Markets Live chat transcript for the chat ending at 12:21 on 25 Jan 2010. Participants in this chat were: Neil Hume, FT Bryce Elder
NH
Halloa
NH
good morning
NH
and welcome to the start of another week
NH
and another session of Markets Live
NH
FT Alphaville’s interactive markets discussion
NH
we comment on things
NH
and the ROTR respond
NH
go off on a tangent and make a few puns
NH
that’s basically how it works
NH
as usual Bryce is with me
BE
morning all
BE
Markets looking a bit steadier this morning
NH
and incredibly dull and quiet
BE
Yes. Very very dull.
BE
The banks and the minings enjoying a bit of dead cat after last week’s big falls
NH
BE
And that’s edged us back into positive territory on the Footsie
NH
yes, yes, yes, yes
NH
but it all feels pretty fragile to me
NH
FTSE 100 up 23 points at 5,326
NH
I still think we could be reaching for the plastic hard hat
NH
or even the tin hat by the end of the week
BE
Hm. Worst week for the banks since May last week, apparently.
NH
hmmm
NH
but there are some decent performances this morning
BE
Volume rotten though.
BE
Standard Chartered and Barclays doing well.
NH
yes
Standard Chartered (STAN:LSE): Last: 1,486, up 57.5 (+4.03%), High: 1,497, Low: 1,413, Volume: 2.92m
Barclays PLC (BARC:LSE): Last: 279.05, up 7.7 (+2.84%), High: 279.25, Low: 265.15, Volume: 23.55m
NH
I have something on both of these
11:08AM
NH
Apart from a dead cat and closing shorts that is
BE
Go on.
NH
Ian Gordon
NH
at Exane
NH
well his team have been pushing both of them today
NH
basically saying Barc does not have a lot of prop exposure
NH
and the sell off in Stan Chart was overdone
NH
I only have a desk note
NH
but it gives a flavour
NH
1. BARC – has sold off >10% in recent days in reaction to renewed (but we
believe unfounded) capital concerns and the various Obama assaults over
prop trading and planned recovery of US bail-out losses from banks with US
operations over the next decade. There is no explicit disclosure of the
quantum of non-client income within Barclays Capital, nor is it clear at
this stage how much may fall foul of the Obama assault. Our guess is <5%,
and in any event, we would highlight the fact that our existing forecasts
assume no increase in Barcap “clean” revenues ’10 vs ’09, so any impact on
revenue expectations is likely to be muted. Moreover, to the extent that
Obama does curtail any Barcap activities, this is likely to be in
relatively capital-intensive activities, so should, at the margin, serve to
ease the aforementioned (unfounded) capital concerns
believe unfounded) capital concerns and the various Obama assaults over
prop trading and planned recovery of US bail-out losses from banks with US
operations over the next decade. There is no explicit disclosure of the
quantum of non-client income within Barclays Capital, nor is it clear at
this stage how much may fall foul of the Obama assault. Our guess is <5%,
and in any event, we would highlight the fact that our existing forecasts
assume no increase in Barcap “clean” revenues ’10 vs ’09, so any impact on
revenue expectations is likely to be muted. Moreover, to the extent that
Obama does curtail any Barcap activities, this is likely to be in
relatively capital-intensive activities, so should, at the margin, serve to
ease the aforementioned (unfounded) capital concerns
NH
As a reminder, BARC
has doubled its core tier 1 capital ratio from 4.6% at 30 June 2008 to 9.2%
proforma following completion of the BGI disposal on 1 December 2009 – the
strongest (arguably ex-RBS) among the UK banks. It now trades on a
remarkably distressed 0.8x 2011e tNAV and our 410p TP offers 51% upside.
has doubled its core tier 1 capital ratio from 4.6% at 30 June 2008 to 9.2%
proforma following completion of the BGI disposal on 1 December 2009 – the
strongest (arguably ex-RBS) among the UK banks. It now trades on a
remarkably distressed 0.8x 2011e tNAV and our 410p TP offers 51% upside.
NH
STAN – has also participated in the Obama sell-off despite the fact that
it has NO prop trading activities and nil (or negligible) exposure to Obama
tax. Once again it compares favourably with HSBC in this regard, despite
trading in line on a tNAV basis. We highlight STAN as a relative “safe
haven” from the Obama regulatory assault, and our 1800p TP offers 26%
upside.
it has NO prop trading activities and nil (or negligible) exposure to Obama
tax. Once again it compares favourably with HSBC in this regard, despite
trading in line on a tNAV basis. We highlight STAN as a relative “safe
haven” from the Obama regulatory assault, and our 1800p TP offers 26%
upside.
BE
Hmmm.
BE
I don’t think it’s outside the consensus to say that Barclays has no immediate capital problems.
BE
Basel III’s not until 2012, if it comes to pass.
BE
However …..
BE
If they are really looking to split out Barcap from the retail side, then they need more capital.
NH
how much more?
BE
Well, the £17bn figure is a handy guide in this context.
BE
To be clear, I’m not suggesting they are looking to split it. But they would if they did.
BE
And I think that might be what’s getting reflected in Barclays shares of late.
NH
OK
BE
While we’re on the banks
NH
yes
BE
BarCap’s got a note out on Lloyds this morning.
BE
Starting coverage with an “underweight” and a 53p target
BE
That’s versus ….
Lloyds Banking Group (LLOY:LSE): Last: 54.55, up 0.95 (+1.77%), High: 54.66, Low: 52.22, Volume: 80.66m
NH
hmmm
NH
going nowhere then
NH
I read this note
NH
and have posted on it
NH
basically the theme is
NH
Lloyds will have a capital shortfall even if
NH
you don’t take into account all of the new Basel III rules
NH
the problem is the life assurance biz
NH
and double counting of capital
NH
basically BarCap
NH
come to the conclusion that
NH
Lloyds should sell Scottish Widows
BE
To whom?
NH
well that’s rather the problem
NH
who wants it
NH
While raising fresh equity would be another way to deal with any deficit, selling the life assurance
business would be a further potential solution given that it is this business that is most impacted
by the potential regulatory changes. Unconfirmed press reports (including a 29 March 2009
article in the Financial Times) suggest that this is an option that the company could explore.
business would be a further potential solution given that it is this business that is most impacted
by the potential regulatory changes. Unconfirmed press reports (including a 29 March 2009
article in the Financial Times) suggest that this is an option that the company could explore.
NH
With UK life assurers currently trading at a 25% discount to embedded value, we estimate
selling the life assurance business would result in a c£2bn loss. Figure 30 shows that
notwithstanding this loss, selling the life assurance business would benefit the capital position
by 230bp on our estimates, which appears sufficient to close the deficit. However, it is unclear
to us at this stage what price might be achievable, particularly given the reduced
attractiveness of these assets to other banks. With very few potential buyers, LBG could either
be forced to sell at a lower price or only sell the more attractive parts of the business.
selling the life assurance business would result in a c£2bn loss. Figure 30 shows that
notwithstanding this loss, selling the life assurance business would benefit the capital position
by 230bp on our estimates, which appears sufficient to close the deficit. However, it is unclear
to us at this stage what price might be achievable, particularly given the reduced
attractiveness of these assets to other banks. With very few potential buyers, LBG could either
be forced to sell at a lower price or only sell the more attractive parts of the business.
NH
Actually this note is quite depressing
NH
every chance Lloyds will need another cash call
BE
You think they could they get another cash call away?
NH
not sure
BE
I have my doubts.
NH
but they made need another
NH
the Lloyds printing press will roll into action again
11:16AM
NH
Right
NH
Taxloss notes Man Utd
NH
and the bond issue they got away just in time
NH
Tracy has just passed this to me
NH
Jan. 25 (Bloomberg) — Goldman Sachs Group Inc. Chief
Global Economist Jim O’Neill, a former shareholder and board
member of Manchester United, said the club has too much debt and
its bonds are unattractive.
“There’s too much leverage going on with Manchester
United,” O’Neill, a lifelong supporter of the 18-times English
soccer champions, said in a Jan. 23 interview. “It’s not a good
thing. I’m not a buyer of the bond.”
Global Economist Jim O’Neill, a former shareholder and board
member of Manchester United, said the club has too much debt and
its bonds are unattractive.
“There’s too much leverage going on with Manchester
United,” O’Neill, a lifelong supporter of the 18-times English
soccer champions, said in a Jan. 23 interview. “It’s not a good
thing. I’m not a buyer of the bond.”
NH
“I value my long-term support for Manchester United better
than anything else,” said O’Neill, who held 1.66 million pounds
of the club’s shares in 2005 when he stepped down from the board
as the Glazers took the club private.
than anything else,” said O’Neill, who held 1.66 million pounds
of the club’s shares in 2005 when he stepped down from the board
as the Glazers took the club private.
NH
and here is how the bonds are trading
NH
The pound-denominated bonds declined after the sale and
were quoted at 95.5 pence on the pound to yield 9.5 percent,
according to HSBC Holdings Plc prices on Bloomberg today. The
dollar bonds were bid at 97.5 cents to yield about 8.9 percent,
according to HSBC.
were quoted at 95.5 pence on the pound to yield 9.5 percent,
according to HSBC Holdings Plc prices on Bloomberg today. The
dollar bonds were bid at 97.5 cents to yield about 8.9 percent,
according to HSBC.
