Markets Live chat transcript for the chat ending at 11:14 on 2 Jun 2010. Participants in this chat were: Bryce Elder Miles Johnson, FT
BE
Good morning.
BE
It’s 11:04am
BE
So it’s time for another Markets Live
BE
FT Alphaville’s daily etc etc etc.
BE
And like the Pru will soon be
BE
We are leaderless
BE
Neil is off for half term
BE
So Miles is joining me for the session
MJ
Morning all
BE
Thanks for joining us, Miles.
BE
The ROTR have started the puns early.
BE
Along with the complaints
BE
(Soundbuy: we’ll come to that. Patience.)
MJ
So, Bryce, we must inevitably move on to the Pru
BE
I guess so. We can turn later to African oil and Cattles getting a bolt through the head.
11:09AM
BE
So. Pru.
Prudential Plc (PRU:LSE): Last: 561.00, down 14.5 (-2.52%), High: 573.50, Low: 554.50, Volume: 7.57m
MJ
I would have expected the shares to be up
BE
Hm. I think we had the short squeeze yesterday.
BE
Rose against the trend.
BE
And now people are looking at what exactly investors are left holding.
BE
Here, for anyone who missed it, is the confirmation of the inevitable.
BE
Harvey McGrath, Chairman, Prudential said:
“While AIA was an excellent opportunity, since we announced the potential transaction we have seen significant falls in the markets. We listened carefully to shareholders over the price and initiated a renegotiation of the terms with AIG. Unfortunately, it has not been possible to reach agreement so we feel it is in the best interest of our shareholders not to pursue this opportunity. We are therefore withdrawing from the transaction.”
BE
Tidjane Thiam, Group Chief Executive, Prudential said:
“We entered into this potential transaction from a position of strength in Asia and we view the region as offering excellent growth opportunities for Prudential. We agreed with shareholders that a renegotiation of the terms was necessary given market movements but it has not proved possible to reach agreement. Our existing business in Asia has delivered another record performance in the first quarter of this year and we will continue to focus on generating sustainable shareholder value across our portfolio.”
MJ
Could be their last RNS
BE
Indeed. Though the big surprise here is that none of that reads like a resignation letter.
BE
It was a fantastic deal, apparently.
BE
But the markets moved against them, apparently.
MJ
Yes. The markets…
BE
So Tidjan won’t jump
BE
and Harvey McGrath won’t push him
BE
Probably for fear of following him overboard.
MJ
So, “shareholder value” – should we be reading this as break-up?
BE
I think that’s premature.
BE
Tidjane still appears to be in the denial phase.
BE
It’s anger next.
BE
Then bargaining, depression and finally acceptance.
BE
Once we get through all that we can start talking about Pru as a breakup candidate.
MJ
At least Tidjane could see if there is still a home for him still at SocGen
MJ
Not sure sure about McGrath
BE
Ah yes. Someone on the right suggested yesterday that SocGen traded lower on the threat of Tid joining.
MJ
MJ
Anyway
MJ
The market is probably chewing on the $750m of fees currently dripping down the wall
BE
Well, yes.
BE
The company reckons it’ll cost about £450m in fees, of which £81m goes to the underwriters
BE
At that price they could’ve doubled their annual dividend.
BE
Or bought Gartmore.
BE
Hm. If you prefer, Rathbone Brothers.
BE
Or Brewin Dolphin. Or F&C Asset Management. Or Paragon.
MJ
Not sure which would be worse
BE
Well, stick in a few hundred more and he could’ve taken a punt at Brit Insurance. Or Beazley.
BE
Anyway, let’s push on to a bit of comment on this shambles.
MJ
Yes lets
BE
Good note from Marcus Barnard of Oriel, who reckons the bid talk is premature.
BE
The least of the problems for the Prudential is the costs associated with the deal,
estimated at £450m. This equates to 12.4p assuming that all of this can be offset against
tax. It is not clear if there is a benefit from the currency hedging put in place when the
deal was announced in March. To put this in context the dividend cost is around £480m
although around a quarter of this is usually paid in scrip.
estimated at £450m. This equates to 12.4p assuming that all of this can be offset against
tax. It is not clear if there is a benefit from the currency hedging put in place when the
deal was announced in March. To put this in context the dividend cost is around £480m
although around a quarter of this is usually paid in scrip.
BE
In terms of leadership, it is quite possible that Tidjane Thiam, Harvey McGrath and
possibly also Barry Stowe will leave the company. We would caution against making
quick decisions or calling for heads to roll. While the bid has now failed, these individuals
are talented, have good track records in the business and prior to the deal were popular
with investors. The question will be whether they wish to stay and if they do whether they
feel they can recover credibility or have a mandate to manage the business making
decisions on behalf of shareholders.
possibly also Barry Stowe will leave the company. We would caution against making
quick decisions or calling for heads to roll. While the bid has now failed, these individuals
are talented, have good track records in the business and prior to the deal were popular
with investors. The question will be whether they wish to stay and if they do whether they
feel they can recover credibility or have a mandate to manage the business making
decisions on behalf of shareholders.
BE
We do not believe the company now becomes a bid or break up target. We see no
reason to break the company up and we doubt that any acquirer has the resources to
make a successful bid.
reason to break the company up and we doubt that any acquirer has the resources to
make a successful bid.
