FT Alphaville » Markets Live transcript 3 Sep 2010

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Markets Live transcript 3 Sep 2010

Posted by Neil Hume on Sep 03 11:03.

Markets Live chat transcript for the chat ending at 11:18 on 3 Sep 2010. Participants in this chat were: Neil Hume, FT Bryce Elder

Hola

Goodmorning

TFIF

a bit late this morning

and rushed

No staff – Joseph and Tracy both on hols

but Bryce is here

Hang on hang on hang on.

We need first to deal with the elephant in the room.

Or, more specifically, the grocery bags in the room.

err, yes

Why are there shopping bags next to your desk?

Ocado bags

Yes. Indeed.

First time I’ve ever seen one.

So you’re a secret Ocado shopper? Can’t get enough of their £3 humous?

well, you probably won’t believe this

but I was sent them

Hm.

in fact the Alpha team were sent them

Cider for Tracy, cocoa for izy, bunting for bryce, baby stuff for Joseph, pink moodys for Sam, moppets for me. Squid and alpha wine for all

And this is from Ocado themselves? A peace offering?

sadly not

I don’t their PR could think that laterally

it came from a reader

who I won’t reveal

for fear of embarassment

although I can reveal it was an Ocado FAIL

the delivery was supposed to come between 10-11am

it came at 9:33:43am

now what would have happened if I had not been in, eh?

still everything was nicely chilled

and the did ask for Neil Hume at reception

and say it was a delivery from Webvan

Well, kudos for that.

I’ll pay £1bn for such a sterling service.

Well I have a welcome pack

with a voucher for a free bottle of Fetzer wine

you can have that

I won’t use it again as I have Waitrose about 500 yards from my house

and as we all know by now

there is nothing wrong WHATSOEVER

with colleagues sharing things

be they vouchers

hotel rooms

wine

cars

Aha. I see they’ve sent me England flag bunting.

nice touch

“Send us victorious,” the packet says.

Hm.

personally I like the Baby Squid in Olive Oil Garlic and Parsley

anyway

enough of this

ROTR

want markets

not shopping lists

11:11AM

where shall we start?

rumour of the day

an increasingly regular feature

wide market

It’s a Friday, why not kick off with the rumourtrage.

Which +20 PE thing is going to be bid for today then?

Right

here’s today offering

and you’re right

this has a sky high PE

and the shares are at the record high

Aggreko

Aggreko PLC (AGK:LSE): Last: 1,510, up 74 (+5.15%), High: 1,510, Low: 1,450, Volume: 338.57k

apparently it is being stalked

by whom I have no idea

in fact I don’t know much about the company at all

other than they had billboards at the World Cup

I don’t quite get Aggreko either. Their generators run fairground merry-go-rounds.

And things in Africa.

I suppose some massive engineering conglomerate in the US

might buy it

for its emerging markets exposure

So, GE or the like. Something that could absorb the inevitable earnings dilution.

just looking at the chart

I stand corrected

not quite at a record high

was £16 just after the world cup

and a big analyst trip to SA

Yes. Conventently timed junket.

So didn’t someone start coverage of Aggreko today?

did they?

Making the usual points about “nice growth, shame about the valuation”

Hang on – will just check email.

Ah – Canaccord.

(soundbuy probably for the CrossRail digging)

A stock prone to reacting positively to good news
Aggreko has been the darling of the FTSE 100 throughout 2010, outperforming the market by 12% year to date. A string of consensus earnings upgrades throughout the year was driven by stellar growth in the company’s International Power Projects division and one-off revenues from contracts relating to the 2010 FIFA World Cup.

Aggreko currently commands a high 2010E P/E ratio of 19 times, above the 10-year average of 15 times. However, despite strong interim results in August, the shares have de-rated from over 20 times 2010E consensus earnings in July 2010. In our view, this is because the company’s outlook does not exceed current market expectations. Upgrade momentum must be maintained to support or increase the current rating.

Further earnings upgrades are possible …
Our analysis shows that Aggreko’s historical outperformance has been based on earnings upgrades that are often triggered by large, one-off opportunities. We argue that one or more of: (1) higher utilisation following record contract awards in the International Power Projects business; or (2) a one-off emergency response opportunity could come into play and drive further upgrades. However, market expectations for 2011 are low with Aggreko entering a cyclically light period for large one-off revenues in its Local business following £70 million of non-recurring revenues from the FIFA World Cup in South Africa and the Vancouver Winter Olympics in 2010.

… but we do not expect the stock to rerate in the near term
Whilst we are confident that Aggreko can continue to deliver earnings upgrades in 2010 and 2011, we do not believe these will be big enough to trigger a further rerating to above 20 times forward earnings.
In light of this, we initiate coverage with a HOLD rating and target price of 1,465p, which we derive from 19 times 2011E diluted adjusted earnings and provides 3% potential upside from current levels.

(Greenback there is bid talk because I have been phoned by several people)

thanks Monty

I’m guessing

but could you mean ABB

who lost out in the bidding for Chloride

(Greenback: it’s 6.17am in New York. I guess they must have started the roadshow meetings ferociously early.)

and

talking of which

we carried an interview with the boss of ABB

in the paper today

http://www.ft.com/cms/s/0/71abfe48-b6ae-11df-b3dd-00144feabdc0.html

let me grab some highlights

“I’m cautiously optimistic,” says Mr Hogan in a rare interview, almost two years to the day since he took over at ABB after stepping down as chief executive of GE’s healthcare division. “Anyone who’s overly optimistic right now would not be reading the economic statistics as they’re coming through.”

