Markets Live chat transcript for the chat ending at 11:31 on 28 May 2010. Participants in this chat were: Neil Hume, FT Bryce Elder
NH
Hola
NH
it’s 11.03am
NH
and time for…
NH
Markets Live
NH
FT Alphaville’s daily markets chat
NH
Bryce is here
BE
Hello, once again.
BE
My – the computers all seem to be working today.
BE
That’s a rarity.
NH
it is
NH
anyway
NH
the rally lives on
NH
going for three days of gains
NH
FTSE 100 up 33 points at 5,228
NH
in fact
NH
there’s been an outbreak mad bull disease this morning
NH
several brokers saying
NH
BE
For example?
NH
Morgan Stanley
NH
upped their FTSE 100 to 5,800
BE
Hm.
BE
They were correct on the way down, it has to be said.
BE
Whether they can repeat the trick on the way up remains to be seen. Brave call.
BE
Can we have a look at their working?
NH
yep
NH
This is more like 1998 than 2008
The renewed weakness in equity markets over the last two
weeks has had a significant impact on investor confidence, not
least because it suggests that the recent ECB
intervention/stabilization package has failed to stem the rise in
risk aversion. At this juncture it is tempting to view current
events through the lens of 2008 given that it originated in
concerns over excess debt levels and a weak banking system
(in the euro-zone), however we think a more comparable
period is 1998.
The renewed weakness in equity markets over the last two
weeks has had a significant impact on investor confidence, not
least because it suggests that the recent ECB
intervention/stabilization package has failed to stem the rise in
risk aversion. At this juncture it is tempting to view current
events through the lens of 2008 given that it originated in
concerns over excess debt levels and a weak banking system
(in the euro-zone), however we think a more comparable
period is 1998.
NH
Macro fundamentals are better today than 2008
While it would be imprudent to exclude the possibility that the
current situation plays out along 2008 lines (which would likely
see the FTSE head down toward our bear case forecast of
3600), we see four reasons to be more optimistic: 1) Global
economic growth is recovering, especially in Asia/EM and the
US; 2) Recent events are likely to delay any efforts to reduce
monetary stimulus/hike base rates; 3) The financial system is
more robust now given banks’ balance sheets are stronger; 4)
The oil price is sub $70 today versus $130 two years ago.
While it would be imprudent to exclude the possibility that the
current situation plays out along 2008 lines (which would likely
see the FTSE head down toward our bear case forecast of
3600), we see four reasons to be more optimistic: 1) Global
economic growth is recovering, especially in Asia/EM and the
US; 2) Recent events are likely to delay any efforts to reduce
monetary stimulus/hike base rates; 3) The financial system is
more robust now given banks’ balance sheets are stronger; 4)
The oil price is sub $70 today versus $130 two years ago.
NH
and then there is HSBC
NH
they too are bullish
NH
With the US market down 12% (and global stocks 16%) from April’s peak, this is now officially a correction. While superficially stocks fell because of worries about European debt, to our mind the drop was more because of a convergence of negative factors such as a peaking of US earnings momentum and shrinking liquidity, exacerbated by investment funds that had chased markets up in March and held too low levels of cash.
NH
But this looks to us very much like the sort of correction typical in the second year of a bull market. True, questions raised by the recent hiatus (How badly hurt are European banks? Will consumer and business sentiment now deteriorate? How will Chinese policy change?) and long-term structural concerns could keep markets weak for a while.
In our view the cyclical upswing remains strong and the advantage of the recent wobble is that interest rates, even in emerging markets, will not go up soon. Also, we don’t believe this situation is similar to late 2008. While measures of bank risk have risen a little, the rise is insignificant compared to back then
BE
(Taxloss: eh? We’re not clever enough to make sense of that.)
NH
We would use this as an opportunity selectively to buy equities. Indiscriminate selling
throws up investments that have got oversold. Some emerging markets now look
decidedly cheap (Russia on a PE of 5x, Korea on 8x), as do dividend yields for some
developed market stocks
throws up investments that have got oversold. Some emerging markets now look
decidedly cheap (Russia on a PE of 5x, Korea on 8x), as do dividend yields for some
developed market stocks
NH
also
NH
Merrill
NH
actually
NH
this is not that bullish
NH
but it explains why it was due a bounce
NH
Flows: Capitulation
NH
Fourth biggest US equity outflows on record (data back to ’92) shows short-term
capitulation and helps to explain the bounce in S&P 500 from key 1044.50.
Outflows from EM have been large in the past 4 weeks ($4.8bn) but not large
enough to trigger a buy signal from BofA ML EM flow trading rule (Page 6).
capitulation and helps to explain the bounce in S&P 500 from key 1044.50.
Outflows from EM have been large in the past 4 weeks ($4.8bn) but not large
enough to trigger a buy signal from BofA ML EM flow trading rule (Page 6).
NH
I think
NH
those outflows were in the last week
NH
Two Scarce Assets to Own: Yield & Growth
Yield: 745 million savers in the G7 now faced with zero interest rates for quarters
or years to come = capital to flow to high yielding corporate bonds & high dividend
paying stocks. Our forecast for a Fed hike just pushed out to Aug’2011 (Chart 2).
Growth: deflationary fiscal policies in G7 = scarce G7 growth = capital flows to
companies exposed to strong EM consumer and US corporate balance sheets.
The Asia crisis caused the tech bubble; the liquidity required to ease the burden
of the sovereign debt crisis could easily cause EM & credit bubbles medium-term
(Chart 4).
Yield: 745 million savers in the G7 now faced with zero interest rates for quarters
or years to come = capital to flow to high yielding corporate bonds & high dividend
paying stocks. Our forecast for a Fed hike just pushed out to Aug’2011 (Chart 2).
Growth: deflationary fiscal policies in G7 = scarce G7 growth = capital flows to
companies exposed to strong EM consumer and US corporate balance sheets.
The Asia crisis caused the tech bubble; the liquidity required to ease the burden
of the sovereign debt crisis could easily cause EM & credit bubbles medium-term
(Chart 4).
NH
I have some more on the topic of outflows
NH
from a number of asset classed
NH
quite interesting
BE
Go on then.
NH
Equity Fund Outflows from Wed 19th to 26th -$16.7B; xETFs – Equity Fund
Outflows -$5.3B
Outflows -$5.3B
NH
Talking to our bond desk on the AMG data. They suggest that HY showed net
outflows of $1.35B over the same period – anything >$500M is considered
extremely excessive…2 weeks ago it was $1.7bn, which was the 2nd largest on
record.
outflows of $1.35B over the same period – anything >$500M is considered
extremely excessive…2 weeks ago it was $1.7bn, which was the 2nd largest on
record.
NH
Clearly a lot of money coming out of the market. In Europe during the height
of the financial crisis, investors worldwide pulled out of equities and moved
into government debt. The ECB figures to March last year show that eurozone
debt benefited from safe haven flows, from inside as well as outside the
eurozone. Foreign investors pulled out of eurozone equities, but invested
heavily in debt instruments while eurozone investors repatriated funds. The
decline in net portfolio investment inflows from the 12 months to March 2009
to March this year was mainly due to the fact that eurozone residents stopped
repatriating funds.
of the financial crisis, investors worldwide pulled out of equities and moved
into government debt. The ECB figures to March last year show that eurozone
debt benefited from safe haven flows, from inside as well as outside the
eurozone. Foreign investors pulled out of eurozone equities, but invested
heavily in debt instruments while eurozone investors repatriated funds. The
decline in net portfolio investment inflows from the 12 months to March 2009
to March this year was mainly due to the fact that eurozone residents stopped
repatriating funds.
NH
Eurozone investment in foreign equity and bond instruments amounted to €214.7B in the year to March, which was still more than outweighed by the
€421.1B in foreign investment in eurozone equities and bond instruments in
the eurozone.
