Markets Live chat transcript for the chat ending at 12:10 on 3 Nov 2010. Participants in this chat were: Neil Hume, FT bryce.elder
NH
Morning rabble
NH
and welcome to Markets Live
NH
and what could be the biggest day of the year
NH
or a massive damp squib
BE
FED DAY.
NH
(BB – Yellow card)
BE
CRACK THE CHAMPAGNE ON THE QE2.
NH
oh the anticipation
NH
I could barely sleep last night
NH
will Ben B give us $500bn
NH
will he give us a target on yields
NH
I haven’t been this excited for years
NH
(BB – get a broker we are not Charles Stanley)
NH
anyway
NH
you can join us
NH
for all the fun
NH
at 5.30pm
NH
for Macro Live
NH
our new feature
BE
Excellent.
NH
(BB – dissent to the ref is not looked kindly upon)
NH
and to get you in the mood
NH
a very good post has just gone up from tracy
NH
she reckons the Fed could do this
NH
In the early 1940s, with the US fighting another hugely expensive World War and Fed/US Treasury independence not as firmly entrenched as it is now, the Fed set off to support the country’s finances by “stabilising” the government securities market. That is, the central bank sought to prop up bond prices and lower yields.
In the early 1940s, with the US fighting another hugely expensive World War and Fed/US Treasury independence not as firmly entrenched as it is now, the Fed set off to support the country’s finances by “stabilising” the government securities market. That is, the central bank sought to prop up bond prices and lower yields.
The Federal Reserve announced it would begin targeting specific interest rates at two (and occasionally three) points on the Treasury yield curve. One-year Treasury bills were capped at 7/8 of a per cent and three-month bills at 3/8 of a per cent. 25-year US Treasuries (i.e. longer-term rates) were also capped at 2.5 per cent.
NH
(BB – you’re close to the edge now)
11:08AM
NH
Right
NH
let’s move on to the wider market
NH
and I guess it’s quiet
NH
ahead of the big event
BE
It is.
BE
Though we’re up.
BE
BP’s obviously the story of the day.
BE
On a HUGE GOLDMAN SACHS UPGRADE
BE
WHICH CAME OUT YESTERDAY.
BE
BP reported strong underlying 3Q results, with adjusted operating profit
(ex. GoM charge) of US$7.77 bn, 7% ahead of company-compiled consensus.
The beat came across both E&P (better realizations and TNK-BP results)
and R&M. BP took an additional Gulf of Mexico charge in the quarter of
US$7.7 bn pre-tax (on top of US$32 bn booked in 2Q) primarily due to the
longer time taken to complete the relief well and the higher cost of the
intervention. We increase our 2010E/11E/12E EPS by 6%, 4% and 3% on
higher E&P realizations and stronger R&M earnings. Our new price target
(up 4%) implies 27% upside and we upgrade the stock to Buy from Neutral.
(ex. GoM charge) of US$7.77 bn, 7% ahead of company-compiled consensus.
The beat came across both E&P (better realizations and TNK-BP results)
and R&M. BP took an additional Gulf of Mexico charge in the quarter of
US$7.7 bn pre-tax (on top of US$32 bn booked in 2Q) primarily due to the
longer time taken to complete the relief well and the higher cost of the
intervention. We increase our 2010E/11E/12E EPS by 6%, 4% and 3% on
higher E&P realizations and stronger R&M earnings. Our new price target
(up 4%) implies 27% upside and we upgrade the stock to Buy from Neutral.
NH
(well Captain M)
BE
Ok – that’s that over. Where now?
NH
NH
actually on BP
NH
there’s a much better note
NH
from JP Morgan
NH
urging the company to do something radical
NH
(BB – off)
BE
Ah yes – basically saying that management haven’t done jack to drag value out of the corpse of BP.
NH
zap
Warning to rude and abusive commenters – your ability to comment will be terminated immediately and permanently, without warning. Henceforth, FTAlphaville has instituted a One Strike and You Are Out policy. We’ve had enough. We are going to clean up these pixels once and for all.
BE
He’s very good, Fred Lucas.
BE
Tends to approach things in a leftfield way, but that’s no bad thing.
BE
Do you have the note to hand?
NH
As it happens I do
NH
and what a shame BB
NH
has now been banned
NH
so she won’t be able to comment
NH
honestly
NH
some of the rif raff we get round here
NH
BP’s Q3 results call was reasonably informative, but may well keep
marginal buyers away from this name for the remainder of Q4 because the
three most potent catalysts for a substantial market re-think on BP’s worth
are not, in our view, in the near term view: (i) signs that BP’s board is
considering more radical actions to unlock value – left unclear at best. (ii)
a resolution of gross negligence risks – unlikely in Q4 2010, so BP
remains confronted by a stock market bias to gross negligence. (iii) zero
clarity on the level of dividends when they resume and the policy that will
bound them.
marginal buyers away from this name for the remainder of Q4 because the
three most potent catalysts for a substantial market re-think on BP’s worth
are not, in our view, in the near term view: (i) signs that BP’s board is
considering more radical actions to unlock value – left unclear at best. (ii)
a resolution of gross negligence risks – unlikely in Q4 2010, so BP
remains confronted by a stock market bias to gross negligence. (iii) zero
clarity on the level of dividends when they resume and the policy that will
bound them.
NH
So, this name may appear tantalizingly cheap versus its peers (BP 2010E
PER around 6x versus 11x for RD Shell) and its history for now and so
continue to under perform RD Shell. This is unfortunate given BP’s
superior earnings power, once again confirmed in Q3 results (Figure 1) –
there are still ‘four wheels on this wagon’.
