FT Alphaville » Markets Live transcript 25 Mar 2010

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Markets Live transcript 25 Mar 2010

Posted by Neil Hume on Mar 25 11:03.

Markets Live chat transcript for the chat ending at 12:15 on 25 Mar 2010. Participants in this chat were: Neil Hume, FT Bryce Elder

Hola

it’s 11.03am

ish

and time for Markets Live

FT Alphaville’s daily gallop around the markets

Bryce is here

Hello!

And we’re under attack.

The FT email servers are collapsing as we speak.

Because we’re receiving about a billion copies of this

Sehr geehrte Kundin, sehr geehrter Kunde,

vielen Dank für Ihre E-Mail. Ihr Anliegen werden wir so schnell wie möglich bearbeiten.
Über unsere aktuellen Angebote informieren wir Sie unter http://www.swm.de/ .
Dort finden sie auch unseren kostenlosen Online-Service. Mit ihm können Sie viele Kontakte mit uns bequem von zuhause aus erledigen, wie z.B. Ihren Zählerstand mitteilen, Ihre Adressdaten ändern, etc.

Mit freundlichen Grüßen Ihre Stadtwerke München

yes

I just got one

It’s Zee Germhams!

Frank van der Stoep
Sales Manager

that sounds Dutch

perhaps the GKP Liberation Front have organised it

the result is

the system is sooooooo slow

more have just landed

There’s zillions of them

Squillions

Brazillians.

Nevertheless, we shall push on.

let’s try

so the Budget then

what about it?

Much ado about zip.

we don’t get a proper budget till post election

and then we can run another budget special

still not good news for cider drinkers

White lightening

I remember that stuff from uni

vile

but very cheap

Went for Double Diamond, myself.

A fraction classier.

a classic

i was more a lightening man

park bench chic

anyway

plenty going on this morning

but where to start?

I guess we should head to sunnier climbs

Dubai?

Nope

Although no doubt we will come to that later

I was thinking more Greece

on the back of this ECB collateral announcement

good idea

very interesting move this

so to recap

the ECB are going to keep the minimum credit threshold in the collateral framework at investment grade level (BBB-) beyond the end of 2010

but that’s not all. as of next January, a graded haircut schedule will apply

to protect the Eurosystem

any details on the haircuts?

nope

we don’t get those until April

Hm.

And what do we make of this?

well I guess

There is no point organising a bailout with the one hand and creating a crises with the other.

actually I nabbed that from a note sent out by Evolution’s Gary Jenkins

have a look at this

quite amusing

All Change! ECB Collateral rule change. Makes perfect sense. There is no point organising a bailout with the one hand and creating a crises with the other.

So early march

9/2/10 – ECB President Trichet, in a Q&A session following the January ECB meeting, stated that the ECB will not change its collateral framework for any country: “no government, no state can expect special treatment”.

then

23/2/10 – ECB member Gonzalez-Paramo commented on the ECB’s collateral rules in an interview saying “It’s certainly unthinkable to change the rules to solve the specific problems of any individual country or bank”.

and today

25 / 3/10 – It is the intention of the ECB’s Governing Council to keep the minimum credit threshold in the collateral framework at investment grade level (BBB-) beyond the end of 2010. In parallel, we would introduce, as of January 2011, a graded haircut schedule, which will continue to adequately protect the Eurosystem. I will provide the technical details when reporting on the Governing Council decisions of our next meeting on 8 April.

Sheesh.

That’s quite a u-turn.

yep a screeching, handbrake one

so the ECB just making things up as they go along

it seems that way

here’s some more comment

from BarCap

ECB president Trichet mentioned at the European Parliament that the ECB intends to make some changes to its collateral framework, which has been under close scrutiny recently (see Global Rates Weekly 12 March, for example). The changes will be presented at the 8 April meeting of the ECB, a bit earlier than what we expected (the results of the previous biennial adjustments to the collateral framework were announced in August/September). No doubt the worries about Greek government bonds remaining eligible at the ECB beyond the end of 2010 have played a role in accelerating the decision to modify the framework, which in itself is not surprising. Note that the ECB Annual Report, to be published on 19 April will provide more details about what kind of collateral is being used at the ECB, but we would note that government bonds represent a very small portion of the collateral being posted at the ECB: the main types of collateral being used are probably unsecured bank bonds (say EUR500bn) and ABS (say EUR750bn), compared to probably around EUR200bn for government bonds.

