FT Alphaville » Markets Live transcript 1 Aug 2011

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Markets Live transcript 1 Aug 2011

Posted by Neil Hume on Aug 01 11:04.

Markets Live chat transcript for the chat ending at 11:28 on 1 Aug 2011. Participants in this chat were: Neil Hume, FT bryce.elder

Hola rabble

sorry for being late

just watching the open over of the Second Test

I’m sure you all understand

much more important that events in Congress

anyway

I’m back after a few days away

and we have a rally on our hands

or a

depending on whether your glass is half empty like us

or half full like Milky

(@Milky: yellow for verbosity.)

yes this week could be all too much for Milky

all the big UK banks reporting

starting with HSBC

which looks to have come in a little ahead of expectations

HSBC Holdings PLC (HSBA:LSE): Last: 621.70, up 27.2 (+4.58%), High: 622.10, Low: 598.70, Volume: 18.92m

(Wicket – Prior out)

Barclays tomorrow

already getting lots of questions

as to whether the bad news is in the price

Barclays PLC (BARC:LSE): Last: 226.70, up 3.7 (+1.66%), High: 231.17, Low: 223.30, Volume: 11.09m

anyway we can come back to that later

Yup – let’s kick off with the dead cat.

meow

FTSE’s up 77 points at 5892

On ………

Er …………..

some sort of deal that’s been cobbled together by US politicians that may or may not get through and won’t prevent a downgrade anyway

is that it?

Guess so.

Potentially ending the most tedious crisis in recent years.

yes

I must admit to reading not a word about it over the weekend

very very dull

hopefully it’s out of the way now

and we can all look forward to the downgrade

before that, however

there’s loads to get through for a week in August

in addition to the banks

there’s rate decision from the BOE and the ECB

and a slew of important eco data

want a preview?

that’s obviously a leading question

Yeah – it is. Go ahead then.

Moving on, we expect the BoE to leave the bank rate at 0.5% and its asset purchase target at 200bn in August. Although August is a quarterly Inflation Report month, recent data trends, financial market developments and MPC minutes suggest little chance of any change in policy.

For the ECB, we have set out clear markers that would stop the ECB hiking rates. For example, we have argued several times that the level of stress in the market associated with a Spanish 10-year sovereign bond yield permanently at or above 6.5% would be consistent with a substantial delay of further rate hikes. We remain of the view that the crisis will continue to escalate and we might be getting very close to a context of paralysis for the ECB. The extent of the recent European and global slowdown will also need to be watched carefully, since this will also determine how much further the ECB can go in moving rates up from their emergency policy setting

Otherwise, the focus will be on the US ISM and employment report on Monday and Friday respectively.

After sliding by nearly seven points in May, the ISM factory index recovered by almost two points in June. However, most of the June advance was due to inventories, with that gauge swinging from 48.7 to 54.1 (signalling a shift from drawdown to build). Or US economists look for the ISM factory index to have firmed only slightly in July to 55.5.

The US June employment report was stunningly weak, with payrolls rising just 18,000 and the jobless rate edging up to 9.2%. Thus, we look for only a modest pickup in job growth, with payrolls rising by just 75,000 and private payrolls expanding by 110,000. Job gains of this magnitude are not sufficient to lower the unemployment rate. A greater pickup in payroll growth is needed if a reacceleration in activity in the second half of this year is to be seen.

see what I mean

very very busy

for August

given that there’s also lots of half year IMS statements to wade through

and hopefully one or two major profit warnings

right then

on to the banks

and HSBC

11:13AM

looks like a beat

of around 5% for PBT

(@Eoghan. Do feel free to help counterbanance with something other than a complaint, should you wish.)

oddly a good performance from its investment banks business

in equities apparently

Though the headline really has to be 30k jobs to go.

That’s a startling number.

it is

but that’s across the world

and HSBC is a rather large bank

how many people does it employ?

335,000

Apparently.

hmm

So – less than 1% of staff.

The great difficulty with HSBC is doing anything that’s sufficiently large-scale to move the dial.

(Silverfox – gold star for spotting the typo. I did of course mean 10%.)

Even the branch disposals in the US won’t really do it.

That’s a $1bn deal.

indeed

but the positive here is top line growth

a rare commodity for a UK bank

albeit

one that does most of its business elsewhere

right comment then

I’ll grab some Citi.

Revenue-Driven Group Beat — 1H11 Group PBT of $11.5bn +5% vs consensus
driven by better than expected revenues of $35.7bn (+3% vs cons) and higher
associate income. 1H11 cost/income ratio of 57.5% was marginally below consensus
57.8%. Better revenues were largely driven by trading and other income, with doubledigit
revenue growth in Asia and EM. Balance sheet metrics were ahead of our
estimates with loans +13% yoy, deposits +15%, core Tier 1 ratio 10.8% (+30bps hoh).
By region the beat was driven by Rest of Asia Pacific, Europe and Middle East, with a
weaker result in the US. By division the beat was focused around CMB.

Update on Strategy — During 1H11, HSBC have begun restructuring across EMEA
and the Americas which will lead to 5k headcount reductions. CEO Stuart Gulliver said
on a press conference call “25k roles (will be) eliminated between now and end 2013″
(Reuters). In addition, 3k-5k per annum emerging market hires could be made. In line
with their announced strategy, HSBC has closed retail businesses in Russia & Poland
and over the weekend announced the divestment of 195 upstate NY branches.