PER around 6x versus 11x for RD Shell) and its history for now and so
continue to under perform RD Shell. This is unfortunate given BP’s
superior earnings power, once again confirmed in Q3 results (Figure 1) –
there are still ‘four wheels on this wagon’.
NH
We believe BP’s new CEO has a golden opportunity to reshape BP in more
fundamental ways than his present 5-point remedy suggests – his script is
not yet fully written and he must be given more time to complete it, but at
present, the book does not appear to be turning into a best seller. But don’t
yet abandon all hope, there is some good news….consensus EPS for 2010
will almost certainly rise 10-15% from around 66p (IBES) given 9M EPS
of 56p – Q4 EPS will almost certainly exceed Q3 (19.0p) even if we see
flat production Q4-o-Q3, higher refinery outages and a smaller contribution
from trading. We must hope that a PER of 6x provides some kind of floor.
fundamental ways than his present 5-point remedy suggests – his script is
not yet fully written and he must be given more time to complete it, but at
present, the book does not appear to be turning into a best seller. But don’t
yet abandon all hope, there is some good news….consensus EPS for 2010
will almost certainly rise 10-15% from around 66p (IBES) given 9M EPS
of 56p – Q4 EPS will almost certainly exceed Q3 (19.0p) even if we see
flat production Q4-o-Q3, higher refinery outages and a smaller contribution
from trading. We must hope that a PER of 6x provides some kind of floor.
NH
(Moose we don’t)
BE
(Moose: though “Blonde” suggests an XX chromosone arrangement.)
NH
Right
NH
enough of this
NH
where now
NH
we have some breaking news from Sky
11:13AM
BE
Go on.
NH
LONDON, Nov 3 (Reuters) – News Corporation : * Says formally notified European Commission of proposed offer for BSkyB
NH
so the clock starts ticking
NH
but the real issue here
NH
is whether Vince, under the media plurality laws
NH
refers the deal to the CC
NH
I suspect politically he has to
NH
but News Corp has a pretty powerful case
NH
indeed Sky has been pretty good for plurality
NH
introduced another news service in Sky nEws
NH
all those new TV channels on its platform
NH
and let’s face if News Corp wanted to start a massive price war
NH
and drive other papers out of business
NH
does it need to buy Sky for this?
NH
this deal looks like a straight forward arb to me
NH
News Corp has flabby balance sheet
NH
cash earning nothing in the bank
NH
and it buys SKy
NH
which is chuckng off loads of cash
NH
looks like a good arb to me
BE
Hm. That argument, though logical, is unlikely to sway Vince.
BE
Who’s the main risk factor in the arb story, I’d guess.
NH
anyway
NH
here’s how things work
NH
EU has 3 days to notify member state (UK)
NH
UK then has 15 workin days to request that the review is done here
NH
ie Vince says
NH
we should review
NH
because of concerns
BE
I see.
BE
Any share price reaction?
NH
none
NH
flat
NH
dead money I suspect until next year
BE
Yup. Looks that way.
NH
when it gets through all the reviews
NH
and then we have the almight row over price
NH
all that to come
11:20AM
NH
More breaking news
NH
Markit Intraday Update – Ireland hits 550bp
NH
the picture gets worse in Ireland
BE
Another record, I assume?
NH
Sovereigns – Greece 835bp (-8), Spain 227bp (+1), Portugal 415bp (+7), Italy 180bp (0), Ireland 545bp (+22), Belgium 125bp (+2)
Marked underperformance by Ireland in the sovereign market. Quotes as wide as 550bp have been seen this morning – yet another record.
Marked underperformance by Ireland in the sovereign market. Quotes as wide as 550bp have been seen this morning – yet another record.
NH
and I think
NH
there was a story in the paper today
NH
raising worries about the budget
NH
and whether it gets passed
NH
bear with me
NH
the FT search function is god awful
NH
reland’s political and financial crisis deepened as the country’s cost of borrowing hit fresh highs. Fears also rose that Dublin would struggle to pass a critical budget to rein back its deficit owing to the resignation of a senior backbencher.
Investors warned they would not buy Irish bonds because of worries that Dublin was facing a “credibility crisis” over its parlous economy and growing banking problems.
The resignation of Jim McDaid, a former minister from the ruling Fianna Fáil party, increases the pressures on Brian Cowen, the prime minister, five weeks ahead of a critical budget aimed at containing its widening fiscal deficit.
11:23AM
NH
Time for some stock stuff then?
BE
Guess so. What’s on your mind?
NH
I quite like this story from Next
NH
we have been bearish on the stock for a while
NH
because of rising cotton prices
BE
Yup.
NH
and then today
NH
the CEO
NH
comes out and says there is a bubble in cotton prices
NH
Outlook for 2011 Prices
As a result of further rises in the price of cotton, retail price rises are likely to be at the top end of our previously stated 5% to 8% range for the first quarter of next year. The longevity of what appears to be a speculative bubble in cotton prices will be critical in determining prices for the second quarter.
BE
Sure. It’s nearly doubled this year.
BE
For rather dull reasons, like an Indian export ban and bad weather in China.
NH
indeed
BE
Is it a speculation-driven market? Dunno.
NH
SINGAPORE, Nov 3 (Reuters) – U.S. and China cotton futures climbed to all-time highs on Wednesday as tightening global supplies and strong demand from the world’s top importer, China, continued to bolster the markets.
Bullish fundamentals have drawn large inflows of speculative funds into cotton, making it the best performing commodity this year, outshining the record-setting gold market and wheat futures.
