Markets Live chat transcript for the chat ending at 11:35 on 5 Sep 2011. Participants in this chat were: Neil Hume, FT bryce.elder
NH
Hola
NH
bonjour
NH
hello
NH
we are BACK
NH
and without the bug
NH
ML is refreshed and raring to go
NH
and
NH
I am pleased to say
NH
the market is down
NH
I was getting slightly worried
NH
over the last couple of weeks
NH
the market seemed to rally every day
NH
and from my vantage point in South West France
NH
I saw no reason why
NH
anyway
NH
normal service resumed now
NH
awful US jobs figures
NH
awful UK service sector data
NH
people talking about UK QE2
NH
Italy not pushing through its budget plans
NH
the Greeks lagging behind
NH
all good stuff for the bears
NH
BE
Yup – reality returns.
BE
After it was rather lacking during the previous two weeks or so.
BE
Biggest gain in a year, depending on how you measure these things.
BE
Biggest gain since your last summer holiday, coincidentally.
BE
Anyway, where to begin? Big board?
NH
yep
NH
good idea
11:09AM
NH
So, we are up
NH
104 points at 5,187
NH
banks taking the worst of the pounding?
BE
We’re up?
NH
Has Sir Allan averaged down?
NH
and where’s Milky?
BE
Don’t tell me Milky’s disappeared.
NH
he and Sugar are one and the same
BE
Given the new pseudonym policy, that’ll start conspiracy theories going.
BE
And, yes, banks getting thumped.
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 22.79, down 2.05 (-8.25%), High: 24.88, Low: 22.28, Volume: 37.82m
Barclays PLC (BARC:LSE): Last: 154.20, down 11 (-6.66%), High: 159.60, Low: 151.55, Volume: 20.28m
Lloyds Banking Group plc (LLOY:LSE): Last: 31.48, down 1.64 (-4.95%), High: 32.46, Low: 31.24, Volume: 40.01m
HSBC Holdings PLC (HSBA:LSE): Last: 511.00, down 13.5 (-2.57%), High: 522.00, Low: 510.20, Volume: 5.08m
Standard Chartered PLC (STAN:LSE): Last: 1,317, down 56.5 (-4.11%), High: 1,350, Low: 1,316, Volume: 1.30m
NH
nasty
NH
Now
NH
in the case of RBS
NH
this is down to the FHFA hit list I presume?
BE
It’s a factor, I imagine.
NH
seeing some forecasts
NH
that RBS could take a £2bn hit
NH
sorry $2bn hit
NH
hang on
NH
let me get the workings
NH
they are from Corma Leech at Canaccord
NH
good banks analyst
NH
UK/EU Banks: sml -ve: Following press reports earlier Friday, post US market
Friday the FHFA (Fannie/Freddie regulator) filed lawsuits against 17 banks/FIs
, including Barc, DBK, HSBA, CSGN, RBS, alleging mis-selling of mortgages to
Fannie Mae and Freddie Mac (Total $201bn).
Friday the FHFA (Fannie/Freddie regulator) filed lawsuits against 17 banks/FIs
, including Barc, DBK, HSBA, CSGN, RBS, alleging mis-selling of mortgages to
Fannie Mae and Freddie Mac (Total $201bn).
NH
Estimate overall impact as % mkt
cap: RBS 4.4% ; CS 3.3%; DBk 2.6%; UBS 1.1% (filed previously); Barc 0.9%;
HSBC: 0.3%. Details: i) FHFA( Federal Housing and Finance Agency), has filed
lawsuits on mortgage securities totaling $201bn (including earlier $4.5bn for
UBS) o/w relating to RBS: $30.4bn; CS: $14.1bn; DBK $14.2bn; Barc: $4.9bn; UBS
$4.5bn; HSBC $6.2bn. ii) We estimate the FHFA targets recouping 15% of the
securities Face Value (i.e. tgt recoup $30bn), based on a) Reuters FHFA source
referencing “recouping over $20bn” (10% of face value) b) UBS settlement of
$0.9bn (20% of face value). iii) Net of tax, prob
cap: RBS 4.4% ; CS 3.3%; DBk 2.6%; UBS 1.1% (filed previously); Barc 0.9%;
HSBC: 0.3%. Details: i) FHFA( Federal Housing and Finance Agency), has filed
lawsuits on mortgage securities totaling $201bn (including earlier $4.5bn for
UBS) o/w relating to RBS: $30.4bn; CS: $14.1bn; DBK $14.2bn; Barc: $4.9bn; UBS
$4.5bn; HSBC $6.2bn. ii) We estimate the FHFA targets recouping 15% of the
securities Face Value (i.e. tgt recoup $30bn), based on a) Reuters FHFA source
referencing “recouping over $20bn” (10% of face value) b) UBS settlement of
$0.9bn (20% of face value). iii) Net of tax, prob
NH
. Weighting unsettled suits at
2/3rds, net of tax, we get expected losses of RBS $2.0bn; CS $0.9bn; DBK
$0.9bn; UBS:$0.6bn; HSBC $0.4bn; Barc $0.3bn. Conc: FHFA lawsuit unlikely to
be material for UK/EU banks (possible exception RBS) in context of Eurozone
crisis and ICB ring-fencing newsflow.
2/3rds, net of tax, we get expected losses of RBS $2.0bn; CS $0.9bn; DBK
$0.9bn; UBS:$0.6bn; HSBC $0.4bn; Barc $0.3bn. Conc: FHFA lawsuit unlikely to
be material for UK/EU banks (possible exception RBS) in context of Eurozone
crisis and ICB ring-fencing newsflow.
NH
so RBS
NH
the only one materially affected by this
NH
I guess Lloyds and Barclays
NH
are worried about the ICB report
BE
(Milky: yellow for confused metaphor.)
NH
and Eurozone jitters
NH
that said
NH
the news on the ICB over the weekend
NH
didn’t look that negative to me
NH
Leech again
NH
UK Banks +ve sentiment: weekend press suggests earnings impact of ICB ring-
fencing will be ‘less than feared’. Prime Minister Cameron has ‘decided to
Intervene’ (Telegraph/Times) to ensure the Ring-Fence is of the ‘light- touch
variety’ according to sources. Details: i) Key parameters of the ring fence are
its ‘Height’ (how easy it is to pool funding across the fence) and ‘Width’(how
much of the balance sheet is included) ii) we estimate avg expectation for PBT
impact were £1.25bn for Barc & RBS; £0.75bn for Lloy.
fencing will be ‘less than feared’. Prime Minister Cameron has ‘decided to
Intervene’ (Telegraph/Times) to ensure the Ring-Fence is of the ‘light- touch
variety’ according to sources. Details: i) Key parameters of the ring fence are
its ‘Height’ (how easy it is to pool funding across the fence) and ‘Width’(how
much of the balance sheet is included) ii) we estimate avg expectation for PBT
impact were £1.25bn for Barc & RBS; £0.75bn for Lloy.
NH
If we assume this now
reduces by 50%, the PBT gain is c£0.6-0.4bn or net tax £0.5-0.3bn; putting this
on 2.5x multiple to reflect delayed implementation and low sector multiples
this implies an increase in fair value for Barc and RBS of c£1.2bn , a 4-6%
increase in FV/share for RBS and Barc resp; and for LLOY £0.7bn , 3% increase
FV/share.
reduces by 50%, the PBT gain is c£0.6-0.4bn or net tax £0.5-0.3bn; putting this
on 2.5x multiple to reflect delayed implementation and low sector multiples
this implies an increase in fair value for Barc and RBS of c£1.2bn , a 4-6%
increase in FV/share for RBS and Barc resp; and for LLOY £0.7bn , 3% increase
FV/share.
BE
Hm.
BE
There was a fair bit of expectation management while you were away.
BE
About turning the page on reform, drawing a line in the sand, kicking into the long grass, etc. etc. etc.
NH
everything gets kicked down the road these days
BE
Never-never regulation.
NH
Just going back to the FHFA I have a bit more comment if interested
BE
Yes – please.
NH
Ok it’s from Deutsche
NH
Applying the 20% UBS ratio to Barclays, HSBC and RBS claims, we see pretax
costs of £605m, US$1.2bn and £3.7bn respectively, reducing 2011 DBe
CT1 ratios by 13bps, 10bps and 73bps. Assuming these figures are a useful
guide (differences in quality of securities, underwriting and marketing practice
may matter a great deal), this looks immaterial for Barclays and HSBC
capital strength, but significant for RBS, taking the CT1 to 8.7%. RBS has
the right to call for up to £8bn in additional core tier 1 capital from the state
at c.50p/share, if necessary. We have not included a tax shield.
Banks we spoke to over the weekend generally cited a combination of “too
early to comment” and “will vigorously defend”. With clarity expected to remain
lacking for some time, we would expect this to be a more significant
and enduring uncertainty for RBS in particular.
costs of £605m, US$1.2bn and £3.7bn respectively, reducing 2011 DBe
CT1 ratios by 13bps, 10bps and 73bps. Assuming these figures are a useful
guide (differences in quality of securities, underwriting and marketing practice
may matter a great deal), this looks immaterial for Barclays and HSBC
capital strength, but significant for RBS, taking the CT1 to 8.7%. RBS has
the right to call for up to £8bn in additional core tier 1 capital from the state
at c.50p/share, if necessary. We have not included a tax shield.
