Markets Live chat transcript for the chat ending at 11:05 on 3 Aug 2010. Participants in this chat were: Bryce Elder Tony Tassell
BE
Good morning
BE
And welcome
TT
good morning folks
BE
To Markets Live, FT Alphaville’s live stock market.
TT
i am still standing for the vacationing Neil Hume
TT
actually Neil does not really take much of a holiday
TT
the blackberry still seems pretty active
BE
Indeed. And we’re early this morning.
TT
how are going this morning Bryce in the market
BE
Well, we’re drifting down ….
BE
However, want another break with tradition and begin with 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.
TT
sure go ahead…always good to start with raw
BE
Right. This one comes with major health warnings.
BE
Totally untested information.
TT
so might not be true
BE
Indeed. But ….
BE
There’s some rumourtrage around Borders & Southern this morning.
BE
Which seems to be moving the price quite a bit.
BE
Up 4.25p at 77.5p at the moment.
BE
Now, the theory is there might be bid interest in this
BE
Price of 125p-150p mentioned, which seems rather extreme.
TT
what is Borders and Southern…when i google it, the palestine comes up
BE
Close. Falklands explorer.
BE
Borders & Southern is building a portfolio of international oil and gas projects. The Company plans to focus on frontier or emerging hydrocarbon systems, seeking to identify high value prospects within its licensed acreage. We aim to apply industry leading edge technology along with diligent petroleum systems analysis to mitigate the technical risks. The Company’s first project is in an untested basin located to the south of the Falkland Islands.
BE
Basically, it has a very high impact exploration programme in the South Falkland Basin ready to go in 2011.
TT
i think Alphaville should appoint a Falklands correspondent, spend their time drinking in the pub, picking up random small cap gossip
BE
Yup. Swapping raw with the penguins.
BE
Anyway, as noted on the right, there are many reasons to doubt this theory.
TT
probably some hedge funds already have their people there already
BE
True.
TT
so what are the reasons
BE
Well, no drilling yet. No rig secured.
BE
Etc. etc. etc.
BE
This is another black-or-red punt on the Falklands.
BE
However, it’s moving the stock and that’s what we’re here to report.
BE
Caveat emptor, as ever.
11:09AM
TT
so the broader market is looking pretty flat again after yesterday’s gains
BE
Indeed.
BE
FTSE down 7 points at 5360 as I type.
BE
Been as low as 5354 earlier.
BE
HSBC’s the main drag after yesterday’s big jump.
HSBC Holdings PLC (HSBA:LSE): Last: 666.10, down 13.9 (-2.04%), High: 672.30, Low: 663.00, Volume: 15.91m
TT
been quite a bit of action around the banks this morning…
BE
So if we’re needing a reason HSBC are pulling back a bit …
BE
RBS pops up to provide one
BE
Cut SmugBank off its buy list this morning
BE
Here’s the gist of the note
BE
HSBC’s 1H10 performance was stronger than we forecast due to an accelerated
fall in impairments and a recovery in unrealised investment portfolio losses. We
expect pre-impairment profit growth and margins to struggle until US short-term
rates rise, and likewise our P/TCE from 1.8x FY10F. Downgrade to Hold.
fall in impairments and a recovery in unrealised investment portfolio losses. We
expect pre-impairment profit growth and margins to struggle until US short-term
rates rise, and likewise our P/TCE from 1.8x FY10F. Downgrade to Hold.
BE
US$5.66 conservative TCE (£3.77), 1H10 is 9% stronger than we expected…
A faster-than-anticipated decline in P&L impairments combined with less unrealised losses in
the ‘Available for Sale’ investment portfolio meant 1H10 conservative TCE per share
increased to US$5.66 (£3.77), 9% higher than our forecast. Also, the RWA geographic
reallocation in favour of Emerging Markets has continued, up US$10bn to 38% of group
RWA and more than offset by the US$68bn decline in Mature Markets RWA, leaving overall
group RWA down 5% on FY09.
A faster-than-anticipated decline in P&L impairments combined with less unrealised losses in
the ‘Available for Sale’ investment portfolio meant 1H10 conservative TCE per share
increased to US$5.66 (£3.77), 9% higher than our forecast. Also, the RWA geographic
reallocation in favour of Emerging Markets has continued, up US$10bn to 38% of group
RWA and more than offset by the US$68bn decline in Mature Markets RWA, leaving overall
group RWA down 5% on FY09.
BE
… but weakening pre-impairment profitability sits uncomfortably with our 1.8x P/TCE
Despite these positive bottom-line financial trends, the major challenge for HSBC continues
to be that revenues are falling and cost efficiency has deteriorated. Combined, these have
driven a further weakening in the group’s pre-impairment profit margin, to 1.6% from 1.9% in
1H09. This is of concern to equity investors, with our HSBC valuation multiple at 1.8x P/TCE
FY10F and our new FY12F RoTCE reduced to 17%, reflecting the downshift in the group’s
geographically blended LIBOR FY12F to 2.6% from 4.0% at the start of this year.
Despite these positive bottom-line financial trends, the major challenge for HSBC continues
to be that revenues are falling and cost efficiency has deteriorated. Combined, these have
driven a further weakening in the group’s pre-impairment profit margin, to 1.6% from 1.9% in
1H09. This is of concern to equity investors, with our HSBC valuation multiple at 1.8x P/TCE
FY10F and our new FY12F RoTCE reduced to 17%, reflecting the downshift in the group’s
geographically blended LIBOR FY12F to 2.6% from 4.0% at the start of this year.
BE
Revenues are falling and costs are rising
HSBC’s underlying 1H10 revenues fell for the second half in a row. Excluding the HSBC
Finance run-off portfolio, core business revenues were down 2% yoy and flat sequentially.
Within this, HSBC Finance cards and the other Mature Market businesses saw revenues fall,
and Emerging Markets delivered an unexceptional 4% yoy revenue uplift. Also, the underlying
cost-income-ratio increased by 5pp to 52%, with a similar trend deterioration evident across
the core businesses. This was disappointing given such a challenging revenue outlook.
HSBC’s underlying 1H10 revenues fell for the second half in a row. Excluding the HSBC
Finance run-off portfolio, core business revenues were down 2% yoy and flat sequentially.
Within this, HSBC Finance cards and the other Mature Market businesses saw revenues fall,
and Emerging Markets delivered an unexceptional 4% yoy revenue uplift. Also, the underlying
cost-income-ratio increased by 5pp to 52%, with a similar trend deterioration evident across
the core businesses. This was disappointing given such a challenging revenue outlook.
BE
Slower and lower interest rate recovery feeds into RoTCE expectations
Primarily due to our downward revisions for short-term interest rate recovery in the US and
the UK, we cut our FY10-12F EPS estimates by 15-18%. This leaves us with a US$7.63
conservative TCE for FY12F. Our FY12F RoTCE falls from 20% to 17%, reducing our target
valuation multiple. We lower our target price from £8.25 to £7.25, and our recommendation
from Buy to Hold. At £6.80, for FY10F HSBC trades on a 15x PE and a 1.8x P/TCE with a
3% yield; for FY12F, these shift to 9x and 1.4x for a 17% RoTCE and 5% yield respectively.