BE
In terms of valuation, we believed the shares looked expensive at 600p prior to the deal
and with the subsequent falls in markets they still look expensive. Prudential is a geared
play on equity markets and with the 10% fall in markets and the costs associated with the
deal, then without a bid the shares should be trading nearer to 500p than 600p. Lack of
leadership creates uncertainty. Prudential is a difficult company to manage with the
needs to balance excess cash generation in the UK with opportunities to reinvest cash
into Asia and other parts of the business. This dynamic was poorly managed under
Jonathon Bloomer, but credibility was rebuilt during the Mark Tucker years. The orderly
handover to Tidjane meant he inherited a ‘Mark Tucker premium’ in the share price and
without clear leadership it is not clear if the company will maintain its premium rating.
and with the subsequent falls in markets they still look expensive. Prudential is a geared
play on equity markets and with the 10% fall in markets and the costs associated with the
deal, then without a bid the shares should be trading nearer to 500p than 600p. Lack of
leadership creates uncertainty. Prudential is a difficult company to manage with the
needs to balance excess cash generation in the UK with opportunities to reinvest cash
into Asia and other parts of the business. This dynamic was poorly managed under
Jonathon Bloomer, but credibility was rebuilt during the Mark Tucker years. The orderly
handover to Tidjane meant he inherited a ‘Mark Tucker premium’ in the share price and
without clear leadership it is not clear if the company will maintain its premium rating.
BE
And here’s Panmure
BE
which does a bit of Littlejohning on the fees.
BE
The total costs of the transaction are estimated to be c£450m including the
break fee of £152.6m and arrangement and underwriting fees of c£81m. The balance
represents costs of advisory and other fees including the net cost of the currency hedging
(£500m per page 888 of the prospectus – you couldn’t make it up). We estimate that the
strengthening of the US$ has helped reduce the financial impact by c£284m.
break fee of £152.6m and arrangement and underwriting fees of c£81m. The balance
represents costs of advisory and other fees including the net cost of the currency hedging
(£500m per page 888 of the prospectus – you couldn’t make it up). We estimate that the
strengthening of the US$ has helped reduce the financial impact by c£284m.
BE
Where now? – We think that the company has a sound independent future as a stand
alone business and concur with comments concerning growth levels in the Asian
business. Moreover we think that a separate listing of the Asian operation could realise
significant upside for existing shareholders.
alone business and concur with comments concerning growth levels in the Asian
business. Moreover we think that a separate listing of the Asian operation could realise
significant upside for existing shareholders.
BE
Highlighting the obvious value in the business, if we applied a similar 13x new business
multiple to Pru’s Asian business that was implied by the revised $30.4bn offer for AIA
we achieve a valuation for PAC (Pru’s Asian operation) at c£12.6bn. Given the current
market cap of £14.6bn this would imply that the value of the UK and US operations at a
mere £2.0bn. Based on 2009 published Embedded Values this would imply that the UK
and US operations would be trading at around a 75% discount to Embedded Value net
of all debt and the small pension fund deficit. The table below highlights the value of
Prudential (890p/share) based on the Asian operations on a 13x multiple, the UK at 1x
and US at 3x.
multiple to Pru’s Asian business that was implied by the revised $30.4bn offer for AIA
we achieve a valuation for PAC (Pru’s Asian operation) at c£12.6bn. Given the current
market cap of £14.6bn this would imply that the value of the UK and US operations at a
mere £2.0bn. Based on 2009 published Embedded Values this would imply that the UK
and US operations would be trading at around a 75% discount to Embedded Value net
of all debt and the small pension fund deficit. The table below highlights the value of
Prudential (890p/share) based on the Asian operations on a 13x multiple, the UK at 1x
and US at 3x.
BE
Break up – Although we have a 955p break up valuation on Prudential we do not think
that Pru is an immediate break up candidate given the current investment markets. In
addition although it may have a couple of ready buyers in the wings, the UK operation is
likely to stay within the group in the short term as it drives cash flow for the growth
business in Asia.
that Pru is an immediate break up candidate given the current investment markets. In
addition although it may have a couple of ready buyers in the wings, the UK operation is
likely to stay within the group in the short term as it drives cash flow for the growth
business in Asia.
BE
Recommendation – We think that Pru will need to clarify its strategy going forward
(plan A) and re engage with its shareholder base. Concerns over the future of the UK
operation will need to be addressed not least because of the knock on effect that this will
have had on its UK distribution and customer base. Although there was clear strategic
logic for the acquisition, we suspect that the way forward will be to list the Asian
operation to realise its true value. This may be the one positive to have come out of this
foray.
(plan A) and re engage with its shareholder base. Concerns over the future of the UK
operation will need to be addressed not least because of the knock on effect that this will
have had on its UK distribution and customer base. Although there was clear strategic
logic for the acquisition, we suspect that the way forward will be to list the Asian
operation to realise its true value. This may be the one positive to have come out of this
foray.
MJ
Hmmm.
MJ
Lex put out a note saying
MJ
That the Pru’s managements only hope
MJ
was to spin off the Asian buisness
MJ
But even that won’t be enough, I am afraid
BE
(UR: zap and week’s ban. Don’t test our patience today.)