Asia Strong — Rest of Asia Pacific was stronger than Citi forecasts and consensus
with 1H11 revenues of $5.3bn (+6% vs Citi) and PBT of $3.7bn (+15% vs Citi, +13% vs
consensus). Revenues were a broad-based beat, with NII particularly strong +23% due
to strong loan growth (+32%), deposits (+22%) and deposit spread widening. HK 1H11
revenues of $5.4bn & PBT $3.1bn were broadly in-line with Citi & consensus estimates.
HK balance sheet growth: loans +40% yoy (+35% Citi), deposits +12% (+13%).

CMB Strong Beat — CMB 1H11 PBT $4.2bn is +19% vs consensus, +15% vs Citi,
and +31% yoy driven by net interest income growth, reflecting higher lending balances
& expanding trade flows, primarily in LatAm, HK and RoA. Customer lending balances
are +9% since end-2010. In addition BoCom associate income showed a notable
improvement, +270% yoy, and there was an improvement in credit quality.

here’s Bruce Packard at Seymour Pierce

HSBC PBT of $11.5bn looks 6% ahead of consensus PBT of $10.8bn, driven by revenues which were flat versus the first half of last year. This compares to Q1 when revenues were down 5%, implying a 6% rebound Q2 versus Q2 last year. Cost income ratio 54.4% v 60.9% in Q1 (or 55% when adjusted for PPI and Fair Value movements in own debt). Impairments for H1 were $5.3bn, a 30% fall on H1 2010 but a 22% rise in Q2. Core tier 1 10.8% v 10.5% Dec 2010A. Q2 dividend of 9$c, in line with Q1 (up 12.5% on last year).

and Alex Potter from

Berenberg Bank

HSBC’s results are ahead of consensus (13% on EPS, 4% on PBT and 24% ahead on dividend, driven by 1.6% on revenues and 5% better performance on loan loss charges) and ahead of our estimates (by 8% at the EPS level). We feel these results are strong and the market will value the revenue beat highly. Loan loss charges were also better than expected but are more easily discounted by the market, and we believe the positive results from US peers in the last couple of weeks will mean this was an anticipated event.

The source of the beat appears to be in revenues. The moving parts included lower contributions from balance sheet management, run-off of the US operations and a weak half for the investment bank, all of which were expected. Positively, the core banking business more than offset these – Commercial Banking revenues were up strongly (14% yoy), driven by lending in Asia and Latin America, as well as Asian trade flows. Retail banking outside North America also performed strongly, driven by Asia and wealth management specifically. RB revenues rose 3%, even with the drag of falling revenues from North America.

n summary, a positive set of numbers with revenue growth being the key surprise to us. Revenue growth amongst UK banks is a relatively rare commodity and this underlines our preference for HSBC. These results, with their revenue strength in Asia are a positive indicator for Standard Chartered (which reports on Wednesday, 3 August).

· We feel consensus estimates, which were low relative to these results, should move up by 3–4% now. More details on the conference call, which is at 11:45 London time, and the webcast are available at http://www.hsbc.com/1/2/investor-relations.

anyway

we need to dig a bit deeper into the figures

because the release the company sent out

has nothing about Greek debt values

and we need to have a lool at that

as for Barclays

any thoughts Bryce?

Barclays PLC (BARC:LSE): Last: 226.05, up 3.05 (+1.37%), High: 231.17, Low: 223.30, Volume: 11.22m

Results tomorrow, of course.

And I guess HSBC’s IB numbers help

Though isn’t BarCap rather exposed to commodities pricing?

and it will hardly comes as surprise that volumes in the debt and equity markets have dried up in the past quarter

Well yes, exactly.

Figures have drifted down in an orderly fashion ahead of the numbers.

Will just grab a previeww from someone.

WestLB – that’ll do.

We maintain our Add rating on Barclays (BARC) ahead of its Q2 2011 results
on 2 August. Our Q2 2011 PBT and EPS estimates are 3% ahead of consensus.
We expect Q2 EPS to be held back by weak investment banking (IB) revenues
(BarCap), and by a rise in loan loss provisions relative to Q1 2011.
Nevertheless, the share price may receive some support from a positive step
forward regarding the US debt ceiling. BARC has fallen 10% over the last
month (-2% vs the sector) and now trades on a 2013E P/TNAV of 0.5x, which
represents a sector discount of c.45% to the European Banks sector (Stoxx50).

EPS to fall 13% from 8.5p (Q1) to 7.4p (Q2). These figures exclude the £1.0bn
PPI provision. Our EPS estimate of 7.4p is 3% ahead of consensus (7.2p, source:
BARC). Our PBT estimate of £1.52bn is also 3% ahead of consensus (£1.48bn).

Investment banking revenues in focus. Q2 results so far suggest the risk of a
marked decline in FICC revenues. Nevertheless, this may be in part offset by
stronger revenues in the equities business.

Outlook. We expect a cautious outlook statement, especially with regards to
income growth. Although BARC is targeting significant additional income of £4.3-
6.4bn by 2013, we believe that it is too early to change the targets.

(@Milky – this is for your own good. I am going to ban you before this gets ugly. This is a real mismatch – you vs Taxloss)

(Quite so. We have to restrict fights to within weight bands, otherwise we can’t be held responsible for the consequences.)