Primarily due to our downward revisions for short-term interest rate recovery in the US and
the UK, we cut our FY10-12F EPS estimates by 15-18%. This leaves us with a US$7.63
conservative TCE for FY12F. Our FY12F RoTCE falls from 20% to 17%, reducing our target
valuation multiple. We lower our target price from £8.25 to £7.25, and our recommendation
from Buy to Hold. At £6.80, for FY10F HSBC trades on a 15x PE and a 1.8x P/TCE with a
3% yield; for FY12F, these shift to 9x and 1.4x for a 17% RoTCE and 5% yield respectively.
BE
(Squarepeg: we tell you what we hear, and we hadn’t heard the rig story this morning. If you have, neat. That’s what makes this two-way thingmy the unique service it is.)
TT
in the smaller tier of banks, Investec has been attracting attention this morning
TT
after a share placing to shore up its capital base
TT
UPDATE 2-Investec to raise up to $165 mln in share issue
* Raises $165 mln by issuing stock to existing shareholders
* Issues 22 mln shares at 475 pence each
* Shares down 5.8 percent in London, 2.7 pct in Johannesburg
(Recasts, adds details)
JOHANNESBURG, Aug 3 (Reuters) – Investec Ltd, the South
African investment bank and asset manager, said on Tuesday it
raised $165 million by issuing new shares, tapping a recovery in
equity markets to shore up its capital base.
Banks around the world have been pressed to improve the
amount and quality of their capital in order to prevent another
financial crisis.
The coming Basel III reforms require banks to hold more
common shares and retained earnings, regarded as the strongest
capital buffer.
Investec, which is also listed in London, said it issued 22
million shares to existing shareholders at 475 pence each,
bringing in 104.5 million pounds ($165.2 million) before
commissions and expenses.
Shares of the bank tumbled in both London and Johannesburg
trade after it said it planned the share issue.
The issue represents 4.27 percent of the existing shares of
the London-listed unit, and 2.79 percent of the shares of the
entire group, Investec said in a statement.
The share issue was managed by Bank of America Merrill Lynch
.
Investec Plc (INVP:LSE): Last: 476.30, down 27.2 (-5.40%), High: 490.20, Low: 469.50, Volume: 3.78m
TT
it seems pretty opportunistic placing..taking advantage of market conditions..may other banks will follow
BE
And let’s not forget, this is the second time in just over a year that Investec has done an opportunistic placing.
BE
Issued 22m shares in July 2009 to buy back debt.
TT
i have always had a bit of soft spot for Investec…decent rugby-obsessed management team
TT
but their agm next week could see a little more heat than usual
TT
Pirc, the corporate governance activist, is complaining that the board is fullof South Africans who have known each other since time began
TT
A lack of independent representation on the board is a
concern at Investec.
We recommend that shareholders oppose the election of a
number of non-executives. Samuel Abrahams is not considered
independent as he has been on the board of Investec Limited for
more than thirteen years. Ian Kantor is not considered
independent as he is the brother of the managing director, was
CEO of Investec and has also been on the board for over thirty
years. Richard Thomas is not considered independent as he has
been on the board for more than twenty-nine years. Fani Titi is
not considered independent as he was previously the chairman of
Tiso Group Limited which has a material relationship with
Investec. Bradley Fried is not considered independent as he was
previously CEO of Investec Bank plc and an employee of Investec.
There is insufficient independent representation on the board in
our view. We therefore recommend that shareholders oppose the
election of all five directors.
We also recommend that shareholders oppose the remuneration
report. The annual bonus scheme is linked to business
performance based on target business unit performance goals,
determined in the main by Economic Value Added (EVA) profit
performance against pre-determined targets. The scheme does
not have a maximum reward limit. In addition, the company has
not quantified the performance targets. Bonuses were granted to
the Executives in the range of 130% and 714% of their respective
salaries during the year.
The company operates the Deferred Bonus Plan, the Share Option
Plan and the Share Matching Plan. Awards were made only under
the Share Matching Plan during the year under review. This
scheme uses EPS as the sole performance measure. 300,000 share
awards were granted to the executives during the year which
equated to salaries in the range of 456% to 627%. Although the
vesting scale is considered sufficiently broad, we do not consider
the targets to be sufficiently challenging in light of the current
brokers forecasts. The Share Matching Plan and the Share Option
Plan, both use EPS as the unique performance condition. This
essentially means double awards are potentially available for
reaching the same conditions. PIRC believes that any long term
incentive should operate with at least two concurrent
performance criteria.
Whilst salaries are broadly in line with the sector General Financial,
aggregate awards made during the year are considered to be
excessive. All executive directors have six month rolling contracts.
Directors are entitled to receive an annual bonus determined at
the discretion of the remuneration committee. No further
information has been provided. PIRC believes that bonuses should
be time and performance pro-rated.
concern at Investec.
We recommend that shareholders oppose the election of a
number of non-executives. Samuel Abrahams is not considered
independent as he has been on the board of Investec Limited for
more than thirteen years. Ian Kantor is not considered
independent as he is the brother of the managing director, was
CEO of Investec and has also been on the board for over thirty
years. Richard Thomas is not considered independent as he has
been on the board for more than twenty-nine years. Fani Titi is
not considered independent as he was previously the chairman of
Tiso Group Limited which has a material relationship with
Investec. Bradley Fried is not considered independent as he was
previously CEO of Investec Bank plc and an employee of Investec.
There is insufficient independent representation on the board in
our view. We therefore recommend that shareholders oppose the
election of all five directors.
We also recommend that shareholders oppose the remuneration
report. The annual bonus scheme is linked to business
performance based on target business unit performance goals,
determined in the main by Economic Value Added (EVA) profit
performance against pre-determined targets. The scheme does
not have a maximum reward limit. In addition, the company has
not quantified the performance targets. Bonuses were granted to
the Executives in the range of 130% and 714% of their respective
salaries during the year.
The company operates the Deferred Bonus Plan, the Share Option
Plan and the Share Matching Plan. Awards were made only under
the Share Matching Plan during the year under review. This
scheme uses EPS as the sole performance measure. 300,000 share
awards were granted to the executives during the year which
equated to salaries in the range of 456% to 627%. Although the
vesting scale is considered sufficiently broad, we do not consider
the targets to be sufficiently challenging in light of the current
brokers forecasts. The Share Matching Plan and the Share Option
Plan, both use EPS as the unique performance condition. This
essentially means double awards are potentially available for
reaching the same conditions. PIRC believes that any long term
incentive should operate with at least two concurrent
performance criteria.
Whilst salaries are broadly in line with the sector General Financial,
aggregate awards made during the year are considered to be
excessive. All executive directors have six month rolling contracts.
Directors are entitled to receive an annual bonus determined at
the discretion of the remuneration committee. No further
information has been provided. PIRC believes that bonuses should
be time and performance pro-rated.