(Pause: Neil’s just managed to kick himself out.)

The group currently has $5.5bn in net cash, even after buying Ventyx and spending almost $1bn on raising its stake in its quoted Indian subsidiary.

In July, ABB stepped aside after being outbid by US rival Emerson for Chloride, the UK supplier of uninterruptible power systems, used in data centres, hospitals and industrial applications.

“Convergence is becoming increasingly important as suppliers try to bring together previously different sides of an industrial process, such as automation and power supply,” said Mr Hogan. “Likewise in smart grids, a lot is about communication and automation.”

there we go

loads of cash

and he likes power supply

2 and 2 =5

and we have a bid story

easy

I do enjoy Fridays.

and can we just go back to Thursday’s bid story

Which one? There were dozens.

Autonomy

stock has kicked on again

Autonomy Corp Plc (AU.:LSE): Last: 1,774, up 58 (+3.38%), High: 1,775, Low: 1,726, Volume: 816.25k

Now, while the bid rumours are still swirling

there is a also a note out of Panmure this morning

which says these new ASA snooping powers

will be good for the company

Go on. Let’s have a look.

News that the Advertising Standards Authority is to extend its monitoring to
the online world bodes well for Autonomy, in our view. As its extends its
regime to corporate websites, social networks and mobile applications we feel
that the ASA will either work via neighbourhood snoopers (twittering
curtains), armies of staff dedicated to browsing the online world or just tap
Autonomy’s domain skills get an IDOL license. The opportunity enables
Autonomy to span its new ‘Promote’ product offer with its established skills
in data governance. As consumer concerns are added to concerns about
children’s safety on social networks, Autonomy is ideally placed to capitalise
on an emerging market opportunity. Autonomy shares are currently enjoying
a rally on spurious take-over stories; investors should enjoy the ride. We
retain our Hold.

Hat tip to FT reporter Tim Bradshaw who flagged up that the UK
is to introduce one of the world’s most ambitious attempts to police online marketing
next year, when the Advertising Standards Authority extends its regime to corporate
websites, social networks and mobile applications. The rules will capture marketing
through Twitter and Facebook pages and could include user-generated content, such as YouTube videos. According to the FT, the current plan is to shame offenders and
include a “rogues’ gallery” on the ASA website with warnings appearing in search results alongside listings of products and brands of companies that refuse to comply with the code. According to the FT, search engines such as Google, as well as traditional media companies, have helped finance the new powers and will donate space in their sponsored results to help with publicising and enforcing the ASA’s work. The ASA, funded by the industry, can already ban misleading or offensive advertising on television, posters, print and online ads, such as banners. The ASA has seen complaints about online marketing double in recent years, even though it has been unable to remedy them. But the new rules have also been motivated by a desire to maintain the industry’s self-regulatory system at a time when concerns about children’s safety on social networks have been attracting attention.

all sounds a bit big brother that

I wonder if the software would report us to the ASA

Lots of what Dr Lynch calls “meaning-based computing” was in fact developed by the security sevices in the first place.

Remember meeting a couple of ex police types back in the early 2000s who’d basically taken a bunch of Met Office software and were trying to punt it as an Autonomy challenger.

(TRL – thanks Emoticon

anyway

I suspect there must be some short covering in Autonomy

helping the stock along

Sound plausible.

11:26AM

Before we get to th wider market

a few questions to answer

someone was asking us what our opinion is on GKP

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 114.75, up 0.5 (+0.44%), High: 119.00, Low: 114.25, Volume: 2.79m

the answer to that

is unprintable

(@NJS: yes, sorry, meant Metropolitan Police, not the weather forecasters.)

but Daniel Stewart is excited by this new drilling news

Gulf Keystone announces that it has begin drilling operations at Shikan-3
Shaikan-3 will be drilled to about 1,100m and is designed to test
Cretaceous intervals. During the drilling of Shaikan-1 there was mud loss
and other difficulties that prevented accurate logging hence the need for
this well

The DGA report indicated that a section from 1,000 – 1,313m MD was not
logged
Gulf Keystone reports that a large percentage of the of the Cretaceous is
saturated with hydrocarbons, but of lower API such as tar and heavy oil
Shaikan-3 will determine if these hydrocarbons are commercial
Drilling is expected to take two months
At a depth of 1,100m Shaikan-3 should test Garagu which is between
1,050m and has a gross interval of 197m and could be of similar size to the
Samord formation
Shaikan-3 is another positive step in the operations of Gulf Keystone and
could potentially improve volumes and valuation. Shaikan has
demonstrated that lighter hydrocarbons are deeper and given that the
Garagu is below the Sarmond it augurs well for this test zone

and as for Churchill Mining

Churchill Mining Plc (CHL:LSE): Last: 105.00, down 1.5 (-1.41%), High: 115.00, Low: 105.00, Volume: 293.62k

does today’s statement take us any further

I would say slightly

because the reason they have put out a trading statement

is that we got the name of the interested party correct- NTPC

not that it was difficult

MUMBAI — State-run NTPC Ltd. is considering buying stakes in two coal mines in Indonesia with coal resources of about 1.8 billion metric tons in the current financial year, to secure coal supplies for its power plants, said Chairman R.S. Sharma Monday.

India’s domestic coal production is expected to rise over the next few years, but will still fall short of the power sector’s massive demand, forcing companies such as NTPC to increasingly rely on imported coal.