China’s benchmark Zhengzhou cotton jumped 4.6 percent to 29,950 yuan a tonne, setting a new record for a third straight day, while the ICE Futures benchmark December cotton contract rose to a historic high of $1.3810 per lb in Asian trade.
Bullish fundamentals have drawn large inflows of speculative funds into cotton, making it the best performing commodity this year, outshining the record-setting gold market and wheat futures.
China’s benchmark Zhengzhou cotton
NH
“There is a big supply gap at home and abroad,” said Yang Guoqi, an analyst with Jinshi Futures in China’s largest cotton producing region of Xinjiang.
“I think the price rise is reasonable and I believe the price will definitely increase to 30,000 yuan a tonne in the near future.
“I think the price rise is reasonable and I believe the price will definitely increase to 30,000 yuan a tonne in the near future.
NH
actually a good point on speculation
NH
if I have to read another story about raw material prices going up because of
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH
china
NH
speculation
NH
I will scream
NH
anyway
NH
not good news for Next
NH
which is now going to bump up prices
NH
and with the VAT rise coming
NH
are customers going to wear that
NH
forgive the pun
BE
So shares are down, unsurprisingly.
Next Plc (NXT:LSE): Last: 2,157, down 72 (-3.23%), High: 2,185, Low: 2,127, Volume: 1.03m
BE
Results looked a mixed bag.
NH
hmmm
NH
as it happens cotton isn’t the only worrying thin
NH
in today’s statement
NH
like for likes weak
NH
although the Directory
NH
which I have to say is a very good product
NH
is going strong
NH
here’s something from Merrill on the figures
NH
Q3 retail LFLs weaker than expected, Directory very strong
Next has reported a slightly weaker Q3 IMS than our high end expectations, with
total Next Retail sales -0.3% (BofAMLe +1.4%) and Next Brand sales +2.2%
(BofAMLe +3.9%). Next is now guiding to potential price rises for Q1 FY12 at the
top end of its previously announced range of 5-8% which is slightly higher than
the 4-6% range we have heard from other retailers, and says that “the longevity of
what appears to be a speculative bubble in cotton prices will be critical in
determining prices for Q2”. Next has reiterated its guidance issued at its interim
results for PBT for FY11 to be in the range of £535mn to £560mn
Next has reported a slightly weaker Q3 IMS than our high end expectations, with
total Next Retail sales -0.3% (BofAMLe +1.4%) and Next Brand sales +2.2%
(BofAMLe +3.9%). Next is now guiding to potential price rises for Q1 FY12 at the
top end of its previously announced range of 5-8% which is slightly higher than
the 4-6% range we have heard from other retailers, and says that “the longevity of
what appears to be a speculative bubble in cotton prices will be critical in
determining prices for Q2”. Next has reiterated its guidance issued at its interim
results for PBT for FY11 to be in the range of £535mn to £560mn
NH
Next retail LFLs a little weak
Retail LFL sales in Q3 (excl. Direct) were -3.3% (BofAMLe -2.0%) or roughly flat
incl. Direct sales (BofAMLe +1.0%). This represents a broadly stable underlying
trend vs. H1. We think that Next’s sales should have benefited from more
prominent TV advertising but that this may have become something of a zero sum
game as several other retailers have also been advertising aggressively.
Retail LFL sales in Q3 (excl. Direct) were -3.3% (BofAMLe -2.0%) or roughly flat
incl. Direct sales (BofAMLe +1.0%). This represents a broadly stable underlying
trend vs. H1. We think that Next’s sales should have benefited from more
prominent TV advertising but that this may have become something of a zero sum
game as several other retailers have also been advertising aggressively.
NH
Next Directory sales very strong
Directory sales were +7.9% in Q3, slightly below our very high end +9.5%
estimate, but still an underlying acceleration on H1. We think this reflects Next’s
more aggressive customer recruitment in Directory, wider and deeper ranges and
more convenient ordering and delivery options for customers, plus the ongoing
structural growth of the UK online clothing market.
Directory sales were +7.9% in Q3, slightly below our very high end +9.5%
estimate, but still an underlying acceleration on H1. We think this reflects Next’s
more aggressive customer recruitment in Directory, wider and deeper ranges and
more convenient ordering and delivery options for customers, plus the ongoing
structural growth of the UK online clothing market.
NH
Valuation still compelling
Next shares have drifted down in advance of the IMS, however we may see some
further near term weakness on account of the slightly weaker than expected
Retail LFL trend. We would expect Next to take advantage of any weakness in the
share price to buy back its own shares with its surplus FCF. Even assuming some
mild downwards pressure on estimates, we think the shares offer very good value
on a 12m view, trading at c.9x cal 11E EPS. Our PO of £27 is based on a DCF
backed up by a blended P/E analysis, valuing Retail at a 20% 2011E P/E discount
to the UK General Retail sector (8x) and Directory at a 50% premium (15x).
Next shares have drifted down in advance of the IMS, however we may see some
further near term weakness on account of the slightly weaker than expected
Retail LFL trend. We would expect Next to take advantage of any weakness in the
share price to buy back its own shares with its surplus FCF. Even assuming some
mild downwards pressure on estimates, we think the shares offer very good value
on a 12m view, trading at c.9x cal 11E EPS. Our PO of £27 is based on a DCF
backed up by a blended P/E analysis, valuing Retail at a 20% 2011E P/E discount
to the UK General Retail sector (8x) and Directory at a 50% premium (15x).
NH
sums it up I think
BE
Matrix, meanwhile, asks the obvious question about share buybacks.
BE
Which is one that’s always asked after Next delivers meh numbers.
