Markets Live chat transcript for the chat ending at 11:23 on 10 Jun 2010. Participants in this chat were: Neil Hume, FT Bryce Elder
NH
Hola
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and welcome to Markets Live
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FT Alphaville’s daily markets round up
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hopefully without any corrupt data today
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and Bryce is back!
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after yesterday’s childcare problems
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Morning all.
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although, Bryce almost had to leave FT Towers
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and buy a hat
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because it did look for one moment there
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as if ARM really had received an offer from Apple
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Hm.
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Well, I wasn’t quite at the point of searching Yell.com for milliners.
NH
but come on
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when the stock was up 30%
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surely
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you were thinking how to make a hat more palatable
BE
Ok – slightly nervous. And I guess sous vide might work.
BE
but I am pleased to say
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the stock is coming back to earth
NH
it is
ARM Holdings PLC (ARM:LSE): Last: 333.60, up 59.6 (+21.75%), High: 362.40, Low: 272.10, Volume: 18.14m
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And the *unofficial* word emanating from Cambridge this morning is
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No bid
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From Apple
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Or anyone else.
NH
indeed
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a number of brokers have spoken to the company
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and the feedback is
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No credibility to the rumours
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no strategic sense in Apple buying
BE
These are arguments we’ve made what feels like a thousand times.
NH
it would destroy the ARM business model
BE
Indeed. Like killing the antelope just for its tongue.
NH
it’s better the license the technology if you want it
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and the idea
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that Apple could buy ARM
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to deny competitors the technology
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would send the regulators into a spasm
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It couldn’t happen. It simply couldn’t.
BE
Arm’s not essential to the Apple roadmap.
BE
Apple, or indeed anyone else, have a huge amount to lose by parking tanks on every consumer electronics maker in the world.
BE
Still, we’ve done this many times before.
NH
and the regulators would not wear it
BE
What’s the short interest in Arm anyway? Is this just an almighty squeeze of weak shorts?
NH
well
NH
it does look that way
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in fact the whole spike
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reminds me of what happened in Sainsbury a few months back
NH
that went nuts on some bid rumour
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and there was no substance to it
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anyway
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on ARM
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we have around 11 per cent on loan
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up from 8% last week
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so yes
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it’s possible a sqeeze was behind it
NH
unless there is a hostile Chinese bidder out there
BE
Or, I guess, if Apple takes a strategic stake.
BE
Which is plausible I guess.
NH
they have one
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in Imagination Technology
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Exactly.
NH
but surely that would make ARM bid proof
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Exactly.
NH
hardly good for the price
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Exactly.
NH
Anyway
NH
this morning has been extremely painful for one City analyst
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at Liberum Capital
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Janardan Menon
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Ah yes – read that this morning.
NH
he put this out
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first thing
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Stretched valuations – downgrade to sell
BE
Sensible note. Unfortunate timing.
NH
We downgrade ARM to a sell with a fair value of 190p. The stock is trading at 36x our 2010 EPS forecast which we regard as expensive compared to its long term earnings growth outlook of about 12.6% CAGR. We also believe the semiconductor industry has entered a downcycle which is likely to be a catalyst for multiple compression and earnings downgrades. ARM remains one of the best long term investments in semis. However, we recommend selling the stock at the current price.
NH
it is sensible
NH
it makes several good points
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just bad timing
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very bad timing
NH
stuff on valuation is good
NH
Current valuations are stretched: Based on this longer term earnings growth outlook, ARM’s current earnings multiple of 36x and 32x for 2010 and 2011 is expensive. The stock is also trading at an FY10 EV/sales of 8.7x and a price to book of 11.8x. European semiconductor stocks have historically traded at a PE multiple of between 1x and 2x their forecasted growth rate. Even if ARM were to have a PEG ratio of 2, it should still trade at only about 25x forecasted 2010 EPS. This is the level at which we have set our current price target of 190p. Our DCF value for the company is 140p.
NH
and also
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on the growing threat from Intel
NH
Intel likely to make some in-roads: We also expect Intel to make some in-roads into ARM territory in coming years including smartphones, TVs and other consumer electronics products. We agree with market speculation that at least some of Nokia’s MeeGo-based phones will run on an Intel application processor. Intel’s recent cooperation with Google, Sony and Logitech in the smart TV market is also likely to result in some volume. We do not expect all of these to separately or in combination to make a material difference to ARM’s medium term revenue or earnings outlook. However, any firm evidence of Intel gaining traction in these product segments is likely to result in multiple compression for ARM.
BE
Danger of the trade that.
BE
Work for a fortnight on your spreadsheets then get hoisted by weak rumourtrage.
NH
yeah
NH
and the rumour didn’t even come on a Friday
NH
how sickening is that
BE
Yup. And, just in case anyone’s unclear about how much Arm’s part of the electronics furniture rather than a strategic target ….
BE
This caught my eye
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Comparison of Apple’s “revolutionary” A4 chip and the one running the new Samsung phone.
NH
gawd
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They’re identical. In every way.
NH
this is all going slightly techy for me
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can we stop and move on
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i think its’ pretty clear
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there’s no bid for ARM
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We can.
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famous last words
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And my hat remains unconsumed.
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11:19AM
NH
Right
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let’s have a look at BP
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which has rallied sharply from its lows
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hit 345p in the auction
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after the ADR’s got obliterated overnight
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and now they are
BP Plc (BP.:LSE): Last: 378.96, down 12.59 (-3.22%), High: 380.20, Low: 345.15, Volume: 121.93m
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and that’s because of rumours
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Warren Puffett
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has been in the market buying stock
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a big position apparently
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Of course he has.
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He got up at 2am in Omaha, Nebraska specifically to buy BP shares
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And then tell everyone.
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look, don’t shoot the messenger. I have had loads of calls on this today
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Hm.
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Puffet
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has caught the falling broadsword
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and do you know what the buy signal was?
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Go on.
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this
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Mesmerized by the Fall of BP
By Jim Cramer
RealMoney Columnist
By Jim Cramer
RealMoney Columnist
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NH
You can’t have one of the largest companies in the world disappear overnight and believe it won’t affect other companies or the market’s psyche. As Doug Kass said late tonight, this was BP’s (BP) last hour, with ETF shenanigans thrown in.
At one point today, between $32 and $29, I remarked to a friend that I had never seen a stock unravel in front of my eyes like this one did, with huge value disappearing. Just amazing. Just disappearing.