The anticipated shortfall in domestic coal is also prompting power companies to secure coal assets in Indonesia, Mozambique and Australia.

“We are taking a view on two coal mines in Indonesia. (One is located) southeast of Kalimantan with 1 billion tons of coal resources and (the other is located at) Sumatra with 800 million tons,” Mr. Sharma said.

that was from the WSJ

11:29AM

Wider market then?

I’m assuming we’re treading water ahead of the payrolls.

we were

but have moved higher

in thin trading volumes obviously

FTSE 100

not up 30 points at 5,400

another physcological level breached

actually it has been a pretty good run this week

(clearseaz – join the club)

You really wouldn’t want to be short in this market. Constant squeeze higher, no liquidity to cover.

although

after the run we have had

would you want to be long ahead of today’s payroll figures

No. I’d want to still be on holiday. Which I suspect many are.

me too

right

these payrolls

let’s just put up consensus

so people know what to look for

headline level is for -100,000

and an unemployment rate of 9.6

but

no one is looking at that

everyone focused on the private payroll numbers

And the detail on those, please?

right

consensus is for +40,000, down from 71,000 in July

although some like Goldman are more bearish

there are going for no change in the private figure

We expect no change in private nonfarm payrolls in August and a
125,000 overall decline due to the reduction of temporary Census
employment. The information received this week—including jobless claims,
survey data, the ADP private-sector payroll forecast, and job advertising
indexes—has been broadly consistent with our below-consensus forecast.

The decline in headline payrolls should push up the unemployment
rate by 0.1 point to 9.6% in August. High unemployment should continue to
keep a lid on wage growth, so we expect only a 0.1% increase in average
hourly earnings.

he recovery of the labor market has stalled in recent months. Following
an impressive rate of private-sector job creation in March and April, the
rate of hiring has slowed appreciably since May. The three-month average
change in private payrolls, for example, slowed from 154,000 in April to
51,000 in July. Private employment in the household survey—calculated as
employment in nonagricultural industries, excluding government wage &
salary workers—tells a similar story. In addition to the slowdown in
private-sector hiring, temporary hiring for the biennial Census turned
from a boost into a drag. Census hiring peaked in May, adding 410,000
workers to overall payrolls, before turning negative in June and July.

Tomorrow’s report on job conditions in August is likely to show a
continuation of these trends. We expect unchanged private nonfarm payrolls
and a 125,000 overall decline due to a reduction in public payrolls. Of
this decline in public payrolls, most (around 115,000) is due to the
Census.

hat about the rest of the employment report? We expect the negative
headline payroll number to push up the unemployment rate up by one tenth
to 9.6% in August. For those who are employed, earnings growth should
remain sluggish. Two factors are important for hourly earnings, (1) the
amount of slack in the labor market and (2) the rate of inflation.
Although the “structural” rate of unemployment is likely to have risen
somewhat, our estimates suggest that this increase is likely to have been
small. (See “Only a Modest Rise in Structural Unemployment So Far,” US
Economics Analyst, August 27, 2010.) A 10% unemployment rate thus implies
substantial slack in the economy, which should mean more competition for
jobs and smaller wage increases. Given low inflation, we expect average
hourly earnings to rise only 0.1% in the August report.

back to stocks?

11:35AM

Right

what’s happening with Telecity?

Telecity Group Plc (TCY:LSE): Last: 500.00, up 15.6 (+3.22%), High: 512.00, Low: 481.40, Volume: 465.68k

last time I looked

they were 440p

more bid rumours?

Not that I’ve heard.

Though there is a very positive Deutsche note going round.

As part of a telecoms sector wrap.

and what it say?

Here’s the upshot.

In conjunction with our telecom sector outlook report published this morning
we are upgrading our target price on Telecity from 500p to 550p. This
purely reflects a roll-forward of our DCF-valuation model to FY11 year-end.
There are no changes to our estimates. We continue to see Telecity as being
well placed to benefit from the continued secular growth trends in internet
related services. And we continue to see upside risk to consensus estimates
as management considers additional expansion projects in Europe.
Rating remains BUY.

To derive our target price we use a long term DCF model with a WACC of
9.1% and perpetuity growth rate of 0%.The WACC reflects a risk free rate
of 4.3%, ERP of 4.5% and beta of 1.3. Our model assumptions generate a
DCF value of 620p against which we continue to apply a discount to reflect
our view that it will take the market more than the next 6-12 months to fully
reflect TCY’s growth potential in the share price. The discount equates to
c50% of the potential value uplift from recently announced expansions in
London, Frankfurt and Stockholm. Further potential expansion projects (e.g.
Amsterdam, Dublin) could provide further valuation upside potential.

rather dull

where’s the bid stuff

Here, relatively speaking, is the interesting bit.

We see recent M&A activity in the US (e.g. 3PAR) as supportive of the potential
magnitude of secular growth trends such as cloud computing. And
recent announcements from the likes of Apple (relaunched IPTV) and Sony
(cloud-based music service) as further evidence of the increasing importance
of internet-based services which will drive data-centre IP traffic and
storage demands.

Though I doubt that’s telling anyone anything they don’t already know.

what

that internet traffic is exploding

Yes. But we’re all getting terribly excited about cloud computing again, apparently.

are we?

C&W Worldwide can convert its thousands of square feet of useless vanity office space in Central London into datacentres, apparently.

Thin client computing. It’s 1996 again.

