FT Alphaville » Markets Live transcript 21 Apr 2010

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Markets Live transcript 21 Apr 2010

Posted by Neil Hume on Apr 21 11:03.

Markets Live chat transcript for the chat ending at 11:16 on 21 Apr 2010. Participants in this chat were: Neil Hume, FT Bryce Elder

Hola

Good morning

and welcome to Markets Live

the sun is shining

the planes are flying

sterling is rising

and all is good with the world

anyway

it’s 11.03

and time for some more ML

FT Alphaville’s daily frolick around the markets

Bryce is here

Hello.

So, Willie Walsh for PM then?

well, I think he’s Irish

but still

A ballsy move to send 26 long haul flights to the UK overnight

without a place to land

Indeed. BA goes rogue.

And it worked.

forced the government’s hand

it did

but what I don’t get is that all of sudden

the airlines and the govt all agree that it is safe to fly through the ash after all

Hm.

it’s as I expected — elf & safety gone mad

anyway, what’s BA doing on the back of it?

British Airways PLC (BAY:LSE): Last: 235.20, up 1.3 (+0.56%), High: 240.00, Low: 235.20, Volume: 3.45m

Off the top now

High was 240p

Did you see Adonis getting taken apart by Paxman on Newsnight last night?

no I missed that

is it on iPlayer?

Very unfair really. One of those “when did you stop beating your wife” type interviews.

well

they stuffed up on this

complete overreaction

and as for all that Ark Royal stuff

phuleeze

I’d argue that, with the unquantifiable risk of planes dropping out of the sky, there’s no such thing as an overreaction.

But, yes, the “Send the Navy!” stuff was ludicrous.

Anyway, let’s push on the the wider market.

11:09AM

We are down – suurprisingly

off 36 points at 5,746

I say surprisingly because

most of the numbers that came out of the US overnight were good

especially Apple

and yet

we are down

Yup – bit of a pullback

And bit of a hodgepodge of stocks doing it

indeed

a few ex-divs around as well

anyway

shall we crack on

a bit slow over on the right this morning

perhaps

they want to tallk stocks

Does seem that way. Perhaps they’re all out in the sun, or planespotting.

11:11AM

Right

let’s have a look at Arm Holdings

biggest riser in the FTSE 100 at the moment

ARM Holdings PLC (ARM:LSE): Last: 252.50, up 9.5 (+3.91%), High: 253.50, Low: 248.50, Volume: 4.76m

any more on the bid rumours?

Well, sort of

And we’ll get to those later

But the Apple numbers are clearly the driver here

(murph’s a judge Monkey – we are compromised)

of course

stunning figures overnight

they were very, very strong

eps came in at $3.33 well ahead of the whisper number of $2.75

iPhone sales particularly strong

Goldman-type profit levels.

gross margins were also very impressive

And here’s an interesting wee statistic

Apple now has 73% of Nokia’s market cap in cash

gawd

that’s says a lot and none of it good for Nokia

any comment on the Apple numbers

Sure. JPMorgan first

We reiterate our Overweight rating on Apple and lift our Dec-10 price target to $316,
versus $305 previously. Apple’s quarterly results and outlook should be more than
enough to keep pushing the stock higher. While there was some noise around gross
margins, particularly as relates to the iPad in the early stages, we believe that the
overall revenue and earnings growth profiles have no rivals in large cap technology.
Over the next few years, we believe that Apple’s revenue and earnings growth could
stay well above 20%, requiring a favorable reset to the stock’s valuation.

Apple delivers a big beat. For the March quarter, Apple reported revenue and EPS
of $13.50 billion and $3.33, versus Street consensus estimates of $12.04 billion and
$2.46. Our above-consensus estimates had been $12.32 billion and $2.53. The
company commented that this was the best non-holiday quarter in its history and
that several more new products are in the pipeline for this year, which we think
keeps investors more than interested.

Gross margins stand to be a hot topic for debate. Apple reported gross margins
in F2Q of 41.7% but guided to gross margins of 36% for the June quarter. The
company expects 25% of the sequential decline to be driven by the first quarter of
iPad sales. Four additional factors weighing on gross margins were highlighted. We
believe the negative iPad margin impact to be temporary in nature, potentially
caused by yield issues, as our BOM analysis suggests that the iPad is accretive.

iPhone is the big positive surprise. Apple reported sales of 8.75 million iPhone
units in the March quarter, higher than our estimate of 7.35 million. Overall, we
believe this surprise performance stands to renew investor optimism related to the
iPhone’s long-term growth story, particularly as new form factors, broader
geographic reach (i.e., China) and carrier penetration (i.e., easing exclusivity) are all
incremental catalytic events.

Mac shipments are good enough. Apple reported sales of 2.94 million Macs,
missing our Street-high estimate of 3.18 million. We do not expect too much fuss
from investors given that unit shipments were just shy of the 3 million unit
psychological-barrier. We see any concern around slowing Mac shipments as
temporary, owing to a combination of iPad hype and recent MacBook Pro refresh.