€421.1B in foreign investment in eurozone equities and bond instruments in
the eurozone.
NH
- There are no signs as yet that the debt crisis is leading to a renewed drying
up of the interbank money market or that a credit crunch is hampering
investment and overall growth. However, most data in Europe is only available
through March, and with uncertainty remaining high and market confidence not
fully restored this AMG data may be a leading indicator of a further drying
up of liquidity ahead for the Eurozone.
- LINK: http://www.amgdata.com/
up of the interbank money market or that a credit crunch is hampering
investment and overall growth. However, most data in Europe is only available
through March, and with uncertainty remaining high and market confidence not
fully restored this AMG data may be a leading indicator of a further drying
up of liquidity ahead for the Eurozone.
- LINK: http://www.amgdata.com/
NH
that was from a broker
NH
can’t name him
NH
but don’t worry
NH
not the Sector Watcher
BE
NH
he is on holiday
BE
So. The picture developing is that we’ve seen a huge level of selling pressure in a very short period.
BE
These arguments about pricing in a double-dip that may not happen are all very interesting
BE
But really, it’s a bit of a rally as the pressure dissipates. Not much more than that.
BE
Oh – hang on
BE
HSBC flashes hitting the tape.
NH
yes
NH
just getting them
NH
saying the CEO should be in Hong Kong
NH
and starting a review on pay
NH
and it looks like Green the chairman is going to be around for a bit longer
NH
RTRS-HSBC HOLDINGS PLC – WE MAY YET SEE FURTHER SHOCKS TO SOME WESTERN NATIONS
11:11 28May10 RTRS-HSBC HOLDINGS PLC – THORNTON TO LEAD A REVIEW ON HSBC REMUNERATION PRACTICE
11:11 28May10 RTRS-HSBC HOLDINGS PLC – OVERALL DIRECTION OF REFORM IS CLEAR AND CORRECT
11:11 28May10 RTRS-HSBC HOLDINGS PLC – WE HAVE NOTHING TO ANNOUNCE ON CHAIRMAN SUCCESSION
11:11 28May10 RTRS-HSBC HOLDINGS PLC – COMPENSATION MUST BE PROPERLY ALIGNED TO RISK, AND MUST BE SUBJECT TO DEFERRAL
11:11 28May10 RTRS-HSBC HOLDINGS PLC – CHAIRMAN STEPHEN GREEN SAYS TO BE CLEAR, I LOOK FORWARD TO CHAIRING THE NEXT AGM IN 2011
11:11 28May10 RTRS-HSBC HOLDINGS PLC – THORNTON WILL THEREFORE CONSULT WITH OUR OWNERS TO ENSURE THAT WE ARE REWARDING PROPER PAY
11:11 28May10 RTRS-HSBC HOLDINGS PLC – BELIEVE THE CHAIRMAN’S ROLE MUST BE ESSENTIALLY FULL-TIME, AND LONDON-BASED
11:11 28May10 RTRS-HSBC HOLDINGS PLC
11:11 28May10 RTRS-HSBC HOLDINGS PLC
11:11 28May10 RTRS-HSBC HOLDINGS PLC
11:11 28May10 RTRS-HSBC HOLDINGS PLC
11:11 28May10 RTRS-HSBC HOLDINGS PLC
11:11 28May10 RTRS-HSBC HOLDINGS PLC
11:11 28May10 RTRS-HSBC HOLDINGS PLC
HSBC Holdings PLC (HSBA:LSE): Last: 635.90, up 1.6 (+0.25%), High: 640.00, Low: 633.10, Volume: 11.25m
NH
Right
NH
shall we turn to some stock stuff?
BE
Certainly. Where to start?
NH
BP
BE
Good idea. Everything’s up, so let’s start with the fallers.
11:14AM
BE
So. BP.
BP Plc (BP.:LSE): Last: 509.50, down 11.3 (-2.17%), High: 517.00, Low: 504.40, Volume: 16.58m
NH
yes
NH
the Top Kill euphoria is fading
NH
fast
NH
BP saying the process could take another 48 hours
NH
which sort of suggest
NH
it’s not been as effective as we first thought
BE
Well, it’s not been as effective as reported
NH
NH
and not enough mud is going into the
wellbore
wellbore
BE
There appears to have been plenty of misunderstanding, wilful or otherwise, of what officials have said.
NH
and BP has now lined up an alternative
NH
in case it doesn’t work
NH
and on top of that
NH
Obama has extended the drilling moratorium
NH
and suspended some 30 approved projects
BE
Yes – Merrill sent around a handy list of them this morning.
BE
Lots of Shell prospects on there.
NH
really
BE
Including the region’s second-deepest, the Great White
BE
7,814ft underwater, apparently.
NH
wow
NH
that’s a long way down
NH
much better IMO to be looking for oil onshore in a politically stable region of the world
NH
somewhere like Kurdistan
BE
NH
actually
NH
we have been getting lots of fan mail
NH
from the GKP Liberation front
NH
well actually the editor has
NH
and his replies are then published on muppetinvestor
NH
which is quite disappoiting
NH
but not unexpected
NH
anyway
NH
comment on BP?
BE
Sure.
BE
Here’s Merrill again
BE
Top kill process makes progress but still needs more time
Despite yesterday’s mixed messages regarding the success in stopping the
Macondo (GoM) leak, the ‘top kill’ procedure – injecting drilling mud to counteract
the well pressure and then cement the well – is still ongoing. BP made some
progress in temporarily suppressing the flow but not enough mud is going into the
wellbore. At their daily update COO Suttles indicates that the procedure needs
some changes (eg, introducing new materials) and that at least another 24 hours
are required before cementing. Yet there is still no gurantee that the process will
work and BP has already lined up alternative processes,
Despite yesterday’s mixed messages regarding the success in stopping the
Macondo (GoM) leak, the ‘top kill’ procedure – injecting drilling mud to counteract
the well pressure and then cement the well – is still ongoing. BP made some
progress in temporarily suppressing the flow but not enough mud is going into the
wellbore. At their daily update COO Suttles indicates that the procedure needs
some changes (eg, introducing new materials) and that at least another 24 hours
are required before cementing. Yet there is still no gurantee that the process will
work and BP has already lined up alternative processes,
BE
New flow rate estimates – not much of a surprise
In addition, the US Geological Survey (USGS) has independently estimated that
the flow rate at Macondo is in the 12-19kb/d range. Whilst this is clearly larger
than the previous 5kb/d estimate, it is inline with the flowrates of typical wells in
the area as we had indicated (see BP: Making tangible progress 21-May). We
note that this new information makes no difference to our worst case liability
estimate of US$10bn – based on the recently proposed liability limit.
In addition, the US Geological Survey (USGS) has independently estimated that
the flow rate at Macondo is in the 12-19kb/d range. Whilst this is clearly larger
than the previous 5kb/d estimate, it is inline with the flowrates of typical wells in
the area as we had indicated (see BP: Making tangible progress 21-May). We
note that this new information makes no difference to our worst case liability
estimate of US$10bn – based on the recently proposed liability limit.
BE
GoM drilling moratorium – impact on medium term growth?
The extension of the offshore drilling moratorium for 6 months and the suspension
of some 30 approved projects in the GoM is a harsher step than we had
anticipated. Whilst BP – and the other European companies affected (Shell,
Statoil, Repsol, Eni) – have a global portfolio deep enough to minimise the impact,
the ban could affect the promising lower tertiary prospects, somewhat reducing
the medium term growth potential in the GoM.
The extension of the offshore drilling moratorium for 6 months and the suspension
of some 30 approved projects in the GoM is a harsher step than we had
anticipated. Whilst BP – and the other European companies affected (Shell,
Statoil, Repsol, Eni) – have a global portfolio deep enough to minimise the impact,
the ban could affect the promising lower tertiary prospects, somewhat reducing
the medium term growth potential in the GoM.
