FT Alphaville » Markets Live transcript 15 Feb 2011

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Markets Live transcript 15 Feb 2011

Posted by Neil Hume on Feb 15 11:03.

Markets Live chat transcript for the chat ending at 12:31 on 15 Feb 2011. Participants in this chat were: Neil Hume, FT bryce.elder

Good morning

Hola

Bonjour

welcome to ML

FT AV’s daily markets chat etc

Bryce is on time today

Well, sort of.

Good morning everyone.

Good

lots to get through today

inflation figures

Barclays numbers

some good news from Premier Foods (yes really)

slowing sales of pizzas

a massive profit warning from tech sector

and another support sector blow-up

that’s today’s menu

but let’s start with a bit of breaking news

9 NOKIA SHAREHOLDERS SAY TO CHALLENGE THE COMPANY’S STRATEGY AND PARTNERSHIP WITH MICROSOFT IN AGM ON MAY 3

do we have anymore on this?

Hang on …………

That’s not breaking.

It’s been all over Twitter for days.

It’s these chaps.

http://nokiaplanb.com/

right

and who are they?

We are a group of nine young Nokia shareholders. All of us have worked with Nokia in different capacities in the past.

oh dear

not liking the sound of that

More than that they don’t say, but I think it’s fair to assume they’re not major shareholders.

just looking at this plan

it’s suicide

Well, it’s slow suicide.

Which may or may not be better than Elop’s fast suicide.

Depending on your view.

* Return the company to a strategy that seeks high growth and high profit margins through innovation and overwhelmingly superior products with unrivaled user experience.

* Maintain ownership and control of the software layer of the Nokia products. Software is where innovation, differentiation and shareholder value can most easily be created.
* Revamp hiring strategy to target the top young software talent from around the world. Only if Nokia is able to attract and keep the best talent in the industry it will be able to generate the level of innovation that is needed to achieve sustained growth and consistently high profit margins.
* Dramatically increase efficiency by eliminating outdated and bureaucratic R&D practices like geographically distributed software development and outsourcing.
* Avoid at all cost becoming a poorly differentiated OEM with only low margin, commodity products that is unable to attract top software talent and cannot create shareholder value though innovation.

Which all makes sense. As does giving every customer a rainbow and a kitten.

quite

and it’s too late for that

the world has moved on

and so I think should we

bonkers plan

will be completely ignored by the big shareholders

Yeah – it’s basically trying to save Nokia as a skunkworks operation

despite the fact that it had failed spectacularly and hopelessly over the past decade.

And as for the MeeGo and Symbian protectionist stuff …

Nokia’s sinking. You should be manning lifeboats, not considering which yacht you’ll use to sail ashore.

Nokia having a small dead cat today Emoticon

up 1% at EUR6.69

It’s barking. Well intentioned, but barking.

Had to rally some time I guess.

not really a rally though

or a proper Emoticon

just a splat

Right, a quick bit of comment on Nokia

from Morgan Stanley

(@Macrus: exactly. It’s the Slashdot Manifesto.)

We downgrade Nokia to EW and reduce our PT to €6.4 (from €9.50) as we think the adoption of
Windows Phone as its main O/S shifts the investment debate from market anticipation of a swifter
pace of recovery to one of 2 long years of transition, with success an uncertain outcome. Our
Sep 2010 upgrade of Nokia was based on it regaining share with a new O/S and faster product
development, but with no new WP products likely in the next few months we expect its market
share to decline (to ~24% by 2012 (2010: ~32%). And we see few positive catalysts. However,
we are Equal-weight as we cannot rule out that the recovery will take less than 2 years – in our
bull case Nokia’s market share dips to 27% by 2012, but recovers strongly to 29.5% in 2013.

11:12AM

let’s have a look a UK tech blow up

Micro Focus International PLC (MCRO:LSE): Last: 268.70, down 126.3 (-31.97%), High: 307.30, Low: 245.10, Volume: 9.41m

Now correct me if I am wrong

but this company does

or rather provides

software that helps companies modernise legacy IT systems without having to buy a new platform

is that right?

Yes, that’s the main bit of the business.

And the one that’s struggling.

COBOL?

Yup. Which is the computing equivalent of Beowulf.

Basically, if you have a great big mainframe in the basemen dating back from the 60s, they’ll come in and make it work.

Or rather, they won’t.

Because the business has totally dried up.

why?

people don’t want to upgrade?

(@Phil. It’s always quiet now. Like the market)

Yup. Companies and, importantly, government agencies are not putting money into legacy systems.

So we have the usual warning of “deferred” contracts at the year end.

hmmm

Second in six months, this.

I see

that must explain the share price reaction

after all

the downgrades aren’t huge

but the stock has been savaged

nearly a third wiped off

Not surprised. Earnings visibility is nil.

And you may remember back in June last year that Micro Focus’s CFO defected to a rival

Nick Bray – very highly rated.

Went to Sophos I think.

yes

I remember

and then there was another profits warning

Yup. You can mark that moment as the start of its recent problems.

Right – some comment.

