FT Alphaville » Markets Live transcript 23 Jun 2010

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Markets Live transcript 23 Jun 2010

Posted by Neil Hume on Jun 23 11:03.

Markets Live chat transcript for the chat ending at 11:05 on 23 Jun 2010. Participants in this chat were: Paul Murphy Neil Hume, FT

Hi there

Old guard taken over

hang on

Neil doesnt know

right

good morning

and welcome to Markets Live

FT Alphaville’s daily markets chat

change of line up today

Heskey is on the bench

and we have moved to a more flexible 4-5-1 formation

with one Paul Murphy spearheading the attack

Morning everyone

I’m back to NY tomorrow

So thought i d get on while have a chance

Not a fun place to be – England over the coming years

Britain

why do you say that?

the readers didn’t think Gideon went far enough yesterday

25% slashed from governemtn departments

is not enough apparently

the BOTER

want more slashing

more pain

more cuts

BOTER?

Bigots on the extreme right

according to one Prof on the radio today

25% cut to the Home office

will result in 60,000 job losses

anyway

let’s hope it is doesn’t derail the recovery

okay — readers dont like being called bigots Neil Emoticon

and I guess

the extreme right

might be a bit extreme

Osborne was pretty tough tho, no?

very tough

I don’t think people have grasped what it means

I was talking to a person familiar with treasury stuff last night

hee was saying that when the new gov came in the treasury team gave them a whole range of scnearios

in terms of fiscal rebalancing etc

an on a range of 1-10

Osborne went for the full ten in terms of cuts

Interesting

how much of this is jackboot poli9cy

The Enforcer

kitchen sink the state

(Dre – it’s £40bn more)

or how much was the markets actually cornerning the politicians

Forcing cuts

well

the gilt market has been rock steady in the run to and post election

so you can’t really argue the market was telling us to do it

although

i guess

at the back of 2009 gilts did sell off

and the market was telling us something

personally

I think its more ideological

hmm

So you dont buy this Greece angle

nope

Liddems get out clause

since Greece blew up

the UK gilt market

has benefited from a flight to quality

I guess you could argue

gonna be grim here tho.

it is a flight to the least worse thing

really grim

but

mass unemployment

stagflation

best you can hope for is that sterling recovers a bit and London has a few less tourists

One thing you really notice is how jammed London is

cant move around

its too full

actually

let’s have a quick look at cable

higher

much higher

$1.4915

whoa

that is a move

it is

sterling likes the Enforcer

as for a euro thingy

that buys 0.8239p

Actually, puts europe on the spot doesnt it

in terms of fiscal tightening

should be an interesting G20 this weekend

in Toronto

and it leaves the US

in the odd position of pushing for stimulus

keeping the liquidity tap on

and not cutting spending

hmm

11:15AM

Is this the moment we go to the wider market?

it is

im so so out of practice

the fabulous FTSE 100

is down

17 points at 5,230

off its lows

not much happening to be honest

absentism rife this morning

all trains running into London late

because people are taking the day off to watch the footie

Good practice for striking

actually there is a rather more complicated explanation for the slowdown in trading activity

a quarter is upon us

and there is all sorts of book squaring

I stumbled on a good explation from RBS on this

want to see it?

yes please

I swung by the funding desk this afternoon to take the pulse of quarter end conditions. Balance sheets are clearly being tightened all across the Street. Indeed, my colleagues noted that since the Lehman disaster, a growing number of banks are doing monthly rather than semi-annual or annual balance sheet shrinkage exercises. Some banks are actually running balance sheets on monthly averages to smooth the kinks further (and constrain balance sheets on the upside). The point is, bank balance sheets have probably never been under more scrutiny and uncertainty– a negative for future growth as banks sit on cash, eschew lending and worry about capital adequacy. As a reminder of what balance sheet use means to growth, I have attached Adrian and Shin’s oft-revised piece on balance sheets, liquidity and the monetary policy transmission for your consideration. Anyway, the desk noted today that the July T-Bills were bid at 0.00% and the over the turn Treasury collateral market is 0.03%/0.04%. So quarter end is in full swing and we all know that quarter end is typically a time when risk-less (and now yield-less!) Treasuries shine

hthat s interesting

yep

get rid of the risky stuff

and just be T-Bills

even if they yield nothing

and then sit back and do nothing

probably a bit of repo 109 happening to

Perfect

just to make things look even better

So the financial sector is in strike mode also

yep

strikes everywhere

11:21AM

So lets get some market specifics

Sector in the spotlight?

banks

after the bank friendly budget

Lloyds up again

RBS making progress too

Lloyds Banking Group plc (LLOY:LSE): Last: 61.76, up 2.76 (+4.68%), High: 61.76, Low: 58.00, Volume: 109.93m

Royal Bank of Scotland Group PLC (RBS:LSE): Last: 48.20, up 1.12 (+2.38%), High: 48.20, Low: 46.09, Volume: 39.68m

as for the rest

Barclays PLC (BARC:LSE): Last: 309.70, down 1.05 (-0.34%), High: 311.25, Low: 303.25, Volume: 12.34m

Standard Chartered PLC (STAN:LSE): Last: 1,782, down 3 (-0.17%), High: 1,782, Low: 1,753, Volume: 1.10m

is this simply down to the bank levy being smaller than expected?