NH
(Yes 2 Para)
BE
Arg – they’ve copy protected their note.
NH
really
BE
Hm. I’ll have to summarise
BE
Sales growth slowing ….
NH
Next has announced Q3 sales growth below consensus, although still in line with the company’s guided range. We view that fact that the top line is slowing, despite a pickup in inflation, as a cause for concern, given the strategy of growing EPS through share buybacks. This strategy has seen a £500m net cash position ten years ago become £500m net debt. With little capex to drive sales growth, we maintain our REDUCE rating and prefer Marks & Spencer (BUY TP 477p).
NH
there you go
BE
Ah – ta.
NH
my version isn’t locked
NH
While Next is cash generative ahead of buybacks, the level of buybacks required (£200m this year) to maintain the EPS growth that the market has now come to expect looks unsustainable on slowing sales growth. Capex barely covers depreciation, and the star of the piece, Next Directory, is seeing sales growth slow.
BE
(@Monkey: I make no claims to be professional.)
NH
(good morning Mr Smug)
NH
right
NH
the news from Next has unsettled
NH
Marks
Marks and Spencer Group PLC (MKS:LSE): Last: 419.60, down 7.9 (-1.85%), High: 430.30, Low: 416.50, Volume: 2.96m
NH
which is not surprising
NH
2011 shaping up to be a difficult year
BE
And doesn’t AB Foods have numbers soon?
BE
I’d imagine Primark would be in the front line for the cost inflation/slowing sales thing.
Associated British Foods PLC (ABF:LSE): Last: 1,051, down 10 (-0.94%), High: 1,066, Low: 1,049, Volume: 350.24k
11:33AM
NH
OK
NH
lets have a look at Lloyds
NH
there are very very very pleased with their new CEO
NH
and surprisingly
NH
the story didn’t leak over hear
NH
to Pestowire
Top News from Top Sources. The BBC’s Business Editor, Robert Peston, has played in important role keeping the British public fully informed during these difficult times.
NH
or Kleinmanwire
NH
it was in one of the Spanish papers
NH
anyway
NH
the market likes it
Lloyds Banking Group plc (LLOY:LSE): Last: 69.56, up 2.17 (+3.22%), High: 70.08, Low: 67.95, Volume: 89.34m
NH
but my first thought has to be that the new man
NH
ANTÓNIO HORTA-OSÓRIO
NH
looks like
NH
that bloke out of desperate housewives
NH
Carlos Solis – Desperate Housewives
BE
Really. I’ll take your word for it.
BE
Also, his hame sounds like it should be an anagram. But I can’t get one.
NH
anyway, as Tuna says the market is no doubt happy that Daniels has gone
NH
because he was bullied into buying HFLOP by Gordon Brown
NH
and almost destroyed the bank in the process
NH
and one can’t even say the benefits
NH
monopoly position in the mortgage market are that great
NH
because the new banking review will probably end that
BE
True. And Mr Horta-Osorio seems to tick the right boxes as a replacement.
NH
well
NH
what’s his track record?
NH
doing loads of deals
NH
intergration
NH
and cost cutting
NH
is that what Lloyds needs now?
BE
They need someone who’s used to moving large numbers of people around, including into the dole queue.
NH
true
BE
Horta-Osorio has done that.
NH
I would have stayed at Santander
NH
rather than get involved with the political viper pit around Lloyds
BE
Would you? 
NH
wonder what they are paying him
NH
loads I expect
NH
(rodney – yellow)
BE
Santander? Really? Rock del Norte?
BE
Anyway, do we have any comment?
NH
yes
NH
here’s Bruce Packard from Seymour Pierce
NH
The head of Santander’s UK unit, Antonio Horta-Osorio, is to become the new CEO at Britain’s Lloyds, newspaper Expansion reported, ahead of the expected IPO of the Santander unit. At Santander’s Q3 results (28th October) António Horta-Osório, confirmed that the UK business will go ahead with an IPO in 2011, probably in the first half of the year.
NH
Comment: If truethis would appear poor timing for Santander, which might struggle to IPO Abbey an unfamiliar Chief Exec. From a LLOY perspective, we think he is a credible external appointment. We are somewhat sceptical about LLOY medium term aspiration of 1.4x (or less) loans to deposit ratio and Net Interest Margin of 2.5%. An external appointment might be more keen to rebase expectations. Our recommendation on LLOY is HOLD TP 72p.
NH
and here’s something Merrill wrote
NH
before Lloyds got round to confirming the appointment
NH
Press suggests that Lloyds to hire Santander UK’s CEO
According to Expansion newspaper, Lloyds looks set to announce that Antonio
Horta-Osorio, Santander UK’s CEO, will take over from Eric Daniels as CEO of
Lloyds. If confirmed, we would view this as a strong positive at this stage, as the
Santander UK CEO is extremely highly regarded by the market and in our view
would bring about a renewed focus on cost and integration benefits over and
above those identified by current Lloyds’ management. Although we reduced our
top of the range Lloyds earnings expectations yesterday (due to Ireland), we
remain very bullish on the shares. Today’s news on the potential appointment of a
new CEO could drive expectations upwards. Stock is at 1.1x 2010E NAV, which
looks too cheap. We reiterate BUY.
According to Expansion newspaper, Lloyds looks set to announce that Antonio
Horta-Osorio, Santander UK’s CEO, will take over from Eric Daniels as CEO of
Lloyds. If confirmed, we would view this as a strong positive at this stage, as the
Santander UK CEO is extremely highly regarded by the market and in our view
would bring about a renewed focus on cost and integration benefits over and
above those identified by current Lloyds’ management. Although we reduced our
top of the range Lloyds earnings expectations yesterday (due to Ireland), we
remain very bullish on the shares. Today’s news on the potential appointment of a
new CEO could drive expectations upwards. Stock is at 1.1x 2010E NAV, which
looks too cheap. We reiterate BUY.