MCRO has warned on Q3, guides FY11 revs 2.2-4% below consensus, EBITDA
2.5-7% below expectations and has announced a large restructuring charge of
$14-18m. The weakness mainly relates to licenses and it seems that closure
rates have slipped in CDMM. We expect consensus to downgrade in the range
of 5-8% for FY11 and in excess of 10% for FY12, but we should have clearer
view after the call. We will review our forecasts and target price after the call,
but expect to retain our Hold.

Q3 weak – Q3 was below expectations mainly due to weak licenses in CDMM. It
seems that the ambitious growth expectations have not materialised and this will
have some impact on FY11, but FY12 might be even worse.
n AMQ – AMQ was in line, but this had a relatively weak outlook anyway (2H flat vs.
1H).

(AMQ’s the software testing business.)

Restructuring – MCRO announced a large restructuring charge ($14-18m) which
seem to imply that this is more structural than just a quarter miss.
n Downgrades – Given the size of the miss and restructuring involved, we
anticipate consensus will reduce FY11 earnings by 5-8%, with FY12 likely to
come down in excess of 10%.

And here’s Barcap’s new numbers.

Micro Focus is now guiding for FY 2011 revenue of $432-442m vs current
consensus of $452m. As a result of the revenue shortfall management now
sees FY adjusted EBITDA at $159-167m vs current consensus of $171m. The
testing business continues to be weak while the legacy business was
suffering from deal slippage. Management initiated another round of
restructuring and is taking a $14-18m charge in the current quarter.
We think the only positive point in these results was the good cash
generation with net debt down to $5.5m (was $40.4m in Oct 2010).

(Tracy went to the Hugh speech. She may give a review later in the show)

(@Itzman: I’m not saying Cobol’s all legacy, but it’s age means there’s a lot of nearly obsolete code out there. Note I did say Beowulf, not Latin.)

11:22AM

Thanks

moving on

the LSE

London Stock Exchange Group Plc (LSE:LSE): Last: 936.00, up 6 (+0.65%), High: 937.00, Low: 920.50, Volume: 364.64k

yesterday was the day

that they went millennium

and all our prices were stuffed

didn’t have any closing prices to write our reports on

NO THEY WEREN’T.

THE PRICES WERE FINE.

THERE WERE ABSOLUTELY NO PROBLEMS.

ACCORDING TO THE LSE.

so it must be Reuters fault then?

Yes. And Bloomberg’s fault.

I see

so more than one data provider affected

And every single website’s fault.

hmmm

None of them agreed. But it was a TOTAL SUCCESS ok?

well

not from where I was sitting

looked to be a typical LSE shambles

no feedback

no info

just head in the sand

My Reuters screen still looks a bit borky, as it happens.

No news flags, and I’m not sure I trust the change data.

it is still dodgy

hang on

here’s the top 4 volume stocks on the LSE

4 3/4% 20 year

Trsy Gilt 3.75%

4% Treasury Gilt

and

Treas 4.75

shurely

that can’t be right

Er. …. no. That looks wrong.

and they have all traded massive numbers

370m

200m

etc

and then

there’s this weird thing with prices

things only move in full percentages

Barr AG – up 2%

etc

anyway

there’s clearly an issue whatever the LSE

says

I think we can summarise this by saying that somewhere between Paternoster Square and Canary Wharf, something’s borked.

For a second day.

And, at £1.5k a month for a terminal, that’s really not on.

11:29AM

Wider market

and we are

er flat

down 1.1 points at 6,058

which at least means

we don’t have to make up an explanation for why it is up or down

there’s just nothing really going on

Chinese inflation data was as expected

UK inflation data was as expected

no surprises really

Right. So, as you’d assume, miners getting a bit of profit taken out.

Xstrata PLC (XTA:LSE): Last: 1,472, down 34 (-2.26%), High: 1,495, Low: 1,466, Volume: 3.04m

Fresnillo Plc (FRES:LSE): Last: 1,449, down 40 (-2.69%), High: 1,489, Low: 1,443, Volume: 206.58k

Kazakhmys PLC (KAZ:LSE): Last: 1,542, down 37 (-2.34%), High: 1,563, Low: 1,530, Volume: 422.49k

Anglo American PLC (AAL:LSE): Last: 3,360, down 77 (-2.24%), High: 3,389, Low: 3,357, Volume: 1.08m

Antofagasta Plc (ANTO:LSE): Last: 1,428, down 58 (-3.90%), High: 1,485, Low: 1,427, Volume: 726.14k

(Note: those prices may or may not be nonsense. But there’s NOT AN LSE PROBLEM, OK?)

Meanwhile, on the other side of the market are banks.

So should be stop in on Barclays to hear the Voice of Bob?

well

I’d prefer not

because you will hear things like this

In general we as banks need to do more to help foster economic growth and job creation as well as helping the public understand better the significant role we already play in this regard. I take pride in the culture at Barclays, where many of my colleagues work selflessly to help those in need in their local communities and we apply our expertise to real world issues. We must do a better job of helping those outside the organisation see the scale of what we do and the impact it has as we seek to intensify our efforts here. You can expect to hear much more from us in this space later this year.