Or the netting out effect of the corporate tax cuts

or what?

both

the levy was less than expected

and lots of the tax

will come back through the 4% recduction in corporation tax

and that’s before

the banks massage their balance sheets to ensure

they don’t pay that much of the levy

all told

they got off very lightly

Vince ‘The Poodle’ Cable

can’t be very happy

(Is Monkey still french?)

hang on

here’s an explanation on the bank levy

and why it was greeted so positively

it is from Bruce Packard at Seymour Pierce

UK banks recovered in the early afternoon following the Chancellor George Osborne’s bank levy announcement. At £2bn per annum, the levy was less than expected, and will be introduced in Jan 2011, and apply to the balance sheets of UK banks, building societies and foreign banks

Assuming UK listed banks pay 75% of the £2bn the tax is supposed to raise, this would represent less than 1.5% of revenue for UK banks. Although £1.5-£2bn a year is a significant impact on the sector, importantly the tax was not as high as some numbers quoted by commentators. Since the tax is on short term non deposit funding, we believe LLOY (SELL TP 41p) which had £326bn of total wholesale funding (Dec 09) would be the most affected, hence the 5% intraday jump in the share price. Of LLOY wholesale funding 50% was less than 12 months at the year end, which will attract higher level of tax. Ironically this £162bn of short term wholesale funding, is almost exactly the same amount as Lloyds receives in support from Governmental and Central Bank (£157 billion, Dec 09), so the taxable base may end up being very similar to the level of support the banks have received.

Next news: G20 meet in Toronto 26-27 June, we will see if other countries follow suit with similar taxes.

and I have something from UBS

on how the banks

might, ahem,

minimise their levy payments

tut tut

do share

if you have it

The bank levy of 4bp in 2011 rising to 7bp thereafter was the focus of market
attention in the aftermath of Chancellor Osborne’s budget earlier today. However,
there were two other significant issues for institutions operating in the UK. As well
as the levy, lower corporation tax will provide a boost to earnings. UK Leasing
operations will also suffer from lower future income flows from these businesses.

Worst case impact of up to 10% of 2012 earnings
If we assume the UK charge is applied across the full balance sheet, the impact
could be up to 8% of normalised earnings. However, we expect balance sheet
management, group restructuring and deleveraging to reduce the net impact of this.

actually

they don’t really go into detail

but you get the point

hmm

11:27AM

How about something fresh

something non-budgety

what you got?

well

after the Save Sky Campagin

I thought

it was time we launched another

So who are we saving now?

retail punters from themselves

go on

Ocado customers to be precise

Ocado — door-step groceries for the middle class

Why do people use ocardo

You just get to pay more for groceries

I have no idea

and to me

Suppose it doesnt arrive in tesco bags — one plus

expansion beyond north london looks limited

anyway

I think we need to have a look at some of rumoured

valuations

they are nuts

So just to recap for us non-brits

Ocado is floating when ?

very soon

£1bn the rumoured market cap

back back story — this was an online business formed by a couple of Goldman people who did a deal with John Lewis to distribute Waitrose stuff

Started in the dot come boom

Some how survived

And had prosopered — over a decade old i think?

so at the EBIT level is makes no profit

at the EBITDA level it made £9m

on sales of £400m in 2009

9m?

at ebitda on 400m of sales?

and that comes after a decade of fund raisings

Not much of a business after ten years of building

Any mroe figs?

yes

I have a good note

from Clive Black at Shore Capital

he has looked at some numbers

and come up with some questions for management

here’s a flavour

Ocado should not, to our minds, have a stock rating that is structurally detached
from its bricks & mortar peers (remember peers that all bar Morrison trade in
Ocado’s space). That implies to us the need for c£100m EBITDA within a
reasonable period of time from Ocado for the stock to trade at 10x EV/EBITDA
multiple (if it has an enterprise value of £1bn), a rating that is 25-30% higher than
the world’s most profitable current on-line grocery retailer (Tesco). Given EBITDA
of £9m in 2009, rapid margin expansion is necessary. A market capitalisation of
£900m, as suggested by the financial and retail press, has no bearing whatsoever
to a sensible earnings multiple in reality (after depreciation, financing costs and any
taxation) given ongoing losses/micro-profits.