NH
“I don’t think the yield offers adequate return for the
risk,” Jonathan Moore, a high-yield analyst at Evolution
Securities Ltd. in London said in a note today. “Given my
conversations with institutional investors over the past two
weeks, it appears a lot of funds in Europe have similar
concerns.”
risk,” Jonathan Moore, a high-yield analyst at Evolution
Securities Ltd. in London said in a note today. “Given my
conversations with institutional investors over the past two
weeks, it appears a lot of funds in Europe have similar
concerns.”
BE
So – Top Squid won’t touch Man United’s Junk.
NH
(Number 1 – calm down pls. calm down).
NH
nope
NH
no junk for Jim
NH
actually his comments are quite interesting
NH
because there is a big push among the Man Utd fans
NH
to find a buyer
NH
an alternative to the Glazer’s
BE
Hm. Good luck with that.
NH
yes
NH
good luck
NH
Goldman aren’t interested
BE
Not that Squid United would improve their image, I guess.
NH
it would make a good club badge though
NH
ditch the red devil
NH
and get a giant vampire squid on Rooney’s shirt
11:20AM
NH
Right
NH
Legal & General on a bit of tear at the moment
Legal and General Group (LGEN:LSE): Last: 79.25, up 3.1 (+4.07%), High: 79.45, Low: 75.00, Volume: 11.46m
NH
what’s going on
NH
not more Resolution bid rumours??
BE
Not that I’ve heard, although it’s as good a reason as any I guess.
BE
There is a note out from Bernstein that doesn’t much like the Resolution theory.
NH
(Titleist – Kronke has not done anything with his US assets to suggest that)
NH
go on
BE
It is, in all respects, exceptionally negative.
BE
Here’s the gist
BE
Legal & General’s annuity focus is central to the business and our Solvency II concerns
Legal & General is heavily exposed to the UK life market and its focus on annuities, which generate 70%
of group new business profits, means it is effectively a mono-line annuity business. This focus brings not
only product concentration risk but also the risk that upcoming Solvency II rules will severely hinder the
company going forwards. While we do not expect Legal & General to need to raise additional equity
capital, we cannot envisage a scenario where it escapes the Solvency II rule introduction unscathed.
Legal & General is heavily exposed to the UK life market and its focus on annuities, which generate 70%
of group new business profits, means it is effectively a mono-line annuity business. This focus brings not
only product concentration risk but also the risk that upcoming Solvency II rules will severely hinder the
company going forwards. While we do not expect Legal & General to need to raise additional equity
capital, we cannot envisage a scenario where it escapes the Solvency II rule introduction unscathed.
BE
Solvency II – White smoke from CEIOPS unlikely to bring much respite
Our key concern for L&G relates to the ongoing deliberations over the discount rate used to measure UK
annuity reserves under Solvency II. Consultation documentation published towards the end of 2009
suggests CEIOPS is remaining steadfast in its intention to push through the requirement to measure
annuity liabilities excluding the crucial liquidity premium.
Our key concern for L&G relates to the ongoing deliberations over the discount rate used to measure UK
annuity reserves under Solvency II. Consultation documentation published towards the end of 2009
suggests CEIOPS is remaining steadfast in its intention to push through the requirement to measure
annuity liabilities excluding the crucial liquidity premium.
BE
Benefit of in-force liquidity premium could be snuffed out by increased capital requirements
One chink of light relates to CEIOPS admission late in 2009 that a liquidity premium could potentially be
included for in-force annuity liabilities. However, this concession is likely to have limited effect, in our
view, as CEIOPS also suggested associated capital requirements would be raised to offset the positive
benefit the liquidity premium brought. The considerable uncertainty and negative bias to much of the
CEIOPS guidance supports our view that the Solvency II rules are likely to not only put L&G’s existing
capital base under strain but also to have a lasting impact on the profitability of the group.
One chink of light relates to CEIOPS admission late in 2009 that a liquidity premium could potentially be
included for in-force annuity liabilities. However, this concession is likely to have limited effect, in our
view, as CEIOPS also suggested associated capital requirements would be raised to offset the positive
benefit the liquidity premium brought. The considerable uncertainty and negative bias to much of the
CEIOPS guidance supports our view that the Solvency II rules are likely to not only put L&G’s existing
capital base under strain but also to have a lasting impact on the profitability of the group.
BE
Harsh realities of UK life market likely to hinder attempts to reduce annuity dependency
L&G has taken some steps to reduce its reliance on annuities but the harsh realties of UK life market
mean we expect this transformation to prove difficult. In particular we feel the move into the mass
affluent pension market, via the 2008 Suffolk Life acquisition, will struggle to transform the business.
The pensions market remains under pressure due to recent tax changes and the risk that further changes
may lie down the track.
L&G has taken some steps to reduce its reliance on annuities but the harsh realties of UK life market
mean we expect this transformation to prove difficult. In particular we feel the move into the mass
affluent pension market, via the 2008 Suffolk Life acquisition, will struggle to transform the business.
The pensions market remains under pressure due to recent tax changes and the risk that further changes
may lie down the track.
BE
Resolution an unlikely acquirer in our view, not least because of Solvency II risk overhang
In our view, L&G remains an unattractive acquisition target for Resolution. We see three main reasons to
take this view: (1) L&G is already a strong cost-leader in the UK Life market, reducing the prospect of
achieving valuable cost-savings synergies, (2) Resolution management has been fairly clear that an
annuity-writer is not currently on their agenda and (3) There are other UK life units that make for a better
fit with Resolution’s first acquisition, Friends Provident.
In our view, L&G remains an unattractive acquisition target for Resolution. We see three main reasons to
take this view: (1) L&G is already a strong cost-leader in the UK Life market, reducing the prospect of
achieving valuable cost-savings synergies, (2) Resolution management has been fairly clear that an
annuity-writer is not currently on their agenda and (3) There are other UK life units that make for a better
fit with Resolution’s first acquisition, Friends Provident.
BE
Investment Conclusion
Legal & General’s business is dominated by its strong annuity business to such an extent the company is
effectively a mono-line annuity writer with a UK-specific footprint. Concession by the EU on Solvency II
treatment could well be a massive positive catalyst, but currently looks a distant prospect in our view. In
addition we believe ongoing M&A speculation surrounding L&G is overdone, not least because of the very
Solvency II regulatory risk that supports our negative stance on the stock. In our view L&G’s current
valuation at 1.2x IFRS NAV implies a return towards “business as usual”. While we do not expect the new
Solvency II rules to result in the need for a damaging equity raise, we cannot envisage a scenario where
Legal & General escapes the Solvency II rule introduction unscathed. We rate Legal & General
Underperform (72p price target) because, in our view, the risks to the business remain skewed to the
downside.
Legal & General’s business is dominated by its strong annuity business to such an extent the company is
effectively a mono-line annuity writer with a UK-specific footprint. Concession by the EU on Solvency II
treatment could well be a massive positive catalyst, but currently looks a distant prospect in our view. In
addition we believe ongoing M&A speculation surrounding L&G is overdone, not least because of the very
Solvency II regulatory risk that supports our negative stance on the stock. In our view L&G’s current
valuation at 1.2x IFRS NAV implies a return towards “business as usual”. While we do not expect the new
Solvency II rules to result in the need for a damaging equity raise, we cannot envisage a scenario where
Legal & General escapes the Solvency II rule introduction unscathed. We rate Legal & General
Underperform (72p price target) because, in our view, the risks to the business remain skewed to the
downside.
NH
thanks for that
NH
we have been over a lot of that ground before
NH
actually
NH
LGEN are being pushed by Credit Suisse
NH
in some sector review thing
NH
they like the insurance sector for 2010
BE
Hang on – the editor’s just come around with a replacement tin hat.
NH
yes
NH
Lionel has just come back from Afghanistan
NH
and he has a proper hard hat
NH
a sort of special forces kevlar one
NH
unfortunately
NH
we aren’t getting it
NH
it’s going to his office
11:25AM
NH
Right
NH
back to this note
NH
and the bit on Legals
NH
Legal & General (Upgrade from Neutral to
Outperform, TP increased from 91p to 113p)
Outperform, TP increased from 91p to 113p)
NH
In our view, Legal & General offers one of the better UK life and pensions franchises with
enviable scale positions in product areas in the UK that would be attractive to any
company wishing to gain scale in the UK market. New management is cutting costs and
changing the business mix to improve the business economics. Solvency II remains an
overhang but near-term newsflow, particularly on the illiquidity premium, is likely to be
positive. Improved disclosure on the drivers of cashflow for the business should help
generalists understand the cash dynamics of insurance business better. Our revised target
price, following market moves and a more optimistic view on corporate defaults than
previously, offers 44% upside potential and, excluding the asset management at our fair
value, the rest of the business is trading on 6.7x 2010E IFRS earnings. We therefore
upgrade L&G to Outperform from Neutral.
enviable scale positions in product areas in the UK that would be attractive to any
company wishing to gain scale in the UK market. New management is cutting costs and
changing the business mix to improve the business economics. Solvency II remains an
overhang but near-term newsflow, particularly on the illiquidity premium, is likely to be
positive. Improved disclosure on the drivers of cashflow for the business should help
generalists understand the cash dynamics of insurance business better. Our revised target
price, following market moves and a more optimistic view on corporate defaults than
previously, offers 44% upside potential and, excluding the asset management at our fair
value, the rest of the business is trading on 6.7x 2010E IFRS earnings. We therefore
upgrade L&G to Outperform from Neutral.