The two changes that Mr Trichet has announced are the following. First, the current minimum credit threshold of BBB- will remain in place beyond the end of 2010 (it was supposed to revert back to A- at that date). For Greek government bonds, it means that to not be eligible anymore, they would have to be downgraded five times by Moody’s and three times by each of Fitch and S&P.
Second, the ECB will introduce from January 2011 a graded haircut schedule. Currently, the rating serves only as the key to be eligible at the ECB, but the haircuts are determined by the type of issuer and the maturity of each bond, and not by its rating, except for BBB bonds, for which there is a 5% additional haircut. This makes sense, given that the collateral value is indeed determined by the ease of realisation of the collateral in the market, which is not per se only dependent on the rating of the instrument. We suspect the new ECB haircut grading will not map directly to rating agencies scales, but will rather be something in between, with groups of ratings attracting the same haircut (eg, with the ECB making little difference between AAA and AA bonds). Potentially, the grading could be applied differently to the various types of issuers, as are the current haircuts.

All good news for Greece I guess

Although not for the euro

Which has been under pressure again

yes, a euro thingy now only buys 0.8924p

while against the dollar it trade at $1.335

for GBK watchers, cable is currently at £1.4957

although that’s probably more a reaction of dollar strength

than post budget GBK weakness

Ok. wider market impact seems faily muted as well.

In fact, we’ve just gone through 5700 on the fabulous Footsie

Up 26 at 5703

another important level breached then

but

Psychologically significant. Somehow.

pretty muted considering we also have the Dubai World/Nakheel bail out news this morning

on that subject, have you seen the terms of the proposed restructuring?

Not looked closely yet.

hang on

Dubai World has been in discussion with lenders and will present a proposal to all its creditors for the restructuring of their loans. In this proposal the Government is offering to recapitalise Dubai World through the equitisation of the Government’s $8.9 billion claim and a commitment to fund up to $1.5 billion in new funds.

Nakheel has been in discussion with its creditors and will announce a comprehensive proposal today. Bank creditors will be asked to restructure their debt at commercial rates. Trade creditors will be offered a significant cash payment shortly and a tradable security. Assuming sufficient support for the proposal, the 2010 and 2011 Nakheel Sukuk will be paid as they fall due.

In this proposal the Government is offering to inject approximately $8 billion in new funds, which will have a significant direct impact on the construction and real estate sectors and the wider economy, and to recapitalise Nakheel through the equitisation of the Government’s $1.2 billion claim.

Nakheel is an important part of the Dubai economy. The Nakheel business plan allows work to continue as soon as possible and puts Nakheel on a sound footing. The Government, as shareholder, will work closely with Nakheel so that any future projects are carefully planned and evaluated.

So, the Dubai govt writes off $8.9bn in Dubai World

but then agreed to inject a further $9.5bn so they can complete their crazy property schemes

that’s about it

and most of that money is coming from Abu Dhabi

the question is however, whether bank and trade creditors want to play ball

and why would you want a tradable security in Nakheel

if you are a trade creditor

I’d want my cash back

however, this news has been taken really well in the middle east

Abu Dhabi at a 17-week high

Dubai makes its largest gain for 17 weeks

hmmm

I haven’t seen any comment on this yet

but I guess

it will take some time to get everyone to sugn up

we should get back to the London marke, though

I had a couple of bits, but can’t drag them out of email

is that attack still continuing?

It’s certainly killed Lotus Notes, although that’s not a tough task.

So yes, let’s return closer to home.

11:18AM

Right on Arriva

as noted by the ROTR

some flashes coming across the screen

DEUTSCHE BAHN HASN’T DECIDED YET ON ARRIVA OFFER, CEO SAYS

Ok. That’s after the board meeting yesterday, right?

supervisory board I think

and follows the other bit of news yesterday

apparently that French transport minister

never said all those things to Bloomberg

about advancing France’s interests in European transport

look at this

the Labour spin machine would be proud of this one

PARIS (Dow Jones)–The French transport ministry Wednesday denied its
minister told a news agency the French government would back state rail
operator SNCF should it bid for U.K. transport group Arriva PLC (ARI.LN).
“Dominique Bussereau has never spoken on the subject of Arriva and SNCF,” a
ministry spokeswoman said. “There is no comment to give on the subject,” she
added.

