Markets Live chat transcript for the chat ending at 12:14 on 2 Feb 2010. Participants in this chat were: Neil Hume, FT Bryce Elder
NH
Hi there
NH
its 11.03 am
NH
which means it is time for another edition of Markets Live
NH
FT Alphaville’s daily knock about markets discussion
NH
hosted by Bryce and me
BE
Morning all.
NH
Soundbuy – you are earlier
NH
11.02am tut tut
NH
you know the start time
NH
Alive does
BE
To be fair, we’re early ourselves this morning.
NH
well
NH
the system was booted up early
NH
when it actually clicks in
NH
is anyones guess
NH
but the important thing is
NH
we are up and running
NH
and raring to go
11:04AM
NH
Okay
NH
where shall we start?
BE
Wider market seems as good a place as any.
NH
yes it is
BE
And, at the moment, we’re hanging on to yesterday’s gain.
BE
FTSE’s up 8 at 5255
NH
I wonder how that leaves the technicals
BE
Didn’t we bounce off some resistance yesterday?
NH
dunno
NH
FatDaz is our man on this
NH
but that market really did like the ISM number state side yesterday
NH
ignored the GDP reading
NH
but loved that
BE
Indeed.
NH
I begining to wonder what would stop the FTSE from falling
NH
and then bang
NH
that came out of the blue
NH
right on to some stocks
BE
Yup
BE
And it’s the miners that are leading
NH
the way
11:07AM
BE
So the diggers have taken all the top slots on the FTSE 100 leaderboard
NH
so it’s one of those days then?
BE
It is.
Eurasian Natural Resources Corporation PLC (ENRC:LSE): Last: 975.50, up 41.5 (+4.44%), High: 983.00, Low: 931.00, Volume: 619.67k
Kazakhmys (KAZ:LSE): Last: 1,332, up 51 (+3.98%), High: 1,340, Low: 1,283, Volume: 1.21m
Vedanta Resources (VED:LSE): Last: 2,627, up 74 (+2.90%), High: 2,646, Low: 2,532, Volume: 802.93k
Xstrata (XTA:LSE): Last: 1,098, up 38.17 (+3.60%), High: 1,110, Low: 1,063, Volume: 6.52m
Rio Tinto (RIO:LSE): Last: 3,302, up 119 (+3.74%), High: 3,330, Low: 3,212, Volume: 3.93m
Fresnillo Plc (FRES:LSE): Last: 719.00, up 19 (+2.71%), High: 728.00, Low: 698.00, Volume: 430.67k
BE
Etcetera.
NH
hmmm
NH
glad you brought up Rio
BE
Why’s that?
NH
well the other day there was that rumour doing the rounds about a Rio bid for Freeport McMoran Copper & Gold
BE
Yeah – $90 a share
BE
And it was rubbished, if I remember correctly.
NH
yes it was
NH
by some people here
NH
but I starting to have second thoughts
BE
Really? Why?
NH
well it’s partly a comment made by one of the ROTR
NH
Deals are in Rio’s DNA
NH
also because their balance sheet is getting much stronger thanks to disposals
BE
……. and that equalisation payment they will get from BHP for the iron ore JV in Western Australia
NH
so this morning, the company announces the sale of most of the Alcan packaging business
NH
and then says this
NH
RIO SAYS BALANCE SHEET NOW ALLOWS SELECTIVE M&A OPPORTUNITIES
NH
Now I am not saying it will be Freeport
NH
but I sense they may be looking at something
BE
Right.
NH
in fact that’s one of the points made by Citigroup this morning
NH
they have upgraded Rio on the basis that recent price weakness has created a decent buying opportunity
NH
on a 7.9x p/e for 2011 and 3.8x EV/EBITDA apparently
NH
$13bn of cash disposals on the way.
NH
so, the price target gets upped to
NH
and the stock is back on the buy list
BE
Sounds interesting. And prescient. Got the note?
NH
sure
NH
Buy Rated — RIO recommendation upgraded to Buy/ Medium Risk,
previously Hold/ Medium Risk, with the target price unchanged at
£40/share. Our earnings have changed as a result of commodity price
changes from our Global commodities team, but we largely anticipated the
impact in our target price (hence no change).
previously Hold/ Medium Risk, with the target price unchanged at
£40/share. Our earnings have changed as a result of commodity price
changes from our Global commodities team, but we largely anticipated the
impact in our target price (hence no change).
Discount to £40.60/share NPV — After the recent share price correction and
increase in our NPV from £37.40 to £40.00/share, RIO is trading at a ~30%
discount to our NPV. This has historically been a very good entry point to
buy the shares.
NH
Balance Sheet — Assets sales and cash flow from operations are expected to
reduce net debt to ~US$7b at end-2010, even before the adjusted ~US$4b
IOJV equilisation payment payable if the JV is consummated in late-2010.
Despite capex increasing from US$5b in 2010E to US$8b in 2011E as iron
ore expansions swing fully into gear, we expect RIO to swing into a net cash
position in 2011, following proportionately highest cash generation in 2010e.
reduce net debt to ~US$7b at end-2010, even before the adjusted ~US$4b
IOJV equilisation payment payable if the JV is consummated in late-2010.
Despite capex increasing from US$5b in 2010E to US$8b in 2011E as iron
ore expansions swing fully into gear, we expect RIO to swing into a net cash
position in 2011, following proportionately highest cash generation in 2010e.
NH
What to Do with the Looming Surplus Cash — From being on the brink in
2009, to having a surplus of cash in 2011 is a stunning turnaround and
raises the question of what to do with any excess cash pile that builds?
Management are still earning their M&A stripes back so a major deal looks
unlikely, but increasing capex, dividends and potentially a buy-back in 2011
is certainly on the cards if our commodity price forecasts ring true.
2009, to having a surplus of cash in 2011 is a stunning turnaround and
raises the question of what to do with any excess cash pile that builds?
Management are still earning their M&A stripes back so a major deal looks
unlikely, but increasing capex, dividends and potentially a buy-back in 2011
is certainly on the cards if our commodity price forecasts ring true.