I have 147,500 colleagues around the world who are focused on bringing the best of Barclays to everything that they do, everyday. They have delivered unfailingly over the past three years. We have many more challenges ahead, but I know I have their support in tackling them. It is my honour to lead them, and this great institution, as we look to deliver against the expectations of all of our stakeholders, most importantly our customers and clients, over the coming months and years

You see

Bob’s diamond geezers

doing their bit for Britain

“I have 147,500 colleagues around the world, many of which are getting P45s shortly.”

It fair warms your heart.

(Long’nwrong – one of the big shareholders selling out I hear)

it does

suffice to say on the figures

BarCap better than expected

Spain worse

but everyone is focused on BarCap

which really is Barclays

and seems to have outperformed most of its peers in the fourth quarter

even after all the funnies are stripped out

(@D. Explain pls)

Figures were simply too messy for me to make any sense of. Is there any comment?

yeah

hang on

This is from Matrix

who focused on the big hit Barclays took in Spain

Provisions in Iberia – Barclays Corporate turned loss-making in 2010, as provisions increased by £630m to £898m in Continental Europe due to depressed market conditions in the property and construction sector. The ongoing problems in Iberia, where Barclays has £27bn of direct lending exposure, will likely be near the top of the agenda as part of any restructuring the new CEO may propose.

and here

in more detail

is Merrill

Results FY10: Reported Group PBT came in at £6.1bn versus cons £5.7bn,
BofAML £6.0bn. On an underlying basis (i.e. ex disposal gains and own debt)
PBT was £5.5bn versus cons of £5.7bn and BofAML of £6.0bn. EPS was 30.4p
versus cons of 27p and BofAML of 28.1p. The DPS was 5.5p versus cons and
BofAML of 5p. Bad debts were £5.6bn (cons £5.6bn, BofAML £5.5bn). BarCap
top line income was up 20% at £3.4bn. Barclays are targeting a 15% RoNAV by
2013.

There are a few funnies in the numbers. Barclays made £500mn of hedge gains
in 2H10 of which c.£250mn was in 4Q and c. £100mn in BarCap. There was also
a derivative gain in Barcap in 4Q of c.£200mn. Therefore on a clean basis
BarCaps’s top line income was £3.1bn. On the negative side there is a £240mn
charge for Russia goodwill write-off and an incremental £200mn restructuring
charge in 4Q. Net net, the funnies are a wash but explain a lot of the differences
on revenues and costs.
With the stock trading at 0.9x 2010E T/NAV and expectations low coming into the
figures we think the shares will do well today.
Coming into the figures all eyes have been on BarCap and what Bob Diamond
would do to boost the RoE > COE.

++ Revenues: BarCap’s IB peers have reported average revenues down 22% 4Q
on 3Q, so investor expectations were low coming into the figures. With 4Q10
topline revenues +20% at £3.4bn versus 3Q10 of £2.8bn and BofAMLe £3.2,
cons £3.0. Ex gilt and derivatives gain top line income is £3.1bn in 4Q, still a big
beat. Barclays has clearly outperformed peers on a top line basis. This should
provide the new CEO with a good platform to set out his vision for returns at the
analyst meeting

Costs: The cost:net income ratio (ex own debt move) came in at 65%, versus
our forecast of 65%.
++ PBT of £4.8bn: Own debt and writedowns were +391mn so on a reported
basis BarCap PBT was £4.4bn versus our forecast of £4.2bn.
ROE > COE?
Barclays are targeting a 15% RoNAV or 13% ROE by 2013. This should go down
well.

that’s all about all I have

And it’s more than enough, I think.

Barclays will be covered in tedious detail elsewhere.

So let’s move on.

yes

11:38AM

Right

i’d like to look at a Premier Foods

Premier Foods Public Limited Company (PFD:LSE): Last: 23.96, up 1.86 (+8.42%), High: 24.28, Low: 21.98, Volume: 12.90m

which I have to say

might not be a zombie for much longer

(@D: we have nothing to add to Tracy’s excellent post yesterday. http://ftalphaville.ft.com/blog/2011/02/14/487451/chinas-vanishing-forests/ )

did you see this

came out after hours last night

Feb 15 – Fitch Ratings has assigned Premier Foods plc (Premier Foods) a Long-term Issuer Default Rating (IDR) of ‘BB’ with a Stable Outlook.
The ‘BB’ Long-term IDR reflects Premier Foods’ profile as the UK’s largest branded ambient grocery manufacturer and bread baker and flour miller with a 6.8% market share in the fragmented and competitive GBP25bn UK ambient grocery market. It manufactures and markets products across many food categories and owns iconic British brands. The company therefore benefits from the diversity and scale in terms of manufacturing, logistics and procurement in the UK, which has also enabled it to demonstrate innovation and brand stretch capabilities to adjacent food categories.
However, these positive strengths are balanced by the company’s reliance on the UK. Fitch notes that this is an intended strategy by Premier Foods as it chooses to compete in categories generally not core to multi-nationals. This strategy limits competitive threats from larger multi-national players. In addition, Premier Foods has a healthy competitive position in many of its food categories where it holds a number one or two market position.