Earlier in the day, Bloomberg News quoted transport minister Bussereau as
saying that “we are for any project that helps SNCF expand and grow.”
Stock markets have been speculating on possible takeover scenarios for
Arriva. German rail operator Deutsche Bahn AG has approached Arriva about a
possible takeover.
Earlier this month, SNCF ended talks for its Keolis transport unit to merge
with Arriva. The French rail operator Wednesday declined to comment on the
transport minister’s reputed remarks.

Hm. I’ve also read that he “didn’t know he was being interviewed”

it didn’t happen then

it was just made up by a reporter

Nope. Switch on your doublethink chips now.

How are Arriva shares reacting?

Huge spike yesterday morning, of course.

does Bussereau have a double?

Arriva PLC (ARI:LSE): Last: 744.00, down 6 (-0.80%), High: 754.00, Low: 738.50, Volume: 1.12m

Evil twin, perhaps.

I find that just incredible

the minister got ambushed

and then

they just say it never happened

it gets airbrushed from history

French politics. Marvelous stuff.

11:22AM

While on bid tales, can we take a quick look at this Wellstream rumour?

which one

were are we now?

Well, the story this morning is that Prysmian is interested.

That’s the thing formerly known as Pirelli cables

er hang on

that’s telecoms cables

not oil pipes

Yeah, but it’s also got a submarine business.

Now, the meat behind this bit of raw …..

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

subs?

Seems to be that the company management is in London at the moment

Marketing a debt issue

Which they intend to use for acquisitions

I see

And the CEO is rumoured to have suggested to investors that Wellstream would be a “beautiful acquisition”

However ….

beautiful eh?

never heard flexible oil pipes described as that before

Well, it makes some commercial logic apparently.

Prysmian underweight and struggling in the oil market, keen to get into Brazil, etc.

However ….

there are not big enough?

can’t afford it?

Dunno. Haven’t done the maths on that yet.

But there’s some comments on the tape from a Prysmian spokesman denying “rumours” they are “studying the acquisiton of Wellstream”.

back to square one then

right share price

Wellstream Holdings PLC (WSM:LSE): Last: 655.00, up 12 (+1.87%), High: 669.00, Low: 621.00, Volume: 606.40k

So – off highs.

Although what exactly that denial means from an Italian company Emoticon

is less than clear.

Look Bryce

he never said beautiful

never happened

understand

I’ll get the Men in Black brainwiper out when the session’s over.

(TheBoss: S&P Marketscope, apparently.)

11:29AM

Right

not much other RAW today

unsurprisingly

but there are a couple of other things worth noting

on Deutsche Bahn

they had an AGM yesterday

and said this in its address

Nevertheless, our job is to observe the market and competitors. The structure of
service providers will change as the passenger transport market opens in Europe.
This development can influence our strong position. This is why we have decided to
enter into talks with Arriva. It is still unknown if these talks will lead to DB making an
offer to buy Arriva.

and that was it

This story’s getting horribly political, isn’t it?

yep

As we always assumed it would.

moving on

some of the ROTR

asking about Gartmore

which was the subject of a nasty bear raid yesterday afternoon

stock was down 10% at one point

on some nasty rumours

which the company crushed at the end of the day

Bryce is just getting the quote

Hold on. It’s on my email … and ….

ARRRRRRRRRRRGH!

hang on

we are having more notes issues

system has wilted under the cyber attack

creeking

Right.

Gmail comes to the rescue.

Gartmore Not Being Investigated By FSA, Spokesperson Says

thanks

March 24 (Bloomberg) — Gartmore Group Ltd. said the firm
is not being investigated by the U.K.’s Financial Services
Authority after the shares tumbled in London trading today.
Spokesperson Caroline Villiers “categorically denies” the
London-based money manager or its employees are being
investigated by the regulator.

suffice to say the rumours were linked to the recent dawn raids

but on a more fundamental tack

Gartmore was also hit by a bearish note from Canaccord yesterday

which I have

Go on.

Following the group’s prelims and our subsequent meeting with management, we are reducing our earnings estimates. This move primarily reflects redemption pressure in Gartmore’s long-only mutual funds and some performance issues in European equities, its flagship product. The absence of a dividend until March 2011 at the earliest and the potential overhang from Hellman & Friedman’s 24% holding (unconstrained from mid-June 2010) could put pressure on the shares above the 200p level.

Q4/09 and Q1/10 saw the resumption of net redemptions from Gartmore’s long-only mutual funds. This trend reflects current investor caution around European equities, exacerbated by poor performance against benchmark by Gartmore’s two largest unit trusts. Management is confident that demand for its Absolute Return funds will remain strong, despite mounting competition in the space. Recruitment is becoming more difficult and the group’s debt terms preclude it from larger acquisitions. As a result, we think the group’s diversification strategy faces some challenges in the short term. However, we expect the group will move into net cash during 2011.