Banks we spoke to over the weekend generally cited a combination of “too
early to comment” and “will vigorously defend”. With clarity expected to remain
lacking for some time, we would expect this to be a more significant
and enduring uncertainty for RBS in particular.
BE
I’ve got RBS itself, which is always a good read.
NH
go on
BE
is very difficult to quantify with any degree of accuracy the likely
size of any final payouts. From the FHFA files we calculate $203bn mortgages sold by these
18 banks to Freddie Mac & Fannie Mae; so every 10% payback by them would cost $20bn.
Reuters reports that ‘while the ultimate amount FHFA will seek is still unclear, a person
familiar with the matter said it could top the $20 billion being discussed by the banks and the
state attorneys general.’ The BBC reports that the banks are being sued for ‘tens of billions’.
According to the FHFA files, the European banks’ total origination amounts are: RBS
US$32bn; CS $14bn; Deutsche $14bn; HSBC $6bn; Barclays $5bn; UBS $4.5bn; SocGen
$1.2bn.
size of any final payouts. From the FHFA files we calculate $203bn mortgages sold by these
18 banks to Freddie Mac & Fannie Mae; so every 10% payback by them would cost $20bn.
Reuters reports that ‘while the ultimate amount FHFA will seek is still unclear, a person
familiar with the matter said it could top the $20 billion being discussed by the banks and the
state attorneys general.’ The BBC reports that the banks are being sued for ‘tens of billions’.
According to the FHFA files, the European banks’ total origination amounts are: RBS
US$32bn; CS $14bn; Deutsche $14bn; HSBC $6bn; Barclays $5bn; UBS $4.5bn; SocGen
$1.2bn.
BE
More detail: The US FHFA that oversees the mortgage firms Fannie Mae and Freddie
Mac has filed suits against 17 big banks, accusing them of misrepresenting the quality of
mortgage securities they assembled and sold at the height of the housing bubble, and
seeking billions of dollars in compensation. The suits stem from subpoenas the finance
agency issued to banks a year ago. These argue that the banks which assembled the
mortgages and marketed them as securities to investors failed to perform the due diligence
required under securities law and missed evidence that borrowers’ incomes were inflated or
falsified. When many borrowers were unable to pay their mortgages, the securities backed by
the mortgages quickly lost value. Fannie and Freddie lost more than $30 billion, in part as a
result of the deals, leading to taxpayer bailouts.
Mac has filed suits against 17 big banks, accusing them of misrepresenting the quality of
mortgage securities they assembled and sold at the height of the housing bubble, and
seeking billions of dollars in compensation. The suits stem from subpoenas the finance
agency issued to banks a year ago. These argue that the banks which assembled the
mortgages and marketed them as securities to investors failed to perform the due diligence
required under securities law and missed evidence that borrowers’ incomes were inflated or
falsified. When many borrowers were unable to pay their mortgages, the securities backed by
the mortgages quickly lost value. Fannie and Freddie lost more than $30 billion, in part as a
result of the deals, leading to taxpayer bailouts.
BE
And, wrapping today’s three issues together ………….
BE
1) Weekend reports suggested that David Cameron may “take over” the banking debate and
explain why economic growth should not be sacrificed for further regulatory upheaval.
Reports have made it clear that it is not just about delaying any banking reforms but that the
reforms themselves need to be fundamentally re-thought. In the event any ring fencing is to
be implemented in the UK, the preference is for a ‘light touch’ version. The Prime Minister
would like to focus on what has been achieved on bonuses, lending and other banking
reforms and make it clear to the markets that the Government backs the UK’s banks. There
were also suggestions that a relatively tough implementation of BIS3 rules would be sufficient
reform. While we agree that this sounds bullish for the UK banks and could spark a small
short term rally, we would note that i) there is an official and lengthy process to this debate so
the Prime Minister must present his view within that ii) we still expect the ICB to press ahead
with meaningful structural reform when it announces its final recommendations next week iii)
regulatory pressure is not the only obstacle facing the UK banks.
explain why economic growth should not be sacrificed for further regulatory upheaval.
Reports have made it clear that it is not just about delaying any banking reforms but that the
reforms themselves need to be fundamentally re-thought. In the event any ring fencing is to
be implemented in the UK, the preference is for a ‘light touch’ version. The Prime Minister
would like to focus on what has been achieved on bonuses, lending and other banking
reforms and make it clear to the markets that the Government backs the UK’s banks. There
were also suggestions that a relatively tough implementation of BIS3 rules would be sufficient
reform. While we agree that this sounds bullish for the UK banks and could spark a small
short term rally, we would note that i) there is an official and lengthy process to this debate so
the Prime Minister must present his view within that ii) we still expect the ICB to press ahead
with meaningful structural reform when it announces its final recommendations next week iii)
regulatory pressure is not the only obstacle facing the UK banks.
BE
2) Moody’s is poised to downgrade credit ratings for 14 UK banks by the end of September.
The timing of the downgrades is an uncomfortable surprise as we would have expected the
agency to wait until after the government has offered its official view of the ICB’s final
recommendations. As previously stated, we expect the government to respond by Dec 2011.
Further, it is not clear to us at this stage how many notches of systematic support will be
removed. Notches systematic support currently embedded in Moody’s credit ratings for our
coverage universe – RBS (5 notches), Lloyds (4 notches), Barclays (3 notches) and HSBC (2
notches). Our preferred pick in the sector remains St Chartered.
The timing of the downgrades is an uncomfortable surprise as we would have expected the
agency to wait until after the government has offered its official view of the ICB’s final
recommendations. As previously stated, we expect the government to respond by Dec 2011.
Further, it is not clear to us at this stage how many notches of systematic support will be
removed. Notches systematic support currently embedded in Moody’s credit ratings for our
coverage universe – RBS (5 notches), Lloyds (4 notches), Barclays (3 notches) and HSBC (2
notches). Our preferred pick in the sector remains St Chartered.
BE
3) Friday’s lawsuit against Barclays, HSBC and RBS by the FHFA and the potential
impending downgrade by Moody’s are sharp reminders of the challenges the banks face to
generate meaningful TCE progression and economically attractive RoTCE in the medium
term. Our preferred pick in the sector remains St Chartered. Most geared plays to the ICB
report: Barclays – most exposed to recommendations focused on financial stability. HSBC -
2nd most geared play. Lloyds – most geared play to the recommendations relating to
competition.
impending downgrade by Moody’s are sharp reminders of the challenges the banks face to
generate meaningful TCE progression and economically attractive RoTCE in the medium
term. Our preferred pick in the sector remains St Chartered. Most geared plays to the ICB
report: Barclays – most exposed to recommendations focused on financial stability. HSBC -
2nd most geared play. Lloyds – most geared play to the recommendations relating to
competition.
NH
thanks for that
NH
while are on the banks
NH
a bit of RAW
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
NH
market talk that CSFB may move to agency broking model following some senior departures last week
NH
which means
NH
getting rid of market making principal trading etc and only acting for clients not for the bank
BE
Old-timer raw if it refers to CSFB.
BE
They ditched the First Boston five or so years ago.
BE
Interesting theory though.
NH
yes
NH
sound a bit extremem
NH
but things clearly are bad out there
NH
have you seen the comments from Deutsche Bank’s Ackermann today
NH
very very bearish
BE
Glanced. Do go on though.
NH
RTRS-DEUTSCHE BANK AG CEO SAYS THE FUTURE OF GROWTH OF EARNINGS IN FINANCIAL SERVICES LOOKS LIMITED
NH
RTRS-DEUTSCHE BANK CEO SAYS THE DEBT CRISIS, REGULATION WILL MAKE IT MORE DIFFICULT FOR EUROPEAN BANKS TO RAISE REVENUES
NH
RTRS-DEUTSCHE BANK CEO SAYS SOME MARKET PLAYERS HAVE UNREALISTIC EXPECTATIONS ABOUT HOW TO RESOLVE SOVEREIGN DEBT CRISIS
NH
RTRS-DEUTSCHE BANK CEO: SUGGESTIONS ABOUT FORCIBLE RECAPITALISATION OF BANKS NOT USEFUL, OR JUSTIFIED – SPEECH TEXT
NH
RTRS-DEUTSCHE BANK CEO: SOME EUROPEAN BANKS WOULD NOT SURVIVE HAVING TO REVALUE ALL SOVEREIGN DEBT AT MARKET LEVELS – SPEECH TEX
NH
RTRS-DEUTSCHE BANK CEO SAYS IF TREND IN MARKETS FROM AUGUST CONTINUES IN SEPTEMBER OCTOBER NEED TO THINK ABOUT COST CUTTING MEASURES
BE
Wow. That’s extreme negativity.
NH
as it happens UBS has put through a big downgrade on Deutsche today
NH
In light of market developments and our recent GDP forecast downgrade, we are cutting our
estimates for Deutsche Bank for 2011E by 15%, for 2012E by 19% and for 2013E by 17%. Key
drivers for the reductions are lower revenues across all divisions. Furthermore, we shaved our
2011E dividend per share to €0.75 from €1 (12E to €1.0 from €1.5), moving expected payout
r.atios below 20%.
estimates for Deutsche Bank for 2011E by 15%, for 2012E by 19% and for 2013E by 17%. Key
drivers for the reductions are lower revenues across all divisions. Furthermore, we shaved our
2011E dividend per share to €0.75 from €1 (12E to €1.0 from €1.5), moving expected payout
r.atios below 20%.
