FT Alphaville » Markets Live transcript 29 Jan 2010

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Markets Live transcript 29 Jan 2010

Posted by Neil Hume on Jan 29 11:04.

Markets Live chat transcript for the chat ending at 12:17 on 29 Jan 2010. Participants in this chat were: Neil Hume, FT Bryce Elder

hola

and welcome to Markets Live

FT Alphaville’s daily waltz around the markets

Bryce is here

Morning.

…. waltz around the market

Was that a sly reference to Tullett Prebon?

I’m not that sharp

but a funny story though

from the Times City diary

The man who runs Tullett Prebon’s operations in the United States has taken leave of absence after some high jinks with a female member of staff got out of hand. No one is saying anything whatsoever, but an e-mail went out to staff of the bonds trader this week, I hear, saying that Marcus Bolton had taken leave at the company’s request. The matter will now go through legal channels.

The bare details appear in the Euromoney WeeklyFiX newsletter. Gossip is that it was a silly and harmless prank, with Bolton apparently essaying an impromptu dance step, but said female staffer ended up on the floor and may or may not be bringing legal action. Looming over it all, I suspect, are our old friends political correctness and the US culture of litigiousness. Bolton is a Brit who relocated to run the US side in 2009.

You do wonder. Bonds traders do not exactly have a reputation for retiring to their beds early of an evening with a cup of Horlicks and a copy of The Forsyte Saga. Some of the things that have happened on the trading floor at other dealers that have gone unreported over the years defy belief.

Bizarre story.

anyway let’s push on

11:06AM

and…

Groundhog day.

Dead cat after sell-off.

and now we are drifting off again

FTSE up 31 at 5177

Having been up about 45 near the start

and I wouldn’t be surprised if we close lower again today

Well, if we do

that’s very bad

according to my Chart Watcher

You have a chartist. How nice.

So, 5190 is the key level – 200 week or something moving average

if we don’t get back above that today or very soon we are screwed apparently

further falls to follow

and time for the

Hm.

Righty-ho.

11:08AM

Okay

some breaking news

Three arrested in FSA insider dealing investigation
Three 38-year-old men were arrested yesterday in connection with an investigation by the Financial Services Authority (FSA) into suspected insider dealing. Search warrants were executed at four addresses in London as part of the operation.
All three were interviewed under caution and then released on police bail.
The operation was jointly carried out by the FSA and the City of London Police Economic Crime Directorate.
No further details can be confirmed at this time and the investigation continues.

The crackdown continues

No detail whatsoever yet.

nope

nothing more

Odd that all three are aged 38 though.

I wouldn’t mind betting

it’s connected to Neutec Pharma

That does seem to be a rich source for the FSA to mine

indeed

the dentist

the company secretary etc

right

But steady. This is a tricky area for us to speculate about.

some more breaking news

some delusion comment

from EU Commissioner Almunia

on Greece

“No, Greece will not default, please. In the euro area, the default does not exist. Because with a single currency, the possibilities to get funding for your own currency is much more bigger…There is no bailout problems. There is the need for the Greek economy to adjust their imbalances. But these adjustments are public.”

“We have no Plan B. The Plan A is on the table…it’s fiscal adjustment. Our recommendations for fiscal adjustments are public…Next week, at the commission level, we will adopt public recommendations for Greece and for other economies — we did so last week…You don’t need to look for secret papers that don’t exist.”

that was from Bloomberg

n the euro area, the default does not exist

remeber that folks

it does not exist

That’s comforting to know.

it is

Euro not doung much against sterling today

under $1.40 against the dollar though

Sterling distorted recently by Cadbury/Kraft of course.

11:13AM

Want to move on to some stock specific stuff?

yes

but before we do

make sure you all hang on until midday

we have a special guest for ML

11:14AM

OK stocks

So what’s moving?

Whitbread

best performer in the FTSE 100 at the moment

Whitbread (WTB:LSE): Last: 1,401, up 37 (+2.71%), High: 1,417, Low: 1,370, Volume: 898.78k

ah it must be the Peter Andre effect

Eh?

Well, they have hired Pete

well to be precise

Costa Coffee have hired Pete

to launch their new coffee

the flat white

What’s that?

ZAP

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.

and Aussie version of a latte I think

Hang on – to Wikipedia …….

Originating from New Zealand and Australia, a flat white is a coffee beverage prepared by pouring steamed milk from the bottom of steaming pitcher over a single shot (30ml) of espresso.

The drink is typically served in a small 150-160ml ceramic tulip cup. The stretched and texturised milk is prepared by entraining air into the milk and folding the top layer into the lower layers. To achieve the “flat”, non-frothy texture the steamed milk is poured from the bottom of the jug, holding back the lighter froth on the top in order to access milk with smaller bubbles, making the drink smooth and velvety in texture.