Warning to rude and abusive commenters – your ability to comment will be terminated immediately and permanently, without warning. Henceforth, FTAlphaville has instituted a One Strike and You Are Out policy. We’ve had enough. We are going to clean up these pixels once and for all.
BE
Of course, there were whispers during the AIA informal roadshow
BE
That a bid for Pru Asia was a big part of their roadmap.
BE
Lot of water under the bridge since then, but ………
MJ
mini Pacman
BE
Ms Pacman.
BE
You’re probably too young to remember that, Miles.
BE
Anyway, we seem to be boring Chopper Bear, so one final question.
MJ
Heaven forbid
BE
Has this damaged the Credit Suisse franchise?
MJ
Or the JP Morgan one, for that matter
MJ
This has surely dented the reputations of some heavy weight advisors
11:24AM
BE
Right. Moving on ……………..
BE
Wider market?
MJ
We are down
MJ
1 per cent – 53 points at 5110
MJ
After Wall Street finished down on session lows
MJ
And the Japanese PM went
MJ
plus a stack of ex dividends
BE
Ah yes.
BE
National Grid and Vodafone, most notably.
BE
And (@Vintage), BP’s accounting for a mere 7 points of today’s fall.
BE
Though it remains the room-bound elephant in terms of news.
BE
So should we do our daily Macondo Watch, Miles?
MJ
We should
11:28AM
BE
Right. So, after Pru, we can look at the other disaster slowly unfolding at a FTSE 100 company.
MJ
shares getting hurt again this morning
BE
(Mike13: yes. A Bloomberg box. Unfortunately, it’s 20 yards away.)
BE
Though it’s not ferocious this morning. ADRs were off 3 per cent last night after UK close.
MJ
Maybe helped by some rather bullish Buy notes still being pumped out
MJ
I suppose they will eventually be right
MJ
even if it costs their clients a pretty penny in the meanwhile
BE
Down 9.65p at 420.55p at the middle.
BE
And, yes, the sellside community has fired out another salvo of buy recommendations this morning.
BE
JP Morgan, for example, is getting very excited about the dividend.
BE
Dividend yield approaches extreme last seen in 1992 – Investors have
today clearly become very anxious about BP’s dividend. The last time
we can recall such high anxiety was back in 1992 when BP subsequently
halved its dividend from 8.40 pence (1991) to 5.25 pence (1992) to 4.20
pence (1993). We note that its ADR DPS was reduced by 60% from
$1.00 (1991) to $0.40 (1993). BP’s historic running yield (figure 1)
peaked at approximately 11% in 1992. That dividend cut was required
given very high balance sheet gearing of over 100% – not present today
(Q1 2010 net debt/equity ratio 30%). It was one of several restructuring
measures (divestments to exit non-core businesses, reduced capex,
reduced head count) implemented by Lord Simon, the successor to Sir
Bob Horton. The latter had lost the confidence of the market and BP’s
board – again, most definitely not the case today in our view. Assuming
no change to BP’s quarterly dividend (14 cents pcq), BP’s dividend yield
is almost 9%.
today clearly become very anxious about BP’s dividend. The last time
we can recall such high anxiety was back in 1992 when BP subsequently
halved its dividend from 8.40 pence (1991) to 5.25 pence (1992) to 4.20
pence (1993). We note that its ADR DPS was reduced by 60% from
$1.00 (1991) to $0.40 (1993). BP’s historic running yield (figure 1)
peaked at approximately 11% in 1992. That dividend cut was required
given very high balance sheet gearing of over 100% – not present today
(Q1 2010 net debt/equity ratio 30%). It was one of several restructuring
measures (divestments to exit non-core businesses, reduced capex,
reduced head count) implemented by Lord Simon, the successor to Sir
Bob Horton. The latter had lost the confidence of the market and BP’s
board – again, most definitely not the case today in our view. Assuming
no change to BP’s quarterly dividend (14 cents pcq), BP’s dividend yield
is almost 9%.
BE
The issues plaguing market sentiment towards BP today are very
different – Specifically, we now detect concerns about the sanctity of
BP’s US assets. Deep value investors now seem to be more interested in
the name and they are keen to know the likely value of BP’s US business.
At end 2009, BP disclosed US operating capital employed of $55.8bn
and US net property, plant & equipment of $50.2bn. Both metrics are, in
our view, incomplete. Table 1 shows the materiality of BP’s US business
– it is clearly very important to group earnings, free cash flow and, ergo,
BP’s dividend. Valuing BP’s entire US proven reserve base (4,764
mmboe at end 2009) at $15 per boe, US refining capacity (1,459 kbopd)
at $10,000 per bopd and US retailing network (11,500 sites) at $1m per
site points to an intrinsic US asset value closer to $98bn or 9.8x 2009
EBITDA. Since we do not believe BP’s US assets are set to be
expropriated or permanently impaired, we do not believe that BP’s long
run dividend trend (figure 2), unbroken since 1993 (£ and $ CAGR
14.2% since then), will be jeopardized by the Macondo incident. The
market is incorrect, in our view, to replay history on this occasion. BP’s
problems in the early 1990s were structural; Macondo is a one-off event.
different – Specifically, we now detect concerns about the sanctity of
BP’s US assets. Deep value investors now seem to be more interested in
the name and they are keen to know the likely value of BP’s US business.