NH
Growth Projects — Work is back underway on the Pilbara iron ore expansion,
but production growth is back-end weighted to 2013-2015 without the iron
ore JV. Next stage of projects probably to be restarted is the technologically /
geologically challenged copper projects La Granja and Resolution.
Aluminium refurbishment projects of existing smelters are likely to be
restarted, but greenfield project capex before 2012 is likely to be modest.
but production growth is back-end weighted to 2013-2015 without the iron
ore JV. Next stage of projects probably to be restarted is the technologically /
geologically challenged copper projects La Granja and Resolution.
Aluminium refurbishment projects of existing smelters are likely to be
restarted, but greenfield project capex before 2012 is likely to be modest.
Capital Allocation — Although we do not expect major M&A, we believe bolton
acquisitions and JVs are possible. Growth capex needs to be selectively
re-accelerated, but the potential is high for Rio to deliver higher than
anticipated dividend payments.
BE
So, an excess cash pile eh?
NH
and thanks Monty – interesting comment as ever
BE
… Although Freeport does look a mouthful. Market cap of $30bn
BE
Suspect institutions would go mad if Rio shelled out that much cash
NH
indeed
BE
Having said that ………
BE
Freeport shares up 7.35% yesterday
NH
true
NH
interesting move
NH
can’t all have been on the back of the ISM numbers
NH
surely
BE
Yes.
BE
Anyway, since we’re on miners
BE
There’s a push from SocGen as well this morning
BE
It’s not the most thrilling of notes, no offence intended, but here’s the flavour
BE
Re-pricing of risk may now be behind us. Metals & Mining stocks have been impacted strongly by the recent increase in risk aversion. We believe that the sector’s correction is now essentially complete with most of the stocks back to their pre-December rally level. Importantly, while we recognize that China is clearly in tightening mode, we are still convinced that China will continue with the fixed asset investment and infrastructure programs already approved by the government. The main drivers of demand will still be China and restocking in OECD countries gathering pace.
BE
Too much pessimism on steel price hikes, in our view. Steelmakers have been hit hard by poor guidance provided by US steelmakers. The sector also suffered an additional impact from the decline in steel prices in China (now over) as inventories piled up and concerns grew that the government could curb lending. There are also fears that the industry may fail to pass on to customers higher input costs. We continue to think that investors could be surprised by the recovery in global steel prices in general and in the EU and US in particular (low inventories, low imports, strengthening order rates and increasing input costs). We reiterate our Buy rating on ArcelorMittal (now with a 40 TP vs 38, SG Premium List). We see greater potential for a positive surprise for steelmakers than for miners.
BE
Miners should be back for good. Miners offer more straightforward exposure to China and the developing world and hence have been hit hard by fears of monetary tightening in China. We maintain our overall positive view on the demand outlook. We have however performed a stress test analysis on our mining coverage. It confirms our preference in the mining complex for Xstrata (TP 1,550p vs 1,500p) and Rio Tinto (TP 4,000p vs 3,900p). After the recent selloff we move Anglo American to Buy (vs Hold) with a TP of 3,000p (vs 2,900p).
NH
right, thanks for that.
NH
bored with the miners now
NH
but worth watching Freeport this afternoon
11:15AM
NH
Okay
NH
we have some flashes coming through
NH
from the new chancellor!
NH
RTRS-UK CONSERVATIVES’ OSBORNE – OUR FISCAL POLICY WILL HELP KEEP INTEREST RATES FOR LONGER
11:07 02Feb10 RTRS-UK CONSERVATIVE’S OSBORNE-WILL SAFEGUARD UK CREDIT RATING, CUT BIG PART OF STRUC. DEFICIT OVER 4YRS
11:08 02Feb10 RTRS-UK CONSERVATIVE’S OSBORNE-INDEPENDENT BOE WILL CONTINUE TO TARGET 2 PCT INFLATION
11:09 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE-BOE WILL USE NEW ROLE IN PRUDENTIAL SUPERVISION TO PRESERVE FIN. STABILITY
11:07 02Feb10 RTRS-UK CONSERVATIVE’S OSBORNE-WILL SAFEGUARD UK CREDIT RATING, CUT BIG PART OF STRUC. DEFICIT OVER 4YRS
11:08 02Feb10 RTRS-UK CONSERVATIVE’S OSBORNE-INDEPENDENT BOE WILL CONTINUE TO TARGET 2 PCT INFLATION
11:09 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE-BOE WILL USE NEW ROLE IN PRUDENTIAL SUPERVISION TO PRESERVE FIN. STABILITY
NH
11:10 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE – WE WILL REFORM BANKING SYSEM TO REDUCE LEVELS OF LEVERAGE
11:10 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE – WILL MAKE BANKS LESS DEPENDENT ON UNSTABLE WHOLESALE FUNDING
11:12 02Feb10 RTRS-RPT-UK CONSERVATIVES’ OSBORNE – OUR FISCAL POLICY WILL HELP KEEP INTEREST RATES LOWER FOR LONGER
11:13 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE – PROTECTING UK’S CREDIT RATING WILL NOT BE EASY
11:13 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE – PACE OF FISCAL TIGHTENING WILL BE COORDINATED WITH MONETARY POLICY
11:10 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE – WILL MAKE BANKS LESS DEPENDENT ON UNSTABLE WHOLESALE FUNDING
11:12 02Feb10 RTRS-RPT-UK CONSERVATIVES’ OSBORNE – OUR FISCAL POLICY WILL HELP KEEP INTEREST RATES LOWER FOR LONGER
11:13 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE – PROTECTING UK’S CREDIT RATING WILL NOT BE EASY
11:13 02Feb10 RTRS-UK CONSERVATIVES’ OSBORNE – PACE OF FISCAL TIGHTENING WILL BE COORDINATED WITH MONETARY POLICY
NH
So under the Tory party
NH
rates stay lower for longer
NH
where’s all this coming from?
BE
Not sure – planned speech though.
BE
Was “previewed” in most of the papers.
NH
yes
NH
and from the looks of it
NH
that seems to spell the end of the FSA
NH
not sure
NH
how they will make banks less dependent on wholesale funding
BE
He’s speaking at the British Museum, it seems.