A flat white differs from a latte in that it is served in a smaller ceramic cup[1], whereas a traditional latte is served in a glass with the steamed milk poured over the espresso shot. A latte can also be served in a bowl or a larger cup requiring more milk, obscuring the complex flavours of the coffee.

obscuring the complex flavours of the coffee eh

So obviously, they hired an Englishman born to Greek parents to promote it. That’s logical.

I thought he was an Aussie

You clearly haven’t read his autobiography.

I was reading Katie’s

Each to their own.

Anyway, that’s not really why Whitbread is up is it?

No, of course not

It’s feedback from the Investor Day

which was yesterday

everyone seems to have come away impressed

here’s Oriel Securities

with their feedback on the day

Yesterday Whitbread held an analysts presentation ; there was an underlying tone of confidence to the meeting

Premier Inn : Well positioned as market leader in UK budget hotels, the fastest growing segment of the market

It is planned to increase the scale of Premier Inn from 42,000 rooms to 55,000 rooms (
+30%) over the next four years

The dynamic pricing model ( flexible prices ) is expected to boost Room Yields by 2-3% over the next 18 months, which equates to £10-15m of profit

In the short term the focus will be on driving occupancies higher as the economy
Recovers Costa: Currently with 1000 stores in UK and 500 overseas, there are good opportunities to expand the business. It is planned to at least double the store network, both in the UK and Overseas

Finance : Intends to retain a predominately freehold estate in hotels/restaurants, although there may be further sale and leasebacks

Next trading statement due on 4th March and recent hotel data indicates that recent
trading has been good

Shares look solid value on 8.1imes EBITDA given the growth prospects and freehold
backing. BUY

Whitbread sort of sums up modern Britain for me

Explain?

cheap hotels

coffee bars

and fake pubs

That’s what it is all about now

Hang on – before we get too Little Britain, here’s a bit from BarCap on the meeting.

We raise EPS forecasts following the investor day yesterday by 1%, 4%, 5% and 8% in 2010, 2011, 2012 and 2013 respectively. These upgrades leave us 5% ahead of consensus for 2009/10E, 7% ahead in 2010/11E and 19% ahead in 2011/12E. The main reason for our upgrades comes from a >20% upgrade to our assumptions for Costa growth as we capture the upside associated with a faster rollout of new stores and more importantly the maturing effect of current sites. We also assume faster increase in new room growth for Premier Inn in line with the group’s target of 55,000 new rooms in 4 years. Our new PT is 1700p, and we remain 1-Overweight.

Blue sky scenario: We have identified 24% upside risk to our 2013 EPS forecasts based on the following factors: 5% from dynamic pricing (management
indicated this should add 2-3% to RevPAR over the next 18 months); Cost efficiencies: We believe there is further scope for management to deliver cost efficiencies through areas such as procurement and see 5% upside associated with this over the next 3 years; 6% from faster occupancy growth (since occupancy should return faster than room rate growth); 8% from sale and leasebacks – we now assume a more modest £200m transactions but at a better 5.5% yield and with 13% ROCE for reinvestment (as indicated in the presentation for Premier Inn).

Valuation/Blue sky: Following the adjustments to our forecasts we have increased our price target to 1700p. Our blue sky valuation rises to 2000p.

Catalysts: The group will deliver a trading update on 4th March – we expect a continuation of the positive trends witnessed in Q3. We continue to see upside risk to forecasts and Whitbread remains one of our top picks in the Leisure sector.

And, before we leave the thrilling subject of the £2.30 regular latte …..

what

Did you see this?

http://www.3am.co.uk/why-3amcouk-wont-be-covering-peter-andres-latest-promotional-stunt-see-contract/20874/

oh yes

I did read that

The press demands of Peter Andre’s flak team.

I thought we had trouble with flaks

but it seems in the world of C-list celebs things are much worse

you can’t ask questions

“The interview will be about Costa Coffee and the event only. 3am online understands that they cannot ask any questions regarding anything else; anything asked will not be answered and will be removed from the copy without exception.”

“3am online agrees to give Can Associates Limited full copy and headline approval of the interview, if approval is not agreed upon 3am online understands that they cannot run the feature.”

“3am online understands that no images of Katie Price can run with this feature relating to this feature at all.”

“3am online, under all circumstances, must accompany the photographs of Peter Andre with positive text/captions/headings.”

jeez

who would agree to that

Makes the Barclays team seem positively cuddly in comparison.

indeed

And, while we’re on vaccuous celebrity news …..

