming down by £3 real rather that £14 in the draft
NH:
and the WACC
NH:
Weighted average cost of capital
NH:
stays at 4.5% post tax real
NH:
also
NH:
easing of capex and opex targets
NH:
whcih could mean addition revs for the water cos
NH:
all in all
NH:
there could be some upgrades coming through on the back of this
NH:
for Severn Trent in particular
NH:
which was or is the biggest riser in the FTSE 100
Severn Trent (SVT:LSE): Last: 1,043, up 37 (+3.68%), High: 1,061, Low: 1,015, Volume: 2.83m
United Utilities Plc (UU:LSE): Last: 491.70, up 7.6 (+1.57%), High: 498.50, Low: 484.20, Volume: 5.03m
Northumbrian Water Group (NWG:LSE): Last: 268.10, up 12.2 (+4.77%), High: 280.90, Low: 256.00, Volume: 1.51m
Pennon Group (PNN:LSE): Last: 498.90, up 12 (+2.46%), High: 504.00, Low: 487.30, Volume: 801.13k
NH:
Bryce
NH:
got any comment
NH:
I have piece from Merrill
NH:
which I will put up now
NH:
OFWAT sticks close to July’s draft PR09 determinations, as anticipated
OFWAT has confirmed that water utility revenues will be significantly squeezed
over the next five years, with negative implications for both profits and EPS. With
no move away from its original 4.5% post tax real WACC assumption, the
companies will on average be allowed to raise water charges by 0.5% out to
March 2015 (versus -0.2% at the draft stage) and this is absolutely in line with our
overall expectations.
OFWAT has confirmed that water utility revenues will be significantly squeezed
over the next five years, with negative implications for both profits and EPS. With
no move away from its original 4.5% post tax real WACC assumption, the
companies will on average be allowed to raise water charges by 0.5% out to
March 2015 (versus -0.2% at the draft stage) and this is absolutely in line with our
overall expectations.
NH:
Thus the economic regulator has indeed ended real growth in water charges. As
revenues typically lag the price cap, the water utilities will be operating in much
more constrained financial conditions.
For the industry, AMP5 investments of c£22bn will be funded versus c£21bn
assumed at the draft stage.
revenues typically lag the price cap, the water utilities will be operating in much
more constrained financial conditions.
For the industry, AMP5 investments of c£22bn will be funded versus c£21bn
assumed at the draft stage.
NH:
Among the quoted water companies, expect United Utilities, the other three listed
UK water companies got 0.8%-1.0% relaxation in five year average price limits
versus our expectation of a 0.5% relaxation. For United Utilities, the five year
average price limits were only 0.2% better (ie minor change) and thus the
outcome remains tough, in our view.
As for the first year price limits, Northumbrian water got the best uplift of 3%
among the quoted companies followed by United Utilities 2% (although for UU the
five year average was no better)
UK water companies got 0.8%-1.0% relaxation in five year average price limits
versus our expectation of a 0.5% relaxation. For United Utilities, the five year
average price limits were only 0.2% better (ie minor change) and thus the
outcome remains tough, in our view.
As for the first year price limits, Northumbrian water got the best uplift of 3%
among the quoted companies followed by United Utilities 2% (although for UU the
five year average was no better)
NH:
United Utilities – Still the toughest outlook amongst the four quoted companies:
2010/11E price limit of -4.3% (draft: -6.3%) and AMP5 average -0.4% (draft: -
0.6%pa). Depsite the better outcome in year one, there are other offsetting
factors disclosed at the results yesterday that underpin our belief that earnings
will remain under pressure in 2010/11E.
2010/11E price limit of -4.3% (draft: -6.3%) and AMP5 average -0.4% (draft: -
0.6%pa). Depsite the better outcome in year one, there are other offsetting
factors disclosed at the results yesterday that underpin our belief that earnings
will remain under pressure in 2010/11E.
Severn Trent – 2010/11E price limit of -1% (draft: -1.7%) and AMP5 average -
0.6%% (draft: -1.5%pa).
Pennon – 2010/11E price limit of 1.1% (draft: 0.0%) and AMP5 average 1.9%
(draft: 0.9%pa).
Northumbrian Water – 2010/11E price limit of 5% (draft: 2.0%) and AMP5 average
1.7% (draft: 0.9%pa).
NH:
What happens next? The companies now have two months to consider their final
determinations. We’d be surprised if any company accepts within the next ten
days, though it’s possible that Thames Water may confirm its intention to appeal
quite quickly. Of the four quoted companies, United Utilities remains the one
which will have the most difficult decision to make as 2010/11E revenues could
still fall by at least £90m. In accepting its PR09 determination, a company
should’ve also been able to work out what kind of DPS policy it can sustain out to
March 2015 and whether or not it requires extra equity.
Nevertheless there should be less uncertainty after today, though with the
exception of Severn Trent the shares of the other three listed UK water
companies continue to trade at premia to their March 2010E fundamental value,
and we anticipate that other commentators will be lowering both EPS forecasts
and valuations now that OFWAT has confirmed its determinations.
OFWAT is holding a City Briefing at 0900 this morning (see attachment).
determinations. We’d be surprised if any company accepts within the next ten
days, though it’s possible that Thames Water may confirm its intention to appeal
quite quickly. Of the four quoted companies, United Utilities remains the one
which will have the most difficult decision to make as 2010/11E revenues could
still fall by at least £90m. In accepting its PR09 determination, a company
should’ve also been able to work out what kind of DPS policy it can sustain out to
March 2015 and whether or not it requires extra equity.