NH
New potential CEO is a strong positive
If the appointment of Antonio Horta-Osorio as Lloyds CEO is confirmed, this
would be excellent news we think: Horta-Osorio has a very strong track record in
the UK, having built up the old Abbey franchise into one of the UK’s most dynamic
and cost-efficient high street banks. Santander UK is the only real competitor to
the domestic UK banks – Lloyd’s appointment of a proven successful competitor
could be a major coup in our view.
If the appointment of Antonio Horta-Osorio as Lloyds CEO is confirmed, this
would be excellent news we think: Horta-Osorio has a very strong track record in
the UK, having built up the old Abbey franchise into one of the UK’s most dynamic
and cost-efficient high street banks. Santander UK is the only real competitor to
the domestic UK banks – Lloyd’s appointment of a proven successful competitor
could be a major coup in our view.
NH
A good fit for Lloyds
Lloyds and Santander are broadly similar Mortgage/Savings businesses: both
have dominant positions in UK mortgages (Lloyds: 30%. Santander 14%) and are
both domestically and retail focussed. So Horta-Osorio’s potential transition into
the driving seat at Lloyds should be a smooth process in our view.
Lloyds and Santander are broadly similar Mortgage/Savings businesses: both
have dominant positions in UK mortgages (Lloyds: 30%. Santander 14%) and are
both domestically and retail focussed. So Horta-Osorio’s potential transition into
the driving seat at Lloyds should be a smooth process in our view.
NH
If true, potential further efficiency gains at Lloyds…
Santander UK has delivered very impressive costs efficiency – at 9M10, the cost
income ratio was <40%. Lloyds is already one of the more cost efficient UK
banks, but we could expect renewed focus on efficiency under a new regime.
Spanish domestic banks typically run with a ~30% cost income ratio, so we think
there is potential for the market to anticipate further efficiency gains at Lloyds,
Santander UK has delivered very impressive costs efficiency – at 9M10, the cost
income ratio was <40%. Lloyds is already one of the more cost efficient UK
banks, but we could expect renewed focus on efficiency under a new regime.
Spanish domestic banks typically run with a ~30% cost income ratio, so we think
there is potential for the market to anticipate further efficiency gains at Lloyds,
NH
so there you have it
NH
slasher Osorio
NH
to strike again
NH
to sack thousands of Halifax satff
BE
There’s loads more on a similar theme.
BE
Here’s Ian Gordon at Paribas
BE
All the right credentials for a strategically constrained business
We continue to regard Lloyds as something of a strategically constrained cash cow.
This is intended to be a positive comment in that rather than having any requirement
(or realistic opportunity) to expand into new markets, the task that lies ahead for Eric
Daniels successor is to complete the rationalisation of the group, shrinking the
balance sheet, over-delivering against the targeted GBP2bn cost synergies following
the HBOS acquisition, and transforming the combined entity into a predominantly
retail-focussed low risk UK-centric bank. This will take a further 3-4 years to achieve.
We continue to regard Lloyds as something of a strategically constrained cash cow.
This is intended to be a positive comment in that rather than having any requirement
(or realistic opportunity) to expand into new markets, the task that lies ahead for Eric
Daniels successor is to complete the rationalisation of the group, shrinking the
balance sheet, over-delivering against the targeted GBP2bn cost synergies following
the HBOS acquisition, and transforming the combined entity into a predominantly
retail-focussed low risk UK-centric bank. This will take a further 3-4 years to achieve.
BE
Santander UK – a model to which Lloyds already aspires?
Santander UK is the product of three relatively weak UK retail franchises – Abbey
National, Alliance & Leicester and Bradford & Bingley. It has established clear cost
leadership, and without the various legacy issues of the crisis that attach to its UK
peers, it has already provided a glimpse of the level of returns that might be
achievable in a materially less competitive post-crisis UK retail banking environment.
Santander UK is the product of three relatively weak UK retail franchises – Abbey
National, Alliance & Leicester and Bradford & Bingley. It has established clear cost
leadership, and without the various legacy issues of the crisis that attach to its UK
peers, it has already provided a glimpse of the level of returns that might be
achievable in a materially less competitive post-crisis UK retail banking environment.
BE
And here’s the conclusion from Carla AdS from JP Morgan
BE
In summary – we would see this news as a positive in the near term,
although there may be questions about potential ‘kitchen sinking’ over
the next few months for Lloyds Banking Group. We would expect
consensus estimates to come more in line with where we are i.e. c. 15%
below current levels. For Santander we would see this as a negative, as
well as potentially delaying an IPO of the UK business.
although there may be questions about potential ‘kitchen sinking’ over
the next few months for Lloyds Banking Group. We would expect
consensus estimates to come more in line with where we are i.e. c. 15%
below current levels. For Santander we would see this as a negative, as
well as potentially delaying an IPO of the UK business.
BE
And that’s quite enough Recruitment Live I think.
NH
and what does this mean
NH
for the IPO of Santander UK
NH
in the balance?
NH
with the Osorio gone?
BE
Good question, that.
BE
I’d assume Santander will want to say it’s business as usual.
BE
Whether that’s true or not is another matter.
