FT Alphaville » Markets Live transcript 8 Jan 2010

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Markets Live transcript 8 Jan 2010

Posted by Neil Hume on Jan 08 11:04.

Markets Live chat transcript for the chat ending at 12:12 on 8 Jan 2010. Participants in this chat were: Neil Hume, FT Bryce Elder

Hola

we’re late

It’s 11.04

anyway

welcome to a still cold and frosty Markets Live

FT Alphaville’s daily markets round up

Bryce is here

(Monkey – i cant do anything about them)

Hello Bryce

pretty quiet out there, no?

It is

FTSE’s up 0.1 of a point.

wow

that is exciting

Footsie rises one basis point.

everyone on hold for the payrolls?

That’s the standard line being trotted out by the “market commentators”, yes

Monkey its 0.01 up

(Monkey – don’t be pedantic.)

(I’ll ban you for attempted smugness in a minute)

these payrolls

I am so confused

as to what consensus is

Go on

well,

there was weird report yesterday

which said they could be up 100,000

or even

316,000

I think the bloomie consensus is for a fall of 8,000

but the market now seems to be expecting a postive number

Makes it kind-of hard to second guess what the reaction will be

Indeed

but I have something from Marc Ostwald at Monument Securities

that might help

For my part, I would suggest:
a) market estimates are clearly even better than the upgraded median forecast of a flat Payrolls reading, with the most extreme forecast calling for a 316K rise, driven primarily by seasonal adjustments and anecdotal evidence of a relatively sharp rise in demand for Temporary Workers. It may in fact be the case that the seasonal adjustment boost for the time of the year was the key factor in the much better than expected 11K fall in November, and that this will either take away from December or result in a downward revision to November. The anecdotal evidence from the ISM Non-manufacturing (Services) Employment PMI is positive in so far as this picked up from to 44.0 from 41.6, but this is still indicative of job shedding in services, and was in any case still below September’s 44.3.

b) The Monster Employment Index fell to 115 from 119, and the overnight NFIB report on hiring by Small Businesses was weak, while the m/m fall in Claims for the weeks including the 12th was
a modest 21K to 480K.

c) Markets are clearly skewed to looking for a better than expected outturn, that the risks in terms of what would prompt a sharp market reaction are that even a modest 50K fall (still suggestive of gradual labour market improvement) would see equities and the USD setback, and prompt a short lived surge in Treasuries (short-lived because of next week’s 3 10 and 30 yr supply, which includes a net ca. $55 Bln demand for ‘new cash’.

d) Indeed for all that expectations are optimistic for Payrolls, anything worse than the expected 10.1% on the Unemployment Rate, and or unchanged Average Weekly Hours of 33.2 would certainly offer cause for a reality check, even if the highly erratic Payrolls are better than expected.

Ok – thanks

Consensus is for “flat”

Should we move on to something a bit more exciting?

11:11AM

Hang on

some breaking news from the Candy Brothers copper play

RTRS-METALS EXPLORATION PLC – TIM WHEELER, FINANCE DIRECTOR, HAS RESIGNED

Metals Exploration (MTL:LSE): Last: 13.38, down 0.125 (-0.93%), High: 13.50, Low: 13.50, Volume: 10.00k

you may recall the company has some problems with reserves before Xmas

anyhow

it is Friday

what about a nice chunk of RAW

RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.

Yes please

right then

here we go

but this is very, very early RAW

Spring lamb then?

very much so

it may never happen but it has been/is being looked at

are we done with the caveats?

yes, but they are very important

as far as this story goes

Health warnings noted and double noted. What is it?

Tomkins

Aha!

rumours of a bid have been doing the rounds for weeks and weeks

have you finally managed to put some meat on the bone?

meat on the bone. RAW. excellent

I think so

what I am hearing is this

two private equity groups are weighing a bid for the company

Tomkins would be a big mouthful for PE

market cap of £1.8bn

and then the debt

actually the debt is not too bad – expected to have come in at $450m at the end of the 2009

I agree it would be a mouthful

but apparently they have got financing

it is there

if they want it

who are these bidders then?

well, the people who have been looking

are TPG and another company called Onyx

TPG being Texas Pacific

and BofA Merrill would provide the finance

any indications of price?

not really

but one imagines they would have to offer the standard 30% premium from here

if not a little bit more

and that’s assuming they press the button

which I don’t think has happened

Interesting

what’s the attraction of old buns-to-guns Tomkins now then?

geared play on economic recovery I guess

not much debt

cash generation

and some of its key markets are picking up like US autos

although housing obviously remains a bit weak

and that’s important for Tomkins too

well, the recent results from the engineers have not been too bad

Although how much of that is cost stripping is open to question

fair point

and there has been marked interest in the sector from investors

indeed

right I have a few notes

that could help explain why someone might look at Tomkinis

this is from Morgan Stanley back in December

Top-line recovery supported by improving US SAAR,
Industrial Production. Since our OW-rated initiation
on Tomkins, the US Auto SAAR has surprised positively,
coming in at 10.9mn units for November, vs. and
Morgan Stanley estimates of 10.5mn units for 2009.
Further, Autoliv, an auto-parts peer, raised guidance for
4Q09, citing stronger than expected production in China
and Europe. US Industrial Production and Capacity
Utilization also continue to move in the right direction.
These indicators are positive for the Auto (42% of group
sales) and Industrial (29% of group sales) businesses of
Tomkins. This is very much in-line with our top-line
recovery thesis for the stock.