NH
OK
NH
thanks
11:18AM
BE
Right – we should have a look at BP
BE
results out this morning
BE
and for the first time in several quarters BP has failed to beat expectations
NH
yes the spanner has come off the nut somewhat – biggest faller in the FTSE 100 at the moment
BP (BP:LSE): Last: 567.48, down 27.12 (-4.56%), High: 579.90, Low: 566.20, Volume: 57.52m
NH
and as Izy has been telling us for weeks – this is not about production but downstream margins
BE
She was telling us again this morning, of course
NH
this is all about margins in the refining business
NH
But unlike Shell, it looks like BP was unable to mind meld with City analysts
NH
so today’s news came as something of a shock
NH
hence the share price fall
NH
although
NH
analysts could have glanced at the numbers from Chevron and Exxon
NH
and come to the conclusion that downstream was likely to strugglr
NH
that said
NH
guidance for flat upstream volume in 2010 is a bit of disappointment for BP bulls
NH
and the company is still slashing costs to keep everything on an even keel
NH
still the positive side of all that
NH
is that BP now needs an oil price $60-65/bbl to cover capex and dividends.
BE
Impressive
BE
Right, we need a bit of comment on this.
NH
OK
NH
here’s Merrill
NH
4Q09 results came 7% below expectations, despite solid E&P performance
BP has reported 4Q09 adj net income (RC) of US$4.384bn, some7% below our
forecast and 5% below consensus estimates. At the operating level, adj EBIT
came in at US$6.279bn, some 8% below estimates as a strong performance in
the E&P division was offset by (1) weaker than anticipated results in Downstream
(US$15m profit for the segment, down from US$1.1bn last quarter) and (2) a
US$492m consolidation charge. Upstream volumes of 4,054kboe/d (+6% QoQ)
came in-line with expectations and was helped by a make-up of a previous
underlift position of 40kboe/d. Below the operating line a 27% tax charge was 300
basis points higher than our forecast. Dividend of US$0.14/sh were in-line with
expectations.
BP has reported 4Q09 adj net income (RC) of US$4.384bn, some7% below our
forecast and 5% below consensus estimates. At the operating level, adj EBIT
came in at US$6.279bn, some 8% below estimates as a strong performance in
the E&P division was offset by (1) weaker than anticipated results in Downstream
(US$15m profit for the segment, down from US$1.1bn last quarter) and (2) a
US$492m consolidation charge. Upstream volumes of 4,054kboe/d (+6% QoQ)
came in-line with expectations and was helped by a make-up of a previous
underlift position of 40kboe/d. Below the operating line a 27% tax charge was 300
basis points higher than our forecast. Dividend of US$0.14/sh were in-line with
expectations.
NH
Outlook: sustained capex; lower 2010 volumes
Following a stellar operational performance in 2009, it appears that 2010 may
have less shine. The company indicates lower upstream volumes in 2010 –
mainly due to a higher base impact (this year volumes were helped by benign
weather conditions in the GoM). We expected some 1.5% growth in 2010, prior to today’s announcement. Management points towards US$20bn in capex in 2010, in-line with our expectations.
Following a stellar operational performance in 2009, it appears that 2010 may
have less shine. The company indicates lower upstream volumes in 2010 –
mainly due to a higher base impact (this year volumes were helped by benign
weather conditions in the GoM). We expected some 1.5% growth in 2010, prior to today’s announcement. Management points towards US$20bn in capex in 2010, in-line with our expectations.
NH
so perhaps 2010
NH
could be the year to switch into Shell
NH
given that some of its bigger projects are coming on line
NH
I’d like to know what Debbie makes of that
NH
anyway
NH
here’s the Citi take
NH
A weaker set of numbers than the market had expected, compounded
by disappointing guidance on 2010 production volumes, which strongly suggests that the operational momentum of 2008/9 is now slowing. After o/performing Shell by c15% since start-09 and c6% YTD on the basis of earnings delivery and a perception that superior operational momentum could be sustained, we think that the relative call is now skewed in favour of Shell (Buy, 1M, £22.10 TP).
by disappointing guidance on 2010 production volumes, which strongly suggests that the operational momentum of 2008/9 is now slowing. After o/performing Shell by c15% since start-09 and c6% YTD on the basis of earnings delivery and a perception that superior operational momentum could be sustained, we think that the relative call is now skewed in favour of Shell (Buy, 1M, £22.10 TP).
NH
2010 Volume Guidance Disappointing — Guidance for 2010 production volumes
of ‘slightly lower than 2010′ is a clear disappointment versus Citi/consensus
expectation of 2-3% growth. First, we expect this to take the shine off the
consensus view that BP’s operational momentum of 2008/9 can continue to
differentiate through 2010. Second, this places an even greater emphasis on
whether BP can offer improved clarity around their 1-2% long-term growth
objective at the forthcoming Strategy Update.
of ‘slightly lower than 2010′ is a clear disappointment versus Citi/consensus
expectation of 2-3% growth. First, we expect this to take the shine off the
consensus view that BP’s operational momentum of 2008/9 can continue to
differentiate through 2010. Second, this places an even greater emphasis on
whether BP can offer improved clarity around their 1-2% long-term growth
objective at the forthcoming Strategy Update.
NH
Investment Thesis — We retain a Buy (1M) rating noting that trading on a
prospective 7.3x 2011e P/E and yield of 5.9% despite a robust cash cycle the
stock is absolutely cheap. However with the 2010 operational outlook (growth,
refining, cost savings) no longer standing-apart from peers we reaffirm a
preference for RD Shell (1M, £22.10 TP).
prospective 7.3x 2011e P/E and yield of 5.9% despite a robust cash cycle the
stock is absolutely cheap. However with the 2010 operational outlook (growth,
refining, cost savings) no longer standing-apart from peers we reaffirm a
preference for RD Shell (1M, £22.10 TP).
NH
is that enough on BP??
NH
actually a big drag on the index BP today
NH
19 points according to Reuters
NH
it has taken off the index
BE
And, as Mystic FatDaz notes, volumes would be woeful today without it.