This just appeared on Sky Breaking

Magistrates laughed when Ashley Cole’s solicitor asked for him to have 21 days to pay £1000 fine and £315 costs

Ok. We should return to the market I guess.

yes

and definately not mention that premiership football player

who has got the super injunction

in fact.

We’re absolutely not mentioning that.

(Dinker???????)

11:23AM

Moving on

International Power

a good market again today

anything new?

International Power (IPR:LSE): Last: 322.70, up 5.2 (+1.64%), High: 328.60, Low: 318.60, Volume: 5.17m

Few comments from the GDF people yesterday.

(Dinker I get it now Emoticon

)

All slightly cryptic.

GDF Suez Vice-Chairman Jean- Francois Cirelli hasn’t ruled out future talks with IPR after negotiations broke down earlier this month, reports BBG. “We are in a procedure and today we are no longer in talks,” Cirelli said in an interview with BFM radio today. “Legislation today prevents us from talking so we aren’t talking for a number of weeks or months. We will see.” Asked whether discussions will restart, he said, “the future will tell us.”

(Dinker – Friday)

actually

is there a 6-month lock up on GDF coming back?

after all they weren’t in takeover talks

Indeed. We’re assuming no lockup.

and does it matter?

this would have to be friendly

So presumably they can come back at any time

Fair point.

talking of Anglo French deals

Arriva

Arriva (ARI:LSE): Last: 485.00, up 3.6 (+0.75%), High: 486.40, Low: 477.10, Volume: 296.26k

this looks to be a carbon copy of the IPR/GDF deal

what is with the French?

they seem reluctant to part with cash

going instead with asset swaps

Assets split out? Knitting together international divisions? It does, doesn’t it.

And, similarly, there’s no guarantees this one will happen either.

and as for what’s worth

well

no one seems to know

here’s a bit of comment

from Arbuthnot

Arriva announced yesterday that it has held very preliminary discussions with SNCF (the French state-owned rail company) regarding the possible contribution of part or all of the transport business of Keolis (46% owned by SNCF) to Arriva. We believe the most likely outcome is that nothing happens, or there is a small transaction covering only selected Keolis assets. However, it is still useful to explore the potential impact of a major transaction on Arriva.

The key constraints on Arriva are its balance sheet, EPS enhancement and ensuring an acceptable return on incremental investment. Our analysis suggests that new equity capital is likely to be required to fund anything other than a very small transaction. Not only must Arriva stay within its banking covenants, but we also believe it is desirable to maintain significant headroom (say, 2.5x net debt/EBITDA vs. 3.5x covenant level) given the ongoing investor paranoia about leverage. As a potential alternative to issuing new shares for cash, we envisage Keolis shareholders receiving Arriva equity as part or full consideration.

The limited overlap between the Arriva and Keolis means that limited synergies are available. This makes it difficult for Arriva to justify paying a premium multiple for Keolis. Our analysis suggests that even at 4.5x EV/EBITDA an acquisition might be only marginally accretive. It remains to be seen if this sort of multiple will be acceptable to the shareholders of Keolis. From the Arriva side, we see the key obstacles as shareholder resistance in the face of a potentially large equity issue and the difficulty in demonstrating an acceptable return on incremental investment.

On a December 2009E P/E of 11.0x, EV/EBITDA of 5.4x and dividend yield of 5.2%, Arriva’s valuation is undemanding, but we see better value elsewhere in the sub-sector. For the time being, our recommendation remains Buy, with a target price of 600p based on our SOTP valuation. However, the possibility of a major transaction poses significant extra risk and uncertainty.

And here’s a line from RBS, which has been rather overtaken by events

But makes some interesting points nevertheless

Keolis has operations across Europe (8 countries), Algeria, Australia and Canada providing services
on behalf of public transport authorities. It manages the largest bus and coach fleet in France.
Revenues in 2008 totalled EUR 3.2bn, comparing to Arriva at £3bn (£1.3bn of which were outside the
UK and in Europe). There could certainly be rationale for the idea Arrivas strategy is to build its
European platform and perhaps this could accelerate that ambition plus take Arriva into France where
it is not currently exposed

But this would come out of the blue, in our view
However, France has never seemed to us to have a big appeal for the group. Weve always
understood its sees it as a difficult market to do business in. Further, we have never got the sense
that Arriva have been preparing for a big event as this would be. So this doesnt look like this could
be something that Arriva is likely to have sought, rather an idea brought to them in our assessment.
So at the outset, we are a little sceptical at the level of interest in this within Arriva, if there is indeed
any truth in it at all. Whilst the market attempts to ascertain the level of truth in this story, we expect
the no smoke without fire sentiment to stir a bit of worry, at least initially. The market continually
frets about level of returns being achieved in Europe and if there were any truth in this, it would
clearly deepen that exposure significantly.

thanks for that

11:29AM

So Bryce

have you watched the Wall Street II trailer

apart from the mobile phone

I thought it looked pretty feeble

embarassing almost

It does look a bit weak, I agree.