Nevertheless there should be less uncertainty after today, though with the
exception of Severn Trent the shares of the other three listed UK water
companies continue to trade at premia to their March 2010E fundamental value,
and we anticipate that other commentators will be lowering both EPS forecasts
and valuations now that OFWAT has confirmed its determinations.
OFWAT is holding a City Briefing at 0900 this morning (see attachment).
BE:
Credit Suisse also worth reading. Comprehensive.
BE:
Final Determinations—The day we have all been waiting for: We regard
today’s release as a small but reassuring improvement on the Draft
Determination. Much of the fears on dividend sustainability have already been
priced-in, in our view. We continue to favour United Utilities (Outperform, TP
550p) and conservatively factor in a c10% dividend cut.
today’s release as a small but reassuring improvement on the Draft
Determination. Much of the fears on dividend sustainability have already been
priced-in, in our view. We continue to favour United Utilities (Outperform, TP
550p) and conservatively factor in a c10% dividend cut.
BE:
At first glance, it looks like a small improvement for the sector: (1)
Allowed return in-line. As we anticipated, OFWAT left the allowed return flat
on the draft at 4.5% post-tax real (5.1% vanilla real). In our view, the mark-tomarket
cost of capital is c4% vanilla real, which still leaves ample spread.
Gearing levels within the calculation will remain the same, at 57.5% of RAB, and
all of the listed stocks are close to this, in our view. (2) Financing ratios: Ofwat
has now targetted an A-/A3 credit rating, albeit if one of Ofwat’s metric’s does
not meet this, it will ensure it meets BBB+/Baa1 criteria. We find this reassuring,
even if allowed returns have not increased. (3) ‘K’ factors just an output, but
they help perception: We saw the average annual real price increases for
NWG increase by ++80ps, for PNN by +100bps, SVT by +90bps and UU by
+20bps. While return on capital and levels of RPI inflation remain the key focus
for us, higher price increases optically improve the Income Statement. (4)
Capex moves up slightly: As we expected, the industry capex increased (to
£22.1bn, from £20.8bn) and the CIS scores fell for the listed stocks. The
notable difference was Severn Trent, where they fell from 112/119 to 102/102,
which is encouraging. Adjustments to the opening RABs improved but did not
change materially, except for UU, where it improved for -75 to -10 (worth
c10p/share of ‘extra’ RAB). RAB growth is generally lower, for the companies,
but we expect this is a function of higer current cost depreciation (5) Other key
items: There was one extra ‘notified item’ in the Final Determination over the
draft: Bad debts. Severn Trent got a c10bps more favourable OPA score. All of
the companies apart from Northumbrian saw slightly higher opex allowances,
with Severn Trent seeing the biggest increase (6) Waiting game: The
companies have until January to decide whether to take their determinations to
the Competition Commission. In the meantime, OFWAT’s city presentation
takes place today at 9.00am at the Hilton Tower Bridge, 5 More Place, SE1 2BY.
Allowed return in-line. As we anticipated, OFWAT left the allowed return flat
on the draft at 4.5% post-tax real (5.1% vanilla real). In our view, the mark-tomarket
cost of capital is c4% vanilla real, which still leaves ample spread.
Gearing levels within the calculation will remain the same, at 57.5% of RAB, and
all of the listed stocks are close to this, in our view. (2) Financing ratios: Ofwat
has now targetted an A-/A3 credit rating, albeit if one of Ofwat’s metric’s does
not meet this, it will ensure it meets BBB+/Baa1 criteria. We find this reassuring,
even if allowed returns have not increased. (3) ‘K’ factors just an output, but
they help perception: We saw the average annual real price increases for
NWG increase by ++80ps, for PNN by +100bps, SVT by +90bps and UU by
+20bps. While return on capital and levels of RPI inflation remain the key focus
for us, higher price increases optically improve the Income Statement. (4)
Capex moves up slightly: As we expected, the industry capex increased (to
£22.1bn, from £20.8bn) and the CIS scores fell for the listed stocks. The
notable difference was Severn Trent, where they fell from 112/119 to 102/102,
which is encouraging. Adjustments to the opening RABs improved but did not
change materially, except for UU, where it improved for -75 to -10 (worth
c10p/share of ‘extra’ RAB). RAB growth is generally lower, for the companies,
but we expect this is a function of higer current cost depreciation (5) Other key
items: There was one extra ‘notified item’ in the Final Determination over the
draft: Bad debts. Severn Trent got a c10bps more favourable OPA score. All of
the companies apart from Northumbrian saw slightly higher opex allowances,
with Severn Trent seeing the biggest increase (6) Waiting game: The
companies have until January to decide whether to take their determinations to
the Competition Commission. In the meantime, OFWAT’s city presentation
takes place today at 9.00am at the Hilton Tower Bridge, 5 More Place, SE1 2BY.
BE:
United Utilities (Outperform, TP 550p) our preferred play: Despite having
the smallest improvement in the ‘K’ factors, we still prefer UU for a low cost of
embedded debt, RAB growth and dividend policy sustainability. We think
today’s review removes a large uncertainty from the sector. We expect the
immediate focus to shift towards the dividend (our base case is for a c10% cut
in FYmar11E), and anticipate UU annoucing/reaffirming their new policy in early
2010. On our numbers, UU trades at a c1% discount to RAB and is the
cheapest water stock. We believe a small premium to RAB (c4%) for UU is
warranted, leading to c14% stock price upside, on our numbers. We do not see
a capital increase as likely for UU.
the smallest improvement in the ‘K’ factors, we still prefer UU for a low cost of
embedded debt, RAB growth and dividend policy sustainability. We think
today’s review removes a large uncertainty from the sector. We expect the
immediate focus to shift towards the dividend (our base case is for a c10% cut
in FYmar11E), and anticipate UU annoucing/reaffirming their new policy in early
2010. On our numbers, UU trades at a c1% discount to RAB and is the
cheapest water stock. We believe a small premium to RAB (c4%) for UU is
warranted, leading to c14% stock price upside, on our numbers. We do not see
a capital increase as likely for UU.
