FT Alphaville » Markets Live transcript 9 Jun 2011

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Markets Live transcript 9 Jun 2011

Posted by Neil Hume on Jun 09 11:04.

Markets Live chat transcript for the chat ending at 11:25 on 9 Jun 2011. Participants in this chat were: Neil Hume, FT bryce.elder

Hola Rabble

apols for being late

just ploughing through my inbox

Right then

Bryce are you in

we have an hour to fill

with market chit chat

and err analysis

Hang on

FT.com just gave me a reader survey when I tried to pull up Alphaville

I’ll fill that in as we go along, I guess.

did it

“Everything’s brilliant”, in summary.

there are some very strange things happening at the moment

ever since the app appeared

WordPress has been eating posts

the AV banner

take you to JP Morgan

or some watch company with an odd name

and now this

Some Belgians are stting up a website alphavillle.com (watch out 3 l’s or total 4 l’s).
They are writers but one of them got a lot of coverage lately for a tube called ‘sharing the wife’.
I didnot have the pleasure to watch it myself but apparently that was what he did.
If this is not a clever way to attract more visitors (those clever marketing people), may be you should have a look at it.

Aha. Alphavillle.com.

yes

we are also having content scrapped by this site

http://www.21lw.com/dowjonestoday/how-to-tinker-with-bank-risk-weightings/

which as far as we know

has nothing to do with Dow Jones

anyway

We’re also having content scraped by City AM.

Rather less blatantly.

are we

Oh – just a bit of mind melding on a Tracy post yesterday.

Innocent mistake I’m sure.

http://alphavillle.com/ – if anyone was wondering

Though, judging from previous efforts from this mob, it may be NSFW.

Anyway, should be begin?

I think we should

before we do

where’s Milky

Lloyds Banking Group plc (LLOY:LSE): Last: 47.72, down 0.96 (-1.97%), High: 48.71, Low: 47.55, Volume: 108.30m

I want to talk!

Up 2% one day, down 2% next. It’s all over the shop, quite simply.

yeah

like this stock

Desire Petroleum PLC (DES:LSE): Last: 18.50, down 5 (-21.28%), High: 25.25, Low: 18.25, Volume: 11.67m

went up on nothing

coming down on nothing

Noise noise noise.

11:12AM

Wider market then

after yesterday’s sell off

we are pretty much flat

up 1.3 points at 5,810

I’m told that’s around the 200-day moving average

and we seem to keep bouncing off that

so to stocks

and let’s start with Lloyds

another day

and another opp for the CEO to talk down the bank

actually Antonio put the boot in yesterday

at the Treasury hearing

where Bob Diamond told MP’s

that Barclays had been a force for stability

during the credit crisis

And we salute you, Capt’n Bob, for your sterling altruistic efforts.

So what did Antonio say?

hang on

the usual stuff

MORE COMMENTS FROM LLOYDS – Horta-Osorio CEO of Lloyds out with more comments last night stating the bank ‘has substantial problems’ and a strategic review will be completed and results announced at the end of the month… Remember Investor day on the 30th June…

I really am starting to believe he’s a Santander double agent

He’s making absolutely sure we know he’s got a job to do, certainly.

he obviously didn’t enjoy the share price ticking up yesterday

so he decided to bash it

with some more doom and gloom

all good for the LTIP scheme

anyway

as for the weakness in Barclays

I don’t really know

above and beyond Project Caja

which we are all being softened up for

on the note

the Evo analysts that’s been doing a sterling job flagging it up

left yesterday

not sure where’s he off to

but he’s gone

Artuo something or other

Arturo de Frias

Good. Bearish.

and gone

I imagine he will resurface somewhere very soon

as RBS

they are down

Royal Bank of Scotland Group PLC (RBS:LSE): Last: 40.61, down 0.75 (-1.81%), High: 41.55, Low: 40.34, Volume: 18.83m

wasn’t there a Merrill downgrade floating around yesterday?

Yeah – they did cut numbers. on Barclays and Lloyds too.

(Milky – where are you?)

Though it was just taking them closer to consensus really.

Helsby having been a bit too optimistic about NIM before.

Not really anything to scare the horses, the way I read it.

and talking of bullish banks analysts

the UBS duo of Ryan and Critchley

are telling people not to worry about big house prices falls

nothing to worry about apparently

A permanent revolution
There is much to worry about in UK banking, with the regulators’ “permanent revolution” having
the same effect on banks’ share prices that Marx hoped to have on the bourgeoisie. We remain
optimists that the Independent Commission on Banking’s report in September will bring an end
t.o this, but that is as yet unproven

Mortgages not the concern…
We focus on mortgage credit. In the absence of 1973-76-style stagflation, which would be a
much broader problem for the UK, declining UK house prices should not lead to significant
challenges for the banks. For example, we estimate a 10% decline would have only a 9%
i.mpact on our Lloyds earnings forecasts

…five reasons why
First, mortgage books are seasoned: even risky bull-market loans have now made 40+
payments. Second, the housing stock is fully occupied, driving rents up; it is now cheaper to buy
than rent. Third, margins have widened sharply. Fourth, credit performance in a combination of
severe recession and 22% price declines has been robust. Fifth, policy rates will take into
account the structurally elevated spread to customers, meaning ‘normal’ policy rates should be
l.ower than historically

Buy Lloyds and RBS
Based on our expectation that policy makers will shift their focus from the increasingly sterile
‘bank safety’ debate to a broader view of what benefits the economy, we see the UK banks as
robust and well positioned to sharply raise payouts in 2012 and beyond. We have Buy ratings
on Lloyds and RBS.

buy, buy, buy

As for Standard Chartered, as mentioned by GB Krona …..