Quick Call — We are significantly raising FY10-12 estimates on the back of
stunning 1CQ10 results. Our revised estimates suggest a new 12-month target of
$320, enough to keep Apple toward the top of our list of preferred hardware
names for 2010. While the shares may take a breather following Wednesday’s
rally, we would use any pull-backs as enhanced buying opportunities ahead of
what should be a truly banner Holiday season for the company.

Refreshing the Bull Thesis — The fact that Apple was able to deliver such
significant upside before this year’s significant product introductions/refreshes
makes us all the more confident in our positive stance through year-end. As a
reminder, iPad should contribute to revenue beginning in 2CQ followed by an
iPhone refresh in July/July, an iPod refresh in September and perhaps a CDMA
iPhone on Verizon’s network in time for the peak Holiday season.

thanks for that

So that’s all good for ARM then?

Sorry – that last one was from Citi.

And yes, broadly, it’s all good for Arm.

(CS – there were some tech issues earlier)

The iPhone runs on an Arm Cortex 8 I think.

right

I’ll take your word for that

that’s an ARM design i presume

Yup. And it generates a higher revenue per unit than your average 7 core found in a non-smart phone.

right

Good for Imagination as well, of course.

yes

Actually, there’s a JP Morgan note running the numbers here.

they supply Apple with graphic chips, right?

Yup – and both Apple and Intel are shareholders.

of course

Imagination Technologies Group PLC (IMG:LSE): Last: 261.80, up 9.9 (+3.93%), High: 263.60, Low: 253.60, Volume: 327.19k

Here’s the note.

Regarding the iPad, which is only selling since this month and hence will
only appear in Apple’s current quarter, COO Tim Cook commented in
the conference call that there was no production issue and that they had
been surprised by end demand (“initial demand for iPad has shocked
us”).

With Imagination having exposure to the iPhone, iPod Touch and to the
iPad, we remain confident that Imagination remains in an upgrade cycle.
• Our sensitivity forecasts remain unchanged – we estimate an incremental
1m shipment of an iPad, iPhone or iPod Touch would lead to an
incremental £500k at the EBIT level (+4% for FY2010, +2% for
FY2011) and incremental 0.2p at the EPS level (+3% for FY2010, +2%
for FY2011

And here’s a bit from Evolution

The last time we spoke to Imagination, we were left with the impression that the company would meet FY10 expectations without having to rush any customers into signing licenses before the end of April. Licensing should get off to a good start in FY11 as a result. We are also bullish about the prospects for royalties following Apple’s earnings beat yesterday – iPhone shipments in the first three months of 2010 were 8.8m against expectations of 7.5m. Talk of capacity shortages in the semiconductor industry suggests that Imagination’s royalty rate could also surprise on the upside over the next couple of years. It is clear that a real head of steam is building up and we expect to put through a substantial earnings upgrade when the company reports in June.

VALUATION AND RECOMMENDATION – Apple’s and ARM’s share prices have risen 25% since the beginning of February, whereas Imagination’s has fallen. Imagination is now on a PE of 18x FY12 (April) compared to ARM’s comparable rating of 28x FY11 (Dec). We see 25% upside from in the near term, and have lifted our target price to 300p. Upgraded to Buy

(TheHoof – Gizmodo’s now given the iPhone back.)

(And the whole story smelt a bit funny, quite frankly.)

Right

thanks for all that

but what about these bid rumours

is there any chance Apple would look to buy ARM?

I’m going to stick my neck on the line and say no.

why

No chance whatsoever.

Well, why would they?

dunno

your the tech expert

Arm’s an industry standard. If any consumer related company bought it, it would be spectacularly disruptive to the industry.

Basically, Nokia and Samsung would be laying eggs at the very suggestion.

And there’s close to zero synergies between Arm and Apple.

and they are already a big customer

so why buy them?

and ARM isn’t cheap either

Yup – major licencee.

They’d be paying, what £4bn-ish just to irritate competitors. Not plausible.

could if not Apple

what about Intel

could they take a look?

Right. Now we’re in more plausible territory.

But the question is, why now?

well, I only ask

because this popped up on Bloomberg last night

ARM HOLDINGS (ARM LN) / IMAGINATION TECHNOLOGIES (IMG LN) / INTEL (INTC US) – In an interview with Bloomberg late yesterday, Intel CFO Stacy Smith said the group is considering acquisitions that would help get its processors into smartphones and consumer electronics. “We are looking at what we believe can accelerate our progress in those markets,” Smith is quoted as saying, adding that “As we see other opportunities like that, we think it’s a place where we can and will deploy capital.” He declined to name any potential targets or say how much Intel is prepared to spend. Intel holds 15% of IMG LN, Apple 9%.

Right.

And all the chipmakers are taking a bit of a lift on that.

I think so

However, Arm and Intel have had a funny sort of relationship for a decade or so

Right

thanks for that

To nerd out for a second: Intel bought DEC, which made a thing called the StrongArm in partnership with ARM ….