NH:
thanks for that
NH:
and thanks for the awful puns
NH:
I can’t zap people
Warning to rude and abusive commenters – your ability to comment will be terminated immediately and permanently, without warning. Henceforth, FTAlphaville has instituted a One Strike and You Are Out policy. We’ve had enough. We are going to clean up these pixels once and for all.
NH:
because we would have no readers left
NH:
so you guys win
BE:
Pun amnesty.
NH:
yeah
11:36AM
NH:
Back to the desert for the moment
NH:
funny piece in the Times today
NH:
Footballers and film stars caught out as Dubai crash hits new low
NH:
look at some of the names
NH:
NH:
David Beckham and Brad Pitt are believed to be among the celebrities and sportsmen who bought villas in Palm Jumeirah in Dubai, a luxury development that juts out into the Gulf. But when the property bubble burst this year, residents saw the value of their investments collapse. Yesterday their situation worsened as Nakheel, the developer, and its state-owned parent made a request to suspend debt repayments.
BE:
NH:
The statement rocked credit mar-kets around the world and prompted analysts to question whether Dubai, the most populous of the United Arab Emirates, will be able to meet its obligations. The concern is that Nakheel will be unable to continue developing the Palm and neighbouring projects, leaving Dubai and its coastal waters an ugly, unfinished construction site.
NH:
When the 2,000 villas and townhouses on the Palm went on sale in 2002, they sold out in a month. Passing through en route to the World Cup in Japan and Korea were the England football team, and several players stopped off to sign up for £1 million properties on the artificial island, with Michael Owen, David James, Joe Cole, Andy Cole and Kieron Dyer, it was reported, joining Beckham on the beaches. Pitt and Angelina Jolie are also said to have bought homes.
NH:
Joe Cole was one of the few who got out in time. The Chelsea player sold his villa for about $3.5 million (£2.1 million) last summer as Dubai’s property bubble approached bursting point.
NH:
we will have to watch Joe Cole
NH:
bit of shrewdie
NH:
obviously
BE:
Hm.
BE:
Actually, since we’ve returned to Dubai
BE:
Lots of people seem to be concerned about how this affects Dragon Oil
NH:
good question. very good question
NH:
the bidder is of course the Emirates National Oil Company
NH:
ENOC
NH:
they have offered 455p a share
BE:
We’re down 2p at 398p at the moment.
BE:
Bit of selling from the hedgies by the looks of it. Volume 1.4m already.
NH:
hmmm
NH:
one view is that events in Dubai
NH:
could this be a MAC for the funding
NH:
and the lenders will be unlikely to let ENOC switch to a tender offer now
NH:
if that is they want to
NH:
funding banks are Stan Chart and Bank of Dubai
BE:
The takeover panel tends to take a hard line on this kind of thing.
NH:
it does
NH:
but I think this falls under the Irish Takeover Panel
NH:
and no one really knows what the funding conditions are
NH:
that’s because the documents
NH:
which you can go and see at a law firm in Dublin
NH:
have been redacted
NH:
well the relevant bits have
NH:
this is about all you can see
NH:
The Facilities documents contain certain customary representations and warranties, affirmative and negative covenants, financial covenants and events of default. Additionally, drawdown under each of the Facilities is subject to certain repeated representations being true in all material respects and there being no major default
continuing or occurring as a result of drawdown. Drawdown of the Facilities is also conditional on the Scheme becoming Effective.
continuing or occurring as a result of drawdown. Drawdown of the Facilities is also conditional on the Scheme becoming Effective.
BE:
Hm. That doesn’t really tell us much, does it?
NH:
nope
NH:
but not sure I would want to holding this right now
NH:
the rebel shareholders might get their way
NH:
and the bid might fail
Dragon Oil (DGO:LSE): Last: 398.00, down 2 (-0.50%), High: 402.50, Low: 395.50, Volume: 1.22m
11:42AM
NH:
Greenback
NH:
thaht’s a very interesting list
NH:
and worth putting into the text
NH:
The most names highlighted as potentially at risk this morning by investors were indeed ABB, Alstom and Schneider…Based on 2008 revenues: Weir Group: 15% / ABB: 13% /Atlas Copco: 10% / Alstom: 9% / Siemens: 8% / Sandvik: 8%/ GEA: 8%/ Charter: 6%/ Invensys:6%/ Schneider: 5%/ MAN: 5%/ Metso: 4%/ SKF: 3%/ Bodycote: 3%/ Cookson: 3%/ Morgan Crucible: 2%/ Electrolux: 1%/ Philips: 1%/ Schindler: 1%/ Tomkins: 1% (as always dodgy..do your own checks)
BE:
Hm.