BE
Woeful yesterday too.
NH
yes
NH
vols have been dreadful for what
NH
almost 2 months
NH
they haven’t been great state side either
NH
yesterday on the Stret
NH
$26bn traded vs $35bn on Friday
NH
OK so it was a Monday
NH
but still
11:25AM
NH
Right
NH
a little bit more on the speech
NH
from the new chancellor
NH
via Reuters
NH
Britain’s opposition Conservatives on Tuesday fleshed out some of their plans for how they might manage the economy if elected to power this year.
Below are key quotes from the speech by Conservative economy spokesman and would-be finance minister George Osborne.
Below are key quotes from the speech by Conservative economy spokesman and would-be finance minister George Osborne.
NH
“Our first Benchmark for Britain is to: Cut the deficit more quickly to safeguard Britain’s credit rating. I know that we are taking a political gamble to set this up as a measure of success. Protecting the credit rating will not be easy.
NH
The largest bond investor in the world thinks there is an 80% chance of a downgrade. But the economic risk of not setting ourselves this benchmark is not one that I am willing take. So we will set out a plan in our first budget to eliminate a large part of the structural deficit in the first parliament.
NH
“We will make a start in 2010. The pace of fiscal consolidation will be co-ordinated with monetary policy. And we will protect Britain’s credit rating and international reputation.”
NH
And the largest bond investor in the world
NH
employs the brother of Ed Balls
NH
as one of its Euro heads
NH
little wonder GO got that dig in
NH
(XWAP – Vince Cable?)
11:27AM
BE
Returning to the miners for a moment
BE
Mungers reminds that Citi was giving Freeport a push in the US yesterday
NH
and were they?
BE
Yup. Very much a valuation call though
BE
Here’s the gist of it.
NH
(Mungers – and the UK after that)
BE
Action – We are adding Freeport McMoRan Copper and Gold to Top Picks Live
(TPL) as our favorite idea in North American Metals & Mining.
Why Now? FCX and copper (Cu) prices have declined due to concerns over tighter
lending in China and a potential construction slowdown, but we see China’s
apparent Cu demand growing by ~10% in 2010, helping to push the global market
into deficit and supporting our 2010 Cu price forecast of $3.34/lb vs spot of
$3.06/lb. We estimate that every $0.10/lb change in Cu translates into $0.29 in
annual EPS for FCX.
(TPL) as our favorite idea in North American Metals & Mining.
Why Now? FCX and copper (Cu) prices have declined due to concerns over tighter
lending in China and a potential construction slowdown, but we see China’s
apparent Cu demand growing by ~10% in 2010, helping to push the global market
into deficit and supporting our 2010 Cu price forecast of $3.34/lb vs spot of
$3.06/lb. We estimate that every $0.10/lb change in Cu translates into $0.29 in
annual EPS for FCX.
BE
Potential Pushback – Cu exchange inventories have continued to build off of July-
2009 lows of 367k tonnes and exceed 700k tonnes. There is little justification for
$3/lb Cu if inventories are increasing, implying a market surplus. We expect
inventories to ease later in 2010 as China demand strengthens further and US
manufacturing continues to recover as evidenced by the latest ISM PMI reading of
58.4, the sixth consecutive monthly expansion.
Bottom Line – In our opinion, FCX is one of the best managed companies in our
coverage universe and with a low consolidated cash cost position of $1.35/lb
before byproduct sales, FCX is well positioned to generate a profit under most
circumstances. Based on our 2010 estimate of $7.50, FCX is trading at a low 9.5x
P/E and we estimate the company can generate free cash flow of $7.29/sh, a
10.2% yield. Management has a history of raising dividends and declaring special
dividends as they accumulate cash such as 2004-2006. At the end of 4Q09, FCX
held $2.6 bln of cash, owed $6.3 bln of debt and closed with a debt/capital ratio
of 41%.
2009 lows of 367k tonnes and exceed 700k tonnes. There is little justification for
$3/lb Cu if inventories are increasing, implying a market surplus. We expect
inventories to ease later in 2010 as China demand strengthens further and US
manufacturing continues to recover as evidenced by the latest ISM PMI reading of
58.4, the sixth consecutive monthly expansion.
Bottom Line – In our opinion, FCX is one of the best managed companies in our
coverage universe and with a low consolidated cash cost position of $1.35/lb
before byproduct sales, FCX is well positioned to generate a profit under most
circumstances. Based on our 2010 estimate of $7.50, FCX is trading at a low 9.5x
P/E and we estimate the company can generate free cash flow of $7.29/sh, a
10.2% yield. Management has a history of raising dividends and declaring special
dividends as they accumulate cash such as 2004-2006. At the end of 4Q09, FCX
held $2.6 bln of cash, owed $6.3 bln of debt and closed with a debt/capital ratio
of 41%.
BE
Though I’m sure those cash/debt figures will add a little something to the Rio story.
NH
thanks for that
NH
interesting
11:29AM
NH
A few people asking about this story in the Italian press
NH
about Telefonica buying Telecom Italia
NH
now, I have chatted to a few brokers on this
NH
and they say the stories are incredibly detailed
NH
1 for 10 share swap etc
NH
so there must be something to this
NH
but then things like this are flashing up on the wires
NH
Italian Industry Minister Claudio Scajola said there’s “too much talk” about a possible merger between Telecome Italia SpA and Spain’s Telefonica SA, Ansa news wire reported from Jerusalem. A spokesman confirmed his comments. Scajola repeated an earlier denial of a newspaper report that Italy’s government had approved the merger, and said he is scheduled to meet Telecom Italia Chief Executive Officer Franco Bernabe on Feb. 4 in Rome.
BE
On the flipside ………
NH
TI share price
NH
currently up almost 7% at 0.87
BE
Though Robin Bienenstock at Bernstein thinks this makes a lot of sense, right?