This became the basis for XScale, which is probably what’s in your Blackberry

again I take your word for it

But Intel then sold it to Marvell

The idea of Intel turning around and buying the defacto standard doesn’t really work for me.

Anyway, that’s more than enough of that

I suspect this bid story is going to rumble on for a while

Let’s push on to something less techy.

let’s cut back to the wider market for the moment

11:26AM

and

the FTSE 100 now off 45 points

no one seems to have a reason why

other than Greece

but why would that matter today

that said

5 year credit default swaps –Today 21st April spread is now +470-500!

Yield on 5 year Greek bonds –Today 21st April the yield is 8.06%!

which is pretty big

not sure

the employment would have done it

actually that looked OK

I think on the claimant count number

perhaps it is Goldman worries

or the new IMG bank tax

Yeah, but banks seems to be doing fine.

And the IMF’s not-a-Tobin-tax-honest stuff wasn’t really all that new

it wasn’t

and was probably leaked to Peston

by the govet

so Gordo could claim

he had been right all along about a global bank tax

and the Tory plans to move on their own were bonkers

anyway

we can come back to that

11:30AM

some of the ROTR asking about the Billiton story today

one view going around is that this investigation

is the final nail in the coffin of the JV with Rio Tinto

What are they supposed to be looking at?

which would exactly be that bad for RIO

Rio Tinto PLC (RIO:LSE): Last: 3,703, down 95.5 (-2.51%), High: 3,825, Low: 3,701, Volume: 2.84m

BHP Billiton PLC (BLT:LSE): Last: 2,129, down 51 (-2.34%), High: 2,180, Low: 2,128, Volume: 2.87m

I have a good breaking views piece on this

It was clear before BHP Billiton admitted to discovering “evidence .. regarding possible violations of applicable anti-corruption laws” that the authorities were getting cold feet about the miner’s proposed deal with rival Rio Tinto .

Last week the Australian Competition and Consumer Commission again extended its timetable for scrutinizing the massive joint venture. This provided the opportunity for the Financial Times to call for the deal to be stopped, provoking a furious letter to the paper from Rio. The group’s senior legal executive wrote that “we will, as always, comply with the strictest competition laws around the world”.
Full compliance with the law is easy for the corporate lawyers to claim, but much harder to enforce on the ground, or even under it, thousands of miles away.
A Rio executive is currently in jail in China for corruption, and BHP’s news is a setback, at the very least. The two companies are trying to convince the ACCC that a $116 billion joint venture, covering 30 percent of the world’s output of sea-borne iron ore, will not be anti-competitive.
The companies have employed the world’s finest legal brains to build the JV. It will be incentivized to maximize production, with a strict 50-50 share of output and costs. Collusion over marketing, sales, bids for tonnage or sensitive information is strictly forbidden.

Yet outlawing something is seldom sufficient to prevent it happening. In theory, this tie-up would mean a greater supply of a vital world commodity, with the magic combination of higher profits for the producers and lower prices to the buyers. Who could object?
Well, those buyers, for a start. The steelmakers have been lobbying as furiously against the deal as the miners have been pushing it. The customers are understandably apprehensive at the prospect of three world-scale producers being reduced to two. They wonder how the Rio and BHP salesmen will avoid each other at the Melbourne Mining Club.
Whatever the legal eagles claim, Chinese walls have chinks, and joint ventures have not proved to be stable structures in the past. This one has only been proposed because BHP’s bid for Rio failed. No wonder the ACCC wants more time.

Hang on …..

“Chinese walls have chinks”??????????

That’s an unfortunate bit of subbing.

let’s not go there

Well, quite.

Anyway, didn’t BHP have production numbers out as well?

they did

Bit weak I think.

there were

BHP Billiton has reported slightly weaker 3Q’10 production numbers, with oil, thermal coal and manganese the main performers in our view. Like Rio, Australian based operations suffered from weather related disruptions and whilst headline iron ore appears strong at +11% YoY this compares to Rio last week reporting iron ore +41% YoY. Weaker production in base metals are mainly due to well flagged operational issues at Olympic Dam therefore should come as no surprise. BHP is undoubtedly cheap; on spot prices it is trading at 5.9x PER 2011 and 3.1x EV / EBITDA 2011, but we continue to prefer cheaper Rio (4.3x PER 2011 and 2.0x EV / EBITDA) which we believe comes with lower downside risk if regulators block the proposed BHP / Rio iron ore JV.