BE
Their advert on Bloomberg and CNBC as immensely annoying.
BE
This one
BE
Find a guy who can pronounce “ordinary” properly, why don’t you?
BE
Anyway, here’s JP Morgan to explain why the placing should be seen as bad news.
BE
Investec announced today its intention to issue 22m ordinary shares in Investec Plc. This amounts to c.4.27% of Plc issued share capital and c.2.79% of overall group issued share capital. The proceeds from the proposed capital raise (assuming current price, cGBP105m) is to be used to take advantage of opportunities in credit and other markets, while maintaining strong tier 1 capital levels. Investec plans to raise the capital through an accelerated book build.
BE
Why the need for higher capital? In essence, we believe there are two key reasons – (i) Various stakeholders require the current targets as minimum levels for comfort (regulators, ratings agencies, funders, and trading counterparties); and (ii) internal capital generation to support risk asset growth is slow – see Q1 trading comments below.
BE
Weak internal capital generation in Plc. Investec released its Q1 2011 trading update on 30 July 2010 (see our note “Q1FY11 trading
update”, 30 July 2010). Q1 FY11 earnings is tracking much weaker than our expectations, with attributable earnings up 2% in Q110 (vs. JPM FY11E: up 18.3%).
update”, 30 July 2010). Q1 FY11 earnings is tracking much weaker than our expectations, with attributable earnings up 2% in Q110 (vs. JPM FY11E: up 18.3%).
BE
Capital levels within targets but buffers are modest. At Q1 2011 capital levels remained within targets (see below):
o Tier 1 ratio (target of 11%): Plc (11.5%); Ltd (12.2%).
o Total capital ratio (target of 14%-17%): Plc (16.1%); Ltd
(15.6%).
o Tier 1 ratio (target of 11%): Plc (11.5%); Ltd (12.2%).
o Total capital ratio (target of 14%-17%): Plc (16.1%); Ltd
(15.6%).
BE
In light of tier 1 capital levels modestly above targets (particularly for Plc), we expect RWA growth to be constrained without the
proposed capital raise. We expect the capital raising to have a marginal impact on ROEs (JPM FY11E: 13.9%) but will support risk asset growth.
proposed capital raise. We expect the capital raising to have a marginal impact on ROEs (JPM FY11E: 13.9%) but will support risk asset growth.
BE
Not the first capital raise over recent times. We remind investors that Investec Plc issued 22m shares on 28 July 2009 through an accelerated book build and raised GBP85.8m before commissions and expenses (see our note “Proposed equity placing…”, 28 July 2009). These proceeds were used to purchase its’ own debt.
11:21AM
BE
So, questions on the right about Lloyds
BE
Which seems to have stalled ahead of results
Lloyds Banking Group plc (LLOY:LSE): Last: 72.47, up 0.03 (+0.04%), High: 72.80, Low: 71.44, Volume: 55.16m
TT
well i have a very upbeat note from leigh goodwin at Citi
TT
recommending a buy
TT
Price Performance (RIC: LLOY.L, BB: LLOY LN)
Life business could provide next upside surprise — We expect the 1H10 Interim
Results, announced 4 August, to confirm the positive trends in margins, costs and
credit quality reported for 1Q10, and reinforce our conviction on the stock. But, we
also look for progress on what we believe could be the ‘next leg’ of the bull case,
namely the transformation of the Insurance & Investments division.
Estimated £700m pa capital upstreaming potential — Lloyds has £10bn of
‘unconsolidated’ investments in its Life businesses, which earn an estimated FY10e
return on (revised) Basel 3 based core capital of only 10%. We believe that the
Clerical Medical business is capital inefficient and ripe for cost-reduction, and lower
new business strain. We estimate that the division has a dividending potential of
c.£700m pa, before we consider the release of existing surplus equity.
Longer-term NIM could easily better our FY13e 239bp — Management has been
guiding that Lloyds’ margins could eventually revert to the 250-290bp range, above
our FY13e forecast. The revised BIS proposal on the NSFR is helpful in this
respect, lifting Lloyds’ NSFR from an estimated FY09e 84% to c.100%, easing
potential funding concerns and costs. A 270bp NIM in FY13e would raise our
FY13e RoE from 13% to 15.3%, with profound valuation consequences.
We forecast 1H10 Combined Businesses PBT of £956m — Our 1H10 forecast
assumes a FV Unwind of £1.35bn, impairments of £6.64bn and a Banking NIM of
195bp. We have lifted our FY10e CB PBT from £2.8bn to £3.0bn, reflecting
industry impairment trends. Our FY11-13e forecasts are revised very slightly to
allow for the new UK bank levy and CT rates.
Maintain Buy/Medium Risk rating and 98p TP — Lloyds’ shares have risen 42%
YTD and easily outperformed the European banks sector, but still trade at a
discount. On FY10e P/GOP, Lloyds trades on 3.6x versus a 4.4x sector average and
5x long-term average. On FY10e P/tNAV, Lloyds is on 1.2x, sector 1.3x
Life business could provide next upside surprise — We expect the 1H10 Interim
Results, announced 4 August, to confirm the positive trends in margins, costs and
credit quality reported for 1Q10, and reinforce our conviction on the stock. But, we
also look for progress on what we believe could be the ‘next leg’ of the bull case,
namely the transformation of the Insurance & Investments division.
Estimated £700m pa capital upstreaming potential — Lloyds has £10bn of
‘unconsolidated’ investments in its Life businesses, which earn an estimated FY10e
return on (revised) Basel 3 based core capital of only 10%. We believe that the
Clerical Medical business is capital inefficient and ripe for cost-reduction, and lower
new business strain. We estimate that the division has a dividending potential of
c.£700m pa, before we consider the release of existing surplus equity.
Longer-term NIM could easily better our FY13e 239bp — Management has been
guiding that Lloyds’ margins could eventually revert to the 250-290bp range, above
our FY13e forecast. The revised BIS proposal on the NSFR is helpful in this
respect, lifting Lloyds’ NSFR from an estimated FY09e 84% to c.100%, easing
potential funding concerns and costs. A 270bp NIM in FY13e would raise our
FY13e RoE from 13% to 15.3%, with profound valuation consequences.
We forecast 1H10 Combined Businesses PBT of £956m — Our 1H10 forecast
assumes a FV Unwind of £1.35bn, impairments of £6.64bn and a Banking NIM of
195bp. We have lifted our FY10e CB PBT from £2.8bn to £3.0bn, reflecting
industry impairment trends. Our FY11-13e forecasts are revised very slightly to
allow for the new UK bank levy and CT rates.
Maintain Buy/Medium Risk rating and 98p TP — Lloyds’ shares have risen 42%
YTD and easily outperformed the European banks sector, but still trade at a
discount. On FY10e P/GOP, Lloyds trades on 3.6x versus a 4.4x sector average and
5x long-term average. On FY10e P/tNAV, Lloyds is on 1.2x, sector 1.3x
TT
but the really fun story today has been RBS
TT
its clients, according to the FSA, include the queen at Coutts and possibly terrorists
TT
The Financial Services Authority (FSA) has today fined members of the Royal Bank of Scotland Group (RBSG) £5.6m for failing to have adequate systems and controls in place to prevent breaches of UK financial sanctions.