There’s a Morgan Stanley note around recommending punters switch to HSBC

there is

do you have?

(Yep – TK it is)

Yup. HK and Asia slowing, is the gist.

Our analysis points to risks to the downside for
consensus PBT for STAN – on income (India growth
engine slowing), costs (jaws – income growth less
cost growth – likely to be negative 1H11), and
impairment (a 2012+ story). In HK, while the bank is
doing well, potential HKMA action to control loan
growth remains an overhang. We prefer HSBC (OW)
to STAN.

We think the market has not fully priced in the
headwinds in Asia – we are 6-8% below consensus:
We expect stock performance to be weak in the near
term. The macro in both of STAN’s key geographies
(India, HK) is looking weaker. We expect the key driver
will be lack of growth in India due to lower Wholesale
income, following high inflation and higher rates and
increased competition. System NIMs are declining. HK
is facing its own monetary challenges and showing signs
of overheating, although STAN started well in HK. We
reduce EPS/PT primarily due to lower India / HK
earnings in FY11-13e.

New normal ROE ~12%: Our DuPont analysis from
2004-2013e points to a relatively flat ROA (~1%) for
STAN. While STAN achieved a relatively high ROE
(14-19%) in 2004-08, this was with an average leverage
of 15.8x. With higher capital requirements in the UK, we
now forecast an average leverage of 12.2x, giving an
average ROE for 2011-13 of 12% (15% RoTE).

Switch to HSBC: We see a 1.9x 11e P/TNAV for a 12%
ROE (15% RoTE) as fully priced and see risks to the
downside for consensus. We prefer HSBC and think its
RoTE may overtake STAN’s in the near term.

Standard Chartered PLC (STAN:LSE): Last: 1,548, down 12 (-0.77%), High: 1,567, Low: 1,540, Volume: 1.58m

HSBC Holdings PLC (HSBA:LSE): Last: 620.10, up 3.5 (+0.57%), High: 620.58, Low: 616.10, Volume: 6.43m

OK then. Well and truly bored of banks

let’s move on shall we

11:23AM

Right

someone has been banging on about Betfair for days

who was it?

Betfair Group PLC (BET:LSE): Last: 830.50, up 31 (+3.88%), High: 845.00, Low: 800.00, Volume: 473.74k

well the shares are up today

and the reason is…

a FTSE reweight

buried in the latest annual review

is news the free float goes up from 50% to 100%

not sure why

presumably the locks have come off all those pre-IPO backers

need to try and figure out the buying demand based on this

but it could be punchy

Ok – and what about the smallers?

Henry Boot’s gone in, right?

Henry Boot PLC (BHY:LSE): Last: 136.00, up 7.5 (+5.84%), High: 136.00, Low: 128.50, Volume: 252.36k

yes

and its causing a few market makers to sweat

along with Xaar this went into the All Share

on the liquidity rule

a lot people over look this

and because most trackers follow the All Share

rather than the FTSE 100 say

it can cause squeezes

that said

I don’t know what Henry Boot actually does

Xaar is ink jet printers

Henry Boot builds things.

like what

Exceptionally ugly shopping centres, mainly.

Priory Park in Hull.

The Mall in Bromley.

Xaar PLC (XAR:LSE): Last: 268.00, up 8 (+3.08%), High: 268.00, Low: 259.50, Volume: 84.78k

Henry Boot has a slideshow of its best work on its website

http://www.henrybootdevelopments.co.uk/home.asp

not sure I want my pension fund tracker buying Henry Boot

quite worrying actually

especially given the latest blast of bad news from the high street

11:29AM

Ok then.

So Argos

yeah

dismal

10% fall in like for likes sales in Q1

because the poor aren’t buying electrical goods

sorry I mean the UK’s low income demographic

that news has whacked Dixons and Kesa

Dixons Retail PLC (DXNS:LSE): Last: 17.13, down 2.17 (-11.24%), High: 18.55, Low: 16.65, Volume: 33.12m

Kesa Electricals Plc (KESA:LSE): Last: 139.00, down 3.7 (-2.59%), High: 140.40, Low: 136.40, Volume: 1.98m

because Argos

claims to have retained market share

which gives you a clue how bad things must be in that sector of the market

Really, though, the statement is terrible.

EPS downgrades of the 50% coming through.

wow

And it’s all down to people not buying enough Bush tellies.

and what about the divi

surely that’s going to get splattered

Looks certain

Though I guess that’s the next bit of bad news.

There’s no way this thing’s going to pay 15p

I guess not

Here’s what the FD said on the conference call

And on dividend, you’re right, it is quite early in the year. The dividend decision, clearly, is a debate for the PLC Board, as we’ve
always said, at the end of the year. But they will take into account a number of factors. They’ll take into account the current
earnings profile of the business; but actually, more importantly, the future earnings profile of the business. At that point in time,
you will, around February, March, be looking at the budget for next year. And all those factors, including the level of cash that
we have at the end of the year, will be functions of that.