BE:
Worth noting also the biggest mid-cap fallers today
BE:
Lamprell down 17.3p at 163.25p
BE:
And has been absolutely hammered over the past week or so, after it cut the price of a previously agreed rig delivery
BE:
Interserve down 15.5p at 203.5p
NH:
hmmm
NH:
there must be a few other
NH:
construction companies with ops out there
NH:
Balfour Beatty
NH:
Atkins
NH:
(lemmy you are right. the CEO has been a seller, no bid for SSL at the moment)
11:45AM
NH:
quick bit of RAW for you
NH:
DTE GY ,rmrs blackstone to raise stake
BE:
And the LSE’s still borked
NH:
god
NH:
this has gone on for what
NH:
1hr 15mins now
NH:
I wonder if people are now using the other trading platforms
NH:
BATS
NH:
Chi-X
BE:
Well, they normally don’t, as they don’t consider the prices as benchmark
NH:
I know
NH:
funny that
NH:
about the only thing the LSE has got going for itself at the moment
NH:
when it goes down
NH:
no one trust the pricing elsewhere
NH:
although that could well
NH:
change
NH:
it will be very interesting to see the figs from BATS, Chi-X etc
NH:
at the end of the day
11:48AM
NH:
Bryce
NH:
what have you been lookingat this morning?
BE:
Well, just to lighten the mood, can we have a look at DSG?
NH:
If we must.
NH:
Half-time results were ok, weren’t they?
BE:
Yeah
BE:
Loss of a mere £17.6m, compared with a £24-28m range
BE:
And recent trading looks better.
NH:
Why?
BE:
Windows 7, apparently.
NH:
Really?
BE:
Apparently.
BE:
Microsoft’s cringeworthy Tupperware-style parties seem to have done the trick
BE:
PC World’s like-for-likes have gone positive since the launch in mid October
BE:
Having been -15% beforehand
NH:
wow. are those figures correct
NH:
What’s this we’re using?
NH:
Windows 98?
BE:
Close
BE:
XP
BE:
2001 edition
BE:
With Interrnet Explorer 6.0
BE:
I suspect Praxis will have just fallen off his chair.
NH:
So. Back to DSG?
BE:
Well, the refurbs also seem to be helping
BE:
Online’s improving, probably helped by those self-effacing Dixons adverts
BE:
And international’s kicking on a bit
NH:
Shares are only small up, although they could be up a lot
DSG International (DSGI:LSE): Last: 37.39, up 0.82 (+2.24%), High: 38.40, Low: 36.70, Volume: 9.53m
BE:
Well there are a couple of negatives in here
BE:
The pension deficit, for example
BE:
Which has balooned to £291.7m, from £148.8m in May
BE:
And elapsing forex hedges are going to cost £65m in the second half
NH:
Praxis
NH:
unfortunately
NH:
it looks like DSG lives
NH:
and by the looks of things
NH:
is not having any stocking issues
NH:
in the run up to Xmas
BE:
There are some mentions to “very tight” inventory controls
BE:
Make of that what you will
NH:
hmmm
NH:
interesting
BE:
But the bottom line is that the trading figures mean consensus for April 2010 is seen moving up to £70m ex-property from current levels of £50-£55m.
NH:
Any comment?
BE:
Loads of it, athough most is kind-of dull.
BE:
Here’s Citigroup
BE:
What does it all mean? — Notably, in DSGi investors are faced with one of the most operationally (sales +1%, EBIT +14%) and financially geared (fixed charge cover 1.6x) UK general retailers, that has seen a -6% group 1Q LFL sales trend recover sharply to +1% over the last 8 weeks of 1H. In addition, since the 15th October Windows 7.0 launch the PC World LFL sales have rallied from -15% to positive LFL territory, driving a further +300bp group LFL sales growth improvement (to circa +4%). In the interests of conservatism, consensus £65m-£70m PBT forecasts assume a flat 2H group LFL sales growth forecast. If current trends persist, +40% to +50% April 2010 PBT upside remains plausible.
BE:
v Consensus April 2010 PBT likely to rise c20% to £65-£70m — On the back of these results we expect consensus April 2010 PBT to rise c20% to £65- £70m (EPS 1.22p to 1.31p, -10% yoy).
v Buy, 45p target price — In valuing DSGi, we continue to apply a 10x calendar 2011E EV/EBIT multiple (sector average), driving a 45p target price. We remain Buyers of the shares.
BE:
And a brief line from Credit Suisse
BE:
Overall this is a reasonably solid set of results and there are some signs of stabilisation in the Group’s international markets. The transformation so far remains on tracks. We retain our outperform rating here but note it is still based on the opportunity for longer term restructuring rather than any short term consumer recovery.
BE:
Now personally …….
BE:
I reckon the PC World figures might be a bit deceptive
BE:
As you get pent-up demand as people delay purchases ahead of the new OS launch
BE:
But that’s a sidenote. We should move on.
NH:
thanks for that
NH:
before we do
NH:
I have an IT helpdesk request
NH:
for Praxis
NH:
I have an iMac
NH:
power PC not Intel chip
NH:
just loaded the Lepoard OS
NH:
but now
NH:
my internet is soooooooooooooo slow
NH:
what’s happened
NH:
is there a firewall in the new OS
NH:
it is seriously affecting my work
NH:
can’t read all the papers in the morning
NH:
online
NH:
so I get to work
NH:
and don’t know what’s happening
NH:
pls help
BE:
Right …………….
BE:
Can we do this another time, perhaps?