Who’s that from?

sorry from Liberum

I haven’t looked in detail at these charges

but the US DoJ are involved

as for the Goldman fraud case

we don’t really have anything fresh on that

the only new thing to come out of yesterday’s press conference

is that Mr Fantabulous was supposed to have told someone that Paulson was short of the equity tranches of the Abacus CDO

whether anyone remebers that

we will see

11:35AM

Markets still falling

and CDS around Europe is rising

RTRS-BUND FUTURES RISE TO SESSION HIGH OF 123.76, UP 26 TICKS ON THE DAY
11:34 21Apr10 RTRS-GREEK 5-YEAR CREDIT DEFAULT SWAP RISES TO FRESH RECORD HIGH 489 BPS – CMA DATAVISION
11:35 21Apr10 RTRS-SPANISH 5-YEAR CREDIT DEFAULT SWAP RISES TO 152.2 BPS VS 144.8 BPS AT NEW YORK CLOSE ON TUESDAY – CMA DATAVISION

FTSE’s off 50 points now.

What’s causing this flurry of risk aversion?

Um ……. pass. There’s no obvious catalyst.

11:36AM

Sterling unaffected by all this

pretty stong this morning

It is.

Cable’s at $1.541

And a euro thingy buys 87p

hmmm

the jobless numbers?

have they helped

Guess so

if you missed those

Here’s the detail

March claimant count unexpectedly fell by 32.9k, against consensus call for a
10k decline. The already far better than expected February reading was revised to show an even larger claimant decline, down 40.1k, compared to -32.2k initially released.

The claimant count rate was just 4.8%, compared to 4.9% in February. The ILO
unemployment rate rose to 8.0% in the three months to February, however, from
7.8% and against a median forecast for a stable reading.

hmmm

The numbers are encouraging, suggesting that the U.K. labour market is stabilising, although the high volatility in the beginning of the year could be weather related to some extent and came from a low base…the employment level of 72.1% in the three months to February was the lowest since October 1996.

also Clegmania is not having any effect on sterling

or gilts

in spite of the fact that his surge in popularity makes the dreaded hung parliament more likely

well, that’s if people really believe the polls

http://www.ft.com/cms/s/0/540ec076-4cc0-11df-9977-00144feab49a.html

And I have to say

I’m not sure I do.

It does seem incredible that the Lib Dems are almost neck and neck with the Tories after one TV debate

actually some polls reckon Clegg could win it

which I can’t believe

I’d argue that Clegg’s the “none of the above” vote.

Like Richard Pryor in Brewster’s Millions

true

but is that enough to win it?

Are people that digusted with Westminister

and the main parties?

No matter his support, first past the post guarantees that a protest vote won’t be enough to win.

perhaps it’s the prospect of Vince Cable as chancellor that had helped sterling

anyway

I guess we should see what happens after tomorrow’s debate

Yup. The Clegg bubble could yet burst.

indeed

but as things stand at the moment

we are in for a hung parliament

and sterling and gilts

aren’t wobbling

it must be the Vince factor

Hooray for Vince. The backwards looking soothsayer.

yes

who wants innocent bankers

banned from doing their jobs

Should we go back to the market?

yes

a few bits 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.

for the ROTR

Oh good. What’s around?

11:42AM

Well

some vague chatter that Vale are looking at Xstrata once more

Xstrata Plc (XTA:LSE): Last: 1,188, down 29.5 (-2.42%), High: 1,220, Low: 1,183, Volume: 4.50m

very RAW this

and no other details

we also have a whisper number for the Morgan Stanley numbers

And ….

Ms new whisper number of 82c vs 65c whisper earlier and estimate at 57c……

on the Pru

this has just come out

RTRS-HONG KONG LISTING COMMITTEE HOLDS PRUDENTIAL PLC IPO HEARING A DAY EARLIER THAN EXPECTED -SOURCE

and also

there is a story going around that Britvic could be a takeover target

Britvic Plc (BVIC:LSE): Last: 481.60, up 3.2 (+0.67%), High: 481.80, Low: 475.10, Volume: 222.54k

very old story that one

but on the back of a couple broker upgrades

it’s out there

It is. Think they were roadshowing last week.

And there are all sorts of industry overlap problems to the Britvic takeover story, but it just keeps coming back.

indeed

they have the Pepsi licence for the Uk

being the main one

Yup – and Pepsi has been buying bottlers.

But Britvic’s not just a bottler, and is generally seen as more likely to be the vehicle that consolidates the European market than a target.

(Lorcan – risk is off today. I guess(

11:45AM

right

let’s move on the retailers because there is a small bit of carnage in the sector this morning

Yup

most stocks down

Marks and Spencer Group PLC (MKS:LSE): Last: 378.60, down 9 (-2.32%), High: 384.20, Low: 378.30, Volume: 4.97m

Next Plc (NXT:LSE): Last: 2,288, down 27 (-1.17%), High: 2,320, Low: 2,281, Volume: 220.20k

HMV Group PLC (HMV:LSE): Last: 80.85, down 4.1 (-4.83%), High: 84.25, Low: 80.85, Volume: 3.98m

Home Retail Group plc (HOME:LSE): Last: 288.10, down 3.8 (-1.30%), High: 290.80, Low: 285.10, Volume: 2.10m

So…

I guess Game Group is to blame

A horrible update on current trading

basically a profit warning

that’s cost the CEO her job

and the COO has also announced he’s off

although no one is painting things like that

they resigned

and there will be a smooth handover

of course no one really believes they resigned

Yup. They both decided on the same day to look for other opportunities. It’s possible.

anyway

why they went or are going is irrelevant

current trading has fallen off a cliff

look at this

Like for like sales in the 11 weeks to 17 April were reported to be down by 14%, including 20% in the UK

and that’s excluding the impact of the launch of the DSI, which plumped up the comparative figures from last year

That’s poor.

and explains the share price reaction

Game Group PLC (GMG:LSE): Last: 90.70, down 10.6 (-10.46%), High: 94.00, Low: 87.00, Volume: 9.58m

and the drop in the price of HMV

and DSG

So what’s happened here?