I’ll take your word for that

Anyhoo, want to see the rest of Deutsche’s telecoms note? It’s broadly supportive of the sector.

sure

paste away

Hang on – sorry. Lost it.

Found it now.

Increase weightings to participate in sector re-rating
Telcos under-performed the cyclical rally in H1 09 and failed to gain ground in H2 (in line) as
top line growth deteriorated. Despite green shoots, the sector remained weak for much of
H1 2010 (the usual seasonal trend) but is now out-performing ytd. Equity market weakness
favours Telco’s defensive characteristics, but improving growth, driven by mobile and
emerging markets, is boosting confidence in the sustainability of strong cashflows and
dividends. We believe telco growth recovery is set to continue at least through to end-10.

A part cyclical, part secular recovery
Telco top line weakness in 2009 was wrongly attributed to structural rather than cyclical
factors. In Europe we identified a strong correlation between mobile voice volumes and
employment trends, which though lagging, are improving. We show that Emerging market
telcos are more responsive to economic recovery. Accelerating secular growth of mobile
data has provided a further boost and is a source of future potential upside (or at least a
buffer to the economy).

Growth improvement to continue through to year end
European telcos have reported three sequential quarters of improving organic growth with
Q2 reaching -0.5% vs -3.5% in the nadir of Q3 09. We now expect flat revenues in FY10
(+2.2pp on last year), which are well under-pinned by the economy. In Europe the recovery
is driven by mobile which we still prefer to fixed, and should continue to benefit from data
and employment growth for another two quarters and despite European GDP growth
stagnating. EM exposure is attractive at this time though increases risk on any double-dip.

Sovereign and index effects remain influential
Our analysis shows that local stock market performance and sovereign risk remain
important drivers of telco share prices in 2010. This is important especially given imminent
substantial Government refinancing in Spain, Portugal and Ireland (Greece appears low risk
in this regard at least near term), and could create attractive entry-points. Interestingly
dividend yield correlation inverted in 2010 but high yielders (e.g. FT, TEF, CWC) should find
more favour if markets turn bearish.

Valuation compelling given the return of growth
Telco valuations remain attractive vs. market (e.g. 6.2% div yield, 2.6pp higher than
market). Dividends look to be well covered by FCF (1.6x), are unlikely to be frittered away
on M&A, and we continue to view the mobile capex outlook as benign, despite high data
volumes. In any event, mobile DCFs are more sensitive to growth than capex and investors
should welcome incremental spend to assure the success of mobile data. Our top picks
amongst the telco large-caps through to end-2010 are: Vodafone, Telefonica & Telenor.
Amongst the smaller and cable names we prefer KDG, VMED, & CWW. CWC is our
preferred high yielder.

Vodafone Group Plc (VOD:LSE): Last: 158.40, up 1.1 (+0.70%), High: 159.55, Low: 156.75, Volume: 20.47m

thanks for that, I have something more to add on Vodafone

a note from Merrill which previews this strategy day coming up

from which we could get news of a cash return policy

November strategy announcement
Vodafone should present a strategy update in November 2010. We expect the
UK-listed company to focus investor attention on portfolio management, cash
return policy, network strategy, branding plans and the data product pipeline.
Portfolio management – hidden value of 35p/share
We believe that portfolio management efforts could unlock substantial hidden
value – of c35p/share (China Mobile, Bharti, Japanese PIK, SFR stake, non-core
EM). A possible disposal of the China Mobile stake would be a game-changer for
Vodafone, in our view, as this would highlight willingness to actively manage the
portfolio, cover this year’s dividend, pay for European & Indian spectrum and delever
the balance sheet.

US business firing on all cylinders: key to FCF & DPS growth
Verizon W (>40% of Vodafone earnings) expects ongoing accelerating growth &
sustained strong margins. The product pipeline is strong (Q3 Android, Q4 LTE
and possible 2011 iPhone deal). Verizon W net debt is now c$15bn (down from
$38bn in Jan 2009) – we see a US dividend being paid to Vodafone before US net
debt reaches zero (Q4 2011), boosting reported Vodafone FCF by c40-50%.

Reiterate Buy on Vodafone shares – PO of 190p/share
Vodafone appears committed to DPS growth of c7% pa between March 2010 and
March 2013. However, driven by US cash dividends, we estimate that Vodafone’s
2013 DPS could be c12.0p (some 17% higher than current consensus estimates).
We are raising our PO by 5.5%, from 180p/share to 190p/share. Our BUY rating is
still supported by non-core asset sales, the US cash dividend, FCF swing at EM
businesses, Best Network position in Europe/US, and finally, expected DPS
growth. In our view, valuation remains compelling at c9.7x reported March 2011E

So Voda

could become a serious high yielder

But … “A possible disposal of the China Mobile stake would be a game-changer” …. It’s only worth about £4bn, I thought?

Surprised that’d move the dial.

it won’t be

but Vodafone does need to think about

what it wants to be

it’s like a giant holding company at the moment

lots of loose ends

minority stakes

imperial overeach of Chris Gent

still has to be sorted

So. Unwinding the previous management’s empire building via pointless, powerless, yieldless minority stakes.

Makes sense I guess.

11:45AM

Right

what else is moving out there?

What of the oilies?