NH:
sure
NH:
let’s move on
11:56AM
NH:
OK
NH:
we have done Ofwat
NH:
shall we look at the insurers quickly
NH:
big, big, big note out from Citi today
NH:
they have new sector analyst
NH:
Raghu Hariharan
BE:
This thing’s an epic
NH:
it is
NH:
hundreds of papers long
NH:
anyway
NH:
a couple of things stand out
NH:
they really do not like LGEN
NH:
and Tuna
NH:
not sure what’s happened to Crean
NH:
I reckon he must have gone to Barcap
NH:
with the banking team
NH:
anyway
NH:
he says sell LGEN
NH:
but buy Resolution
NH:
and the Pru because of its Asian exposure
BE:
Will give a flavour of this thing
BE:
Our main picks are Prudential and Resolution. We rate both stocks as a buy.
We downgrade Legal and General to a sell to reflect higher operational and
regulatory risks,
Prudential is a rare growth property in the European insurance space. In our
view, Prudential offers a franchise growth opportunity mainly in Asia but its
strong presence across the UK and the US in addition to Asia leaves
opportunities for value enhancing restructuring in its UK business (mainly in its
with profits business) and in the US business (through exploiting its lower
expenses through acquisitions). It has also improved its relative competitive
position in the US and Asia and in its main with profits franchise in the UK. Its
undisturbed geographic and product footprint means it can rely on organic
growth with only execution risk being a challenge.
We downgrade Legal and General to a sell to reflect higher operational and
regulatory risks,
Prudential is a rare growth property in the European insurance space. In our
view, Prudential offers a franchise growth opportunity mainly in Asia but its
strong presence across the UK and the US in addition to Asia leaves
opportunities for value enhancing restructuring in its UK business (mainly in its
with profits business) and in the US business (through exploiting its lower
expenses through acquisitions). It has also improved its relative competitive
position in the US and Asia and in its main with profits franchise in the UK. Its
undisturbed geographic and product footprint means it can rely on organic
growth with only execution risk being a challenge.
BE:
The potential for restructuring is clear, with £1.2 trillion of life insurance assets in
the UK life space. We believe Resolution could become the catalyst for driving this
restructuring in the UK life insurance sector. Resolution is in the unique position of
offering a clear play on acquiring cheap life insurance assets and then creating
value through asset market recovery and/or operational restructuring. Clearly, when
Resolution’s activity sphere includes Prudential, our portfolio is ideal in capturing
both the franchise and restructuring opportunity. A key question to ask is whether
the restructuring potential can be unlocked by existing management or by the
existing company or whether restructuring requires a transformational deal (usually
an asset sale freeing up capital and changing the risk and growth profile of the
company). We believe an external investor such as Resolution can accelerate the
restructuring potential inherent in most of the UK life companies.
the UK life space. We believe Resolution could become the catalyst for driving this
restructuring in the UK life insurance sector. Resolution is in the unique position of
offering a clear play on acquiring cheap life insurance assets and then creating
value through asset market recovery and/or operational restructuring. Clearly, when
Resolution’s activity sphere includes Prudential, our portfolio is ideal in capturing
both the franchise and restructuring opportunity. A key question to ask is whether
the restructuring potential can be unlocked by existing management or by the
existing company or whether restructuring requires a transformational deal (usually
an asset sale freeing up capital and changing the risk and growth profile of the
company). We believe an external investor such as Resolution can accelerate the
restructuring potential inherent in most of the UK life companies.
BE:
Pearl Group (PEAR.AS) – Not Rated – is potentially Resolution’s strongest
competitor for assets in the closed life fund restructuring field.
The combination of a full valuation, inadequate diversification, and regulatory risks
around its main annuity product line, high risky asset leverage and operational risks
around the strategic shift to savings products drives our new sell recommendation
on Legal and General
competitor for assets in the closed life fund restructuring field.
The combination of a full valuation, inadequate diversification, and regulatory risks
around its main annuity product line, high risky asset leverage and operational risks
around the strategic shift to savings products drives our new sell recommendation
on Legal and General
BE:
The company has recently been the subject of bid
speculation1 but we believe that an acquisition is unlikely unless the regulatory risks
around capital are fully known. This is not expected to be clarified till mid -2010. We
maintain our Hold recommendations on Aviva and Standard Life.
Aviva has taken significant management action to re-build its capital position
but now needs to find growth engines to complement its restructuring in the
UK life and non life businesses. We believe that the relatively cheap valuation
reflects this risk. With short term capital pressures having abated, we would
now wait to understand the strategic direction for earnings growth before taking
a more active view on the stock. We reduce our risk rating from High to
Medium to reflect abating capital pressures.
speculation1 but we believe that an acquisition is unlikely unless the regulatory risks
around capital are fully known. This is not expected to be clarified till mid -2010. We
maintain our Hold recommendations on Aviva and Standard Life.
Aviva has taken significant management action to re-build its capital position
but now needs to find growth engines to complement its restructuring in the
UK life and non life businesses. We believe that the relatively cheap valuation
reflects this risk. With short term capital pressures having abated, we would
now wait to understand the strategic direction for earnings growth before taking
a more active view on the stock. We reduce our risk rating from High to
Medium to reflect abating capital pressures.
NH:
actually
NH:
could well be worth
NH:
posting that in the usual place
NH:
actually there is another interesting note out of Citi today
NH:
on Greece
NH:
and the panic there
BE:
Sure. What’s their take?
NH:
actually they are quite relaxed
NH:
not a bad read
NH:
Greece today fell 2.3% (down c4% at some stage) and c18% since October’s
high. It has decoupled from the European markets and banks (-3%). The Greek
10-year bond spread rose from 140bp to 179bp this month – still well below the
300bp in early 2009, with significant pick-up in volumes. The market fears on the
weak macro situation and the difficulties in fixing it1 have been compounded by
concerns on the high level of ECB funding by the Greek banks (peaked at 12% of
their balance sheet earlier in the year – now reduced by an estimated 2-3%).