What’s gone wrong?

well

here’s what the analysts think

Freddie George of Seymour Pierce

Results to the end of January were at the top end of expectations but the company has announced the resignation of its CEO Lisa Morgan, and COO Tony Scidon. Underlying pre-tax profits declined by 27% to £90.4m vs. SP forecast of £90m on sales down by 10% to £1,772m. There were non recurring costs, as expected, of £6m relating to the integration of Gamestation. Underlying EPS of 19.2p was higher than expected because of a lower tax charge than projected while the dividend was increased by 5% to 5.78p. Net cash at the year end declined by c.£40m to £45m, reflecting the timing of supplier payments. A major disappointment in the statement, however, is the update on current trading, which management states that, excluding the impact of the launch of the Dsi last year, was in line with expectation. Like for like sales in the 11 weeks to 17 April were reported to be down by 14%, including 20% in the UK. The poor performance in the UK perhaps explains the management departures.

As we noted in our pre-results note we believed that current trade was weak over the last two months. But for the time being we are keeping our Buy recommendation on the stock. On the basis of our current forecasts the stock, in our view, remains too lowly rated at 6.4x 2010/11 forecasts based on a pre-tax profit of £80m with a dividend, 3x covered, projected to yield 6% and a strong balance sheet with cash forecast at over £60m at January 2011. The management departures reflect the challenges ahead in the games market but are also likely to open the company up to corporate activity, in particular the attentions of larger US peer, Gamestop.

Aha! The old takeover story. I’ll tick it off my M&A bingo card.

Any more?

yes

JP Morgan

Trading since the beginning of the new financial year has, however,
continued to be difficult. LFL sales for the 11 week period are down
20.1% in the UK and 3.9% in international. Online sales are also down
3.5%. This is in line with our estimate of a 20% decline in LFL sales
for the quarter, but looks to be worse than the market as a whole
(software down c. 6% in the last two months) and we suspect the
company is losing share. Worryingly online sales are also poor, down
9.1%.

The real surprise today comes in the announcement of the departure of
CEO Lisa Morgan and COO Terry Scicluna. Lisa Morgan has been
with the company for 14 years and in the industry for 20. The timing
coming as it does at a crucial point in the company’s strategy, will we
think unsettle investors. Game faces considerable challenges in the
coming years as it endeavours to manage the transition of its industry
from bricks and mortar retailing to online. This will entail a managing
down of the store base in order to deal with the erosion of bricks and
mortar revenues. Currently Game has 682 stores and it has announced
this morning that by 2013 it expects to have 550.

We expect the shares to react negatively to the news of the
management departures. One of the non-execs, Chris Bell, has stepped
in to the role on an interim basis, but the uncertainty regarding Ms
Morgan’s replacement as well as the shock of her departure will we
believe weigh heavily on the shares. In terms of estimates, we are
considerably below consensus for FY2011E at £62.2m PBT (12.9p).
Consensus (Thomson Reuters) is for £73.3m (14.8p) and we expect
that to come down today.

The shares have traded well over the last month, up over 20% in the
last 5 weeks. We would expect them to lose much of this ground
gained following today’s announcements. At the current price the
shares are trading on a PER of 7.9x FY2011E.

Sorry bit long that

but one thing I note

is that Game don’t look that expensive

so I wonder if a lot of the bad news and the threat from the internet is in the price

Game also had a strong balance sheet and generates a fair bit of cash

True

But, as the rabble note, the industry’s long discussed move online is finally happening

does Game become Blockbuster?

Hm. That may be overstating things.

HMV has survived digital downloads, for example.

true

But it’s a risk, certainly.

last man standing

perhaps Game will be the survivor

Perhaps you could consider it a retailer in run-off.

11:52AM

But

Game is not the only factor weighing on the retailers today

what else then?

negative note from Merrilll

they reckon we should be cautious on the UK retailers

because the outlook does not look great

higher taxes, petrol prices

Share prices have bounced back

and some like M&S are expensive

that sort of stuff

here’s the note

for the retail watchers out there

At the start of this year we stated that we expected general retail stocks to
underperform their food retail counterparts and for non-UK retail stocks to
outperform UK stocks in 2010. We see no reason to change that view, especially
following the recent bounceback in UK general retail share prices. We remain
cautious on the UK general retail space for three main reasons: 1) Our main lead
indicator for UK non-food retail sales (half disposable income, half housing
transactions) is still trending downwards suggesting retail sales momentum will
slow in H2 2010 and into 2011 2) We expect to see more pressure on gross
margins from next year, from sourcing cost pressures and as US demand soaks
up excess capacity and 3) As valuations for UK general retail stocks are broadly
in line with the market compared to their historic average of a 10-20% discount.