(@Jarvis – half the team were rested in WI and Eng have just played Sri Lanka. Not a good excuse. More a case of being found out overseas)

thanks for that

and just going back to the HSBC results announcement

some comments on Greece

During the first half of 2011, an impairment
charge of US$105m was recognised in respect of
Greek sovereign and agency exposures classified as
available for sale, reflecting the further deterioration
in Greece’s fiscal position and the recently
announced support measures. The amount of the

impairment charge represents the cumulative fair
value loss on these securities as at 30 June 2011, and
does not necessarily represent the expectation of
future cash losses. The impairment charge was
recycled from the available-for-sale reserve to the
income statement. Our sovereign exposures to
Ireland, Portugal, Italy and Spain are not considered
to be impaired at 30 June 2011 because, despite
financial difficulties in these countries, the situation
is not severe enough to conclude that loss events
have occurred which will have an impact on the
future cash flows of these countries’ sovereign
securities

bored with banks

Where now then?

that said

RTRS-CYPRUS LENDER BANK OF CYPRUS SAYS THERE IS AN “IMMINENT” THREAT ISLAND WILL HAVE TO ASK FOR EU SUPPORT

not followed this story

How big is Cyprus, in economic terms?

Need we care?

ROTR, if you have an answer, shoot.

thanks Lorcan

Hm. GDP $25.04 Billion.

Though. …..

1. Bank of Cyprus Public Co Limited
2. Marfin Popular Bank Public Co Ltd
3. Hellenic Bank Public Co Limited
4. USB Bank Plc

(@Ptolemy – you’re right)

There’s your problem.

Oh, and Barclays is big in Cyprus.

Anyway, let’s push on.

11:32AM

Right then

housebuilders are a good market today

Taylor Wimpey PLC (TW.:LSE): Last: 36.56, up 1.22 (+3.45%), High: 36.74, Low: 35.78, Volume: 1.21m

Barratt Developments Plc (BDEV:LSE): Last: 101.60, up 3.1 (+3.15%), High: 103.90, Low: 100.30, Volume: 594.07k

just trying to figure out why

there are a few interesting data points around

such as

The central London luxury-home prices costing on average ·3.7mn rose 9.6% in the 12 months through July, the most in six months, as the European investor sought a safe haven from economic instability, according to Knight Frank real-estate index.

and this

The continuing resilience in London house prices is triggering a long awaited move by institutional investors into UK residential property, with spiking rents finally attracting some of the country’s largest companies into the market.
Corporate ownership of large rental portfolios has been well established in countries such as the US and Germany, but has been slow to take off in the UK in spite of government support for the concept.

The demand is being driven, in part at least, by a lack of homes available and affordable for first time buyers. As a generation of would-be owners struggle to get on the housing ladder average London rents have hit a record high, climbing to more than the £1000 a month barrier for the first time in June, according to LSL Property Services.

that’s from the FT

London property market a safe haven

http://www.ft.com/cms/s/0/a10958c8-b934-11e0-b6bb-00144feabdc0.html

forget US treasuries

(@jaws: you mean the one on Friday? That was on Friday.)

“more than the £1000 a month” ………..

Does that include the sticks? You won’t get much for £1k inside zone 2.

A leading European hedge fund is preparing to build one of London’s most expensive housing developments as global investors scramble to gain a foothold in the capital’s resurgent residential market.
In a deal completed over the weekend, Orion Capital Managers acquired an acre of prime residential land in Chelsea. The fund plans to build a £300m ($493m) housing complex which, it hopes, will vie with One Hyde Park for the title of the capital’s priciest address.

The site has planning consent in place for a building designed by Sir Norman Foster’s practice, with six apartments, a duplex penthouse and two detached villas, which are expected to price at between £25m-£35m ($41m-$57m). The development, to be called the Glebe, will be marketed to a mixture of domestic and overseas buyers. Mr Lahham said it could be brought by a single family wanting to use it as a gated housing compound.

it’s not like it’s the south of France

or the Antibes

a £300m family home

http://www.ft.com/cms/s/0/e3cd5fac-bb77-11e0-a7c8-00144feabdc0.html

Do you need a gated development in the badlands of Chelsea?

Also, I assume this one acre of prime residential land has something on it already.

presumably

anyway

that was all a rather long winded way

of getting to the Goldman upgrade

which looks to be behind the strength in the housebuilders

We expect broadly flat UK house prices
We move to a base case assumption of flat UK new build house prices over the next two years as we believe
monetary policy is likely to remain accommodative and unemployment has stabilized recently, while build
volumes remain low.

Margins recovering but at low asset turn
We believe margins for the group will rebuild gradually (c.200 bp pa) as new land makes its way into P&Ls.
However, we believe asset turn will remain low due to lower volume growth and onerous planning requiring
higher land holdings.

Risk/reward skewed to the upside
We acknowledge the risks to our assumption of flat nominal house prices such as renewed decline in UK
economic activity, rising unemployment due to public spending cuts, a generally challenged UK consumer
and a restrictive lending environment. However, we believe the current group valuation of 0.75.x 12m forward
P/TB prices in an element of the above risks and the potential reward on our base case assumption (group
average IRR of 23% until 2014E). This skews the risk/reward to the upside, in our view.