NH
she
NH
does
NH
thinks that Telefonica has to do a deal
NH
although she thinks KPN might be a better deal
NH
and one that would be a lot easier to pull off
NH
Without resorting to debt financed dividends or buybacks, we believe Telefonica will not be able to sustain its promised dividend of €1.75 to investors in 2012. One way for Telefonica to get around this and support its share price would be the acquisition of a major competitor, using the acquired cash flow to fund dividend payments going forward
NH
this is a good note by the way
BE
(Dow Chemical beats)
NH
Of the options available to Telefonica, we think that KPN and TI would
provide sufficient additional cash flow to meet these requirements, but have very different profiles as acquisition targets. KPN would create most synergies at a price likely to be palatable to KPN management, whereas TI looks attractive on a valuation basis but we think that the potential for value destructive negative synergies and political and operational complications is very high indeed
provide sufficient additional cash flow to meet these requirements, but have very different profiles as acquisition targets. KPN would create most synergies at a price likely to be palatable to KPN management, whereas TI looks attractive on a valuation basis but we think that the potential for value destructive negative synergies and political and operational complications is very high indeed
NH
PT offers a cleaner fit
than TI, with resolution on Brazil , but synergies are likely to be negative, cash flows insufficient to reach dividend cover, and the full valuation of PT means Telefonica has no room to offer a premium. Note that we have no specific knowledge regarding plans or potential for the deal combinations mentioned in this report and that the analysis is entirely our own.
than TI, with resolution on Brazil , but synergies are likely to be negative, cash flows insufficient to reach dividend cover, and the full valuation of PT means Telefonica has no room to offer a premium. Note that we have no specific knowledge regarding plans or potential for the deal combinations mentioned in this report and that the analysis is entirely our own.
NH
We estimate that not only will Telefonica fail to generate enough cash to cover its promised dividend of €1.75 in 2012, but that the long term sustainable dividend is below the €1.40 promised this year. We expect FCF including spectrum to shrink by a CAGR of 6.2% YoY for the 2008-2012 period and by a breathtaking 19.5% in 2010. This means that Telefonica must either raise an already relatively high level of debt to cover the dividend or reduce the dividend. If we assume that the company pays out all of its FCF in dividends by 2012 we estimate the dividend would be just €1.29, some ~30%
below guidance.
below guidance.
NH
the rest could be made availble in the usual place if anyone is interested
NH
I also have some comment from RBS on this
BE
(… and BNY Mellon buys a lump of PNC for $2.31bn.)
NH
A report in La Repubblica today suggests that the Italian government is prepared to countenance an all share merger of Telefonica and Telecom Italia assuming certain conditions on the network and management were met. The report also suggested that an offer was imminent. Clearly this comes after several weeks of fairly persistent speculation in the Italian press of a move from Telefonica for TI but to this point the Italian government had been seen as a fatal block to any move.
NH
If the Italian government were to confirm this stance, it would though remove a serious block to any move and would therefore increase the chances of a deal happening sooner than previously anticipated. However this still leaves the question of whether Telefonica want to make a move at this juncture and the unresolved regulatory status in Brazil, which would be a serious concern given the importance of that market. If a deal were to progress we would expect the combined group to settle at BBB+ with potential to improve over time. At these levels therefore there is upside in TI spreads although recent sovereign-inspired widening suggests to us that Telefonica already prices in this outcome.
NH
hope that helps
NH
telecom watchers
BE
I’m sure it does.
11:35AM
BE
While on the telecoms, there was a request on the right about C&W’s demerger doc
NH
hmmm
NH
not sure this is too much to say
NH
£30m going into the pension fund
NH
lots of presentations to come
NH
all a bit dull
NH
quite a bit of comment about
NH
(Rain – Paul sent that earlier – the office of Mcquarie – very funny)
BE
Can just cut to this summary from Collins Stewart, which gives you the long and the short of it.
NH
ok
BE
On track is good news
There had been mutterings about whether the demerger might be scuppered
by pension issues. The fact that the demerger is on track, financing nearly
finalised, dividends and guidance confirmed, should give investors
appropriate assurances. =
There had been mutterings about whether the demerger might be scuppered
by pension issues. The fact that the demerger is on track, financing nearly
finalised, dividends and guidance confirmed, should give investors
appropriate assurances. =
BE
Right – should we move on to something more interesting?
NH
yes
NH
a bit of breaking news
NH
RTRS-SFO SAYS TO TAKE NO ACTION AGAINST MADOFF SECURITIES, THE UK ARM OF MADOFF’S INVESTMENT SCHEME
11:37 02Feb10 RTRS-SFO SAYS INSUFFICIENT EVIDENCE TO CONVICT MADOFF SECURITIES, THE UK ARM OF MADOFF’S INVESTMENT SCHEME
11:37 02Feb10 RTRS-SFO SAYS INSUFFICIENT EVIDENCE TO CONVICT MADOFF SECURITIES, THE UK ARM OF MADOFF’S INVESTMENT SCHEME
NH
now Madoff UK
NH
had a big punting operation
NH
and quite a few of the traders
NH
were left out of pocket when it went down
NH
never got paid their profits
NH
anyway
NH
where now?
11:39AM
NH
A bit of small cap corner?
BE
Sure – what do you have?
NH
GCM Resources
NH
the former Asia Energy
BE
The one developing the big coal pit?
NH
that’s the one
NH
shares motored higher first thing
NH
and they are still up
GCM Resources PLC (GCM:LSE): Last: 95.00, up 5 (+5.56%), High: 103.00, Low: 94.00, Volume: 390.16k
NH
reports out of Bangladesh
NH
that a a deal with the govt could be close
NH
now we have heard all this before
NH
but there’s what the deal could look like
NH
according to the local press
NH
The government is considering ‘positively’ a new proposal of the UK-based Asia Energy which offered the government only 10 per cent stake in the Phulbari coal field for operating an open-pit mine, said sources in the government.
Besides, the government has also engaged the UNDP and German GTZ, which has supported open-pit mining in Bangladesh, for conducting a feasibility study for an open pit coal mine on the north flank of Barapukuria coal field, they said.
Asia Energy, which had submitted a controversial proposal for an open-pit coal mine at Phulbari in 2005, recently submitted another proposal to the energy and mineral resources division offering the government a 10 per cent share of the coal field without any government ‘investment’.