Operating leverage and restructuring to drive
margins to 8% in 2010. We think there is scope for
margin recovery driven by aggressive restructuring
action and portfolio pruning, which can drive margins to
8% for 2010 and support long-term margins of 10%. We
also believe consensus is overlooking the bounce back
in margins and hence is 15-20% too low for this name.
Earnings upgrades coupled with strong free cash flow
generation should drive the shares towards our price
target of 230p (23% upside from current levels).

Valuation and risk-reward compelling. The stock
now trades on 9.6x 2011 P/E, 4.9x EV/EBITDA and 0.7x
EV/Sales – at a discount to historical NTM valuations of
12.4x P/e and 5.5x EV/EBITDA. Moreover, in our bull
case, we assume margins meet management
expectations of 12% long-term and recovery surprises
on the upside in 2010-12. This scenario yields a value of
335p per share, implying 79% upside from current levels.
With 35% downside to the bear case, this stock offers a
compelling risk-reward.

and this is a bit more recent

from SocGen

Tomkins has been making one of its regular ring rounds of analysts. Demand
has continued to improve slightly month on month through the final quarter of the year.
Automotive production is remaining firm right up to Christmas and the aftermarket has
continued slow growth. Industrial aftermarket is not falling as much as earlier in the year
but there is no sign of improving demand yet from original equipment manufacturers.
Cost-cutting at projects “Eagle” ($100m by end 2010) and “Cheetah” ($50m by 2010-11)
is running well and slightly ahead of plan. We believe that Tomkins is dealing well with
the downturn at Air Distribution, but management expect another year of weak demand
in 2010.

At group level, we feel that management remains cautious on the outlook for
demand through 2010, given the relatively low visibility across the business areas,
however the general outlook does seem to be improving and we expect that the end of
de-stocking will spread to industrial customers leading to a higher level of demand.

Impact The impact of improved automotive volumes drops through quickly to profit,
given the increasing impact of cost savings. We accordingly raise our forecasts for
underlying operating profit for FY09e by 11% to $224m, and we similarly raise our
FY10e forecast by 14% to $342m. We now forecast FY09e SG adjusted EPS loss of
0.1c and FY10e EPS 23.1c. Cash flow has remained strong during the final quarter of the
year despite the closure of a further six factories in Q4 09. We expect net debt to have
fallen by around another $50m in Q4 09 to $344m on the back of continued tight
working capital control.

Target price & rating We raise our target price from 180p to 190p. This is based on our
theoretical EV/EBIT model using a mid-cycle margin (post restructuring) of 8.5%, cash
conversion of 85%, tax rate 28% and growth rate 1.5%. The shares have already been
strong on the back of a number of earnings upgrades over the last week, so we retain
our Hold recommendation

Very interesting bit of raw, that

it is

anyway

share price

Tomkins (TOMK:LSE): Last: 211.90, up 5.5 (+2.66%), High: 212.30, Low: 206.20, Volume: 3.21m

11:20AM

some more RAWish stuff

Aberdeen Asset Management

told their placing has been done

they were raising around £100m

hearing demand was good

stock placed above 131p

This was to fund the RBS deal

indeed

looks to be a pretty good deal

I have some comment if people are interested

Go on then

Right

this is from Altium

The group has unexpectedly published an IMS for Q1 FY 2010E. AUM of £144.1bn were reported (end Sep – £146.2bn). The group has also announced the proposed acquisition of parts of RBS’s asset management business. AUM of £13.5bn are being acquired, bringing annual revenues of c.£22m and EBIT of c.£10m. The transaction is to be financed by cash of £84.7m. A placing today of 84m shares is being undertaken today partially to finance the transaction.

Implications for estimates / valuation / recommendation: We expect to upgrade our FY 2010E estimates by c.5% following the IMS. The transaction is anticipated to be earnings enhancing in the first full year. We will await clarification at the analyst meeting but envisage limited enhancement. The transaction is however, strategically important increasing distribution and product capability. Anticipating an upgrade to our estimate, we move our target price to 175p (170p) and retain our BUY recommendation.