Our adjusted EPS estimate falls from 19.9p to 18.1p (-9%) in 2010 and from 30.0p to 23.9p (-20%) in 2011. Lower net management fees and performance fees are partly offset by reduced variable compensation costs. However, year-on-year earnings growth remains above 30% throughout our forecast period. Our revised numbers are c.10% below Bloomberg consensus for 2010 and c.7% behind in 2011.

Our target price reduces to 217p from 232p, reflecting lower earnings estimates, partly offset by a sharper fall in reported net debt. Based on EV/NOPAT metrics, Gartmore’s shares trade on 12.0 times in 2010, falling to just 9.3 times in 2011. The c.10% discount against the peer group looks fair and we maintain a HOLD stance.

217p target price

not that is bearish

Yup. That all looks horrible.

Hit from three sides.

And with a 24% overhang

nice

No wonder they’re getting stuffed, rumours or otherwise.

indeed

a nasty cocktail that

don’t think we have a auto ticker for it

shares currently down 2.1p at 177.8p

And that’s after the 9% fall yesterday.

Ugly.

11:37AM

Right

time to look at a few blue chips

and then on to small cap corner

where we can lool at Assura

and then Afren

but first

we need to look at the banks

and this claim from the govt

that they are in the money on Lloyds

But are they?

The maths of this seems tortuous.

depends if you count the £2.5bn they paid to leave to the APS

Exactly.

and given taxpayers half on it

they are just robbing peter to pay paul

so in reality they are not

and in anycase

they aren’t going to sell now

Well, yes.

For starters, they couldn’t place at the market price.

that’s one thing

right

the sector watcher

has been having a look at this claim

and the assumptions behind it

and this is a good primer

UKFI yesterday issued an update of average in price on a gross & net basis. The difference is fees received by the Gvt from these banks. For RBS, the numbers are 50.2p and 49.9p. For Lloyds, 73.6p and 63.2p. With Lloyds now above the average net in price, speculation of a pending pre-election sell down by UKFI is bound to grow. 5 reasons why this should not lead to a sustained share price setback:

1) If the Gvt wants to sell out at a profit, the price needs to be higher than the average in; allowing for a likely block trade discount, say c10pc min – 70p for Lloyds.

2) If like us UKFI believes in RoE recovery driven re-rating, by 2012 at x1.5-2.0 book Lloyds is >100p and RBS is 80-100p ie no economic rush to offload holdings.

3) Reduced Gvt ownership will increase index free float weighting, and so require u/w benchmarked funds to revisit their position.

4) UBS case study of Gvt stake sell down – which was distorted by other major market concerns at the time – suggests that recovery from technically driven sell down can be rapid. In UBS’ case, investors used the placing to square shorts/underweights.

5) Today’s FT suggests that the Treasury want to remain involved in the banks as instruments of policy, given the drive towards social utility banking increasingly popular in Whitehall. A UKFI sell down near term therefore feels unlikely given yesterday’s budget pledges on banking reform.

Conclusion: bottom up restructuring opportunity continues to crystallise faster than our forecasts factor in. We see domestic UK bank ‘normalised’ RoTCE at 15-20pc by 2012/13 and anticipate towards 1.5-2.0x p/TCE multiples by then. Implies 3 year TSR >100pc. Geared plays = Lloyds & RBS. Any near term sell down either due to macro/political/sovereign risk or Gvt sell down in our view is a buying opportunity, unless you believe in UK sovereign downgrade of 2 notches or more.

Yes. That’s all sensible stuff.

And here’s our old friend Bruce Packard at Seymour Pierce.

excellent

not heard from him for a while

Figures released by the UKFI show that the government is now sitting on a profit from
its 41 per cent shareholding in Lloyds Banking Group. The Govt’s average “in-price”
was 63.2p, including the rights issue in the second half of last year at 37p. The
average in-price for RBS is 50p, and amounts to £45bn investment.
Most of the academic research on Nordic and Japanese banking crises suggests that
the faster the Govt steps in to nationalise the banking crisis, the better the outcome for
both the economy and the Govt. But we are sceptical that the Govt can now place all
the £17bn on the market, because of the substantial challenges the UK economy still
faces (although London is full of talented investment bankers who would love to advise
the Govt on the disposal).

thanks for that

moving on

11:43AM

let’s go shopping for a few minutes

biggest rise in the FTSE 100 at the moment

Next Plc (NXT:LSE): Last: 2,193, up 123 (+5.94%), High: 2,200, Low: 2,140, Volume: 1.61m

and guess what?