Besides, the government has also engaged the UNDP and German GTZ, which has supported open-pit mining in Bangladesh, for conducting a feasibility study for an open pit coal mine on the north flank of Barapukuria coal field, they said.
Asia Energy, which had submitted a controversial proposal for an open-pit coal mine at Phulbari in 2005, recently submitted another proposal to the energy and mineral resources division offering the government a 10 per cent share of the coal field without any government ‘investment’.
NH
Now, 10%
NH
would be a result
NH
in fact dealers reckon 50% wouldn’t not be too bad
NH
not sure how much credence there is to all this
NH
will check with a friendly 
later
laterBE
Ok – cheers for that.
NH
and the other bit of news from the small caps
NH
is the Falkland Islands
NH
those looking on the shallower, north side
NH
have issued statements today
NH
on who uses the rigs that has been dragged dwn from the north see and when
NH
(Home Retail was in the Evening Standard based on an SG note)
NH
anyway
NH
here’s some share prices
Desire Petroleum (DES:LSE): Last: 121.50, up 3.5 (+2.97%), High: 124.00, Low: 118.00, Volume: 1.34m
NH
and
Rockhopper Exploration (RKH:LSE): Last: 73.00, up 0.5 (+0.69%), High: 77.25, Low: 72.25, Volume: 1.45m
NH
and a little bit of comment
NH
from Canacord
NH
Although this morning’s press release provides little in the way of new information it does serve as a timely reminder that the first of five wells that Rockhopper will participate in this year is due to spud within the month. Hence, the group has much to look forward to and, whilst they are not for the faint-hearted, we believe the risk/reward profile associated with the shares remains in investors favour
NH
Rockhopper has announced it has been formally assigned two slots with the Ocean Guardian semi-submersible drilling rig which is expected to arrive in the North Falklands this month. Drilling operations are set to commence later this month with the Liz prospect in which Rockhopper owns a 7.5% interest (Desire 92.5% interest). Rockhopper’s two key 100% owned prospects, Sea Lion and Ernest, will occupy the second and either third or fourth drilling slots in the forthcoming drilling campaign. The Sea Lion and Ernest prospects are estimated to have the potential to contain more than 300 mmbbl between them.
NH
We maintain our NAV-derived target price of 103p/share and a SPECULATIVE BUY recommendation.
11:44AM
NH
Okay Bryce
NH
anything you want to look at?
BE
Well, before we leave the smalls
BE
Helphire’s up
NH
yes
NH
8% or so
Helphire Group (HHR:LSE): Last: 58.25, up 4.75 (+8.88%), High: 60.00, Low: 54.50, Volume: 147.35k
BE
Now, there are several things going on here, apparently
BE
A big seller was cleared out last week, for one.
NH
right
BE
But there’s also some serioiusly raw raw going around that it might be a target.
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH
for private equity?
BE
That’s the idea.
BE
And it all seems to come from rogue gossip that the company is looking to put together a defence.
BE
However ……….
NH
as in a defence document?
BE
That’s the story. But I emphasise it’s extremely raw stuff.
BE
However ……………….
BE
We should also highlight here that car distributor Autologic has results out showing a strong second half.
BE
And the pair tend to be lumped together
BE
Not least because Autologic’s CEO is a non-exec at Helphire.
BE
Avril Palmer-Baunack
NH
and Helphire are still trying to get a resolution on a big legal issue
NH
but Mungers doesn’t believe it
NH
so we should probably leave it there
NH
BE
Helphire has what we should best call a troubled history, so all those caveats are there for a reason.
BE
And yes, let’s move on to something less controversial ,….
11:49AM
NH
what then?
BE
GKP
NH
must we?
BE
Well, it’s not our doing.
NH
good
BE
But our friends at Mergermarket have been in touch with “sources close to” everyone’s favourite Kurdistan oil play.
NH
oh gawd
NH
that’s sounds ominious
BE
Well, they’re asking why there’s not been a fundraising.
BE
Here’s edited highlights of the replies
BE
A share placement by GKP [GKP LN] remains the most sensible funding option for its 2010 drilling programme, said a source close to the Kurdistan-focused, UK-listed oil and gas company
BE
“GKP has enough cash for the next one to two months [following the draw-down] and funding is not something it is concerned about,” said the source and a second who is familiar with the situation. “The company has a number of funding options it is considering and will choose one,” said the first source. The source did not rule out the possibility of negotiating a second SEDA.
NH
SEDA is an equity pipe
BE
That’s right. £30m.
NH
actually what’s new in this
NH
looks like they hav talked to the PR guy at Brunswick
NH
who is not ruling anything in or out
BE
Let’s call it “colour”. For example
BE
Going forward a share placement makes the most sense, followed by a potential debt finance facility further down the line, added the first source. The source added that, in his opinion, it would not make much difference to GKP’s long-term prospects if it carried out a share placement at 90p or 110p. When pressed on the apparent delay to the share placement, the source said it was a “matter of personal preferences and timing” but that nothing was preventing one taking place should the company choose that option.
The same source conceded that the company is “frustrated” at its share price performance following its 14 January RNS, which said oil in-place for the Shaikan structure had been increased to a gross 1.9 (P90) to 7.4 (P10) bn barrels of oil from 1.0 (P90) and 5.0 (P10). Despite an initial 8% surge in the company’s share price to 119p, the stock has since drifted and is trading at 92p this morning, giving it a market value of GBP 434.5m. The source said he believed the downward pressure on the shares partly related to the significant percentage of retail investors buying in and out of the stock while larger institutions held firm.
NH
OK
NH
so the last bit is colour
NH
but we still know it
BE
And ….. the concluding paragraph
BE
A second source, familiar with Kurdistan E&P companies, said it was rumoured that Todd Kozel, GKP’s chairman and chief executive, believed the company would eventually be worth around USD 3bn. Last July GKP denied it was in sale talks with Indian state-owned entities regarding a USD 2.23bn bid for the company.
NH
NH
of course it will
NH
$3bn
NH
Chopper Bear
NH
you see that
NH
$3bn
NH
that’s what your company is going to be worth
NH
$3bn
NH
that’s if it doesn’t get taken out first
BE
But that’s more than enough Gulf Keystone.