NH
right
NH
bored with banks
11:43AM
NH
which should have a quick look at Cobham
NH
COB:LSe
NH
which has been hammered on one of these
NH
read between the lines trading statements
Cobham PLC (COB:LSE): Last: 211.80, down 22 (-9.41%), High: 220.10, Low: 206.30, Volume: 10.22m
NH
on first glance it looks good
NH
then you get the nuance
NH
Cobham
NH
is this flares
NH
and decoys
NH
and tanker refuelling stuff?
BE
Yup. Flares. Flak. Pipes.
NH
aerospace broadly
NH
so
BE
Yes. Though they prefer “defence electronics”
NH
the company has lowered its outlook for 2010
NH
from
NH
“further underlying progress”
NH
to
NH
“limited underlying progress”
NH
of course that will be lost on my most people
NH
but what it means is downgrades
NH
here’s citigroup
NH
COB reported a slight decline in organic revenue in 9M10 (vs. -3% in 1H10) in the
core Technology divisions and lowered its outlook for FY10 from its previous
expectation of “further underlying progress” to “limited underlying progress”. We
expect consensus estimates to fall by 3-5% in 2010E and potentially by 5-10% in
2011E if lower growth rates are extrapolated going forward.
core Technology divisions and lowered its outlook for FY10 from its previous
expectation of “further underlying progress” to “limited underlying progress”. We
expect consensus estimates to fall by 3-5% in 2010E and potentially by 5-10% in
2011E if lower growth rates are extrapolated going forward.
NH
The core Technology divisions, which represent 80-90% of sales and EBITA,
reported a slight decline in organic revenues in 9M10, similar to -3% reported in
1H10. COB had previously guided that organic growth would return in 2H10 but
now guides that a significant increase in organic revenue growth in 2010 is
unlikely to be achieved. No comment was made on 2011E. The issues are
persistent delays and deferrals of defence contracts in the US. Our earnings
forecasts assume 8-9% organic sales growth in 2H10 and beyond.
reported a slight decline in organic revenues in 9M10, similar to -3% reported in
1H10. COB had previously guided that organic growth would return in 2H10 but
now guides that a significant increase in organic revenue growth in 2010 is
unlikely to be achieved. No comment was made on 2011E. The issues are
persistent delays and deferrals of defence contracts in the US. Our earnings
forecasts assume 8-9% organic sales growth in 2H10 and beyond.
NH
Cobham has lowered the outlook for FY10 from its previous expectation of “further
underlying progress” to “limited underlying progress” in the year. We believe
consensus EPS of 19.9p (Citi 20.0p) in 2010 (+6% vs. 18.8p in 2009A) could fall
by 3-5% and consensus of 21.4p (Citi 22.0p) for 2011E could fall by 5-10%if
lower growth rates are extrapolated going forward. Restructuring benefits of ￡10m
are expected in 2010, as previously announced.
underlying progress” to “limited underlying progress” in the year. We believe
consensus EPS of 19.9p (Citi 20.0p) in 2010 (+6% vs. 18.8p in 2009A) could fall
by 3-5% and consensus of 21.4p (Citi 22.0p) for 2011E could fall by 5-10%if
lower growth rates are extrapolated going forward. Restructuring benefits of ￡10m
are expected in 2010, as previously announced.
NH
I am getting slightly annoyed with coded statements
NH
not exactly a level playing field is it?
NH
and Cobham aren’t the fed
NH
why all this Delphic stuff?
BE
You’re right. There’s couching your language in caution and there’s simply being evasive.
NH
why can’t they just spell it out
NH
for everyone in black and whilte
BE
I guess if your business is making defensive countermeasures, it affects management thinking.
BE
So here are what the downgrades look like.
BE
Cheuvreux to start.
BE
Defence activity in Q3-10 was disappointing
Cobham released this morning its interim management statement;
b-t-b in technology divisions is stable vs. H1-10. On sales:
1) technology divisions are disappointing with 9m decreasing,
meaning that Q3-10 is negative (H1-10 was up 1%); 2) commercial
market sales remain stable but fragile, according to the group; and
3) aviation services still delivered good organic growth.
Cobham released this morning its interim management statement;
b-t-b in technology divisions is stable vs. H1-10. On sales:
1) technology divisions are disappointing with 9m decreasing,
meaning that Q3-10 is negative (H1-10 was up 1%); 2) commercial
market sales remain stable but fragile, according to the group; and
3) aviation services still delivered good organic growth.
BE
Sales/underlying profit growth to be weaker than exp.
Given the fact that growth in Q4-10 remains uncertain and contract
delays/postponements are still on the agenda, the group indicated
that organic sales growth and underlying profit growth could be
lower than initially expected in 2010 (even if the group had no
precise guidance for 2010).
Given the fact that growth in Q4-10 remains uncertain and contract
delays/postponements are still on the agenda, the group indicated
that organic sales growth and underlying profit growth could be
lower than initially expected in 2010 (even if the group had no
precise guidance for 2010).
BE
2/Outperform rating maintained at this stage, TP at 256p
We keep our 2/Outperform rating at this stage with a TP at
EUR256p; we are likely to revise down our H2-10E to take into
account the message of this publication. On a longer-term view, we
still consider that Cobham has sound positioning in future growing
defence segments (C4ISR), while the return of the M&A story should
allow the group to grow faster.
We keep our 2/Outperform rating at this stage with a TP at
EUR256p; we are likely to revise down our H2-10E to take into
account the message of this publication. On a longer-term view, we
still consider that Cobham has sound positioning in future growing
defence segments (C4ISR), while the return of the M&A story should
allow the group to grow faster.
BE
So. Bid target. As per usual. Has been for years.