NH
Right
NH
and here’s the riposte to the Benstein stuff
NH
Solvency II and M&A
NH
The CEIOPS proposals for the implementation of Solvency II remain a huge issue for the
European insurance industry as the proposals currently stand. There are some moves that
give us more confidence with L&G than before: (i) it is now widely recognised by European
insurers that the CEIOPS proposals for Solvency II are not just a UK annuity writer issue but
have much wider implications for their own capital positions and management flexibility – i.e.
UK life (and, in particular, L&G) is no longer alone; witness the comments Axa has made on
the issue; (ii) there appears to be positive movement on some of the major issues to do with
Solvency II. In particular, we expect allowance for a liquidity premium on new business, not just
grandfathering the in-force business, and we expect it to move with spreads, reducing the
volatility in the available capital position. We also expect some form of leniency on current
hybrid capital structures. (iii) the UK Treasury and regulator appear to be fully behind the
industry and we believe will lobby on its behalf to the EU Commission.
European insurance industry as the proposals currently stand. There are some moves that
give us more confidence with L&G than before: (i) it is now widely recognised by European
insurers that the CEIOPS proposals for Solvency II are not just a UK annuity writer issue but
have much wider implications for their own capital positions and management flexibility – i.e.
UK life (and, in particular, L&G) is no longer alone; witness the comments Axa has made on
the issue; (ii) there appears to be positive movement on some of the major issues to do with
Solvency II. In particular, we expect allowance for a liquidity premium on new business, not just
grandfathering the in-force business, and we expect it to move with spreads, reducing the
volatility in the available capital position. We also expect some form of leniency on current
hybrid capital structures. (iii) the UK Treasury and regulator appear to be fully behind the
industry and we believe will lobby on its behalf to the EU Commission.
NH
We believe it is difficult to see L&G as a bid target at the moment (although we could be
wrong) given the uncertainty over Solvency II that still remains. If Solvency II starts to
move in the right direction and acquirers gain confidence in the outcome, then this view
could change.
Our revised price target is 113p, offering 44% upside potential to the current share price,
based on sustainable returns of 11%, assumed growth of 3%, a COE of 10.3% and a spot
EV of around 99p. The stock is currently trading on 9.8x 2010E IFRS earnings but we
believe that Legal & General asset management should trade on a higher multiple given
the persistency on its index-tracking business. Adjusting for this would bring the multiple to
nearer 6.7x.
wrong) given the uncertainty over Solvency II that still remains. If Solvency II starts to
move in the right direction and acquirers gain confidence in the outcome, then this view
could change.
Our revised price target is 113p, offering 44% upside potential to the current share price,
based on sustainable returns of 11%, assumed growth of 3%, a COE of 10.3% and a spot
EV of around 99p. The stock is currently trading on 9.8x 2010E IFRS earnings but we
believe that Legal & General asset management should trade on a higher multiple given
the persistency on its index-tracking business. Adjusting for this would bring the multiple to
nearer 6.7x.
BE
Ok then. Take your pick I guess.
11:28AM
NH
Acutally that hat was pretty cool
NH
I wonder if we can borrow it
NH
when LB heads of to Davos
BE
Fitz – I think the chances of getting LB to model the hat are fairly slim.
BE
On the other hand, Neil’s always up for a bit of modelling.
NH
yes, it is better than the yellow plastic thing I was forced to wear on Friday
11:29AM
NH
Let’s move on
NH
where next?
NH
The miners?
BE
I guess. It’s a small dead cat, as we said previously.
Xstrata (XTA:LSE): Last: 1,143, up 18.25 (+1.62%), High: 1,150, Low: 1,103, Volume: 5.13m
BHP Billiton (BLT:LSE): Last: 1,959, up 24 (+1.24%), High: 1,967, Low: 1,910, Volume: 4.51m
Rio Tinto (RIO:LSE): Last: 3,342, up 50 (+1.52%), High: 3,360, Low: 3,264, Volume: 3.27m
Kazakhmys (KAZ:LSE): Last: 1,332, up 38 (+2.94%), High: 1,334, Low: 1,277, Volume: 912.02k
NH
hmmm
NH
interesting note out of Citi this morning
NH
basically saying there will probably be a bounce
NH
because there are so many buy on dips
NH
EM fans out there at the moment
NH
but
NH
be wary
NH
because of excessive inventories
NH
it is worth a read I think
BE
Paste away then.
NH
Triple-Whammy — The old saying goes that you wait a long time for a bus then
three arrive at the same time. Its been a long time waiting for anything remotely
negative to happen in the mining space but suddenly three buses have arrived: (1)
China tightening (2) Australian Tax review (3) Resurgent Dollar. Even news such as
China increasing primary aluminum exports by 680% December over November
(admittedly on small tonnage) pales into insignificance.
three arrive at the same time. Its been a long time waiting for anything remotely
negative to happen in the mining space but suddenly three buses have arrived: (1)
China tightening (2) Australian Tax review (3) Resurgent Dollar. Even news such as
China increasing primary aluminum exports by 680% December over November
(admittedly on small tonnage) pales into insignificance.
NH
Expect a Bounce Soon — There are enough ‘buy-on-the-dips’ operators out there to likely ensure that we get a healthy bounce in the miners after recent sharp falls. The real question is whether prices will simply sail up through their previous highs as they have done on the previous ten occasions or if there has been a genuine change in the barometer, with more medium term storms possibly brewing.
NH
Lighten into the next ‘Dips’ Buying? —In the first MMM of 2010 our outlook for the year was for a ‘Grind Higher at Best” scenario. Last week we were a bit more dramatic in arguing that the markets reminded us of “a herd of stampeding wildebeest heading towards a precipice”. Still, we are not out-and-out bears yet but the negative variables are beginning to pile up. Perhaps the ‘Buy-on-the-Dips’ bounce will be a godsend for those significantly overweight and wanting to lighten.
NH
Any excuse will do — The market has a habit of finding excuses for a direction
change when an existing move is threatening to exhaust itself. The Aussie tax
discussions had been ongoing for a long time. The dollar could still swing either way. China’s economy is still robust. In the commentary accompanying the mining equity falls last week, there was hardly a word about ongoing surpluses in supply of metals and ongoing record levels of inventory. These are the real issues, even if they are too boring to make the headlines. Other issues may be a temporary smokescreen whereas excessive inventories may well be here to stay.
change when an existing move is threatening to exhaust itself. The Aussie tax
discussions had been ongoing for a long time. The dollar could still swing either way. China’s economy is still robust. In the commentary accompanying the mining equity falls last week, there was hardly a word about ongoing surpluses in supply of metals and ongoing record levels of inventory. These are the real issues, even if they are too boring to make the headlines. Other issues may be a temporary smokescreen whereas excessive inventories may well be here to stay.
NH
and on the subject of excessive inventories
NH
did you see this today?
BE
Go on.
NH
Jan. 25 (Bloomberg) — Steel prices in China, the world’s
biggest producer of the metal, dropped the most in four months
last week as inventories piled up and concerns grew that the
government may curb lending.
Inventories of steel products, including holdings by
traders, producers and end users, are estimated to exceed 50
million metric tons, setting a record, said Ma Haitian, an
analyst with Beijing Antaike Information Development Co. That’s
compared with an estimated 18 million tons a year ago, he said.
Jan. 25 (Bloomberg) — Steel prices in China, the world’s
biggest producer of the metal, dropped the most in four months
last week as inventories piled up and concerns grew that the
government may curb lending.
Inventories of steel products, including holdings by
traders, producers and end users, are estimated to exceed 50
million metric tons, setting a record, said Ma Haitian, an
analyst with Beijing Antaike Information Development Co. That’s
compared with an estimated 18 million tons a year ago, he said.
NH
“Some may trim their inventories at discounted prices to
collect money before the Chinese New Year” holiday in February,
Ma said. “Speculation of interest rate hikes and other
tightening measures also added to concerns about capital
availability in the market.”
China’s growth rate in the fourth quarter accelerated at
the fastest pace since 2007, as the nation’s $586 billion
stimulus spending and record lending stoked car and property
sales. That’s raised concerns the government may increase
interest rates or take other measures to curb inflation and
limit asset bubbles.
collect money before the Chinese New Year” holiday in February,
Ma said. “Speculation of interest rate hikes and other
tightening measures also added to concerns about capital
availability in the market.”
China’s growth rate in the fourth quarter accelerated at
the fastest pace since 2007, as the nation’s $586 billion
stimulus spending and record lending stoked car and property
sales. That’s raised concerns the government may increase
interest rates or take other measures to curb inflation and
limit asset bubbles.