What

they have beaten expectations

which is really no surprise

because every time Next has results

it makes all sorts of bearish noises

everyone sets conservative estimates

and hey presto

nearly every time they beat

Yup – Simon Wolfson’s very good at the whole “talking down then delivering” lark.

What does he say in today’s outlook statement? It’s usually worth a read.

We are reluctant to give full year profit guidance at this early stage. However, we think it is useful to outline how we expect profits to perform in a scenario where total sales are broadly level with last year. In the event that this year’s total 52 week Brand sales can match last year’s 53 weeks (i.e. full year Retail like for likes down around -2%), then we believe we can further improve the Group’s net operating margins by around 1%. It is important to stress that this is not a forecast but does give an indication of the level of cost management within the business.

The outlook for the year ahead is hard to predict. The consumer has come through the recession in relatively good shape. Employment is down by less than 2%, mortgages remain low and the savings ratio is back to sustainable levels. There are some slight worries; interest rate reductions annualise in April and we are beginning to see some modest inflationary pressure from the recent spike in commodity prices.

The main concern is the size of the Government deficit. In whichever way a future Government balances its books, the results will be uncomfortable for the consumer. The best outcome will be if the Government is able to reduce the deficit through productivity gains, although this will not be without impact on consumer spending, as inevitably it will result in the loss of some public sector jobs.

A worse scenario for the consumer would be a rise in taxation; direct taxes will reduce consumer spending, indirect taxes are likely to be inflationary. So the outlook for the economy (and therefore for retail sales) remains dependent on policy decisions and their timing and, as yet, we have little certainty as to either.

There we go. He always sounds like he’s on Question Time.

(student – no)

a Tory MP in the making me thinks

It’d be a pay cut, I imagine, though the consultancy fees are okay.

anyway

the results for 2009 were above expectations

£505m vs consensus on £495m

beat down to better margin in the retail business

Any comment?

yes

here’s Merrill

FY10 RESULTS AHEAD OF EXPECTATIONS, REMAINS TOP PICK IN UK
Next has reported FY10 results ahead of our and consensus expectations with
PBT of £505mn vs our £497mn and EPS of 188.5p compared to our 180.5p
forecast. Next is guiding for H1 LFL sales to be -2.5% to +0.5%, broadly in line
with its previous guidance for the full year of -1% to +3%. H1 Directory sales are
expected to grow by +1% to +4% compared to previous guidance for the full year
of 0% to +2%. Next believes it can improve its operating margin by a further
100bp this year (vs BofA MLe +30bp). As such we see at least 5% upgrades to
consensus earnings estimates for FY11

We believe Next is continuing to benefit from its gradual repositioning upmarket,
improved womenswear offer and more competitive entry price points in areas
such as kids and homewares in Spring 2010. This should have boosted Next’s
value credentials, while TV advertising should continue to build the brand image
in the eyes of the consumer. We believe Next is starting to see some small
upward supplier pricing pressure, but better buying should offset currency and
VAT impacts on gross margin, while opex remains well controlled, including
minimal staff cost inflation and a likely lower bonus provision in FY11.

In homewares, Next now has a much wider range and deeper buy, and appears
to be benefiting from customers browsing homewares in store and then buying
online. Customers are benefiting from live stock information and from fast
delivery. Bad debts have fallen slightly, such that we believe Next can now drive
the top line harder going forward.

There’s also a bit from Investec. I’ll cut to the interesting stuff.

Forecasts should rise for under-lying over delivery as well as buy-backs:
Consensus forecasts for FY11E have yet to catch up with buy-back activity, our
PBT of £518m and EPS of 198p captures buy-back to date but consensus EPS
is 189p. We continue to believe Next could buy back an additional 6-7% of
equity as well as investing in Next Home roll-out, Lipsy roll-out and growth in
Europe.

Guidance for H1: Next has given LFL guidance for H1 for retail as +0.5% to
-2.5% ex-VAT, and Directory +1 to +4%. This compares with its previous
planning base for FY11E as follows: Next Retail LFL +1% to -3% on a VAT-inc
basis (statutory sales ex-VAT 1.6% less than the cash in the tills – remember
childrenswear is non-VATable). However this guidance also excludes “direct”
sales generated on line (included in Directory revenue) which in H2 contributed
c1.6% to Next Retail sales. Our assumption is “same store” sales growth of
+1% for FY11E (ex-VAT) and +2% for Directory. This marks the first period of
positive LFL growth since FY05. With some help from a recovering consumer
economy in FY12E, we forecast 2% LFL growth.