Soco doesn’t seem to be doing very well.

they have announced duster

Soco International PLC (SIA:LSE): Last: 437.90, down 38.7 (-8.12%), High: 464.00, Low: 425.60, Volume: 1.44m

not that you would guess from the statement

they talk about the existence of a working hydrocarbon system

Just not working well enough, I guess.

indeed not

here’s the sector watcher

SOCO’s first well on its onshore Nganzi block in the Democratic Republic of Congo (DRC) is effectively a dry hole. Despite that well-used phrase “existence of a working hydrocarbon system”, the 2,200 metre Nganga-1 well encountered only water-bearing sands. Pre-drill the group estimated that the prospect could contain 200m barrels of oil, or 130m barrels net to SIA’s 65% interest, i.e. it could have made a material difference to its valuation. However there are up to three more chances in the area, with the similarly sized Kinganga Nyanya-1 well due to spud immediately after the current well is P&A’d. This will be the second firm well in the campaign which has two contingent wells, although these will clearly depend on the perceived success of the first two. The Nganga well is obviously a disappointment, although it was certainly a high-risk well and as such we don’t expect the shares to suffer too much as a result, especially after the success the group had earlier this week in Vietnam. Nevertheless we think SIA is over-priced and we would be sellers.

and here is JP Morgan

SOCO announced this morning that the Nganga well, onshore the
DRC, failed to encounter oil and will accordingly be plugged and
abandoned. However, the well did find reservoir and source rock,
thereby derisking the key components needed for a working
petroleum system and thus actually increasing the geological chance of
success for Prospect D, from c.20% to c.33% (management guidance).
However, given the vicinity of prospects A and C to Prospect B, their
chances of success look less favourable now. Adjusting our model for
the results decreases our risked (unrisked) upside from 221p (953p) to
193p (839p). We leave our core NAV of 349p unchanged.

there is still hope for this block

The rig will now move to drill the Kinganga Nyanya 1 well (Prospect D)
which is in a different part of the basin, and importantly is not expected
to be impacted by this localised sand given different margin geometry.
Given the good reservoir and source rock found at Prospect B, Prospect
D’s chance of success has been increased from c.20% to c.33%. The key
risk remains seal, as SOCO does not have seismic control over the
northern end of the prospect. However, an aeromag survey indicated
structural closure. Also, SOCO believes that Prospect D is sourced from
a different direction than Prospect B.

and while we are on the oils

some interest in another old favourite today

Regal Petroleum Plc (RPT:LSE): Last: 37.00, up 4.25 (+12.98%), High: 37.75, Low: 33.50, Volume: 2.51m

Oh. Here we go.

What now?

well obviously as it’s Friday

we have a bid rumour

although who wants RPT

I have no idea

and then there is some talk about a positive update next

not checked to see if anything is due

will do so now

here we go

from a recent RNS statement

Regal, the AIM-listed oil and gas exploration and production group (symbol: RPT), is pleased to announce the spud of exploration well E-1 Sagna on 22 August 2010 in its 100%-held Barlad Concession in Romania.

E-1 Sagna is being drilled based on an expanded network of 2D seismic profiles close to Regal’s RBN-4 gas discovery announced on 13 December 2007. The well is designed to provide an additional test of the regionally productive gas-bearing Sarmatian aged sandstone reservoirs. The planned total depth of the well will be approximately 900 metres and it is anticipated that the well will be completed by mid-September.

Is that big?

not really but it’s not in the Ukraine

so that’s a positive

here’s a bit of context from a recent Seymour Piece note

Regal has started drilling the E-1 Sagna well on its Barlad Concession (Regal 100% and operator) in Romania. The well is being drilled close to the company’s RBN-4 gas discovery which was announced in December 2007. The E-1 Sagna well will be drilled to a target depth (TD) of approximately 900 metres with operations likely to be completed by mid-September. These shallow depth gas targets are typically quite modest in terms of reserves but discoveries are comparatively high-value given that they can be tied into existing infrastructure quickly. Whilst Ukraine remains Regal’s primary focus, Romania does offer (albeit small) potential additional upside in terms of reserves and production. BUY.

Right.

Meanwhile, was just reading a note from earlier this week from some mob called Dragon Capital.

Sticking a 124p price target on Regal.

Dragon Capital

who they?

http://www.dragon-capital.ua

That’s all I know.

Want a taster?

go on then

equity research all the way from the Ukraine

Yea. And they deliver a frankly over-generous array of statistics.

Coverage initiation. Regal Petroleum trades at a staggering 95% discount to its
peers based on 2010E EV/2P, which we believe reflects investors’ concern over
the latest license conflict with the government and yet looks unjustifiably high
to us. Quite expectedly, given its low production forecast for 2010, Regal is
valued at premiums over peers on profitability multiples — 145% on 2010E
EV/EBITDA and 162% on P/E. But production growth expected in 2011
onwards makes the company’s profitability-based ratios much more attractive,
resulting in discounts of 34% and 53% on 2011-12F EV/EBITDA and 55% and
72% on 2011-12F P/E.

Our summary analysis, being the average of the DCF
and comparative valuation estimates, yielded a fair value estimate of
$1.93/share or 283% above the stock’s current price. While such an upside
warrants a Strong Buy recommendation, we rate Regal as a Buy to reflect its
high-risk profile. The stock ranks second out of eight on the sector analyst’s
ranking scale.

Outlook. There are several imminent developments affecting Regal’s financial
performance and risk profile. First, the government committee inspecting the
company’s licenses will meet to approve the final decision in mid-fall. We think
the chances are very high that Regal will successfully defend its position, which
should give an immediate boost to its stock price. Second, the company is
completing testing of two new wells and finishing work-over on a third well,
which, if successful, will provide for higher production. Given its current
output of around 2,000 boepd, we expect Regal to become at least breakeven in
2010 and rapidly increase profitability in 2011, eventually more than doubling
its output and attaining EBITDA and net margins of around 70% and 50%,
respectively. In the long run, the company can potentially become the largest
private player on the domestic oil and gas market, capitalizing on its generous
reserve base and modern drilling technologies.

quite enough of that I think

Yes. Agree.