It was frightening.
NH
Also, it is clear that if you make the company’s liability unlimited, it might never want to drill again. Who can risk this? Who can risk having a company taken away from its shareholders, as if it were expropriated even when you believe it deserves it?
Lots of people are debating right now whether any company in the Gulf of Mexico can finish a project, or even stay in the Gulf. They believe this is Three Mile Island for offshore drilling. My colleague Matt Horween reminds me that the risk-reward has now gotten astronomical for those who drill or already have wells in the Gulf.
Watching BP fall and watching Anadarko Petroleum (APC) collapse after actually being up at one point — talk about misdirection — was horrifying to everyone. It was like watching the collapse of every single nuclear-power utility in the 1980s in time-lapsed photography.
I know there had been many smart value buyers of BP all the way down. They came on TV. They talked their game. But in the end, they could own, well, nothing. Or what, maybe they make $5? BP is now, to quote the late Richard Nixon, a pitiful helpless giant.
And that has everyone and everything spooked. I ask you this: If you follow the market, were you able to take your eyes off BP?
NH
Bascially
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Lord. He writes like he talks.
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Cramer was a buyer
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he isn’t anymore
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and to me that’s a huge buy signal
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in fact so big
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that I am adding BP to Alpha Muppet Fund I
NH
I’m going to have a real go
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Fair enough. I’ll add it to the fund at the end of today’s session.
BE
Muppetfund Alpha, for anyone interested ….
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Is down 0.7% today
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And off 1.1% in the two days since it was created.
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annualised
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that’s not very good is it?
BE
No. No it’s not.
BE
So anyway, should we look at the thinking behind this BP ADR slump overnigt?
NH
(danrwl – don’t so daft)
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before we do
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let me address the comment of danrwl
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BP is now becoming like HBOS
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loads of people have caught the falling knife
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are hurting
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and are now blaming the meida
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IN LEAGUE WITH THE SHORT SELLERS! CITY SPIVS!
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yep
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(sigh)
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we have had that too
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blaming the shorts for the demise
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when
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in fact
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there has been NO
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uptick in the short selling activity
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NONE
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and what are we supposed to do
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sit back
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and not comment
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on Britain’s biggest company
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being shot to pieces??
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puhleeze
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Right. That’s that out of the way.
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What was the catalyst for the slump overnight? This Chapter 11 theory?
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yep
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push the US biz into Chapter 11
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Matt Simmons is pushing the idea
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hang on
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will grab his comment
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one moment
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Lotus Notes crash
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AGAIN
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NH
What do you think is in store for the future of BP?
They have about a month before they declare Chapter 11. They’re going to run out of cash from lawsuits, cleanup and other expenses. One really smart thing that Obama did was about three weeks ago he forced BP CEO Tony Hayward to put in writing that BP would pay for every dollar of the cleanup. But there isn’t enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this my guess is that they’ll panic and go into Chapter 11.
NH
Now
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in case we are accused of bias
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let’s note that Simmons thinks
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the only way to plug the well
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is nuke it
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That suggestion’s banned over at The Oil Drum.
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Simmons also thinks that perhaps the only way to seal the gush of oil is by doing what the Soviet Union did decades ago — setting off a bomb deep underground so that the fiery blast will melt the surrounding rock and shut off the spill.
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We should note that Simmons is a trader.
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He wrote a book about the Saudis having less oil than thought.
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Which was a solid, if hugely repetitive, bit of work.
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short seller no doubt
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But is he a restructuring expert? No.
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no
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Does he explain why a company generating 35bn ebit would, or indeed could, seek bankruptcy protection? No.
NH
indeed
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and there is a good note from Merrill on this today
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looking at the blow out
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on the CDS to over 500
NH
Our credit analyst Nicholas Harrison has provided a view on the recent
developments of the BP credit situation. In a similar vein to the equity, on the
credit side BP’s CDS and corporate bonds have displayed significant volatility
following the Macondo incident on 20th April. Historically given its strong credit
rating and business profile, BP has been one of the most stable low beta credits
in the corporate universe. The multitude of questions that have arisen as a result
of the incident, however, have now seen the CDS curve invert and 5Y CDS trade
up to 250bps from c.40bps in early April.
developments of the BP credit situation. In a similar vein to the equity, on the
credit side BP’s CDS and corporate bonds have displayed significant volatility
following the Macondo incident on 20th April. Historically given its strong credit
rating and business profile, BP has been one of the most stable low beta credits
in the corporate universe. The multitude of questions that have arisen as a result
of the incident, however, have now seen the CDS curve invert and 5Y CDS trade
up to 250bps from c.40bps in early April.
NH
With the total cost implications of the incident still unknown and BP management
saying it is not possible to provide even an estimate, at this stage uncertainty
continues to be the driver in the credit market.
saying it is not possible to provide even an estimate, at this stage uncertainty
continues to be the driver in the credit market.
NH
Of what is known, the liquidity profile of BP is solid and coupled with the financial
flexibility of the company, are reasons in our view why BP has long been rated as
an ‘AA category’ issuer. Management have commented that with cash on the
balance sheet and undrawn credit facilities in addition to the cash flow generated
from operations, they intend to pay the majority of clean up and containment
costs by year end. Litigation and other costs are likely to be spread over many
years. As a contingency BP also have in place a number of ‘backstops’ in the
form of backup facilities which management stated can be utilised should BP
have trouble accessing the capital markets in the future.
flexibility of the company, are reasons in our view why BP has long been rated as
an ‘AA category’ issuer. Management have commented that with cash on the
balance sheet and undrawn credit facilities in addition to the cash flow generated
from operations, they intend to pay the majority of clean up and containment
costs by year end. Litigation and other costs are likely to be spread over many
years. As a contingency BP also have in place a number of ‘backstops’ in the
form of backup facilities which management stated can be utilised should BP
have trouble accessing the capital markets in the future.
NH
Credit agencies have already acted to cut BP’s credit rating and we think further
cuts cannot be ruled out as uncertainties over liabilities and potential regulatory
changes persist. Despite the downgrades, on the 4-Jun investor call, BP
management affirmed that longer term they intend to maintain an AA rating. As
we observed before, BP’s financial gearing is currently below the target 20-30%
(at 1Q10) which highlights the significant financial headroom the company has.