We await the documentation accompanying the flotation, but we feel that ahead of
meeting management the following question is considered by prospective
investors; is Ocado a good business that can make substantial and sustainable
profit or a good service for affluent households

we must get a copy of the prospectus

here are some of the questions people might wish to ask

the scope for Ocado to build and sustain material margins; a case can be
constructed for such high margins considerably down the line with
operational gearing, especially if distribution charging becomes a
mainstream feature of the proposition – remember Sainsbury’s (SBRY^,
Hold at 332p) CEO Justin King suggests it costs c£20 to fulfil each ecommerce
order. For Sainsbury on-line is arguably a service that helps
retain custom. However, for Ocado double-digit EBIT margins seem
someway off.

close to a billion?

the Waitrose relationship, which has recently been extended another 10
years. Now, Waitrose is a marvellous retailer to the better off British but is
a supply relationship a dependency (i.e. risk and so a discount factor) or a
surety (i.e. virtue and so a premium factor). Is Ocado not largely another
organisation’s distributor? On this issue we cannot help feeling that the
dependency on a retailer brand outside one’s control for the bulk of
products is more on the risk than reward side; even taking into account
how good Waitrose is as a brand and retailer.

its only jsut a nd so washing its face

the earnings multiples for the next five years – this is important so that the
business model is seen for what it is, rather than a skewed dotcomesque
view of the world, devoid of post-tax profits but full of clicks and exceptional
lines – note: in hi-tech and so IT system based Ocado maintenance capital
can be expected to be material (so EBITDA may not be the key line with
depreciation or ‘D’ a real cost; EBITA or NOPAT may be more important)

the differences (and cost) between ambient (non-perishable e-commerce)
and multi-temperature (perishable) businesses. The Amazon analogy
breaks down very quickly to our minds; like at the point a 38-tonne chilled
vehicle turns up at the distribution centre to offload goods (it is much more
costly for Ocado handling these lines)

I can’t believe this will get away

I mean

some decent companies have been turned away

like Merlin

which owns all the big amusment parks in the UK

and yet

this thing wants to raise £1bn in a float

So why the pressure to float

Someone want their money back?

john Lewis?

The GS guys?

yeah, the JS pension scheme

Shrewdies in the JS pension scheme

A market capitalisation at about the £1bn mark would see the stake held by the company’s three founders – Jonathan Faiman, Tim Steiner and Jason Gissing – worth about £160m.

The biggest beneficiary of any listing of Ocado would be the pension fund of the John Lewis Partnership, which owns about 26.5 per cent of Ocado and which would stand to make about £270m at the proposed valuation.

Ocado has already appointed JPMorgan Cazenove, UBS and Goldman Sachs to advise it on the listing.

good luck to them

http://www.ft.com/cms/s/0/8f0f67e8-7aec-11df-8935-00144feabdc0.html

ah, three founders

apols

I think this stock

is a dead cert for Muppet Alpha 1

if it ever comes to market

Straight in

wouldnt touch the sides

shall we move on

sure

11:38AM

Anyway

forget about Ocado

I have bet IPO bet

Battersea Power Station

Bricks and mortar

shame most of the bricks are separated from the mortar

Not realy floating is it

yep

it’s bankers have forced it

the back story here

is one that involves fat bloke finance

back in 2006 a couple of Irish property guys

bought the site for £400m

40 times what the previous owner paid

and they were backed by

HBOS

and Bank of Ireland

anyway

banking covenants have been breached

and the lenders

now Lloyds and NAMA

have said

you float the business and find and outside investor

according to the books

site now worth £388m

What’s the latest plance for the stie?

could turn it into a bankers’ prizon

here you go

http://www.battersea-powerstation.com/#/home

prison as well

The guiding principle of the revised Masterplan is to create three major
avenues towards the Power Station, with each having different characteristics
and degrees of animation. Rafael Viñoly has defined the character areas
to reflect these conditions.