Like a neutered version of CSI Miami.

the limo bit

was especially poor

However, it’s hard to tell anything from trailers I guess.

and I thought Shia Le Beef

or whatever his name is

looks like Andrew Ross Sorkin

of the NY Times

http://www.thedisciplinedinvestor.com/blog/wp-content/uploads/2008/05/sorkin190.jpg

You have a point.

a vague likeness

anyway

the new catch line

that now greed is legal

seems, well

trite

And wrong.

Entirely oppositely wrong.

11:32AM

Time for some banks?

Sure

HSBC the best performer in the sector this morning

HSBC Hldgs (HSBA:LSE): Last: 675.50, up 15.5 (+2.35%), High: 677.90, Low: 666.00, Volume: 14.49m

and do you remember Alex Potter?

Of course. Good scribbler.

Disappeared from Collins Stewart a few months ago.

he did

and has now resurfaced

at FBR

which are a US outfit

with a UK arm

and he has pubbed a note today

saying why he prefers HSBC to Stan Chart

(Friedman, Billings, Ramsey. Which always sounds like a solicitor.)

Do you have the note to hand?

one moment

got it

now it is on Basell III

and its impacts

now

I am getting slightly bored with Basel

but hey

Get used to it.

“Basel III” affects HSBC (HSBA LN – Outperform) more than it does Standard Chartered (STAN LN – Market Perform). We are
trimming our HSBC price target to 800p (from 893p) to reflect a similar level of conservatism surrounding insurance capital as we have
with Lloyds Banking (LLOY LN – Outperform, 77p price target). We also are revising our Standard Chartered (StanChart) price target
to 1,493p (from 1,574p), reflecting rising long-term rates and their input into our cost-of-equity calculation. We continue to prefer
HSBC to StanChart on the basis of earnings recovery, accretion to the equity base, and valuation. HSBC is trading as low as 1.7x 2010E
tangible book value, compared to StanChart at 2.1x

HSBC’s main “Basel III” effects are easily manageable. The main effects are in insurance, deferred-tax assets (DTAs), and the
pension deficit. Insurance is a materially smaller impact here (8%) than at Lloyds (20%), and again, we believe management can
explore options such as a sale, capital withdrawal, or securitization of the value-in-force (VIF). Now that HSBC is approaching
profitability in its North American business unit (where we believe many of the DTAs lie), we believe these can start to be
crystallized such that, by the end-2012 implementation schedule, these will have been “converted” to retained profits in large part.
The pension deficit is the final, larger part of the effect: This, by nature, is a volatile element, and we note that the deficit nearly
doubled in the first six months of 2009 as there were some changes to actuarial assumptions. In aggregate, not only are these
actions the bank can take to offset these capital effects, it has time in which to perform them. HSBC is a strongly cash flow
generative bank, such that it can improve capital levels organically with relative ease, in our view

We continue to favor HSBC over StanChart based on greater earnings momentum as the U.S. business recovers, expectation of a
positive AFS move in 2H09, and the discount to StanChart on which it trades. HSBC, fully adjusted, trades as low as 1.7x 2010E
tangible book value compared with StanChart at 2.1x. Results are reported the first week of March.

while we are with the banks

I have a bit more on Lloyds

and this CoCo bond reweight

Aha – this is coming in about three weeks, right?

I think so

Something like 3bn shares to be printed.

yep

more paper than Weirmar republic

Stuck this in yesterday, but worth reminding about the anticipated, but most likely overlooked, debt-to-equity conversion which will take place in 3 weeks time. There is GBP1.5bn of debt converting into ordinary equity. We expect this to result in the issuance of c.2.9bn additional shares. The actual conversion price will be the greater of the VWAP between 5-11th Feb or 90% of the closing price on 11th Feb. We currently estimate a price of 52.6p per share. This roughly equates to 4% of the current outstanding share count and will cause some re-weighting for index funds. Internal estimates for demand equate to 2-3 days of volume. Timeline: conversion price & no. of shares announced on Feb. 12th. re-weighting to the new shares to be complete by COB on Feb. 17th. The new shares should begin trading on 18th Feb.

could be some fun and games around that

Lloyds Banking Group (LLOY:LSE): Last: 51.00, up 0.25 (+0.49%), High: 52.05, Low: 50.04, Volume: 64.17m

as the VWAP price goes all over the place

Reweight + flowback x hedging = chaos.