Barratt and Persimmon up to Buy; reiterate Buys on Taylor Wimpey and Bellway
Following the change in our methodology, our price targets for Barratt and Persimmon imply 60% and 37%
upside, respectively and we upgrade both to Buy (from Neutral). We also reiterate our Buy ratings on Taylor
Wimpey and Bellway, with 64% and 31% potential upside, respectively.

(@jaws: without wishing to argue with undue futility, it wasn’t. It’s dated 29th July, and I distinctly remember reading it on Friday afternoon.)

Ok – done on housebuilders?

yes

shall we have a look at Laird

11:39AM

Laird PLC (LRD:LSE): Last: 166.20, down 21.5 (-11.45%), High: 175.60, Low: 165.10, Volume: 1.92m

all looking pretty grim ahead of the PUSU deadline

later today

to recap

the Americans, Copper Industries

have said they might be prepared to offer 200p

but Laird have said they want 220p offer

before they talk

so it looks very much like the deal will collapse

and I just hope Laird management know what they are doing

nothing in the company’s recent past inspires confidence

that they will be able to get the share price

back to 220p

Hm.

There’s certainly some mixed messages about how pleased shareholders are with this strategy.

quite

sure that have de-Nokia’ed the business

but there remains much to do

as to why Cooper don’t take the bid directly to shareholders

not sure

financing?

possible but unlikely?

perhaps they aren’t sure about the claims surrounding the closure of the business that supplied Nokia

perhaps that’s the way they always do acquisitions – recommendation only

Worth noting Cooper has sold off over the past three weeks or so.

Down something like 17%

really

on what?

poor results?

growth jitters?

or buying something on a fancy valuation

just because it supplies a few bits and bobs to Apple?

(@Student. in theory but in practice the Panel will I think look favourably on requests for extensions)

There are concerns, certainly, about strategy as well as the $1bn of debt Cooper would need to buy this thing.

(@Tuna – Melrose would be financing. As its quasi private equity deals)

Particularly as Cooper would keep the antenna business.

Which, as we know, is breakeven at best.

Perhaps Cooper shareholders would rather have a buyback.

Hence their rather disciplined approach to this.

I think we are done with this

let’s have a look at another FTSE 250 faller

Ocado Group PLC (OCDO:LSE): Last: 166.90, down 3.4 (-2.00%), High: 173.10, Low: 166.90, Volume: 206.94k

back below float price

and Tracy has sent me an interesting link

http://www.groupon.co.uk/deals/london/ocado/602621

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

cut price delivery pass on Groupon

perhaps this is normal

in the summer when all their clients go on hols

perhaps it isn’t

One Year Midweek Delivery Pass Plus £40 Worth of Groceries for £39 from Ocado (£110 Value)

(@Student – it is if the bidder has done it’s homework and is prepared)

Interesting. Looks like this is a new strategy.

(Bresnan 86- Eng 515-7)

And an odd one, given how much the company complains that its problem is lack of capacity.

One Year Midweek Delivery Pass Plus £40 Worth of Groceries for £39 from Ocado (£110 Value)
Superfoods include flying feta, grappling grapes and chasing cakes, and can be seen seeing off comestible criminals in supermarket aisles all over the UK. Get a slice of the action with today’s Groupon: for £39 instead of £110 get £40 worth of groceries and a one year delivery pass from Ocado.

Those in need of a Groupon grocery guardian can receive assistance with £40 worth of groceries, as well as a one year midweek delivery pass, usually priced £69.99, to summon their defender vendor bearing Grouponic goods throughout the year for no extra fee. Choose from a range of over 20,000 products including Waitrose, Ocado own brand and big brand names, and a one year delivery pass giving you midweek deliveries with no charge for a year from Ocado. Busy Batmans and Green Lanterns can use their technology for good by ordering via an iPhone and iPod Touch app exclusive to Ocado.

enough of that

let’s head to the pub

11:52AM

Punch Taverns PLC (PUB:LSE): Last: 15.40, up 2.85 (+22.71%), High: 17.82, Low: 11.22, Volume: 8.29m

the break has happened

Though it’s not REALLY up 22%, is it?

Reuters have been all over the place with this today

down 80% first thing

and now up 22%

the thing to remember here is that Punch Taverns

is the toxic bit

contains all the old boozers that are leased

and it has PLC resources – cash and stake in Matthew Clark – that’s worth around 25p a share

so that’s the way to benchmark the share price

the discount to that

as for the other better bit

Spirit Pub Co PLC (SPRT:LSE): Last: 52.05, up 52.05 (), High: 55.00, Low: 50.00, Volume: 654.11k

well

that’s been savaged by Jamie Rollo at Morgan Stanley

savaged

Go on. He’s a good analyst.

We initiate on the newly demerged Spirit Pub Company at Underweight as we see structural
reasons for its low margins, FCF generation is very weak relative to EPS (we do not think it
should pay a dividend), its exposure to Leased pubs makes it less attractive to other parties, and
it trades on a 2011 adj P/E of 14x – we prefer Wetherspoon (OW). Spirit believes it can close the
operating gap with MAB (EW), both on sales per pub and margin. We agree some of the gap can
be closed due to Spirit’s heavy investment programme. However, we think closing the gap fully is
unlikely, as Spirit has ‘churned’ its Managed estate less, it has a lower food exposure, it has less
established brands, a smaller scale (800 vs 1,500 Managed pubs), and 5% of its pubs are closed.