Premier got a rating

it’s only BB

but it’s a start

and important

Why?

it means

they can do a bond issue

and if they can do a bond issue

Premier can refinance

and that means they can get the cost of their bank debt down

which would be good news

the CFO has done an excellent job at Premier

capped those swaps

sold businesses

and now has a credit rating

credit where credit is due

now all they need is for the CEO to fall on his sword

(after all he got them into this mess)

and this company might no longer be toxic

And Premier had results out this morning, didn’t it?

Still awful? Or improving?

yeah

and they are not too bad

do we have any of these shares

in Muppet Alpha 1?

A term of endearment used to describe BB share promoters on FT Alphaville.

FT Alpha’s fantasy investment portfolio. We employ a modifed version of cartoonist Scott Adams’s bet on the bad guys for stock selection.

Um – dunno. Will check.

trading profit was ahead of forecast

debt heading down

admitedly it’s still £890m

so there’s work to do

Ah. We do have some, yes.

but Preimer does have a chance

That debt pile was hard to ignore.

So Premier’s up 20% since Muppet Alpha’s inception.

Though it’s underperforming the trend.

With the fund up 37.5% in less than a year.

Beat that, 2 and 20s.

wow

what a return

based on nothing more

than things I don’t like

Yeah – being hated by you is a huge bull signal. I wish more retail shareholders would recognise that.

I try to tell them

but they won’t listen

anyway

some comment on Premier

Clive Black at Shore Capital

is even sounding positive

and he’s more bearish than me

Trading on a 2011 PER of 4.3x, and an EV/EBITDA of 4.1x, with no income, we believe Premier’s management is making progress in its quest to de-risk and deleverage the business, however with debt still a burden after selling some prize assets (Quorn) and the pension liability considerable (£3,120m liability, £232 net deficit) and concern over the trading and input cost environment we reiterate our SELL recommendation.

and here’s Citigroup

Beat to forecasts — Trading profit of £311m beat our forecast of £303m. This
followed through down the P&L to give EPS of 5p vs our forecast of 4.6p. Lower
pension, restructuring, and marketing costs, however, make up for the difference,
so in underlying terms performance was not dissimilar from expectations

Cash flow strong — Underlying cash flow was £124m vs the £100m target set
earlier in the year. This has been partly used in the swap restructuring, as planned,
but net debt is therefore c£20m better than forecast at £1.261bn. On a pro-forma
basis, adjusting for the two recent disposals, year-end net debt is £890m. This
brings average pro-forma net debt/EBITDA to 3.74x vs the stated target of 3.25x.

Heading towards funding diversification — Following the swap restructuring,
Premier Foods has now gained a credit rating. The intention is to access the debt
markets and raise a bond in 2011. This should diversify sources of funding, and
reduce the company’s reliance on bank debt – again, steps in the right direction
towards a more balanced capital structure, in our view.

Q4 trading was tough — Premier Foods had a tough Q4 in terms of underlying
trading, together with the rest of the UK market. Promotional activity escalated
significantly, and commodity cost inflation hit the own-label Brookes-Avana
business disproportionately (which is being written down).

Headwinds remain — Management acknowledges raw material inflation, but it
believes it is manageable. This is likely to lead to a volatile performance across the
board in the food space. We adjust our EPS to reflect the results and the dilution
from the canning disposal. While we acknowledge Premier Foods is taking the
right steps towards rebuilding its balance sheet, and the FY10 results are
encouraging, we continue to see better risk/reward elsewhere in the food space
and retain our Hold (2S) recommendation and 28p target price.

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.

11:48AM

(Not that kind of raw, obviously.)

(No)

Now

while things are going well at Premier

or as well as can be expected

the same cannot be said of Yell

which has issued another profit warning

Yell Group PLC (YELL:LSE): Last: 9.22, down 0.69 (-6.96%), High: 9.84, Low: 9.09, Volume: 13.93m

the print business continues to fall off a cliff

and the strategy bits and bobs in today’s statement

really don’t inspire at all

So,

Print revenues fell by 18.4% to £936.6 million.

The digital marketplace is rapidly growing and highly fragmented. It is one where the consumer is a leader and a small market share can mean big business and strong growth. General search is consolidated. Local search is not, and Yell is already the source of many of the local listings produced by general search engines, as well as growing its own Yell destination sites. The foundations of web print are established; Yell’s website creation and management services are developing and growing rapidly; Yell has successfully entered the mobility space, itself still very young, with apps on smartphones and iPads; and it is beginning to explore social networking and recommendation.

“All this can be radically built upon to provide solutions for consumers and to be a solutions provider for the SME, making Yell as relevant in the digital age as Yellow Pages was in the print only age – perhaps more so.

“Doing this will change Yell’s structure, products, systems, culture and prospects. It will open up not only the opportunity for digital revenue streams but also for substantial synergies through group-wide operation of key functions and it will bring with it new strategic partnerships.