BP affirmed it will continue to target the lower end of this range going forward.
cuts cannot be ruled out as uncertainties over liabilities and potential regulatory
changes persist. Despite the downgrades, on the 4-Jun investor call, BP
management affirmed that longer term they intend to maintain an AA rating. As
we observed before, BP’s financial gearing is currently below the target 20-30%
(at 1Q10) which highlights the significant financial headroom the company has.
BP affirmed it will continue to target the lower end of this range going forward.
NH
Whilst headline risk will undoubtedly continue to affect the credit spreads of BP,
the liquidity profile and strong cash generative nature of BP’s operations should in
our view, serve to provide a reassuring backdrop. In our view the implied
bankruptcy risk for BP shown by the inverted CDS curve is not justified given the
company’s balance sheet. We would expect the curve, notably the front end, to
steepen as further clarity regarding the costs of clean up and litigation becomes
clearer.
the liquidity profile and strong cash generative nature of BP’s operations should in
our view, serve to provide a reassuring backdrop. In our view the implied
bankruptcy risk for BP shown by the inverted CDS curve is not justified given the
company’s balance sheet. We would expect the curve, notably the front end, to
steepen as further clarity regarding the costs of clean up and litigation becomes
clearer.
NH
actually
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lots of comment around today
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from the big houses
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BP oversold etc
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Ah. Right. “All in the price”.
BE
We’ve had a month and a half of “all in the price,” but let’s not carp about that.
NH
true
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the Morgan Stanley note is good though
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calling on the company
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to come out and say
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the dividend is being suspended
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till will clear things up
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Yeah – got that.
BE
The US Administration continues to place
further pressure on BP – the National Incident Commander today asking BP in a public letter for greater transparency on the claims process. The uncertainty around the dividend is also weighing on the name. The share price reaction is telling BP’s Board to show its hand quickly, rather than wait for the Q2 results (27th July), both on the payout policy and on how it intends for BP to provide a clearer line of sight on payment of future liabilities for Macondo (e.g. a creation of trust)
to appease an increasingly frustrated US Administration, in our opinion. In addition, investors will want to see the board reiterate confidence in the management team.
further pressure on BP – the National Incident Commander today asking BP in a public letter for greater transparency on the claims process. The uncertainty around the dividend is also weighing on the name. The share price reaction is telling BP’s Board to show its hand quickly, rather than wait for the Q2 results (27th July), both on the payout policy and on how it intends for BP to provide a clearer line of sight on payment of future liabilities for Macondo (e.g. a creation of trust)
to appease an increasingly frustrated US Administration, in our opinion. In addition, investors will want to see the board reiterate confidence in the management team.
BE
Without that, political pressure could continue to outweigh fundamental value. The market is already pricing in a suspension and a rebase of dividend to a significant degree, in our opinion. All else being equal
clarity on these issues should support a significant bounce away from our bear case and a 2010 PE multiple of 4.4x (a 38% discount to the group), in our opinion.
Two sides to containment: BP continues to make good progress with collection now up to 15,600b/d – with processing capacity expected to rise to 28kb/d as the team incorporates the use of the Q4000 drillship. However, success at the same time raises investor concerns on the initial flow rates and the number of barrels already split, and ultimately the clean-up cost.
clarity on these issues should support a significant bounce away from our bear case and a 2010 PE multiple of 4.4x (a 38% discount to the group), in our opinion.
Two sides to containment: BP continues to make good progress with collection now up to 15,600b/d – with processing capacity expected to rise to 28kb/d as the team incorporates the use of the Q4000 drillship. However, success at the same time raises investor concerns on the initial flow rates and the number of barrels already split, and ultimately the clean-up cost.
BE
Again, the market will look for the start of a reduction in the net numbers (flow rate less clean-up and capture rates) before getting substantially more positive, we believe.
CDS spread widens to over 300 basis points: On the positive, we point to US$15bn of
short-term cash lines.
CDS spread widens to over 300 basis points: On the positive, we point to US$15bn of
short-term cash lines.
BE
Consolidation or exclusion in the US makes little sense: Decreasing competition would be detrimental to the long-term security and future of US Energy. BP has world-class assets and people – with a strong track record in developing deepwater, unconventional gas and giant fields – exactly the skills required to move dependence away from oil imports.
NH
thanks for that
NH
I also have something from Citi
NH
Lowering price target from 730p to 590p — and also increasing risk rating from
Medium to High. This new assessment adjusts the BP valuation for the destruction
of up to US$40bn of shareholder value from the Macondo spill.
Medium to High. This new assessment adjusts the BP valuation for the destruction
of up to US$40bn of shareholder value from the Macondo spill.
NH
Range of outcomes remain wide — We recognize that there is little certainty or
definition around the costs of the spill to BP’s shareholders. The quantum of cost
and the share of burden remains uncertain but we have adjusted for almost 4x
what we believe reasonable cost to be.
definition around the costs of the spill to BP’s shareholders. The quantum of cost
and the share of burden remains uncertain but we have adjusted for almost 4x
what we believe reasonable cost to be.
NH
BP remains financially robust — BP’s net debt is currently estimated around
$25bn. The underlying asset base is worth over $130bn, excluding any
contribution from the US leaving BP solvent even assuming they abandoned the
US.
$25bn. The underlying asset base is worth over $130bn, excluding any
contribution from the US leaving BP solvent even assuming they abandoned the
US.
NH
Cashflow generation is also strong —BP will generate c$40bn of cashflow a year
between 2011 and 2013 on our estimates. Capex of c$20-25bn pa leaves
headroom of $15-20bn – enough to pay the $10bn dividend and fund the
Macondo spill response.
between 2011 and 2013 on our estimates. Capex of c$20-25bn pa leaves
headroom of $15-20bn – enough to pay the $10bn dividend and fund the
Macondo spill response.
NH
Dividend has become a political issue — The US administration seems to think
that BP needs to conserve cash for spill related expense. Financially there is no
reason why BP can’t accommodate both dividend payments and comfortably
respond to its Gulf of Mexico obligations. If the company chooses to pass on
dividends in 2Q to mollify the politicians, full year yield would still be c6.8%
that BP needs to conserve cash for spill related expense. Financially there is no
reason why BP can’t accommodate both dividend payments and comfortably
respond to its Gulf of Mexico obligations. If the company chooses to pass on
dividends in 2Q to mollify the politicians, full year yield would still be c6.8%
NH
What to do with the stock? Long term we still believe BP is undervalued and that
the market is now discounting the worst case rather than most likely outcome. We
would buy the stock, realizing that near term BP will continue to be buffeted by
negative speculation, at least until it can be more informative about costs.
the market is now discounting the worst case rather than most likely outcome. We
would buy the stock, realizing that near term BP will continue to be buffeted by
negative speculation, at least until it can be more informative about costs.