NH
Our new EPS forecasts are now 12% and 16% below Bloomberg consensus for the next two
years; and the €10bn target for 2011 (sum of operating divisions) has now become rather
obsolete – we now forecast the group to miss by 17%. We reduce our price target to €38 from
€52 to reflect the EPS downgrades and increased uncertainty. Our price target is derived from a
Gordon growth model, in which we assume 9.5% sustainable ROE (was 11.3%), 12% cost of
e.quity and 4% growth.
years; and the €10bn target for 2011 (sum of operating divisions) has now become rather
obsolete – we now forecast the group to miss by 17%. We reduce our price target to €38 from
€52 to reflect the EPS downgrades and increased uncertainty. Our price target is derived from a
Gordon growth model, in which we assume 9.5% sustainable ROE (was 11.3%), 12% cost of
e.quity and 4% growth.
NH
We keep our Buy rating. While there are extremely low visibility and substantial risks, we
highlight that, relative to peers, Deutsche has over the past quarters achieved considerable
progress and further cost cuts are likely. However, as the sector has fallen back into ‘crisis
mode’, the main potential positive catalysts seem outside the bank’s control, as virtually all is
a.bout addressing the sovereign crisis.
highlight that, relative to peers, Deutsche has over the past quarters achieved considerable
progress and further cost cuts are likely. However, as the sector has fallen back into ‘crisis
mode’, the main potential positive catalysts seem outside the bank’s control, as virtually all is
a.bout addressing the sovereign crisis.
NH
and on top of that
NH
Deutsche Bank are facing a probe by the SFO
NH
SFO hunts for evidence over securities sales to UK
NH
Securities packaged by Deutsche Bank are among half a dozen deals being examined by Britain’s Serious Fraud Office as part of an evidence-gathering exercise into whether financial institutions fraudulently misrepresented deals to clients and counterparties in the UK.
The SFO has spent the past two years looking into sales of asset-backed securities – bonds backed by the repayments on vast pools of loans such as mortgages – after consulting senior City figures about which areas the agency should be looking into after the financial crisis.
The SFO has spent the past two years looking into sales of asset-backed securities – bonds backed by the repayments on vast pools of loans such as mortgages – after consulting senior City figures about which areas the agency should be looking into after the financial crisis.
BE
This is awful.
BE
I’m getting depressed.
NH
(No Milky – he’s saying it because the IMF Lagarde want it)
NH
I know
NH
great isn’t it
BE
I think we need some positivity to end this banking item.
NH
go on then
NH
give Milky the floor
BE
Close. Here, right on cue, is Michael Helsby of Merrill Lynch.
BE
2011 hasn’t gone as we expected at the start of the year. A confluence of top down issues has left its mark on IB revenues
and funding costs, driving downgrades and risk aversion. In this Bankwatch we supplement the usual trend analysis with an
updated view on UK banks. Our top pick remains BARC followed by LLOY and RBS. STAN is our preferred play in UK/Asia.
and funding costs, driving downgrades and risk aversion. In this Bankwatch we supplement the usual trend analysis with an
updated view on UK banks. Our top pick remains BARC followed by LLOY and RBS. STAN is our preferred play in UK/Asia.
NH
perma bull of the banks
NH
been buying Lloyds for longer than Milky
BE
Sovereign issues are likely to linger, with protracted periods of volatility now base case. This is bad for IB earnings, and we
have cut revenue to reflect. The UK is well placed in an international perspective, which should provide differentiation for UK
banks. Funding remains the conduit for Euro stress. Given balance sheet improvement and liquidity, solvency is not seen as a
risk. 2011 funding is either 100% done or almost complete; but funding is an earnings risk. Marking to market current CDS
spreads (ignoring any re-pricing) would hit LLOY and RBS PBT by c. £1.1bn, BARC is substantially less impacted at £300mn.
Stressing the banks for a GIP Euro exit and subsequent 50% devaluation suggests that capital increases need not follow.
have cut revenue to reflect. The UK is well placed in an international perspective, which should provide differentiation for UK
banks. Funding remains the conduit for Euro stress. Given balance sheet improvement and liquidity, solvency is not seen as a
risk. 2011 funding is either 100% done or almost complete; but funding is an earnings risk. Marking to market current CDS
spreads (ignoring any re-pricing) would hit LLOY and RBS PBT by c. £1.1bn, BARC is substantially less impacted at £300mn.
Stressing the banks for a GIP Euro exit and subsequent 50% devaluation suggests that capital increases need not follow.
NH
BE
Our macro team see a 40% risk of US double dip. Base case is for sub-trend growth. With short rates lower for longer and
long rates low a renewed credit cycle is not likely, in our view. If we are wrong the EBA stress tests suggest that the banks are
capitalized to withstand an adverse scenario without recourse to shareholders. Under an EBA adverse stress scenario T/NAV
per share troughs at 353p (1H11: 353p) at Barclays, 49p (1H11: 56p) at Lloyds and 39p (1H11: 50p) at RBS.
long rates low a renewed credit cycle is not likely, in our view. If we are wrong the EBA stress tests suggest that the banks are
capitalized to withstand an adverse scenario without recourse to shareholders. Under an EBA adverse stress scenario T/NAV
per share troughs at 353p (1H11: 353p) at Barclays, 49p (1H11: 56p) at Lloyds and 39p (1H11: 50p) at RBS.
BE
We think ring-fencing will be phased in over a long time period; Lloyds divestment issues can be solved with better funding.
Outside of IB trends the improvement in underlying profits continues. In our trend analysis we highlight another potential leg to
mortgage spread widening, recovery in non IB revenues, cost control and a UK corporate sector in rude health (i.e. corporate
bad debts cycle risk very low) as key to seeing a continued recovery in ROEs in the near term.
Outside of IB trends the improvement in underlying profits continues. In our trend analysis we highlight another potential leg to
mortgage spread widening, recovery in non IB revenues, cost control and a UK corporate sector in rude health (i.e. corporate
bad debts cycle risk very low) as key to seeing a continued recovery in ROEs in the near term.
BE
In our base case (muddle through) the domestic UK banks offer compelling value, with fundamental upside still present at
Barclays and Lloyds even if investors think an EBA style recession and a permanent 20% reduction in normalised EPS is
likely. If a double dip, GIP exit from the Euro and a 30% permanent reduction in normalised EPS is your base case, then a
zero weighting in domestic UK banks would be warranted.
Barclays and Lloyds even if investors think an EBA style recession and a permanent 20% reduction in normalised EPS is
likely. If a double dip, GIP exit from the Euro and a 30% permanent reduction in normalised EPS is your base case, then a
zero weighting in domestic UK banks would be warranted.
BE
There you go. All in the price. Ship ‘em on board.
BE
Sugar logic.
11:25AM
NH
Right
NH
before we push on and look at stocks
NH
a few macro things to look up
NH
Italian ten-year bonds
NH
through 5% I believe
NH
let me just check
NH
around 5.4%
NH
now that’s started a few conspiracy theories
NH
such as this
NH
Ok I have a conspiracy theory (for fun) re Italian bonds. Might the ECB have slowed down their purchases of Italian bonds in order to fire a rocket up the backside of Berlusconi re back-tracking on austerity measures?
I only wonder because if the ECB are still trying to maintain a 5% rate on the Itaalian 10 year then it looks as if they cant hold back the tide. That would be scarier than if they are just letting it happen in order to give Berlusconi nightmares.
NH
IN fact
NH
Spain
NH
it’s 10 year at 5.2%
NH
I reckon there could be something on that
NH
ECB starts to review Italian purchases
NH
in the wake of Berlusconic fiddling with the budget programme
NH
slows things do a bit
NH
let’s the bond yield move up
BE
Plausible.
NH
well it does seem as if Greece
NH
and Italy
NH
aren’t delivering
NH
the IMF isn’t happy
NH
things really don’t look good in Europe
NH
Oh dear
NH
market sell off acclerating
NH
FTSE 100 down 130 points at 5,162
NH
RTRS-GERMANY’S DAX <.GDAXI> FALLS 3.7 PCT, HITTING A 22-MONTH LOW
11:28 05Sep11 RTRS-EUROPE’S FTSEUROFIRST 300 <.FTEU3> FALLS FURTHER, DOWN 2.9 PCT AT 920.84 POINTS
11:29 05Sep11 RTRS-BRITAIN’S FTSE 100 <.FTSE> FALLS 2.3 PCT, AND FRANCE’S CAC 40 <.FCHI> FALLS 3.8 PCT
11:29 05Sep11 RTRS-SPAIN’S IBEX 35 <.IBEX> FALLS 3.6 PCT, ITALY’S FTSE MIB <.FTMIB> DOWN 3.7 PCT AND PORTUGAL’S PSI 20 <.PSI20> DOWN 2 PCT
11:28 05Sep11 RTRS-EUROPE’S FTSEUROFIRST 300 <.FTEU3> FALLS FURTHER, DOWN 2.9 PCT AT 920.84 POINTS
11:29 05Sep11 RTRS-BRITAIN’S FTSE 100 <.FTSE> FALLS 2.3 PCT, AND FRANCE’S CAC 40 <.FCHI> FALLS 3.8 PCT
11:29 05Sep11 RTRS-SPAIN’S IBEX 35 <.IBEX> FALLS 3.6 PCT, ITALY’S FTSE MIB <.FTMIB> DOWN 3.7 PCT AND PORTUGAL’S PSI 20 <.PSI20> DOWN 2 PCT
BE
Not outlandish volume behind this yet.