“It will take time to change the revenue trajectory and to secure the available synergies but we can see a course for Yell to return to sustainable profitable growth and we believe Yell has the business base and financial strength to achieve this.”

now

are you buying that?

making Yell as relevant in the digital age as Yellow Pages was in the print only age – perhaps more so.

Hang on – I’m not sure I entirely grasp what the essence is here.

Yell has successfully entered the mobility space, itself still very young, with apps on smartphones and iPads; and it is beginning to explore social networking and recommendation.

He’s saying Yell has to do everything differently.

He’s saying it no longer has a market.

And he’s saying that a different market, which doesn’t exist yet, will be conjured up out of the ether by sheer willpower?

Interesting.

or deluded

and there’s still mountains of debt

huge piles of the stuff everywhere

Indeed. That’s the structure Yell really has to change.

via a debt for equity swap

Nasty.

it’s the only way

swap it

refinance

and move on

Remember when this thing was FTSE 100? Sheesh.

stop this pretence

actually

this also made me laugh

Today Yell announces that Mark Payne has joined the Group in the new role of Group Chief Operating Officer beginning 14 February, 2011, reporting in to the Group CEO. Mark will be responsible for the Company’s day to day activities at Group level, including supply chain, information technology, procurement, facilities, customer services, call centre operations and processes.

In 2006, Mark published his book, Make the Numbers, Don’t Chase the Numbers, setting out a simple structure that allows all departments in a business to work together with a common set of numbers, structure and language. Mark holds a Bachelor of Business Administration in Quantitative Business Analysis and Marketing from Baylor University in Waco, Texas.

words fail me

Me too. I mean, Texas has a university?

Waco

So he’s used to burnin …. no, sorry, best not say that.

Cut to some more measured comment on the profit warning.

yeah

Here’s Canaccord.

More grim news on current trading for Yell – another reminder that investors have yet to
see any significant light at the end of the tunnel – the rate of decline of its business, driven
by the economic downturn and online migration, has yet to show any meaningful
recovery. We have now seen eight consecutive quarters of double-digit organic declines.

While the company continues to make progress in its internet strategy (now 25% of group
sales), it has yet to see any benefit from a cyclical recovery in SME confidence levels,
suggesting to us that there is likely to be a much longer time lag in any upturn than seen in
other media.

And some RBS

new CEO Mike Pocock hasnt given guidance for Q4 organic revenue (note the previous
management team said they did not expect improvement in Q4), but he says that FY
EBITDA is expected to be below the current range of market expectations. The consensus
range (according to the company) is £520-£530m, wed expect consensus to settle around
£510m (given managements new guidance).

- new management are more realistic on the outlook for print than the previous management
team, accepting that print directories are in permanent decline, but they are optimistic on the
outlook for digital.

- in our view, the problem management has is that print still accounts for 69% of group
revenue and is in free-fall (print revenue down 20% in 9M), while the digital products are
under-invested and there is limited room to invest given Yell is close to banking covenants

- covenants for 2012 are set out net debt/EBITDA of 5.7x, there is 13% headroom to 2012
net debt/EBITDA covenant on our current forecasts, however EBITDA forecasts are likely to
fall following todays profit warning

cyclical recovery

this myth needs debunking

there’s no recovery

because its structural

not cyclical

people advertise elsewhere

you can wait for eternity

it won’t happen

Eight consecutive quarters of decline doesn’t say cyclical anything to me.

Unless it’s an epic cycle.

Wagnerian.

anyway

what’s the debt level?

A mere £2.83bn

Which is down from £2.88bn in September.

At that rate, it’ll be debt free by the time the monkeys have overthrown humanity.

What a shambles of a business.

and another thing

the new management team

have decided it’s not worth setting forecasts

because they can never beat them

this from Citi

Outlook: Below Market Expectations — The group has moved away from its
traditional quarterly organic revenue growth guidance. Yell guides to EBITDA for
FY11 (to March) to be “slightly below the current range of market expectations”,
which suggests that current revenue trends are worse than the -12% organic
previously guided for the fiscal 4Q. Consensus for EBITDA is £530-540m. A
strategy review conducted by the new CEO (Mike Pocock) and new CFO (Tony
Bates) will be presented in the summer (see below), but at this stage the CEO
notes, “it will take some time to change the revenue trajectory”.

The company has
announced a new COO (Mark Payne), who used to work with CEO Mike Pocock at
Linksys and Polaroid. The CEO does offer some early thoughts on strategy,
essentially reinforcing the view that Yell needs to migrate from a media owner to a
‘solutions provider’ for the SME. He argues ‘doing this will change Yell’s structure,
products, systems, culture and prospects’. The question for many investors – and
the focus on the call – will be whether it also changes the margin profile and
whether its success will be reliant on a change to the capital structure.