At end 2009, BP disclosed US operating capital employed of $55.8bn
and US net property, plant & equipment of $50.2bn. Both metrics are, in
our view, incomplete. Table 1 shows the materiality of BP’s US business
– it is clearly very important to group earnings, free cash flow and, ergo,
BP’s dividend. Valuing BP’s entire US proven reserve base (4,764
mmboe at end 2009) at $15 per boe, US refining capacity (1,459 kbopd)
at $10,000 per bopd and US retailing network (11,500 sites) at $1m per
site points to an intrinsic US asset value closer to $98bn or 9.8x 2009
EBITDA. Since we do not believe BP’s US assets are set to be
expropriated or permanently impaired, we do not believe that BP’s long
run dividend trend (figure 2), unbroken since 1993 (£ and $ CAGR
14.2% since then), will be jeopardized by the Macondo incident. The
market is incorrect, in our view, to replay history on this occasion. BP’s
problems in the early 1990s were structural; Macondo is a one-off event.
MJ
Thanks for that
MJ
Some pretty large numbers still being bandied about over how much this is going to cost
MJ
ING went for a worse case scenario of $22bn
BE
Interesting
BE
UBS, who are shop to BP, said this could cost $40bn gross
BE
with an earnings hit of $18bn.
BE
But they still think the divi is safe
MJ
erm
BE
Here’s their working.
BE
Updating spill scenario, forecast changes and valuation
We are updating our analysis of the spill cost first published on 25 May. We use
the same basic framework which focuses in on the compensation costs to the
two main industries impacted (tourism and fishing) plus an estimate of clean up
costs. We are also introducing some scenario analysis to reflect the uncertainty
over the outcome.
We are updating our analysis of the spill cost first published on 25 May. We use
the same basic framework which focuses in on the compensation costs to the
two main industries impacted (tourism and fishing) plus an estimate of clean up
costs. We are also introducing some scenario analysis to reflect the uncertainty
over the outcome.
BE
For the clean-up, we have used our methodology of a unit cost based on an
updated Exxon Valdez cost, applying a mitigated (70%) and unmitigated
estimate. We now assume a spill of 15kbd for 90 days.
updated Exxon Valdez cost, applying a mitigated (70%) and unmitigated
estimate. We now assume a spill of 15kbd for 90 days.
BE
We have run scenarios based around the compensation for the 4 states
involved. Our base case is as was – a 1 year impact with various proportions
of full year industry costs (to represent partial impact). To this we have
added two more scenarios – a 2 year impact, and a 2 year impact plus full
weighting of cost (i.e. that the industry is fully impacted in that year).
involved. Our base case is as was – a 1 year impact with various proportions
of full year industry costs (to represent partial impact). To this we have
added two more scenarios – a 2 year impact, and a 2 year impact plus full
weighting of cost (i.e. that the industry is fully impacted in that year).
BE
We have also estimated the bottom line impact to BP based on 4 further
conditions which vary whether it can take its equity share or pays the full
100% and whether the costs are relievable against tax (Condition 1 shared,
relievable; Condition 2 unshared, relievable; Condition 3 shared, not
relievable; Condition 4 unshared, not relievable).
conditions which vary whether it can take its equity share or pays the full
100% and whether the costs are relievable against tax (Condition 1 shared,
relievable; Condition 2 unshared, relievable; Condition 3 shared, not
relievable; Condition 4 unshared, not relievable).
BE
We have added a contingency of $2bn for legal costs as it is becoming
evident that BP will have to fight legal actions on all fronts.
Using these scenarios and weighting according to our guess of probability, we
now included a bottom line cost to BP of $18bn. The average of the scenarios
discussed above and shown below is $19.8bn. We had previously assumed
$5.1bn. This doesn’t relate directly to a ‘gross’ to ‘net’ analysis as it is a product
evident that BP will have to fight legal actions on all fronts.
Using these scenarios and weighting according to our guess of probability, we
now included a bottom line cost to BP of $18bn. The average of the scenarios
discussed above and shown below is $19.8bn. We had previously assumed
$5.1bn. This doesn’t relate directly to a ‘gross’ to ‘net’ analysis as it is a product
BE
of differing scenarios but implies, assuming equity share and tax relief, a gross
cost of $40bn versus our previous figure of $12bn.
We have assumed these costs are paid over 3 years, 2010-12, rather than 2 years
previously.
cost of $40bn versus our previous figure of $12bn.
We have assumed these costs are paid over 3 years, 2010-12, rather than 2 years
previously.
BE
Oh, and here’s Credit Suisse talking options.
BE
Which is still a keen subject among our readers, I note.
BE
Revising potential clean-up costs and liabilities upwards: At the higher
flow rate of 12-19kbd, by early August when relief wells are drilled, Macondo
could have spilled 45-72million gallons of oil into the Gulf (4-7x
ExxonValdez). Clean-up costs could total $15-23bn plus $14bn of claims.
This would absorb 3 years of BP’s free cashflow after dividends and capex
(at $80/bbl oil) and require a 10% rise in gearing; raising dividend risk.
flow rate of 12-19kbd, by early August when relief wells are drilled, Macondo
could have spilled 45-72million gallons of oil into the Gulf (4-7x
ExxonValdez). Clean-up costs could total $15-23bn plus $14bn of claims.