NH
it is
NH
that will have set them off on muppetinvstor.com
NH
$3bn you hear me
BE
Enough.
11:54AM
NH
OK
NH
a few other things to cover
NH
Close Bros
NH
has slapped down the idea that Nomura is going to buy Wins
NH
which would have been an amusing integration process
NH
anyway
NH
Close had a get together with analysts yesterday
NH
and Preben Prebensen
NH
crazy name, crazy guy
NH
said it was nonsense
NH
Close Brothers held a useful – and timely – presentation on its Securities business yesterday. It gave a more detailed view of the three businesses that comprise the division, introduced members of the senior management teams and emphasised the focus of each of the operations.
• It also gave CEO, Preben Prebensen the opportunity to comment on weekend press speculation of a potential offer for Winterflood. He noted that there had been no approach and that there was no substance to speculation.
• Close announces its interim results on 16 March 2010.
• It also gave CEO, Preben Prebensen the opportunity to comment on weekend press speculation of a potential offer for Winterflood. He noted that there had been no approach and that there was no substance to speculation.
• Close announces its interim results on 16 March 2010.
NH
that’s from Canaccord BTW
NH
want some more?
BE
Sure – why not.
NH
The investor presentation on the Securities businesses ran through some useful detail on Winterflood, Seydler and Mako. The Securities division is focused on developing the growth opportunities of its three businesses ahead of any crossover with Banking or Asset Management. Nonetheless, it appears to remain integral part of management’s strategy for the group.
NH
Winterflood is aiming to expand its business globally with opportunities apparent in the US and it has targeted an expansion of its institutional business. Broker dealer Seydler is looking to grow its fixed income activity and capital markets franchise. Derivatives-focused Mako has opportunities to develop its investment management activities. As an aside, we wonder if the group will add to its 49.9% stake in Mako at some stage.
NH
• There were several running themes through the presentation: strong risk management, business focus, development opportunities (including capturing US order flow) and through the presentation it was clear that technology is a key element of the Securities business – particularly the trading systems in Winterflood.
• The recent trading update noted that Winterflood had seen a slower November and December. That said, business activity looked consistent with the second half of the last financial year – and therefore in line with our expectations. Seydler’s performance was described as ‘resilient’ with Mako reporting lower activity levels. We have assumed a subdued contribution from Seydler and a more normalised contribution from Mako where we haven’t assumed a repeat of the exceptional H1 seen last year.
• The recent trading update noted that Winterflood had seen a slower November and December. That said, business activity looked consistent with the second half of the last financial year – and therefore in line with our expectations. Seydler’s performance was described as ‘resilient’ with Mako reporting lower activity levels. We have assumed a subdued contribution from Seydler and a more normalised contribution from Mako where we haven’t assumed a repeat of the exceptional H1 seen last year.
NH
What Close has:
• A Securities business that is performing well.
• An improving impairment outlook and organic growth in its Banking business.
• A long term recovery plan for the Asset Management business (admittedly with near-term investment).
• Room for further acquisitions – especially in the Banking business.
What Close doesn’t have:
• Regulatory capital concerns.
• Funding issues.
• Exposure to ABS.
• A Securities business that is performing well.
• An improving impairment outlook and organic growth in its Banking business.
• A long term recovery plan for the Asset Management business (admittedly with near-term investment).
• Room for further acquisitions – especially in the Banking business.
What Close doesn’t have:
• Regulatory capital concerns.
• Funding issues.
• Exposure to ABS.
NH
Valuation
• We currently have a value of STG514m for the Securities business in our conservative SOTP valuation for Close Brothers. The division represents around 49% of our forecast group operating profits excluding D&A and Central Items. On our current forecasts, Close Brothers’ shares trade at 11.8 times calendarised 2010 EPS and yield 5.7%. We have an 830p target price and a BUY rating.
• We currently have a value of STG514m for the Securities business in our conservative SOTP valuation for Close Brothers. The division represents around 49% of our forecast group operating profits excluding D&A and Central Items. On our current forecasts, Close Brothers’ shares trade at 11.8 times calendarised 2010 EPS and yield 5.7%. We have an 830p target price and a BUY rating.
11:57AM
NH
Right
NH
Bryce has just broken his screen
NH
after seeing a picture of the FT’s Martin Wolf
NH
in a cod piece
NH
it’s not quite a Word Up codpiece
NH
but a cod piece none the less
BE
(80s reference, younguns.)
BE
BE
That’s terrifying.
NH
OMG
NH
I don’t ever want to see that again
BE
We should point out that’s from a “Movers and Shakespeares” thing at Davos
BE
And he doesn’t dress like that to the office.
BE
Not even on dress-down Fridays.
NH
12:00PM
NH
Right
NH
more than enough of that
NH
I have a few bits
NH
of RAW
NH
well, more like quorn really
NH
substitite RAW
BE
Ok then.
NH
International Power
International Power (IPR:LSE): Last: 326.50, up 1 (+0.31%), High: 328.40, Low: 322.10, Volume: 1.43m
NH
- IPR significantly has had NO January pull back whilst having NO further clarification from GDF Suez (apart from not ruling out more talks!) – The Converts are edging higher for no apparent reason making the suggestion that possibly something is afoot…
NH
Rentokil
Rentokil Initial (RTO:LSE): Last: 117.80, up 1.8 (+1.55%), High: 118.80, Low: 115.70, Volume: 976.66k
NH
RTO LN( Rentokil ) Results 19Feb .. They last reported in
Nov … they were good results then.. and UPGRADED ..
Citylink I suspect will show a big improvement ..Amazon is a
very big customer !! .. Swine Flu also would have helped ..
Hygiene !!! .. LTIPS cut in at 120p .. below that ..management get Zero .. TRADING BUY HERE … 116p …. tgt 130p
Nov … they were good results then.. and UPGRADED ..
Citylink I suspect will show a big improvement ..Amazon is a
very big customer !! .. Swine Flu also would have helped ..