BE
They retain buy. As ever.
NH
naturally
NH
meanwhile
NH
I think Credit Suisse have put through some downgrades
NH
BP (BP.N, $45.38, OUTPERFORM, TP $57.80, MARKET WEIGHT) Kim Fustier – TOP KILL ONGOING, LIABILITIES TO RISE; TP CUT TO $57.80 VS $64.36 – Over last 37 days & using upwardly revised range of 12-19kbd, Macondo well has now spilt some 23.3mn gallons of oil into the Gulf at midpoint compared with ExxonValdez at 10.8mn gallons, the worst spill in US history. BP has already incurred some $850mn in costs. Higher flow rates result in a raised est of clean up costs to a range of $4 – $9.8bn (vs $2.5-8.5bn). Our est of present value of claims liability remains ~$8.6bn, with upside risks given affected revenues in the region. Total liability could add up to $17.6bn. We have cut earnings for BP by 14% in 2010, 10% in 2011 & by 3% in 2012 & 2013. We have cut earnings for BP by 14% in 2010, 10% in 2011, & by 3% in 2012 and 2013.
NH
and in oil news
NH
Shell has jumped on the shall gas bandwagon
BE
Although they don’t call it that.
BE
Trying to keep off the radar of the treehuggers, perhaps.
BE
“Tight gas”
NH
yes
NH
of course
NH
Tight gas
NH
anyway
NH
Shell are buying privately held East Resources for some US$4.7bn
NH
privately held East Resources for some US$4.7bn
NH
and a number of leases totalling 250k acres in the Eagle
Ford area for an estimated US$1.1bn
Ford area for an estimated US$1.1bn
NH
according to Merrill
NH
that will add
NH
some 16TCF of nat gas resources to Shell.
NH
Growing its shale gas foot print in Marcellus and Eagle Ford areas
This morning Shell announced two separate deals that significantly increase their
position in the North American shale gas market. The company has acquired
privately held East Resources for some US$4.7bn – mainly 650k acres in the
Marcellus shale area – and a number of leases totalling 250k acres in the Eagle
Ford area for an estimated US$1.1bn. In total both transactions add some 16TCF
of nat gas resources to Shell.
This morning Shell announced two separate deals that significantly increase their
position in the North American shale gas market. The company has acquired
privately held East Resources for some US$4.7bn – mainly 650k acres in the
Marcellus shale area – and a number of leases totalling 250k acres in the Eagle
Ford area for an estimated US$1.1bn. In total both transactions add some 16TCF
of nat gas resources to Shell.
NH
The price paid implies US$7,200/acre for the Marcellus shale transaction – this
compares well against the US$5-14k/acre seen in the area – and US$4,500/acre
for the Eagle Ford acreage – against a range of US$4-10k/acre for the area.
We see Shell’s move into the shale gas area as positive as it allows them to
cement a solid position in the US nat gas market at a reasonable price.
compares well against the US$5-14k/acre seen in the area – and US$4,500/acre
for the Eagle Ford acreage – against a range of US$4-10k/acre for the area.
We see Shell’s move into the shale gas area as positive as it allows them to
cement a solid position in the US nat gas market at a reasonable price.
NH
brokers tell me
NH
it’s a competitive price
NH
(Ptolemy – that shouldn’t happen. Can you send me a screenshot. neil.hume@ft.com)
11:25AM
NH
Right
NH
we need to clear something up from muppetland
NH
yes, we have seen the email from DGA
NH
from
NH
Van Odell
DGA Kurdistan Team Leader
DGA Kurdistan Team Leader
NH
and
NH
very interesting it is too
NH
so interesting
NH
I mailed the PR today
NH
Brunswick
NH
and said
NH
we would love to run it
NH
and have these forecasts out there
NH
so
NH
we can judge the company against them
BE
And we’re still waiting for a reply, I assume.
NH
(taxloss good point. doh)
NH
we are
NH
but we are more than happy to have it on the site
NH
so all you GKP lurkers on the site
NH
take note
NH
but danrwl
NH
is right
NH
this is a boring topic
NH
and yes Taxloss
NH
we will pribably get in trouble
NH
anyway
BE
Europe’s in meltdown/meltup and we’re stuck obsessing over an oil minnow that’s dug one hole. It’s bloody silly.
BE
So let’s move on.
NH
(Throg – sorry. you want his note?)
11:30AM
NH
Right
NH
Pru
NH
we must talk about the Pru
BE
Yes. So we’re down today.
Prudential Plc (PRU:LSE): Last: 543.50, down 4 (-0.73%), High: 560.00, Low: 532.00, Volume: 8.09m
BE
I guess that’s on the possibility that the deal’s still on.
NH
oh yes
NH
this deal goes through now
NH
and the Pru should be much lower
NH
there are billions of shares coming down the slip way
NH
and even on revised terms
NH
this still looks expensive
NH
and Pru has to deliver on some very tough targets
BE
So why are you saying it’s increasingly likely to go through?
NH
(Stomper you are now on zapwatch with possibility of a downgrade)
NH
because
BE
(@Stomper: that’s a quite staggeringly idiotic thing to say. I’m not zapping it, because I feel it needs to be saved for the ages as a warning to others.)
NH
the US Treasury has no choice
NH
but to accept a lower price
NH
and that’s because
NH
they can’t really float AIA in Hong Kong
NH
until the start of next year
NH
and that’s because of the all the issuance already lined up
NH
have you seen the size of the ABC float
NH
it’s massive
NH
so Tim Geithner has a choice
NH
he gets $30bn in cash and stock in three weeks
NH
or he waits till next year
NH
to IPO and get’s $14bn (they sell half of their holding).
NH
as for the big shareholders at Pru
NH
surely not even this boneheaded management team
NH
would not approach the US treasury without have them on board
NH
so
NH
I think
NH
at $30bn it goes through
BE
Right. That’s the general view of the sellside as well, it seems.
BE
Bernstein, for example, which looks at the option of cutting the hybrid
BE
Prudential may look to reduce if not eliminate the amount of paper being paid for AIA
The $35.5bn asking price that Prudential is paying for AIA includes 2,024m Prudential shares to be
issued as the transaction is completed. These shares equate to a 10.9% holding in the pro forma group.
We estimate using current FX rates and a pro forma TERP price of 171 pence that a reduction of up to
$5bn in the consideration could be achieved by reducing or even eliminating the paper consideration.
Reducing the consideration by $3.5bn (in line with the 10% fall in equity markets since the deal was
announced) would see the number of shares handed over the AIG fall to 607m. Adjusting the transaction
in this way would also potentially save the need to re-price the rights issue and the associated work on a
supplementary prospectus. All else being equal the shareholder vote on the rights issue could take place
as planned on 7th June.
The $35.5bn asking price that Prudential is paying for AIA includes 2,024m Prudential shares to be
issued as the transaction is completed. These shares equate to a 10.9% holding in the pro forma group.
We estimate using current FX rates and a pro forma TERP price of 171 pence that a reduction of up to
$5bn in the consideration could be achieved by reducing or even eliminating the paper consideration.
Reducing the consideration by $3.5bn (in line with the 10% fall in equity markets since the deal was
announced) would see the number of shares handed over the AIG fall to 607m. Adjusting the transaction
in this way would also potentially save the need to re-price the rights issue and the associated work on a
supplementary prospectus. All else being equal the shareholder vote on the rights issue could take place
as planned on 7th June.
BE
What is the impact? Earnings neutrality from 2013/14, fair value per share would rise by ~12%
Reducing the consideration by $5bn would make the deal earnings neutral by 2013/14 and raises our fair
value per share (on a cum rights basis) by 12% to 904 pence. A cut of $3.5bn would see earnings dilution
of 5% in 2013 with neutrality in 2015 – our fair value per share estimate would rise to 872 pence.