And I’ve got RBS on RBS’s disposal

Acquisition assets from RBS Asset Management for £84.7m, funded by Placing.
Aberdeen is to acquire certain assets from RBS Asset Mgt and is entering into a long term distribution
agreement with RBS Wealth Mgmt including Coutts. The cash payment on completion is £84.7m
(1Q10). This will be funded by a non pre-emptive placing of c84m new ordinary shares (c8.3% of the
existing share capital). This will provide the group with a strong platform in alternatives as it brings a
profitable fund of hedge funds, long only multi-manager and private equity products and is expected
to be earnings enhancing in the first full year. RBSs AuM at 30 September was £13.5bn with annual
revenue of c£22m and an operating profit of c£10m.

share price

Aberdeen Asset Management Plc (ADN:LSE): Last: 133.80, down 4.8 (-3.46%), High: 139.00, Low: 132.40, Volume: 9.89m

11:24AM

ROTR asking about Minerva

Minerva (MNR:LSE): Last: 79.25, up 3.25 (+4.28%), High: 80.25, Low: 76.00, Volume: 1.14m

Kirsh was indeed meeting shareholders this week

and asking what they want

but I don’t think there is a deal to be done

they want NAV

which is above

90p

he does believe NAV is really 90p

because it contains some derivatives

actually a portfolio of them

anyhow

today is the last day

the bid can be increased

FJP73 – was there not a different figure in the defence doc)

but

in the wake of Drapers letting

at 50sq foot

I don’t know

perhaps Kirsh might pay

someone I don’t see it

but you never know

Seems unlikely, I agree

Still, stranger things and all that.

indeed

shall we move on

Sure

11:27AM

Right

let’s have a look

and see what’s moving out ther today

Barclays

up again

Barclays PLC (BARC:LSE): Last: 322.45, up 6.95 (+2.20%), High: 326.00, Low: 318.35, Volume: 26.34m

yeah – still motoring

Which is up an incredible 19% since the start of the year

So you could argue that UBS — which upgraded to “buy” this morning — is a bit late on the turn

What’s their argument?

Valuation, largely

Arguing that BarCap’s rough fourth quarter’s already in the price

As are the risks connected to its empire building

And, while Basel’s a big threat, capital looks adequate

Finally, it reckons that things have stabilised going into 2010 and there’s a big bear to be squeezed

11% out on loan, apparently

is everyone short of the banks?

there’s a big bear in RBS too

and probably Lloyds

Can we see the note?

Sure – here’s the summary

Cutting estimates but upgrade to Buy
Lower base revenues for BarCap reflecting a second half that failed to maintain the
momentum of the first partially offset by lower impairments drives our earnings
downgrades. However, with Barclays the only member of its international peer
group trading below tangible book, we see value in the shares and upgrade to Buy.

Diminished strategic concerns
Our concerns in 2009 related to the pace of international expansion in GRCB and
concerns over H2 cost/revenue momentum in BarCap. We think the latter is in the
price and that the reorganisation of GRCB effectively addresses the first. Despite
an expected 25% decline in BarCap FICC revenues in 2010, we think the division
can maintain 2010 revenues near 2009 levels but achieve much higher profitability.

Challenging environment but …
Across the industry, the external environment remains challenging, albeit that the
regulatory agenda looks to be potentially more onerous for Barclays than its
international peers. Nevertheless, the moves the group has taken to recapitalise and
its ability to earn its way through headwinds leaves it better positioned to address
these and we believe this supports a higher target valuation multiple.

… Valuation attractive
A discount relative to its peer group looks to be appropriate given this backdrop
but at the moment it appears too wide. We lift our rating to Buy (from Neutral)
with a 392p price target which represents 1.1x forward tangible book which is a
discount to the multiple we target for J P Morgan, Goldman Sachs, Morgan Stanley
and Deutsche Bank.

thanks for that

Barclays PLC (BARC:LSE): Last: 323.00, up 7.5 (+2.38%), High: 326.00, Low: 318.35, Volume: 26.45m

staying with the banks for a moment

a note had just landed from the banks team at Credit Suisse

on the BIS regulations

looks interesting

and puts into sharp relief

the line on Barclays above on capital

The Basel Committee provided a consultative document (17/12/09) regarding new solvency and liquidity requirements. Overall we find that most proposals seem sensible, except the deduction of minorities and stakes in parent companies in the case of Natixis (part of Credit Suisse Focus List) and CA. In total we estimate that Basel III changes could potentially cost the European banks we cover €139bn by 2012E, equivalent to 150bps of solvency, reducing the equity tier one ratio from 9.6% to 8.1%.

Applying Basel III proposals with no adjustments, on H2 09E data would use up €303bn of capital or 3.5% of solvency, with the ET1 ratio falling from 8.7% to 5.2% proforma.
o By the time of implementation (earliest 2012E) retained earnings and partial reversal of some items (DTA, negative AFS reserves) could potentially reduce the hit by €78bn.
o Finally we take the view that the deductions for minorities and the stakes at CA and Natixis will not be implemented, saving another €86bn of capital, taking the total negative impact to €139bn.