UK firms are prohibited from providing financial services to persons on the HM Treasury sanctions list. The Money Laundering Regulations 2007 (the Regulations) require that firms maintain appropriate policies and procedures in order to prevent funds or financial services being made available to those on the sanctions list.
During 2007, RBSG processed the largest volume of foreign payments of any UK financial institution. However, between 15 December 2007 and 31 December 2008, RBS Plc, NatWest, Ulster Bank and Coutts and Co, which are all members of RBSG, failed to adequately screen both their customers, and the payments they made and received, against the sanctions list. This resulted in an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including terrorist financing.
The FSA considers that RBSG’s failings in relation to its screening procedures were particularly serious because of the risk they posed to the integrity of the UK financial services sector. This is the biggest fine imposed by the FSA to date in pursuit of its financial crime objective. It is also the first fine imposed by the FSA under the Regulations.
UK firms are prohibited from providing financial services to persons on the HM Treasury sanctions list. The Money Laundering Regulations 2007 (the Regulations) require that firms maintain appropriate policies and procedures in order to prevent funds or financial services being made available to those on the sanctions list.
During 2007, RBSG processed the largest volume of foreign payments of any UK financial institution. However, between 15 December 2007 and 31 December 2008, RBS Plc, NatWest, Ulster Bank and Coutts and Co, which are all members of RBSG, failed to adequately screen both their customers, and the payments they made and received, against the sanctions list. This resulted in an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including terrorist financing.
The FSA considers that RBSG’s failings in relation to its screening procedures were particularly serious because of the risk they posed to the integrity of the UK financial services sector. This is the biggest fine imposed by the FSA to date in pursuit of its financial crime objective. It is also the first fine imposed by the FSA under the Regulations.
TT
not ideal for a government-controlled bank really
BE
No. Not ideal.
BE
Letting Osama have an ISA’s probably not really politic.
TT
They have been a little indiscriminate in the past…phil collins used to have an account at Coutts until 2001
BE
Really. Hm.
BE
And, just to round up on the banks, Simon Maughan is giving the sector a push this morning.
BE
Now of MF Global
BE
He thinks the sector can go to two times book.
BE
Banks still undervalued. After the summer rally, Euro land banks have
closed much of the valuation gap to the sector. However, based on
normalised returns, the bank sector as a whole offers significant upside.
» Normal returns. We define normalised return on equity (RoE) as preprovision
forecasts for 2012 less the 10 year average impairment charge.
We have made some other adjustments, such as ignoring the costs of
the asset protection scheme for RBS.
closed much of the valuation gap to the sector. However, based on
normalised returns, the bank sector as a whole offers significant upside.
» Normal returns. We define normalised return on equity (RoE) as preprovision
forecasts for 2012 less the 10 year average impairment charge.
We have made some other adjustments, such as ignoring the costs of
the asset protection scheme for RBS.
BE
» Spanish banks best placed. The most significant beneficiaries of the
normalisation process are BBVA and Santander, as the ten year average
impairment is below our 2012 forecast. The adjustment lifts normalised
RoE above 20%, while the stocks trade around book value.
normalisation process are BBVA and Santander, as the ten year average
impairment is below our 2012 forecast. The adjustment lifts normalised
RoE above 20%, while the stocks trade around book value.
BE
» French banks still attractive. The three large French banks and
Deutsche Bank still offer value relative to the sector when normalised
RoE is plotted against current price to book.
Deutsche Bank still offer value relative to the sector when normalised
RoE is plotted against current price to book.
BE
» European banks offer value. In Chart 1 overleaf, the bulk of the sector
is grouped around a best-fit line valuing 10% RoE at 0.6x book, 15% at
0.9x book and 20% RoE at 1.2x book. Assuming cost of capital of 10%
and no growth, the sector would be 66% cheap using a Gordon Growth
Model (GGM) predicting 2.0x book for 20% RoE.
is grouped around a best-fit line valuing 10% RoE at 0.6x book, 15% at
0.9x book and 20% RoE at 1.2x book. Assuming cost of capital of 10%
and no growth, the sector would be 66% cheap using a Gordon Growth
Model (GGM) predicting 2.0x book for 20% RoE.
BE
» Further upside. Assuming the market will return to paying 2x book for
15% RoE (i.e. with 10% cost of capital and 5% growth using the GGM)
the sector would have 100% upside over the next two years.
15% RoE (i.e. with 10% cost of capital and 5% growth using the GGM)
the sector would have 100% upside over the next two years.
BE
» UK Asian banks and UBS look most highly valued. These banks
trade above the best fit line, although this would be perfectly justified
assuming premium growth rates. At 1.8x book for a forecast 17% RoE in
2012, Standard Chartered does not look overvalued on this methodology.
trade above the best fit line, although this would be perfectly justified
assuming premium growth rates. At 1.8x book for a forecast 17% RoE in
2012, Standard Chartered does not look overvalued on this methodology.
BE
» UK domestic banks. We continue to forecast a tough couple of years for
the part government owned UK banks in terms of funding, given the need
to replace cheap, central bank supplied loans with market priced debt.
However, although at the lower quality end of the spectrum, there is still a
case for absolute upside for these names based on 2012 earnings. Both
Lloyds and RBS are forecast to have impairment charges below the 10
year average by 2012
the part government owned UK banks in terms of funding, given the need
to replace cheap, central bank supplied loans with market priced debt.
However, although at the lower quality end of the spectrum, there is still a
case for absolute upside for these names based on 2012 earnings. Both
Lloyds and RBS are forecast to have impairment charges below the 10
year average by 2012
BE
» Buying banks. We remain positive on the sector and in particular
recommend Buying Barclays, BBVA, Credit Suisse and UniCredit.
recommend Buying Barclays, BBVA, Credit Suisse and UniCredit.
Barclays PLC (BARC:LSE): Last: 343.09, down 0.8625 (-0.25%), High: 343.10, Low: 336.05, Volume: 8.50m
Standard Chartered PLC (STAN:LSE): Last: 1,893, up 31.5 (+1.69%), High: 1,896, Low: 1,844, Volume: 2.03m
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 52.10, no change, High: 52.80, Low: 51.95, Volume: 32.09m
BE
Right. Bored with banks now.
11:27AM
BE
Ok – question on the right about Arm Holdings.
BE
Getting a bit of a kicking this morning.
ARM Holdings PLC (ARM:LSE): Last: 315.80, down 16.2 (-4.88%), High: 325.00, Low: 314.30, Volume: 3.73m
BE
There are a couple of theories around, the most plausible seems to be ….
BE
That Intel might buy Infineon’s Wireless Solutions unit
BE
BERLIN (Dow Jones)–German semiconductor maker Infineon Technologies AG (IFX.XE) has made “considerable progress” in discussions with firms interested in its Wireless Solutions unit, the company said Monday.