So would we be comfortable paying the dividend out of cash on the balance sheet? The answer is both yes and no, depending
upon what all the other factors say. If the other factors were looking more positive, and we could see some pickup in consumer
spending and some route to beginning to improve the earnings cover, then I think yes, you could see the possibility of using
your balance sheet. But there are too many moving parts at this early stage of the year to say where that might end up.

interesting

Though the price is already telling you it’s gone.

So what’s been the response from the sellside?

one moment

Oriel

Difficult first quarter will put the shares under
pressure – Sell

First quarter trading at Argos has proved much worse than even the most cautious
expectations with LfL sales declining by a worrying 9.6% against a fear of -6%.
 It seems that consumer electronics are the real culprit, but Argos alleges it has
maintained its Market share which suggests that both Dixons and Kesa will also have
been weak.

The 75 bps decline in gross margins (at Argos) will bring forecasts under pressure when
taken in combination with the unexpected 50 bps decline in gross margins at Homebase.
 Whilst the LfL performance at Homebase is better at 1.6% up, management had been
guiding to an improvement in profitability which must now be open to question.

Overall this is a disappointing result and forecasts are likely to fall from c.£210m at the
pre tax level back to c.£190m for the year to February 2011.
 With Argos continuing to struggle to find it’s place on the high street and margins under
real pressure at Homebase, we stay firmly with our SELL recommendation.
 We expect shares in Dixons (SELL) and Home Retail to come under real pressure.

and something from BES

Home Retail has published a very weak 1Q trading update this morning, with the performance at Argos much weaker than either we or management were expecting and, as a result, management has said that the outcome of the full year is now more difficult to predict. Ahead of today’s statement consensus forecasts were in line with our estimates looking for a 20% yoy decline in PBT to c.£203m but we think downgrades could reach c.15%. If PBT were to fall to around £170m (all else equal) we think the dividend would only be 1x covered on an EPS basis and distributable cashflow would likely to fall to the extent that a large proportion of the dividend would have to be paid by reducing the net cash position. Given the the attractive dividend yield has seemingly supported the shares, this is a concern.

At Argos LFL sales fell by 9.6% versus our estimate of -4.0% taking the two year run rate to nearly -18%. The weakness has been blamed primarily on a larger than expected decline in the electricals market, even though TV sales fell by approximately 10% in last year’s comparable period. Management has said that market share was maintained in electricals, which would imply a negative read-across for Kesa and Dixons, although we believe that Dixons does not contribute to the market share data. That said, there is no escaping the fact that the UK electricals market looks weak. Gross margin at Argos fell by 75bps versus our estimate of -50bps

In terms of readacross for the sector as a whole, the statement isn’t positive although we would note that the Argos weakness seems to be confined to electricals. As also highlighted by New Look yesterday and our own Spend Trend survey work, it seems as though the low income demographic is under most pressure. We continue to think that older, higher income consumers will outperform this year.Home Retail trades on 11.6x our cal.2012 EPS forecast, an unwarranted premium to our favoured stocks of M&S (9.3x) and Kingfisher (10.9x).

Not sure about that

true M&S and Next

both recently made good statements

but surely that was down to the weather

and people buying the summer wardrobe early

hell even Homebase

saw positive like for like sales

the outlook for consumer spending

and disposable income is dismal

rising utility bills

food prices

petrol prices

soft housing market

job cuts

austerity

prospect of a rate rise

who on earth is going to splash out?

ROTR reckon the TV upgrade cycle has run out of puff, and they’re probably right. Spending £400 to replace the TV that cost you £800 five years ago is the very definition of inessential.

(Monty – agreed. the internet competition angle would be enough to see Kesa and Dixons through a CC investigation)

One more note on Home, if that’s ok. From JP Morgan, post conference call.

go on

Post the poor Q1, we have substantially downgraded our estimates for
FY12E. Group PBT falls from £216m to £113m, a c.50% reduction to our
EPS (from 19p to 10p). This is below the implicit profit guidance from mgt,
which based on a mid single digit LFL decline in Argos for the FY would
seem to be more around the £150m to £160m PBT level.

The Argos LFL assumption seems ambitious in light of the poor Q1
performance especially when we consider all the Q1 factors such as weather
(positive for outdoor toys and seasonal), extra bank holidays and easier
comps that were working in the company’s favour. Into Q2, comparatives
strengthen by c. 3% as Argos annualises last year’s World Cup and hence
management’s indication of a Q2 performance in line with that of Q1 still
assumes an underlying improvement in run-rate, which we are far from
confident will materialise. Furthermore, a mid single digit LFL decline in
the FY from a starting point of an H1 of -10% demands a substantial
improvement in H2. Our revised FY12E LFL estimate for Argos is -8.7%
(pvs -4.5%), which combined with our previous GM assumption of -50bp
and mgt’s guidance of costs +£30m (at group level) results in our new
FY12E PBT of £113m. Within this, Argos EBIT is £92m (vs £219m FY11
and £376m 2008). This illustrates the extent of the operational gearing in
Argos and in our view highlights the risk to group PBT. No chge to mgt’s
guidance on Homebase of flat FY and GM +50bp, which seems reasonable.