NH
Baoshan Iron & Steel Co., the nation’s largest steelmaker,
fell 1.9 percent to 7.72 yuan at 11:29 a.m. in Shanghai trading.
Angang Steel Co. fell 1.8 percent to HK$14.42 in Hong Kong.
Chinese prices of hot-rolled coil, a benchmark product,
fell 2.2 percent last week, the biggest weekly decline since
Sept. 25, according to Antaike. Prices have gained 16 percent
since Oct. 15, the low of last year.
fell 1.9 percent to 7.72 yuan at 11:29 a.m. in Shanghai trading.
Angang Steel Co. fell 1.8 percent to HK$14.42 in Hong Kong.
Chinese prices of hot-rolled coil, a benchmark product,
fell 2.2 percent last week, the biggest weekly decline since
Sept. 25, according to Antaike. Prices have gained 16 percent
since Oct. 15, the low of last year.
BE
Ah. So we’re back to the destocking story.
NH
It would seem so
BE
After a month or so with the restocking story.
BE
It’s cyclical, this Chinese bubble.
BE
Nevertheless, there’s no reason to panic.
NH
why’s that then?
BE
Andrew Garthwaite says the China fears are overdone.
NH
Does
NH
he
BE
Yes
BE
He
BE
Does
NH
O
NH
K
BE
Here’s the note
BE
Equities: we believe recent market weakness is a buying opportunity.
Our tactical indicators are not telling us to sell: equity sentiment and risk
appetite are at neutral levels, the 2-year yield remains below our trigger level
of 1.5% and both earnings revisions and economic surprises remain
positive; we think 2010 global GDP growth will be above consensus, at 4.3%
and expect the Fed to remain on the sidelines; EPS growth could be above
30%; the equity risk premium is 5.3%, versus our target of 4.5% and a longrun
average of 3.6%; equities have lagged high-yield by 25% over the past
year; and investors are still sceptically positioned. A pick up in US bank loan
growth or accelerating Chinese wage growth would make us more cautious.
Our tactical indicators are not telling us to sell: equity sentiment and risk
appetite are at neutral levels, the 2-year yield remains below our trigger level
of 1.5% and both earnings revisions and economic surprises remain
positive; we think 2010 global GDP growth will be above consensus, at 4.3%
and expect the Fed to remain on the sidelines; EPS growth could be above
30%; the equity risk premium is 5.3%, versus our target of 4.5% and a longrun
average of 3.6%; equities have lagged high-yield by 25% over the past
year; and investors are still sceptically positioned. A pick up in US bank loan
growth or accelerating Chinese wage growth would make us more cautious.
BE
China: we would be worried if we saw economic, rather than financial,
overheating. A sign of economic overheating would be a sharp acceleration
in Chinese wage growth (as proxied by rising export prices). Currently, this is
not happening. We suspect there will be no strong pick-up in wage growth
until 2011, given 10m to 20m migrant unemployed and 6m graduates
entering the workforce. Ultimately, the China growth story does not end until
there is a shortage of labour or capital, which there is not: 300m people
could still migrate from the rural sector and China has $2.4tn of FX reserves
as well as a current account surplus of 4.8% of GDP. Moreover, there is no
obvious over-leverage: government debt is below the OECD norm and
private sector credit to GDP is in line with the OECD average.
overheating. A sign of economic overheating would be a sharp acceleration
in Chinese wage growth (as proxied by rising export prices). Currently, this is
not happening. We suspect there will be no strong pick-up in wage growth
until 2011, given 10m to 20m migrant unemployed and 6m graduates
entering the workforce. Ultimately, the China growth story does not end until
there is a shortage of labour or capital, which there is not: 300m people
could still migrate from the rural sector and China has $2.4tn of FX reserves
as well as a current account surplus of 4.8% of GDP. Moreover, there is no
obvious over-leverage: government debt is below the OECD norm and
private sector credit to GDP is in line with the OECD average.
BE
Historically, the time to sell China has been on the first interest rate rise, not
when the reserve requirement ratio starts going up – and Credit Suisse
economist, Dong Tao, believes it will be hard for the PBoC to raise rates
ahead of the Fed. Monetary conditions are still loose and bank reserves still
nearly 2%pts above the reserve requirement ratio. It is not clear to us that
there is an economy-wide property bubble: national property prices are only
up 15% yoy, according to the NDRC, and only a fifth of new bank lending is
going to property
when the reserve requirement ratio starts going up – and Credit Suisse
economist, Dong Tao, believes it will be hard for the PBoC to raise rates
ahead of the Fed. Monetary conditions are still loose and bank reserves still
nearly 2%pts above the reserve requirement ratio. It is not clear to us that
there is an economy-wide property bubble: national property prices are only
up 15% yoy, according to the NDRC, and only a fifth of new bank lending is
going to property
BE
We recommend adding to metals & mining and luxury goods on dips.
Metals & mining: industrial commodity prices rise if global IP is above 3%,
and we think it will be 9% yoy by year-end; excess liquidity adds further
support to prices. Buy Xstrata, Anglo, Freeport, Thyssen, Nucor. Luxury
goods: the CAGR of discretionary consumption in China could be 20% by
2020, as the consumption share of GDP rises from 36% to 50%; luxury
goods have a unique franchise (Richemont, Swatch, LVMH).
Metals & mining: industrial commodity prices rise if global IP is above 3%,
and we think it will be 9% yoy by year-end; excess liquidity adds further
support to prices. Buy Xstrata, Anglo, Freeport, Thyssen, Nucor. Luxury
goods: the CAGR of discretionary consumption in China could be 20% by
2020, as the consumption share of GDP rises from 36% to 50%; luxury
goods have a unique franchise (Richemont, Swatch, LVMH).
BE
We are cautious of European capital goods: they look expensive, half of
new bank lending in China has gone to infrastructure, the Chinese
investment share of GDP has to fall and China is a growing competitive
threat. Short ABB and Atlas Copco
new bank lending in China has gone to infrastructure, the Chinese
investment share of GDP has to fall and China is a growing competitive
threat. Short ABB and Atlas Copco
NH
Interesting stuff
11:36AM
NH
OK let’s pause for a moment
NH
this caught me eye
NH
RTRS-AIG – UPDATES LUXURY EXPENDITURE POLICY – SEC FILING
11:04 25Jan10 RTRS-AIG SAYS POLICY PROHIBITS PERSONAL USE OF CORPORATE AIRCRAFT, UNLESS BY CEO IF PERSONAL USE IS INCIDENTAL TO BUSINESS TRIPS.
11:04 25Jan10 RTRS-AIG SAYS POLICY PROHIBITS PERSONAL USE OF CORPORATE AIRCRAFT, UNLESS BY CEO IF PERSONAL USE IS INCIDENTAL TO BUSINESS TRIPS.
NH
We must get hold of that filing
NH
and also
NH
Bryce
NH
do you ever look at these 10-day Aim notices
NH
that come up on RNS?
BE
You mean the “intention to float” notices?
BE
There haven’t been that many for a year or two.
NH
Well
NH
one has just popped up
NH
and it is downright bizzare
NH
an Australian company
NH
listing a gold company
BE
What’s strange about that?
NH
well it’s the location
NH
The Company’s business is to establish and operate a mining and exploration company in central Scotland, specifically the Cononish gold and silver deposit.
NH
Now, Bryce
NH
you are from Scotland
BE
Yes …………….
NH
is there gold in Stirlingshire?
BE
Not that I’ve seen. They’re very keen on Cash for Gold I guess.
BE
But none in the ground that I know of.
NH
actually
NH
they have one of those things in my local shopping centre
NH
I did not realise it was H&T
NH
behind it
NH
right back to this new issue
NH
it is called
NH
a reverse takeover
NH
by the looks of things
BE
What’s it reversing into?
NH
COMPANY BUSINESS (INCLUDING MAIN COUNTRY OF OPERATION) OR, IN THE CASE OF AN INVESTING COMPANY, DETAILS OF ITS INVESTING POLICY). IF THE ADMISSION IS SOUGHT AS A RESULT OF A REVERSE TAKE-OVER UNDER RULE 14, THIS SHOULD BE STATED:
The Company’s business is to establish and operate a mining and exploration company in central Scotland, specifically the Cononish gold and silver deposit.
DETAILS OF SECURITIES TO BE ADMITTED INCLUDING ANY RESTRICTIONS AS TO TRANSFER OF THE SECURITIES (i.e. where known, number and type of shares, nominal value and issue price to which it seeks admission and the number and type to be held as treasury shares):
Depository interests each representing one fully paid-up ordinary share of no par value.
NH
Christopher John Stuart Sangster – Chief Executive Officer
John William Sharp Bentley – Non-Executive Chairman
Shane Beatty Sadleir – Non-Executive Director
Adam Stuart Davey – Non-Executive Director
Edmond William Edwards – Non-Executive Director
Phillip Sidney Redmond Jackson – Non-Executive Director
BE
Sangster?
BE
As in the racing Sangsters?