Today’s concern was on the ability of the banks to use the Greek government debt
as collateral – in the event of a downgrade of the sovereign ratings.
high. It has decoupled from the European markets and banks (-3%). The Greek
10-year bond spread rose from 140bp to 179bp this month – still well below the
300bp in early 2009, with significant pick-up in volumes. The market fears on the
weak macro situation and the difficulties in fixing it1 have been compounded by
concerns on the high level of ECB funding by the Greek banks (peaked at 12% of
their balance sheet earlier in the year – now reduced by an estimated 2-3%).
Today’s concern was on the ability of the banks to use the Greek government debt
as collateral – in the event of a downgrade of the sovereign ratings.
NH:
We are surprised by such concerns. The ECB in Oct 2008 lowered the
requirement for collateral from A to BBB- (with haircut or BBB without a haircut).
In the May 2009 12-month auction the ECB extended the period for these
requirements to at least the end of 2010 (the only thing that is unclear is whether
this will also apply to 2010 auctions maturing in 2011). This now suggests that it
will need a significant 4-notch downgrade by S&P / Fitch (Greece now at A-, there
is BBB+, BBB, BBB-) and a 6-notch by Moodys (now at A1, then A2, A3, Baa1,
Baa2, Baa3) before the collateral cannot be used. Such extreme, and in our view,
unlikely events could have bigger issues for Greece’s ability to borrow and not just
the banks. Despite the high macro risk we struggle to see how Greece will be
allowed to fail in an EU/EMU context.
requirement for collateral from A to BBB- (with haircut or BBB without a haircut).
In the May 2009 12-month auction the ECB extended the period for these
requirements to at least the end of 2010 (the only thing that is unclear is whether
this will also apply to 2010 auctions maturing in 2011). This now suggests that it
will need a significant 4-notch downgrade by S&P / Fitch (Greece now at A-, there
is BBB+, BBB, BBB-) and a 6-notch by Moodys (now at A1, then A2, A3, Baa1,
Baa2, Baa3) before the collateral cannot be used. Such extreme, and in our view,
unlikely events could have bigger issues for Greece’s ability to borrow and not just
the banks. Despite the high macro risk we struggle to see how Greece will be
allowed to fail in an EU/EMU context.
NH:
We believe the collateral / ECB funding issue is one that affects more the cost of
funding (for Greek banks and subsequently corporates) and less the availability of
funding. We believe it will lead to a decoupling of share price and operational
performance among the Greek banks to those with comfortable balance sheets.
Buy on Weakness – Bank of Cyprus (marginal ECB funding and exposure to Greek
government bonds) now on P/E of 7.5x and price to tangible book of 1.3x. We also
believe in NBG’s strong balance sheet (P/E of 10x, P/TB of 2.1x) despite high
exposure in government bonds. From the defensives we pick out PPC (P/E of 4.5x)
where the new management issue has now being resolved. We also pick out
Hellenic Exchanges (volumes at 2x normal average today) and Greek industrial
companies like Frigoglass that have little exposure to the Greek economy. Finally,
we highlight growth companies with strong balance sheets like Jumbo Babyland
and Terna Energy.
funding (for Greek banks and subsequently corporates) and less the availability of
funding. We believe it will lead to a decoupling of share price and operational
performance among the Greek banks to those with comfortable balance sheets.
Buy on Weakness – Bank of Cyprus (marginal ECB funding and exposure to Greek
government bonds) now on P/E of 7.5x and price to tangible book of 1.3x. We also
believe in NBG’s strong balance sheet (P/E of 10x, P/TB of 2.1x) despite high
exposure in government bonds. From the defensives we pick out PPC (P/E of 4.5x)
where the new management issue has now being resolved. We also pick out
Hellenic Exchanges (volumes at 2x normal average today) and Greek industrial
companies like Frigoglass that have little exposure to the Greek economy. Finally,
we highlight growth companies with strong balance sheets like Jumbo Babyland
and Terna Energy.
BE:
Cheers.
BE:
(That’s not an invite to start with the Hellenic puns, ROTR.)
12:02PM
NH:
Any movement in the National Express share price?
BE:
Who knows?
NH:
the big vote tomorrow
NH:
OK
NH:
what were they doing
NH:
earlier this morning
NH:
when things were working
National Express (NEX:LSE): Last: 338.00, no change, High: 344.00, Low: 325.30, Volume: 486.71k
BE:
Flat
NH:
so nothing
NH:
no one remotely bothered by the Dept of Transport
NH:
snatching back the Anglian franchise?
BE:
I guess so. Either that or risk reward’s been priced to the head of a pin.
BE:
We should still take a look at the Anglian news though
BE:
There’s a Caz note that gives a good outline
BE:
The Department for Transport has today announced that National Express’ East Anglia franchise will not be extended beyond March 2011; there was an option to extend to March 2014. The DfT statement goes on to state that “the public interest would not be served by terminating the franchise immediately.” The government will now start the re-franchising process “so that after full consultation a new franchise can begin from April 2011.”
BE:
Comment
The scenario outlined above is reflected in our forecasts.
After very confrontational rhetoric from Lord Adonis (Secretary of State for Transport) , about cross default at the time National Express announced its intention to return the East Coast franchise to the Government we believe that today’s statement represents something of a climb-down by the government – it is therefore positive for National Express in our view.