Reducing the consideration by $5bn would make the deal earnings neutral by 2013/14 and raises our fair
value per share (on a cum rights basis) by 12% to 904 pence. A cut of $3.5bn would see earnings dilution
of 5% in 2013 with neutrality in 2015 – our fair value per share estimate would rise to 872 pence.
BE
If Prudential eliminates the hybrid debt consideration we estimate interest cost savings of $425m
The impact of eliminating the hybrid debt consideration would have a similar effect as cutting the amount
of paper handed over to AIG. We estimate earnings dilution of 6% in 2013, falling to 3% in 2015. Our
fair value per share under this scenario would be 865 pence.
The impact of eliminating the hybrid debt consideration would have a similar effect as cutting the amount
of paper handed over to AIG. We estimate earnings dilution of 6% in 2013, falling to 3% in 2015. Our
fair value per share under this scenario would be 865 pence.
BE
Investment Conclusion
We feel the investment case for Prudential, together with AIA, remains compelling. We believe investors
able to identify the long-term drivers of growth in developing Asian life markets and ride out the medium
term dilution in earnings will be handsomely rewarded for doing so. The price paid for AIA at $35.5bn is
high, however we believe the underlying value of AIA (we estimate $49bn) is indicative of the considerable
upside to come.
We feel the investment case for Prudential, together with AIA, remains compelling. We believe investors
able to identify the long-term drivers of growth in developing Asian life markets and ride out the medium
term dilution in earnings will be handsomely rewarded for doing so. The price paid for AIA at $35.5bn is
high, however we believe the underlying value of AIA (we estimate $49bn) is indicative of the considerable
upside to come.
BE
If Prudential succeeds in renegotiating a lower price for AIA this would have a distinctly positive impact on
our valuation for the pro-forma group whilst also substantially reducing the dilutive impact of the deal on
existing shareholders. While a reduction in price would be welcomed we remain convinced that the deal
remains an attractive opportunity as is. The lack of confirmatory detail on any reduction in price means we
hold back from adjusting our earnings forecasts and target price for Prudential at this time. We rate
Prudential Outperform with an 810 pence price target on a cum-rights basis, 255 pence ex-rights.
our valuation for the pro-forma group whilst also substantially reducing the dilutive impact of the deal on
existing shareholders. While a reduction in price would be welcomed we remain convinced that the deal
remains an attractive opportunity as is. The lack of confirmatory detail on any reduction in price means we
hold back from adjusting our earnings forecasts and target price for Prudential at this time. We rate
Prudential Outperform with an 810 pence price target on a cum-rights basis, 255 pence ex-rights.
NH
thanks for that
NH
and here’s Olivetree
NH
Prudential have just issued a statement to say that they confirm that discussions have taken place with AIG and will continue, regarding the “current status” of the transaction.
Press commentary (seemingly well informed) flags that Pru is pushing for a price reduction to $30bn (from $35.5bn) but AIG seem to be reluctant to go below $31bn. If Pru is able to negotiate a price cut to around these levels, we think the deal has a greater than 50% chance of going ahead, against the c20% chance at present.
Modelling an eventual price of $30.5bn makes the deal earnings neutral in 2013 and delivers a ROI of 10%, assuming 20% AIA earnings growth. This just about works mathematically, although it still requires shareholders to build in some relatively aggressive assumptions. While this helps with the deal dynamics, PRU will still need to rebuild relationships with investors and reassure that they can execute on the acquisition and deliver the 20% growth pa in AIA earnings which is key for the deal being successful.
NH
In an ideal scenario we believe shareholders would like to see Pru reduce the $27bn by not issuing $5.5bn stock to AIA nor a $3bn mandatory convert, although this degree of price reduction seems very optimistic. By way of reference though, we calculate that this would make the deal small accretive from 2012 and would generate a ROI of c.10% in the same year, assuming PRU were able to grow AIA’s earnings by 20%pa which management seem to believe is easily achievable. In this situation we would be supportive of the transaction.
Conclusions – no surprise to see Pru trying to renegotiate the price, as we wrote yesterday, shareholder feedback suggests the chances of the deal proceeding in its current state are slim. Yesterday’s press gives Pru management sufficient ammunition to attempt a renegotiation, and although it may just be a last roll of the dice, AIG remain a motivated seller and may yet agree to a reduction. It seems the range is $30-31bn at present – not necessarily enough to make Pru shareholder support a slam-dunk, but materially more likely that it is at present.
NH
and one more Pru thing
NH
F&C SAYS WILL VOTE AGAINST AIA ACQUISITION
NH
but not sure
NH
if that refers to the original terms
11:39AM
NH
Right
NH
we have some footy news
NH
UNITED BOARD COMMENTS IN STATEMENT AS PART OF RESULTS*MAN. UNITED SAYS GLAZERS WON’T ENTERTAIN OFFERS FOR CLUB*UNITED BOARD SAYS GLAZER FAMILY `FULLY COMMITTED’ TO OWNERSHIP*MANCHESTER UNITED BOARD SAYS CLUB IS NOT FOR SALE
NH
and that comes
NH
I believe
NH
from the Man Utd results statement
NH
(Captain Mannering we do and have never heard of them. its 70 pages long right)
NH
The Board notes recent press speculation regarding a possible bid for Manchester United. The owners remain fully committed to their long-term ownership of the club. Manchester United is not for sale and the owners will not entertain any offer
BE
When’s the Panorama on the Glazers?
BE
Next month, isn’t it?
BE
And have we had time to go through the results yet?
NH
hang on
NH
here’s a link
NH
Gross debt
NH
three months to end of March
NH
£543.3m
NH
now tell
NH
me
NH
how Man Utd will meet these new FIFA rules
NH
with that much debt
BE
Ah, this new Platini cap.
NH
Group operating profit before depreciation and amortisation of players’ registrations and goodwill is
NH
£25.9m
BE
Interest payments must be, what, £40m annually?
NH
not in the figures
NH
over the nine months to end March
NH
Group operating profit before depreciation and amortisation of players’ registrations and goodwill is £82.1m
NH
and here’s a lovely statement
NH
Strong balance sheet
––Net assets of £794.9m
––Cash balance of £95.9m
––Net assets of £794.9m
––Cash balance of £95.9m
BE
Sheesh.
BE
So. Rooney gone after the World Cup?
NH
not sure
NH
I need to look at this Platini rule more carefully
NH
I think every club
NH
has to balance their books
NH
or else
NH
they don’t get into Europe
NH
(TL – let me know on that)
BE
The regulations will … cap the amount benefactors can put in to underwrite losses to €45 million (£38 million) over three years.
NH
here it is
NH
from the BBC
NH
Uefa president Michel Platini described it as the start of an important journey for European football that would eventually lead to a return of “economic common sense”.
Thursday’s approval of Uefa’s new financial fair play rules means that, for the first time, clubs wishing to compete in the Champions League or Europa League must aim to break even each season.
In addition, club owners will be limited to investing just £38m in the three seasons after the regulations come in, starting in 2012/2013.
NH
will Platini accept
NH
EBITDA before player amortisation?
NH
probably not
NH
I am guessing
BE
Yes. How they define “loss” is a big unknown here.
BE
As it stands, this’d be bad news for all sorts. Fulham …. Heart of Midlothian ….
BE
(Disclaimer: I know nothing about football south of the border.)
BE
So anyway, should we return to the market?
NH
one moment
NH
I have some comment on the Man Utd figs
NH
from Jonathan Moore at Evo Securities
NH
MU Finance [MANUTD] Co has just reported its 3Q10 press release, which just provides summary numbers (EBITDA down slightly).
- I have not seen the full results yet but (from the press release) club does not yet appear to have paid out the £70mm distribution earmarked for Red Football JV in the bond docs (although cash balance is down to £96mm from £122mm at 2Q).