This would absorb 3 years of BP’s free cashflow after dividends and capex
(at $80/bbl oil) and require a 10% rise in gearing; raising dividend risk.
BE
3 containment options offer some hope: Importantly, BP plans 3
containment options, (1) the LMRP cap, (2) reversing the manifold that BP
used for the top-kill and (3) an “overshot tool” with a separate floating riser
that, most importantly, can quickly be released and re-connected in the
event of a hurricane. Given the limited success thus far, confidence in these
solutions will be low until proven otherwise. However, were these
containment solutions to work, the amount spilt could be capped at around
35million gallons (3x ExxonValdez), potentially capping clean up at ~$13bn.
containment options, (1) the LMRP cap, (2) reversing the manifold that BP
used for the top-kill and (3) an “overshot tool” with a separate floating riser
that, most importantly, can quickly be released and re-connected in the
event of a hurricane. Given the limited success thus far, confidence in these
solutions will be low until proven otherwise. However, were these
containment solutions to work, the amount spilt could be capped at around
35million gallons (3x ExxonValdez), potentially capping clean up at ~$13bn.
BE
Cutting target price to 560p/sh ($49/sh ADR): We lower our target price to
560p/share ($49/sh ADR) to reflect 1) the additional clean-up cost liability
($5/ADR) given flow rate of 12-19kbd for 90days, and 2) a lower target
multiple now at an 8% discount to supermajor peers RDS and Total
($4/ADR). Our new TP of 560p leaves upside of c.33%, more than some
peers though other Big Oils also offer value. After today’s 15% share price
drop ($20bn), BP is now trading on 5.5x 2012 P/E (a 30% discount to peer
group avg), a 8.9% dividend yield and a 9.8% FC yield in 2011.
560p/share ($49/sh ADR) to reflect 1) the additional clean-up cost liability
($5/ADR) given flow rate of 12-19kbd for 90days, and 2) a lower target
multiple now at an 8% discount to supermajor peers RDS and Total
($4/ADR). Our new TP of 560p leaves upside of c.33%, more than some
peers though other Big Oils also offer value. After today’s 15% share price
drop ($20bn), BP is now trading on 5.5x 2012 P/E (a 30% discount to peer
group avg), a 8.9% dividend yield and a 9.8% FC yield in 2011.
MJ
We should also look at the series of notes being pumped out
MJ
riffing on the “BP in play” theme
BE
(@MJ: yellow.)
MJ
sorry
BE
Right. Is anyone taking this stuff seriously?
MJ
Not really
MJ
I am pretty sceptical
MJ
in spite of some analysts magicing up a “20-25% chance” that BP will be taken out
BE
Ah yes. That was DnB Nor. I too was impressed with their precision.
BE
The “why catch a falling knife” argument is the most convincing, frankly. Let alone the political complexity.
MJ
Yup
MJ
you can’t strip the liabilities from BP
BE
Not without becoming corporate non grata with the US government, certainly.
BE
And, anyway, who would buy?
BE
Chinese seems a fantasy
BE
It does seem that the Shell-BP merger is the one people have focused most on
MJ
That deal has been around as a concept for a long time
BE
Indeed. More than a concept, in fact.
MJ
the synergies, as Lord Browne said in his memoirs, would be huge
MJ
something like $9bn
MJ
And the antitrust issues in a Shell-BP merger would be surmountable
MJ
The new company would need to divest some downstream assets
MJ
which, considering current margins, there would not be too heart wrenching about
MJ
But the only way I could see BP being swallowed
MJ
would be if the White House was pushing for it
BE
(@Daddy: well said.)
BE
And why would Obama want an even bigger oil company to have to grapple with?
BE
And where on earth would you get the financing for a deal like that anyway? You don’t find £90bn under the sofa.
BE
And this is all presuming that BP management and shareholders would be willing to accept a deal.
MJ
Yes
MJ
Actually
MJ
One stumbling block which I haven’t seen too much written about
MJ
is the TNK-BP joint venture
BE
Ah yes. Very important for BP.
MJ
Yup.The Russian operations make up something like a quarter of BP’s production
MJ
and about a fifth of reserves
MJ
And BP’s time in Russia has hardly been without problems
BE
Indeed. Legal wrangling, Kremlin politics and the like
BE
So, in short, it’s a pretty complicated set of contracts and political deals.
MJ
Exactly
BE
A poison pill, some might suggest.
MJ
what would the Russians do if, say, Exxon or Shell, made a move?
BE
Hm.
11:43AM
BE
Right. We’re 42 minutes in and we’ve only done two stocks.
BE
That’s been the way of things recently.
BE
So let’s have a quick whip around the other movers
BE
Starting with Aegis.
Aegis Group PLC (AGS:LSE): Last: 110.20, down 5.6 (-4.84%), High: 115.10, Low: 109.00, Volume: 2.67m
MJ
Please dont tell me this is more Bollore stuff?
BE
It’s not, thankfully.
BE
The stalest of all stale bid stories that.