The scenario outlined above is reflected in our forecasts.
After very confrontational rhetoric from Lord Adonis (Secretary of State for Transport) , about cross default at the time National Express announced its intention to return the East Coast franchise to the Government we believe that today’s statement represents something of a climb-down by the government – it is therefore positive for National Express in our view.
BE:
The timing of the announcement, ahead of the rights issue EGM tomorrrow, is also helpful for sentiment. We estimate that 2010 net debt: EBITDA will be 2.0x
As a reminder our post rights EPS forecasts are as follows: 2009E 27.3p: 2011E 21.8p: 2012E 22.9p. We estimate that the TERP is 175p.
The completion of the £360m rights issue will mark another step on the path to recovery and will effectively end bid interest in the company for the time being, in our view. Stagecoach is precluded from bidding again until March, by which time we expect a chief executive to be appointed who will most likely be given a period of grace by shareholders to see how the performance can improve.
As a reminder our post rights EPS forecasts are as follows: 2009E 27.3p: 2011E 21.8p: 2012E 22.9p. We estimate that the TERP is 175p.
The completion of the £360m rights issue will mark another step on the path to recovery and will effectively end bid interest in the company for the time being, in our view. Stagecoach is precluded from bidding again until March, by which time we expect a chief executive to be appointed who will most likely be given a period of grace by shareholders to see how the performance can improve.
BE:
While the value of the business cannot be restored in a trice we believe that the progressive rehabilitation of National Express represents an interesting medium term recovery story and we see considerable share price upside, relative to the TERP of 175p based on our post rights DCF valuations of 278p including rail and 257p assuming cross default on rail.
We expect the share price to react positively as various milestones are passed such as the approval of the rights issue and the eventual appointment of a chief executive. For this reason we retain our Outperform recommendation
We expect the share price to react positively as various milestones are passed such as the approval of the rights issue and the eventual appointment of a chief executive. For this reason we retain our Outperform recommendation
NH:
(Frodo sorry missed them – could u mail any thoughts neil.hume@ft.com)
NH:
thanks for that
NH:
right time for a quick bit of small cap corner
12:06PM
NH:
And
NH:
a bid battle has broken out for something called Kenmore
BE:
Aha
NH:
Hansteen bid the other day
NH:
and now Joe Lewis has come in
NH:
got the statement
BE:
Yeah.
BE:
The board of KEIF confirms that it has been notified that Brockland Inc., a company which is beneficially owned by a trust established for the benefit of family interests of Mr Joseph C Lewis, has acquired a 7.5 per cent stake in the Company’s shares.
The board of KEIF confirms that it has been notified that Brockland Inc., a company which is beneficially owned by a trust established for the benefit of family interests of Mr Joseph C Lewis, has acquired a 7.5 per cent stake in the Company’s shares.
NH:
ah
BE:
The Board of KEIF can confirm that it is in discussions with advisers and principals of entities controlled by Joseph Lewis in regard to one of the Board’s options for the continued management of the Company’s assets.
As announced on 12 November 2009, the Company was notified by its Investment Manager, Kenmore Financial Services Limited (the “Investment Manager” / “KFSL”), that its indirect parent company, KIL had been placed into receivership and KIL’s parent company, the Kenmore Property Group Limited, had been placed in administration.
NH:
right
BE:
However, KFSL and a number of KIL’s European subsidiaries to which KFSL delegates certain of its management functions are not in any form of insolvency and continue to trade.
The Board of KEIF will make a further announcement if and when appropriate.
NH:
interesting
NH:
share price
Kenmore European Industrial Fund (KEIF:LSE): Last: 41.75, up 1.5 (+3.73%), High: 41.75, Low: 41.50, Volume: 203.47k
NH:
ta for that
NH:
right
NH:
small people also asking about Borders & Southern
NH:
I think it is a miracle that have raised $180m
NH:
almost twice their market cap at 50p
NH:
can’t believe it
NH:
and what I also can’t believe
NH:
is the disclosure from this company
NH:
no doubt there will be some dull technical explanation
NH:
for why they did not have to confirm the weeks of speculation about this fund raising
NH:
but I think out of respect for the market
NH:
and the shareholders that weren’t approach something should be said
NH:
the UKLA should have forced the issue
NH:
not saying it was a false market
NH:
but…
NH:
and the PR still has never called back
NH:
what exactly is it these people do
NH:
anyway rant
NH:
over
NH:
shares are up
NH:
shares up 4p at 59p
NH:
and I have some comment from panmure
NH:
Equity Issue
Borders & Southern has announced that it has conditionally raised US$188.4
million (net of expenses) through the issue of 234.23 million shares at a price
of 50 pence per share – which represents a discount of approximately 9% on
yesterday’s closing price, but is at a slight premium to the average price seen
over November
Borders & Southern has announced that it has conditionally raised US$188.4
million (net of expenses) through the issue of 234.23 million shares at a price
of 50 pence per share – which represents a discount of approximately 9% on
yesterday’s closing price, but is at a slight premium to the average price seen
over November
NH:
This issue will represent 54.7% of the enlarged issued share capital of the group. This will be
subject to approval at an EGM which is expected to be held on 14 December. This should be
seen as good news for the group. The funds raised, coupled with the net cash balance of
approximately US$20 million, are now more than sufficient to fund the drilling campaign on its
acreage in the Falkland Islands, which has the potential of adding significant shareholder value.
subject to approval at an EGM which is expected to be held on 14 December. This should be
seen as good news for the group. The funds raised, coupled with the net cash balance of
approximately US$20 million, are now more than sufficient to fund the drilling campaign on its
acreage in the Falkland Islands, which has the potential of adding significant shareholder value.