Might be fun.

oh yes

evil prop desl will love that

talking of index changes

I think there was something out about the delisting of Cadbury last night

and there has been a rule change

FTSE will delete Cadbury when the deal is declared unconditional

not when they have 85% acceptances

Here’s the RNS

Cadbury PLC (UK): Offer by Kraft Foods Inc. (USA)
Anticipated Treatment In FTSE Indices

28 January 2010

Subject to and upon the offer being declared wholly unconditional FTSE will issue a notice to confirm the deletion of Cadbury from all FTSE indices and the addition of approximately 265m shares in Kraft.

Where applicable, such as the FTSE 100 index, Cadbury will be replaced by the company with the highest market capitalisation on the reserve list.

If the offer is declared wholly unconditional Cadbury shareholders are expected to receive a dividend of 10 pence out of the previously planned final dividend of 12.3 pence. It is currently expected that the ex dividend date will be Friday 5 February 2010, as previously announced by Cadbury.

FTSE will treat the dividend as an ordinary cash dividend and reflected in the total return indices accordingly.

It is therefore anticipated that changes to FTSE indices will become effective on Monday 8 February 2010 (i.e. applied at close on Friday 5 February 2010).

All details are subject to the offer becoming wholly unconditional and a further FTSE notice to confirm index changes.

So the biggest company on the reserve list nex t Friday goes in

and is that still ARM

ARM Holdings (ARM:LSE): Last: 194.40, up 3.7 (+1.94%), High: 195.70, Low: 187.80, Volume: 4.22m

Last time I checked, yes.

ITV’s about £200m behind.

oh perhaps

Crozier will get them there

actually

Can he deliver?

I have a bit of comment on the Cadbury change

from Olivertree Securities

that up and coming broker Emoticon

FTSE last night made an announcement regarding the treatment of Cadbury once Kraft’s offer goes unconditional. Normal FTSE rules dictate that a stock only gets delisted once (a) the offer is unconditional AND (b) 85% of the stock has been tendered to the acquirer.

This normally means that passive index trackers will wait until both these conditions are certain to be met before tendering or selling their stock. Given consensus generally believes that the Kraft offer will go unconditional next Tuesday, but that 85% might be too aggressive a hurdle so immediately, we has seen some hesitancy from these funds to react to this closing date, feeling they would be better off waiting for any extension to the offer.

However – the new FTSE announcement dictates that (at the decision of the FTSE board) the 85% rule has been waived in this case, and Cadbury will be deleted simply upon Kraft’s declaration that the offer is unconditional.

This means that the passive trackers are more likely (settlement deadlines permitting) to tender into nect Tuesday’s close, and has some potential impact on Mix & Match elections.

The passive trackers are those most likely to do the financially irrational thing and elect for all cash (currently worth 799p on ex-dividend basis). These funds will now potentially be tendering into the first close, meaning those electing for all stock (currently 870p ex-div) might see an uplift at this time, rather than into an extended deadline (as was previously the case).

Our models still suggest the actual value of this potential pro-rate improvement to be small, but it helps to be receiving this on this “first” close rather than via an extension.

11:41AM

Strawbug

we had just spotted that

after weeks of rubbishing Google

Rightmove

have now struck a deal

Hm. And it’s put a bit of a fire under their share price.

RMV’s up 32p at 533p at the moment.

here’s the deal

and this is really odd

I thought the two of them were at war

Rightmove today launches new property level maps, the first in a series of mapping innovations by the UK’s number one property website, in association with Google. Under this new partnership, Google will now supply all maps for displaying properties on Rightmove.

From today, Rightmove users will see properties placed on a Google Map on each property’s detailed view page. The application will then be expanded over the next month so home-hunters will be able to see initial search results plotted out within their search area. Additional exciting uses of Google Maps are also now in development.

“With this technology on their site, Rightmove will be able to provide property searchers with a faster, more accurate and more comprehensive mapping system to help them find that perfect home even more efficiently”, said Sanjay Patel, Geo Manager EMEA, Google Enterprise.

Now I wonder

all this sparing between the two of them

do you think Google might bid for Rightmove?

Plausible, I guess.

They haven’t entered any other property market via an acquisition.

but then again

they haven’t exactly done that well

with the organic model

Well, they haven’t done well with a whole variety of things

But the model involves selling apps such as Google Maps wholesale as well as direct ….

So I’m not sure this tie-up with Rightmove suggests they’re not going to make an assault on their market later.