BE
“increasing risk rating from Medium to High” ……….
BE
Righty ho.
NH
BP coming off again
NH
Puffet needs to buy more
BP Plc (BP.:LSE): Last: 375.75, down 15.8 (-4.04%), High: 387.80, Low: 345.15, Volume: 126.78m
BE
Where’s the CDS at?
NH
hang on
NH
that’sa delyaed price
NH
BP down 21.15p at 370p
NH
not sure on CDS
NH
i looked at BP bond earlier
NH
a 2013 5.25%
NH
and it was yielding almost 8%
NH
apparently that’s junk territory
BE
BP 1 yr cds is up at 800-900 apparently.
BE
Which is Greece territory.
NH
RTRS-UK PM CAMERON LIKELY TO DISCUSS BP IN WEEKEND CALL WITH OBAMA- PM SPOKESMAN
BE
Though, of course, there’s zero liquidity in the one year.
BE
5yr’s up at 570bp, plus 194
BE
Which again, is deep into junk territory.
NH
and
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guess who is a big holder of BP now
NH
the muppets
NH
Paul Inkster, Head of Product, Barclays Stockbrokers, comments: Barclays Stockbrokers clients have continued to see investment opportunity in BP’s ongoing troubles as the weak share price has seen investments in the company soar. BP has topped the most popular buys list for the past 7 business days and so far this week has accounted for 14% of total stock purchases. In contrast, news of Tesco’s chief executive Sir Terry Leahy’s decision to retire after leading the group for 13 years had a muted reaction from investors. A 2% drop in the share price across Tuesday had some appeal to clients but Tesco still only ranked 8th in the top 10 buys list for the day.
BE
It’s time to play the music ……….
BE
It’s time to light the lights.
BE
Anyway, let’s push on.
BE
That’s more than enough BP for today, agreed?
NH
But we have added BP to the portfolio though
BE
Yup. Muppet Alpha’s long BP.
11:40AM
NH
Right
NH
quick market update
NH
and look at the currencies
NH
so
NH
the FTSE 100 up 12 points at 5,098
NH
Euro
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back above $1.20
NH
currently trading at $1.2063
NH
and cable is $1.4624
BE
(@Monkey – it’ll be about 6%ish. I’m using a rather unscientific “chuck £1k at each stock” formula.)
NH
OKAY
NH
before we look at some more stock specific stuff
NH
a couple bits of breaking news
NH
FSA annual report reveals £108,000 bonus for outgoing chief executive Hector Sants
NH
and
NH
RTRS-ITALY’S CABINET APPROVES DECREE GIVING MKT REGULATOR CONSOB OVERSIGHT ON RATING AGENCIES-MINISTER
11:43AM
NH
So stocks
NH
what’s moving?
BE
How about Home Retail?
NH
ah yes
NH
stock off sharply
NH
post results
Home Retail Group plc (HOME:LSE): Last: 227.50, down 10.5 (-4.41%), High: 230.00, Low: 224.80, Volume: 5.59m
NH
reason?
BE
Argos looks weak.
BE
Q1 numbers are a mixed bag overall.
NH
indeed
NH
looks like a weak LFL trend at Argos
NH
because of pricing pressures on TV’s
NH
ahead of the World Cup
NH
also video gaming weak
NH
which probably explains the fall in Game
Game Group PLC (GMG:LSE): Last: 85.30, down 4.75 (-5.27%), High: 89.20, Low: 84.95, Volume: 1.15m
BE
Electronics deflation. The scourge of big-box retailers.
BE
And that’s undermined what was, at the margin, a decent enough performance by Homebase.
BE
So the company’s looking at flat PBT
BE
Which isn’t, in truth, that different from the consensus
NH
any comment?
BE
Sure.
BE
Here’s Investec.
BE
Q1 trading performance was like the curate’s egg, good in parts, less
so in others. The net result is that Home is still targeting flat PBT for FY11E ie c
£293m, broadly where consensus lies at this stage. There is no change to
divisional gross margin guidance (down 50bps at both Argos and Homebase),
given the calendar phasing of FX hedging, which is progressively more
favourable over the rest of the year, and especially in H2. We leave our
sub-consensus PBT forecast unchanged at this stage, with Argos’ Christmas
performance crucial to the full year outturn. There is little visibility on consumer
sentiment for peak trading at this stage, so we retain our Hold, seeing longer-term
value, but no short-term catalyst, although the forecast yield of 6%+ offers good
underpinning. Below, we summarise gross margin and LFL sales, vs. our and
broader market expectations.
so in others. The net result is that Home is still targeting flat PBT for FY11E ie c
£293m, broadly where consensus lies at this stage. There is no change to
divisional gross margin guidance (down 50bps at both Argos and Homebase),
given the calendar phasing of FX hedging, which is progressively more
favourable over the rest of the year, and especially in H2. We leave our
sub-consensus PBT forecast unchanged at this stage, with Argos’ Christmas
performance crucial to the full year outturn. There is little visibility on consumer
sentiment for peak trading at this stage, so we retain our Hold, seeing longer-term
value, but no short-term catalyst, although the forecast yield of 6%+ offers good
underpinning. Below, we summarise gross margin and LFL sales, vs. our and
broader market expectations.
BE
Argos: Argos fared worse than feared with an 8% LFL decline and a 150bps
gross margin decline. Management attributes two thirds of the LFL decline to two
categories, televisions and video games. In contrast, Argos saw further growth in
white goods, toys and personal computers. The gross margin drivers were a
175bps adverse impact from FX, offset by a 25bps favourable mix effect. The
multi-channel model continues to gain traction with customers, with the internet
accounting for 32% of sales, up from 28% last year.
gross margin decline. Management attributes two thirds of the LFL decline to two
categories, televisions and video games. In contrast, Argos saw further growth in
white goods, toys and personal computers. The gross margin drivers were a
175bps adverse impact from FX, offset by a 25bps favourable mix effect. The
multi-channel model continues to gain traction with customers, with the internet
accounting for 32% of sales, up from 28% last year.