Danske Bank, DnB NOR, Santander, Standard Chartered and UBS (all O/P) offer significant amount of excess capital proforma under Basel III. This reinforces our view that they should not only perform for their intrinsic qualities but also because they are less exposed to this solvency risk. On the contrary French and UK banks do not feature well in our analysis. These banks will have to either convince market participants that they can operate with a relatively lower ET1 ratio, or act decisively in order to improve their solvency (disposals, capital raising).

Ok – that’s plenty on banks I think.

yes

agree

11:32AM

hang on

back to tomkins for a moment

getting a bit of feedback on this

story, which I fancy has some substance

right

is is more up to date note

from Collins Stewart

in fact it came out to day

Strong finish to ‘09 looks increasingly likely. Consensus still lags.
Tomkins shares have finally started to outperform on the back of sharp upgrades to consensus, though we think there’s plenty more to play for. We’ve upgraded our 2009 EBIT forecasts by 7% on the back of a stronger than expected finish to Q4 in global auto markets and increasing signs of customer re-stocking in both auto OE and industrial aftermarkets, and with strong growth from low troughs forecast to continue in US auto and residential markets, combined with further evidence of cost saving successes, we have increased confidence in the company’s ability to drive margins toward double digit levels in the next two years.

Our price target is raised to 245p on the back of estimate upgrades
As ever, our target is based on CS Quest™ modeller valuation, with four years of explicit forecasts, backed up by EV/Sales mean reversion and EVA valuation. It should be noted that Capital Goods companies with significant upside on Quest are rare beasts. At 8.1x 2011E EV/EBIT, Tomkins is also by far the cheapest stock in the pan-euro large cap sector (average 10.7x).

Tomkins margin targets look easier to achieve than market thinks
As we have discussed previously, with significant low margin disposals in recent years, some 70 factories closed and significant growth in high margin niches, we think Tomkins 12% cross-cycle margin target will be much easier to achieve than its 0.8x 2011e EV/Sales ratio suggests.

he company fits in well with our ‘opex vs. capex’ sector view
We’ve talked about it for several months now, but it’s worth reiterating that while sentiment indicators suggest industrial production is likely to bounce back strongly, helped by inventory restocking, capex growth is likely to be held back by low utilisation levels. We continue to favour companies selling small ticket items into inventory and opex, and Tomkins fits that bill perfectly.
■ We retain Tomkins as our top pick for 2010.

So, that could well be helping the price this morning

indeed

11:34AM

Right

Lorca

(Taxloss – was I right? did we draw?)

sorry

Lorcan

wants to look at the miners

he says he is not up to speed

(in part due to Belly)

I didn’t think there was much going on with the miners?

Is there?

a few bits

ENRC

biggest riser in the FTSE 100 at the moment

ENRC

and that’s on the back of a push from RBS

her’s the note

We have raised our production forecasts for ENRC’s ferroalloys and iron ore
divisions and adjusted our price profile. We have also incorporated CAMEC into
our numbers. Our revised target price is £11/share, and we upgrade to Buy.

We have raised our 4Q09 production forecasts to near the capacity run rate for both
ferroalloys (except Serov) and iron ore, now forecasting a 13% qoq increase for ferroalloys
and flat qoq production of iron ore production. Our 2010-11 iron ore production forecasts are
also near full capacity levels now. We have passed through our revised commodity price
profile, with iron ore and aluminium price upgrades having the greatest positive impact on our
ENRC forecasts.

CAMEC acquisition should be mildly accretive, initially
We have incorporated CAMEC into our forecasts, effective 1 November 2009, in line with
company guidance. We forecast CAMEC would contribute US$38m, US$231m and
US$324m to group EBITDA for 2009-11. On our current forecasts, the CAMEC NPV comes
in at US$1.2bn, just US$240m above the acquisition price.

Our EPS forecasts are up 14% on average through 2009-11
Our EBITDA forecasts are up 19% on average through 2009-11. Our tax rate forecasts are
up 200bp from 2009 onwards, as per new guidance. Our 2009-11 EPS forecasts are up 14%
on average, and stand 7% above current Bloomberg consensus.

We raise our target price to £11/share; upgrade to Buy
We continue to value ENRC at its NPV plus a 20% premium, resulting in an NPV-based
valuation of £9.56/share. However, we have also incorporated a 2011F PE-based element to
our valuation, to incorporate shorter-term earnings leverage. At 12x our 2011 EPS forecast,
we can see ENRC trading as high as £13.60/share in 12-18 months time. We set our target
price at £11/share (up 29%), and upgrade the stock to a Buy rating.

Good to see Camec getting a mention in there …

yes

actually

ENRC were linked with an acquistion this week

What’s that?