– 3Q revenues grew 4% YoY to £74.6mm from £71.6mm, helped by growth in Commercial (+12% YoY). Matchday turnover grew 3%, while Media fell 2% YoY.
- Reported EBITDA fell to £23.4mm from £25.9mm in 3Q09 but no colour in press release (may be impact of number of matches played).
- Net debt is £425mm for reported net lev of 3.6x (but 4.2x pro forma for £70mm Red Fooball JV payment).
- Spokesman again has said Man Utd is not for sale and Glazers “won’t entertain offers” for the club.
- Conference call at 12pm UK time.
- I have not seen the full results yet but (from the press release) club does not yet appear to have paid out the £70mm distribution earmarked for Red Football JV in the bond docs (although cash balance is down to £96mm from £122mm at 2Q).
– 3Q revenues grew 4% YoY to £74.6mm from £71.6mm, helped by growth in Commercial (+12% YoY). Matchday turnover grew 3%, while Media fell 2% YoY.
- Reported EBITDA fell to £23.4mm from £25.9mm in 3Q09 but no colour in press release (may be impact of number of matches played).
- Net debt is £425mm for reported net lev of 3.6x (but 4.2x pro forma for £70mm Red Fooball JV payment).
- Spokesman again has said Man Utd is not for sale and Glazers “won’t entertain offers” for the club.
- Conference call at 12pm UK time.
NH
So
NH
it doesn’t look like the Glazer’s have got their mits on £70m
NH
to pay off the PIKS
BE
And when they do …. It’s Yell.
BE
It’s Punch.
BE
It’s Toxic Footballco.
NH
yep
NH
Yellow and Toxic United
11:51AM
NH
Back to the market and
NH
BP is almost back through 500p
BP Plc (BP.:LSE): Last: 505.20, down 15.6 (-3.00%), High: 517.00, Low: 504.40, Volume: 19.16m
BE
Anecdotally, it seems to trade worse when US markets are awake.
BE
Just looking at the US quote the other day, which fell for something like 15 days straight.
BE
Whereas the UK one bounced around a bit.
BE
Not sure you can conclude much from that. Just an observation.
NH
right
NH
another faller today is Standard Chartered
NH
which has been hit by a downgrade from Ian Gordon
NH
at Exane
BE
Ah. He’s good, Ian Gordon.
BE
What does he have to say?
NH
one moment
NH
it’s value call I think
NH
switch into Lloyds etc
NH
and Barclays
NH
Time to concentrate overweight positions in Barclays and Lloyds
We believe that Standard Chartered remains cheap in absolute terms, and highly
attractive over the longer-term, but, following its sustained relative outperformance
against our European banks universe, we now advise investors to concentrate
overweight positions in Barclays, Lloyds Banking Group and the French banks to take
maximum advantage of current distressed entry levels for those names. As such, we
(somewhat reluctantly) downgrade Standard Chartered from Outperform to Neutral.
We believe that Standard Chartered remains cheap in absolute terms, and highly
attractive over the longer-term, but, following its sustained relative outperformance
against our European banks universe, we now advise investors to concentrate
overweight positions in Barclays, Lloyds Banking Group and the French banks to take
maximum advantage of current distressed entry levels for those names. As such, we
(somewhat reluctantly) downgrade Standard Chartered from Outperform to Neutral.
NH
A pause to Standard Chartered’s relentless outperformance?
Standard Chartered has outperformed European banks over 1 day, 1 week, 1
month, 3 months, 6 months, 12 months, 5 years and 10 years. It is currently enjoying
record client income in Wholesale Banking, recovering revenues in Consumer
Banking, an accelerating pace of decline in consumer impairments and record
profitability. With a loans:deposits ratio below 80%, and no reported exposure to
Greece, it has enjoyed something of a “safe haven” status, notwithstanding modest
anticipated dilution from its Indian listing, market disquiet over renewed Nedbank
speculation, and recent tensions in Korea. However it may underperform in any
wider sector/market recovery.
Standard Chartered has outperformed European banks over 1 day, 1 week, 1
month, 3 months, 6 months, 12 months, 5 years and 10 years. It is currently enjoying
record client income in Wholesale Banking, recovering revenues in Consumer
Banking, an accelerating pace of decline in consumer impairments and record
profitability. With a loans:deposits ratio below 80%, and no reported exposure to
Greece, it has enjoyed something of a “safe haven” status, notwithstanding modest
anticipated dilution from its Indian listing, market disquiet over renewed Nedbank
speculation, and recent tensions in Korea. However it may underperform in any
wider sector/market recovery.
NH
Still a compelling story, but at fair relative value
We have found it increasingly difficult to contain our enthusiasm for the undoubted
success of the unique and enduring Standard Chartered model, discussed in our
various reports Plenty more to go for!, 2 December, Simply the best, better than all
the rest!, 9 December, You’re just too good to be true!, 24 February, Anything you
want, you got it!, 3 March and Don’t you forget about me!, 4 May. But however much
we like the story, on a 12-month view we now see better value elsewhere.
Consensus has moved up, but our forecasts are substantially unchanged. We retain
a target price of 1900p, equivalent to 2.7x 2009 tNAV. Barclays trades on 0.9x,
Lloyds on 1.0x.
We have found it increasingly difficult to contain our enthusiasm for the undoubted
success of the unique and enduring Standard Chartered model, discussed in our
various reports Plenty more to go for!, 2 December, Simply the best, better than all
the rest!, 9 December, You’re just too good to be true!, 24 February, Anything you
want, you got it!, 3 March and Don’t you forget about me!, 4 May. But however much
we like the story, on a 12-month view we now see better value elsewhere.
Consensus has moved up, but our forecasts are substantially unchanged. We retain
a target price of 1900p, equivalent to 2.7x 2009 tNAV. Barclays trades on 0.9x,
Lloyds on 1.0x.
NH
Sort of saying
NH
things are as good as they will get
NH
BP now below 500p
BE
And while on the banks,
BE
Jason Napier has one of his regular round-ups out this morning.
BE
Deutsche Bank. I’ll give you a few pars for flavour.
BE
Looking for internal consistency in the view on banks
UK banks are down 15% over the month, bringing Barclays and LBG to 5x 2012
EPS. Market fears around funding, regulation and mid-austerity growth are well
rehearsed, but it strikes us that while downside risk has risen, some significant
positives are being overlooked: (i) GDP growth is still positive on consensus
despite planned austerity; (ii) the EU’s E750bn could refi Spain, Portugal and
Ireland for 3 years; (iii) ECB has provided enough ways for banks to get liquidity;
(iv) Regulators and governments appear more pragmatic about change.
UK banks are down 15% over the month, bringing Barclays and LBG to 5x 2012
EPS. Market fears around funding, regulation and mid-austerity growth are well
rehearsed, but it strikes us that while downside risk has risen, some significant
positives are being overlooked: (i) GDP growth is still positive on consensus
despite planned austerity; (ii) the EU’s E750bn could refi Spain, Portugal and
Ireland for 3 years; (iii) ECB has provided enough ways for banks to get liquidity;
(iv) Regulators and governments appear more pragmatic about change.
BE
Bank stocks are discounting a far-worse-than-consensus GDP outcome
The OECD released yesterday updated Euroland GDP growth forecasts of 1.2%
and 1.8% for 2010 and 2011, despite planned austerity measures in Greece,
Spain, Portugal, Italy, France and others. The DB forecasts are lower at 0.9% and
1.0% respectively, but not inconsistent with the normalisation of credit costs we
forecast for banks and a decent outcome if this growth is achieved whilst
countries such as Spain cut their budget deficits by two thirds. Lower for longer
interest rates are helpful to UK banks which are largely at the point of maximum
deposit spread compression.