11:54AM

Time for small cap corner?

Certainly. What’s caught your eye?

well Emblaze looked to have flogged that IT division

Ra’anana, Israel, 3 September 2010: Emblaze Ltd (LSE: BLZ) announces that it
has agreed to sell its entire 49.2% holding in Formula Systems (1985) Ltd (“
Formula”) to Asseco Poland SA, the largest Polish IT company (Warsaw Stock
Exchange: ACP) and a leading member of the Asseco Group (“Asseco”), for a total
consideration of US$ 139,138,400 payable in cash on closing of the
transaction. The sale is subject to Emblaze shareholders’ approval.

but there is a BIG sting in the tail

Well I never. What’s that?

this

The net proceeds of the transaction will be applied towards implementing
Emblaze’s strategy to focus on further improving the Company’s business
performance and achieving long-term sustainable growth

Now

as a shareholder

I’d be seriously unhappy with that

Emblaze being given $140m to spend on development

Yikes. How many handsets can they fail to develop for that much? I assume several.

what about an iPad killer

you could burn through that cash in months

In the sense that it’s something that looks like an iPad that’s quietly killed, then probably.

11:58AM

Thanks Greenback

I guess the play on Mad Cow is what

Genus?

or Devro

Robert Wiseman Diaries

Cranswick? Or do they only do pigs?

Devro Plc (DVO:LSE): Last: 237.90, up 2.9 (+1.23%), High: 241.00, Low: 235.00, Volume: 117.13k

Genus PLC (GNS:LSE): Last: 724.00, up 3.5 (+0.49%), High: 725.00, Low: 716.50, Volume: 224.67k

Cranswick PLC (CWK:LSE): Last: 830.00, down 1.5 (-0.18%), High: 830.00, Low: 825.50, Volume: 7.11k

anyway

back to the small caps

the other big movers today

are

gold companies

specifically gold companies with a single asset

For example?

Patagonia Gold PLC (PGD:LSE): Last: 18.00, up 2 (+12.50%), High: 18.00, Low: 15.75, Volume: 1.54m

European Goldfields Ltd (EGU:LSE): Last: 620.96, up 27.46 (+4.63%), High: 619.00, Low: 595.00, Volume: 41.34k

Why?

a deal canada overnight

Goldcorp today launched an agreed bid for Andean Resources in a C$3.6bn cash and share deal. Andean Resources is an early stage, non-producing gold asset in Argentina, which has 2.54Moz gold and 23.56Moz silver. The offer represents a 35% premium to the TSX closing price, and c.21% of Andean’s shareholder register having indicated they will vote in favour of the deal. The deal is another clear indicator (following the acquisition of Red Back by Kinross at 2.2x NAV) that some gold stocks remain hugely undervalued bid targets, particularly on reserve / resource valuations. The offer is being made at a very punchy US$773/oz resource gold equivalent oz; our favoured early stage gold producer European Goldfields is trading on $140/oz resource. While Andean’s resource base has lots of upside, this deal implies EGU at £32/shr vs. the current share price of just £6/shr.

that was from Liberum

and you can see the read across

they are paying a pretty punchy multiple

but EG

is not the only play on this

this is from the new mining team at Collins Stewart

Goldcorp, one of the world’s largest gold producers, has announced an acquisition of Andean Resources (AND AU) for $3.4bn in cash and shares, trumping a competing all share offer of $3.2bn from Eldorado Gold. Andean owns a high grade gold/silver exploration project Cerro Negro in Patagonia, Southern Argentina with reserves of over 2 moz gold and 20 moz silver. Cerro Negro is suitable for underground mining.
Looking at acquisition metrics, Goldcorp are paying $1,425 per gold equivalent reserve ounce and $925 per gold equivalent resource ounce, approximately 4x the sector average multiples. These numbers appear very expensive; however Cerro Negro is a world class asset with high grades (+10g/t) and potential to expand the reserve base far beyond the current levels. This looks like a good acquisition for Goldcorp’ due their strong balance sheet, share price strength and the high upside in the Cerro Negro asset.

This acquisition has very positive implications for the junior gold companies with good quality gold deposits. With gold price at these levels, we expect cash rich gold producers to look for M&A for growth, to satisfy the market, where growth companies are attracting significant premiums. We expect high quality, one deposit companies such as Centamin Egypt, Greystar Resources to strengthen on the back of these news. We also expect increased investor interest in companies with gold projects in the vicinity to Cerro Negro, such as Minera IRL, Patagonia Gold, Mariana Resources and Extorre Gold.

need to look at that a bit more closely

but it does seems

that for bigger companies it is easier to borrow debt very cheaply at the moment

and buy companies

rather than whack up cap ex

and do it yourself

I guess the Potash bid is an example of that

although somewhat bigger

talkng of Potash and BHP

aren’t there rumours that BHP want to buy Anadarko?

Ah yes. This comes from a rather well written backgrounder piece in the Australian yesterday.

http://www.theaustralian.com.au/business/behind-bhps-burning-energy-ambitions/story-e6frg8zx-1225913505881

otash Corp isn’t the only blockbuster deal BHP has been actively working on in 2010.