These included:
• Open Space • Arts Centre
• Public Toilet • Post Office
• Museum • Library
• Gym • Health Centre
• Youth Centre • Pharmacy
• Dentist • Community Hall
• Crèche • Internet / Wi-Fi Zone

well that’s not going to happen this decade

like it hasnt happened in the past four decades]

or so

very true

anyway

the company that owns the Station

Real Estate Opportunities

has fallen like a stone this morning

down 38 per cent at 10.1p

(new boy — carry on reading and you will catch on, maybe. all welcome)

(Baz – Polly on finance was always a site to behold. I used to be thought of as spokesman for the military industrial complex while at the Guardian)

sight

still havent learnt to tipe

11:45AM

Dinker you are right — we should do a fresh ML lexicon thingy

Stacy was putting one together

agreed

and we need a few more auto responses

and a vuvuzela icon

will have to get to work on that

11:46AM

How’s BP?

type for knife watch

well

the knife

has stopped falling today

moved a little bit higher

BP Plc (BP.:LSE): Last: 337.70, up 3.5 (+1.05%), High: 340.80, Low: 332.30, Volume: 14.06m

not really sure why

but then

I didn’t really understand why it was down yesterday

I haven’t seen anything fresh

Funny post by Izy on that portrait award

fabulous piece of art. just a shame abot the subject matter

http://ftalphaville.ft.com/blog/2010/06/23/269016/portrait-of-an-oil-company-in-distress/

Beyond P(R)

everything they touch goes wrong at the moment

(Sorry for comment being rejected on the right. I was over hasty… but cant reinstate immediately)

As AA notes

a judge did lift the drilling moritorium yesterday

by Obama is going to appeal that

so I am not sure

it really makes that much difference

11:50AM

what else is moving?

CFA boy wanted to know about the Unilever note

Unilever PLC (ULVR:LSE): Last: 1,875, down 26 (-1.37%), High: 1,902, Low: 1,871, Volume: 794.26k

and we have a copy of that

upgraded from underperform

here the note

We are raising our rating on Unilever to Neutral (from Underperform), and our price target to Eu24.50 (£20.35 on PLC) from Eu21.0.

Investment Case: A cynic might view the renaissance at Unilever as no more than a good dose of pricing and marketing that will lose steam as soon as the foot is taken off the pedal. History certainly supports this view.

But this would be to dismiss the changes at Unilever out of hand. The group is leaner, fitter, better structured and more set up for growth than ever before. Ultimately long term revenue growth is driven by innovation and new products, and historically Unilever has been very weak in this area.

Unilever’s changes are beginning to be noticed by the competition. Our survey of 56 of the group’s international competitors shows they consider Unilever a more effective competitor than 18 months ago (when we last surveyed them) and expect them to get tougher still. The retailers too (we surveyed 44) see Unilever as sharpening up its act.

Valuation: The shares have moved sideways this year yet earnings numbers have gone up sharply as the Euro weakens against virtually all currencies (we think FX will now add 10% to sales this year). As a result the group sits on a pretty modest 14.1x 2011E earnings – versus its long term trading range of 13-19x forward earnings.

With market jitters as they are Unilever offers quality growth, emerging markets, a CDS spread not dissimilar to many governments, FCF yields above government bond yields, and a limited amount in the price we suggest for the “turnaround story”. It may not be our favourite food company (we are overweight the food sector), but the shares look reasonable value at these levels.

11:51AM

We could also talk about the world’s next super major IOC

Paul are you there?

hello

oh well

will push on

Gulf Keystone’s move to super major status

has been delayed a while

Sirrt about that

sorry as well

Oh no!

But why?

The Bijeel-1 exploration well has encountered more than 400 meters of potential hydrocarbon bearing interval between 3646m and TD at 4383m. Kalegran evaluated and tested the top 30 meters of the zone at rates up to 3200 bopd, as reported on March 9, 2010, however mechanical problems were encountered when testing and evaluating the remaining 370 meters. This has necessitated a sidetrack and re-drill of the lower portion of the well to fully evaluate and test the remaining intervals, which is expected to take up to eight weeks to complete.

Consequently, drilling of the Shaikan-2 appraisal/exploration well, which is to use the Weatherford 842 rig currently on location at the Bijeel-1 well, will be delayed. The Shaikan-2 well is now expected to spud during the third quarter of 2010.

but don’t worry because Todd is still a very confident oil executive

“While the sidetrack of Bijeel-1 delays our drilling of the Shaikan-2 appraisal well, we are delighted by the first successful test of 3200 bopd and we look forward to the test results from the additional prospective intervals. The implications of the water pressure data from Bijeel-1 provides further support for movement toward the upside volume range for the Shaikan structure.”