We have also cut our DPS estimate from 14.7p to 10.7p. We expect mgt
will still pay a level dividend at H1 as it will be reluctant to make a call on a
cut until post peak at Christmas, but with the dividend uncovered on our
estimates, we expect the final to be cut. Our new assumption is covered 1x
by earnings but still not by cash. Home’s shares are still only down 5% ytd
despite a c. 12% fall as of 10am this morning. This reflects some
anticipation of an operational gearing upswing in the event of a consumer
recovery. With little sign of such a recovery, adverse structural factors and
the likelihood of a dividend cut, it looks inherently unattractive at 18x PER
our new estimates (based on 179p 10:00am). We believe c. 10x is a more
appropriate rating; 12M TP reduced to reflect that (100p from 165p). U/W.

of course

the sign that the consumer is really dead

will be when people give up their Sky subs

that really will be the end

(Monte:suggestion I had was that Currys wouldn’t really be interested in Comet’s whole store portfolio.)

(If they had the chance to pick up, say, a quarter of the stores they’d be interested.)

(But the portfolio overlap would be too great, and the liabilities too onerous, to consider anything more.)

Ok – before wrapping up on retail.

What of Halfords?

well the statement is reassuring

the stock has been clattered recently

so a lot of bad news is in the price

it’s also buying back stock

and there’s a divi of over 5%

that said

I still don’t believe it’s as defensive as people think

(Oh, hello @milky. Was it a meeting with your parole officer?)

but in spite of the dismal backdrop for retailers

you can still find value in some stocks

I see. Better than feared.

Or at least not as bad as it could be.

So,

here’s some comment

Halfords – PBT is slightly ahead of our forecast and up 7.2% year on year. Current year has started positively with retail 9 weeks +0.8% (but with a 1.5% Easter like for like benefit) and 1.2% for Autocentre. Leisure i.e cycling drove the retail pick up. Net debt down to £103.2m from £155.5m. FY divi up 10%. Don’t expect change to numbers but one caveat is that they are talking about further pressure on margins. They continue to buy shares back with £21m of £75m program completed. Looks like the business is turning around for the better to me after a poor period and trading on 10.5x 3/12 with a 5.4% yield look to add on weakness.

Oriel

The main focus of Halfords’ Prelims will be on the current trading statement and it is
ahead of expectation. We suspect that there will have been a bringing forward of
leisure purchases, and whilst we won’t change our fundamental stance, the shares will
probably enjoy the statement.
 Management pre-announced PBT a couple of months ago so £125.6m was not a
surprise.
 A dividend of 22p was also in line with hopes.

In the last 9 weeks LFL has picked up. It now stands (ex Easter) at -0.7%, and
although the comparative was straightforward, that’s a decent bounce back from H2′s
lows.
 The main eye-catcher was the leisure category (+11% LFL). It is clear that bike sales
have done well, although we suspect that the good weather may have dragged
forward some purchases. Thus we won’t change forecasts (we are towards the top of
the range on £107.5m next year).
 We still have our concerns over the underlying business here and fear that continued
superstore pressure, the need to put more staff in store and the potential impact of
MOT regulation changes could weigh.
 We stick with our REDUCE stance, although it’s hard to be churlish about current
trading today.

and finally Seymour Pierce

Having given detailed guidance at its Q4 trading update and pre-warned on an exceptional of £7.5 due to Focus lease liabilities, Halfords FY results contain no surprises. Management reported a 7.2% increase in FY11E PBT to £125.6m (SPL forecast £125.1m), EPS 40.7p (+10.6%) and DPS 22p (+10%). This was driven by gross margin (+16bp) and cost cutting as LFL sales were down 5.5% (Easter timing negatively impacted by 0.6%). Net debt stood at £103.2m at year end, down by £52.3m and compared with our forecast of £106m.

Current trading for the 9 weeks to 3 June benefited from the exceptionally warm weather and number of Bank Holidays. Retail LFL sales were up 0.8% with the timing of Easter benefiting performance by 1.5% according to management and Autocentre LFL sales were up 1.2% helped by the new brand advertising campaign. Management has completed £20.7m of its £75m proposed share buy-back programme to date.

Despite the slightly stronger start to the year, we are maintaining our FY12E PBT of £106m, EPS 38.9p, DPS 22p compared to consensus forecast PBT of £110m as we believe management will need to put extra cost back into the business and management has already warned on retail gross margin pressure. The valuation is not particularly demanding, with the shares trading on a FY12E PE of 10.2x and supported by an 5.5% yield which is secure we believe. However, the share price will continued to be driven by the performance of its retail business which we do not expect to return to profit growth until 2013.

sorry to give you so many notes

but Brass Monkey was asking for us to cover it

11:48AM

Question from the right on Imperial Tobacco

Imperial Tobacco Group PLC (IMT:LSE): Last: 2,098, down 41 (-1.92%), High: 2,142, Low: 2,092, Volume: 1.35m

I’m afaid it’s Spain again

Philip Morris?

Yup.

MPI’s cut all its prices again.

In another attempt to grab market share.