Just like their various deals with the handset manufacturers didn’t mean they wouldn’t later launch their own handset.

true

Rightmove share price

on a tear at the moment

up 7% now

I guess we should also point out the Nationwide house price survey here

yeah

Nine months up.

that will have helped

a big rise in January

here’s Howard Archer to explain

Nationwide reports house prices rose 1.2% month-on-month in January

The Nationwide reported that house prices picked up anew at the start of 2010 after showing some signs of flagging towards the end of 2009. According to the Nationwide, house prices increased 1.2% month-on-month in January, which was the largest increase since last August and was the ninth rise in a row. Furthermore, it was double the 0.5-0.6% month-on-month increases seen in each of the final four months of 2009. Nevertheless the three-month/three-month rise in house prices slowed to 2.1% in January from 2.3% in December and a peak of 3.8% in September. Meanwhile, the year-on-year rise in house prices jumped to 8.6% in January from 5.9% in December. This reflected the fact that house prices fell 1.3% month-on-month in January 2009.

and his thoughts

The Nationwide data indicate that house prices started 2010 with some impetus and they look likely to rise further in the near term at least. Even so, the suspicion remains that the rises seen since early 2009 cannot be sustained given a still far from favourable economic environment and still relatively tight credit conditions. We believe that a modest relapse in house prices is likely at some point in 2010 and they may well be essentially flat over the year as a whole. A relapse in house prices is even more likely to occur if more properties come on to the market as a result of the recent firming in prices, given that a shortage of properties has been a key factor supporting house prices since early 2009. Much will obviously depend on whether or not the economy can develop recovery after it crawled out of recession in the fourth quarter of 2009. Future developments in unemployment, earnings and interest rates will also obviously be key factors to future movements in house prices.

has that helped any of the housebuilders?

No.

Barratt Developments (BDEV:LSE): Last: 118.90, down 2.2 (-1.82%), High: 123.30, Low: 118.60, Volume: 1.94m

Persimmon (PSN:LSE): Last: 430.00, down 7 (-1.60%), High: 446.50, Low: 425.40, Volume: 936.86k

Bovis Homes Group (BVS:LSE): Last: 399.20, down 9.5 (-2.32%), High: 414.30, Low: 399.20, Volume: 101.32k

strange

on Bovis

there’s quite an aggressive sell note out today

Who from?

KBC I think

Robin Hardy

a big housing market bear

Bovis’s valuation still appears stretched, on the basis of EPS recovery. The level of EPS needed after 2011 to place the stock on a reasonable mid-cycle rating looks unachievable. Using NAV has left the whole sector overvalued and, while Bovis’s downside may now be more limited, we see a low ceiling set by reasonable PEs as likely to limit improvements in the price.

Now, Bovis is reckoned to have the best land bank in the sector

and has always been at the pricer end of the sector

here’s some more of the note

Concerns about net margin development – Bovis cut costs deeper than most,
losing 60% of its headcount, fine when build rates were low. This cost base must
now be rebuilt and, in addition to re-opening whole business areas (land, buying
and planning), existing staff costs are expected to be unfrozen. Against limited
gains in revenues and gross margins, net margins may come under pressure

EPS rebuild needed to support fair value still looks demanding – We still
believe that the housebuilders need to return to being valued on an earnings
basis rather than NAV, and that fair value will be set by a mid-cycle PE of around
8-9x by end-2012. To achieve this on the current price, EPS growth after 2011
will need to be very high – perhaps as much as a five-fold increase. This is much
higher than appears achievable from that point in the cycle. If one sets a target
price equal to a 25% premium to book value, EPS would need to make nearer
an eight-fold increase to achieve a reasonable earnings-based valuation.

And before we leave house prices ….

Paragon up again after a decent trading statement yesterday.

Here’s Collins Stewart on them re. the Nationwide data

Nationwide index is up 1.2% in January
The Nationwide House Price Index for January 2010 shows a strong start to
2010 with a 1.2% rise. This rise comes after a flat for the last three months
of 2009.
Nationwide index is important to Paragon
Paragon’s bad debt provisions are based on the Nationwide House Price
Index (with additional adjustments to reflect lower realisable values of
properties which are in arrears).
Paragon’s 1Q10 profit was based on 0.2% house price growth
Paragon’s 1Q10 Profit before tax of £13.1m was based on 0.2% house price
growth.

At end September 2009 Paragon had £221m of impaired Buy-to-Let loans
and a £46.1m provision. If the Nationwide House price in September 2009
had been 1.2% higher, we estimate that the bad debt provision would have
been £2.6m lower.
Scope for a material upgrade later in 2Q10
There are two more months before the end of Paragon’s 1H10. Despite
the
stronger than expected 1Q10, the fall in arrears and the rise in house prices,
we leave our forecasts unchanged. We recognise that there is scope for a
material upgrade once the data from the securitisations and the actual
house price movement for the period to March 2010 are known. We maintain
our 150p short-term price target and 177p January 2011 target.