Higher tax and petrol prices impacting disposable incomes
In the short term retailers’ profits are likely to be protected from easy sales
comparisons until September, a still benign sourcing environment from excess
capacity in the Far East and as bonuses rose dramatically last year in the sector,
providing retailers with a cushion to control operating costs. However interest rate
stimulus has annualised and no matter what the outcome of the General Election,
we expect disposable incomes to be impacted by a rising tax burden and by
higher petrol prices. While we expect housing activity to increase from a low base,
we expect the rate of change to slow in coming months, contributing to only a
slow recovery in consumer spending

We favour retailers with self help or structural advantages
Against this backdrop we favour retailers with a high degree of self-help or non-
UK exposure (eg Debenhams and Kingfisher) and structural long term winners eg
Inditex, with its focus on newness, or Next, with its strong online offer.

Reduce Home Retail and Marks & Spencer to Underperform
We reduce our rating on Home Retail from Buy to U/P – as a 100% UK
discretionary retailer we think Home is exposed to a more cautious UK consumer
and housing outlook and at this share price we don’t think it is attractive as a
takeover candidate. We downgrade Marks & Spencer from Neutral to U/P as we
think it will struggle to maintain its premium rating to the sector given a lack of
operating leverage and lack of a credible international strategy.

Upgrade WH Smith to Buy, H&M to Neutral
We upgrade WH Smith to Buy for its defensive business mix, strong position in
captive markets and attractive valuation. We also upgrade H&M from U/P to
Neutral on an improving top line and as we expect a continued strong gross
margin performance going forward.

Ah. So that’s undermining Marks.

yes, I reckon so

and as for DSG

which are also down

that’s due to Most

who don’t like the stock

and have another negative piece out today

making the point that…

Of the 30 largest electrical retailers in the UK in 1997, 18 have subsequently exited the market

And we think it is going to get a lot worse

Really.

yep

and as opposed to buying DGI

the new Carphone/Best Buy JV

will just let it wither

We reiterate our Underweight on DSGi and Kesa and prefer CPW (Overweight, 30% upside to 235p price target), as we would much rather have exposure to the ‘new entrant’ than the ‘incumbents’ in the forthcoming battle to achieve ROIC targets. While CPW (via its 50% stake in Best Buy Europe) is also exposed to the market, our forecasts already assume that its ‘Big Box’ initiative meets with only limited success and makes no profit for the foreseeable future. In short, while CPW may not win, we think it has much less to lose.

Prospects are not good for the UK electricals market, which has been a ‘graveyard’ for a decade. Of the 30 largest electrical retailers in the UK in 1997, 18 have subsequently exited the market. Despite this, the ROIC generated by the leading players is lower than for any other subsector we cover. And we think it is going to get a lot worse. Even if all of the UK’s remaining independents exited the market, we believe it would still not be possible for Best Buy, DSGi, Comet and John
Lewis to achieve their targets. We are convinced that something is going to have to give.

and note

Carphone

has a strategy day coming up

next week I think

when we will hear a little bit more about its plans

for expansion

here’s a quick preview from UBS On that

Trading and strategy update on 26 April
This will be the first update since demerger. It will incorporate Q4 results, guidance for 10-11 and a visit to the first Best Buy branded store in the UK. There are no changes to our forecasts in this note but given the stronger momentum in Q3 the risk to “core” Best Buy Europe and Best Buy Mobile remains on the upside.

Big Box key
Big Box is important as losses are currently high, and there would likely be a material boost to EPS over time if these reversed. In addition, if the venture succeeds there would be additional value leakage for Best Buy Inc and this would increase the chances of it acquiring the remaining 50% of BBE. Investors will be looking for a clearly differentiated format as well as any formal guidance from management.

Valuation: Maintained Buy, Price Target 205p (from 184p)
Our PT is based on SOP, with BBE taken at a small discount to the sector and Big Box at zero. We now remove the 10% SOP discount, as the anticipated drag from flowback and lack of indexation does not seem to have materialised.

Ok – cheers for all that.

11:57AM

Update – Greek 10-year premium to bunds just went through 500 bips.

hmmm

Risk off.

yep

risk off/sell off

euro getting hammered

miners being hit over here

Vedanta Resources PLC (VED:LSE): Last: 2,661, down 86 (-3.13%), High: 2,768, Low: 2,661, Volume: 478.75k

Rio Tinto PLC (RIO:LSE): Last: 3,697, down 102 (-2.69%), High: 3,825, Low: 3,695, Volume: 3.24m

BHP Billiton PLC (BLT:LSE): Last: 2,129, down 51.5 (-2.36%), High: 2,180, Low: 2,128, Volume: 3.24m

Anglo American PLC (AAL:LSE): Last: 2,814, down 56 (-1.95%), High: 2,887, Low: 2,812, Volume: 1.59m

Xstrata Plc (XTA:LSE): Last: 1,174, down 43.5 (-3.57%), High: 1,220, Low: 1,173, Volume: 4.99m

It’s strange how Greece can be an issue one day

and not the next

and then vice versa

Quite. This is why us hack types are always accused of attaching reasons to moves when there is none.