NH
OK
NH
thanks for that
11:49AM
NH
Right I need to shoot off earlier today
NH
to give a presentation to the sales force
NH
so we have about 15 mins left
NH
and a fair bit to get through
BE
We have a sales force?
NH
yes
BE
Neat.
BE
So – what now?
NH
well the owner of the Indy
NH
is tweeting again
NH
lebedevalex
Police raid bank of Russian media tycoon Lebedev http://bit.ly/9NyRpP 9 minutes ago via Post my articles
NH
and his blogged on the police raid
NH
which in the circumstances
NH
is a pretty brave thing to do
NH
Armed police on Tuesday swarmed into the Moscow headquarters of a bank owned by Russian media tycoon Alexander Lebedev, who watched helplessly as they rifled through company files, his spokesman and police said.
Up to 50 masked officers raided the National Reserve Bank, jumping turnstiles to enter the offices and search for certain documents, Lebedev’s spokesman, Artyom Artyomov, told The Associated Press.
“What do they need this idiotic show for?” Artyomov asked. “Why do they come in here with their guns and masks? If they need a file, they can come with a piece of paper and just ask,” he said.
NH
City police spokesman Viktor Biryukov confirmed to the AP that the raid was part of an ongoing criminal investigation. He would not elaborate.
The bank later issued a statement saying that police had produced a court order for the search in connection with transactions made by one of the bank’s clients in 2008.
BE
He also released CCTV footage of the raid.
NH
hmm
NH
I think he might be pushing things here
BE
It’s not very dramatic viewing, to be honest.
NH
fair enough
11:52AM
NH
Right
NH
elsewhere
Petropavlovsk PLC (POG:LSE): Last: 911.50, down 27.5 (-2.93%), High: 928.50, Low: 895.00, Volume: 1.90m
NH
and guess what?
NH
they didn’t make the absurdly ambitious production forecast
BE
Blimey. Why? Because Russia can be quite cold at times?
NH
yeah
NH
they have 16 years experience in the country
NH
and they have only just realised
NH
it’s get cold
NH
and things don’t like work
NH
and also
NH
those diggers
NH
well one still hasn’t turned up
NH
anyway
NH
massive downgrades have followed
NH
and management now has to persuade the market
NH
they can get out 700,000oz next year
NH
when they only managed 535,000 this year
BE
Management credibility does seem to be an issue.
NH
yep
NH
why would anyone believe them
BE
So the options are: regain credibility, or change management.
NH
one issue
NH
the biggest shareholder
NH
the chairman’s son
BE
Oh.
BE
That’s awkward.
NH
very
NH
right
NH
a bit of comment on this
NH
from Collins Stewart
NH
who believe the company has
NH
some serious structural issues
NH
FY 2010 production downgraded to 510 – 530 koz: Whilst the Q3 production figure
of 138.3 koz was previously flagged up and expected, the full year production
downgrade to 510 – 530 koz is the most significant take out from the release. Using
the low of the new guidance range, this represents a 20% downgrade from the most
recent implied guidance of 635 koz and a 24% downgrade from the March’s guidance.
We flagged up our expectation for further downgrades in our note on the 19th of
October, however the scale of the downgrade surprised us, with our most recent end
of year forecast being 564 koz.
of 138.3 koz was previously flagged up and expected, the full year production
downgrade to 510 – 530 koz is the most significant take out from the release. Using
the low of the new guidance range, this represents a 20% downgrade from the most
recent implied guidance of 635 koz and a 24% downgrade from the March’s guidance.
We flagged up our expectation for further downgrades in our note on the 19th of
October, however the scale of the downgrade surprised us, with our most recent end
of year forecast being 564 koz.
NH
Issues at Pioneer and Malomir responsible for delay: Downgrade is primarily due
to delay in high grade mining at Pioneer, with processing of the material now not
expected to start until December 2010. Mined grades at the recently commissioned
Malomir operation are also below recent guidance, however is in line with our
forecasts. The company flagged up equipment delays, harsh weather conditions as
well as lack of planning contingencies as the chief causes of the production delays.
to delay in high grade mining at Pioneer, with processing of the material now not
expected to start until December 2010. Mined grades at the recently commissioned
Malomir operation are also below recent guidance, however is in line with our
forecasts. The company flagged up equipment delays, harsh weather conditions as
well as lack of planning contingencies as the chief causes of the production delays.
NH
Downgrades symptomatic of bigger issues: Downgrades symptomatic of bigger
issues: As previously flagged up by us, we believe that the production delays are
Petropavlovsk are symptomatic of issues, which are insufficient mine planning,
inaccurate forecasting and suboptimal growth. We re-iterate our thesis that
Petropavlovsk faces significant challenges in changing its work culture to become a
profitable bulk, low grade miner, as the processing capacity increases and grades
decrease at its operations. We will be updating our numbers this morning and expect
a change in our production forecast for 2011. The stock should trade sharply lower
today. Our preferred pick in the growth gold producer space is Avocet Mining (Buy
TP 230p)
issues: As previously flagged up by us, we believe that the production delays are
Petropavlovsk are symptomatic of issues, which are insufficient mine planning,
inaccurate forecasting and suboptimal growth. We re-iterate our thesis that
Petropavlovsk faces significant challenges in changing its work culture to become a
profitable bulk, low grade miner, as the processing capacity increases and grades
decrease at its operations. We will be updating our numbers this morning and expect
a change in our production forecast for 2011. The stock should trade sharply lower
today. Our preferred pick in the growth gold producer space is Avocet Mining (Buy
TP 230p)
11:56AM
NH
Bryce
NH
anything you want to look at?