Spirit could be an interesting investment: Spirit,
Punch Taverns’ demerged Managed pub business, has
underperformed peers on L4L sales and operating
margins, and management aims to close the gap, aided
by a heavy investment programme. In theory, this could
double its EPS, and if not Spirit could be a consolidation
candidate. However, we see 5 major risks:

1. Structural weaknesses: Spirit has always had lower
margins than leading operator Mitchells & Butlers, due
to less estate ‘churn’, weaker brands, and smaller scale.
2. Minimal FCF: Spirit will generate no FCF even when
capex normalizes at a lower level, so why is it paying a
dividend? PBT halves if we adjust for the £16m onerous
lease provision and £10m non-cash interest income.
3. Questions over Leased pubs: The plan to convert
some Leased pubs to Managed is somewhat outside
Spirit’s control, and selling the rest of the pubs is dilutive.
4. Obstacles to consolidation: Only 60% of EBIT is
Managed pubs, not all are attractive, the debt structure
is hard to split, loss-making leases are a drag on cash.
5. Expensive stock: Spirit will open trading at an
estimated 14x P/E and 10x EBITDA 2011e post the
onerous lease provision, and a FCF yield of 4% (pre
expansion capex), so is already pricing in a lot.

and I like this last bit

Bear case of just 10p: We calculate a recession would
make Spirit unlikely to upstream for several years, and
with £77m of PLC cash, £22m of annual liabilities and no
income, the PLC could run out of cash in this scenario.

worth 10p in the event of a recession

that sorts out a few myths

namely that Spirit

is a managed business

it isn’t

that it’s a takeover target

it isn’t

and that’s its somehow detoxified

it isn’t

Quite so.

However, as a counterpoint, there are bulls.

Peel Hunt, for example.

Maybe by association with Punch’s historical issues, the share
price pre-demerger indicates Spirit is being significantly
undervalued by the market at 9.6x prospective PER and 7.3x
EV/EBITDA. Spirit’s re-investment programme, together with
initial cash allocation, is set to generate substantial growth for a
number of years, is adequately financed and managed, and we
believe the shares should trade at a comparable valuation with
the peer group. We initiate with an 81p price target.

(Broad 42 off 28 balls)

Spirit is part-way along its programme of rebranding its managed pubs among a
small number of vivid brands. Beyond that there is a significant programme of
brand conversions and further investment which we believe will drive double-digit
earnings growth for the next five years.

In our view Spirit is the leisure company most likely to be bid for over the next
few months. However, we cannot recommend the shares on the prospects of a
bid premium. We base our recommendation on current peer group valuations,
SOTP, free cash flow yield considerations, and DCF.

………. ok. So it’s a bid target.

Hm.

We have taken care to value Spirit conservatively, and in particular we have
taken EBITDA after charging onerous lease rents. This sidesteps the issue of
whether the £83m provision is adequate. It is possible we have been too
conservative by including a current period SOTP as one of our measures, which
assumes little investment-led growth, as well as a dilutive sale of leased pubs.

Our valuation for Spirit is 81p. The recent Punch share price values Spirit at
57-62p assuming 0-5p for the residual Punch company. We believe that means
that in any case Spirit is being undervalued by the market.

hmm

If I got some Punch paper today

in my account

I think I’d sell

can’t see the equity is worth much

as for Spirit

I’m not sure you can say it’s a peer of

Mitchells and Butlers PLC (MAB:LSE): Last: 277.80, up 3.3 (+1.20%), High: 277.80, Low: 274.80, Volume: 94.24k

J D Wetherspoon PLC (JDW:LSE): Last: 432.40, down 0.4 (-0.09%), High: 435.90, Low: 432.10, Volume: 4.47k

Both of those have businesses, like them or otherwise.

Spirit has a random collection of properties it needs to fix.

Agree – different animals.

why by a not very cheap imitation

when you can buy the real thing?

12:01PM

right

done with pubs

someone mentioned Kofax

there are a few downgrades around

There are.

Kofax Plc (KFX:LSE): Last: 332.60, down 29.4 (-8.12%), High: 370.20, Low: 330.00, Volume: 384.41k

Shares have been destroyed over the past few days.

After management warned on growth three months after repeating guidance.

(@Student – have the new rules come into force yet?)

And put the warning in a rather opaque way.

recently entered the FTSE 250

document scanning specialist

And, when you’re on a 20-25 times PE, don’t cut growth guidance then kid on you haven’t.

Folks don’t like it.

I bet they don’t

Today’s downgrade is from Jefferies.

Downgrading our recommendation to HOLD with PT 410p (prev. 598p). Macro
uncertainty caused two major deals to slip, leaving Kofax short of its FY11
organic growth guidance. Despite management’s confidence in the outlook,
visibility remains low and large deals are likely to remain difficult to close. With
Q2 as the next meaningful insight into trading, we are going to have to wait at
least until February to build confidence in guidance.