Paragon Group of Companies (PAG:LSE): Last: 139.00, up 1 (+0.72%), High: 140.90, Low: 138.00, Volume: 1.09m

11:52AM

Some sad news

our special guest has cancelled

it will have to Monday now

Oh well. Something to look forward to I guess.

indeed

11:53AM

Where now?

Is there any Friday raw going around?

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.

One bit

Shanks Group

the other day we heard Caryle had got access to the books

and had started DD

Indeed.

well, the story doing the rounds is that

they have been allowed to look at the books

because they have said they are willing to pay 145p a share

subject to DD being ok

Shanks Group (SKS:LSE): Last: 122.60, up 1.1 (+0.91%), High: 124.50, Low: 122.00, Volume: 274.14k

I though management set Carlyle a mark of 150p to hit

that’s right

15:47 08Dec09 -SHANKS GROUP PLC – STATEMENT RE POSSIBLE OFFER
15:48 08Dec09 -SHANKS GROUP PLC – SAYS 2 BIGGEST SHAREHOLDERS AGREE THAT CASH OFFER OF 150P/SHR OR MORE WOULD BE APPROPRIATE VALUE

so 145p might get it

but you never know with PE

they usually negotiate down after seeing the books

so I wouldn’t say this was done and dusted by any means

Always seemed an interesting strategy that. Naming your price.

And the shares seem up with events, to say the least.

and some of the ROTR

were asking about yesterday’s RIO story

rumour RIO to bid $90/share for FCX US

Looks flaky. Very very flaky.

that’s Freeport

yes

why would Rio

having got their debt down to a managable level

buy this

I just can’t see it

and neither can our mining people

who dismissed it out of hand

Also, their Papua New Guinea JV has been a complete pain.

Yeah Freeport’s famous for the Grasberg mine in Indonesia which has descended into a war zone of sorts with local militias periodically killing miners and the company having to bring in the military on a rent-a-soldier basis.

It’s the biggest copper/gold mine in the world and Rio is a JV partner there. But can’t think why Rio would so want to consolidate ownership of Grasberg

safe to say

no one hear at the FT really likes this story

Rio Tinto (RIO:LSE): Last: 3,088, up 34 (+1.11%), High: 3,120, Low: 3,058, Volume: 4.28m

BHP Billiton (BLT:LSE): Last: 1,866, up 23 (+1.25%), High: 1,873, Low: 1,840, Volume: 3.51m

Debbie – noted BHP’s potash deal. Tiny, but interesting.

Merrill reckons it’s one small step towards ………

what

come on

the suspense is killing me

Sorry – Lotus notes is being as friendly as usual

BHP acquires Athabasca Potash for $320 mn
BHP has announced that it will acquire Athabasca Potash for C$341 mn
(US$320 mn). Athabasca is a Toronto listed junior that owns the Burr Potash
project and various exploration properties in Saskatchewan, Canada. The Burr
project is Adjacent to BHP’s Jansen project. We think the transaction underlines
BHP’s interest in Potash. We also believe that the transaction makes sound
strategic sense; BHP is (once again) consolidating a mineral district to eventually
benefit from economies of scale and synergies from optimising contiguous assets.

No big deal for BHP… this time.
We think this acquisition needs to be taken in context. US$320 mn for a US$190
bn market cap company is a rounding error. Will it impact BHP’s ability to pay a
dividend or buy back shares? Absolutely not. In our opinion, one of the biggest
problems facing BHP is how to redeploy the strong cashflows from its tier one
asset base and how to gear up an almost completely unlevered balance sheet.
We believe that large scale M&A is one path to this end. We have previously
written research contemplating a merger between BHP & POT for example.

We are bullish and thus prefer more geared names
Recent market gyrations notwithstanding, we are bullish on the global economic
outlook. BHP has world class assets and a best in class balance sheet. As a
less operationally and financially geared player, we think that BHP is unlikely to
outperform the wider sector in a period of rising commodity prices. We estimate
BHP is trading on 13x 2010E CY earnings, 10x CY2011E earnings against Rio
Tinto (RTPPF, GBP3621.5, C-1-9) and Anglo (AAUKF, GBP2796.5, B-1-9) on
about 9.5x 2010E, 7x 2011E.

thanks for that

12:02PM

Right

let’s head back to the mid cap world

and have a look at a support services stock

we haven’t really covered before

Connaught?

yes

it’s one of these outsourcing companies that have come from nowhere to be a really sizeable company

I think they cut the grass verges in my town

not very frequently

Connaught (CNT:LSE): Last: 329.40, down 30.5 (-8.47%), High: 355.00, Low: 325.00, Volume: 10.28m

So the CEO’s gone with immediate effect.

yes it is one of those

but everyone is being terribly polite

backslaps all round

but if memory serves me correctly

this is a bit of acquisition machine

that Evil Knievil has had issues with in the past

“Acquisition machine” tends to be a bit of a warning sign in itself.

indeed

worth looking a bit more closely at this company

anyway Mark Davies

the CEO was rated by investors and seems to have been

a bit of counterbalance

to the executive chairman

actually the corporate governance at this company

is all a bit odd

So. Off “to seek new challenges elsewhere”. Chairman steps in.