NH
that’s the thing
NH
volume across Europe
NH
due to Labor Day is dire
NH
the most actively traded stock in London
NH
as usual is Lloyds
NH
and that’s done
NH
just 44.6m shares
BE
We’ve got a good old-fashioned buyers’ strike.
NH
peanuts
BE
Anyway, should we take a quick look at the UK PMI before moving on?
NH
we should
NH
dreadful reading
NH
QE2 on the way
11:33AM
NH
Right
NH
before we look at the survey
NH
a bit of background
NH
On Friday the mighty Goldman issued a note
NH
calling for another round of asset purchases
NH
Amid renewed financial system stress and
mounting evidence of weaker global growth,
we now expect the MPC to engage in a
second programme of asset purchases (QE2)
in the coming months. We are also shifting
back our forecast for the first rate hike from
2012Q4 until 2013 and further reducing our
GDP growth forecasts, from 1.5% to 1.4%
for 2011 and from 2.5% to 2.3% for 2012.
mounting evidence of weaker global growth,
we now expect the MPC to engage in a
second programme of asset purchases (QE2)
in the coming months. We are also shifting
back our forecast for the first rate hike from
2012Q4 until 2013 and further reducing our
GDP growth forecasts, from 1.5% to 1.4%
for 2011 and from 2.5% to 2.3% for 2012.
NH
A serious concern for the MPC is that,
having maintained policy rates at their floor
for 2½ years and purchased £200bn in assets
already, lending supply remains highly
constrained and effective lending rates
remain high (and are heading higher).
having maintained policy rates at their floor
for 2½ years and purchased £200bn in assets
already, lending supply remains highly
constrained and effective lending rates
remain high (and are heading higher).
NH
The MPC has argued that a key cause of the
large spread between effective lending rates
and policy rates is the high funding costs that
banks face. In this context, we believe that a
strong case can be made for focusing QE2 on
‘credit easing’ (directly targeting the credit
spreads that cause the problem), rather than
on the purchase of government gilts.
However, the Bank is unlikely to choose this
option, as it believes that credit market
intervention of this type should be the
responsibility of the fiscal authorities.
large spread between effective lending rates
and policy rates is the high funding costs that
banks face. In this context, we believe that a
strong case can be made for focusing QE2 on
‘credit easing’ (directly targeting the credit
spreads that cause the problem), rather than
on the purchase of government gilts.
However, the Bank is unlikely to choose this
option, as it believes that credit market
intervention of this type should be the
responsibility of the fiscal authorities.
NH
The question of how big QE2 is likely to be
is intrinsically linked to which assets are
bought. But if, as was the case in QE1,
purchases are focused on government gilts,
then a total of £100bn over two quarters is a
reasonable central case.
While we believe that QE2 would be
significantly more effective if it were
targeted on assets other than gilts, there are
still likely to be significant positive benefits
from a programme of this type.
is intrinsically linked to which assets are
bought. But if, as was the case in QE1,
purchases are focused on government gilts,
then a total of £100bn over two quarters is a
reasonable central case.
While we believe that QE2 would be
significantly more effective if it were
targeted on assets other than gilts, there are
still likely to be significant positive benefits
from a programme of this type.
NH
So Goldman calling for QE2
NH
but with a twist
NH
buying bank notes
NH
(No Jarvis – but if you have could you send pls. neil.hume@ft.com)
NH
of course
NH
for that to happen
NH
we need some more dreadful eco data
BE
And, as if by magic ……………
BE
UK PMI hits 51.1 in August
NH
The Markit/CIPS services PMI headline activity index fell to 51.1 in August from 55.4 in July. This was the second-biggest fall on record, and confounded forecasts for a gentler drop to 54.0, although it remained above the 50-mark that divides growth from contraction.
BE
That’s the worst since foot-and-mouth, apparently.
NH
largest monthly decline for over a decade
BE
April 2001
NH
And this report
NH
is very closely followed by the MPC
NH
and BoE
NH
well
NH
according to RBS it is
NH
Historically, the Services PMI has been a key indicator for BoE policymakers – the survey covers around half of the economy, is timely and has proved to be a reliable leading indicator for the official data. We continue to expect no change in BoE policy this week, though self-evidently the risk of further dovish dissent has increased.
NH
Our forecast remains for no change in UK monetary policy settings this year – clearly, if the Services PMI fails to recover some lost ground over the next two months then the decision about QE2 at November’s MPC meeting would become a very close call. The MPC will want to gauge the extent to which August’s PMI decline will endure and, as we have emphasised repeatedly, inflation continues to present a significant near-term hurdle to policy loosening (CPI is set to climb towards 5% over the next quarter as utility price hikes feed into the data).
NH
In previous research, we have attached a probability of around 40% to QE2 in 2012. Clearly, the risk of further asset purchases has increased after August’s Services PMI survey, though it is still not our central scenario. Much will hinge on the extent to which (or, perhaps, whether) the key surveys can regain some traction. As a marker: were the manufacturing (49.0) and services (51.1) PMIs to remain at current levels, further monetary policy stimulus would in our view be warranted.
BE
Hm.
BE
Though there is the riot factor at work here.
NH
(tks Jarvis)
BE
The civil unrest deflator.
BE
Headline activity may have taken a “burning building” knock.
BE
But, underlying, it’s not QUITE so bad.
BE
Here’s HSBC with the detail.
BE
The underlying slowdown, therefore, is perhaps best shown by the new business index, which would normally be less affected
by such disturbances than the headline activity series. New business fell from 55.6 to 53.4 in August, thereby losing only
around half as much as the activity index. This same, slightly less negative, trend was also shown by business expectations,
which fell by just over 2 points (65.1 from 67.3).
by such disturbances than the headline activity series. New business fell from 55.6 to 53.4 in August, thereby losing only
around half as much as the activity index. This same, slightly less negative, trend was also shown by business expectations,
which fell by just over 2 points (65.1 from 67.3).
BE
Elsewhere the outstanding business index fell further from 48.0 to 46.9 (weakest since September 2010), while the
employment index fell from 49.7 to 48.8. It appears, therefore, that with limited amounts of outstanding work and slowing
growth of incoming new business, service providers are continuing to gradually reduce their headcount.
employment index fell from 49.7 to 48.8. It appears, therefore, that with limited amounts of outstanding work and slowing
growth of incoming new business, service providers are continuing to gradually reduce their headcount.
BE
Combined with the manufacturing and construction surveys, the composite PMI is now down to 50.7 (from 54.4 in July). This
is the lowest since April 2009 – the last time the composite index was below 50 (47.8)
is the lowest since April 2009 – the last time the composite index was below 50 (47.8)
BE
Implications
With the service sector such an integral part of the UK economy, a more than 4 point slump in the PMI will rightly ring alarm
bells that the economy is slipping into a period of stagnation. However, while this may still be the case, it must be noted
that the detail of today’s survey is perhaps not quite as weak as the headline. Assuming that the new business and business
expectations indexes are a better representation of the underlying trend, August’s riots may have accounted for around half
of the decline in the headline activity reading. Therefore the underlying growth trend, though still weaker than in July and
below average, may be slightly better. As a result, this survey alone should do little to push the MPC towards an extension of
quantitative easing.
With the service sector such an integral part of the UK economy, a more than 4 point slump in the PMI will rightly ring alarm
bells that the economy is slipping into a period of stagnation. However, while this may still be the case, it must be noted
that the detail of today’s survey is perhaps not quite as weak as the headline. Assuming that the new business and business
expectations indexes are a better representation of the underlying trend, August’s riots may have accounted for around half
of the decline in the headline activity reading. Therefore the underlying growth trend, though still weaker than in July and
below average, may be slightly better. As a result, this survey alone should do little to push the MPC towards an extension of
quantitative easing.
BE
I wonder, as I often do at such moments ….. What does Howard Archer make of it all?
NH
funny you should say that
NH
because he’s also back from his summer hols
NH
and
NH
is reacting in double quick time
NH
to the release
NH
This survey really rings the growth alarm bells. The very sharp slowdown in activity in services sector in August indicated by the purchasing managers’ survey is a particularly significant blow to the economy given the sector’s dominant role. Even allowing for any impact from the riots and a correction after a surprise spike up in services activity in July, this is a hugely disappointing survey. The only crub of comfort is that it shows services activity is still expanding.
NH
It is not just that business activity expansion sharply to a 2011-low in August but also that incoming new business moderated, backlogs of work contracted, employment fell and business expectations sank to a 13-month low. The survey strongly reinforces belief that increases rates are staying down at 0.50% for a long time to come, and fuels expectations that the Bank of England will enact further Quantitative Easing. However, we believe that further Quantitative Easing still seems unlikely as soon as this Thursday given still significant near-term inflation concerns
NH
I guess
NH
there will be a big QE discussion at Thursday’s meeting
NH
clearly
NH
they aren’t going to go for it yet
NH
but November
NH
could be the time
NH
and Goldman have forecast it
11:41AM
BE
Ok. Back to the movers I feel.