Not mature yet: Total top-line in Next Retail is likely to be supported by the rollout
of stand-alone Home stores (an estimated 100-120k of this year’s raised
340k sq ft space addition) and Lipsy stores. We do not see Next as facing
greater maturity issues than the majority of its UK Retail peers. It has growth
investment opportunities in both the UK (Home stand-alone and Lipsy) and now
potentially overseas (mainly on-line) but we do not see these as capital-hungry,
so that capex is not expected to exceed depreciation in the next couple of years.

Thus in FY11E we could see additional scope to buy back a further 6-7% of
the equity. Although resumption of buy-back activity has led to the nowtraditional
de-rating, at 10x PE the shares are at the bottom end of their
“normal” range.

thanks for that

11:49AM

While we’re high streeted, we should note the ONS retail sales data this morning

2.1% rebound for February

snow deflator alert

Quite. January was revised down to minus 3%, from minus 1.8% previously

Snow. Vat hike. Blah blah blah.

You know the routine.

Here’s HSBC with a quick summary of what to make of it.

Overall, this data makes us a little more confident that the sharp drop in the data in January was more to do with the
snow than indicative about anything more sinister about the underlying pace of the recovery.
The size of the revision to last month’s data suggests that despite the ONS’ recent refinement of the data we shouldn’t spend
too much time analysing the detail of this release. But with that caveat in mind, looking at the three month on three month
rate of growth to smooth through some of the volatility, it is clear that clothing and footwear and internet spending (nonstore
retailing) is driving the recovery in spending. Spending on household goods remains lacklustre and food consumption
is falling. It’s worth noting that during the downturn food consumption was inversely correlated with leisure spending (as
people chose to eat in rather than go out). As such, retail spending held up but this provided a reasonably poor guide to overall
consumption. It may be that as consumer confidence recovers, retail spending starts to underperform total consumption.

Snow then

Snow.

when will it finally fall out of the readings

Spring, one imagines. Although it might annualise.

11:52AM

Right

let’s have a look at Drax

which in recent weeks

has been mentioned as a takeover target

and is up today

Drax Group Plc (DRX:LSE): Last: 379.00, up 23.4 (+6.58%), High: 379.10, Low: 362.50, Volume: 2.83m

Blimey.

but that’s not down to bid rumours

oh no

something more fundamental

and RBS note

although

you wouldn’t guess it

from the top line

The UK is awash with gas, pushing down dark spreads

Oh great. Dark spreads.

Back to Wikipedia.

one to Google that

The difference between something or other and something else.

And the subs never let it through without a fight and a full paragraph of explanation..

so, here’s the start

Due to an weak international economy and a boost in US unconventional gas production, here is a surplus of LNG on world markets, which is depressing UK gas prices and looks set to continue for the next few years. This is bad news for Drax, as a coal-fired generator in a gas-priced power market. Our 2010 forecasts look intact but if current forward prices persist, our 2011 forecasts will be too high.

but

Nevertheless, Drax looks cheap on conventional metrics
At only 3.3x 2010 EV/EBITDA and 6x earnings, on our forecasts, Drax looks cheap on
conventional measures. Our DCF-based price target is 560p, but this only tells part of the
story: we find considerable hidden value in Drax.

We estimate Drax has around 275p/share of hidden value
This hidden value arises from Drax.s coal stocks (46p/share); the carbon credits it will
receive under the UK.s National Allocation Plan (74p/share); its historical tax losses
(64p/share) and the value of its trading book, assembled when prices and spreads were
significantly higher than today, (107p/share). Subtracting debt, we estimate this totals around
275p/share. This implies that the physical assets of Drax (the largest coal-fired power station
in Western Europe, fully equipped with flue gas desulphurisation) are only being valued at
£330m . around 10% of replacement cost, or 75% of the last three years. capex.

We believe Drax.s value will become apparent as UK generation market tightens

The UK is scheduled to close 15% of its older coal and oil powers stations by 2015, and probably earlier in practice. The UK will still need Drax and other coal stations to run for most of the winter to meet demand. Therefore spreads will most likely have to rise in order to remunerate this important source of security of supply. We therefore rate Drax as a Buy on this longer-term view, although our 2011 and 2012 forecasts may get worse before the outlook for Drax gets better.

so low gas prices

don’t really matter tha much

Righty-ho.