NH
not sure
NH
FULL NAMES AND HOLDINGS OF SIGNIFICANT SHAREHOLDERS EXPRESSED AS A PERCENTAGE OF THE ISSUED SHARE CAPITAL, BEFORE AND AFTER ADMISSION (underlining the first name by which each is known or including any other name by which each is known):
Before Admission:
Shane Sadleir – 11.35%
Christopher Sangster – 4.61%
Saruman Holdings Pty Ltd – 4.16%
NH
(Very good Throg 
)
)11:41AM
BE
Should we make a visit to small-cap corner?
NH
Yes
NH
why not
BE
Anything caught your eye?
NH
If you have time today
NH
and it looks like a few of you have
NH
have a look at this extraordinary piece of guff
NH
It is being mailed round by the corporate comms team at Africa Mineral’s
NH
Dear All
Please find link below to the BBC World News Service, Africa in Focus programme. Contained within the 40 minute broadcast, is an interview with the President of Sierra Leone, HE Ernest Bai Koroma President Koroma was on site today, at the African Minerals Tonkolili Iron Ore Project with the Executive Chairman, Frank Timis.
This interview was given from Tonkolili earlier today during the President’s visit.
Please note the President’s interview is approx 19:20 into the programme
NH
BBC Focus on Africa – Why The President of Sierra Leone is a Happy Man Today
NH
Now
NH
it is all rather touching
NH
the Pres of Sierra Leone
NH
is under the impression that he is going to get $1bn of royalties a year
NH
from Frank’s new project in the country
NH
that Tonkolili
NH
however,
NH
people I have tallked to
NH
reckon $4m is more likely
BE
Oh dear.
BE
Haven’t they suffered enough?
BE
Ten years of civil war, and now Timis.
NH
NH
yes
NH
I suspect this is not going to play
NH
exactly how both sides envisaged at the start
NH
but still
NH
actually
NH
just going back to last week’s fund raising
NH
there was a little twist
NH
which I missed
NH
you know it was underwritten
BE
Yeah?
NH
yes
NH
but by a related party
BE
Okay ……..
BE
How very Frank.
NH
This is from RNS
NH
On 21 January 2010, the Company announced an underwritten cash placing of 20,000,000 new common shares of the Company (“New Shares”) at 400 pence per share to raise £80million, before expenses (the “Placing Announcement”).
NH
On 22 January 2010, the Company was informed by the Underwriters that, as a result of an allocation to additional purchasers, the participation, directly and/or on behalf of managed accounts of Dundee Corporation and certain of its subsidiaries (“Dundee”), had been reduced by 900,000 New Shares from 8.37 million New Shares to 7.47 million New Shares. As a result, the total consideration payable by Dundee for the New Shares has been reduced from £33.5 million to £29.9 million. Dundee Securities Corporation, an indirect subsidiary of Dundee Corporation, will continue to receive a fee of £1.2 million as an Underwriter.
NH
As described in the Placing Announcement, Dundee has notified the Company that it owns or has control or direction over an aggregate of 16,969,738 common shares of the Company, representing 7.9% of the Company’s issued share capital. In addition, Murray John, who is Chief Executive of Dundee Resources Limited, a subsidiary of Dundee Corporation, is a director of African Minerals. As described in Note 1 to the Placing Announcement, the Company therefore considers Dundee Corporation to be a Related Party under the AIM Rules. The Directors of the Company consider, having consulted with its nominated adviser, Canaccord Adams Limited, that, notwithstanding the change in the underwriting participation of Dundee described above, the terms of the transaction with Dundee continue to be fair and reasonable insofar as shareholders are concerned.
NH
Following the Placing, but excluding the CRM Option described in the Placing Announcement, and as a result of the reduction in Dundee’s participation, Dundee Corporation, directly and/or through accounts managed by Ravensden Asset Management Inc., a direct subsidiary of Dundee Corporation, will own or have control or direction over an aggregate of 15,530,000 common shares of the Company, representing an approximate 6.65% interest. In addition, accounts managed by Goodman & Company, Investment Counsel Ltd., an indirect subsidiary of Dundee Corporation, will have control or direction over 8,912,738 common shares of the Company, representing an approximate 3.81% interest in the share capital of the Company.
BE
Dundee Corporation? As in Tayside, or Crocodile?
NH
BE
And this Murray John is a director of African as well?
NH
yep
NH
and there’s a £1.2m underwritting fee
BE
To raise how much? 80m?
BE
That’s a decent fee.
NH
indeed
NH
right
NH
bored with Frank
11:48AM
NH
Another favourite small cap
NH
for some of the ROTR is
NH
Bowleven
NH
update out today
NH
and here with his thoughts
NH
is the THE SECTOR WATCHER
NH
the rumoured rig
NH
will be coming
NH
Bowleven released an operational update highlighted by a signed letter of intent for a rig. The drilling campaign will start in April/May with an appraisal well on IE (IE-3) followed an exploration well on MLHP-5. The location of the IF-2 well will be determined upon the outcome of additional seismic activity on MLHP-7. Note that BLVN will also drill an onshore well in Gabon this year
NH
A letter of intent has also been signed for a vessel to acquire 3D seismic on Etinde, including the IF field. So what does this all mean? The optionality around three or four wells for BLVN in 2010 makes it attractive – in the 80-90p range it was a screaming BUY, but at a shade over £1, things are a little more mixed.
NH
One of the main criticisms levelled at BLVN has been around the binary nature of the outcomes here (reminds me of the old joke: there are 10 types of people who understand binary – those who do and those who don’t) – but let’s not forget that this is lower-risk exploration than many are pricing in, as much of the drilling is appraisal, albeit priced as exploration. BLVN is a BUY for us for this campaign – with US$ 100m in the bank, and $100m gross from Vitol in work commitments, BLVN is well-funded for an exciting exploration and appraisal campaign, during which any success will put it firmly on the M&A radar.
BowLeven (BLVN:LSE): Last: 102.75, down 3.25 (-3.07%), High: 105.00, Low: 102.00, Volume: 246.07k
NH
(Debbie any thoughts on this one???)
11:49AM
NH
and staying in the small cap resource spave
NH
another current favourite
NH
Vatukoula Gold Mines
BE
Ok
NH
auto ticker does not work for this one
NH
but they are flat this morning
NH
unchng at 2.56
NH
they too have had an update
NH
here’s some comment on that
NH
because I haven’t had the time to go through it
11:51AM
NH
this is from Arbuthnnot
NH
Vatukoula Gold Mines have announced promising results from a recent 10 hole exploration programme targeting oxide mineralisation that can be surfaced mined.
• Processing of surface-mined oxide material contributes a significant portion of the production in 2010, as it currently supplements higher grade underground production while the company undertakes capital development.
• These results show that the extent of oxide material is potentially greater, with the drill results containing a number of mineable grades and widths but also demonstrating that the mineralisation remains open along strike and at depth.
NH
• The drill programme has identified a number of mineralised structures, with the better intersections containing gold width and concentrations of 5.35m @5.97g/t and 6.03 @ 2.06g/t, although many of the intersects eyeball around 1m at 2g/t and range from 5 to 90m in depth.
• The company anticipates that these drill intercepts will be used to develop an exploration programme to delineate the extent of the mineralisation with a view to estimating a Mineral Resource and possibly a Mineral Reserve for the oxidised mineralisation. It is important to note that the 4.3Moz in Resources announced on 13 January 2010 did not include any oxide material.
NH
This is positive news as adding surface gold ounces would potentially justify the extended use of the oxide circuit past 2010 and add to the current planned 100koz pa of underground gold production beyond FY2010. Vatukoula is continuing to demonstrate that there are substantial opportunities missed by previous owners of the lease. With the company’s fresh approach starting to gain traction, we continue to see substantial upside in the stock.
BE
Right – so it looks better than digging for gold under Aberfeldy High Street.
NH
indeed
11:52AM
BE
Ptolemy – the FT’s sending one of the grad trainees to Cape Town, and we will hopefully get some daily updates exclusively for AV
NH
yes
NH
the plan is
NH
to have a daily blog
NH
and for anyone that is going
NH
note
NH
the World’s Most Annoying Broker
NH
will also be there
BE
NH
so do pop over and say hello
11:52AM
NH
Right
NH
let’s climb back up the market cap ladder
NH
and look at some bigger stuff
NH
IDBs still being hit
BE
Yup
NH
Tullett in particular
Tullett Prebon (TLPR:LSE): Last: 300.00, down 10.1 (-3.26%), High: 306.10, Low: 297.90, Volume: 1.53m
NH
I haven’t seen anything fresh on that
NH
By merrill are saying that only 10% of the LSE’s volumes come from prop desks
NH
I would have thought higher
NH
but that’s what Merrill claim
BE
Hm – 10% and falling, wasn’t it?
BE
But then, I guess this is one of the few opportunities the LSE has to boast that they’re losing market share.
NH
here is the note
NH
Prop trading ~10% of volume
LSE shares have fallen 5% since its Q3 IMS on concerns about US proposals to
restrict bank prop trading operations (the so-called “Volcker Rule”). According to
the company, bank prop trading accounts for no more than 10% of volume and
has been steadily declining in importance as bank leverage has declined and high
frequency trading houses have sprung to prominence.