In a press release, Infineon didn’t name the potential suitors and said the discussions haven’t produced a definitive outcome yet.
BE
People familiar with the situation told Dow Jones Newswires and the Wall Street Journal Friday that Intel Corp. (INTC) is close to a deal that would increase the Silicon Valley-based firm’s presence in the smartphone market.
Munich-based Infineon’s wireless chip unit makes products including cellular baseband chips used by Apple Inc. (AAPL) and other mobile phone makers. The company has also discussed its wireless unit with Samsung Electronics Co. Ltd. (005930.SE) and Broadcom Corp. (BRCM), according to people familiar with the matter.
Intel has seen confidential Infineon financial data and appears to be the frontrunner, people familiar with the situation added, though there is no certainty that a deal will be completed.
BE
One person briefed on the situation said a deal could be struck within days or weeks, but a key issue is valuation. Infineon is looking for at least EUR1 million, this person said.
BE
(I think it’s fair to say that they’ll be looking for a bit more than “at least eur1 million,” incidentally.)
BE
Now, the idea I guess is that if Intel buy this they won’t buy Arm.
BE
And, without the added fillip of takeover speculation, the PE of 40+ begins to look a bit toppy.
TT
there are very times when a pe of 40 can be justified
TT
nice line Nately…Arm could be left without a leg to stand on
BE
Yes – we do like those Arm puns. Can’t hear those enough.
11:31AM
TT
shall we turn to another speculative play with delusions about its future
TT
how is ITV doing
ITV Plc (ITV:LSE): Last: 52.40, down 1.15 (-2.15%), High: 52.65, Low: 51.00, Volume: 8.06m
TT
Crozier promises sweeping shake-up at ITV
By Philip Stafford
Adam Crozier, the new chief executive of ITV, said on Tuesday he would make the commercial broadcaster “fit for purpose” and promised far-reaching changes that would see up to half of its revenues come from outside TV advertising in five years time.
Mr Crozier said the group’s interim results showed progress in reducing ITV’s net debt from £612m to £437m, but it still faced challenges from a market that had changed rapidly and he offered only a cautious outlook for 2011.
Unveiling a five-year plan to transform the group, Mr Crozier said that ITV had not kept pace with the changes to the media industry such as pay TV and the internet.
“We are under no illusion that ITV needs to change substantially,” he said. “Reshaping the economics of ITV will require changes not only to the strategy but also to ITV’s management, culture and organisation,” he said. “Our priority for the next 18 months is to make ITV a creatively dynamic and fit for purpose organisation while maintaining strict financial controls.”
Interim results to June 30 saw revenues rise £78m to £987m as net advertising revenue rose 18 per cent, ahead of the market average. Cost-cutting meant ITV moved from a pre-tax loss of £105m to a profit of £97m. It turned from a loss per share of 1.8p to a profit per share of 1.8p. The group again withheld payment of a dividend.
Shares in ITV opened down 2.6 per cent at 52.15p.
Mr Crozier promised that revenues from non-TV advertising would rise to around 50 per cent of revenues from the current level of around 26 per cent.
Among the first moves ITV will make is a pay-television deal with British Sky Broadcasting to launch high definition versions of its successful digital channels as a subscription service on Sky.
By Philip Stafford
Adam Crozier, the new chief executive of ITV, said on Tuesday he would make the commercial broadcaster “fit for purpose” and promised far-reaching changes that would see up to half of its revenues come from outside TV advertising in five years time.
Mr Crozier said the group’s interim results showed progress in reducing ITV’s net debt from £612m to £437m, but it still faced challenges from a market that had changed rapidly and he offered only a cautious outlook for 2011.
Unveiling a five-year plan to transform the group, Mr Crozier said that ITV had not kept pace with the changes to the media industry such as pay TV and the internet.
“We are under no illusion that ITV needs to change substantially,” he said. “Reshaping the economics of ITV will require changes not only to the strategy but also to ITV’s management, culture and organisation,” he said. “Our priority for the next 18 months is to make ITV a creatively dynamic and fit for purpose organisation while maintaining strict financial controls.”
Interim results to June 30 saw revenues rise £78m to £987m as net advertising revenue rose 18 per cent, ahead of the market average. Cost-cutting meant ITV moved from a pre-tax loss of £105m to a profit of £97m. It turned from a loss per share of 1.8p to a profit per share of 1.8p. The group again withheld payment of a dividend.
Shares in ITV opened down 2.6 per cent at 52.15p.
Mr Crozier promised that revenues from non-TV advertising would rise to around 50 per cent of revenues from the current level of around 26 per cent.
Among the first moves ITV will make is a pay-television deal with British Sky Broadcasting to launch high definition versions of its successful digital channels as a subscription service on Sky.
BE
So, the strategic review has proved to be a bit of a damp squib.
BE
Basically, they’re going to buy Friends Reunited again.
TT
well given that stock has moved 30 per cent higher in a year on hopes of a turnaround, the lack of detail was not particularly encouraging
BE
Yes. Quite. Lots of stuff about building content, pay-tv and online revenues.
TT
but maybe i am missing the true potential of some of the moves…
TT
Imagine the “The Jeremy Kyle Show” and “Loose Women,” in high definition
BE
I’d rather not, ta.
TT
there has to be a lot of demand for that
BE
Well, they’re jumping into bed with Murdoch on that assumption.
TT
for more sensible comment, here is Lorna Tilbian of Numis
TT
Numis: ITV (Add, TP: 61p) Interim results update
ITV has released interim results which are slightly ahead of expectations, with EBITA of £165m vs NSe £161m and consensus £155m. The group has made good progress in 1H10, particularly on the balance sheet with net debt coming down to -£437m vs NSe -£572m. Following on from +18% growth in 1H10, ITV expects advertising to be up +15% in Q3 (NSe +10%) though it cautions on the outlook for 4Q10 when comparatives become tougher and into 2011; we don’t expect to change our estimates for +12% and +1% for 2010 and 2011, respectively. The group has outlined its long-term strategy, which looks sensible in our view. ITV is targeting that half of revenues should come from non-TV advertising ‘over time’ and as a first step towards this has announced that HD versions of ITV2, ITV3 and ITV4 will go on Sky’s HD basic tier. The group indicates that the network budget will be held at under £800m in 2011 and 2012, below our expectations of £812m and £828m. As expected, the group will invest £75m over 3yrs in online. Although there are a large number of moving parts, we do not expect materially to change our forecasts of £250m/4.2p and £325m/5.5p; consensus is 3.7p and 5.1p. Our recommendation remains ADD against a target price of 61p.
BE
Yes. It’s all evolution type stuff, as we all expected, rather than the major changes some think are needed.
BE
No abandoning terrestrial, for example.
TT
Panmure was admirably succinct on ITV
TT
H1 results c5% ahead of expectations. Modest incremental investment. Outlook cautious, re Q4 and FY 11. Five year plan does not look exciting at face value.