Visibility is low. Kofax’s FY11 Trading Update left us with more questions than
answers and while Friday’s hastily arranged analyst call allowed management to underline
confidence in the outlook, we feel that in the current climate, it is impossible to credibly back
a target of organic growth “significantly above 5%”. Continued macro uncertainty led to
slippage of two large government deals at the end of Q4; and with the macro environment
having worsened, we expect to see continued contract closure issues, particularly around
the larger deals, also seeing potential for competitive pricing pressures.

Downgrading to HOLD, cutting estimates, new price target of 410p. We cut
estimates and our mid-term growth/margin assumptions giving a new DCF-based price
target of 410p (prev. 598p). We cut FY12 earnings by 9% based on organic growth of 5.6%
(above the 2H11 run rate) and cut FY13 earnings by 20% with organic growth of 3.3%
balancing accelerating licence growth with the traditional lag of maintenance revenues.

thanks for that

time for a bit of small cap corned I think

but not before a FTSE 100 update

up 97 points at 5,912

time for the rally monkey?

Getting close.

Having said that, isn’t a fair slice of Europe on holiday today?

it is

Squeezy market, volume low.

12:05PM

Small cap time

main talking point today

Bowleven PLC (BLVN:LSE): Last: 247.25, down 14.25 (-5.45%), High: 278.16, Low: 247.25, Volume: 5.44m

drilling results from its Sapele-2 well offshore Cameroon

which are a bit of mixed bag

The background here is these results are a tad later than expected.

And come shortly after the departure of its COO.

So there was a bit of panic preceding the results.

yes

So, the second Drill Stem Test on the well produced 2,700 boe/d with around two-thirds of this oil. Now this is below the flow rate at Sapele-1and thus disappointing

the market expected more

and traders are pinning the share price fall

on some cautious comments from Merrill Lynch

which has been a big cheerleader and fan

Sapele2 test: operational issues constrain flow…
BLVN indicated that its Sapele2 (Cameroon) well flowed at a 2.7kboe/d, this
compares to 3.1kboe/d for the prior Sapele sidetrack test. Whilst the headline flow
is undoubtedly disappointing, a number of operational issues, including formation
damage, constrained the flow. Importantly, log correlation & seismic interpretation
point to lateral connectivity in the Sapele wells at the Deep Omicron level.

…but could still be commercial with a modular approach
Management updated Sapele estimates and indicate in place resources of 101-
315mmboe (P90-P50 basis), c70% are liquids (oil + condensate). Whilst this is
c20% lower than the estimates we were carrying, our view is that the field could
still be commercial on a P90 basis assuming 10-30% recovery rates and a
modular onshore processing development combining Sapele with the IF/IE fields

Moving to Sapele3
The rig will now move to drill the Sapele-3 well (4p risked; 12p unrisked) at the
edge of block 6 in an attempt to test a similar horizon (DR-1 sands) to that present
in the Alen field on the Eq Guinea side of the border. As expected, BLVN will drill
Sapele-3 (16km away from Sapele2) on a sole risk basis and will change the well
design to improve operational performance. Following Sapele-3 we expect BLVN
to analyse the data for 3 months before re-starting drilling in blocks 5, 6 & 7

Financing options
We estimate that post Sapele3, BLVN will be net cash in the tone of US$60m
(assuming the EOV disposal completes). Whilst this is clearly not enough for the
development phase, it gives BLVN breathing space to start planning the next
drilling phase and push for pre-FEED studies of the development.
Lowering NAV by 65p; retaining Buy rating
Reflecting lower Sapele estimates, we cut our NAV/PO by 65p/sh to a total of
470p. We continue to believe that Bowleven offers compelling risk/reward and
retain our Buy rating on the stock.

there you go

lowering NAV by 65p

and here is the sector watcher

with his view

A mixed bag from BLVN, with what looks like slightly lower than expected flow-rates from the Sapele-2 well offshore Cameroon. The first Drill Stem Test (DST) on the well produced at relatively low rates of 381 boe/d, with around 60% of this oil. DST-2 fared much better, producing over 2,700 boe/d with around two-thirds of this oil. This is below the 3,100 boe/d that Sapele-1 ST produced at. Hopes were higher for Sapele-2, primarily because it had intersected 35 metres of net pay, compared to only 23 metres in Sapele-1 ST. The group cites potential formation damage which may have impacted productivity. On the reserves/resources side, BLVN is now estimating P90/P50/P10 figures of 62m 171m and 746m barrels of oil in place.

. This compares to 65m, 167m and 430m barrels previously. Hence on a P50 basis there has been only a marginal increase, probably because it has not been proved that the two wells are in pressure communication. Ideally we’d have seen a shift from P10 into P50. A third well, Sapele-3, will now be drilled immediately following Sapele-2. Of slight concern is that the group’s partner, Vitol, has elected not to participate in this well. Overall then, as many questions as answers. We like BLVN, with a TP of 400p/share, but I think it may be some time before we have a definitive answer on the commerciality or otherwise of Sapele.

And, sticking with oil …..