BE
Homebase: Homebase performed better than our (and market expectations) on
both the LFL and gross margin front, against a strong comparative last year.
Seasonal categories were broadly flat, as were big ticket sales. The 150bps
margin decline comprised an adverse 125bps FX decline and a 25bps adverse
impact from pricing/promotions. There was slightly revised guidance for the full
year space contribution, previously flat, to “marginally negative” for the year.
both the LFL and gross margin front, against a strong comparative last year.
Seasonal categories were broadly flat, as were big ticket sales. The 150bps
margin decline comprised an adverse 125bps FX decline and a 25bps adverse
impact from pricing/promotions. There was slightly revised guidance for the full
year space contribution, previously flat, to “marginally negative” for the year.
BE
Our view: Management has managed the better than expected volumes at
Homebase, relative to their planning basis, of a low single digit LFL decline,
without changing its cost position, therefore this will be beneficial to profitability.
This has not been the case at Argos, and management will re-visit its
volume-related operating costs. The full-year outturn will primarily depend on the
performance of Argos over the peak period, at a time when sentiment towards
consumer cyclical sectors is weakening. In the absence of more favourable
short-term catalysts, we retain our Hold and SoTP-based target price. We see the
6%+ forecast dividend yield as providing some underpinning for the shares,
although realising the longer-term value potential requires improved trading
metrics in our view.
Homebase, relative to their planning basis, of a low single digit LFL decline,
without changing its cost position, therefore this will be beneficial to profitability.
This has not been the case at Argos, and management will re-visit its
volume-related operating costs. The full-year outturn will primarily depend on the
performance of Argos over the peak period, at a time when sentiment towards
consumer cyclical sectors is weakening. In the absence of more favourable
short-term catalysts, we retain our Hold and SoTP-based target price. We see the
6%+ forecast dividend yield as providing some underpinning for the shares,
although realising the longer-term value potential requires improved trading
metrics in our view.
NH
thanks for that
NH
Now Strawbug asks an interesting question
NH
about DSGI
NH
which are up DSG:LSE
DSG International Plc (DSGI:LSE): Last: 25.39, up 0.57 (+2.30%), High: 26.00, Low: 24.00, Volume: 13.38m
NH
and that is apparently because
NH
they are winning the battle of the TV world cup war
NH
look at this sales rise
NH
LONDON (Dow Jones)–DSG International PLC (DSGI.LN) said Wednesday that the soccer World Cup is shaping up to be the best ever for the European electricals and computer retailer, with television sales last week up more than 140% year-on-year
NH
The retailer said the surge in television purchases has come in across the group’s Currys and PC World chains, as well as its Dixons online operation. This compares with around an 80% rise in sales in the same period four years ago ahead of the tournament in Germany, the group said.
NH
The company also said demand for light-emitting diode (LED) and high-definition television screens has been “exceptionally strong”.
In May, the group posted a 6% rise in same-store sales in the second-half. For the fiscal year it forecasts sales up 2% and pretax profit before exceptional items to be in line with market expectations of between GBP80 million and GBP90 million
In May, the group posted a 6% rise in same-store sales in the second-half. For the fiscal year it forecasts sales up 2% and pretax profit before exceptional items to be in line with market expectations of between GBP80 million and GBP90 million
BE
How much worth are year-on-year comparisons here? And what margin’s that at?
NH
well
NH
that’s a good point
NH
but brokers seem to be really taken by the 140%
NH
rise
NH
forget about the margins for now
BE
(Wibble: it took a week to remove the flea from our collective ear the last time we suggested that. Nevertheless, yes, the one in Kensington does look rather understocked.)
NH
has anyone comment on DSG
NH
and this TV surge?
BE
Hang on – will just check.
NH
I haven’t been tempted
NH
nor have I been tempted
NH
by getting a high def box
NH
so I can watch England struggle to the quarter finals
NH
in better clarity
BE
Likewise. Though I concede that those new Samsung no-glasses 3d screens are a lot better than the prototypes.
BE
Anyway, nothing worth repeating on DSGi.
BE
Or indeed on Game Group.
NH
Halfords results look OK though
BE
Hadn’t looked. People still need bikes I guess.
Halfords Group Plc (HFD:LSE): Last: 536.50, up 36.7 (+7.34%), High: 543.00, Low: 494.00, Volume: 616.66k
BE
Quick bit of comment on that one?
BE
Here’s Oriel.
BE
Strong prelims, very bullish outlook
Very strong prelims today from Halfords but even more interesting is the company’s
rhetoric on future growth: 15% EPS growth is the target and that means upgrades.
£117m was slightly ahead of our top of the range £116m, they did a bit better on GM than
I thought. Cash generation was extremely strong: they reduced debt by £20m despite
making a £73m acquisition
Very strong prelims today from Halfords but even more interesting is the company’s
rhetoric on future growth: 15% EPS growth is the target and that means upgrades.
£117m was slightly ahead of our top of the range £116m, they did a bit better on GM than
I thought. Cash generation was extremely strong: they reduced debt by £20m despite
making a £73m acquisition
BE
Looking ahead, there are many reasons to be cheerful. All parts of the business have
growth characteristics, and the acquisition of Nationwide has gone smoothly so far.
There are also plenty of cost saving opportunities, the news today coming on rent, where
management see material opportunities.
We were expecting 15% growth for next year but not in the medium term, which is now
the company goal. We are upgrading earnings and dividend today.
growth characteristics, and the acquisition of Nationwide has gone smoothly so far.
There are also plenty of cost saving opportunities, the news today coming on rent, where
management see material opportunities.
We were expecting 15% growth for next year but not in the medium term, which is now
the company goal. We are upgrading earnings and dividend today.
BE
This is one of our top picks in the sector. It is growing fast but is defensive, it has an
impressive yield and is on less than 10x PE. A steal.
impressive yield and is on less than 10x PE. A steal.
NH
thanks for that
11:53AM
NH
Right
NH
on Wednesday’s shambolic show
NH
lots of people were asking about housebuilders
NH
and why they have been so weak recently
Barratt Developments PLC (BDEV:LSE): Last: 95.85, down 0.65 (-0.67%), High: 97.40, Low: 93.70, Volume: 4.37m
Taylor Wimpey Plc (TW.:LSE): Last: 29.01, down 0.17 (-0.58%), High: 29.19, Low: 27.99, Volume: 5.40m
Persimmon PLC (PSN:LSE): Last: 359.00, down 5.2 (-1.43%), High: 361.20, Low: 355.90, Volume: 602.17k
NH
Now
NH
I don’t have an answer for that
NH
but
NH
remember Alaistair Stewart?