BE
But Aegis is ex a 1.5p final dividend
BE
And there’s a Deutsche downgrade to sell in circulation
BE
The gist of which is as follows
BE
Revenue performance gap between Aegis and the peer group
Over the past 12-18m, Aegis’ organic revenues have lagged peers in both Media
and Research. We assume that new management prioritizes a return to aboveaverage
revenue growth, although high European exposure may constrain the rate
at which this happens. Emphasizing topline recovery is also likely to inhibit nearterm
margin upside. Aegis is signalling a step-up in acquisitions, but heavy M&A
spend has historically depressed ROCE. We think the shares, close to a 3yr high
relative to Media and the UK market, are due a period of underperformance. Sell.
Over the past 12-18m, Aegis’ organic revenues have lagged peers in both Media
and Research. We assume that new management prioritizes a return to aboveaverage
revenue growth, although high European exposure may constrain the rate
at which this happens. Emphasizing topline recovery is also likely to inhibit nearterm
margin upside. Aegis is signalling a step-up in acquisitions, but heavy M&A
spend has historically depressed ROCE. We think the shares, close to a 3yr high
relative to Media and the UK market, are due a period of underperformance. Sell.
BE
Too much Euro exposure, too little US: not the year for mid-cap agencies
Organic sales growth has historically been the key benchmark by which Aegis has
successfully differentiated itself. With Jerry Buhlmann appointed as Aegis’ fourth
CEO in six years, we have no doubt over the management team’s resolve to turn
the business around and reinstate Aegis’ top line growth credentials. In the near
term, however, we expect Aegis’ high exposure to Europe (est >70% of profit)
and underexposure to the US (est 15% profit) will constrain revenue recovery (and
FX gains). Additionally, we think the more difficult long-term challenge will be
growing margins against the backdrop of an increasingly competitive market in
both its divisions. Media margins declined over the last cycle (from 21.5% in 2000
to 17.8% in 2008), and Research margins (<7%) remain below the peer average.
Organic sales growth has historically been the key benchmark by which Aegis has
successfully differentiated itself. With Jerry Buhlmann appointed as Aegis’ fourth
CEO in six years, we have no doubt over the management team’s resolve to turn
the business around and reinstate Aegis’ top line growth credentials. In the near
term, however, we expect Aegis’ high exposure to Europe (est >70% of profit)
and underexposure to the US (est 15% profit) will constrain revenue recovery (and
FX gains). Additionally, we think the more difficult long-term challenge will be
growing margins against the backdrop of an increasingly competitive market in
both its divisions. Media margins declined over the last cycle (from 21.5% in 2000
to 17.8% in 2008), and Research margins (<7%) remain below the peer average.
BE
Aegis needs to demonstrate that acquisitions add value
Following its £191m convertible, the group is explicitly looking to increase
acquisition investment. We believe heavy acquisition spending has historically
depressed group ROCE, as well as adversely impacting free cash conversion. We
estimate returns have been only 5.2-7.4% in the last 15 years. This also has an
impact on EPS. For Aegis to be an attractive investment proposition, we think it
needs to be growing EPS, as well as revenue, ahead of peers. On our estimates, it
has not achieved this over the last cycle: from 2000-08 (peak to peak), adjusted for
restructuring, CAGR EPS has been 7%. The balance sheet has not been especially
underlevered – net debt/EBITDA has been 1.7-2.4x in the last 5 years.
Following its £191m convertible, the group is explicitly looking to increase
acquisition investment. We believe heavy acquisition spending has historically
depressed group ROCE, as well as adversely impacting free cash conversion. We
estimate returns have been only 5.2-7.4% in the last 15 years. This also has an
impact on EPS. For Aegis to be an attractive investment proposition, we think it
needs to be growing EPS, as well as revenue, ahead of peers. On our estimates, it
has not achieved this over the last cycle: from 2000-08 (peak to peak), adjusted for
restructuring, CAGR EPS has been 7%. The balance sheet has not been especially
underlevered – net debt/EBITDA has been 1.7-2.4x in the last 5 years.
BE
Market discriminating on Media cyclicals: TP reduced from 130p to 100p
We believe Aegis’ revenue performance lag and a sluggish European macro mean
EPS risk is on the downside. The lack of support from an M&A bull case is an
additional negative. Bollore (29.6% shareholder) remains a disincentive for fresh
money to invest because M&A optionality is reduced. We think Aegis’ valuation
premium (7.4x EV/EBITDA 2011E vs WPP 6.8x, Publicis 7.2x) is unjustified. We
base our 100p target on valuing Aegis at 10x 2011E PE (30% discount to median
14.4x PE, reflecting the revenue bias to Europe and the Bollore blocking stake).
Risks: stronger ad market; higher cost savings; bid at a premium to current price.
We believe Aegis’ revenue performance lag and a sluggish European macro mean
EPS risk is on the downside. The lack of support from an M&A bull case is an
additional negative. Bollore (29.6% shareholder) remains a disincentive for fresh
money to invest because M&A optionality is reduced. We think Aegis’ valuation
premium (7.4x EV/EBITDA 2011E vs WPP 6.8x, Publicis 7.2x) is unjustified. We
base our 100p target on valuing Aegis at 10x 2011E PE (30% discount to median
14.4x PE, reflecting the revenue bias to Europe and the Bollore blocking stake).