Mvelaphanda

Bless you.

yes, I do have a nasty cold

but that’s it name

Miningmx has reported speculation that ENRC, following its recent $950m acquisition of CAMEC, is in discussions over a potential bid for Mvelaphanda resources. Mvela currently has a 5.5% stake in Gold Fields Ltd, having sold much of its stake in H1 2009 to pay off debt. Its main asset is a 62.8% stake in Northam (post the Booysendal transaction with Anglo Plat and Northam), and 20.3% of Trans Hex (a small diamond producer). It also has unlisted assets, namely a 50% holding in Dwaalkop (its JV with Lonmin), a 51% holding in Ndowana (its JV with De Beers), and 50% of Mvela Exploration.

Ah: http://www.mvelagroup.co.za/

The stated strategy of Mvela has been to sell its remaining stake in Goldfields, recapitalise Northam via a Northam rights issue, and then unbundle its stake in Northam to shareholders. Such a recapitalisation of Northam would contribute to funding its coveted Booysendaal mine, having published a feasibility study at the end of 2009. As such we view the speculation as credible given ENRC has previously been linked to a bid for Northam Platinum, with any acquisition once again highlighting both the convergence of the FeCr and Platinum industries (e.g. XTA/LMI), as well as the acquisition risk associated with ENRC (which has also been linked to an acquisition of IMR/Samancor).

anyway

apart from the RBS note

some other things driving the price up

is the spot iron ore price

which hit its highest level since Sept 08 yesterday

that’s an 18% increase over the past three weeks

apparently

that’s all on the back of Chinese demand

some problems in India

and

hang on

I have a handy note from Liberum

which ties all this up

Spot iron ore price highest since Sept ‘08
Spot traded iron ore prices yesterday hit FOB US$112/t, a +18% increase over the last 3 weeks or +9% in the last week alone. Metal Bulletin reports rumours of offers earlier this week at CIF US$140/t

There are 3 key reasons for this price spike

i) exceptional demand from China as traders and customers stock up ahead of the Chinese New Year holiday from 14th February; ii) over the Christmas period India introduced a +5% export tariff on fines and +10% on lump in order to curb exports, exacerbated by a government crackdown on illegal mining in Orissa; and iii) reported lower delivery of Australian and Brazilian production into the spot market as the market leaders meet year end contractual delivery commitments.

Spot price is equivalent to +86% increase on 2009 benchmark prices – this is not a realistic expectation for a 2010 settlement

With our uncertainty over physical support (rather than speculative) for base metal prices, we reiterate our short term trading view that we prefer bulk commodity exposures. On a mark to market basis Rio Tinto (on 7.3x 2011 PER) and Vedanta (5.6x PER) are the standout picks across the sector, although BHP is now looking more interesting into 2011 (8.9x PER) due to its internal iron ore growth plus the impact of its pending iron ore JV with RIO. For pure mid-cap exposure to iron ore we retain our view that London Mining (BUY) is cheap with our estimated fair value of £3.05/shr (calculated at a long term iron ore price of US$55/t at Marampa). Whilst we lack conviction on upside in the near term copper price, we reiterate our view of yesterday that Kazakhmys is the cheapest way to play base metal exposure and is compellingly cheap on 5.5x 2011 PER ex-ENRC.

Liberum’s view is a +25% settlement in 2010 is more likely
In 2009 the benchmark was struck with Japanese and Korean steel mills at FOB US$60/t and we believe a settlement with Asian steelmakers is most likely at around +25% in 2010 ie: US$75/t FOB. The main impact of a US$75/t price on our valuations is to highlight how cheap Xstrata currently is on sub 10x earnings, however we retain our view that with seemingly higher commodity price certainty Rio Tinto is the standout pick of the Big 4 plus Vedanta due to its exceptional growth.

Hm. A month ago we were all talking about China destocking in Q1.

Will stick in some prices

Xstrata (XTA:LSE): Last: 1,243, up 24.5 (+2.01%), High: 1,243, Low: 1,220, Volume: 3.44m

Kazakhmys (KAZ:LSE): Last: 1,500, up 37 (+2.53%), High: 1,511, Low: 1,465, Volume: 1.27m

Anglo American PLC (AAL:LSE): Last: 2,869, up 25 (+0.88%), High: 2,874, Low: 2,843, Volume: 1.11m

BHP Billiton (BLT:LSE): Last: 2,086, down 5 (-0.24%), High: 2,097, Low: 2,073, Volume: 1.37m

(TB is ill at the moment.)

Oh – and thanks to the person who just emailed to remind me that Mvelaphanda was founded by Tokyo Sexwale.

http://en.wikipedia.org/wiki/Tokyo_Sexwale

hope that helps Lorcan

Are we done on the miners?

think so

11:43AM

I see the short rally covering rally in Autonomy has ended

So it has

Down 17p at 1575p

acutally we have had another note from Paul Moorland

the mega bear at Astaire Securities

who was telling the world and his wife to sell it earlier this week

Right then.

Go ahead – let’s see it.