NH
or more precisely fallers
NH
there’s not much moving higher today
NH
aside
NH
from banks
NH
miners taking a shoeing
Eurasian Natural Resources Corp PLC (ENRC:LSE): Last: 627.00, down 31.5 (-4.78%), High: 644.31, Low: 626.00, Volume: 266.83k
Xstrata PLC (XTA:LSE): Last: 970.30, down 48.2 (-4.73%), High: 994.77, Low: 969.20, Volume: 3.60m
Kazakhmys PLC (KAZ:LSE): Last: 992.50, down 47.5 (-4.57%), High: 1,016, Low: 991.00, Volume: 484.29k
Antofagasta PLC (ANTO:LSE): Last: 1,241, down 59 (-4.54%), High: 1,263, Low: 1,229, Volume: 649.35k
NH
you get the picture
BE
Usual story then? Global recession?
NH
yeah
NH
more downgrades coming through
NH
Citi have lowered their global growth estimates
NH
and that Ackermann
AckermannNH
he reckons global growth will be just 2.5% this year
NH
which is one of the lowest forecasts I have seen
BE
Give us a look then.
NH
hang on
NH
here’s Citi
NH
now this is quite interesting
NH
because there has been a debate for a while
NH
whether it was falling stock prices
NH
that were the correct signal for commodities
NH
or commod prices themselves
NH
Global economic prospects continue to worsen markedly, especially for many
advanced economies. Citigroup has made sharp cuts to US, Euro area and UK
growth, but also modest forecast cuts for China and India. In all, Citi is cutting its
2011 global GDP growth forecast to 3.1% in 2011, and 3.2% in 2012
advanced economies. Citigroup has made sharp cuts to US, Euro area and UK
growth, but also modest forecast cuts for China and India. In all, Citi is cutting its
2011 global GDP growth forecast to 3.1% in 2011, and 3.2% in 2012
NH
. In light of
the lower economic growth forecasts and the market turmoil in recent weeks, we
have downgraded all base metal price forecasts. However, from current spot
levels, we see little downside to aluminium prices, as prices are now below the
high-cost marginal producer. We downgrade Antofagasta from Hold to Sell (3H),
Norsk Hydro from Hold to Sell (3M) and First Quantum from Buy to Hold (2M).
the lower economic growth forecasts and the market turmoil in recent weeks, we
have downgraded all base metal price forecasts. However, from current spot
levels, we see little downside to aluminium prices, as prices are now below the
high-cost marginal producer. We downgrade Antofagasta from Hold to Sell (3H),
Norsk Hydro from Hold to Sell (3M) and First Quantum from Buy to Hold (2M).
NH
We have made a number of price target reductions for those companies with
heavier base metals exposure, on the back of lower forecast earnings in the near
term. This has been offset to some extent by an upgrade to our copper long term
price from USc220/lb to USc263/lb.
heavier base metals exposure, on the back of lower forecast earnings in the near
term. This has been offset to some extent by an upgrade to our copper long term
price from USc220/lb to USc263/lb.
NH
With emerging markets driving demand for
bulks commodities such as coal and iron ore, we expect those markets to weather any
downturn in developed economies. Within this space, we continue to prefer thermal
coal, which has exposure to booming India and Chinese demand as well as a
recovering Japan.
bulks commodities such as coal and iron ore, we expect those markets to weather any
downturn in developed economies. Within this space, we continue to prefer thermal
coal, which has exposure to booming India and Chinese demand as well as a
recovering Japan.
NH
Equity impact mixed — We have made a number of price target reductions for those
companies with heavier base metals exposure, on the back of lower forecast earnings
in the near term. This has been offset to some extent by an upgrade to our copper long
term price from USc220/lb to USc263/lb. Bulk miners have held up strongly, with Rio
Tinto’s TP increased to £53 and Ferrexpo up marginally to £5.60. Estimate and target
price changes shown in the table below.
Key Picks — Our key picks in the space are Rio Tinto, ENRC and Xstrata.
companies with heavier base metals exposure, on the back of lower forecast earnings
in the near term. This has been offset to some extent by an upgrade to our copper long
term price from USc220/lb to USc263/lb. Bulk miners have held up strongly, with Rio
Tinto’s TP increased to £53 and Ferrexpo up marginally to £5.60. Estimate and target
price changes shown in the table below.
Key Picks — Our key picks in the space are Rio Tinto, ENRC and Xstrata.
NH
there you go
BE
(@Goladaman: good question. In previous recession miners gapped lower and comms then fell more gradually to meet them.)
BE
(Though the former does not imply the latter will follow, needless to say.)
11:47AM
BE
Ok – we now have no risers.
NH
even Randgold is down
Randgold Resources Ltd (RRS:LSE): Last: 6,665, down 5 (-0.07%), High: 6,755, Low: 6,605, Volume: 95.67k
NH
BE
The only gold miner worth buying, it seems.
BE
And it’s no longer worth buying.
BE
We’re doomed. DOOMED.
BE
Anyway ……….
11:48AM
NH
hang on
NH
I found a riser
NH
and it’s a housebuilder
NH
oddly enough
Berkeley Group Holdings PLC (BKG:LSE): Last: 1,213, up 34 (+2.88%), High: 1,228, Low: 1,199, Volume: 213.91k
NH
why is that?
NH
other than the fact it is THE PLAY
NH
on the safe haven london housing market
BE
Trading ahead.
BE
All’s brilliant in the world of Berkeley.
BE
Because London, obviously, remains an undeflatable bubble.
NH
is it
BE
And it throws off cash direct to shareholders, so it — relatively speaking — is defensive in this kind of puke-out.
BE
Anyway, some comment.
BE
From Numis.
NH
go on
BE
Berkeley’s update points to profits doubling on a three year view (between 2010 and
2013), as opposed to the previous five year target. This is testament to the strength
of market conditions in London and the South East, well timed investment in land
and WIP and Berkeley’s ability to add value through planning and sales. In our view,
providing market conditions remain stable, the group has the potential to continue
growing profits which could enable the cash return to be accelerated and end-co to
be larger than initial expectations.
2013), as opposed to the previous five year target. This is testament to the strength
of market conditions in London and the South East, well timed investment in land
and WIP and Berkeley’s ability to add value through planning and sales. In our view,
providing market conditions remain stable, the group has the potential to continue
growing profits which could enable the cash return to be accelerated and end-co to
be larger than initial expectations.
BE
Berkeley state that since the cash return was announced in June, trading has been
ahead of expectations and now it anticipates doubling profit over a three year period,
rather than the previous five year target. Accordingly we are upgrading estimates quite
substantially. 2012 PBT increases from £161.6m to £181m (EPS from 89.4p to 100.1p)
and 2013 PBT increases from £187.2m to £219.9m (EPS from 105p to 123.3p). We
feel that with continued investment in land and WIP, Berkeley has the potential to
continue showing strong profit growth beyond 2013.
ahead of expectations and now it anticipates doubling profit over a three year period,
rather than the previous five year target. Accordingly we are upgrading estimates quite
substantially. 2012 PBT increases from £161.6m to £181m (EPS from 89.4p to 100.1p)
and 2013 PBT increases from £187.2m to £219.9m (EPS from 105p to 123.3p). We
feel that with continued investment in land and WIP, Berkeley has the potential to
continue showing strong profit growth beyond 2013.
NH
amazing
BE
In our view upgrades of this magnitude will increase speculation about the potential to
accelerate the timing of the £13/share cash return and also the ultimate size of end-co -
which we believe will be outperformed against. Berkeley states that forward orders
currently stand in excess of £850m, which is c.42% up on the prior year. The group has
continued to be active in the land market and has secured seven sites in the period and
also attained improved planning consents on several more sites.
accelerate the timing of the £13/share cash return and also the ultimate size of end-co -
which we believe will be outperformed against. Berkeley states that forward orders
currently stand in excess of £850m, which is c.42% up on the prior year. The group has
continued to be active in the land market and has secured seven sites in the period and
also attained improved planning consents on several more sites.
BE
Overall, this is a solid update and is testament to the strength of market conditions in
London and the South East, but also the timing and execution of a focussed investment
programme since market conditions troughed in early 2009. We retrain our buy stance
and argue that our 1,500p target price looks increasingly well underpinned. The shares
are trading on 9.6x P/E and 1.26x P/NAV for April 2013.
London and the South East, but also the timing and execution of a focussed investment
programme since market conditions troughed in early 2009. We retrain our buy stance
and argue that our 1,500p target price looks increasingly well underpinned. The shares
are trading on 9.6x P/E and 1.26x P/NAV for April 2013.
NH
best managed business in the sector
NH
by a mile
BE
And in the right place, namely London.
NH
yep
NH
right
NH
some flashes coming through from the CDS market
NH
and they are not pretty
NH
IFR-WESTERN EUROPE SOVEREIGN INDEX WIDENS 10BP TO 320BP – ALL TIME WIDE – MARKIT
NH
IFR-MARKIT ITRAXX SENIOR FINANCIALS INDEX WIDENS 20BP TO 266BP, WIDEST EVER -MARKIT
NH
11:48 05Sep11 IFR-MARKIT ITRAXX SUBORDINATED FINANCIALS INDEX HITS NEW RECORD WIDE AT 473BP, 30BP WIDER ON THE DAY -MARKIT
NH
and going back
NH
to Italy
NH
and the rise in bond yields
NH
some interesting comments
NH
from the next ECB chief
NH
RTRS-BOI’S DRAGHI SAYS WE ARE DISCOVERING THAT WE CANNOT LIVE WITH INCOMPLETENESS OF EURO ZONE FISCAL RULES “ANY LONGER”
NH
RTRS-BOI’S DRAGHI SAYS SOME EURO ZONE COUNTRIES ARE NOT SHOWING ENOUGH SOLIDARITY IN CRISIS
NH
RTRS-BOI’S DRAGHI SAYS WE MUST GIVE EFSF ENOUGH RESOURCES SO IT IS NOT PERCEIVED AS LACKING MONEY
NH
I wonder who he means?