NH:
Border & Southern has a 100% working interest in a large tranche of exploration acreage to
the South of the Falkland Islands. Over the past few years the group has conducted an
extensive 2D and 3D seismic survey and identified significant prospects. These had been
developed to the extent that they are “drill ready”. The company has identified two significant
prospects that it wants to drill first – Darwin and Stebbing. Although these are not the largest
prospects identified they cover two major geological plays (tilted fault block and anticline) and
the three main productive horizons (Lower Cretaceous, Upper Cretaceous and Tertiary) and
so can provide good information as the potential of the entire acreage. These two prospects
have their risks reduced by geophysical attributes such as AVO anomalies and flat spots. The
prospects could contain combined P50 recoverable reserves of over 2 billion bbl which at
current oil prices would have an approximate NPV of US$10/bbl. Success at either of these
prospects would significantly reduce the risks of other prospects in the block.
the South of the Falkland Islands. Over the past few years the group has conducted an
extensive 2D and 3D seismic survey and identified significant prospects. These had been
developed to the extent that they are “drill ready”. The company has identified two significant
prospects that it wants to drill first – Darwin and Stebbing. Although these are not the largest
prospects identified they cover two major geological plays (tilted fault block and anticline) and
the three main productive horizons (Lower Cretaceous, Upper Cretaceous and Tertiary) and
so can provide good information as the potential of the entire acreage. These two prospects
have their risks reduced by geophysical attributes such as AVO anomalies and flat spots. The
prospects could contain combined P50 recoverable reserves of over 2 billion bbl which at
current oil prices would have an approximate NPV of US$10/bbl. Success at either of these
prospects would significantly reduce the risks of other prospects in the block.
NH:
Prior to this placing, the company had a net cash balance at the interim stage of US$20.6
million which was not sufficient to carry out a drilling programme. The company has
considered the potential of farming out some of its acreage to another party who would fund
a disproportionate share of the drilling costs. However, there proved to be several problems
with this strategy for the group. The weakness in the oil price at the start of the year had
reduced risk appetite of the major oil companies. The company felt that if it was able to
achieve a farm out on attractive terms in such an environment and would therefore be giving
much of the potential upside that shareholder would have enjoyed on success. The other
problem was that through farming out, the company would be beholden to the timetable of
its partner and that this could create unwanted delays to the drilling schedule.
million which was not sufficient to carry out a drilling programme. The company has
considered the potential of farming out some of its acreage to another party who would fund
a disproportionate share of the drilling costs. However, there proved to be several problems
with this strategy for the group. The weakness in the oil price at the start of the year had
reduced risk appetite of the major oil companies. The company felt that if it was able to
achieve a farm out on attractive terms in such an environment and would therefore be giving
much of the potential upside that shareholder would have enjoyed on success. The other
problem was that through farming out, the company would be beholden to the timetable of
its partner and that this could create unwanted delays to the drilling schedule.
NH:
The funds to be raised will be sufficient to carry out this drilling programme without the need
for any partners. The company wants to drill up to three wells (2 firm wells and one
contingent) which are likely to cost US$120 million. On top of this the company would have
to pay for mobilising and demobilising the rig and equipment which we believe could cost
approximately US$80 million – there is the potential of reducing this substantially should
BHP Billiton/Falkland Oil and Gas in the adjacent acreage want to share the rig. The
company will also have some contingency reserves.
for any partners. The company wants to drill up to three wells (2 firm wells and one
contingent) which are likely to cost US$120 million. On top of this the company would have
to pay for mobilising and demobilising the rig and equipment which we believe could cost
approximately US$80 million – there is the potential of reducing this substantially should
BHP Billiton/Falkland Oil and Gas in the adjacent acreage want to share the rig. The
company will also have some contingency reserves.
NH:
With the company being fully funded it will now be in a position to secure a rig. Prior to the
fund raising, the rig operators and oil companies would not have considered talking to the
company given the lack of financial security. The company, with the help of a well
management company, will look to secure a rig as soon as possible with the potential of
drilling at the end of next year.
fund raising, the rig operators and oil companies would not have considered talking to the
company given the lack of financial security. The company, with the help of a well
management company, will look to secure a rig as soon as possible with the potential of
drilling at the end of next year.
NH:
so now all it needs is a rig
NH:
if it can get one
NH:
I think there are only 8 or so in the entire world
NH:
that can do the job
NH:
in this much water
NH:
and in that part of the world
BE:
Hm. Falklands oil plays.
BE:
NH:
Right
NH:
I think we are done
NH:
what’s the FTSE doing?
NH:
oh
NH:
its still down 99 points at 5,264
BE:
Holding steady though.
NH:
yeah no vol this morning
BE:
Wonder if the chartists will interpret that as a support level?
BE:
Anyway, we should close this.
BE:
Lunchtime.
NH:
we should
NH:
thanks for logging in today
NH:
fun session
NH:
lots of comments
NH:
although our audience measurement thing has gone down
BE:
Surprisingly entertaining when there are no prices to disrupt things
NH:
Praxis will do
BE:
Will put everything Dubai-ish in the long room
BE:
Perhaps even open a table
NH:
we when get round to it
NH:
exhausted after that
BE:
(LorcanRK – feeling marginally better, thanks for your concern.)
NH:
cya
BE:
Bye