I can understand the market’s reaction.

right some comment on this

Go on.

Altium

they might be house

Altium view: With Mark Davies held in such high regard by many investors, his unexpected departure is likely to unsettle some holders of the shares. However, we take significant reassurance from the fact that Mark Tincknell has performed a ‘hands on’ role as Executive Chairman and has been instrumental in developing group strategy, particularly in building the Compliance division. In addition, following the reorganisation of the group into three business units and associated management restructuring, Mark Davies leaves behind three experienced divisional CEOs to take the group forwards.

Parallels may also be drawn with the to’ings and fro’ings of Bob Holt at Mears (Mkt. cap: £202m, SP: 272p, TP: 355p, BUY) and, in this regard, investors may take comfort from the positive impact the founder of a Social Housing had on his return to the role of CEO. In terms of forecasts, PBT and EPS estimates remain unchanged. We continue to believe that Connaught has strong prospects across all three divisions to take market share via an increasingly integrated and efficient service offering, enhanced by ongoing investment in systems and technology. We retain our Buy recommendation and 465p target price.

Here’s a succinct evaluation from Oriel Securities …

This really is a hammer blow as in
his time with the City he has shown himself to be talented and visionary
 As a consequence, we see this as enough of a negative to downgrade our
recommendation from BUY to HOLD
 No real reason is given for Davies wanting to exit. The official line is “to seek new
challenges elsewhere”. Given that he we’re told he is not jumping into another role
elsewhere, it feels to us like there is more to this than meets the eye

hmmm

I’ll go along with that version

this seems very curious to say the least

12:09PM

Right

it is past midday

and we need to start winding things u[

one small cap to mention

UK Coal (UKC:LSE): Last: 61.50, down 4.5 (-6.82%), High: 64.00, Low: 59.50, Volume: 1.77m

another dismal statement today

and burried within the update

is a hint that another cash call

might be needed

We have also identified a number of
actions which are being implemented to address the impact on working capital of
the later new Daw Mill face start.

remember the company

has one last autumn at around the 60p level

and if they have to pass round the hat again

I wonder what the reaction of the biggest shareholder Peel Ports will be

12:10PM

and also

RBS

they are bucking the generally firmer trend among the banks

Royal Bank of Scotland Group (RBS:LSE): Last: 31.91, down 0.66 (-2.03%), High: 32.96, Low: 31.50, Volume: 54.02m

and I am guessing

it is on the back of this

A Philadelphia real estate developer has sued the Citizens Bank unit of UK bank RBS for $8bn, claiming the bank jeopardised a $700m project to redevelop a steel-plant site by reneging on financing commitments, reports Reuters. O’Neill Properties argued that Citizens Bank, using an “artifice” of sham defaults, tried to collect on about $180m of loans because of RBS’s own liquidity crisis. O’Neill is seeking $4bn for damages allegedly arising from Citizens’ actions, plus $4bn of punitive damages.

12:12PM

Right

I think I am done

Bryce

you got anything else?

Mention of the US GDP on the right.

Consensus I think is for a 4.6% annualised rise in Q4, with the core deflator remaining steady at 1.3%.

But will it make a differenct to next week’s FOMC decision?

I’d have thought no.

Next week’s NFP report is the key reading here.

indeed

right

We must end this

I have to go and get my tickets for Arsenal vs Man Utd

that I am selflessly giving away

aren’t I nice?

Aren’t you.

I am really

just giving them up

I’ve heard PRs arguing the case otherwise.

the truth is I don’t think I would be able to watch

Anyhoo, let’s close this.

yep

Thanks for all your comments, today and this week.

the Lunch Wrap need to go

yes

thanks for logging in this week

lots of comments

even though it has been painfully slow at times

like watching paint dry

volumes are shocking at the moment

and the FTSE 100

ROTR have failed today

market higher than when we started

V POOR

up 43 points at 5,189

perhaps the US GDP reading will surprise on the upside

who knows

the ROTR

goodbye

Bye.

and have a goodweekend everyone

This entry was posted by Neil Hume on Friday, January 29th, 2010 at 11:04 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 29 Jan 2010

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