BE
Yes. That’s a fair summary.
BE
Liberum say more but come to the same conclusion.
BE
ITV reported their interim results this morning. On the headline numbers, they reported 1H advertising revenues
up 18% yoy, in line with our estimates, but we think slightly ahead of the consensus. 1H EBITA was £165m vs.
Liberum estimates of £163m, and adjusted EPS of 2.2p vs. estimates of 2.1p.
By category: “Retail and food advertisers have performed well, both up by 25% or more compared to the
previous year. Entertainment & Leisure spending was up 13%, Finance was up by 7% and Cosmetics &
Toiletries were up by 17%. Government spend has declined by 20%, but this makes up a small proportion of
total advertising spend, roughly 3% in the first half of 2010 compared to 5% in the first half of 2009”.
up 18% yoy, in line with our estimates, but we think slightly ahead of the consensus. 1H EBITA was £165m vs.
Liberum estimates of £163m, and adjusted EPS of 2.2p vs. estimates of 2.1p.
By category: “Retail and food advertisers have performed well, both up by 25% or more compared to the
previous year. Entertainment & Leisure spending was up 13%, Finance was up by 7% and Cosmetics &
Toiletries were up by 17%. Government spend has declined by 20%, but this makes up a small proportion of
total advertising spend, roughly 3% in the first half of 2010 compared to 5% in the first half of 2009”.
BE
Of more importance are their comments on the outlook and the strategic review, which we see as positive.
On outlook, ITV suggesting Q3 advertising revenues are up 15% in Q3. Given the propensity for ITV to beat
initial estimates in this upturn, we see upside risk. While cautious on Q4 because of comps and the economy,
anecdotal evidence suggests strength will continue into Q4, with retailers likely to up spend. Given the 9m
performance would itself mean c. 12%+ of FY advertising growth (assuming a flat Q4), we see upside risk to
both consensus of 11%-12% and Liberum estimates of 13.1%.
On outlook, ITV suggesting Q3 advertising revenues are up 15% in Q3. Given the propensity for ITV to beat
initial estimates in this upturn, we see upside risk. While cautious on Q4 because of comps and the economy,
anecdotal evidence suggests strength will continue into Q4, with retailers likely to up spend. Given the 9m
performance would itself mean c. 12%+ of FY advertising growth (assuming a flat Q4), we see upside risk to
both consensus of 11%-12% and Liberum estimates of 13.1%.
BE
On the strategic review, the focus will be on building content, pay-tv and online revenues, while maintaining tight
cost control. ITV is setting up a £75m investment fund for investment in these areas and has hinted at bolt-on
acquisitions. We see this £75m as covered in our forecasts (we assume implicitly £80m of the cost savings in
FY10F and FY11F are reinvested). As part of this plan, ITV has signed a deal with BSkyB to show ITV 2, 3 and
4 in High Definition. This sort of move to pay-tv requires little extra investment and we see the potential for
further deals with other pay-tv operators.
On cost control, ITV has committed to keep ITV1’s network programme budget below £800m in 2011 and 2012,
which will be welcomed given some concerns there could be more spending here. The company remains on
track on cost saving initiatives.
cost control. ITV is setting up a £75m investment fund for investment in these areas and has hinted at bolt-on
acquisitions. We see this £75m as covered in our forecasts (we assume implicitly £80m of the cost savings in
FY10F and FY11F are reinvested). As part of this plan, ITV has signed a deal with BSkyB to show ITV 2, 3 and
4 in High Definition. This sort of move to pay-tv requires little extra investment and we see the potential for
further deals with other pay-tv operators.
On cost control, ITV has committed to keep ITV1’s network programme budget below £800m in 2011 and 2012,
which will be welcomed given some concerns there could be more spending here. The company remains on
track on cost saving initiatives.
BE
On net debt, it reduced to £437m at the end of 1H, with cash conversion of 134% vs a stated target of 90%. Our
YE forecast of £348m could see upside risk, given the £175m reduction in 1H.
One devil in the detail: in its comments on pensions, ITV has agreed with its trustees that, if pre-exceptional
EBITA is above £300m from 2012, it will pay 10% above this £300m until 2015 to reduce the deficit. We have
£536m EBITA for the group for FY12F, so this would represent a pension payment in total of £58m (£35m +
10%*(£536m-300m)) vs. £30m previously. Do not think it will overshadow the review but bound to be raised as
a point.
YE forecast of £348m could see upside risk, given the £175m reduction in 1H.
One devil in the detail: in its comments on pensions, ITV has agreed with its trustees that, if pre-exceptional
EBITA is above £300m from 2012, it will pay 10% above this £300m until 2015 to reduce the deficit. We have
£536m EBITA for the group for FY12F, so this would represent a pension payment in total of £58m (£35m +
10%*(£536m-300m)) vs. £30m previously. Do not think it will overshadow the review but bound to be raised as
a point.
BE
Reiterate Buy and 110p fair value. Today’s results should provide a catalyst for the shares, given their underperformance
against the sector in recent months and especially given their attractive valuation at 10.4x FY10F
PE ex-regulatory benefits.
against the sector in recent months and especially given their attractive valuation at 10.4x FY10F
PE ex-regulatory benefits.
BE
By the way, what exactly does a £75m investment fund buy you?
BE
Half a Jonathan Ross? Three Adrian Chiles?
BE
I remain unconvinced.
TT
yes..that was the other good news ITV pointed to in the results – recent hirings
TT
New presenters have also been recruited, including Jonathan Ross, Adrian Chiles and Christine Bleakley.
BE
Who is Christine Bleakley?
TT
not sure..but i think Frank Lampard will be watching at least
BE
Hm. Without wishing to sound like a High Court judge, I don’t know who any of these people are.
11:39AM
TT
just on Ocado, Soundbuy…we have new developments
BE
Hooray! Too long since we’ve paid a visit so Webvan 2.0.
TT
Clive Black , the Shore Capital analyst, dissed by the management of Ocado for daring to question its value is making visit to main facilities of webvan
TT
Ocado (OCDO^). Analysts’ visit to Hatfield. Sell at 167p.
A trip up, or is down, the A1
Shore Capital is today attending a visit organised by Ocado to its Hatfield facility; the second time that our company will have visited the heart of its organisation. The ‘premier league’ of investment banks could not, seemingly, ‘get the company away’ at the desired original valuation and so the ‘cavalry’ in the form of ‘the championship’ brokers has been duly brought in to try and do the job. ‘Horse, bolted, door, stable’ comes to mind…
The profitability of the incremental customer is key
Ocado serves its customers well in our view, but it has yet to deliver a profit after a decade of trading and substantial losses. Accordingly, the profitability of the incremental customer becomes essentially important to understand if sub-optimal performance ratios are going to a) become positive and b) justify the existing, never mind a higher, share price.
An emerging consensus…
We welcome the listing of Ocado but we still consider its somewhat stellar stock multiples to be far too high for our liking. What’s more, there is no room whatsoever for disappointment from the company. We also believe that it will be interesting to observe where consensus will rest for the stock once the whole analytical community becomes familiar with its admittedly impressive operating hub; we estimate 2010F EBITDA of £26m.