Technology : Autonomy (AU..L) ; 1592p Sell
Correction re BAE Systems

Yesterday Autonomy announced a seven figure deal with BAE Systems which we incorrectly described as a deal worth more than $10m.
Ø We should of course have said that it was worth over $1m and this would not put it in the ‘very large deal’ category.
Ø We believe that Autonomy last announced a deal worth more than $10m on 29 July 2009.

but wait

here’s the punch line

Astaire view: Autonomy’s apparent inability to sign any more very large deals is starting to be a concern. Such deals have contributed an average of just under $20m to sales in each of the last five quarters. If we don’t see any more of these deals soon, then year on year growth comparisons are going to become challenging. Not only was the BAE deal yesterday relatively small, but we note that BAE was listed as a customer in the Q4 08 results presentation. Yesterday’s deal looks as though it was the renewal or extension of an existing contract rather than new business for Autonomy. A failure to find new customers is also likely to limit the company’s ability to grow in 2010.

and he is right

that does have to be a concern

Hm.

but

I guess

we have to wait for the results

until we really know

I refuse to believe that interpretation. It’s not like Autonomy to announce an insignificant deal ………

they would never do a thing like that

There’s absolutely no precedent.

I mean what do you take them for

someone who would abuse RNS

with PR puff

come on

Okay

enough of that

and from one of today’s biggest fallers

to another

Man Group

11:47AM

(AU were short, just, of most forecasts)

what’s going on there?

Man Group (EMG:LSE): Last: 321.40, down 6 (-1.83%), High: 324.20, Low: 317.10, Volume: 3.92m

Morgan Stanley’s getting worried

About AHL’s woeful performance last year

actually Sam explained to me recently

why it was so bad

in spite of all the obvious big trends

And?

it was all very complicated

and he said it over lunch

I can’t remember

Right. That’s handy.

sorry

I will ask him again

Should we cut to Morgan Stanley’s analysis?

er, yes I think that would be a good idea

We see risks to Man Group’s sales and earnings in FY11; downgrading to EW.

AHL performance remains the critical risk, despite supportive themes of increasing onshore client demand for absolute return, re-engaged institutional and demand for managed accounts. With AHL reporting its first negative calendar year and 15% below watermark, we see downside risk to estimates
(we are 10-15% below consensus) from the impact on performance fees and sales. The 18% cut to our numbers is chiefly on performance fees, with underlying EPS down 5%. We see better value opportunities
elsewhere, and reiterate SDR as our top asset management pick. Q4 mutual fund data supports SDR’s ongoing growth momentum at ~2x the industry average, and we expect upwards earnings revisions.

Sales momentum to disappoint. Consensus forecasts could prove too high, given correlation to AHL (down 6% Q409), lack of substantial product launches in H210, and the return of institutional momentum only in FY11 as clients complete due diligence.

Negative margin mix in sales is underappreciated. Our management fee profit estimate is ~10-15% below consensus in FY11. This in part reflects lower sales, but we also believe the market underestimates the margin impact of strengthening institutional sales in FY11 and weakening private client momentum (institutional margins are less than one-third those of retail).

Available capital surplus closer to $1.1bn and
execution risks to M&A. The surplus capital confers
options, but building in a prudent buffer takes the
available surplus to $1.1bn (versus $1.6bn reported).
Management has indicated interest in acquiring a
~25-50% stake in an equity L/S manager to address
capacity/content concerns, which could be positive. But
accessing names with capacity and a need for Man’s
distribution strength will be tough, in our view.

thanks for that

11:51AM

Ok – so the sun’s over the yardarm ……..

Should we go to the pub?

yep

good idea

not a toxic pub

but one frequented by a billionaire

Eh? Which billionaire is taking advantage of their two-meals-for-a-fiver promotions?

Joe Lewis

Mitchells & Butlers

unlike the Toxic Pub Co

decent trading over Xmas and the New Year

it’s the salad cart at Harvester you see

popular in these tough times

shares have had a bit of a more too

Mitchells and Butlers (MAB:LSE): Last: 268.90, up 16.6 (+6.58%), High: 272.60, Low: 254.70, Volume: 1.21m

LFLs for the first 14 weeks of the Financial year (to 2nd Jan) are Up 3.3% vs up 3.2% last time they reported

which implies a decent Xmas

Margins are 1.5% better yoy

although

they have pushed through the VAT price increase early

even so

seems to be good

Got any comment?

yes, a quick bit from Cazenove

Mitchells & Butlers – [MAB.L, MAB LN, 252p] OUTPERFORM
M&B has updated the market on its Christmas trading. This has been announced ahead of the AGM on 28th January, presumably to separate the trading issue from the board disagreement with Joe Lewis.
Lfl sales in the last 6 weeks were +3.4%. This is consistent with the run rate of +3.2% in weeks 1-8.
Food sales were +5.5% and drinks sales were +2.1%
The ten day Christmas period was particularly strong with sales +4.9%, suggesting that subsequent weeks have been more impacted by the winter weather conditions.
Margins are 1.5% points ahead of the prior year
Outlook: “the board is still cautious on the outlook for consumer spending”.