Valuation on P/E, even after a likely downgrade to
consensus numbers, is on face value quite cheap (1.5x 2012E P/E). Even on
EV/EBITDA (at 6.5x 2012E), which normalises for leverage, it hardly looks
demanding. The issue for us is that we don’t see a turn in revenue momentum
before 2012 and we ascribe a low probability to positive ‘wild card’ events, in
particular M&A. We do see scope for incremental cost saves, but also see heavy
cuts adversely affecting usage over time. Reflecting our caution, we rate Yell
Sell/Speculative Risk (3S).

Right

(@Montesquieu: very measured and eloquent as always. Is there any rational reason why a shareholder should stick around to see if management can reinvent this thing?)

and I believe the bonds have also weakened on the news

Yell Group held a conference call today to discuss its third-quarter results, and its dollar-denominated TLB has shed around a point, sources said, to a mid-price of 48.

48 on the dollar

says it all

this need a debt for equity swap

and soon

otherwise

well

This may all sound too harsh on poor old Yell.

So, for the sake of balance, let’s say something positive.

that won’t be easy

Their new advert’s quite good.

http://www.guardian.co.uk/media/video/2011/feb/05/yell-ad

Right. Done. Move on.

12:04PM

Right

time to go shopping

Morrison has made its first step into e-commerce

and no

it’s not buying

Ocado Group PLC (OCDO:LSE): Last: 253.40, down 5.6 (-2.16%), High: 260.00, Low: 250.44, Volume: 397.56k

but something called Kiddicare

which sells baby stuff

from a big warehouse in Peterbrough

paying £70m, or around two times sales

Huh. Interesting.

NYSE EURONEXT SHARES SUSPENDED

anyway Morrison

what can we say

a pricey if sensible step into e-commerce?

1.9 times historic sales

growing quickly though

Looks expensive by any normal measure, but yes. It’s online

of course the big fear is what the new man does next

he’s gone digital

but will he write the big cheque

and buy the WEBVAN 2.0?

Clive Black at Shore Cap thinks not

and so do I

because I don’t think Dalton Philips has a corporate death wish

but I could be wrong

Morrison, the Bradford based supermarket group, has surprised us this morning with the announcement that it has acquired Kiddicare. The food retailing business, that has said to date that it will remain a focused grocer, indeed this perspective was highlighted as a point of difference in recent times by senior management, has decided to diversify into on-line baby products.

Indeed, Morrison bills the acquisition of Kiddicare as the first stage of its e-commerce strategy, on which on balance we take comfort as to a perhaps a rapidly evolving growth strategy for the UK food retailer most dependent upon the low growth grocery channel. As a first stage it also raises questions as to what Dalton Philip’s second and third e-commerce stages are likely to be; no doubt we will find out a little more with the preliminary results on the 10th March 2011. For what it is worth we do not see merit or the likelihood of Morrison shelling out £1.4bn+ on Ocado (OCDO^, Sell at 155p) as a mechanism to enter on-line grocery; that would be a) more costly, b) materially earnings dilutive and c) debilitating to group capital returns.

An internet food retailer that many believe is the second coming of Webvan. Loss making yet valued at close to £1bn on flotation.

Morrison is spending £70m to acquire Kiddicare, which had sales last year of £37.5m. The price is, therefore, 2x historic sales, which is reasonably full albeit the current growth rate of Kiddicare is very high at c75% over the past 3 years. The acquisition includes a 160k sq ft freehold distribution centre in Peterborough. Morrison also reveals that Kiddicare will be operated as a separate entity although how this will fit in organisationally within the group will be interesting to learn. No profit figures for Kiddicare are yet revealed and no indication as to the earnings impact is provided at this stage albeit within Morrison c£37.5m of sales is small beer; an average Morrison superstore of say 30k sq ft at c£20/sq ft/week would take similar annual sales. We do know that Kiddicare has good awareness level amongst Mum’s, not so sure about Dad’s, and so with Morrison’s balance sheet behind it, the business’ growth potential should be boosted; such a boost may give the likes of Mothercare (MTC^, No Recommendation, Coverage Pending), Asda (Wal-Mart, No Recommendation) and Tesco UK (TSCO#, No Recommendation) something to think about in the baby product market.

So, an interesting move that sets the mind whirling as to what are Dalton Philips’ plans for Morrison. One senses that it is not going to be more of the same, which may provide for some excitement. However, until we are clear as to mix of performance, direction, balance sheet and medium-term valuation, we reiterate our HOLD stance on the shares.

Spinning back a bit, the point about Kiddicare’s scalability seems a valid one.

Morrison doesn’t do non-food yet.

With this deal they’re buying a lot of back office

I wonder …..

Oh, hang on, RBS has had the same thought.

Strategically the acquisition brings a business that has a strong e-commerce and IT plattform
and one that has a high levels of availability and fulfillment. Morrisons intends to build its
online non-food business and, with the aid of the kiddicare.com platform and its successful
management team, plans to launch its first online non-food products in 2012.

The opportunity to leverage the Kiddicare range across Morrisons’s 12m weekly shoppers is
clear, in our view, as is the future opportunity for the Group to widen its online non-food offer
and capabilities in 2012.

12:11PM

Right

D.Boerse down 3.7%

what’s going on?

deal off

are CME coming in with a bid for NYSE?