Time for small cap corner

11:56AM

Okay then

a moments silence then

for a dear departed friend

Jarvis

it’s finally left us

That may be a little premature.

It’s brought in the administrators.

However, following negotiations with the Company’s secured lenders, it has today become clear that sufficient support will not be extended to the Company to enable it to continue trading as a going concern.
As a consequence, the Directors now have no option but to take steps (together with the Company’s secured lenders) to place the Company, and certain of its subsidiaries, into administration, and to request that trading in its shares be suspended with immediate effect.

is Steven Norris still the chairman?

Yup.

In fact, he doubled his stake less than a year ago.

wasn’t this stock £10 once

or higher

it’s had some many spilts

and capital increases I can’t remember

but it was a real go go stock once upon a time

before Hatfield and Potters Bar rail crashes

and I go through both of those on the way to work

Let’s be honest here, it’s been a shambles.

true

Playing off the quangoised nonsense involved with TFL and rail infrastructure.

And getting it horribly wrong.

We have to remember this was once the UK’s biggest construction company.

really

that’s incredible

it got involved in building schools

hosptials

if I remember correctly

Yup. Wherever there was taxpayers money sloshing around, the former Conservative transport minister could be found.

What were shares at last night before the suspension, incidentally?

someone said 10p earlier this morning

but I would have to check

Yup – that’s right. 9.5p or thereabouts, giving it a market cap of £20m.

Depressing story this.

indeed

but it also goes to show

how long it takes sick companies to die

they can hang on for years

like an annoying old relative

right, more small caps

someone mentioned Assura over on the right

both yesterday and today

This was the thing that sold its healthcare business to The Beared Pullover, isn’t it?

GP business

well now a stake builder is at work

someone called Somertson Investment has popped up with a 25% stake

Who?

based in Jersey

real estate developers

http://www.somerston.com/

he Somerston Group of Companies is an international group engaged primarily in real estate investment and development. The Group is privately owned and its headquarters are situated in Jersey, Channel Islands.

With over 30 years in real estate investment, development and finance, the Group has an established track record and has built a reputation for being fast acting and professional in the execution and management of its projects.

The Group has undertaken real estate projects on three continents and spanning the following real estate sectors:

Real estate?

omerston has consistently out performed other real estate groups, both listed and privately owned, through discerning investment selection, innovative structuring, efficient and effective development and the maximisation of asset performance.

obviously Assura must be some sort of property play

Well, it’s got GP surgeries.

But they have GPs in them, surely.

Not quite seeing where the real estate development angle is here.

just tryinig to get the NAV

from some recent results

NAV at March 31st

65p

Against what price this morning?

S-Net ITG Gl.Agri Bus. ETF (AGRP:LSE): Last: 3,078, no change, Volume: 0.00

are sorry

that did not work

Assura are up 2.2p at 49.25p

Smallcap tickers are a dark art.

So there’s a reasonable discount there.

yes

but as ROTR note

need to take into account Virgin sale

Good point.

More small cap news

something positive out from Afren

which isn’t a small cap anymore

but a mid cap

something to with a lending facility

didn’t read

but Morgan Stanley did

The platform for growth: The announcement today
should alleviate persistent concerns on 2010 liquidity
since the operational update in January. We would
argue the size of the facility, larger than previous
indications of c. $300m, will provide confidence on a
favourable outcome from the independent audit reserve,
which should be published alongside the full year results
on Monday 29th March. Admittedly the margin above
Libor may be seen at the high end but ultimately we think
the RBL facility should be seen as significant given Afren
looks sets to grow its asset base through development,
appraisal and exploration. We maintain our Overweight
rating.

What’s new: Afren has announced it has finalised
arrangements for a new reserves based lending debt
facility of up to US$450m. It has been secured against
the Ebok field reserves, has a maturity of a maximum of
five years, is repayable semi-annually and has a margin
of between 4% and 5.5% over LIBOR.

New RBL should provide confidence in core and
upside case: With the banks working closely with the
NSAI, the independent reserve auditors, we expect a
positive outcome when the updated numbers are
released. This should in turn provide greater confidence
in core valuations (MS currently at 74p/sh). With the
facility also including spend on development of any
subsequent phases of the Ebok field, the Okwok field,
OML 115 or other projects on OML 67, we think it
provides management greater flexibility to accelerate
further phases of production.