We believe this update is encouraging, confirming the acceleration in lfl sales that was evident at the FY results announcement in November. Our FY forecasts assume 1% lfl growth, with EBIT margins broadly unchanged. If the 1.5% margin improvement was maintained for all of the first half, there would be c.10% upside to our EPS forecast (to 28p, pre pensions interest). While we remain confident of positive earnings momentum, we will review our forecasts in March once M&B has experienced several months of operating under the higher VAT rate.
M&B had indicated in November that the customer response to its new autumn menus had been favourable. These already contained selected price increases ahead of the return of VAT to 17.5% from January. There is no comment on pricing vs volume in the statement but the continued growth in lfls suggests that consumer reaction to higher prices has been relatively benign i.e. a relatively low price elasticity of demand.

Valuation & Conclusion
We see several favourable dynamics in M&B’s P&L: it is continuing to take market share in casual dining, the cost outlook is arguably the best for some time and the one-off costs (c£4m) associated with the refurbishment of the 44 sites acquired from Whitbread will not recurr in 2010.
We believe the factor causing the most uncertainty is the generic issue of fiscal policy following the general election. Put simply the market’s fear of 20% VAT could present a psycological barrier but we see the risk as overdone. On our current forecasts, with 1% lfl sales growth M&B trades on a 2010E EV/EBITDA of 7.6x and PER of 10.6x. Stress testing our assumptions to factor in 20% VAT with no offseting efficiency gains: the EPS would fall to 20.8p and the PER rise to 12.0x. This worst case does not seem excessive for a company with substantial freehold backing and a strong retail model which is taking market share.
Clearly, the ongoing dispute with its largest shareholder Piedmont, is unhelpful. However, the trading momentum suggests that there has to date been little impact on the fundamentals of the business. We believe the asset backing is also attractive with the stock underpinned by an NAV (excluding deferred tax) of 378p. We retain an Outperform recommendation.

Of course

the real fun and games with Mitchells comes later this month

with the AGM

everyone attempting to vote everyone else off the board

Yeah – a proper old-fashioned boardroom bunfight.

indeed

Joe and the Irish

and some hedge fund

will probably try to vote down the changes

could be a fun AGM

anyhow

the results from M&B

have helped the rest of the sector

even

Punch Taverns (PUB:LSE): Last: 73.85, up 2.85 (+4.01%), High: 74.50, Low: 71.50, Volume: 2.18m

Enterprise Inns (ETI:LSE): Last: 99.40, up 2 (+2.05%), High: 100.10, Low: 96.95, Volume: 2.21m

Whitbread (WTB:LSE): Last: 1,399, up 3 (+0.21%), High: 1,423, Low: 1,396, Volume: 223.41k

11:58AM

Cyprus

on Legal & General

our insurance correspondent

Paul Davies wrote a nice piece today

Spectres of uncertainty continue to haunt L&G as Resolution hovers

which may explain the move

Legal & General shares have risen 251 per cent since stocks hit the lows of last March – a performance way ahead of the FTSE 100′s 57.5 per cent gain and one that was only marginally outstripped in the UK life sector by Old Mutual’s 266 per cent rise.

Unlike Old Mutual and the FTSE, however, L&G’s stock price enters 2010 at almost the exact same level it entered 2009.

In spite of a year of fire- fighting measures at the group, which have included bolstering its capital base, cutting costs and dramatically altering its sales strategy to focus on stockpiling cash, L&G has seen its stock move from 77.2p on January 2 last year to just shy of 82p yesterday.

http://www.ft.com/cms/s/0/3231957a-fbf6-11de-9c29-00144feab49a.html

this Resolution bid story

will not die

11:59AM

talking of a story that won’t die

Frank is having a bit of Friday fun

with one of the newswires

Eurasian Natural Resources Corp., theproducer of ferroalloys and iron ore in Kazakhstan, is still intalks that may lead to a bid for African Minerals Ltd., saidFrank Timis, African Minerals’ chairman

What?

Isn’t that the sames story ENRC smacked down a month or so ago?

indeed

Eurasian Natural Resources Corporation PLC

Statement Regarding Announcement by African Minerals Limited

London – Eurasian Natural Resources Corporation PLC (‘ENRC’ or ‘the Group’) notes the announcement earlier today by African Minerals Limited (AIM:AMI).

ENRC is considering a range of opportunities, including diversification into Africa, but at this time the focus of its consideration is the possible transaction with Central African Mining and Exploration Company PLC (‘CAMEC’).

ENRC confirmed in its announcement of 16 September 2009, that it is currently in advanced discussions with CAMEC regarding a potential offer for CAMEC. Whilst ENRC is engaged in such discussions and is assessing the merits of a potential transaction, there can be no certainty that any such transaction will proceed.

that was from September

but look

Frank likes a bit of fun with the wires

(Wow. September? How time flies.)

mentioning potential bidders

and the like

cut the man some slack

He keeps things interesting, I’ll give him that.