The OECD released yesterday updated Euroland GDP growth forecasts of 1.2%
and 1.8% for 2010 and 2011, despite planned austerity measures in Greece,
Spain, Portugal, Italy, France and others. The DB forecasts are lower at 0.9% and
1.0% respectively, but not inconsistent with the normalisation of credit costs we
forecast for banks and a decent outcome if this growth is achieved whilst
countries such as Spain cut their budget deficits by two thirds. Lower for longer
interest rates are helpful to UK banks which are largely at the point of maximum
deposit spread compression.
BE
Too little credit given for steps by the ECB, BOE, EU and regulators?
It also strikes us that the disquiet over sovereign solvency has caused the market
to overlook the magnitude of protection afforded to banks by steps announced by
the EU (the E750bn is sufficient to cover the budget deficits and refi requirements
of Spain, Portugal and Ireland for the next three years), the ECB (providing liquidity
to the bond market and to banks), and the increasingly pragmatic tone evident in
regulator and political circles (see the text from yesterday’s bank resolution fund
as a recent example).
It also strikes us that the disquiet over sovereign solvency has caused the market
to overlook the magnitude of protection afforded to banks by steps announced by
the EU (the E750bn is sufficient to cover the budget deficits and refi requirements
of Spain, Portugal and Ireland for the next three years), the ECB (providing liquidity
to the bond market and to banks), and the increasingly pragmatic tone evident in
regulator and political circles (see the text from yesterday’s bank resolution fund
as a recent example).
BE
Housing positive in April; a pause likely in our view
UK housing indicators were almost uniformly positive in April following a fairly
mixed March. House prices were up around 1%, whilst RICS reported more
buying interest, more houses sold than new ones put up for sale (tightening the
demand/supply balance) and greater surveyor optimism on the likely direction of
prices in the coming quarter. Mortgage volumes were slower and we expect to
see a pause in activity levels, and perhaps prices as the consequences of the UK’s
emergency budget on 22 June are awaited, and then digested.
UK housing indicators were almost uniformly positive in April following a fairly
mixed March. House prices were up around 1%, whilst RICS reported more
buying interest, more houses sold than new ones put up for sale (tightening the
demand/supply balance) and greater surveyor optimism on the likely direction of
prices in the coming quarter. Mortgage volumes were slower and we expect to
see a pause in activity levels, and perhaps prices as the consequences of the UK’s
emergency budget on 22 June are awaited, and then digested.
BE
Middling of views provides sector upside potential
Given the undemanding valuation of the UK domestic banks in particular, and the
fact that there are far fewer middle-of-the-road investor views in evidence at
present (we spend almost as much time discussion inflation as deflation, for
example), we see sector upside potential as sentiment moves to encompass the
mean view exemplified by the GDP forecasts highlighted above.
Given the undemanding valuation of the UK domestic banks in particular, and the
fact that there are far fewer middle-of-the-road investor views in evidence at
present (we spend almost as much time discussion inflation as deflation, for
example), we see sector upside potential as sentiment moves to encompass the
mean view exemplified by the GDP forecasts highlighted above.
BE
And, since we’re on the theme, got Libor yet?
NH
yes
NH
just hitting the screen now
NH
THURSDAY -BBA
11:56 28May10 RTRS-LIBOR THREE-MONTH EURO RATES FIX AT 0.63438 PCT VS 0.63500 PCT ON THURSDAY -BBA
11:56 28May10 RTRS-LIBOR THREE-MONTH STERLING RATES FIX AT 0.71063 PCT VS 0.70938 PCT ON THURSDAY -BBA
11:56 28May10 RTRS-THREE-MONTH DOLLAR LIBOR/OIS SPREAD AT 29 BPS VS 30 BPS – REUTERS DATA
11:56 28May10 RTRS-THREE-MONTH EURO LIBOR/OIS SPREAD AT 23 BPS VS 24 BPS – REUTERS DATA
11:56 28May10 RTRS-THREE-MONTH STG LIBOR/OIS SPREAD AT 20 BPS VS 21 BPS – REUTERS DATA
11:56 28May10 RTRS-LIBOR THREE-MONTH EURO RATES
11:56 28May10 RTRS-LIBOR THREE-MONTH STERLING RATES
11:56 28May10 RTRS-THREE-MONTH DOLLAR LIBOR/OIS SPREAD AT 29 BPS VS 30 BPS – REUTERS DATA
11:56 28May10 RTRS-THREE-MONTH EURO LIBOR/OIS SPREAD AT 23 BPS VS 24 BPS – REUTERS DATA
11:56 28May10 RTRS-THREE-MONTH STG LIBOR/OIS SPREAD AT 20 BPS VS 21 BPS – REUTERS DATA
NH
and
NH
RTRS-LIBOR THREE-MONTH DOLLAR RATES FIX AT 0.53625 PCT VS 0.53844 PCT ON THURSDAY -BBA
NH
falling
NH
everything is going to be alright
BE
By a whisker, yes.
BE
I guess the trend is as important as the reading though.
NH
Dollar three month and OIS down
NH
a touch
NH
actually
NH
have got an interesting note on Libor
NH
from Citi
NH
saying the recent spike
NH
is nothing to worry about
NH
it’s just a structural re-pricing
NH
Overview: We think that the recent spike in USD Libor rates is a structural
repricing rather than an indication of imminent financial disaster and as such
we feel that the flight-to-quality rally has gone too far.
Libor does not look too high at 0.55%, rather nominal and real yields now look
too low against a backdrop of the slow but steady recovery in the global
economy in our view.
repricing rather than an indication of imminent financial disaster and as such
we feel that the flight-to-quality rally has gone too far.
Libor does not look too high at 0.55%, rather nominal and real yields now look
too low against a backdrop of the slow but steady recovery in the global
economy in our view.
NH
We do not think the current Libor levels, or indeed the recent moves, should
trigger further risk aversion. Equity markets are down between 15 and 20% on
the month, but they are still up between 15 and 20% on a year ago and 50% or
more from the lows. Such a correction is understandable given the pace of the
original move up and the fact that we are now likely to be facing a sustained
period of fiscal tightening that may slow the pace of the recovery. Meanwhile,
GDP growth continues to look encouraging, European sovereigns are finally
cementing more realistic fiscal packages, and even the UK’s latest budget
figures have shown cause for cautious optimism.
With bond yields close to all time lows, the funding burdens for many countries
should also be alleviated. This, we think, is a very important dynamic. In April
we had a falling Euro and rising bond yields among peripheral issuers. This
was a very worrying and dangerous dynamic.
trigger further risk aversion. Equity markets are down between 15 and 20% on
the month, but they are still up between 15 and 20% on a year ago and 50% or
more from the lows. Such a correction is understandable given the pace of the
original move up and the fact that we are now likely to be facing a sustained
period of fiscal tightening that may slow the pace of the recovery. Meanwhile,
GDP growth continues to look encouraging, European sovereigns are finally
cementing more realistic fiscal packages, and even the UK’s latest budget
figures have shown cause for cautious optimism.
With bond yields close to all time lows, the funding burdens for many countries
should also be alleviated. This, we think, is a very important dynamic. In April
we had a falling Euro and rising bond yields among peripheral issuers. This
was a very worrying and dangerous dynamic.
12:00PM
BE
Midday already
BE
And we seem not to have mentioned the near 10% funding bump for our favourite government quango.
NH
ah yes
NH
inflation busting
NH
(Midlander – we are focused soley on the dollar quote)
BE
The Financial Services Authority (FSA) has today confirmed its annual funding requirement for 2010/11.
BE
The annual funding requirement for 2010/11 is £454.7m, up from £413.8m in 2009/10.
NH
that’s what?
NH
10%
BE
9.9%.
