Markets Live chat transcript for the chat ending at 12:28 on 14 Nov 2011. Participants in this chat were: Bryce Elder/FT Neil Hume, FT
BE
Good morning
BE
And welcome to Markets Live
BE
FT Alphaville’s etc round the etc.
BE
As well, of course, as the daily wait for the technical fault
NH
Yes sorry about Friday’s outage
NH
we still have no idea what caused it
BE
(Or Thursday’s. Or Wednesday’s.)
NH
but we’d had enough so we just stopped the show
NH
anyway
BE
We do have an update from our boffins …..
NH
go on
BE
I tracked this to ftco2009013/marketslive/xxxxxxxxxxxxxx (line 50), but the code there is unfamiliar. I can see it’s generating and (I think) executing a curl shell command. Could this error be a case of http://api.xxxxxxxxxx (which is the URL being curled) being temporarily down?
BE
If anyone wants to make sense of that for us, please do.
BE
“the code there is unfamiliar” ……
NH
in fact we had a total tech disaster on Friday. Collins’ copy got stick in the spam filter and was only spat out this morning
NH
so we pubbed it then
BE
Yes. We’ve upgraded the spam filter to “predator” mode.
BE
Anyone who wants to tell you how brilliant computers are at sorting unstructured data ……….
BE
Just look at your spam filter for instant disproof.
BE
(Autonomy was deleted today, incidentally. End of an era.)
Autonomy Corp PLC (AU.:LSE): Last: 2,549, down 2 (-0.08%), High: 2,553, Low: 2,549, Volume: 15.16k
BE
Anyway, let’s move on from the preamble to the markets section of today’s show.
11:09AM
BE
So!
BE
FTSE!
BE
Down!
BE
Off 23 points at 5521 at pixel time.
NH
hmm
NH
just been looking at the Italian auction
NH
they got it away
NH
but the issue of 5-year paper was small
NH
much smaller than usual
NH
so it could be digested by domestic investors
NH
and the yield
NH
well
NH
that was unsustainable
NH
6.3%
NH
and post that the 10-year note has pushed out to 6.6%
NH
all in all
NH
not really a ringing endorsement of Super Mario and his government of technocrats
BE
Indeed. This is hardly the endorsement of the New Era of Technocracy we might have hoped for.
NH
quite
NH
he’s got a lot to do
NH
implementing all this austerity
NH
and there’s still someone lurking in the background
NH
promising to make things difficult
NH
Berlusconi ‘ready to pull plug’ on Monti
NH
The public humiliation of Mr Berlusconi on Saturday night – his motorcade chased through the streets and crowds of thousands screaming abuse as he handed in his resignation – reflect the extent of the ex-prime minister’s fall from grace.
But as he defiantly told a party leadership meeting hours earlier, they still retain the “golden share” in Mr Monti’s enterprise, particularly in the senate.
“We are ready to pull the plug,” Mr Berlusconi was quoted as saying.
While many are talking of the end of the Berlusconi era and one man’s dominance of Italy’s centre-right politics for almost 18 years, Vittorio Feltri, an editor close to the departing prime minister, cautioned that the “death of Berlusconismo and the centre-right is exaggerated”.
But as he defiantly told a party leadership meeting hours earlier, they still retain the “golden share” in Mr Monti’s enterprise, particularly in the senate.
“We are ready to pull the plug,” Mr Berlusconi was quoted as saying.
While many are talking of the end of the Berlusconi era and one man’s dominance of Italy’s centre-right politics for almost 18 years, Vittorio Feltri, an editor close to the departing prime minister, cautioned that the “death of Berlusconismo and the centre-right is exaggerated”.
NH
IT LIVES!
NH
so that’s not great
NH
and nor are the comments
NH
from
NH
Bundesbank President Jens Weidmann
NH
how many times does the ECB need to make it clear
NH
they won’t do QE
NH
it ain’t going to happen
NH
We have a mandate and we have to stick to our mandate. Fixing an interest rate for a country is certainly not compatible with our mandate. You would guarantee a certain refinancing cost for a government and you could not argue that this was not monetary financing.
The stated purpose of the SMP is to cope with dysfunctional markets and it’s not to ensure a specific spread for a specific country.
NH
It’s not about helping Italy or penalising Italy. The ECB Governing Council has always stressed that the Securities Markets Programme is about ensuring the monetary policy transmission process., But it comes with risks. The risks are reflected in our balance sheet. There’s also a risk that you mute the incentives that come from the market. Recent experience has shown that market interest rates do play a role in pushing governments towards reforms. You have seen that in the case of Italy quite clearly.
NH
there you go
NH
pretty clear to me
NH
but the market
NH
doesn’t want to listen
BE
(Buffett’s having his regular audience with Becky Quick on CNBC at the moment, by the way. We’ll bring you highlights if he says anything of note. So far, he hasn’t.)
BE
Oh, hell, give us the headlines anyway.
BE
What’s the view on Europe from Omaha?