Ticking the boxes and what else to look for on
Monday: The appointment of a FD earlier this week to
the board should be seen as another milestone while we
highlight investors should look next week for further
updates on: 1) Incremental upside potential on Ebok
through deeper prospects in the Isongo horizon. 2) More
colour on the upside and activity plans from the recent
OML115 (Nigeria) acquisition. 3) Update on the potential
farm down of blocks CI-01 (Cote d’Ivoire) and Keta
(Ghana).

(Hello Emptyend – you’re too late we used the Dana ammo earlier this week – a Goldman note saying they could be a target).

12:10PM

Right

are we done?

it is past midday

Yeah. Let’s wrap this up now.

Haven’t mentioned the Thomas Cook trading statement, which looks okay.

Or this big Vodafone downgrade, which has been reported ad nauseum everywehere else.

Vodafone Group Plc (VOD:LSE): Last: 147.00, down 1.9 (-1.28%), High: 147.50, Low: 146.10, Volume: 59.74m

yes

Morgan Stanley

In a relative call, we downgrade Vodafone to Underweight from OW and cut our PT by 11% to 160p (7% implied upside), as, unlike consensus, we don’t think Vodafone Europe can return to growth given it has the greatest exposure to falling returns in mobile versus other operators with a mix of fixed and challenger mobile operations. We forecast high 29% ROCE in FY2010e, but think that such high returns should fall due to competition / new entrants. Since FY06, Vodafone Europe will have lost 18% in constant currency opFCF, or 5% CAGR. We would be more positive on Vodafone below 130p, but currently prefer BT, KPN and Telenet. Where could we be wrong?

and finally

a bit of budget comment

from Michael Saunders at Citi

Market reaction is likely to focus on two key questions: Does the Budget
establish a credible route back to fiscal sustainability? Will the Budget have
much effect on opinion polls as the Election approaches?

Oh good. We haven’t had enough budget comment.

In our view, the answer to both questions is “No”. The UK’s fiscal plans remain
relatively unambitious compared to other high-deficit countries. Moreover, the
Budget has no proper medium-term public spending plans and, without those,
the UK cannot claim to have credible plan to return to fiscal sustainability. But,
at the same time, the Budget probably does not contain sufficient giveaways to
materially change poll ratings. With no credible fiscal tightening in place, the
UK will likely go into the election with major medium-term fiscal uncertainties.

Ratings agencies say they will wait to see the UK’s fiscal plans post-election,
but if – as seems likely – there is a hung parliament, then there is unlikely to
be a quick move to credible fiscal consolidation post-election as well. Gilts and
sterling remain vulnerable, and if there is no post-election fiscal tightening,
then the MPC might well have to hike much earlier than markets price in.

and a little dinner party live

from UBS

the impact of all that stamp duty stuff

on the housebuilders

Stamp duty relief for first-time buyers (property value less than £250k)
In the budget report of 24 March, the government has announced that the stamp duty land tax (SDLT) on house purchases under £250k is cut to 0% from 1% for first-time buyers (FTBs) with immediate effect for a period of 2 years. This is funded by a SDLT raise from 4% to 5% fort.ransactions above £1m in 2011-12.

The suggested cost of the SDLT relief is £230m. FTBs account for 18% of UK mortgage loan volume, and hence have a significant participation in the housing market. The tax break is aimed at improving affordability for FTBs and has the potential of raising the number of transactions. The £250k limit is above the average UK house price (£161k) and the ASP of the listed housebuilders apart from Berkeley. Hence the government action is relevant for these companies. Conclusion: impact on housebuilders

In our view, the SDLT cut of 1% for FTBs will not provide a significant boost to housebuilders’ performance in the face of low mortgage availability. The government estimate is that the tax relief totals £230m, small in the context of overall transaction values. We view improved mortgage availability as the true driver for sustained recovery in housing transactions. We see value in the UK housebuilders (trading at 0.86x TNAV). Our top picks are Barratt (Buy; PT 209p) and Bellway (Buy; PT 1060p). As a second derivative play on higher housing transactions we highlight Travis Perkins (Buy; PT 1030p).

Right. Can’t be bothered reading that.

Should we close this now?

yes

I have a lunch to get to

thanks for logging on

cya tomorrow

when hopefully

when might have a story on Dana

Bye.

bye

This entry was posted by Neil Hume on Thursday, March 25th, 2010 at 11:03 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 25 Mar 2010

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