You’ll remember the stooshie last month when PMI raised prices, then cut them again.

To challenge BAT, which was undercutting in what is a very small market for them.

Whereas for Imperial it’s a rather important one.

UBS gives a good summary of the latest crossfire.

PMI have reduced their prices of all their major Spanish cigarette brands yet again.
This follows on from the price reductions announced on the 28th May. The price of
Marlboro has been reduced from €4 to €3.85 per 20, Chesterfield from €3.70 to
€3.50 per 20 and L&M from €3.40 to €3.30 per 20.

go on

It appears that PMI remains determined to price L&M within the lowest price
category, and the latest move is a response to BAT who cut the price of Pall Mall
from €3.40 to €3.30 per 20 on the 2nd June. PMI appears to have moved
Chesterfield to be priced in line with Winston at €3.50 per 20. BAT and JTI will
argue that Pall Mall and Winston have long sold at a discount to L&M and
Chesterfield respectively.

Were Imperial to reduce the price of all its brands by €0.10 per 20, including
Fortuna and Nobel from €3.50 to €3.40 per 20, and Ducados Rubios and JPS from
€3.40 to €3.30 per 20, then we estimate this would have an annualised impact on
net sales of c£65m and impact on EBITDA of £35m-£40m. The large impact on
the net sales is because there is a minimum duty rate in Spain, so the reduction of
the retail price below €3.65 per 20 is mostly borne by the manufacturer. This (and
31st May price reductions) are not reflected in our current FY’12 estimates.

(@Outlaw – FTSE reweight driving it higher. 100% free float now)

thanks for that

Zoomy wants to talk miners

shall we move on?

or is there something more to say on Imperial?

I think Morgan Stanley are positive

Are they? I didn’t see that.

We like global Tobacco for its pricing power, limited input cost pressures vs. other consumer
staples categories, cost savings potential, and options for shareholder-friendly use of its high
cash generation. In Europe, we prefer IMT (OW) over BAT (EW) for its discounted valuation on
overly pessimistic relative earnings growth potential. In the US our top pick is OW-rated PM as
cost cutting has contributed greatly to the company’s peer-leading earnings growth profile and

further optimisation should support this trend. We remain OW on JT in Japan as domestic and
international cost bases both present cost reduction opportunities, in our view, and we believe JT
should be able to continue expanding profits, mainly as it increases pricing in key EU markets.

11:53AM

Mining

I guess we should start with ENRC:LSE

Eurasian Natural Resources Corp PLC (ENRC:LSE): Last: 803.00, no change, High: 804.50, Low: 795.00, Volume: 1.01m

Eurasian Natural Resources Corp PLC (ENRC:LSE): Last: 803.50, up 0.5 (+0.06%), High: 804.50, Low: 795.00, Volume: 1.01m

what a mess

The three Kazakh oligarchs and the Kaxakh government

just fire anyone

who stands in their way

ie a non executive

who is concerned about good corporate governance

Well, indeed.

Though the problem’s been there for some time.

It’s run as a private company.

public/private company

I’m not sure how this ends

I guess the oligarchs might buy it

after all

do they really want or need all of this

A company that’s disposed of two CEOs, One CFO, one chairman and four Noddies since listing in December 2007.

That must be some kind of record.

it’s operational performance is pretty dismal

it’s made a massively controversial deal in the DRC

i think they should delist

or so does JPMorgan

Could the founders consider taking the business private? We think it not
inconceivable given the listed minority is worth only $3.5bn, ENRC is carrying very low gearing and the constraints of a UK main board listing are clearly frustrating the founder shareholders. This could present meaningful upside risk to our recommendation but in our view is probably still an ‘in extremis’ option vs redomiciling to a ‘lighter-touch’ regime.

No need to change view yet, remain Underweight: While it is tempting to wonder how much worse things can get, we believe consensus numbers need to decline further, to a level closer to our estimate which sits 14% below (Bloomberg) consensus. With the stock still trading at a premium to Rio, Anglo and BHP on 2011E PER on our numbers, we feel there is no valuation case yet while the company continues to suffer from minimal volume growth for the next two years and high exposure to ferrochrome which remains in medium-term oversupply

and here’s Liberum with some more

 The aftermath of the ENRC board debacle features heavily in the press today with The Times publishing a Valedictory letter from one of the two ousted NEDs Ken Olisa. It is clear the company’s credibility on governance is at an all time low – a shame given that its assets and growth plans are actually quite attractive. At the heart of the problem seems to be the idea that the oligarch shareholders who are not represented on the board very much meddle in the running of the company.

 With investors unable to have any visibility on the workings of this company now, we can only speculate as to why the key shareholders have ‘turned’ on the minority shareholders representatives. The governance structure of the company is now in shreds and the long term viability of ENRC as a listed entity must be called into question. Perhaps the nuclear option of kicking out the ‘turbulent’ NEDs is a pre-cursor to some take-private transaction.