NH
Alastair Stewart
BE
The ITN Newsreader?
NH
not
NH
the former Dresdner housebuilding analysts
NH
mege, ultra bear
NH
BE
He went to the same school as me. The newsreader, not the Dresdner bear.
NH
he kept saying really nasty things about
NH
Taylor Wipeout
NH
and Barratt
NH
anyway
NH
he has changed his tune this days
NH
and is a bull
NH
BE
Really? REALLY?
NH
yep
NH
valuation call
NH
I suspect
NH
he remains a bear underneath
NH
We have upgraded our recommendations on Barratt and Persimmon from
Hold to Buy … meaning we are now Buyers of all leading housebuilders. This
is despite our deep-rooted and long-argued scepticism on the sector and our
short-term concerns about the market post-election. But they look just downright
cheap, especially after yesterday’s falls. Our recommendation is based
on long-term investors selectively taking advantage of short-term volatility
Hold to Buy … meaning we are now Buyers of all leading housebuilders. This
is despite our deep-rooted and long-argued scepticism on the sector and our
short-term concerns about the market post-election. But they look just downright
cheap, especially after yesterday’s falls. Our recommendation is based
on long-term investors selectively taking advantage of short-term volatility
NH
Stewart is now at Investec
NH
by the way
BE
Brave call.
NH
here’s some more
NH
Our changed recommendations reflect steep falls in the share price, with most
housebuilders’ stocks tumbling by 5-7% yesterday alone and the sector falling
17% in 3 months, 23% YTD and 29% since the recent peak on 26 April.
We have not changed our estimates or price targets. We base our view purely
on valuations – even based on our relatively conservative “inferred NAV”
approach, which attempts to adjust inventories for the current market value of
land rather than the much higher accounting treatment.
housebuilders’ stocks tumbling by 5-7% yesterday alone and the sector falling
17% in 3 months, 23% YTD and 29% since the recent peak on 26 April.
We have not changed our estimates or price targets. We base our view purely
on valuations – even based on our relatively conservative “inferred NAV”
approach, which attempts to adjust inventories for the current market value of
land rather than the much higher accounting treatment.
NH
Bellway, Redrow, Taylor Wimpey and Bovis are all now below our inferred NAVs,
while the others trade at narrow premiums (see table below). In our latest sector
note, Land of the brave, published 19 May, we argue for varying premiums.
In the note, issued prior to the UK General Election, we argued that there could
be mounting economic, political and operational challenges ahead.
Since then we have observed gathering evidence that there has been a
subsequent slowdown in site visitors ahead of the 22 June Emergency Budget,
which could be exacerbated by the World Cup – which coincided with a four
week hiatus in site visits during the tournament in 2006.
while the others trade at narrow premiums (see table below). In our latest sector
note, Land of the brave, published 19 May, we argue for varying premiums.
In the note, issued prior to the UK General Election, we argued that there could
be mounting economic, political and operational challenges ahead.
Since then we have observed gathering evidence that there has been a
subsequent slowdown in site visitors ahead of the 22 June Emergency Budget,
which could be exacerbated by the World Cup – which coincided with a four
week hiatus in site visits during the tournament in 2006.
NH
We suspect that the slower market could be referred to in Bellway’s IMS on 15
June and that consumers are reluctant to commit to buying ahead of the Budget.
However, we argued a strategy for investors with a 3-5 year time frame would
be to steadily accumulate positions at times of particular market weakness and
that, under this approach, “bad new could be good news”.
Yesterday was one of those days, in our view. We don’t doubt that there could
be more ahead … and that stocks could become even “cheaper”. The main risk
in our investment approach is a serious “double dip” in the housing market.
In the sector, we favour Redrow, Bellway and Berkeley based on management,
geography, product and track record.
June and that consumers are reluctant to commit to buying ahead of the Budget.
However, we argued a strategy for investors with a 3-5 year time frame would
be to steadily accumulate positions at times of particular market weakness and
that, under this approach, “bad new could be good news”.
Yesterday was one of those days, in our view. We don’t doubt that there could
be more ahead … and that stocks could become even “cheaper”. The main risk
in our investment approach is a serious “double dip” in the housing market.
In the sector, we favour Redrow, Bellway and Berkeley based on management,
geography, product and track record.
NH
there you go
BE
Just as a postscript to that
BE
Did you catch the news yesterday that Bovis and Barclays are going to be punting 90% LTV mortgages?
BE
NH
good grief
BE
The UK’s fourth largest lender is to offer competitive new loans worth up to 90 per cent of a property’s value, but only to those who are willing to purchase a Bovis new-build house or flat.
NH
have we learnt nothing
BE
Nope. We’ve learnt nothing. Buy your polystyrene house on 90% LTV
BE
Where the V in that is essentially fictional.
NH
I live in a polystyrene home
NH
not nive
BE
My sympathies.
12:00PM
NH
Right
NH
a bit of RAW
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH
bid rumours around in International Power again
International Power plc (IPR:LSE): Last: 295.00, up 2.7 (+0.92%), High: 295.60, Low: 289.40, Volume: 3.62m
NH
IPR LN ~ RUMOUTRAGE, GDF Suez ARE BACK !!!
- They always left their options open and did not rule out a bid, we are hearing that the calculators are back out and possibly….either way, the volume and price are telling the story..
NH
also told by brokers to look at this story in Handelsblatt
NH
- DEUTSCHE BANK being weighed by Handelsblatt report they may have to inject
money into it’s US subsidiary – Taunus
- LINK:
http://www.handelsblatt.com/unternehme1n/banken-versicherungen/taunus-us-behoerde-nimmt-deutsche-bank-ins-visier;2598025
money into it’s US subsidiary – Taunus
- LINK:
http://www.handelsblatt.com/unternehme1n/banken-versicherungen/taunus-us-behoerde-nimmt-deutsche-bank-ins-visier;2598025
NH
Joseph is a German speaker
NH
so he can look at that
BE
(BOE hold.)
NH
and going back to ARM
NH
Reuters now reporting the unofficial official denial
NH
if there is such a thing
NH
A spokeswoman for ARM said has not received an approach, and said a takeover from Apple would not make sense.