BE
Despite a 9.9% increase overall, the introduction of a fairer and more transparent fee structure means 60% of firms will actually pay less. The increased cost of intensive supervision will be levied on those firms whose size and impact require the most regulation from the FSA.
BE
Of course it will.
BE
And of course they will.
NH
hmmm
NH
what’s the justification pay rise
NH
using a 150 coppers to nick one insider dealer?
BE
Now, if you want to plough through the fee document, feel free.
BE
It runs to 238 pages.
NH
gawd
BE
TWO-HUNDRED AND THIRTY EIGHT PAGES.
NH
I imagine the Treasury will be looking at is closely
BE
However, I chose instead to have a scan through previous FSA press releases.
BE
Which included gems like this
BE
“Share fraud is estimated by the FSA to cost the UK around £200 million a year.”
BE
So there you are. Pay £454m to stop £200m of fraud.
BE
NH
come on that’s not fair
NH
they do other things
NH
like stopping bank failures
BE
Ah yes. and “maintaining market confidence”
BE
“promoting public understanding of the financial system”
NH
cheap
NH
at twice the price
BE
Actually, there was the annual meeting of compliance officers yesterday
BE
Which must’ve been a thrilling conference.
NH
yes
NH
missed that
BE
And they’re saying the culture of fear has made a real difference.
BE
Nick Child, Head of Compliance EMEA at Citi, told the conference the industry was at a crossroads: “Business is increasingly under threat from the regulator and Government far in excess of what compliance professionals, risk professionals and business professionals have ever had to deal with before.”
BE
“We are undergoing an evolution not a revolution, but the recent spate of arrests by the FSA has brought about a sea change in culture,” he said
BE
So. They’re providing employment for the compliance industry, if nothing else.
NH
great
NH
lets move on
NH
Lord Tiny Hayward of BP
NH
is talking
NH
12:05 28May10 RTRS-BP’S HAYWARD SAYS ‘TOP KILL’ OPERATION GOING PRETTY WELL ACCORDING TO PLAN
12:06 28May10 RTRS-BP’S HAYWARD SAYS HAVE SENT OTHER MATERIALS INTO WELL, KNOWN AS ‘JUNK SHOT’
12:07 28May10 RTRS-BP’S HAYWARD SAYS PLANS TO PUMP MORE MUD INTO THE OIL WELL LATER TODAY
12:07 28May10 RTRS-U.S. INCIDENT COMMANDER THAD ALLEN SAYS NEXT 12-18 HOURS CRITICAL IN BID TO STOP OIL LEAK
12:06 28May10 RTRS-BP’S HAYWARD SAYS HAVE SENT OTHER MATERIALS INTO WELL, KNOWN AS ‘JUNK SHOT’
12:07 28May10 RTRS-BP’S HAYWARD SAYS PLANS TO PUMP MORE MUD INTO THE OIL WELL LATER TODAY
12:07 28May10 RTRS-U.S. INCIDENT COMMANDER THAD ALLEN SAYS NEXT 12-18 HOURS CRITICAL IN BID TO STOP OIL LEAK
BE
Ah. The brightest star in our English aristocratic firmament.
NH
indeed
NH
if you missed it
NH
there was a great interview on Today this morning
NH
where a tree hugger from the US
NH
demanded to know if the BP boss
NH
was a Lord
NH
because he was acting like God
BE
The main thrust of it seemed to be “Tiny”‘s claim that Gulf of Mexico had quite a bit of water in it.
BE
Now, I’m no oceanographer, but ………..
NH
This Lord Tiny Hayward, where does he sit in your firmament?”
BE
It was all very peurile, albeit quite amusing at 7am.
NH
talking of Today
NH
how did the Prime Minister’s racing tips farre yesterday?
NH
any update
BE
I didn’t check, but I will. Give it a moment.
NH
Shrewdette are you out there
NH
PM racing tips
NH
If only he had looked at the form book, he would have known that Midnight Fantasy had gained all her three wins over six furlongs and a longer trip proved beyond her as she laboured into fifth place in the 3pm at Wolverhampton.
Daring Dream, his other tip, made a much better fist of things, closing all the way to the finish but only managing to finish second in the 3.50pm at Ayr.
NH
that was from the Times
12:13PM
NH
We are into overtime again
NH
but a few things to look at
NH
888.com
BE
Another profit warning.
BE
It feels like only yesterday since the last one.
BE
Autoprice doesn’t work – hang on.
NH
no it doesn’t
BE
We’re down 10.25p at 57.25p
NH
and the profit warning
NH
has hit the rest of the sector
Muppet stock. PartyGaming would be a penny dreadful, but for a share consolidation.
PartyGaming Plc (PRTY:LSE): Last: 257.50, down 14.4 (-5.30%), High: 261.00, Low: 248.70, Volume: 1.98m
BE
Ha! That’s an old Murphyism above.
BE
Anyway, it does seem curious that 888 keeps warning
BE
While the rest of the sector are doing okay.
BE
If it’s a company-specific problem, what exactly is it?
NH
hang on there. 888 say this is structural
NH
Trading is being impacted particularly by the continued weakness of online poker, which management believes is affecting the online poker industry generally. 888′s poker daily average ring games’ players declined approximately 18% during the period from January to May and management believes that this decline reflects industry-wide trends
BE
Is this the flock to player liquidity? Is 888 too small so has lost punters?
NH
dunno
NH
I have some comment though
NH
here is Panmure
BE
Go on.
NH
Profit warning
888 expects 2010E profit to be significantly lower than previous market
expectations. Since the IMS of 28 April, when average daily revenue for the
first 25 days of Q2 was down 13% on Q1, 888 has continued to experience a
difficult trading environment with the exception of bingo; poker is
particularly weak. We are reducing our already below consensus estimates by
18% per annum 2010-12E. This leaves the group trading on a 2010E P/E of
11.2x and an EV/EBITDA of 5.9x supported by a 4.5% yield. We think the
group’s attractiveness as an M&A target will only increase with this warning
and as such will provide some downside support to the share price. We retain
our Buy recommendation but lower our price target to 80p (from 100p).
888 expects 2010E profit to be significantly lower than previous market
expectations. Since the IMS of 28 April, when average daily revenue for the
first 25 days of Q2 was down 13% on Q1, 888 has continued to experience a
difficult trading environment with the exception of bingo; poker is
particularly weak. We are reducing our already below consensus estimates by
18% per annum 2010-12E. This leaves the group trading on a 2010E P/E of
11.2x and an EV/EBITDA of 5.9x supported by a 4.5% yield. We think the
group’s attractiveness as an M&A target will only increase with this warning
and as such will provide some downside support to the share price. We retain
our Buy recommendation but lower our price target to 80p (from 100p).
BE
Yes. Of course. The M&A angle.
NH
and Liberum
NH
888 have released a profit warning saying profits will be significantly below
expectations. With other companies reporting solid trading this is increasingly
looking stock specific. The stock will fall significantly today but we cut our
rating to HOLD from BUY given the total lack of visibility on trading. Investors
should only Buy the shares on weakness if they believe a bid is forthcoming
expectations. With other companies reporting solid trading this is increasingly
looking stock specific. The stock will fall significantly today but we cut our
rating to HOLD from BUY given the total lack of visibility on trading. Investors
should only Buy the shares on weakness if they believe a bid is forthcoming
NH
Poker very weak. Poker revenue is -18% year to date. Although peers have
reported pressure in the poker market, we think this represents
underperformance and demonstrates the need for scale. 888 have become the
latest company to shut down their French operations ahead of regulation which
will also affect profits.
reported pressure in the poker market, we think this represents
underperformance and demonstrates the need for scale. 888 have become the
latest company to shut down their French operations ahead of regulation which
will also affect profits.