If the FSA doesn’t have his number on speed-dial, they should.

12:03PM

Okay it is midday

which means we need to be winding things up

back to Tomkins

Tomkins (TOMK:LSE): Last: 212.90, up 6.5 (+3.15%), High: 213.60, Low: 206.20, Volume: 4.05m

in spite of my sceptisism

it seems 300p offer

would not be completely bonkers

this from a sector watcher

Market has underestimated ability to take margins above 10% across the cycle. Target is 12% across the cycle, with recent disposals, 70 out of 200 factories already closed and a bit of growth, that doesn’t look too tough at all. Can easily value it at 300 on 12% margins in 2012. Beyond that, lots of scope to replicate geographic expansion in auto into the industrial side. No wonder PE is having a look!

Hm.

anything else

you want to look at?

Well, we should revisit the Vodafone story before wrapping up

ah yes

this ‘guidance’ from their US partner

Verizon

Well, not guidance exactly, just comments at a tech conference

(Montpar – good Emoticon

)

Generally downbeat on dividends and the chances of a dividend for the forseeable

As well as some profit guidance that looked a bit snide versus the consensus, largely due to pension costs.

Here’s a bit of Evo on yesterday’s sharp share price reaction

hmmm

Sell off on Verizon CEO comments looks overdone.
DETAILS – If Verizon was going to issue a profit warning would it choose to do it at the Citigroup telecoms conference? Essentially the CEO talked 2009 earnings expectations for Verizon down by about 5c from US$2.45 to US$2.40. However, some took this to be a wireline issue, some took it to be a wireless issue and others took it to be a pension issue. Having spoken to Vodafone, Verizon, and been through the transcript: it’s a mixture of the first two. Pension impact was already in guidance. New comments were a slower path to profits from fibre and that a stronger than expected Q4 in VZW subs might dent margins a little as the company upgrades customers. Questions on Vodafone corporate action got stock answers.

a storm in a teacup

Yup.

VALUATION AND RECOMMENDATION – There are copious reasons to not like Vodafone – most of them spelt out in our initiation note. The stock was an underperforming value trap for much of 2009 and we can’t discount operational disappointments in 2010. But ultimately our Buy stance centres on the attractions of a single digit PE, a 6% yield, the scope for some asset disposals and (we live in hope) a clearer, more aggressive strategy from the management team. We see little in yesterday’s news to change our view.

12:07PM

Regular ROTR contributor Cityunslicker mentions Heritage Oil bid gossip ….

did he

Which turns up buried in a (non-Geoff) market report this morning

My impression was HOIL was more likely to buy than be bought once Uganda’s sold, at least in the short term

Still, you never know I guess.

And finally, Game Group

ah yes

some read across from a rival

Gamestop

Game Group 5 (BUY) – Gamestop Christmas trading statement
GMG.L (116p) Market cap £368m
Gamestop put out a disappointing Christmas trading statement and forecasts for 2009/10 have been revised downwards. In the nine week period total sales were flat at $2.86bn while the LFLs declined by 8.6%. In the commentary, management states that it benefited from strong growth in the early part of the period from new titles such as Modern Warfare but was affected by the weather and an unexpected shortages of both software including New Super Mario and surprisingly all the hardware. The company now expects EPS of between $2.23 to $2.27 vs. $2.45 to $2.63 forecast in November following the announcement of the third quarter figures while the LFLs are projected to be down by between 8% and 9% vs. 4% and 7%. Our forecasts for Game Group are predicated on the LFLs being down by 12% over the same period.

The stock will remain ‘under a cloud’ until we start to see some positive momentum in revenues. It is however, lowly rated at under 5.1x 2009/10 earnings with a prospective dividend yield, over 3x covered, approaching 6%. In addition, at these levels, the stock is looking vulnerable to private equity as it has a relatively strong balance sheet with year end cash forecast at c£60m, strong cashflow and a well established network of international stores.

that’s from Seymour Pierce

Game Group (GMG:LSE): Last: 105.50, up 0.6 (+0.57%), High: 107.00, Low: 104.80, Volume: 1.45m

and while we are on the retailers

Debenhams Plc (DEB:LSE): Last: 76.80, down 1.2 (-1.54%), High: 78.50, Low: 76.55, Volume: 4.76m

more rumours that they have had a tough Xmas

A rumour that won’t go away, that.

indeed

Although I’d suspect they haven’t had time to add up all the figures yet.

12 Jan for trading update

but if there was a huge warning

we would have heard by now

Okay

that’s it for today

and this week

thanks for joining us

and apologies for the skelton staff

hope to be back to normal next week

Izy

has bronchitis

so she might be a while longer

anyway

c u all next week

Bye.

cya

This entry was posted by Neil Hume on Friday, January 8th, 2010 at 11:04 and is filed under Uncategorised. Edit this entry.

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Markets Live transcript 8 Jan 2010

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