NH
which countries are showing enough solidarity?
BE
I wonder, idly, if this is what finally does for Berlusconi?
NH
RTRS-BOI’S DRAGHI SAYS WE NEED A TREATY CHANGE TO INCLUDE RULES FOR FISCAL DISCIPLINE, GROWTH
11:55 05Sep11 RTRS-PARIS- FSB’S DRAGHI SAYS NOT EXACTLY TRUE THAT BANKS UNDERCAPITALISED, MANY HAVE SUCCESFULLY RAISED CAPITAL
11:55 05Sep11 RTRS-PARIS- FSB’S DRAGHI SAYS NOT EXACTLY TRUE THAT BANKS UNDERCAPITALISED, MANY HAVE SUCCESFULLY RAISED CAPITAL
BE
Incidentally, the FT’s new capital markets correspondent Tracy Alloway — you may have heard of her — has just put up an interesting chart.
BE
Of net debt issuance of European banks
BE
http://twitter.com/#!/tracyalloway/status/110664479917867008/photo/1
BE
Nil, basically.
NH
hmm
11:58AM
NH
Back to stocks
NH
and a couple of mid cap fallers
NH
first up
Kofax Plc (KFX:LSE): Last: 289.10, down 41.9 (-12.66%), High: 335.00, Low: 289.10, Volume: 162.92k
NH
document scanning company
NH
that a few analysts are quite concerned about
NH
including
NH
David Toms at Numis
BE
As a reminder, it had a very odd trading statement a few months ago.
BE
That we can’t call a profit warning.
NH
no
NH
because the company and its 
NH
get very angry
BE
Though all the analysts cut their forecasts in respose to the guidance.
BE
Which APPEARED to show growth had hit nil.
NH
i see
BE
And, when you’re on a poppy PE, that’s not good.
NH
this company does document scanning software?
NH
is that right?
BE
Yes – paperless office
BE
The dream of the 1960s.
BE
Anyway, today’s statement is worse than the trading statement that wasn’t a profit warning.
BE
Sales below guidance.
BE
Here’s Numis’s downgrade.
BE
Kofax’s results are slightly below our (downgraded) forecasts, with revenue and
EBITA at $244m/40m respectively, c.$2m below our expectations on each measure.
Management are guiding to 8-10% overall growth (including c.2% points from
acquisitions) vs. our 6% which itself feels very much a best case. We see a clear
risk that costs are ramped up in an attempt to drive growth, but any revenue
shortfall in this situation could lead to a second, much more severe, warning.
EBITA at $244m/40m respectively, c.$2m below our expectations on each measure.
Management are guiding to 8-10% overall growth (including c.2% points from
acquisitions) vs. our 6% which itself feels very much a best case. We see a clear
risk that costs are ramped up in an attempt to drive growth, but any revenue
shortfall in this situation could lead to a second, much more severe, warning.
BE
Strangely, management seem to feel this is the right time to introduce the concept
of a US IPO, although admitting it is unlikely this year (and, some might say, equally
unlikely the year after). Despite the likelihood of a further warning we are reluctant
to be too negative given a) Kofax’s strong cash generation, and b) ongoing M&A in
the software sector. However, this feels increasingly like Intec Telecom, where an
initial strong turnaround lost steam and a series of increasingly severe warnings
was followed by the sale of the business. Our target price falls to 340p (was 380p),
12x CY12 EV:NOPAT. Hold.
of a US IPO, although admitting it is unlikely this year (and, some might say, equally
unlikely the year after). Despite the likelihood of a further warning we are reluctant
to be too negative given a) Kofax’s strong cash generation, and b) ongoing M&A in
the software sector. However, this feels increasingly like Intec Telecom, where an
initial strong turnaround lost steam and a series of increasingly severe warnings
was followed by the sale of the business. Our target price falls to 340p (was 380p),
12x CY12 EV:NOPAT. Hold.
BE
I like David Toms’ deadpan style.
BE
Following up a profit warning with a results release entitled “Company
Begins Preliminary Work for a U.S. Listing” strikes us as an unusual strategy.
Begins Preliminary Work for a U.S. Listing” strikes us as an unusual strategy.
BE
We think
the market might prefer more detail and focus on how the rapid reversal in Kofax’s
fortunes will be addressed. We cannot discern any clarity on how this improvement will
be achieved.
the market might prefer more detail and focus on how the rapid reversal in Kofax’s
fortunes will be addressed. We cannot discern any clarity on how this improvement will
be achieved.
NH
and he’s right
NH
float the prospect of USA IPO
NH
at some unspecified point
NH
to try and sugar the pill of not very good results
NH
that AREN’T a profit warning
BE
Aim companies always try the same trick.
BE
“Here’s a dry well, but we’ll be moving to the main list soon.”
BE
Then never do.
NH
talking of which
NH
no it can wait
12:05PM
NH
Right a couple of other moves
EnQuest PLC (ENQ:LSE): Last: 97.20, down 10.5 (-9.75%), High: 103.00, Low: 96.80, Volume: 2.53m
NH
north sea oil explorer
NH
poor update
NH
I only glanced at it
NH
so can’t offer any real insight
BE
Late Friday release.
NH
oh no
NH
late Friday
NH
never good
NH
always a PR disaster
BE
Yes – why anyone thinks a 5pm Friday release is a good idea baffles me.
BE
(*GREEK TWO-YEAR NOTE YIELD RISES ABOVE ITS PRICE FOR FIRST TIME)
NH
what!
BE
Quite a landmark, that.
BE
Yielding 49.85%.
NH
not sure landmark is the right word
NH
more like tombstone
BE
Price is 49.82%.
BE
(That data via Bloomerg.)
BE
Anyway, back to Encore.
NH
Enquest
BE
Oh – sorry – Enquest.
BE
(That’ll have triggered a few robots.)
BE
Here’s MF Global.
BE
What’s happened: EnQuest released a trading update on Friday afternoon after the UK markets had closed, announcing that due to worse than expected performance at two of its new wells brought on-stream in August in the UK North Sea it is downgrading 2011 average production from its targeted 26,500boepd to 23,000-24,500boepd. The S7 completion well at its recently discovered Conrie Field, located near The Dons Fields, came on-stream at lower than expected rates; while the Don Southwest S8Z producer well initially performed inline but declined sooner than anticipated. With a 1H11 average rate of 25,210boepd this would imply a 2H11 production level of 20,000-24,000boepd.
BE
Additionally, EnQuest has announced that it has submitted the Field Development Plan (FDP) for the Alma development in the Central North Sea, with full project sanction expected before year end and first production in 2H13. Peak production from the field is expected to be >20kboepd. The submission of a separate FDP for the Galia field will follow shortly.
BE
Our take: The lowering of FY production is a major setback for EnQuest, given the importance it attaches to production targets, and only as recently as its 1H11 results last month reaffirmed their 26,500boepd target for this year. In our opinion, the news underscores the risks of EnQuest’s strategy of focusing on the exploitation of mature fields in the UK North Sea, with growth very sensitive to operational issues such as the performance of new wells. Although EnQuest “did not expect a material change in the ultimate recovery of reserves in the Don Southwest Field”, this does suggest the possibility that some downgrade may take place – representing a potential dent in its vision of maximising the value from its existing production hubs which it expecteds to underpin growth to 2013.
BE
Up until this point EnQuest had demonstrated considerable growth since its IPO last April, however this setback, in our opinion, highlights the need for EnQuest to broaden its strategy beyond exploitation in the UK North Sea, for example through more near-field exploration or replicating its business model in other global mature basins, both of which we feel would lift the story and excite the market.
NH
thanks for that
12:10PM
NH
On to some M&A
NH
Charter
NH
the mystery bidder is
NH
Colfax Corp
NH
which seems to be a US version of Melrose
NH
except with bigger backers
BE
Though a small market cap. Only $1bn-ish at current price.
NH
true
NH
but two billionaire backers
NH
by Rales Brothers
NH
and these guys have access to financing
NH
so if they want to buy Charter
NH
they can
NH
the question is
NH
what they will have to offer
NH
my take is a lot more than Melrose
NH
because Melrose is offering paper
NH
and a chance to share in the upside
NH
of the restructuring
NH
and as we know there’s quite a large shareholder overlap
NH
perhaps 900p a share?
BE
That’s the feeling, yes. Counter offers have to start with a 9.
BE
And, as I think Lex mentioned last week, it’s Melrose’s to lose now.