NH
perhaps when the stock was up 30%
NH
a statement might have been in order
NH
anyhow
12:02PM
BE
BOE BREAKING!!!!!!!!
BE
The Bank of England’s Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £200 billion.
The minutes of the meeting will be published at 9.30am on Wednesday 23 June.
BE
So, no surprises there.
BE
Here’s Howard Archer, always quickest on the “send” button
BE
As expected, the MPC kept interest rates down at 0.50% as still pretty muted and fragile economic recovery, a looming major tightening of fiscal policy and the threat to U.K. growth coming from the Eurozone’s woes outweighed the pressure for tighter monetary policy coming from consumer price inflation spiking up to 3.7% in April. Furthermore, the MPC was always unlikely to act before seeing what grizzly measures the emergency budget on 22 June has in store for the UK economy.
BE
The fact that consumer price inflation has frequently come in higher than expected in recent months and reached 3.7% in April has led to some questioning of whether the Bank of England can still credibly argue that it will fall back below the target level of 2.0% in 2011 and then be at that level on a two-year horizon. We believe that this is still a defensible position given the serious headwinds facing the UK economy and significant spare capacity, although inflation will be pushed up for a while if VAT is raised to from 17.5% to 20% – either at the 22 June emergency budget or sometime within the next year – as seems likely as part of the major fiscal consolidation measures that are on the way.
BE
We think it is more likely than not that the Bank of England will keep interest rates down at 0.50% into 2011. This reflects our suspicion that recovery will be bumpy and gradual overall during the coming months amid ongoing difficult conditions. However, we do acknowledge that there is a very real chance of at least a token interest rate hike before the end of the year if inflation continues to provide upside surprises over the coming months.
BE
We believe that whenever interest rates do start to rise, the increases are likely to be both gradual and limited due to the need to offset the extended, substantial tightening of fiscal policy that the economy must endure. Meanwhile, we expect the Bank of England to keep the stock of Quantitative Easing unchanged at £200 billion for the rest of 2010 and at least the first half of 2011 before starting to gradually reverse the process.
NH
thannk for that
BE
(@danrwl. Hypothetical answer: no.)
12:05PM
NH
Okay
NH
I have a bit of fantasy M&A for you
NH
via RBS
BE
Okay then. What’s their story?
NH
ITV
NH
buying Five
ITV Plc (ITV:LSE): Last: 54.45, up 1.7 (+3.22%), High: 54.55, Low: 52.75, Volume: 11.98m
BE
Old one, that.
NH
highly accretive to ITV’s earnings (we estimate 24%)
NH
While regulatory hurdles are meaningful, we don’t
see them as being insurmountable
see them as being insurmountable
NH
might be a good deal though
NH
here’s the note
NH
Strong June/July leads us to raise our ITV advertising forecast to +10%
Media buyers report that ITV.s advertising in both June and July is likely to be up 30%, with a slowdown thereafter (early readings for August suggest up 5%). With ITV.s advertising revenue
up 8% in 1Q, and 2Q looking to be up 26%, we raise our FY advertising forecast from 8% to 10%. Our FY EPS forecast rises by 13% and is 13% ahead of Bloomberg consensus.
Media buyers report that ITV.s advertising in both June and July is likely to be up 30%, with a slowdown thereafter (early readings for August suggest up 5%). With ITV.s advertising revenue
up 8% in 1Q, and 2Q looking to be up 26%, we raise our FY advertising forecast from 8% to 10%. Our FY EPS forecast rises by 13% and is 13% ahead of Bloomberg consensus.
NH
An ITV/Five combination would be highly accretive to earnings, in our view
RTL has indicated that it is exploring a disposal of Five. We regard ITV as the natural buyer:
RTL has indicated that it is exploring a disposal of Five. We regard ITV as the natural buyer:
Channel 4 is prevented from owning Five by the Broadcasting Act (and a public sector solution is far from perfect); BSkyB could bid but an FTA acquisition would be inconsistent with Sky.s strategy; and a newcomer to the market would have no operational synergies. We estimate ITV could deliver £70m in cost synergies and £45m in revenue synergies (the latter achieved by reducing Five.s pricing discount to ITV1 from 40% to 20%). We estimate 24% potential EPS accretion if a deal were to occur (assuming the aforementioned synergies and a £250m acquisition financed by issuing ITV shares to RTL).
NH
Regulatory hurdles are meaningful but not insurmountable
A combination of ITV and Five would see ITV family audience share rise to 30% (from 24%), commercial audience share rise to 45% (from 36%), and share of TV advertising rise to 52% (from 43%). The latter is high but still below the level at which CRR was introduced in 2003, although arguably the market definition should be broadened given the rapid growth of internet advertising: 27% in 2010 vs 3% in 2003.
An opportunity to test the new government
A combination of ITV and Five would see ITV family audience share rise to 30% (from 24%), commercial audience share rise to 45% (from 36%), and share of TV advertising rise to 52% (from 43%). The latter is high but still below the level at which CRR was introduced in 2003, although arguably the market definition should be broadened given the rapid growth of internet advertising: 27% in 2010 vs 3% in 2003.
An opportunity to test the new government
The Conservatives were strongly in favour of deregulating ITV when in opposition, so while a Competition Commission enquiry will likely still be needed, we think ITVs chances of acquiring Five are better than most assume.
BE
Sunday Times called this a “shock” in April when they spun the story.
NH
Small cap corner?
BE
Certainly.
NH
Sterling Energy
NH
had a big move this morning
Sterling Energy PLC (SEY:LSE): Last: 139.00, up 24.5 (+21.40%), High: 169.25, Low: 115.75, Volume: 4.02m
NH
and then a drilling update popped up
NH
Now
NH
this is my favoured Kurdish oil play
BE
Ha.
NH
CEO has vast expereience in the industry
NH
and there is a very savvy Russian shareholder with 29%
NH
this was the team behind
NH
that Syrian company that was acquired a while back
NH
what was it called
BE
This is the Mikhail Krupeev connection you’re talking about.
NH
Emeraldn Energy
NH
that was the one
BE
That’s the one. 
NH
anyway
NH
those looking for a Kurdish play
NH
could do worse
NH
than look at Sterling
NH
here’s some comment on today’s find
NH
from a new sector watcher
NH
Sterling Energy has encountered hydrocarbons whist drilling the top of the main reservoir – the Shiranish in the Sangaw North well in Kurdistan. Sterling has a 53% interest in the well (which would fall to 40% assuming government back-in).