12:00PM

So, do we have anything else?

interesting story has just gone up on Sky

remember Peter Tom

he used to run Aggregate Industries

and I think he owns Leicester Tigers

anyway

he has had a cash shell for a while

and according to Kleinmanwire

might be about to strike its first deal

The global mining group Anglo American has been approached about a multibillion pound sale of its Tarmac building materials arm, I have learned.
The suitor for Tarmac, which is valued by analysts at between $4bn and $6bn, is Marwyn Materials, an acquisitions vehicle headed by Peter Tom, the former chairman of Aggregate Industries, and Simon Vivian, a one-time executive of the British industrials group Hanson.
Tarmac is a significant employer in the UK as the owner of quarries and cement manufacturing facilities in the Midlands and other parts of the country.

(GeeDub – ex div, aren’t they?)

Investment bankers at HSBC are advising Marwyn on its proposal, which would involve the company acquiring a controlling stake in Tarmac. Anglo would retain a minority shareholding in the business, and Marwyn would then seek a stock market listing for Tarmac several years down the line.
Anglo has yet to respond formally to the Marwyn proposal but my understanding is that the mining conglomerate does not believe that it would optimise the value of Tarmac by offloading the business now.

This rings a bell. Is Marwyn listed?

it is

unchanged at 15p

looks like it never trades

yep

chart flat lines for ages

It’d be a reverse, this deal, needless to say.

So I’d assume it’s heading for suspension.

well

Klienmanwire says Anglo

not interested

so it might survive

just looking at the share register

very illiquid stock

anyway

interesting story

anything else

you want to look at Bryce?

Um ….. hang on, just checking the notepad.

New poster Kenyan Rose seems very excited about the Pru for some reason.

As it happens, I had a word with our insurance correspondent yesterday about the Landsdowne short position thing

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article7102224.ece

And his response was, “well, who cares” basically.

It’s a small position, and we don’t know if it’s hedged against a long.

that didn’t stop some people making a big deal out of it

and the fact that Lansdowne are now long of Lloyds

around 2.5% holding

Lloyds Banking Group PLC (LLOY:LSE): Last: 67.33, up 0.11 (+0.16%), High: 68.30, Low: 67.29, Volume: 90.28m

Fund manager takes positions shock.

Also, here’s the early IPO story from Reuters.

HONG KONG, April 21 (Reuters) – Britain’s Prudential Plc (PRU.L) had its Hong Kong share offering plan reviewed by exchange officials on Wednesday, according to a source directly involved with the deal, a day earlier than was expected.

ru’s Hong Kong listing is a key step in the process for its $35.5 billion acquisition attempt of AIG’s (AIG.N) life insurance group, AIA. A spokeswoman for Pru declined to comment.

Reuters previously reported that Pru sought a committee hearing this week for the regular Thursday slot, but the source said the meeting took place a day earlier. [ID:nTOE63F068]

There is no indication yet on the result of the meeting.

Aside from that, Autonomy’s numbers look much as preannounced.

Autonomy Corp Plc (AU.:LSE): Last: 1,787, up 6 (+0.34%), High: 1,808, Low: 1,767, Volume: 468.49k

(note ROTR, Xstrata ex-div)

Oh, and C&W Worldwide seems to be outperforming

On the back of a rather odd Deutsche note.

Volcano benefit, basically.

Make what you want of this

WTF

ash helps C&W

Two recent pieces of news underline the strong strategic positioning of
C&W Worldwide (CWW) at this time. We believe the shares are attractive,
offering a pure-play on corporate telco/IT spend recovery, utility computing
and the “insatiable” demand for global bandwidth. TP 130p.

The first supporting story is the Icelandic volcano which has so disrupted
European travel over the past week. What stranded UK CEO wouldn’t now
look more favorably on a request for additional teleconferencing facilities
post his/her long journey home? Dow Jones reports that Skype has seen a
surge in video-calling (inc. a UK couple stuck in Dubai who attended their
wedding reception online). Cisco has similarly seen a “huge spike in usage”
of its telepresence technology. Even before the volcano, National Grid
claimed that its recent installation of CWW/ Tandberg videoconferencing
facilities were readily justified by flight savings. We suspect that CWW’s
salesforce will be fielding more enquiries over the coming weeks.