Remaining cautious
Shore Capital could not justify the aspired mid-price of 235p for Ocado, nor the re-based 180p price, a ‘lowering’ which according to quotes from the Chief Executive was undertaken to ‘attract higher quality investors’ (what that must make original investors or those prepared to pay a higher price feel like Lord only knows) nor the 167p current share price. Accordingly, we retain our SELL or SHORT recommendations on the stock, waiting as we do, for evidence of meaningful, very meaningful, margin expansion. Will we be waiting for a very long time… that is the question?
TT
we await the outcome of his visit with genuine excitement..will Clive be converted and see the light
TT
fatdaz..i believe Bryce is only allowed to watch the bbc in his household
TT
like all good households used to
TT
but he makes an exception for jeremy kyle
BE
Yes – Cbeebies for no more than one hour a day. Also, I highlight there’s a difference between “know” and “care”
BE
Anyway, have we done a Ocado share price?
BE
I don’t think we have.
Ocado Group PLC (OCDO:LSE): Last: 166.75, down 0.25 (-0.15%), High: 167.25, Low: 166.50, Volume: 342.24k
BE
But it’s still in the stabilisation period, of course.
TT
how long does that last
BE
Another couple of weeks I think. We really have to wait until the training wheels are removed before getting a true view of where this thing should be trading.
11:44AM
BE
(@Throg: officelols. You win today’s gold star.)
TT
moving on, it is not exactly stock sensitive but i note today that Tim Bond has moved on Barclays
TT
Barclays’ Bond Said to Leave After Resigning From Research Role
^c.2010 Bloomberg News
By Gavin Finch and Matthew Brown
Aug. 3 (Bloomberg) — Barclays Plc’s Tim Bond has left the bank, less than two months after he stepped down as head of asset allocation research, said a person with knowledge of his decision.
Bond, 47, was reviewing his options inside and outside the bank after leaving his research role, two people familiar with the talks said in June, declining to be identified because the negotiations were private. Bond has been listed as “inactive” on the Financial Services Authority’s register since July.
His departure follows that of David Woo, former head of group-of-10 currency research, who left for Bank of America Corp. in May. Steven Englander, former chief U.S. currency strategist, joined Citigroup Inc. in April, while London-based currency strategist Adarsh Sinha resigned in June.
Barclays has been overhauling its banking operations since purchasing Lehman Brothers Holdings Inc.’s North American operations in September 2008. Finance Director Chris Lucas said last month that investment-banking revenue was “softer” in the second quarter of 2010. Barclays reports first-half results on Aug. 5.
A spokesman for Barclays declined to comment. Bond couldn’t immediately be reached.
–Editors: Edward Evans, James Amott.
To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net
To contact the editors responsible for this story: Edward Evans at eevans3@bloomberg.net; Daniel Tilles at dtilles@bloomberg.net
08-03-10 0543EDT
BE
Has he? That’s interesting.
TT
genuinely one of the best strategists out there….
TT
i think he will seen a lot of demand for his talent…maybe he just wanted to escape BarCap
BE
Another sign of tensions at the Bank of Bob, perhaps?
BE
Expanded too quickly and is now paying the price with some grizzly attrition, some might argue.
TT
well just on banks, i thought Philip Aldrick made a very good point on bank “compensation ratios” this morning
BE
Go on.
TT
as one top investment banker readily admits. “Put it this way,” he said. “There are an awful lot of Emile Heskey’s getting paid far more than they are worth.”
One problem, according to the bank executive, is how to measure pay. Investment banks use a compensation-to-income ratio that tended to settle at about 50pc. Barclays’ annual report defines the ratio as “staff compensation compared to total income net of insurance claims”. But the measure excludes provisions on bad debts, so strips out the worst mistakes made by staff in previous years. Barclays’ ratio in 2009 was 38pc, which was applauded. But, including the £2.6bn of provisions, the ratio was 49pc. The bank executive reckons a simple improvement would be to measure the ratio “net of insurance claims and provisions”.
One problem, according to the bank executive, is how to measure pay. Investment banks use a compensation-to-income ratio that tended to settle at about 50pc. Barclays’ annual report defines the ratio as “staff compensation compared to total income net of insurance claims”. But the measure excludes provisions on bad debts, so strips out the worst mistakes made by staff in previous years. Barclays’ ratio in 2009 was 38pc, which was applauded. But, including the £2.6bn of provisions, the ratio was 49pc. The bank executive reckons a simple improvement would be to measure the ratio “net of insurance claims and provisions”.
TT
why should comp ratios be based pre-write-offs and impairments
TT
it is pretty outrageous really..
TT
to exclude the consequences of bad decisions from the revenues
TT
well at least Tim Bond is not in the Emile Heskey class..
BE
Swedes makes a very good point about the grocer’s apostrophe.
BE
Poor Telegraph subbing.
BE
Which you can see for yourself here
11:49AM
TT
i have to run early today..am having lunch with Albert Edwards at the Don..that is name-dropping for you
TT
before i go, i would like to leave you with a spot the difference challenge
TT
in the european journal this morning
TT
Wheat prices are climbing against a substantially different backdrop, meaning a run on food supplies is unlikely this time around. Inventories are abundant, especially in the US, lessening the chances of a food panic, analysts say.
TT
in the US edition of the journal later
TT
Wheat prices have staged the most drastic rise in more than 50 years, as a drought in Russia fuels growing worries that it could lead to a global shortage of the grain.
While prices are still well below the levels of 2008 and global stockpiles are much stronger than they were two years ago, the specter of the 2008 shortage looms large, particularly for countries that can’t depend on their own production.
While prices are still well below the levels of 2008 and global stockpiles are much stronger than they were two years ago, the specter of the 2008 shortage looms large, particularly for countries that can’t depend on their own production.
TT
not quite a consistent line
TT
it might not be entirely coincidental that Javier Blas’ FT story appeared sometime in between
BE
Hm.
TT
anyway i probably should remember the line about glass houses…time to run
TT
many thanks for having me
BE
Okay Tony, thanks for joining. And enjoy The Don.
TT
still one of the best in the city
BE
I recommend the carpaccio followed by the squab pigeon.
TT
fantastic wine list too
BE
True. And you’ll need it with uberbear on the other side of the table.
BE
And, on that note, I think it’s time to wrap up.
TT
not sure Swedes
BE
Just a couple of things to mention.
BE
Lots of people seem to be getting back on board the Invensys story.
Invensys PLC (ISYS:LSE): Last: 273.10, down 0.9 (-0.33%), High: 273.50, Low: 270.40, Volume: 637.61k
BE
Can’t pin down the specifics yet, but bid/break-up rumours are prerennial.
BE
Also meant to highlight that Laxey Partners has appeared on the shareholder list of Capital and Regional.
BE
The “troubled” property and shopping centre group.