 ENRC’s shares are down 26% YTD (14% underperformance relative to the sector) putting it on a current year PER of 6.8x. This rates it slightly cheap relative to its more cyclically stretched diversified peers. For an acquiror, this valuation would be a bargain. Frankly we are unsure what to do with the shares. To our mind the likelihood of a corporate transaction/break up seems to be rising, so selling now could be a mistake.

an honest note that

Eurasian Natural Resources Corp PLC (ENRC:LSE): Last: 801.50, down 1.5 (-0.19%), High: 804.50, Low: 795.00, Volume: 1.06m

No wonder Kaz is (it has been rumoured) looking for someone to take its stake in this thing.

indeed

But, apart from ENRC itself, who would?

we have no visibility on how this company is run

if the oligarchs decide they want to do something

like buy in the DRC

they do it

anyway

we have a copy of the letter

referred to in the Liberum note

it’s from one of the Noddies

called Ken Olisa

he works for Restoration Partners

and recently penned a letter to the FT telling us

how our sniping was destroying Britain

anyway

here’s some of the letter

Dear colleagues
Given today’s seismic events I thought that I would write to you with a valedictory analysis of my
position.
When Sir David Cooksey invited me to join the board of ENRC prior to our IPO I accepted
enthusiastically.
My enthusiasm was rooted in a belief that for the City to retain its leadership position in the world’s
capital markets we must do everything possible to make the UK’s particular approach to liquidity
and governance attractive to companies from abroad.
Selfishly I also relished the opportunity to learn about an exciting industry and an intriguing country
– Kazakhstan.
From the very beginning it became apparent that the journey on which the company was embarked
was not going to be a smooth one. Although the founding shareholders had signed Representation
Agreements committing them to support an independent board it soon became obvious that the
original owners’ informal historical links with Directors and senior management meant that their
influence would be ever present.
This is not necessarily a problem – there are many listed companies whose boards include major
shareholders and where the tension between being a private company and a public company is
significant. In our case however, it has become more and more apparent that the founders’
influence was less transparent than is ideal; manifesting itself, for example, in the Chairman
frequently playing the part of founders’ messenger – not always accurately – rather than as leader of
an independent board.

In my various discussions with Mr Machkevich and Mr Chodiev I explained my view that for
companies such as ENRC, there are only two, mutually exclusive governance models – either the
founding shareholders should take a big step back and let the board of ENRC govern the company
independently, or they should take a big step forward and play a hands on role in the strategic and
operational detail of the business which they created.
Neither is the right answer per se, but a hybrid is definitely the wrong one. If ENRC is to change the
commitments that we made at IPO and to adopt the second option – ie become a private company
with a public listing – it must be done openly. The FSA needs to be consulted, the Representation
Agreements need to be renegotiated and the many relationships between the Directors and the
founders need to be entirely transparent and the market needs to be informed.
Whilst not really doubting the outcome, I had rather hoped that we would determine privately
which option was preferred by the principal shareholders – the founders, Kazakhmys and the
Kazakhstan government – and then effect an orderly restructuring of the board to achieve the
consensus. As you know I had no interest in remaining once the change was effected if it were the
second option and was happy to step down as part of that orderly process.
My dismissal alongside that of Sir Richard is a rather more brutal way of signalling the principal
shareholders’ decision to the market than I had in mind – more Soviet than City – made more so
because it was in absolute contravention of the assurances given last week.

More Soviet than City

great line that

anyway

we have a BoE non decision to talk about

12:01PM

UNCHANGED

And still £200bn in the kitty

RTRS-BANK OF ENGLAND HOLDS KEY UK INTEREST RATE AT 0.5 PCT (REUTERS POLL 0.5 PCT)
12:00 09Jun11 RTRS-BOE MAKES NO CHANGE TO QUANTITATIVE EASING TOTAL OF 200 BLN STG (REUTERS POLL 200 BLN STG)
12:00 09Jun11 RTRS-BOE MAKES NO STATEMENT ON MONETARY POLICY ALONGSIDE JUNE RATE DECISION

12:03PM

Misys

Strange software outfit, seemingly controlled by US investor ValueAct Capital.

someone was asking about Misys

Misys PLC (MSY:LSE): Last: 388.00, no change, High: 390.50, Low: 381.00, Volume: 1.20m

shareholder support above 400p

I’m sure ValueAct would take it

not sure about Schroders

not sure if that’s an Andy Brough shareholding or not

Why should anyone buy at 388p based on the unconfirmed potential of a bid at 400p?

Not fancying that risk-reward.

So much in the price here.

And stepping forward to sum up the argument today is David Toms from Numis

I like David

in spite of his positive recommendation on Autonomy

what’s he saying

Misys shares have been strong in recent weeks led, we suspect, largely as a result
of ongoing bid speculation. This has driven the shares to a level where we believe
that any bidder would struggle to pay a significant premium. On 18x CY12
EV:NOPAT, Misys now trades at a significant premium to peers such as Temenos
(16x) and Fiserv (15.4x) and in our view such a rating is well ahead of the value of a
company that is struggling to deliver 5% growth. Misys has performed well as a
trader of assets and we think it would be dangerous to bet against this performance
continuing. However, as an operating entity we think the jury remains out. Absent a
takeover we believe the shares look overvalued albeit our elevated 350p TP (was
310p) means we remain a Hold.

Q3 update showed decent performance. In April, Misys reported a robust Q3,
confounding our concerns about downside risk driven by geopolitical turmoil albeit
benefiting from some slipped orders in H1. However, overall we expect FY11 (May y/e)
performance will be, at best, at the bottom of management’s 5-8% growth guidance – a
poor performance in a banking recovery in our view.