Fox News were reporting that last night

bye bye big synergies

actually remember that German tipsheet that broke the merger story last week

they have another exclusive today

Go on.

Beiersdorf AG rose the most in more than four months in Frankfurt trading after Der Aktionaer magazine said that larger competitor Procter & Gamble Co. may want to buy a stake in the German maker of Nivea skin creams.

The shares gained as much as 3.3 percent, the steepest intraday advance since Sept. 29. The stock was up 95 cents, or 2.3 percent, at 42.46 euros as of 12:57 p.m., leading advances among the 30 companies in Germany’s benchmark DAX Index.

A combination of Beiersdorf and Cincinnati, Ohio-based P&G would be advantageous for both companies, Der Aktionaer said today on its website, citing an unidentified person with knowledge of the industry.

Der Aktionaer magazine

one to watch

12:14PM

time to go macro

inflation report out this morning

and it was bang in line with expectations at 4%

but that’s nothing to shout about

given the target is 2%

Right. Then here’s Shore Capital

Inflation in the UK came in line with expectations in the UK at 4% year on year in January against 3.7% in
December. We would highlight the difference between inflation at the headline level and inflation once
the effects of indirect taxation is removed, CPI Y, in figure 1. The rise in inflation cannot be put down to
VAT or petrol duty, so it may mean that underlying inflationary pressure is worse than we would have
hoped or expected.

The ‘essential’ cost of living is increasing rapidly, as shown in figure 2, rising at 5.77% over the past year.
We classify ‘essential’ spending to comprise of spending on food and non-alcoholic beverages, housing
and utility bills, fuels for transport, housing and motor insurance, and telephone. Together these
comprise 30% of overall basket of the CPI, according to the ONS.

Examining the components of CPI we are fearful of continued rising inflation from food, as food inflation
tends to lag the commodity index, as shown in figure 3. Whilst food and non-alcoholic beverage inflation
according to the ONS is increasing at 6.3% the leading nature of CRB foodstuffs suggest further pressure
in the months ahead. We believe that an issue for the Bank of England must surely be how much is this
inflation controllable through monetary policy.

The concern we have from this latest data is that, even excluding the effects of taxation, the backdrop is
less benign than we had previously believed. Figure 4 shows the CPI for the Services baskets (i.e.
utilities insurance, etc) that accounts for approximately 50% of the overall CPI basket. Stripping out the
effects of tax changes we suggest that service CPI inflation lags the growth in average earnings. We are
therefore concerned that the service sector CPI has increased sharply last month, from 2.4% to 2.9%.
Were average earnings to grow over the next couple of years, then inflation in services could be expected
to return to levels that would trigger rate tightening, in our view.

right

what matter here is

interest rates

does today’s figures

and King’s 10th letter to the Chancellor

make a rate rise more or less likely

Nomura is going for 25bps in May now

Following the inflation release, Mervyn King effectively endorsed market rate expectations. We now expect the next move from the Bank of England to be a 25bp rate hike in May with balanced risks around the timing. This hike is additional to those we had previously pencilled in every three months from August.

In the fifth consecutive quarterly exchange of letters explaining why inflation remains so far above target, Governor King gave a clear spoiler about the Inflation Report forecasts to be published on Wednesday. Specifically:

“The MPC’s central judgement, under the assumption that Bank Rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.

Although the MPC never pre-commits to a policy, this statement is a clear indication that the MPC’s central judgement is that market expectations are consistent with what it needs to do in order to meet its target. As such, we are bringing forward our modal forecast for the first rate hike to May from August and adjusting the risks around the timing back to being balanced. This would be marginally ahead of current market expectations for the first hike (June) and even further ahead of the consensus forecast (Q4). An earlier move remains possible, but we continue to expect the acute downside risks in the near term to urge sufficient caution to prevent this. We see a May hike as being in addition to those we had previously pencilled in every three months starting in August. This lifts our forecasts for Bank rate at the end of 2011 to 1.25% and to 2.25% at the end of 2012.

For the February Inflation Report, we continue to expect the modal inflation forecast conditioned upon market rates to be slightly below target on the horizon, but the upside skew is probably sufficient to cause the mean forecast and balance of risks to be balanced around 2%. On unchanged rates, we would expect the probability of inflation being above target on the horizon to be clearly above 50%. This most accurately represents the policy dilemma facing the MPC and suggests that the MPC believes it needs to remove stimulus at some point in the next few months in order to meet its mandated inflation target.

interesting view that

Non consensus.

A May hike would spook.

(@Swedes, @Chrispy: do remember Morrison’s already hired George “at Asda” Davies.)

Okay. I have a lunch to get to

so we need to finish up

I just wanted to mention the latest profit warning in the suport services sector

which thanks to govt’s austerity drive

has been shown for what it is

warning today was

AEA Technology PLC (AAT:LSE): Last: 4.50, down 0.575 (-11.33%), High: 4.71, Low: 4.05, Volume: 249.32k

here’s Matthew Earl at Matrix on that

This is the “environmental consultancy,” isn’t it?