Capital and Regional PLC (CAL:LSE): Last: 31.50, down 0.25 (-0.79%), High: 31.75, Low: 31.00, Volume: 107.46k
BE
As for GKN, results look to be exactly as strong as was rumoured.
GKN Plc (GKN:LSE): Last: 142.00, up 5.4 (+3.95%), High: 142.00, Low: 137.00, Volume: 5.50m
BE
Here’s JP Morgan’s new numbers.
BE
Summary. GKN reported a strong set of results for H1 2010 with
revenues growing 25% YoY and trading profit margin at 7.5% vs 1.2%
in H1 2009. Margins improved YoY in all divisions and cash flows were
also strong. GKN was also able to utilize £53mn of deferred tax assets to
bring down the cash tax rate to 9% and the book tax rate to 14%.
revenues growing 25% YoY and trading profit margin at 7.5% vs 1.2%
in H1 2009. Margins improved YoY in all divisions and cash flows were
also strong. GKN was also able to utilize £53mn of deferred tax assets to
bring down the cash tax rate to 9% and the book tax rate to 14%.
BE
2010/2011E EPS up 17%/8%. We have raised our revenue forecast for
the group to £5,214m from £4,720m. This together with the increase in
our operating profit forecast for the group translates into a management
pre tax profit of £333m, up from £296m. As a result of the improved
profitability in countries such as the UK, US and Germany the group is
now well placed to utilize the some of the tax loss carry forward. As a
result of this we are lowering our tax rate forecast to 14% from 16% in
the current year. Overall these changes translate into 2010E EPS of
15.33p, up from 13.12p, an increase of 17%. The base effect of higher
sales this year, improved margins and a lower ongoing tax rates results
in 2011E EPS of 20.59p, up 8%.
the group to £5,214m from £4,720m. This together with the increase in
our operating profit forecast for the group translates into a management
pre tax profit of £333m, up from £296m. As a result of the improved
profitability in countries such as the UK, US and Germany the group is
now well placed to utilize the some of the tax loss carry forward. As a
result of this we are lowering our tax rate forecast to 14% from 16% in
the current year. Overall these changes translate into 2010E EPS of
15.33p, up from 13.12p, an increase of 17%. The base effect of higher
sales this year, improved margins and a lower ongoing tax rates results
in 2011E EPS of 20.59p, up 8%.
BE
Valuation undemanding. Based on our revised forecasts, the group is
trading on 2011E EV/sales, EV/EBIT and PE multiples of 0.52x, 6.5x
and 6.6x respectively. These compare with multiples for our universe of
1.14x, 8.9x, and 12.2x, respectively, leaving GKN trading at a discount
of between 36% and 54%. We believe our forecasts to be conservative
with ongoing upside risk. It is also noteworthy that the group is trading
on PE, EV/EBIT and EV/EBITDA multiples which are towards the
lower end of the range of the last 9 years. Hence, we are maintaining our
Overweight recommendation.
trading on 2011E EV/sales, EV/EBIT and PE multiples of 0.52x, 6.5x
and 6.6x respectively. These compare with multiples for our universe of
1.14x, 8.9x, and 12.2x, respectively, leaving GKN trading at a discount
of between 36% and 54%. We believe our forecasts to be conservative
with ongoing upside risk. It is also noteworthy that the group is trading
on PE, EV/EBIT and EV/EBITDA multiples which are towards the
lower end of the range of the last 9 years. Hence, we are maintaining our
Overweight recommendation.
BE
And I think that’ll do for today.
BE
Oh – thanks Cityslicker for the reminder, we haven’t mentioned Taylor Wipeout.
BE
It’s not in Muppet Alpha.
BE
Because, as previously noted, if we included every single company Neil hates it’d just be an all-share tracker.
BE
Fund’s up 6.8% since inception, by the way.
BE
And TW is flying.
Taylor Wimpey Plc (TW.:LSE): Last: 31.35, up 2.83 (+9.92%), High: 31.75, Low: 29.05, Volume: 38.87m
BE
Here’s Matrix with the summary.
BE
Interim results – in-line results, no major change to outlook in either UK (steady) or North America (volatile). NAV per share estimate for 2010 raised to 48p (42p) – group house prices up in H1 underlying 4%, 9.3% nominal. 86% of budgeted UK sales for the full year now achieved, 80% in North America: HOLD rating retained.
BE
No major surprises in the interims results to the end of June, with the tone remaining reasonably encouraging for the UK, although the US is clearly taking time to show sustained signs of recovery. Canada is still the best region in North America, with house sales rate up 18% against the same period last year to 1.18 sales per site per week. The house sales expectations set by the group were achieved in the first half for both North America and UK (and 80% and 86%, respectively, for full-year targets) by the end of June. Operating margin has recovered faster than we expected at 7.5% in the UK (-1%) and 7.6% in North America (5.2%), but driven mainly by a robust Canadian market.
BE
We predict a less onerous period in the US in the second half, with pricing steady on gently improving volumes, while Canada continues to offer the strongest outlook for both price and volume for Taylor Wimpey. We believe Canada now represents around 47% of the North American business by turnover but contributes far more of the £28.2m of first half operating profit than the US. The spilt of business is 67% UK, 33% North America by turnover, so UK outlook should remain a critical area. With the key metric remaining mortgage availability, the slow recovery over the first half is expected to continue to the end of 2011, given comments on lending intentions by the main banks as reported by the Bank of England in its quarterly report.
BE
Taylor Wimpey has demonstrated its determination to maintain the advantage it has wrung from the cost-reduction programme secured during the downturn and to strengthen the overhead controls necessary to meet its debt restructuring targets. There is little doubt that this is a much improved business, it is just not able to demonstrate value at the current price while its peers are trading with fewer if any legacy issues and certainly not the scale of pension liabilities derived from the large construction workforce Taylor Woodrow and George Wimpey once employed.
BE
Net debt at end-2009 was at £751m. This fell to £660m at the time of the AGM in April and £650m now. We forecast this will be £728m by the end of 2010 once cost of paying for deferred land acquisitions start to gather some momentum and new site openings soak up some working capital. This implies a gearing level of around 53%. This is still a high debt level compared with the operational cash flow, and its land purchase restrictions of £150m in the UK and £80m in the US set by the bond and private note loan covenants could prove a hindrance once the housing market recovers further and a call is made for additional working capital and land.
BE
With the NAV excluding deferred tax assets at 47p at the half-way stage – this should advance a little to 48p on our forecasts by the end of this year – the valuation seems to be up with events compared with its peers and the wider market. The HOLD rating appears appropriate for a company in a recovery phase while there appears to be better value elsewhere requiring fewer caveats for investors. 2011 is seen as the year of strengthening profit recovery at Taylor Wimpey, as it should be for most of the better-placed housebuilders.
BE
As for AV summer drinks, we await Neil’s return later this month to stick a date in the diary.
BE
But a date in the diary will be stuck.
BE
Late August or early September most likely.
BE
Right. Done. Thanks for all your comments.
BE
Join us again tomorrow for more of the same.
BE
Good afternoon, everyone.