Shares keep going up… The performance of Misys’s shares is in the ‘somebody
knows something’ category. This has driven the rating up to 18x CY12 EV:NOPAT
(close to a Fidessa/Autonomy/AVEVA-esq 20x for what are, in our view, vastly better
businesses). This is also a substantial premium to Temenos’s 16x CY12 EV:NOPAT
(based on consensus) and Fiserv’s 15.4x. It also represents c. 12x EV:EBITDA which
we think is a challenging level for private equity.

Risk for investors? Given Misys has just paid <15x EV:NOPAT for Sophis in what we
suspect was a very broad auction process, and given that Sophis represents around a
third of the Group’s NOPAT, this mitigates against a bid for the whole of Misys in our
view. We see a risk that corporate action could involve just a sale of the banking
business which would possibly be dilutive (it is hard to justify a premium for the
long-troubled banking division) and leave the shares looking exposed.

Target price up. The sector has performed well since we last wrote, and applying our
previous 10% premium (to reflect takeout potential) moves our target price up to 350p
(was 310p). Although the shares remain a Hold they feel very fully valued.

sensible stuff

Yeah – valuation work’s very good.

18 times EV:NOPAT for Misys seems absurd when Temenos is on 16, given Temenos has all the market share.

not bad for an Autonomy apologist

12:08PM

To small cap corner

Shovel is asking about Lookers

the Jack Petchey consortium now have three weeks to go through the books

after making an indicative offer of 80p a share

presumably that will be enough

to secure a deal

although Panmure says not

We learnt yesterday that the consortium bidding for Lookers have offered 80p
in cash, which equates to a 2011E P/E of 12.2x falling to 11.1x with an
EV/EBITDA of 6.0x falling to 5.3x. The deadline on the offer period has now
been extended out to 29 June, with the consortium now having access to the
books. While this is a starting point, we suspect the consortium would have
to offer more to secure the business given valuations of previous transactions
in this space, and given what management plans to deliver in the future. We
maintain a Hold recommendation on the basis we believe there is still a risk
this may not materialise, but watch for further developments with interest.

Will the deal happen? Its clear that the consortium is serious on making an offer, with
the due diligence period now underway. We believe 80p is a good starting point, but the
consortium will probably have to bid more to secure the business. It will also be
interesting to see the reaction of the manufacturers to this transaction, as this will be key
given the rule changes on block exemption.

I guess Tony Brammel

will be key here

he owns 22%

and could be a pain

is he still on the board?

Non-exec?

I think.

yeah

noody

what other small cap news have we

yes I know

Bowleven

good update from them

Bowleven PLC (BLVN:LSE): Last: 326.00, up 34.25 (+11.74%), High: 331.48, Low: 310.50, Volume: 4.99m

oil in Cameroon

the sector watcher is very impressed

Good news for BLVN – test results from the Sapele-1 sidetrack well offshore Cameroon look very positive with a flowrate of 3,100 boe/d, around 2/3 of which is oil, the remainder gas. The initial well result in April had looked disappointing with less net oil pay in the Omicron objectives (23 metres) than perhaps the market had been hoping for, hence today’s news is a big relief. Subsequent to the initial Sapele-1 result, the Sapele-2 well had come in with a strong result (35 metres of net pay), with testing of this well now ongoing and a result expected within 2-3 weeks

. It appears that the Sapele reservoir is quite complex due to its stratigraphic nature, hence the group is unwilling to provide reserves estimates for the time being, however the successful flow-test is a clear positive. We have a NAV for BLVN of 400p/share, i.e. 37% above the current share price, but the reality is the upside is far greater. Sapele is still at an early stage of appraisal, and the group’s other discoveries, IE and IF, will also be appraised this year. The BLVN share price has drifted down 10% in the past couple of weeks and I’d expect to see that being reversed today, and I’d continue buying it even after the bounce.

he’s also been banging about Petroneft

another stock

that’s interests a few of you

We are reducing our NAV-derived target price on PTR by 6% from 93p to 87p/share although we retain our Buy recommendation, given the current price of only 50p/share. PTR disappointed the market on Tuesday with the news that production from its Lineynoye oilfield in Siberia was struggling to meet earlier expectations, and the shares have fallen 18% since despite the fact that the group also announced some positive news on the exploration front. To reflect the lower production rates, we’ve cut our NAV, but I certainly wouldn’t give up on the stock. Apart from anything else, the group has enormous exploration upside, and has a further 4 wells to drill this year targeting close to 100m barrels net, or double the current reserves base. I said on Tuesday I’d be a buyer on weakness and I’d reiterate that today

anything small cap from you Bryce?

Not much

I guess we should note, if only for posterity, the official flotation of HaywardCo.

oh yes

Announcement of intention to raise £1 billion and list on the London Stock Exchange’s Main Market

Vallares intends to raise £1 billion to acquire or establish a major company, business or asset that has significant operations in the resources sector

The Company intends to focus on the oil and gas industry

Ah yes Vallares

it’s really another Rothschild acquisition vehicle

like Vallar

Vallares is advised by the Founders, being Nathaniel Rothschild, Tony Hayward, Tom Daniel and Julian Metherell.