NH
Closest read across is PartyGaming. In terms of read across, other companies in
the gambling sector have all reported much stronger trading in recent weeks, so
we think that this is looking increasingly stock specific. The closest read across is
probably to Party Gaming given the group’s focus on poker and casino, and the
fact that the company also reports in Dollars, which have been a part of 888’s
troubles. The lack of a large sportsbook will also affect both companies with the
World Cup approaching.
the gambling sector have all reported much stronger trading in recent weeks, so
we think that this is looking increasingly stock specific. The closest read across is
probably to Party Gaming given the group’s focus on poker and casino, and the
fact that the company also reports in Dollars, which have been a part of 888’s
troubles. The lack of a large sportsbook will also affect both companies with the
World Cup approaching.
NH
Valuation uncertain. With significant downgrades likely today, valuation becomes
a guessing game. 888 say that they continue to trade profitably. To us, the most
relevant factor is that the company has c£35-40m cash on the balance sheet
compared with a market cap (at yesterday’s close) of £230m, or freefloat of just
c£90m. The company may continue to buy back shares. The cash pile should
a guessing game. 888 say that they continue to trade profitably. To us, the most
relevant factor is that the company has c£35-40m cash on the balance sheet
compared with a market cap (at yesterday’s close) of £230m, or freefloat of just
c£90m. The company may continue to buy back shares. The cash pile should
NH
limit the downside, but from here we believe that only investors who are certain
of a bid should be buying the shares today.
of a bid should be buying the shares today.
BE
Ah. There we are. Lack of scale. The online poker audience has, at best, peaked and the active players are moving to where there are still active players.
BE
Makes sense. Sort of.
NH
yup
NH
lack of liquidity
NH
so people move on
NH
and the only hope is a bid
NH
move on
NH
888 heading for small cap land
12:20PM
NH
Talking of small caps
NH
people asking about Rockhopper
Rockhopper Exploration Plc (RKH:LSE): Last: 265.75, up 14.75 (+5.88%), High: 274.00, Low: 251.00, Volume: 3.49m
NH
now 10 days ago
NH
the company said it would
NH
in 10-15 days
NH
announced the results of sampling
NH
which could lead to a reserve upgrade
NH
we are waiting for that news
NH
I am told it doesn’t come out today
NH
but Tuesday
NH
and there could be an upgrade
NH
and that the company is not looking to do a cash call
NH
so perhaps they have found a famr out well
12:22PM
BE
22 minutes into overtime and we haven’t even mentioned today’s proper inter-market M&A
BE
Travis buying BSS Group
NH
oh yes
BE
Both are going better on it.
NH
Travis back on the acquisition trial
Travis Perkins PLC (TPK:LSE): Last: 801.00, up 56 (+7.52%), High: 829.00, Low: 752.00, Volume: 1.78m
NH
any views
BSS Group Plc (BTSM:LSE): Last: 438.50, up 113.5 (+34.92%), High: 444.90, Low: 415.10, Volume: 495.95k
BE
Well, the general theme seems to be “decent price for Travis, hard to match for others”
BE
“Counter-bid therefore looks unlikely.”
NH
(who was the last englishman to get a double century. Collingwood in Adalaide?)
NH
who said that?
BE
Oh, it was paraphrasing. But I think Collins Stewart made noises along these lines
BE
Recommended offer for BSS
Travis is buying BSS in a recommended cash and equity offer. The offer values BSS at 433p per share, a 33% premium to yesterday’s close. Travis is offering 232.91p in cash, 0.2608 new Travis shares for each BSS share, and the 6.09p BSS dividend. The deal values BSS at £553m. This equates to an EV of £639m if we include our BSS debt forecast. It has the backing of certain BSS shareholders – a stock that has always been tightly held by UK institutions with the top five currently holding 45%.
BE
Transaction multiples
Based on our estimates for BSS, the multiples are 10x EV/EBITDA falling to a possible 7x based on synergies of 2% of BSS sales. Taking our 28.3p BSS eps for the y/e March 2011, the PE is 15.3x. Travis will pay circa £300m in cash (including the BSS dividend) which neatly equates to the size of its rights issue last year. Travis debt/EBITDA will rise from 1.3x to 2.0x under the deal.
BE
A powerful combined group
The merger will create the largest UK plumbing and heating group – we estimate market share will rise from 17% to 25%. Travis sees no competition issues. Synergies will be mainly in sourcing, the supply chain and IT. With the backing of some BSS shareholders and a high headline price before synergies, we expect this deal to go through smoothly. Of the leading merchants, St Gobain could be the only possible counter-bidder and is unlikely in our view to get involved in a bidding war.
BE
Valuation
We remain buyers of Travis – stock trades on 10x 2011e earnings. This deal should bring healthy synergies to the group and remove major questions over Travis growth prospects. Our target price is based on peer group multiples, CS Quest™ and DCF. The group has sector-leading EBIT margins of 7.5% and outstanding 5-year CFROA returns of 13%.
NH
and I have the views of Shore Capital
NH
n our view, this looks an attractive deal to Travis. It is acquiring a business with strong organic growth. In the event of a double dip, c£800m of debt may be challenging, though BSS has grown in a period that has been less than buoyant. Post deal, our estimates point to EPS of 86.8p in 2011 (enhancement of c5% in the first full year, even assuming no synergies) and, with the shares on a p/e ratio of below 10x, we maintain our BUY recommendation.
NH
Based on the figures above, Travis would be buying BSS on the following multiples:
EV/sales of 0.5x.
EV/EBITA of 12x (please note that BSS’s 2010 EBITA was lower than the £68m achieved in 2009).
This compares with Travis Perkins’ own pre-acquisition implied multiples (EV/sales of c0.7x; EV/EBITA of c8.9x).
Please note that the EV/sales and EV/EBITA differential, reflects the margin differential between the two businesses (Travis’s margin is c8%, well above the c4% achieved by BSS).
EV/sales of 0.5x.
EV/EBITA of 12x (please note that BSS’s 2010 EBITA was lower than the £68m achieved in 2009).
This compares with Travis Perkins’ own pre-acquisition implied multiples (EV/sales of c0.7x; EV/EBITA of c8.9x).
Please note that the EV/sales and EV/EBITA differential, reflects the margin differential between the two businesses (Travis’s margin is c8%, well above the c4% achieved by BSS).
NH
The proposed deal has a number of potential benefits, including enhanced market share, stronger buying power, etc (the deal will create the largest plumbing and heating distributor in the UK).
It will dilute the company’s exposure to retail (the contribution of Wickes will fall from around one-third to less than a quarter of group revenues), an advantage in the event of a consumer slowdown.
It could raise the growth prospects of the business (see above).
There is scope to generate synergies (both cost and revenue synergies) For example, a 1% revenue synergy on BSS’s sales would amount to c£14m, which would be an additional 5% to 2011 PBT (see table below).
It will dilute the company’s exposure to retail (the contribution of Wickes will fall from around one-third to less than a quarter of group revenues), an advantage in the event of a consumer slowdown.
It could raise the growth prospects of the business (see above).
There is scope to generate synergies (both cost and revenue synergies) For example, a 1% revenue synergy on BSS’s sales would amount to c£14m, which would be an additional 5% to 2011 PBT (see table below).
BE
Okay. Cheers.
NH
Right
NH
I think we are done
NH
and I am hungry
NH
and as for the book competition
NH
we are planning to announce the winner
NH
in the People Column tomorrow
BE
NH
the authors of the column
NH
will be selecting their favourite
NH
right I am off
NH
and I am not about next week
NH
half term you see
NH
so we will be having a number of special guests
NH
hopefully
BE
Yup. It’ll be like HIGNFY.
BE
So, have a good long weekend everyone.
BE
And thanks for all your comments this week.
NH
(norfolk, Captain)
NH
yep
NH
thanks very much
BE
It’s been lively, and sometimes not for the right reasons.
BE
However, your contribution’s always appreciated.
BE
Good afternoon, all.