NH
it could be game over for them
NH
although the PUSU deadline
NH
has just been extended
NH
here’s some comment from Merrill
NH
Charter – Colfax confirms premliminary approach for Charter ** Colfax produces
broad range of fluid handling (pumps and valves), mkt cap of $1bn ** Confirms in
prelimininary discussions regarding an all cash offer for Charter ** No price
announced, but Colfax believes it complements its strategy of value creating
acqusitions ** Deal would be financed through balance sheet, new debt and
equity ** New equity provided in whole or part by certain existing shareholders **
Telegraph reported that 43% of Colfax equity owned by Rales Brothers. **
Melrose also in discussions and have access to books following the 858p
approach last Thursday ** Colfax approach 1) appears to be few synergies, 2)
smaller mkt cap than Charter, 3) all cash offer ** Charter – No rating due to M&A
spec driving share price
broad range of fluid handling (pumps and valves), mkt cap of $1bn ** Confirms in
prelimininary discussions regarding an all cash offer for Charter ** No price
announced, but Colfax believes it complements its strategy of value creating
acqusitions ** Deal would be financed through balance sheet, new debt and
equity ** New equity provided in whole or part by certain existing shareholders **
Telegraph reported that 43% of Colfax equity owned by Rales Brothers. **
Melrose also in discussions and have access to books following the 858p
approach last Thursday ** Colfax approach 1) appears to be few synergies, 2)
smaller mkt cap than Charter, 3) all cash offer ** Charter – No rating due to M&A
spec driving share price
NH
I might do a bit more work on the Rales Brothers
NH
so how wealthy they are
NH
hang on
NH
here’s a Wiki entry
NH
In 1979, he left his father’s real estate firm to found Equity Group Holdings, with his brother Mitchell Rales. Using junk bonds, they bought a diversified line of businesses: first Mastershield, a vinyl siding manufacturer, then Mohawk Rubber Company, then Diversified Mortgage Group. They changed the name to Diversified Mortgage Investors, in 1978, and then Danaher, in 1984.
In 1985 they bought EASCO, an aluminum siding manufacturer, and hand tool manufacturer.
In 1988, they made a hostile takeover bid for Interco, (including Converse (shoe company), and Ethan Allen (furniture company)).[3][4] When the company responded with a poison pill, they sued, and prevailed in court.[5] They later ended the bid after five months with a profit of $60 million.[6]
In 1985 they bought EASCO, an aluminum siding manufacturer, and hand tool manufacturer.
In 1988, they made a hostile takeover bid for Interco, (including Converse (shoe company), and Ethan Allen (furniture company)).[3][4] When the company responded with a poison pill, they sued, and prevailed in court.[5] They later ended the bid after five months with a profit of $60 million.[6]
NH
n the 1980s, the AM side of WGMS was sold off to Washington, D.C., venture capitalists Steven and Mitchell Rales, who converted the music station into the first frequency for WTEM, a sports-talk station, in 1992.
He has served as Chairman of the board, of Danaher, since January 1984.[7]
In May 2008, he engineered the initial public offering of Colfax, a Richmond, Virginia industrial pumps manufacturer.[8
He has served as Chairman of the board, of Danaher, since January 1984.[7]
In May 2008, he engineered the initial public offering of Colfax, a Richmond, Virginia industrial pumps manufacturer.[8
NH
Danaher
NH
another big US acquisition vehicle of industrials
NH
these guys are serious players
BE
And Converse? And sports talk radio!?
BE
Colourful.
BE
Big, though very old, profile here.
12:17PM
NH
Moving on
NH
only one bit of RAW
NH
to report
NH
concerns something called Walter Energy
NH
recently had a profit warning
NH
hearing some bid rumours
BE
Never heard of it. Is it listed over here?
NH
US listed
NH
big I think
BE
Ah. Vancouver based.
NH
coal company
BE
And Alabama.
NH
worth keeping an eye on
NH
I am told
NH
what else
NH
oh yes
NH
retailers
NH
big couple of weeks coming up
NH
and I am hopeful
NH
we can announce
NH
a special ML guest to help cover them
NH
one day next week
BE
Excellent.
NH
hearing bearish noises about the updates
NH
from Dixons
Dixons Retail PLC (DXNS:LSE): Last: 11.05, down 0.92 (-7.69%), High: 11.73, Low: 11.04, Volume: 3.82m
NH
and Home Retail
Home Retail Group PLC (HOME:LSE): Last: 116.50, down 7.8 (-6.28%), High: 122.20, Low: 116.50, Volume: 2.56m
BE
It’d be stunning if Home Retail didn’t warn, quite frankly.
NH
the low income demographic
NH
not buying flat screen TVs
NH
actually
NH
here’s a handy guide
NH
via Citigroup
NH
of what to look for
NH
in terms of LFL sales
NH
Lots of reporting by UK retailers this week – against a background of bearish sentiment and gloomy outlook from both retailers (eg. Topps) and clients. Summary of my views for week ahead:
NH
Dixons (Q1 IMS, 7 Sept) – no position – short Kesa for read-across – key figure: UK sales (Citi -13% LFL)
NH
Sports Direct (Q1 Sales) – no position – buy on any weaknes – key figure: UK sales (Citi -0% LFL)
NH
Home Retail (Q2 IMS, 8 Sept) – short – key figure: Argos (Citi -11% LFL, GM -50bps)
NH
Morrison (Interims, 8 Sept) – short Tesco on UK read-across – key figure: PBT £430m
NH
- HMV (Q1 sales, 9 Sept) – no position – buy WHSmith on any related weakness – key figure: UK sales (Citi -15% LFL)
NH
and while I remember
NH
big note out
NH
on the supermarket companies
NH
from Merrill today
NH
very bearish for
J Sainsbury PLC (SBRY:LSE): Last: 291.80, down 5.6 (-1.88%), High: 295.80, Low: 290.90, Volume: 823.60k
NH
Only the radical will succeed, cash is king
Easing inflation into the start of 2012 should provide some respite but with likely
sub-par GDP growth and crimped consumption for the foreseeable future; and
with on-line increasingly influencing all retail, radical actions are required to reinvent
most operators’ models if returns and cash flow is not to be pressured.
Until the successful emerge, valuations rightly look set to remain suppressed.
Easing inflation into the start of 2012 should provide some respite but with likely
sub-par GDP growth and crimped consumption for the foreseeable future; and
with on-line increasingly influencing all retail, radical actions are required to reinvent
most operators’ models if returns and cash flow is not to be pressured.
Until the successful emerge, valuations rightly look set to remain suppressed.
NH
Mass-market curse – low asset turn and margin pressure
Consumers demand choice but seem unprepared to pay for it – in the last decade
only smaller, narrow range operators have driven asset turn and returns; the big
box, wide-range operators, have seen slower sales growth and have had to cut
costs/increase margins to compensate. This is a short-term strategy that is set to
be pressured as on-line offers the ‘retail nirvana’ of wide range and low price.
Consumers demand choice but seem unprepared to pay for it – in the last decade
only smaller, narrow range operators have driven asset turn and returns; the big
box, wide-range operators, have seen slower sales growth and have had to cut
costs/increase margins to compensate. This is a short-term strategy that is set to
be pressured as on-line offers the ‘retail nirvana’ of wide range and low price.
NH
Don’t expect food to escape the internet advance
The pressure is already being felt by the general retailers and the big-box grocers,
but we expect on-line encroachment to increase in food even if only at a gradual
rate. There is no game-changing on-line offer in food, but retailers need to be
wary as Amazon tries to build a ‘Subscribe & Save’ grocery loyalty offer in the US.
Smaller store, narrower range, multi-channel approach
We believe most of the quoted operators need to structurally lower cost, ideally
with a more edited range in-store and the product ‘tail’ on-line. This is difficult,
particularly for the bigger box operators, but doing nothing is not an option.
The pressure is already being felt by the general retailers and the big-box grocers,
but we expect on-line encroachment to increase in food even if only at a gradual
rate. There is no game-changing on-line offer in food, but retailers need to be
wary as Amazon tries to build a ‘Subscribe & Save’ grocery loyalty offer in the US.
Smaller store, narrower range, multi-channel approach
We believe most of the quoted operators need to structurally lower cost, ideally
with a more edited range in-store and the product ‘tail’ on-line. This is difficult,
particularly for the bigger box operators, but doing nothing is not an option.
NH
that’s the background
NH
here’s the stuff on Sainsbury
NH
Sainsbury – gearing into ‘the problem’
Sainsbury is now a much better managed, more able, grocery retailer. However,
its head-long rush to open big box space with a focus on non-food is ill-timed. The
new space is underperforming with new space densities less than half that of
mature stores, and with mature store densities and LFLs declining. This
underperformance, allied with rising operating costs associated with the newspace
build, mean Sainsbury’s earnings look most pressured, even if the UK
market remains broadly rational. That gross pension liabilities equate to c75% of
the group’s market cap also increases equity risk in these volatile times – we cut
the shares to Underperform.
Sainsbury is now a much better managed, more able, grocery retailer. However,
its head-long rush to open big box space with a focus on non-food is ill-timed. The
new space is underperforming with new space densities less than half that of
mature stores, and with mature store densities and LFLs declining. This
underperformance, allied with rising operating costs associated with the newspace
build, mean Sainsbury’s earnings look most pressured, even if the UK
market remains broadly rational. That gross pension liabilities equate to c75% of
the group’s market cap also increases equity risk in these volatile times – we cut
the shares to Underperform.