LSE shares have fallen 5% since its Q3 IMS on concerns about US proposals to
restrict bank prop trading operations (the so-called “Volcker Rule”). According to
the company, bank prop trading accounts for no more than 10% of volume and
has been steadily declining in importance as bank leverage has declined and high
frequency trading houses have sprung to prominence.
NH
Risks appear manageable
We estimate a 10% loss of volumes would reduce our FY11 EPS estimate by less
than 5%. Furthermore, if this legislation were to be implemented, we believe the
impact would be cushioned by higher revenue capture as bank volume discounts
unwind and risk capital is reallocated elsewhere (e.g. to hedge funds).
We estimate a 10% loss of volumes would reduce our FY11 EPS estimate by less
than 5%. Furthermore, if this legislation were to be implemented, we believe the
impact would be cushioned by higher revenue capture as bank volume discounts
unwind and risk capital is reallocated elsewhere (e.g. to hedge funds).
NH
Q3 revenues 2% ahead
Although the Q3 IMS was overshadowed by President Obama’s speech later in
the day, the LSE reported revenues of £154.9mn, 2% ahead of our forecast of
£151.4mn and 3% ahead of company derived consensus (£149.9mn). Revenues
fell 9% YoY, reflecting lower trading volumes and reduction in clearing fees.
Although the Q3 IMS was overshadowed by President Obama’s speech later in
the day, the LSE reported revenues of £154.9mn, 2% ahead of our forecast of
£151.4mn and 3% ahead of company derived consensus (£149.9mn). Revenues
fell 9% YoY, reflecting lower trading volumes and reduction in clearing fees.
NH
Outlook still looks tough
Although the impact of Volcker Rule proposals appears to be modest, more noise
on this front is unlikely to improve investor sentiment in the stock. Given the
additional context of sluggish volumes and ongoing structural challenges, we
retain our Underperform rating.
Although the impact of Volcker Rule proposals appears to be modest, more noise
on this front is unlikely to improve investor sentiment in the stock. Given the
additional context of sluggish volumes and ongoing structural challenges, we
retain our Underperform rating.
NH
Cutting estimates, PO to £6.50 (from £7.10)
We have cut our adjusted EPS estimates by 4% in FY11 and 2% in FY12, mainly
reflecting higher costs associated with the consolidation of Turquoise. We lower
our PO to £6.50 based on a two pronged valuation approach which assumes an
average of 11x our CY10E, cross referenced against a DCF model.
Estimates (Mar)
(GBp) 2008A 2009A 2010E 2011E
We have cut our adjusted EPS estimates by 4% in FY11 and 2% in FY12, mainly
reflecting higher costs associated with the consolidation of Turquoise. We lower
our PO to £6.50 based on a two pronged valuation approach which assumes an
average of 11x our CY10E, cross referenced against a DCF model.
Estimates (Mar)
(GBp) 2008A 2009A 2010E 2011E
London Stock Exchange Group (LSE:LSE): Last: 665.00, up 0.5 (+0.08%), High: 669.50, Low: 657.00, Volume: 132.00k
BE
Cheers for that.
BE
On the IDBs, a note from Noble has just dropped in
BE
Here’s the upshot
BE
Our analysis of the P&L of investment banks and discussion with industry participants suggest that if the ban is implemented it is unlikely to have a huge impact on the revenues for IDBs. However, given the high operational gearing, the impact on profits can be material. We would recommend investors to book profits on ICAP and hold on to Tullett on valuation grounds.
NH
where’s this from
BE
From Noble analyst Nitin Arora
BE
Here’s the detail
BE
Whilst the definition of proprietary trading seems to be unclear, the focus seems to be purely on the proprietary trading using bank’s capital unrelated to client trading. There is a lack of clear demarcation between client trading and banks’ own proprietary trading and many times it is difficult to separate the two types of trading activities. Therefore, banks classify most of their trading revenues under “revenues from clients”. Trading unrelated to clients is said to account for a minimal component of investments banks’ revenues (2-7% on an average except for some cases such as c.10% for Goldman Sachs). Our discussions with industry participants suggest that whilst investment banks are likely to lobby against the ban, however, if implemented, some revenue loss is inevitable. Whilst it is difficult to quantify the impact of the trading ban on investment banks, it is even more difficult to estimate what proportion of revenues for inter dealer brokers is directly related to prop trading. Our discussions with industry participants indicate that it can be anywhere in the range of 2-20%.
BE
On the positive, these proposals have increased volatility in the financial markets. This should encourage more trading in the short term and hence should support revenues for IDBs in the short term. Our industry contacts suggest that even if this proposal becomes a law, it is unlikely to be implemented before next 24 months. So, there is little earnings risk from these proposals in the short term.
NH
(insanities – NO)
BE
Whilst there is uncertainty related to timing and implementation of the proposals, if implemented it is likely to have a negative impact on IDBs. Our sensitivity analysis suggests that a 10% decline in revenues is likely to result in a 22% decline in PBT for ICAP and 25% for Tullett.
BE
Using our current estimates, our FCFE model suggests a valuation of 375p for ICAP, 6% downside and 382p for Tullett, 23% upside. At this stage, we believe the best way to capture the uncertainties is by assuming a higher cost of equity. If we were to use a cost of equity of 11% compared to 10% used in the base case, our FCFE model suggests a valuation of 338p for ICAP, 15% downside. For Tullett, the valuation reduces to 342p, 10% upside. Given that ICAP seems to be fairly valued even without considering the impact of proposed ban, we would recommend investors to book profits on ICAP and hold Tullett on valuation grounds.
11:57AM
NH
Thanks for that
NH
Now
NH
some questions about Wolseley
NH
and the latest management change
NH
what can we say
NH
another senior director forced out
NH
following last year’s rights issue
NH
this is happening a lot
NH
as we have noted
NH
and this change
NH
does not seem to be particularly price sensitive
NH
here’s Panmure Gordon
NH
Management change
Further management change should not be a major surprise at Wolseley. The
arrival of a new CEO last year always left open the possibility of an FD
change while greater focus on regional performance meant no role for the
Europe
Further management change should not be a major surprise at Wolseley. The
arrival of a new CEO last year always left open the possibility of an FD
change while greater focus on regional performance meant no role for the
Europe
NH
Management change. It is announced today that group FD Steve Webster and CEO
Europe Rob Marchbanks will be leaving the group at the end of Mar 2010. With a
change in group CEO last year we are not totally surprised by this news.
Europe Rob Marchbanks will be leaving the group at the end of Mar 2010. With a
change in group CEO last year we are not totally surprised by this news.
NH
FD change. Steve Webster has seen the group through the £1bn capital raising, Stock
disposal and arrival of new CEO. The new FD is John Martin who has previously
worked at Alchemy Partners, Travelex (CFO role) and Hays (including CFO role). He
has worked with Wolseley CEO Ian Meakins before, so we assume that the latter has got
the man he wants to do the job.
disposal and arrival of new CEO. The new FD is John Martin who has previously
worked at Alchemy Partners, Travelex (CFO role) and Hays (including CFO role). He
has worked with Wolseley CEO Ian Meakins before, so we assume that the latter has got
the man he wants to do the job.
NH
Impact on share price. We do not think that this news will have a major impact on the
share price. There may be some positive sentiment around the CEO getting the FD that
he wanted but clearly the new FD will want to ensure that the financials are as he expects
them to be. This means his first results, which we assume will be the FY figures in
Sept/Oct, will be monitored carefully for any change. Until then US related
housing/construction sentiment will have the biggest impact on the share price.
share price. There may be some positive sentiment around the CEO getting the FD that
he wanted but clearly the new FD will want to ensure that the financials are as he expects
them to be. This means his first results, which we assume will be the FY figures in
Sept/Oct, will be monitored carefully for any change. Until then US related
housing/construction sentiment will have the biggest impact on the share price.
BE
What are the shares doing?
BE
Ahead 35p at £14.55
NH
thanks
11:59AM
NH
Okay
NH
it is almost midday
NH
so time to start rounding things up
NH
anything else you want to look at Bryce
BE
Nah – not really.
NH
what nothing at all
BE
Well it is, as we’ve noted, very quiet.
NH
surely there must be something
NH
of interest
BE
Well, there are a few mildly interesting broker moves I guess, such as CSR and Dairy Crest.
BE
But frankly, we’re holding off until the UK data and Obama’s state of the union address later in the week.
NH
(thanks Monrty – does that mean they could pull out of territories??)
NH
(insanities are you james in disguise. if you are ZAP is waiting)
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.
BE
……… And there was nowt in the Sundays worth picking up.
NH
back to Wolseley for a moment
NH
an interesting comment from Monty
NH
he reckons the strategic review
NH
could be more radical than thought
NH
what might that mean?
BE
How radical were we thinking in the first place?
BE
Pulling out of the US entirely, perhaps?