Odd news from Heritage today.

hang on

there’s no statement

this is HGAS we are talking about

Oh – sorry – not news. Rumour. Speculation.

not a normal listed company

Heritage Oil Plc (HOIL:LSE): Last: 261.70, up 3.4 (+1.32%), High: 262.50, Low: 257.80, Volume: 385.87k

the backstory

is that they have taken a 10% stake in a Canadian business

that has interests in the Aussie shale market

and

it’s not notified the market

On July 14, Heritage has acquired 310,000 common
shares of PetroFrontier Corp. (PFC CN, SB, C$13.00),
representing 0.49% of the outstanding shares and for
a price of C$0.98 mm. Post transaction, Heritage owns
10.39% of PetroFrontier. In Canada, only shareholders
of more than 10% of the stock are required to disclose
their ownership; hence the market was unaware of the
first 9.9%. We have assumed that Heritage has paid
US$24m for the overall 10.39% stake.

that’s from First Energy Capital

who picked up the statement

Curious.

so it’s not big money

but a change of strategy

Just as everyone else is diving into Iraq as well.

Afren, Petroceltic …..

http://www.petrofrontier.com/

PetroFrontier is an international oil and gas corporation engaged in the exploration, acquisition and development of both conventional and unconventional world-class onshore petroleum and natural gas assets in Australia’s South Georgina Basin. PetroFrontier has a net 85.5% operated working interest in 13.6 milliongross acres (54,850 km2) of land in the region

Bit more from First Energy.

What Heritage lacks in respect of a dearth of high
impact newsflow in the short term (appraisal drilling
and seismic acquisition in Kurdistan during Q3/
Q4 2011), the investment in PetroFrontier provides
two game changing events, with the drilling of the
Baldwin-2 and MacIntyre-2 wells in the Lower Arthur
Creek “Hot Shale” formation. Baldwin-2
is targeting 13.2 bnbbl of gross unrisked
prospective resources in the EP103
prospect (5% chance of success, 100%
WI); MacIntyre-2 is targeting 5.7 bnbbl
of gross unrisked prospective resources
in the EP127 prospect (5% chance of success,
75% WI).

Following the Baldwin-2 and MacIntyre-
2 wells, PetroFrontier intends to
drill two further exploration wells, Ross-
2 and Owen-3, targeting the conventional
oil resources. 2D Seismic is underway
with 420 km currently being acquired
close to the Ross-2 location and around
540 km around the Owen-3 location
starting in September. Depending on the
seismic acquisition timeline on Owen,
there could be additional drilling at Ross
instead of a forth exploration well at
Owen. Specific NAV contributions for each
well are not broken down.

In our revised valuation we have reflected
the immediate four PetroFrontier wells
within the forthcoming 12 months work
programme and the capital investment
to secure the 10.49% stake (we assumed
Heritage paid US$24m for the overall
10.49% stake). Heritage’s stake in Petro-
Frontier contributes a total 18p per share to
the risked NAV, of which 7p is assigned to
Baldwin-2 and 1p is for MacIntyre-2 risked.
Note that PetroFrontier’s Hot Shale assets
represent 80% of PetroFrontier’s total risked
NAV (C$12.80/share), while Baldwyn-2/EP
103 alone represents 40% of PetroFrontier’s
total risked NAV.

and we have a bit of comment from our man down under

they seem to like oil/gas fields with no easy means of transport. Suppose this one only needs a 300 km pipeline for the gas – about $1m per km? The oil would have to go out by truck/rail.

Oh, and gas is dirt cheap in Australia. Would have to be an export from Darwin…

Hm.

Buying into unrelated high-risk, questionable return companies.

And not mentioning it via RNS, as far as I can see.

Interesting.

(And letting Swan bat with a dodgy hand)

one more small cap to look at

and a man we havent’ mentioned for a long time

too long really

Frank Timis

The world’s greatest living natural resources entrepreneur. He also does a lot of good work for charity. Known to like a vodka.

he’s finally got the Chinese to cough up $1.5bn

for a 25% stake in his iron ore project in Sierre Leone

Well done, Frank.

We all had our doubts.

African Minerals Limited (AIM: AMI) have signed final agreements (“the Agreements”) with SISG, the terms of which are materially unchanged from those set out in the Company’s announcement of 3 May 2011. SISG has agreed to acquire a 25% shareholding in the mine, rail and port and power subsidiaries comprising the Tonkolili iron ore project for a cash consideration of $1.5bn. The Agreements include certain discounted off-take arrangements in respect of iron ore produced at the Tonkolili Mine. SISG will purchase 2Mtpa of Phase I production, an incremental 8Mtpa after Phase II is commissioned and 10 Mtpa during Phase III, with discounts in each phase ranging from zero to 15%.

The Company will use the funds to accelerate the expansion and further development of the Tonkolili project and to repay the existing $417m Secured Loan Facility.

(@Tuna – I have done that and in a league match)

anyway

lots of analysts positive

including Deutsche Bank

which I believe are Frank’s new house broker

I don’t have that note

but I do have something from Collins Stewart

West African Iron Ore developer, African Minerals, has secured a $1.5bn investment from Shandong Iron & Steel Group for a 25% stake in the Tonkolili Project. Final agreements have been signed, with the consideration to be paid upon closing, conditional on the receipt of Chinese regulatory approvals, a requirement that in our experience has always taken longer than expected (with the parties adding a long-stop date of 31 December 2011). Nevertheless, the investment implies a project valuation of $6bn, vs the current EV $2.4bn, suggesting potential upside of 150% versus the current market valuation. The agreement further endorses the company’s project and highlights the desire of Chinese companies to secure alternate sources of supply.