Outsourcers – latest tremor across the market for UK government facing companies (Capita, Serco, Babcock, MITIE, Atkins). AEA Technology [AAT LN, Mkt Cap £74m, NR] “The market conditions remain tough as the UK Government continues to reduce spending. As management anticipated, there has been no significant increase in UK Government procurement following the Comprehensive Spending Review announcement in October 2010

Furthermore it would now appear that the UK Government is proposing further changes to the way it procures across every sector of Government, which means that there is potential for even further delay. As a result management expects the European business to deliver a disappointing result in 2010/11. Management also remains cautious about the prospects for the UK Government sector over the next 18 months.”

This echoes our long standing view that the poor state of the public finances may not be the feeding frenzy for outsourcers, which a number of market participants expect. While there will undoubtedly still be contracts to be won, we believe that it will be fairly lean diet, with the value being lower and costly overruns not being tolerated as they were in the past.

All these companies clearly just got fat on state spending

and that’s going

also

wanted to mention Domino’s Pizza

Domino’s Pizza UK & IRL plc (DOM:LSE): Last: 488.10, down 34.9 (-6.67%), High: 589.00, Low: 475.42, Volume: 2.20m

figures looked OK

Another company getting fat, indirectly, on state spending.

but there has been a big slowdown in pizza eating

since the start of the year

this from a sector watcher

Domino’s Pizza (Mkt Cap £850m DOM) Dominos prelims for FY 2010 are strong, with LFL sales ahead by 11.9% – in-line with the pre-close on Jan 5. So no surprises here. However the key focus needs to be on trading for the seven weeks of the current year where LFL sales are +4.7% ahead, a rather large slow down from the run-rate in Q4 2010 and up against an 11% rise in LFL sales in the first 6 weeks of last year. They added an extra week in the current trading this year, which begs the question why?

Anyhow we do not expect any upgrades which the market was factoring in implied by the FY1 PE of c.27x for 10% EPS growth. In our view the market was expecting LFL sales of at least 10% which is the level required to drive the volume growth necessary to kick-start the cycle of upgrades to justify a 27x PE rating. Whilst comparatives are tough, they always have been. We are concerned that despite a more intense level of promotional activity this has not delivered the trading result expected. Shares should come off… on a prospective PE of 22-24x suggests the range of 420-450p

Anything more from you Bryce?

Yeah – one more par on the mystery of why Dominos is suddenly struggling.

This is from Panmure.

We are surprised by the weakness of this number given longer opening hours
should be adding c3% to LFL sales growth and Novembers price increase c3%. It
would appear therefore that volumes are under pressure. We think the market will be
disappointed by current trading it is the weakest number we can recall over the last five
and a half years and comparatives only get harder over the rest of H1 as the football
World Cup had a very positive impact in Q2 last year when LFL sales were +17.2%.

hmm

what’s caused that I wonder

interesting

12:22PM

One more thing from me

Sir Clive Thompson

ex-Rentokil boss

and Neil Gillis

the guy who quit from Blacks Leisure last week

are in a bit of trouble

Farepak Food & Gifts Ltd

On 26 January 2011, following a long and complex investigation by The Insolvency Service, on behalf of the Secretary of State for Business, an application was made in the High Court of Justice, London, for disqualification orders to be made against the following directors in relation to their conduct as directors of European Home Retail Group PLC (“EHR”) and/or its subsidiary Farepak Food & Gifts Limited (“Farepak”):

Stevan Lloyd FOWLER

Neil Duncan GILLIS

Nicholas Piers GILODI-JOHNSON

Stephen Matthew HICKS

Michael Stephen MACKELCAN JOHNS

Paul MUNN

Joanne Elizabeth PONTING

William Peter ROLLASON

Sir Clive Malcolm THOMPSON

The application was made in the public interest on the grounds that the conduct of each director in relation to the relevant company or companies makes him or her unfit to be concerned in the management of a company.

Business Minister Edward Davey said:

“Cases like Farepak are often very complex and complicated so take time – but we can confirm that High Court proceedings seeking disqualification orders have now started.”

(@Thud: he makes foldy bicycles and plays on the celeb poker circuit. @Itzman, that’s sacrilege where I come from.)

Right – Neil’s off already.

So it’s up to me to wind up.

Oh – forgot to mention another austerity budget profit warning.

Phoenix IT Group Plc (PNX:LSE): Last: 250.00, up 2 (+0.81%), High: 255.00, Low: 248.48, Volume: 10.66k

Up now, bizarrely.

And you have to work hard to find the warning in the statement.

“the board’s expectations for the group next year are similar to those of the current year”

(@Itzman: no, but I cut my teeth on a ZX81 and a 16k Spectrum. Whatever he did professionally — and yes, I’ve heard all the stories — he still deserves no little credit for founding the British homebrew computing industry.)

Right – anyway, that’s enough of that.

So thanks for all your comments today.

Hope you can join us tomorrow

Until then, have a good afternoon everyone.

This entry was posted by Neil Hume on Tuesday, February 15th, 2011 at 11:03 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 15 Feb 2011

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