The aggressive and acquisitive chief executive and his team are believed to have also been examining a major oil and gas acquisition in tandem with the encirclement of the $US38.7 billion ($42.5bn) Canadian fertiliser player.

An energy deal has been firmly on the agenda for BHP for several years. The Australian can lift the lid on manoeuvring that occurred between BHP and Royal Dutch Shell last year, when they explored, but then abandoned, a joint $35bn takeover bid for local player Woodside Petroleum.

(etc)

a senior figure in the global energy industry is convinced that the “second target” for BHP is Anadarko Petroleum Corporation, telling The Australian he believed the US oil and gas independent was firmly on BHP’s radar. BHP declined to comment for this article.

hmm. Anadarko had a bit of move on the back of that

up 5% I think

not sure why they would want to leave themselves on the hook for the Macondo clear up

but Anadarko does have a really exciting portfolio

here’s a bit more on this

from Liberum

Elsewhere, Anadarko Petroleum was up as much as 5.1% on the day in NY trading, closing up 3.0% to $50.24 on speculation of being a takeover target for BHP. Anadarko, who holds a 25% stake in BP’s Macondo well in the Gulf of Mexico, has dropped 32% since the rig explosion in mid-May. Assuming a 25% premium to current price (market cap $24.9bn), a bid would come in at $40.1bn (on an EV basis) which would take BHP’s FY2011 gearing to 39% (on a 100% debt basis). Theoretically, combined with a fully debt-funded $43bn bid for Potash Corp, BHP’s net debt would soar to $83.2bn in FY2011, with a gearing of 56% and net debt/EBITDA of 2.2x. While this would clearly be an opportunistic acquisition in a favoured commodity, in light of the current Potash bid we do not believe management would deviate from its current practice of exercising balance sheet restraint. We therefore see the likelihood of BHP undertaking two simultaneous bids of these magnitudes as small.

12:07PM

and just back to European Goldfields for a moment

here’s another reason to be positive

no equity issue on the way

apparently

this comes from a sector watcher

European Goldfields is now the largest company on AIM with a market capitalisation of over £1bn. We have a price target of 625p and the stock closed last night at 593p, so the stock has rallied hard on the better gold prices of late. Where is the valuation upside? Clearly final permitting at Olympias and Skouries in Greece, hopefully by year end will provide the catalyst for a further re-rating of the project.
I took a lunch with Tim Morgan-Wynne and Steve Sharpe of European Goldfields and a shareholder yesterday. They are keen to stress that they will not need to issue any new equity to fund the three projects they have moving forward. In total, they need $500mn of capex, but the Certej project in Rumania has already been 75% debt financed and the bank that help fund this are keen to get involved with the Greek assets. Don’t forget there are plenty of Greek banks that will have to get involved and EGU’s major shareholder is Aktor the big Greek construction company. Olympias will need $50mn to re-open and Skouries will need $300mn to get into production. The company has $100mn of working capital. Martin Konig Tim Morgan-Wynne and Steve Sharpe are debt finance specialists so if they say they can do this with out going to the equity market; you have to take them seriously. I think the general market believes a major slug of equity is coming. They are wrong.

12:07PM

it is past midday

most of ROTR have disappeared

so shall we finish up?

Lamprell?

Lamprell Plc (LAM:LSE): Last: 285.80, up 18.2 (+6.80%), High: 288.70, Low: 273.50, Volume: 399.71k

upgrade?

Yup. Citi pushing.

Hang on. Will just grab.

2010E moderate, 2011E very strong — From 2011, we expect major construction
sales to drive earnings growth despite lower margins. In addition to its rig
refurbishment business (c 20% gross margin, lower sales), Lamprell is building a
high-volume construction business (11-15% gross margin, higher sales). We think
the market underestimates the resulting upside potential to earnings and valuation
in the next 12-24 months

Base Case: target price (DCF) £3.80 — Requires 25% success on bids and 50% of
order options exercised. EPS vs consensus (Reuters): -17%, +82%, +30% in
2010E, 2011E and 2012E, respectively.

Bull Case: fair value £5.50 — Requires 50% success on bids and 75% of order
options. EPS vs consensus +7%, +154%, +98% in 2010E, 2011E and 2012E.

Bear Case: fair value £2.60 — Assumes only 10% success on bids and 25% of
order options. EPS vs consensus -26%, +39%, -13% in 2010E, 2011E and 2012E.

Blue Sky: fair value £8.50 — Requires 100% success on bids and 100% of order
options. EPS vs consensus +47%, +288%, +213% in 2010E, 2011E and 2012E.

Valuation undemanding — The stock trades on 2011E P/E multiples of 6.9x (Citi)
and 12.7x (consensus), well within Lamprell’s historical range of 3-20x. The 2011E
P/E of 9.7x implied by our target price is well below the 12.5x average at which the
sector trades, on consensus estimates. (See Figure 15.)

Buy reiterated, catalysts from 4Q 11E onwards — We reiterate our Buy (1H) rating
as the contracts won in 2010 mostly translate into revenue from 2011E, driving the
earnings momentum (tripling EPS in 2011E). Further awards (jack-up rigs,
liftboats) should follow from 4Q 10E onwards; GTL/FLNG mid 2011E. The results in
2011 should reveal the earnings growth from projects awarded. We raise the DCFbased
target price to £3.80 based on our higher earnings estimates.