Shucks

Only eight weeks tho

and just in case you forgot

the p10 resource range for Shaikan

wait for it

7.4bn barrels of oil

bit on the low side, surely

shares have rallied on the news

as they should

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 74.75, up 1.25 (+1.70%), High: 75.00, Low: 69.00, Volume: 2.70m

here’s a positive take

The delay in the drilling of Shaikan 2 could be a blessing in disguise as the political move on slowly but surely. I am prepared to be patient – I much prefer the idea of ‘one step at a time’ to ‘one step forward, two steps back’.”

random quote

gawd

BraveLion was equally optimistic about the future: “It is great news. One day, the Iraqi government will be formed, the contracts issue dealt with and during that time Gulf Keystone would be able to prove how much oil there actually is in Shaikan.”

any more

they make me laugh

cant make this stuff up fast enough

At least the delay shows they are a reall mining company

exploration company

oh yeah

and so to be production company

11:57AM

Student

on Cape the bidder was private equity

3i we believe

and management wanted way more than they were prepared to offer

as for

Chloride

it has all gone very, very quiet

Chloride Group PLC (CHLD:LSE): Last: 347.00, down 1 (-0.29%), High: 348.10, Low: 345.80, Volume: 32.53k

Cape PLC (CIU:LSE): Last: 225.00, up 7 (+3.21%), High: 231.75, Low: 215.00, Volume: 492.09k

on cape

we also hear management are about to be roadshowed in the US

and turning to 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.

yep

Dana is being rehased again

Dana Petroleum PLC (DNX:LSE): Last: 1,221, up 27 (+2.26%), High: 1,229, Low: 1,177, Volume: 224.71k

lots of nosey buying today

I am told

and the same goes for Northumbrian Water

Northumbrian Water Group PLC (NWG:LSE): Last: 306.00, up 6 (+2.00%), High: 307.40, Low: 299.30, Volume: 489.15k

where the muted bidder is now supposed to be a sovereign wealth fund from the middle east

and to complete the hatrick

Sainsbury

rumours the QIA want to do something with their holding

before sterling rallies

J Sainsbury PLC (SBRY:LSE): Last: 331.80, up 1.1 (+0.33%), High: 331.90, Low: 327.40, Volume: 2.18m

that’s all the gossip I have picked up this morning

(CFA – August I believe)

12:00PM

What else is there

we have had results from Kesa

and they look to have gone down well

Kesa Electricals plc (KESA:LSE): Last: 121.00, up 3.6 (+3.07%), High: 125.00, Low: 118.40, Volume: 4.94m

just going to check if they have had a world cup impact

this is from Investec

Kesa’s preliminary results were ahead of our and market expectations,
delivering adjusted PBT of £81.9m, against pre-close guidance of £76m. With
strong net cash flow, the company has delivered an increased final dividend,
making 5.9p for the full year (+18%). While there is scant further detail on
strategic plans and management believes the year ahead will be challenging,
the results should be viewed positively for the shares.

Summary: Other than the beat against guidance, there were no undue surprises
in Kesa’s preliminary results, with the group delivering adjusted PBT of £81.9m,
up 18% from FY09′s £68.5m figure. The full-year dividend was surprisingly
increased to 5.9p and year-end net cash improved from £7.5m to £79.3m. It
appears that there will be no major new strategic roadmap, with the company
merely measuring progress against the key areas it had highlighted before. While
this may disappoint some investors, and indeed us, we believe the shares will
respond positively to these results. There is no current trading update, with the
company stating merely that the year had started in line with expectation, and that
it expected conditions in the year ahead to remain challenging. We would expect
FY11E consensus PBT of £95m to increase on the back of the FY10 forecast
beat

The way ahead: There are no new major strategic revelations or a more detailed
roadmap within the results announcement, which we view as disappointing. There
will be an update against the key areas of focus already outlined by the company.
These include increasing internet penetration, with all divisions making good
progress on this front in FY10.

Reporting changes: The company is also to change its reporting currency from
sterling to euros. Given the weighting of revenues (c. two thirds) and profits (over
90%) generated in euros, this seems a sensible decision. In future, dividends will
be offered in either euros or sterling. The interim results will be the first to be
presented in euros with pro forma historical figures provided with the Q1 IMS
statement

Outlook/our view: The low valuation metrics, relative to both consensus
forecasts and the group’s property backing, clearly suggest that investors are
discounting downside risk rather than upside potential. It remains too early to say
whether the strategic update will improve investor confidence, and management’s
performance in today’s presentation will play an important role with regard to
market sentiment.

Thanks for that Neil

You know ive got to go

12 noon meeting internal

And i promised i wouldnt be late

which i now

as every

Thanks for letting me on here again

regards to the ROTR

bye

12:04PM

Right

that’s if for today

sorry for the rush today

I have a lunch

then it’s back to the newsroom for the match

thanks for logging on today

cya

bye

This entry was posted by Neil Hume on Wednesday, June 23rd, 2010 at 11:03 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 23 Jun 2010

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