The well is being funded on a dry hole basis through the Addax farm in .
The well is being funded on a dry hole basis through the Addax farm in .
NH
Prior to logging and testing it is too soon to definitively say what hydrocarbon type is present but we understand that higher hydrocarbons are present in the gas detected in the mud – which indicates at least wet gas/condensate, and fluorescence in the drill cutting suggests a liquid phase. We also understand that gas flared at surface burned with an orange flame which also suggests a liquid phase.
The plan is to drill to TD – with the 180 day schedule still pretty much on track would take us to mid August, to be followed by testing.
We have no reason to change our pre-drill estimates (sept 09) for the well which gives 274p/share unrisked potential for the Shiranish and over 450p/share for all horizons
The plan is to drill to TD – with the 180 day schedule still pretty much on track would take us to mid August, to be followed by testing.
We have no reason to change our pre-drill estimates (sept 09) for the well which gives 274p/share unrisked potential for the Shiranish and over 450p/share for all horizons
NH
interesting that
NH
and the CEO now
NH
is Alasitair Beardstall
NH
who has been around for a while
BE
It is. And Waterford’s presence on the list makes it very interesting.
NH
indeed
NH
a large shareholder in a Kurdish oil play
NH
we actually know something about
BE
I’ve no idea what you’re referring to.
BE
NH
moving on
NH
this ECB rumour
NH
just been mailed the following
NH
Vague spec about on a 50bp cut at the ECB. cons is for unchanged. … ECB is at 1% currently.
NH
market responding a touch
NH
FTSE 100 now up 19.5 points at 5,105
NH
BP coming off again
NH
down 17.55p at 374p
NH
come on Puffett
NH
more firepower
NH
keep buying
NH
we’ve got these now
12:14PM
NH
Right Bryce
NH
anything else to look at?
BE
Um …..
BE
Not much.
BE
Miners-wise, Chile put in place its emergency earthquake tax last night.
BE
Although that’s having not much of an impact.
Antofagasta PLC (ANTO:LSE): Last: 857.50, up 3.5 (+0.41%), High: 866.00, Low: 842.00, Volume: 709.68k
BE
And, in the smaller end of things, there’s a desperate push of the 888 bid rumour again this morning.
NH
(The Word – yep. Heard that)
BE
Though they’re down, so make your own conclusions there.
NH
I have one thing to finish up on
NH
some comment
NH
on today’s results and update
NH
from Frank Timis’s new iron ore play
NH
in Sierra Leone
NH
Tonkolili
BE
Ah. Aim’s biggest company, there or thereabouts.
BE
African Minerals.
NH
yep
NH
Canaccord follow this quite closely
NH
and here is their thoughts
NH
African Minerals (AMI : BUY : TP 490p: MV £970 million)
Getting serious about near term value –
Getting serious about near term value –
NH
Recent metallurgical test work has shown that the duricrust at Tonkolili (the hematite-rich at-surface expression of the primary magnetite hematite) lends itself to a desirable blast furnace feed after limited crushing and screening. We understand the average grade of this material is around 58% Fe. In our previous note we had expected more of the iron to report to the lump fraction than the fines fraction and that more of the deleterious elements, largely alumina, would report to the fines.
• Extensive testing have shown that while this surface material will generate up to 70% by weight of the 30mm x 6mm lump fraction from simple crushing and screening, the iron content of the lump fraction is not enhanced significantly by the process – only slightly more of the alumina reported to the fines fraction. A high grade +64% Fe lump product can be generated from this surface material but only after 30% recovery by weight.
• Extensive testing have shown that while this surface material will generate up to 70% by weight of the 30mm x 6mm lump fraction from simple crushing and screening, the iron content of the lump fraction is not enhanced significantly by the process – only slightly more of the alumina reported to the fines fraction. A high grade +64% Fe lump product can be generated from this surface material but only after 30% recovery by weight.
NH
The loss of iron units implied in this low recovery by weight suggests that the economics of the DSO product would favour sale of significantly more iron units in a lower grade product despite a lower price per tonne after penalties for the alumina content.
NH
• Further tests on the lump fraction have shown that the high porosity of the product leads to high reducibility in the blast furnace – a characteristic that will help offset the lower grade.
• The company has now embarked on an aggressive exploration programme to prove up additional hematite mineralisation that would underpin an expansion of Phase 1 of the project from 8Mtpa to 25Mtpa with the additional 17Mtpa coming from a hematite concentrate extracted from the ~60 metre thick Saprolitic zone which lies below the duricrust at surface.
• The company has now embarked on an aggressive exploration programme to prove up additional hematite mineralisation that would underpin an expansion of Phase 1 of the project from 8Mtpa to 25Mtpa with the additional 17Mtpa coming from a hematite concentrate extracted from the ~60 metre thick Saprolitic zone which lies below the duricrust at surface.
NH
The proposal to expand DSO production to 25Mtpa however, is subject to an engineering study into process engineering, an extension of the rail link out to the mine site to replace the road transport proposed for the 8Mtpa project and construction of a much larger port at Tagrin Point.
NH
We estimate the hematite DSO project could deliver product for close to US$30/t FOB of which transport costs will be an estimated US$10-12/t. At current prices we estimate a blended price for this material of between US$70-80/t after penalties for alumina. This suggest a very healthy margin of at least US$40/t for say 8Mtpa DSO project or say US$300-350 million per annum form a project that will probably cost less than US$300 million to get started – Mine, crusher and power for ~US$80 million, Road from Tonkolili to Marampa and refurbished rail to port ~US$75 million, upgraded port with ship loader and stacker ~US$90 million and say US$50 million of working capital.
NH
shares trading a touch lower
NH
down 2.5p at 394p
NH
(The Word – have you got the Rogers comment pls?)
12:20PM
NH
Okay
NH
Bryce has disappeared to the Bloomie machine
NH
and I have a lunch
NH
so we should end things here for today
NH
thanks for logging in
NH
today’s session went much more smoothly
BE
Yup. Thanks all.
BE
Bye.
NH
cya
NH
Tuna – red card. Off
BE
(And Chopper: First Quantum’s on the main list.)
NH
(Shall we send Chopper off too?)
BE
(Yes. Red card in the tunnel.)
BE
(So to speak.)