BE
Partygaming getting hit again.
Muppet stock. PartyGaming would be a penny dreadful, but for a share consolidation.
PartyGaming Plc (PRTY:LSE): Last: 227.50, down 11.5 (-4.81%), High: 243.00, Low: 227.10, Volume: 1.70m
NH
really. I thought Sharon Angle failed to get elected
BE
She didn’t. A rare defeat for the Tea Party.
BE
But I guess this answers what’s currently driving the stock.
BE
It’s not really all that much to do with the potential upside from US legislation.
BE
More to do with the potential downside from European legislation.
NH
I see
BE
IE: Germany and Greece close the door on casino gaming, so the BWin merger maths look decidedly shaky.
NH
hmm
NH
and this deal is nothing more
NH
than a handshake between the parties at the moment
NH
nothing binding
BE
Yup. The latest broker to downgrade is BarCap.
BE
Third in as many days.
BE
Here’s the note.
BE
We downgrade both bwin and PartyGaming to 3-Underweight from 1-Overweight
as we revise downwards our underlying earnings forecasts and on concerns over
future regulation. We have cut our underlying earnings forecasts for both bwin and
PartyGaming, leaving us 23% and 10%, respectively, below consensus EBITDA
forecasts in 2011. This is following a structural increase in costs associated with
regulated markets and a tempering of growth forecasts. We have also changed our
view on the regulatory risk for both companies. The past year has thrown up a
number of marginal negatives which, when summed, leave us with the belief that
European regulation will lead to structurally lower earnings for existing operators.
as we revise downwards our underlying earnings forecasts and on concerns over
future regulation. We have cut our underlying earnings forecasts for both bwin and
PartyGaming, leaving us 23% and 10%, respectively, below consensus EBITDA
forecasts in 2011. This is following a structural increase in costs associated with
regulated markets and a tempering of growth forecasts. We have also changed our
view on the regulatory risk for both companies. The past year has thrown up a
number of marginal negatives which, when summed, leave us with the belief that
European regulation will lead to structurally lower earnings for existing operators.
NH
thanks for that
12:00PM
NH
Before I shoot off
NH
very interesting note out of Seymoure Pierce today
NH
on the Toxic Pub company
NH
and things seem to be getting bleaker
NH
and bleaker every day
Punch Taverns PLC (PUB:LSE): Last: 68.50, down 0.55 (-0.80%), High: 71.85, Low: 68.20, Volume: 706.75k
BE
Rollo at MOST reckons it might be drilled down to 5p.
BE
Can it get worse than that?
NH
well Seymour have a fresh angle
NH
apparently
NH
some of the toxic debt
NH
was wrapped by Ambac
NH
which is facing bankruptcy
NH
the question is
NH
what does that mean for the Toxic Pub Co
NH
here’s Seymour’s early thoughts
NH
Reports on Ambac in yesterday’s financial press claimed that the US bond insurer had stated on Monday that it might have to file for bankruptcy. Better known for insuring US municipalities’s debt so that the latter could achieve higher credit ratings, Ambac insured a substantial proportion of the higher rated debt within Punch Taverns’ securitizations, making it a form of ‘trustee’ over the top of the bond structures. The article in the FT yesterday (p.21) said that Ambac “…had branched out into structured finance in search of higher profits than were available in their traditional business of insuring municipal debts”. In the case of Punch Taverns, as one of the structured finance vehicles insured by Ambac, it is a rare instance of the ‘sub-prime’ disease spreading from this side of the Atlantic to the other.
NH
The implication of the (potential) bankruptcy of Ambac is unclear but could be material for stakeholders in Punch Taverns. It may be that the responsibility of Ambac as insurer passes to another body which is more active in protecting its interests. It may be that the insurance simply disappears and that the immediate result is the downgrading of the underlying Punch debt by rating agencies. This will precipitate the discussion between debt representatives and other (esp. Equity) representatives. What is the likely result of this? Either (1) Debt holders demand additional equity injection to prevent longer term default probability or (2) Debt holders agree on some form of ‘haircut’, or, as per 2009, sell out at a significant discount
BE
Wow. Just wow.
NH
The Doomed Pub Company
NH
what was the new CEO thinking of
NH
taking on this job
NH
what did buffett say about good managements and bad businesses
BE
One of the ROTR said yesterday that administration looked the best course of action for Toxic Taverns. I’m increasingly minded to agree.
NH
indeed
12:03PM
NH
OK
NH
I am leaving the chat now
NH
do tune in for Macro Live later today
NH
and before I go some RAW
Caledon Resources PLC (CDN:LSE): Last: 77.00, up 5 (+6.94%), High: 77.50, Low: 74.50, Volume: 1.01m
NH
talk of a 105p a share bid
NH
but this came via 
NH
so be careful
NH
and also talk of something bullish coming from Bowleven next week
BowLeven PLC (BLVN:LSE): Last: 186.50, up 12 (+6.88%), High: 193.50, Low: 177.00, Volume: 1.24m
BE
Right – ta for that.
BE
Caledon – Queensland Coal. Bowleven – shallow water off Cameroon.
BE
If I remember right.
BE
You can speculate quite a few obvious buyers in both those areas.
BE
(Smudger: Ascending scale. 1 is high and 10 is not. )
BE
So anyway, that’s us done for the day I think.
BE
Thanks for joining us today.
BE
And do join Neil, Cardiff and whoever else turns up later today for Macro Live.
BE
(Just to warn you, Cardiff’s clever. Don’t try your luck like you do with us slow types.)
BE
In the meantime, thanks for all your comments, and good afternoon all.