Risks: stronger ad market; higher cost savings; bid at a premium to current price.
BE
(@Firean: we pride ourselves in sporadically providing neither.)
11:46AM
MJ
And, ahem, what about the banks?
BE
Well, we’re down.
BE
Following the market, largely.
Barclays PLC (BARC:LSE): Last: 295.90, down 7.4 (-2.44%), High: 300.75, Low: 293.55, Volume: 12.15m
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 45.34, down 1.46 (-3.12%), High: 46.55, Low: 44.97, Volume: 36.23m
Lloyds Banking Group plc (LLOY:LSE): Last: 56.09, down 1.32 (-2.30%), High: 56.94, Low: 55.60, Volume: 75.64m
BE
Although there is one interesting thing to flag up (even for you, @Bored with …)
BE
A JP Morgan note that’s tailor made for a Daily Mail front cover tomorrow.
BE
Concluding that it’s costing us, as in the taxpayer, about £3.2bn a year simply to hold the stakes in RBS and Lloyds.
MJ
BE
That’s 8% of the 2010 UK budget
MJ
BE
Think Tracy’s doing a post on this for the main blog, but here’s the note.
MJ
Bryce, have we figured out how this works yet?
BE
Um, no. The note’s 42 pages long, and rather heavy going.
BE
But it’s by Carla Antunes da Silva, who’s rarely wrong about such things.
BE
Anyway, make your own conclusions.
BE
At the crux of this debate is the conflict of interest of owning large
stakes in the banks whilst trying to implement significant regulatory
changes in a global forum and balancing this with influencing banks’
lending behaviour. We see 3 main costs to the UK;
stakes in the banks whilst trying to implement significant regulatory
changes in a global forum and balancing this with influencing banks’
lending behaviour. We see 3 main costs to the UK;
BE
1 – During the temporary ownership period the stakes account for c.4%
of net debt to GDP under the Maastricht definition. Whilst we do not
see the stakes as long-term holdings, if fully consolidated, UK net debt
to GDP would go from 64% (2009) to 165%;
of net debt to GDP under the Maastricht definition. Whilst we do not
see the stakes as long-term holdings, if fully consolidated, UK net debt
to GDP would go from 64% (2009) to 165%;
BE
2 – Indirectly, there is a cost to the sovereign from providing guarantees
to the sector (both implicit and explicit) – for every 10bps of additional
financing costs, we estimate annual costs of c.£1bn for the government;
to the sector (both implicit and explicit) – for every 10bps of additional
financing costs, we estimate annual costs of c.£1bn for the government;
BE
3 – Last but not least, we estimate a financing cost of c.£3.2bn annually
of holding these stakes, equivalent to a meaningful 8% of 2010E UK
budget interest expense.
of holding these stakes, equivalent to a meaningful 8% of 2010E UK
budget interest expense.
BE
(Vintage et al: sorry – budget interest expense. Sorry. These are the dangers of typing faster than my brain works.)
BE
Despite comment that disposals of the stakes are not imminent, with the
change of government we believe the breakeven prices are less relevant,
esp if the government were to structure a transaction similar to the
British Gas & BT privatisations, where there could be a focus on retail
investors, not least because this would ‘democratise’ any potential future
share upside. News flow around the exit strategies will be a drawn out
process, providing trading opportunities, and may remain unclear.
change of government we believe the breakeven prices are less relevant,
esp if the government were to structure a transaction similar to the
British Gas & BT privatisations, where there could be a focus on retail
investors, not least because this would ‘democratise’ any potential future
share upside. News flow around the exit strategies will be a drawn out
process, providing trading opportunities, and may remain unclear.
BE
While stocks have come off their highs on the back of sovereign
concerns and both Lloyds and RBS are now trading on 0.9x 11E P/NAV,
we remain UW on both. Fundamentally, we see NAV per share as a
ceiling rather than as a floor as we currently struggle to see returns
exceeding CoE. TP for Lloyds remains unch at 50p with modest
earnings changes (-1.1% 2012E) and unch at 42p for RBS, where we
raise 12E EPS by 6.7% on reduced loss estimates for non core activities.
concerns and both Lloyds and RBS are now trading on 0.9x 11E P/NAV,
we remain UW on both. Fundamentally, we see NAV per share as a
ceiling rather than as a floor as we currently struggle to see returns
exceeding CoE. TP for Lloyds remains unch at 50p with modest
earnings changes (-1.1% 2012E) and unch at 42p for RBS, where we
raise 12E EPS by 6.7% on reduced loss estimates for non core activities.
BE
Given the strain on public finances we believe the likelihood of a specific
tax charge along the lines of a wholesale liability tax is high and could
remove c.10-20% of sector earnings, raising a much needed £5-10bn.
Beyond that, further regulatory changes will likely have to be pushed
back, as we believe regulation goes hand in hand with economic
stability.
tax charge along the lines of a wholesale liability tax is high and could
remove c.10-20% of sector earnings, raising a much needed £5-10bn.
Beyond that, further regulatory changes will likely have to be pushed
back, as we believe regulation goes hand in hand with economic
stability.
BE
Usual place for more on that.
MJ
returning to Barclays for a second
MJ
What was that deal they did this morning?
BE
Ah yes.