 Offtake: Under the agreement, Shandong will acquire a 25% shareholding in the mine, rail and port and power subsidiaries comprising the Tonkolili iron ore project for a cash consideration of $1.5bn. Shandong in return will secure an off-take, of 2mtpa of Phase I production, lifting to 8Mtpa on Phase II and then 10Mtpa during Phase III, at a price discount ranging between 0-15% depending on stage, representing c.15-22% of production. Clearly the stock should be up strongly today on this news.

(@Tuna. No. The winning runs had just been scored)

I have Deutsche, fresh from their appointment as broker on Thursday.

African Minerals has announced that it has finalised the Shandong agreement
for US$1.5b for 25% of the underlying assets as previously proposed
in the MOU with Shandong. This is extremely positive as the funding will
enable the company to progress with PhaseII of its expansion and to repay
its debt. Note that this deals still needs NDRC (Chinese Government) approval
to proceed, which is expected to take 4 to 6 months to complete
(December probably). We believe that Shandong would not have signed off
on the deal without speaking with the Chinese Government first and believe
that approval is likely. The announcement represents a point of de-risking
and is one of the multiple catalysts that we had expected for the stock. Reiterate
Buy.

target price?

come on

let’s have it

725p

conservative

African Minerals Ltd (AMI:LSE): Last: 664.50, up 45 (+7.26%), High: 672.50, Low: 647.50, Volume: 1.97m

Merrill’s on 900p

very conservative

Deal terms imply 75% premium to current EV
The total implied EV of the deal is $6bn. However we estimate the value of the
discounts to Shandong at $750mn on our base case iron ore forecasts. This
results in a net EV of $5.25bn for the asset, which represents a ~75% premium to
the current market cap implied EV.

i was expecting at least £10

Deal makes development of Phase II more credible
We see the deal as positive, in that it: 1) secures funding for Phase II
development, currently risked at 75% in our valuation 2) implies a premium to
current market value 3) increases the credibility of the project (we assume
Shangdong has undertaken extensive due diligence before the investment) 4) it
allows Phase II development to begin imminently, with start up in 2014 vs our
2015 base case.

I’m sure we’ll get the targets into quadruple figures as the week progresses.

Merrill, incidentally, started coverage on Friday.

Which is rather fortunate timing.

yes

like that big shareholder at Ophir Energy

who sold all that stock

just before the dry well

announcement

Ophir Energy PLC (OPHR:LSE): Last: 250.00, no change, High: 252.00, Low: 250.00, Volume: 50.22k

Yes. Fortunate.

Anyway, here’s the paragraph you’ll be wanting from Merrill’s initiation.

http://www.thetimes.co.uk/tto/business/markets/article3108818.ece

“Blue sky” scenario GBp1950 on further expansions
Beyond Phase I, further Phase II and III expansions are planned to exploit the
current 1.1Bt saprolite and 11.6Bt magnetite resources. Our base case valuation
applies a discount of 25% and 90% respectively on these phases to reflect
execution risk. Our hypothetical “blue sky” valuation assuming on-budget
execution is around GBp1950 (+213% vs current share price).

that’s more like it

well done Merrill

£19.50 a share

which would make it a FTSE 100 company

in market cap terms

Though, in governance terms …… well ……

Market cap is a mere £2bn at the moment.

so a £6bn iron ore company in the making

heading by Frank Timis

the mind boggles at that

12:25PM

a few things to end with

Telecity

have confirmed the FT’s story about a possible acquisition

Telecity Group Plc (TCY:LSE): Last: 569.00, up 16 (+2.89%), High: 574.00, Low: 553.00, Volume: 200.41k

and it looks a sensible deal

according to Espirito

TELECITY (BUY, FV 600p) – Telecity confirmed that it is in discussions to acquire Data Electronics, which operates 2 data centers in Dublin, Ireland. In our recent note, we have highlighted that Telecity is looking for bolt-on acquisitions (<£100m range) to expand its capacity. Telecity has 1 data centre in Dublin with 1,000 sqm (1MW) capacity and no current expansion plans while its major competitor, Interxion (NYSE: INXN), has tripled its capacity in the past 18 months (c.2800 sqm). Given long lead time (c.3 years) to build a new data centre, we believe such an acquisition is quite sensible and will enable Telecity to expand its share and accelerate revenue growth. Data Electronics has c.2,600 sqm operational capacity with an overall data centre footprint of c.8,700 sqm. Telecity will report its interims on 8 August.

and that I think is it

Milky is somewhat disturbing that you wait for the hour long ban to end and then start commenting again

anyway

the FTSE 100 is up 87 points at 5,902

with Intertek the biggest riser

post IMS

Intertek Group PLC (ITRK:LSE): Last: 2,032, up 117 (+6.11%), High: 2,048, Low: 1,940, Volume: 284.10k

however it’s too dull to talk about

Oh, and I don’t have a clue about this MF Global story as referenced at the start of the session.

If it’s interesting, please email or usual place.

If it’s not, forget I asked.

And, with that, I think we’re done.

Thanks for all your comments, folks.

yes

thanks

cya

In today’s session we said that Heritage Oil has not disclosed its investment in Petrofrontier. That was wrong. It did – http://www.hemscott.com/companies/company-news-item.do?companyId=6504&newsId=148618753386004

Apologies.

This entry was posted by Neil Hume on Monday, August 1st, 2011 at 11:04 and is filed under Uncategorised. Edit this entry.

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