NH
Or as Monty suggests
NH
more JV’s
NH
like the one in the US
NH
here’s a bit more comment
NH
from MF Global
NH
Wolseley – Enforcing His Grip
NH
Wolseley announced a number of board changes, which the market will like, although they probably should have
been expected. Not only do these moves prove that Ian Meakins can enforce his grip, but also get on with
restructuring the Group. As you know we will hear more about his restructuring plans at the interims on the 22nd of
March. The valuation continues to look very attractive, in our view, while the new CEO’s restructuring efforts and a
slight US housing rebound should also drive this story.
been expected. Not only do these moves prove that Ian Meakins can enforce his grip, but also get on with
restructuring the Group. As you know we will hear more about his restructuring plans at the interims on the 22nd of
March. The valuation continues to look very attractive, in our view, while the new CEO’s restructuring efforts and a
slight US housing rebound should also drive this story.
NH
Board changes with a meaning. Both Steve Webster (CFO) and Rob Marchbank (CEO Europe) will be
leaving the Group in due course. John Martin, a partner at Apex and former Ian Meakins colleague at
Travelex, will be joining as the new CFO, while the position of CEO Europe will be removed;
leaving the Group in due course. John Martin, a partner at Apex and former Ian Meakins colleague at
Travelex, will be joining as the new CFO, while the position of CEO Europe will be removed;
NH
Whether fair or not, we think that these moves will be well greeted by the market for various reasons. That
said, the main message here is that Ian Meakins is in control and is set to continue the restructuring plan
with his own view and people;
said, the main message here is that Ian Meakins is in control and is set to continue the restructuring plan
with his own view and people;
NH
We think the other important message is that by removing the CEO Europe position he reduces reporting
lines and increases the ‘cultural’ input by the various country/regional managers. We have always seen the
Group’s Continental European ‘understanding’ as a weakness and it will be interesting to see whether this
move and the new CEO will be able to address the challenges there and in particular in France; and
lines and increases the ‘cultural’ input by the various country/regional managers. We have always seen the
Group’s Continental European ‘understanding’ as a weakness and it will be interesting to see whether this
move and the new CEO will be able to address the challenges there and in particular in France; and
NH
The valuation remains very attractive. At 0.36x 10/11E EV/Sales the shares remain significantly undervalued
against a margin potential of around 5%, in our view. A 0.5x EV/Sales should be possible, in our view.
against a margin potential of around 5%, in our view. A 0.5x EV/Sales should be possible, in our view.
12:05PM
NH
Okay, Insanties. Executive decision. I don’t think this site is for you. So goodbye.
NH
ZAP
BE
A bit of an arbiary zap. Nevertheless, if you begin by saying China Goldmines PLC has “broken out” then you’re probably going to be toast. Sorry about that.
NH
Yes
NH
that does tend to happen
12:06PM
NH
Right
NH
we were talking about the GDP figures
NH
and on which note
NH
did you see Darling’s interview with the Sunday TImes at the weekend?
BE
No – missed that.
NH
basically
NH
he won’t get the figs till today
NH
but thinks we will climb out of recessions
NH
but things are still GRIM
NH
“I’m saying now that I don’t know what the figures are, because I don’t get them until Monday, but I remain cautious. My message to people will be that we should be cautious,” he lectures.
“I’m saying now that I don’t know what the figures are, because I don’t get them until Monday, but I remain cautious. My message to people will be that we should be cautious,” he lectures.
NH
Perhaps he is worried there could be a “double dip”, with the economy appearing to recover for a short period, only to plunge into recession again. Though he doesn’t use the phrase, he’s not denying that it’s a risk if people don’t follow his grand recovery plan.
“If you go farther and faster than I have proposed, then I think the risk is that you will derail or even wreck the recovery,” he says, seizing the opportunity to deliver another lecture about the perils of undoing all his great work. He clearly wants voters to be afraid of what might happen if the Conservatives win the general election and press ahead with their plans to make drastic cuts in public spending.
“If you go farther and faster than I have proposed, then I think the risk is that you will derail or even wreck the recovery,” he says, seizing the opportunity to deliver another lecture about the perils of undoing all his great work. He clearly wants voters to be afraid of what might happen if the Conservatives win the general election and press ahead with their plans to make drastic cuts in public spending.
NH
Of course
NH
what hit the headlines from the interview
NH
was his comments on Volcker’s Rule
NH
and this govt
NH
don’t like anyone claiming the moral highground
NH
when it comes to banking reform
NH
Despite pressure from the Liberal Democrats and Tories, he is not inclined either to follow Obama’s lead by restricting the size of banks so they cannot become “too big to fail”, or by stopping them engaging in certain risky activities. The danger, he thinks, is that Obama is acting for domestic political reasons only.
“I don’t think America has any detail to show us,” he says dismissively.
“I don’t think America has any detail to show us,” he says dismissively.
BE
Interesting. Big words from Captain Eyebrows.
NH
arrogance
NH
dripping from him
NH
anyway
NH
his supertax
NH
was much better
NH
Still, as we speak, Goldman Sachs is issuing quarterly results revealing that its staff will get an irritating 57% rise in their pay packages. The £10 billion dished out in pay and bonuses by the firm nicknamed “Golden Sacks” has renewed public anger about the banks, prompting a furious response in the US from Barack Obama, who has vowed to rein in reckless financial institutions
NH
By contrast, Darling appears to believe bankers have been punished enough. He insists the one-off 50% tax on bank bonuses, announced in his pre-budget report last month, is working, citing reduced bonus pools at Credit Suisse and JP Morgan as a result of the policy.
NH
Where banks are refusing to reduce bonuses, the public purse is reaping the reward because of the tax, he says. He frets that if he goes any further, financial institutions and their workers will quit the City for more welcoming climes.
NH
“It’s a one-off bonus tax; I’ve said that repeatedly. It’s for this year, a year when repair work is still being carried out. I’m determined to ensure our banks remain competitive … I don’t want to disadvantage London; I want London to remain a competitive place. I want it to remain the world’s leading financial centre,” he says.
12:10PM
NH
Enough of that
NH
I have one more thing to mention
Petropavlovsk (POG:LSE): Last: 981.50, up 0.5 (+0.05%), High: 996.00, Low: 969.00, Volume: 562.05k
NH
or the GCWLN
NH
this is the reason is needs a $300m convertible bond
NH
apparently
NH
via Canaccord
NH
The 70% expansion potential in gold production from Q4/09 to Q4/11 remains in place, as does the company’s ability to fund all expenditure from cash and cash flow to the end of 2012. Bringing forward the two major projects, however, could see gold production in Q4/10 up 39% YoY. Our earlier assessment of self sufficiency was on the basis of gold project expenditure totalling US$92 million in 2010. The higher cost of Malomir and the planned acceleration of development will now see expenditure reach US$200 million in 2010.
NH
This increase in cash draw, plus the lower cash position at the year-end of US$76 million versus our estimate of US$132 million, will see an estimated US$36 million negative net cash flow in 2010 and underscores the need for prudent interim financial resources. This lower cash resource at the year-end appears to be mostly a result of higher capital expenditure on these projects in the six months to December, estimated at US$154 million versus our previous estimate of US$98 million. Effectively, the company has termed out its financing at 4% compared to 7.125% and provided itself some flexibility – not a bad thing in uncertain markets.
12:11PM
NH
Oh
NH
and I did have something on the orignal muppet stock
NH
and that’s note GKP
BE
Which of the many?
NH
Partygaming
BE
PRTY
Muppet stock. PartyGaming would be a penny dreadful, but for a share consolidation.
PartyGaming (PRTY:LSE): Last: 288.90, up 3.4 (+1.19%), High: 294.00, Low: 282.80, Volume: 646.34k
NH
they slipped out a statement Friday afternoon
BE
In response to some Austrian magazine saying the Bwin merger talks has picked up pace.
NH
that’s it
NH
Numis have been looking at what a deal might mean
NH
PartyGaming confirmed last week that it was holding “preliminary stage”
consolidation discussions with “a number” of companies. Bloomberg later quoted a
BWIN spokesperson confirming that merger discussions were ongoing with Party.
It is not clear that anything material will emerge from these talks, but we continue to
believe that consolidation in the sector is inevitable. We see increased scale and
liquidity, together with the substantial operational leverage embedded within
gaming business models, as being key drivers of this process. As a very simple
rule of thumb, we believe that cost savings in the order of 30%-50% of an
acquisition target’s EBITDA could be generated in the consolidation process. We
have increased our PartyGaming target price from 320p to 350p.
consolidation discussions with “a number” of companies. Bloomberg later quoted a
BWIN spokesperson confirming that merger discussions were ongoing with Party.
It is not clear that anything material will emerge from these talks, but we continue to
believe that consolidation in the sector is inevitable. We see increased scale and
liquidity, together with the substantial operational leverage embedded within
gaming business models, as being key drivers of this process. As a very simple
rule of thumb, we believe that cost savings in the order of 30%-50% of an
acquisition target’s EBITDA could be generated in the consolidation process. We
have increased our PartyGaming target price from 320p to 350p.
NH
Financial rationale: We estimate cost savings of roughly 20% and 30% of combined
EBITDA (savings of £40-£70m) from a Party/BWIN merger. Revenue benefits are also
potentially substantial (from increased liquidity and cross-selling), but these are much
more difficult to quantify and there are also likely to be some dis-synergies.