BE
Small deal. Tricorona.
BE
Carbon trading thing.
BE
Here’s the FT story.
BE
Barclays, the UK bank, has extended its carbon trading business by snapping up Sweden’s Tricorona for £98m in cash.
The deal, in which it will pay SKr8 ($1.02, €0.84, £0.70) in cash for each Tricorona share, represents a 40 per cent premium over the closing Tricorona price in Stockholm on Tuesday.
Tricorona specialises in generating carbon emission reduction credits from greenhouse gas reduction projects in developing countries. Barclays has been involved in the carbon emissions trading business since 2004, although it is the first deal that it has made in the environmental markets business.
BE
Now, this is barely significant for a beast like Barclays of course.
BE
Though it does have a bit of a readthrough for the smallcap carbon traders
BE
Which have been dreadful investments.
BE
All trading sub their net asset value, with failed mergers and shareholders getting testy.
BE
Camco’s up 11.9% to 16.5p
BE
And Trading Emissions is …..
BE
(BLOODY REUTERS MACHINE! GOD I MISS TOPIC 3.)
BE
Trading Emissions apparently doesn’t have a price, according to Reuters.
BE
Oh – here we are. Up 1% at 104p.
BE
Quick line from Mirabaud on all this.
BE
This morning the management of Tricorona, the Swedish aggregator of carbon credits, announced its support for Barclay’s all cash bid of SEK8.00/share, valuing the company at SEK1.15bn (€120m/£100m). This is at a 6% premium to our valuation of the company in mid-February at SEK7.56/share.
BE
In keeping with our valuation of Camco and Trading Emissions, our valuation of Tricorona is principally based on the company’s cash (end of Q1 2010: SEK401m/ €42m/ £35m*) and its registered credits of 27mt (out of a contracted portfolio of 43.7mt). The registered tonnage is then risk-adjusted. However, most pertinently, only the pre-2012 credits are included in this valuation, thereby excluding Tricorona’s post-2012 contracted and registered portfolio of 63.8mt and 27.6mt respectively. The similarity between our and Barclay’s valuation could suggest that the Bank is equally excluding/ putting a very small valuation on the post-2012 portfolio. Assuming the former, this would also suggest that that the Bank is also using an average price range over the remainder of Kyoto of between €15.00 and €16.00. At the mid-price this would suggest a 25% premium to the current CER price of €12.45.
BE
Management had rebuffed the previous offer made by Opcon. However, that was a paper transactions. To boot, this transaction offers a better fit, especially given that Barclays is one of the most active participants in the carbon markets and this deal mirrors J.P. Morgan’s acquisition of EcoSecurities. This transaction should also act a shot of confidence to the emissions market and again this should also shed some light on Camco’s bushel.
BE
As O&G notes on the right, the carbon market’s exposed to regulation and descending into shambles, so a nice clean bid I’m sure would be welcomed for either or both.
11:59AM
BE
While on the subject of fantasy M&A ….
MJ
Well
MJ
We there is this Afren-BG story knocking about
BE
MJ
we are not buying that one
MJ
makes little sense
MJ
The whole point of Afren, is that it has indigenous company status in Nigeria
MJ
So can suceed where the majors have failed
MJ
BG would most likely lose that
MJ
And what does BG want with Nigeria?
BE
You tell me.
BE
So, just for the sake of completeness, the theory was a 140p bid.
MJ
(Yes, Macrus, you are right – Afren gets its staus through First Hydrocarbon Nigeria, but that is splitting hairs)
BE
That’s against a 96.8p mid at the moment.
MJ
Also, Afren managment has said it is looking to do deals itself right now
MJ
So I would be suprised if thye were looking to shop the company
BE
Right. A “pipeline of bolt-on acquisitions with news expected soon, if not imminently,” I’d guess?
MJ
(@Vintage – The existing poitical relatoinships Afren has are very important, BG can’t just buy those)
MJ
I would think that is fair to say
BE
Ok. We should move on.
12:06PM
BE
(Taxloss: good evening. That’s a very good point, and one we made ad infinitum in yesterday’s Macondo Live.)
MJ
(Thanks Taxloss – good point)
BE
And, Fitz, I’m happy to assist.
BE
Dublin Drinks on Friday June 25th.
BE
Starts @ 6 pm at Doheny and Nesbitts in Dublin.
BE
The theme for the evening is A Farewell to Euros.
BE
Please RSVP on the Ireland table!
12:08PM
MJ
Right – we are coming to the end of the session
BE
We are.
MJ
Anything else you want to look at?
BE
(Taxloss: nauseam’s implied.)
BE
Haven’t mentioned Cattles.
BE
Bovine spongiform bid approach.
BE
“No more than 1p per share”
Cattles PLC (CTT:LSE): Last: 6.88, no change, Volume: 0.00
BE
Frankly, I had no idea they were still traded.
BE
(Although, obviously, they’re not actually *traded*.)
BE
But anyway, Miles is being dragged off by the news desk to do something big on BP
BE
So we’ll have to end this now.
MJ
thanks for the commments
BE
Even the puns.
BE
Same time tomorrow, when we’ll draft in another exciting guest presenter.
BE
Or borrow Miles again. Whichever.
BE
Until then, good afternoon all.
MJ
Bye