Hygiene !!! .. LTIPS cut in at 120p .. below that ..management get Zero .. TRADING BUY HERE … 116p …. tgt 130p
NH
and finally
NH
something on Wolseley
NH
Note all the recent comments from WOS LN concerning what they’re not going to do, ie ‘not use/extend their borrowing etc’but the focus should be on perhaps, what they’re about to do…possibly selling many of their divisions, most particularly, Build Centre to Travis Perkins, whilst the new ceo has echoed that disposals are central to his new role…. – WOS LN has’toughed’out the last couple of years & avoided as many onslaughts of bad news as is possible. Also, they have avoided selling divisions at the bottom of the cycle, so now with prospects looking a bit better, those same ‘vulture buyers’ of assets are concerned that they could miss the opportunities. For WOS, rich in brands, & having weathered the storms, suddenly their portfolio can command excellent prices. – With 14 days short interest, people are still suspicious, but these same sceptics look like thy’re about to be squeezed (again) BUY
BE
Noted. Cheers.
NH
OH
12:03PM
NH
Are we boring you Taxloss? Or is the market?
12:03PM
NH
Right
NH
it’s past midday
NH
and time to start bringing maters to a close
NH
a few things to look at
NH
Reckitt
NH
shares down today
Reckitt Benckiser Group (RB:LSE): Last: 3,190, down 61 (-1.88%), High: 3,210, Low: 3,139, Volume: 2.22m
NH
Credit Suisse
NH
being nasty about them
BE
Give us a look then.
NH
all to do with this heroin substitute
NH
which some of the ROTR look like that have overdoesed on
BE
suboxone
NH
that’s the one
NH
in fact
BE
Off patent end of last year, but still no generic out there.
NH
I reckon most of the City is on it right now
BE
Steady on.
NH
right
NH
here is the note
NH
We are updating our forecasts for the timing of Suboxone’s likely decline
(raising 2010, lowering 2011) and reducing our rating from Outperform to
Neutral. The next few months in the HPC space look pretty challenging to us,
and other consumer staples stocks may prove more rewarding short term.
■ Reckitt’s growth prospects may be lower by its own high standards, but
should still be better than its immediate peers. It would surely be rather
premature to say Reckitt has lost its touch that has helped it consistently
outperform these peers (and indeed the stock market).
(raising 2010, lowering 2011) and reducing our rating from Outperform to
Neutral. The next few months in the HPC space look pretty challenging to us,
and other consumer staples stocks may prove more rewarding short term.
■ Reckitt’s growth prospects may be lower by its own high standards, but
should still be better than its immediate peers. It would surely be rather
premature to say Reckitt has lost its touch that has helped it consistently
outperform these peers (and indeed the stock market).
NH
That said the growth in the core (i.e. excluding Suboxone in the US) is
slowing, and in household alone (excluding OTC) has all but stopped – a
combination of very sluggish markets, the reluctance of consumers to trade
up and increased competition.
■ Margins in the core have started to mature, having risen from 14% to 22%
over the last decade – but rose only 20bps in each of the last 2 years.
■ Suboxone rather surprisingly hasn’t yet been assaulted by a generic version,
though this is surely just a matter of time. We think there will be a number of
generic Subutex launches and with prices likely to collapse there will be
switching from Suboxone to Subutex. Subutex has already lost 60% of its
business to the single generic launch inside 3 months.
slowing, and in household alone (excluding OTC) has all but stopped – a
combination of very sluggish markets, the reluctance of consumers to trade
up and increased competition.
■ Margins in the core have started to mature, having risen from 14% to 22%
over the last decade – but rose only 20bps in each of the last 2 years.
■ Suboxone rather surprisingly hasn’t yet been assaulted by a generic version,
though this is surely just a matter of time. We think there will be a number of
generic Subutex launches and with prices likely to collapse there will be
switching from Suboxone to Subutex. Subutex has already lost 60% of its
business to the single generic launch inside 3 months.
NH
■ The Reckitt record of upgrades, and its share ownership (£250m+ by the top
40 managers) should not be condemned to history. The management’s
interests are still firmly aligned with shareholders. However upgrades at least
on the core look rather less likely in 2010 to us.
■ For the moment the more discretionary HPC sector looks the most
expensive consumer staples group to us. Though Reckitt may be the best
value in this sub-sector, a Neutral rating looks more appropriate for now.
40 managers) should not be condemned to history. The management’s
interests are still firmly aligned with shareholders. However upgrades at least
on the core look rather less likely in 2010 to us.
■ For the moment the more discretionary HPC sector looks the most
expensive consumer staples group to us. Though Reckitt may be the best
value in this sub-sector, a Neutral rating looks more appropriate for now.
NH
that’s it on that
NH
anything else to look up
NH
TB makes a good point
NH
the whole JOhn Terry thing has been fascinating
NH
esp the super injunction
NH
and we have seen a copy of the Schillings letter
NH
very aggressive stuff
NH
the question is now
NH
does the lady tell all?
BE
Peculiar that John Terry may have inadvertently improved press freedom.
BE
That was probably not his intention.
NH
TB – not seen that injunction
BE
Anyway, don’t think I have anything more to add.
BE
You?
NH
Not really
NH
market now up 19 points at 5,265
NH
this market badly needs another proper takeover story
NH
post Cadbury there is nothing
NH
in fact
NH
hedgies with cash coming in from that
NH
are looking for places to put it
NH
and are parking in in BA
NH
because they think there will soon be news on the Iberia tie up
NH
and pension stuff
NH
Thanks TL
NH
I wonder who could it be???
BE
Old old story. And not one we can speculate about.
NH
Sorry Sir
BE
Right – thanks for your comments. Even you, TB …….
BE
And we’ll see you tomorrow at around the same time.
NH
Arry – the hot favourite
BE
Steady ………………………
NH
yes
NH
see you tomorrow
NH
at 11.03 am
NH
when hopefully
NH
there will be some action
NH
you never know
NH
someone might bid $3bn for GKP
BE
Bye.
NH
Taxloss
NH
stop it
NH
you can’t mention that sort of thing here
NH
yes the orange bit
NH
the last time I did….
NH
right
NH
that’s it
NH
cya tomorrow