EBITDA (savings of £40-£70m) from a Party/BWIN merger. Revenue benefits are also
potentially substantial (from increased liquidity and cross-selling), but these are much
more difficult to quantify and there are also likely to be some dis-synergies.
NH
Scale benefits: These include the elimination of duplicated corporate overhead,
software, technology and development costs. Scale also brings increased marketing
and purchasing clout, whilst increased liquidity especially in Poker, is of major benefit.
software, technology and development costs. Scale also brings increased marketing
and purchasing clout, whilst increased liquidity especially in Poker, is of major benefit.
NH
Party/BWIN: We perceive a compelling strategic logic for a Party/BWIN merger. The
two parties have complementary strengths and the combination would create a very
powerful entity with leading positions across all four key industry product verticals.
n Powerful combination: Party is the global leader in on-line Casino and Bingo, whilst
BWIN has the leading Sportsbook in Europe. In Poker, Party is No.3 whilst BWIN is
No.5. Party and BWIN also have ambitions in B2B and together they would be able to
offer a full suite of products with market-leading technology.
two parties have complementary strengths and the combination would create a very
powerful entity with leading positions across all four key industry product verticals.
n Powerful combination: Party is the global leader in on-line Casino and Bingo, whilst
BWIN has the leading Sportsbook in Europe. In Poker, Party is No.3 whilst BWIN is
No.5. Party and BWIN also have ambitions in B2B and together they would be able to
offer a full suite of products with market-leading technology.
12:13PM
NH
OK
NH
and for those of you at Indaba next week
NH
our man on the ground is
NH
Matthew Kennard
NH
Hi Neil,
I’m off to South Africa this week to the Indaba mining conference. Oliver Ralph said you might be interested in a daily dispatch from the conference, sounds like a good idea. When would be a good time to come over and just run through what you are looking for?
NH
if the ROTR
NH
have any ideas on what Matt should be sending back
NH
pls let me know
12:14PM
BE
Wow – 14 minutes past deadline already.
NH
so it is
BE
So, just before we go, Wibble wanted this CSR note from UBS.
CSR (CSR:LSE): Last: 432.00, up 10.4 (+2.47%), High: 439.00, Low: 421.40, Volume: 338.68k
BE
Simple upgrade ahead of results. Not thrilling, but here you are anyway
BE
CSR reports Feb 10th – expect solid performance While we do not believe the device/headset semi market is witnessing as strong a bounce-back
as other end markets (noticeably PCs/autos), we believe that industry unit volumes for devices are trending ahead of expectations. As such, we expect
CSR will deliver Q4 results slightly ahead of consensus expectations.
Visibility improving, baseband integration not threatening yet We believe that visibility within CSR is improving and that Bluetooth products are
trading well, with the exception of some minor share losses at RIM (where GPS is – we believe – steady). While we recognise the longer term
concerns around baseband integration with Bluetooth, for now we see limited signs of this occurring and we believe that CSR has the opportunity to
grow into Wifi, though it is critical that the company now executes and announces further design-ins in this area.
as other end markets (noticeably PCs/autos), we believe that industry unit volumes for devices are trending ahead of expectations. As such, we expect
CSR will deliver Q4 results slightly ahead of consensus expectations.
Visibility improving, baseband integration not threatening yet We believe that visibility within CSR is improving and that Bluetooth products are
trading well, with the exception of some minor share losses at RIM (where GPS is – we believe – steady). While we recognise the longer term
concerns around baseband integration with Bluetooth, for now we see limited signs of this occurring and we believe that CSR has the opportunity to
grow into Wifi, though it is critical that the company now executes and announces further design-ins in this area.
BE
2010 outlook is fine With the device market expected to grow 7-10% by most market participants (UBS + 11%) in 2010E, and key customers such as
Samsung continuing to trend well and Nokia recovering from a low base, we believe CSR should be able to deliver solidly against consensus
expectations in 2010 which we believe is sufficient, given the valuation, for the stock to perform well.
Valuation – looks cheap Our forecasts remain broadly unchanged for CSR as does our valuation (495p based on 1.3x EV/sales ‘10E). Based on our
forecasts CSR trades on 11x P/E ‘11E against its peer group on 14.2x. We remove the short-term Buy rating as we believe the industry volume
recovery is now largely reflected in market expectations.
Samsung continuing to trend well and Nokia recovering from a low base, we believe CSR should be able to deliver solidly against consensus
expectations in 2010 which we believe is sufficient, given the valuation, for the stock to perform well.
Valuation – looks cheap Our forecasts remain broadly unchanged for CSR as does our valuation (495p based on 1.3x EV/sales ‘10E). Based on our
forecasts CSR trades on 11x P/E ‘11E against its peer group on 14.2x. We remove the short-term Buy rating as we believe the industry volume
recovery is now largely reflected in market expectations.
BE
And, more interesting to a general audience …………
BE
The latest Teun’s just dropped into my mailbox.
NH
ok
NH
is he still bearish?
BE
Yup.
BE
He’s saying …. well …. I’ll let him explain himself.
BE
Sell into strength as the tightening phase has started
BE
Sell into strength, as authorities have switched from “all out stimulus” to “let’s start some stimulus withdrawal”. Tightening measures are
coming in thick and fast around the world. We always thought that the start of tightening was not the first Fed rate hike, but could be many other
things including higher taxes, less spending, more regulation, Chinese/Asian tightening, or Fed language change. Recent initiatives include
Obama’s banking initiatives, and several Asian tightening measures. In the next few months this theme is set to intensify, and we expect positive
payrolls, a Fed language change, and the start of QE withdrawal. This willingness of authorities to move away from crisis mode is an important
change and means that the tightening phase in the broad sense of the word has now started. Thus, indeed, 2010 is shaping up to be like 1994 and
2004, as we expected. The start of tightening is hardly ever the end of the growth cycle, and normally the accompanying dip needs to be bought,
but it typically is a serious double-digit dip lasting 2 quarters or more. The sector rotation has of course already started in October-2009 and is set
to continue. As a result we move 2% from equities to bonds in our asset allocation, going to +5% cash, -2% UW equities, -3% UW bonds. We
think short-term strength is quite possible, and we have not quite gotten an outright sell signal on our MTIs either, but the 6 month risk-reward of
being long is worsening, and we recommend to sell into strength. Our 12 month MSCI Europe target of 1030 implies 6% downside.
coming in thick and fast around the world. We always thought that the start of tightening was not the first Fed rate hike, but could be many other
things including higher taxes, less spending, more regulation, Chinese/Asian tightening, or Fed language change. Recent initiatives include
Obama’s banking initiatives, and several Asian tightening measures. In the next few months this theme is set to intensify, and we expect positive
payrolls, a Fed language change, and the start of QE withdrawal. This willingness of authorities to move away from crisis mode is an important
change and means that the tightening phase in the broad sense of the word has now started. Thus, indeed, 2010 is shaping up to be like 1994 and
2004, as we expected. The start of tightening is hardly ever the end of the growth cycle, and normally the accompanying dip needs to be bought,
but it typically is a serious double-digit dip lasting 2 quarters or more. The sector rotation has of course already started in October-2009 and is set
to continue. As a result we move 2% from equities to bonds in our asset allocation, going to +5% cash, -2% UW equities, -3% UW bonds. We
think short-term strength is quite possible, and we have not quite gotten an outright sell signal on our MTIs either, but the 6 month risk-reward of
being long is worsening, and we recommend to sell into strength. Our 12 month MSCI Europe target of 1030 implies 6% downside.
BE
We like reliable growth, and … We expect strong earnings growth in 2010, leading to the start of stimulus withdrawal and struggling equity
markets. Many cyclical stocks trade on 15-20x earnings and are already priced for this strong earnings growth, and could be hit by the start of
stimulus withdrawal even if strong growth materialises. That is why we prefer reliable growth companies which we find attractively valued, and
having the right characteristics for the macro environment (“new normal”) we expect in the next few years, beyond 2010.
markets. Many cyclical stocks trade on 15-20x earnings and are already priced for this strong earnings growth, and could be hit by the start of
stimulus withdrawal even if strong growth materialises. That is why we prefer reliable growth companies which we find attractively valued, and
having the right characteristics for the macro environment (“new normal”) we expect in the next few years, beyond 2010.
NH
hmm
NH
there was certainly some of that last week
NH
Are we done?
BE
I think we are.
NH
thanks for logging on today
NH
Sorry for the lack of newsflow
BE
And thanks for your contributions, which really help keep things ticking over on a moribund day like this.
NH
very quiet this morning
BE
Very.
NH
and the market now is
NH
down…
NH
wait for it….
NH
just 0.4 points
NH
what are we supposed to do with that?
NH
and thanks taxloss
NH
a lovely story to end today’s session
NH
Cat a la Aga
NH
shame
NH
about the pun outbreak it has triggered
NH
but
NH
as Lorcan says
NH
our work here is done
NH
the market was up 20 points when we started
NH
down now
NH
small
NH
and on that note
NH
goodbye from me
BE
And me.
NH
cya
NH
(Ptolemy – off. straight red)
NH
and you BillyBoy