And that’s that.

nothing more on Yell I am afraid

looks to me like a massive sqeeze

Yell Group PLC (YELL:LSE): Last: 17.80, up 0.01 (+0.06%), High: 19.62, Low: 17.20, Volume: 24.02m

As for Man Group, as mentioned by Monkey …..

There’s a bid rumour in the Independent.

Can’t say I’ve heard that.

But others seem right to note that AHL had a belting August.

trending with the market I would guess

Well, you’d have thought, but other hedgies have done jack recently.

Another month like August for AHL and the fund’s nearly back to its HWM.

There was a rather good note out of Numis yesterday on this theme.

go on

Ahg. Can’t find it now. But the detail’s summarised in today’s paper. So go spend £2.

and while we are talking about fund management

Gartmore

post all the recent departures

Numis popped in for a chat

and

Performance fee upside potential – we believe earnings could recover rapidly from current forecast levels if performance can be restored (each 1% incremental fund alpha = incremental £7.2m fees = £2.88m EBITDA = 0.7p EPS). II) Possible bid target – we do not see a bid as highly likely, although we believe the prospect of a bid cannot be ignored at the current share price range (we do not see enough natural fit with most of the logical potential bidders, but we estimate worth 140-205p to a serious acquirer). We do nonetheless feel it would represent a significant risk to any investor contemplating shorting the stock. III) Equity biased asset manager, so should benefit from real long term AuM/earnings growth. IV) As a player in the retail market, we see it as a growth beneficiary from the trend from DB to DC pensions.

We expect no dividends for 3-4 years – given the level of debt (desire to pay it off by 2014) and the waiver expiry in 2012 (FSA’s desire for groups to move towards a waiver free existence), we do not expect significant dividends to be paid until the company has generated c.£130m of FCF after dividends – we think this will not be before 2014. II) Large net outflows – we expect the last of the large outflows in Q310 and expect the group to get to neutral flows by Q211. If the Gartmore brand has been more damaged than we believe, other important fund managers leave and/or consultants/intermediaries place funds under review (similar to the experience of F&C 12-18 months ago), we believe the outflows could persist for longer. III) Strategic growth plans seem limited – management did not leave us with the impression that they had any significant growth plans in the pipeline.

We have separately modelled the FuM and P&L controlled by the Euro Large Cap team, for investors concerned about key person risk. We estimate the team (during 2011) will control c.£3bn AuM, 25% group revenue, 20% group EBITDA and 19% of our valuation.
Valuation: We value the company at 113p (Roger Guy 21p + Other 137p – 45p surplus capital deficit on a waiver free basis). This yields a hold rating. We would rather own other companies in the sector, such as Jupiter (BUY TP278p) or Aberdeen (BUY TP163p), as these companies share many of the investment positives, without many of risks in our view. As we cannot rule out the possibility of a bid, we believe shorting the stock would be a risky strategy at the current price.

that’s quite fun

Modelling Roger Guy

anyway

we are done

almost

just want to add one more thing

BAE Systems PLC (BA.:LSE): Last: 324.30, up 11 (+3.51%), High: 324.90, Low: 314.40, Volume: 6.72m

up again

another positive note around

this time from Redburn

We are today soft launching coverage of the Pan European Aerospace and Defence sector, publishing our recommendations, price targets and valuation forecasts for the 7 stocks we are initially following. These are detailed below.
We shall be following these up with more detailed studies on the stocks in coming weeks and months. In the mean time if you would like to discuss any of these or arrange a meeting please feel free to call.

Whilst the civil stocks have performed well since the market lows, defence has been heavily derated in the face of legitimate budgetary concerns in North America & Europe.
> The rating of defence stocks now looks as ludicrously low as some civil stocks just 18 months ago as the market anticipated cuts to civil aircraft production. We feel that in the case of defence the impact of spending cuts may not be as bad as feared, and thus estimates could well be underestimating outturns next year and beyond:
- US Defence Secretary Robert Gates constantly talks of the historic mistake of underinvestment (i.e. RDT&E and procurement spend) in previous downturns.
- A large part of reduced spending should come from lower activity in Iraq and hopefully eventually Afghanistan, as well as overhead reductions and efficiencies.
- International demand remains strong for exports.
- UK defence cuts are coming but will impact only UK activities, a relatively small part of total exposures. Europe is broadly in the same situation.
> Civil market models are increasingly exposed to growth in large aircraft production, as well as recovery in regional, bizjet and general aviation markets, all bolstered by more favourable FX than was threatening in recent years .
> In defence, the yield-supported BAE Systems (Buy, Price Target 450p) remains our favoured play; Thales (Neutral, Price Target€29.0) is our least favoured.

> In civil, Rolls-Royce (Buy, Price Target700p) is our key core long term investment although both Safran (Buy, Price Target €24.0) and MTU (Neutral, Price Target €48.0) remain attractive. EADS (Neutral, Price Target €20.0) is a deep value play although this requires evidence it can overcome its new programme retardations and return to more normal earnings generation.
Recommendations

Right I am done

thanks for joining us this week

Yes – and thanks for each and every one of your comments.

(Bear – read RNS)

and thanks to our generous Ocado sponsor

we shall enjoy the Montes Alpha wine this weekend

well

I will

probably need it

if I watch England

in fact I will need a second or third

to dull the pain

And if anyone wants re-useable England large flag outdoor bunting, do drop me an email.

Have a good afternoon, everyone.

cya

This entry was posted by Neil Hume on Friday, September 3rd, 2010 at 11:03 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 3 Sep 2010

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