Valirx PLC (VAL:LSE): Last: 0.665, down 0.01 (-1.48%), Volume: 809.55k

Metherell is the ex Goldman hot shot

£1bn is a lot of wonga

I wonder what they are going to buy?

The next supermajor, potentially sitting on 60bn barrels of oil in Kurdistan. Loved by muppets across the globe.

Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 148.00, down 3.5 (-2.31%), High: 154.00, Low: 147.25, Volume: 670.70k

Xcite Energy Ltd (XEL:LSE): Last: 156.50, down 1 (-0.63%), High: 161.00, Low: 153.55, Volume: 638.05k

EnCore Oil PLC (EO.:LSE): Last: 63.50, up 1 (+1.60%), High: 64.25, Low: 61.75, Volume: 642.81k

Chariot Oil and Gas Ltd (CHAR:LSE): Last: 218.00, no change, High: 220.00, Low: 217.75, Volume: 68.97k

even

Bahamas Petroleum Company PLC (BPC:LSE): Last: 18.25, up 0.25 (+1.39%), High: 18.50, Low: 17.25, Volume: 1.64m

so many top quality companies to chose from

All the kind of companies where a smooth operator such as Tony Hayward could make a real difference, I’m sure.

Here, for the sake of it, is the target areas.

The Company intends to focus primarily on emerging and under-developed geographic regions where the Founders collectively have prior knowledge and experience. These include Russia, the CIS region, the Middle East, Africa, Asia and Latin America. However, the Company will not exclude other geographic regions where an opportunity presents an appropriate investment proposition.

So — “anything”.

that’s most of the world

apart from the North Sea

Though proven and established reserves only, according to the Flak.

Shall I say it

Which rules out a few we could mention.

or do you want to

Let’s not. No point in prodding the beehive.

presumably the Gulf of Mexico is out as well

Well, for PR reasons you have to think it is.

Some people seem to think Indonesia would be interesting.

Though what they’re basing that on, I don’t know.

And we’re certainly not speaking UK listed.

oh and I had some read across on that other oil that’s listing

Ophir

I must say very brave to list in London

given the curse

but they are

looking to raise up to $400m

gas discoveries in Tanzania

where BG has interests

as does Cove

Cove Energy PLC (COV:LSE): Last: 80.25, up 1 (+1.26%), High: 80.50, Low: 79.75, Volume: 233.60k

BG (BUY, TP 1,475p) – BUY on readacross from Ophir listing
– BG’s partner in its Tanzania acreage, Ophir, has this morning announced its intention to float on the London stock exchange
– BG and Ophir have so far made 3 gas discoveries offshore Tanzania (100% success rate) – but have not announced details on size of discoveries, or the timing of any development plans
– We expect BG and Ophir to try and prove up sufficient volumes for an LNG facility, given its favourable location in East Africa for access to Asian gas markets
– We believe that Tanzania could provide the next leg of NAV upgrades to BG, and while we would be cautious of taking any valuation read-across from Ophir at 100% face value, the co.’s marketing materials could prove very +ve for BG’s valuation…BUY

To be fair to them, O&G doesn’t seem to suffer quite the same curse as gold miners, budget airlines, betting exchanges, commodity traders, whitboard makers, etc. etc. etc.

you wait

the curse will strike

12:22PM

Ok – we done?

almost

quick comment on African Barrick

while we are talking about Tanzania

From Collins Stewart

African Barrick Gold PLC (ABG:LSE): Last: 422.10, up 7.1 (+1.71%), High: 433.90, Low: 410.16, Volume: 682.35k

Storm in a teacup: The stock was down sharply yesterday as the Tanzania’s
Economic Planning Commission recommended the country to bring in a mining
‘super tax’ similar to Australia. The story ended up being overblown, as the 2011
budget speech delivered later in the day by Tanzanian finance minister did not
mention anything on the mining tax. We expect the stock to bounce back sharply
today.

Tax terms protected by MDA’s: Aftican Barrick operations have “standstill”
agreements in place around on fiscal terms around royalty and tax which have been
tested in court last year when the government was defeated in an attempt to raise
fuel excise duties. Bulyanhulu agreement is valid till 2025, Buzwagi till 2022, whilst
North Mara expires in September 2011.

Hugely profitable business: Despite all the negative sentiment on the stock, African
Barrick remains a big cash cow with a great balance sheet. The company currently
has $401m in the bank and is set to generate $157m in free cash flow according to
our model. It is currently trading at 0.8x P/NAV versus London peer group of 1.1x
and a global average of 1.3x. African Barrick’s assets are a stand out in the space
due to their high grade and long life. The company remains hugely undervalued
based on fundamentals, however needs to produce several quarters of good news
flow for the faith of investors to remain.

and that’s it I believe

thanks for joining us today

lots of comments which is good

Yup – thanks for your time and attention.

Nice to see both Milky and Zoomy in the same (virtual) room.

yeah

As I had my doubts they were two different people.

the old and the new

AV plaything

So until tomorrow, have a good one.

bye

This entry was posted by Neil Hume on Thursday, June 9th, 2011 at 11:04 and is filed under Uncategorized. Edit this entry.

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Markets Live transcript 9 Jun 2011

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