Separately, Reuters reports on the findings of a multinational research
project led by the IEEE that the “insatiable thirst for bandwidth is accompanied
by an ever-growing dependence on inter-continental communications”
and that global backup routes should be planned “to address soaring demand
and reduce the risk of catastrophic outages”. CWW’s 69 global cable systems,
connectivity to 153 countries and PoPs in 40+, appear to be an
increasingly valuable resource. Indeed yesterday, CWW announced a multimillion
pound 3-year contract with PZ Cussons to connect its offices in
Europe, Asia & Africa. According to a joint press release, security and reliability
were key to the choice of CWW. The Co. appears to be well placed to
achieve on its goal of diversification outside of the UK.

So people didn’t travel

and used phones more

and in future they will be flocking to C&W

to make sure they have back up in place

we should all be buying video conferencing stocks then

like Polycom

I like the sound of the stuff about “reducing the risk of catastrophic outages”

yeah

not here at the FT

I wouldn’t trust C&W to back anything up

certainly nothing remotely critical

12:11PM

Right we are going to finish with the banks

we rather dismissed the IMF bank stuff earlier

but Credit Suisse

which have a rather good banks team

are worried

very worried

Really? That’s worrying.

The IMF is bringing forward proposals for a set of new taxes on the
financial industry. Documents made available yesterday outline these
taxes. It is proposed that a global liability-based charge should be levied on
banks (the “Financial Stability Contribution”) to recoup the cost of bailouts,
and that an additional tax (the “Financial Activity Tax”) should be levied on
all financials, based on the sum of profits and remuneration

On our analysis, the impact could be up to 20% of PBT for the
European banking sector: We have analysed similar proposals recently
(“Update on banks’ liability charge”, 6 April) and conclude that if the liability
tax was set to raise 2-4% of GDP and recoup the anticipated cost of future
bailouts, it would be set at between 10bp and 20bp of total liabilities ex
deposits and amount to around 15% of sector 2011e PBT. Fewer details are
available on the FAT, but it could easily have a further 5% impact

20% of profit after tax!?

Seriously?

These proposals need to be taken seriously: The IMF produced this
document at the request of G20 finance ministers, and similar proposals
have already been adopted in many major centres. The proposals are to be
discussed at the G20 Finance Ministers’ meeting this weekend, with a final
decision to be taken at the Toronto summit at the end of June

On our analysis, the most affected stocks are RBS, Commerzbank,
Dexia and Swedbank (all Underperform). Relative winners are HSBC,
Standard Chartered, Santander, Intesa and Unicredit (all Outperform).

anyway

the fear of the FAT tax

is being offset

by a super bullish Citigroup note

they reckon the UK banking industry is a cosy cartel once more

and everyone is going to make hay

margins will rise

and no competition won’t be able to get into the market

because there’s no wholesale funding for them

here’s the note

and the target price upgrades

Getting their ‘mojo’ back — We believe that a profound structural change has
occurred in the UK banking industry. The result of this is that the UK banks have
regained significant pricing power. In our view, this will continue to drive up
margins, easily offsetting any potential funding issues. In combination with a
faster-than-expected cyclical recovery in bad debts, this should drive upgrades.

Back to the future — For 2 decades, accommodating regulation, cross-subsidising
pricing models, securitization and excess liquidity looked like welcome stimulants
to bank performance; but ultimately they were value-destroyers. The last 2 years
have reversed this, with a return to rational pricing practices and an end to
securitization-funded new entrants cherry-picking the banks’ best customers

Mortgage book margins could rise by another 1% — We estimate blended portfolio
mortgage margins could rise by a further 1% based on current pricing, due to the
progression of customers from front- to back-book rates. We’re not describing
usurious or collaborative pricing, just a continuation of current, rational pricing.

Market valuation does not reflect improved dynamics — UK bank share prices
remain below their absolute and relative levels of last August, and consensus
FY11e earnings have hardly moved since then, despite clearly improved industry
dynamics and trading. The UK domestic banks’ FY10e P/GOP (3.4x) remains well
below the European bank average (4.1x) and the 20 year average (5x).

Raising earnings forecasts and target prices — We maintain Buy ratings on
Barclays and Lloyds, with target prices raised to 470p (from 420p) and 94p (from
70p), respectively. We maintain our Hold rating on RBS with a target price of 51p
(up from 35.3p). Valuation Upside Ratios, comparing FY13e/FY07 earnings with
current/1Q07 peak market capitalizations, suggests that the share prices of
Barclays and Lloyds could double by 2013 if P/E ratings recover to 2007 levels.

Not sure what the new chancellor Vince Cable will make of all that

or what he might do

will be interesting to see

and with that

I think we are done

We are.

FTSE 100 still falling

off 55 points at the moment

at 5,729

A precautionary tin hat, that.

Not a sell-off yet, but Wall Street open could really derail things.

Anyway, lunchtime.

Thanks for all your comments today.

And thanks lurkers just for tuning in.

Goodbye.

cya

thanks for logging in

until the morrow

This entry was posted by Neil Hume on Wednesday, April 21st, 2010 at 11:03 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 21 Apr 2010

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