NH
and
Ocado Group PLC (OCDO:LSE): Last: 110.90, down 2.6 (-2.29%), High: 114.20, Low: 110.00, Volume: 234.68k
NH
Whether the centrally-picked, delivery to home grocery model is truly economic
remains unproven. However, with trends moving on-line and Ocado the only
pure-play on-line grocery operator, it is a potentially attractive asset. Teething
problems scaling the picking facility have been evident in recent months, but the
service again seems to be improving just as the share has fallen to levels only
briefly seen previously. It is premature to argue the model is a game changer but
stories of its demise are premature and trading at c1x sales, we raise our rating
from Underperform to Neutral.
remains unproven. However, with trends moving on-line and Ocado the only
pure-play on-line grocery operator, it is a potentially attractive asset. Teething
problems scaling the picking facility have been evident in recent months, but the
service again seems to be improving just as the share has fallen to levels only
briefly seen previously. It is premature to argue the model is a game changer but
stories of its demise are premature and trading at c1x sales, we raise our rating
from Underperform to Neutral.
An internet food retailer that many believe is the second coming of Webvan. Loss making yet valued at close to £1bn on flotation.
NH
an upgrade
NH
how disappointing
NH
although the share price
NH
is er
NH
quite low
BE
£1.10.
BE
Deary me.
NH
(Gold – what does NAV means for a food retailer. A load of stores it can do nothing with?)
NH
also
NH
seen
Alexon Group PLC (AXN:LSE): Last: 5.00, down 2 (-28.57%), High: 5.50, Low: 4.42, Volume: 249.15k
NH
the end is nigh
NH
well for shareholders at least
NH
company up for sale
NH
refinancing needed
NH
Our Brands
We have a unique collection of strong brands, which serve specific segments of the market.
We have a unique collection of strong brands, which serve specific segments of the market.
Alexon A premium offering of understated classics for women looking for an accessible price point within the luxury market. 158 outlets in the UK, and 14 in Europe. Click to visit Alexon
Ann Harvey Clothes for all occasions, which work for a larger silhouette. 133 outlets in the UK, and 14 in Europe. Click to visit Ann Harvey
Dash A trusted brand that offers practicality and comfort but doesn’t compromise on femininity and style. 189 outlets in the UK, and 2 in Europe. Click to visit Dash
Eastex For affluent, mature women, who take pride in their appearance and need a wardrobe of timeless classics, fit for everything. 279 outlets in the UK. Click to visit Eastex
Kaliko A boutique style offering, which celebrates and champions women who embrace feminity. 144 outlets in the UK, and 18 in Europe. Click to visit Kaliko
Minuet Petite Elegant, timeless classics from an established brand that understands how petite women wear clothes and provides exactly what they need for the way that they live today. 99 outlets in the UK, and 14 in Europe. Click to visit Minuet Petite
NH
some of the brands
NH
which could be disappearing from the high street soon
BE
I wonder … Alexon used to be big in Debenhams
NH
did it
BE
And Debenhams has gone all own-label, pretty much.
NH
here’s quick bit of comment from Seymour Pierce
NH
on Alexon
NH
Following the coverage in the Sunday Times, the company has put out a statement confirming that it is looking at a number of options for a more appropriate capital structure and that it is in discussions re a possible offer for the group. In the statement, it also provides an update on trading and announces another profit warning with it’s performance expected to be well below its previous expectations. Sales in the first half to end of July were down 8% with LFLs up by 0.7% helped by better performance from the Alexon and in particular the Kaliko brands. In the first three weeks of August, however, LFLs have deteriorated and were down by 9%. There has, though, been some recovery to -1% in the last week of August. We assume the profit warning is due to weaker than expected gross margins and poor trading in August. There is no mention on the debt situation.
NH
Following this update, we are provisionally assuming the company incurs a FY12 pre-tax loss of £0.5m vs. pre-tax profit forecast of £1.5m. We retain our Sell recommendation. It appears the company has not been able to ‘get off the ground’ a second capital raising programme with the support of its shareholders. Net debt is forecast at a minimum of £10m at January 2012. The turnaround strategy is very much unproven and the consumer outlook is unlikely to get any easier. We are reducing our price target from 8p to 3p on the basis that the brands will be of interest to other parties.
NH
3p target price
NH
ouch
12:27PM
NH
and finally
NH
what’s been happening with my favourite Kurdish oil explorer over the last couple of weeks
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: 134.00, down 1.5 (-1.11%), High: 145.00, Low: 133.00, Volume: 2.42m
BE
Well ……….
BE
There was an OUTRAGOEEOEOEUEOUS story in the Sunday Times.
BE
Saying they were shopping around for bankers
BE
And that could lead to the sale of the company
BE
Using the usual formula of “price + 35%”
NH
right
NH
so it’s true
BE
It is.
NH
Todd is selling up?
BE
Well …….
BE
He’s interested in bringing in more banks.
BE
And, if someone wants to make Todd an offer, then so be it.
BE
Kurdistan being hot property at the moment.
NH
hmm
NH
I don’t wish to be cynical but…
BE
Yes, that was my reaction too.
NH
anyway
NH
another update from the supermajor today
NH
and here’s the sector watcher
NH
with some reaction
NH
Gulf Keystone – GKP LN
GKP has completed a flow-test on a newly discovered zone within its Shaikan oil discovery in Kurdistan. GKP has a 75% working interest although this will fall to 51% if the Kurdistan state exercises its pre-emption rights (as is likely). The zone flowed at 2,600 barrels/day, and although this is well below the maximum 15,000 b/d from previous testing, it is certainly a positive that the well flowed. OIP reserves remain in the 4.9-10.8 billion barrels range, and I imagine it will be some time before the group can give definitive guidance on likely recoverable reserves. Whilst GKP shares have fallen 20% year-to-date, this still represents a much better performance than the sector, which is down 35%, and I wouldn’t be piling in just yet.
GKP has completed a flow-test on a newly discovered zone within its Shaikan oil discovery in Kurdistan. GKP has a 75% working interest although this will fall to 51% if the Kurdistan state exercises its pre-emption rights (as is likely). The zone flowed at 2,600 barrels/day, and although this is well below the maximum 15,000 b/d from previous testing, it is certainly a positive that the well flowed. OIP reserves remain in the 4.9-10.8 billion barrels range, and I imagine it will be some time before the group can give definitive guidance on likely recoverable reserves. Whilst GKP shares have fallen 20% year-to-date, this still represents a much better performance than the sector, which is down 35%, and I wouldn’t be piling in just yet.
NH
and Arbuthnot
NH
Following Gulf Keystone’s discovery of a new Triassic on drilling the Shaikan-2 appraisal well announced last month, the company has now completed a flow test in the lower section of the Kurre Chine B zone. The test achieved flow rates of 2,600bopd of 40 degree API oil, with associated gas of 5.4mmcf/d.
To date, GKP has conducted three well tests at Shaikan-2 with total flow rates in excess of 15,000bopd. A further five tests are yet to be performed as part of the ongoing Shaikan-2 testing programme in the Triassic and Jurassic. The next test will be conducted on the upper section of the Kurre Chine B.
NH
At Shaikan-4, the first appraisal well is currently drilling at a measured depth of 2,580m, with preliminary well logs indicating that the net pay count on this well for the upper Jurassic reservoirs is significantly better than those achieved with either Shaikan-1 or Shaikan-2.
Today’s announcement illustrates that GKP continues to make strong progress in Kurdistan, with the Shaikan field yielding further discoveries and better data than originally anticipated. On the back of recent share price growth, we would expect the market to continue to react positively to today’s update. We continue coverage with a Buy recommendation with a target price of 279p.
BE
Want some Investec as well?
NH
go on
NH
and let’s finish
BE
Positive news today from Shaikan 4, which has been drilled to 2580m, about
2/3rd’s of the way to target depth (TD) of 3760m, and has encountered a net
pay count on the well ‘significantly’ better than Shaikan 1 or 2 in the upper
Jurassic. 1H results are due in mid September. We see any ratification of
Kurdish PSA’s by Baghdad as a major catalyst to stock, and this might occur
before year end. We maintain our NAV-derived target price of 208p and BUY
recommendation.
2/3rd’s of the way to target depth (TD) of 3760m, and has encountered a net
pay count on the well ‘significantly’ better than Shaikan 1 or 2 in the upper
Jurassic. 1H results are due in mid September. We see any ratification of
Kurdish PSA’s by Baghdad as a major catalyst to stock, and this might occur
before year end. We maintain our NAV-derived target price of 208p and BUY
recommendation.
BE
The possibility that Baghdad will recognise Kurdish PSA’s by the end of this year
has been mooted to us by the company in recent meetings, and we view any
resolution of this issue as an important catalyst for the stock as it would
substantially reduce the country risk associated with the assets. This may explain
why M&A has come into media headlines recently regarding this stock. 1H results
are due in mid September.
has been mooted to us by the company in recent meetings, and we view any
resolution of this issue as an important catalyst for the stock as it would
substantially reduce the country risk associated with the assets. This may explain
why M&A has come into media headlines recently regarding this stock. 1H results
are due in mid September.
BE
That’ll keep our fanclub happy.
BE
And, with that, let’s wind up.
NH
yep
BE
Thanks for tuning in, ROTR.
NH
FTSE 100 down 121 points at 5,170
NH
volume low
NH
no US markets today
NH
thank you
NH
and goodnight
BE
And please note this operational message from SilverFox
BE
Quick reminder: unofficial ML drinks from 6pm this Thursday, at The Lamb, Lamb’s Conduit St
BE
We do not endorse, only direct.
BE
See you tomorrow everyone.
NH
bye