NH
RTRS-WARREN BUFFETT SAYS IT’S NOT CLEAR EUROPE HAS THE ABILITY TO DO WHATEVER IT TAKES TO STOP CRISIS – CNBC
11:11 14Nov11 RTRS-BUFFETT SAYS LOOKING AT EUROPEAN SOVEREIGN DEBT EVERY DAY BUT HAS NOT GOTTEN BACK INTO IT – CNBC
11:12 14Nov11 RTRS-BUFFETT SAYS WE ARE SEEING A PARTIAL RUN ON EUROPE – CNBC
11:14 14Nov11 RTRS-BUFFETT SAYS WOULD HAVE TO UNDERSTAND EUROPEAN BANKS BETTER BEFORE HE INVESTED IN THEM – CNBC
11:14 14Nov11 RTRS-BUFFETT SAYS HAS NOT SEEN ANY EUROPEAN BANK INVESTMENTS HE WOULD WANT TO TAKE PART IN YET – CNBC
11:11 14Nov11 RTRS-BUFFETT SAYS LOOKING AT EUROPEAN SOVEREIGN DEBT EVERY DAY BUT HAS NOT GOTTEN BACK INTO IT – CNBC
11:12 14Nov11 RTRS-BUFFETT SAYS WE ARE SEEING A PARTIAL RUN ON EUROPE – CNBC
11:14 14Nov11 RTRS-BUFFETT SAYS WOULD HAVE TO UNDERSTAND EUROPEAN BANKS BETTER BEFORE HE INVESTED IN THEM – CNBC
11:14 14Nov11 RTRS-BUFFETT SAYS HAS NOT SEEN ANY EUROPEAN BANK INVESTMENTS HE WOULD WANT TO TAKE PART IN YET – CNBC
NH
bearish
NH
and he’s obviously read the Jens Weidmann interview
BE
Does he have any thoughts on Kurdistan? Because it seems to be all our readers care about this morning.
NH
yes
NH
have the blocks Exxon is investing in been announced?
NH
I must say
NH
the latest headlines i read
NH
from the Iraq side
NH
sounded bearish
BE
Anyway, that’s the flamebait primed for later.
NH
nicely cued up
BE
Let’s stick with Europe. Anything more to say?
NH
More tape bombs
NH
from Merkel
NH
RTRS-MERKEL SAYS IF THE EURO FAILS THEN EUROPE WILL FAIL
11:14 14Nov11 RTRS-MERKEL SAYS IF EUROPE IS NOT DOING WELL, THEN GERMANY WILL NOT DO WELL
11:14 14Nov11 RTRS-MERKEL SAYS EUROPE IS IN PERHAPS ITS MOST DIFFICULT HOUR SINCE WORLD WAR II
11:15 14Nov11 RTRS-MERKEL SAYS EUROPE MUST EMERGE STRONGER FROM THIS CRISIS THAN BEFORE
11:15 14Nov11 RTRS-MERKEL SAYS IT IS TIME FOR A BREAKTHROUGH TO A NEW EUROPE
11:17 14Nov11 RTRS-MERKEL SAYS THE HISTORICAL CHALLENGE FOR OUR GENERATION IS TO SHOW WE CAN USE THE CRISIS FOR A BETTER FUTURE
11:17 14Nov11 RTRS-MERKEL SAYS WE NEED A RESCUE FUND IN ODER TO KEEP THE EURO TOGETHER
11:18 14Nov11 RTRS-MERKEL SAYS WE NEED TO DEVELOP THE STRUCTURES OF THE EU, THAT MEANS MORE EUROPE
11:14 14Nov11 RTRS-MERKEL SAYS IF EUROPE IS NOT DOING WELL, THEN GERMANY WILL NOT DO WELL
11:14 14Nov11 RTRS-MERKEL SAYS EUROPE IS IN PERHAPS ITS MOST DIFFICULT HOUR SINCE WORLD WAR II
11:15 14Nov11 RTRS-MERKEL SAYS EUROPE MUST EMERGE STRONGER FROM THIS CRISIS THAN BEFORE
11:15 14Nov11 RTRS-MERKEL SAYS IT IS TIME FOR A BREAKTHROUGH TO A NEW EUROPE
11:17 14Nov11 RTRS-MERKEL SAYS THE HISTORICAL CHALLENGE FOR OUR GENERATION IS TO SHOW WE CAN USE THE CRISIS FOR A BETTER FUTURE
11:17 14Nov11 RTRS-MERKEL SAYS WE NEED A RESCUE FUND IN ODER TO KEEP THE EURO TOGETHER
11:18 14Nov11 RTRS-MERKEL SAYS WE NEED TO DEVELOP THE STRUCTURES OF THE EU, THAT MEANS MORE EUROPE
NH
didn’t she say all this
NH
last week
BE
She did. Looks to me like bowling slow balls for the German electorate, frankly.
BE
(Is that the right term? Bowling slow balls? I’ve no idea.)
BE
So – any comment worth sharing before we move on?
NH
I have a bit on Italy
NH
from BarCap
NH
Markets in the short run are likely to welcome a new technocratic government in
Italy, led by former European Union commissioner Mario Monti. EUR/USD is
holding up near Friday’s high and Asian equities are up. Pending formal
parliamentary approval, Mr Monti’s incoming interim administration will have a
mandate to kick-start the reform process until elections expected early next year.
Italy, led by former European Union commissioner Mario Monti. EUR/USD is
holding up near Friday’s high and Asian equities are up. Pending formal
parliamentary approval, Mr Monti’s incoming interim administration will have a
mandate to kick-start the reform process until elections expected early next year.
NH
We regard these developments as necessary, but not sufficient, steps to reduce
Italian yields. It will take time for reforms to be implemented and for their
beneficial impact on economic growth and debt dynamics to be realised. In the
meantime, reforms are likely to contribute negatively to economic activity,
suggesting that any risk rally on the back of the weekend’s news may not be
sustained. It is therefore essential in our view that the ECB continues to support
Italian debt in the secondary market as Italy faces heavy bond redemption over
the next few months
Italian yields. It will take time for reforms to be implemented and for their
beneficial impact on economic growth and debt dynamics to be realised. In the
meantime, reforms are likely to contribute negatively to economic activity,
suggesting that any risk rally on the back of the weekend’s news may not be
sustained. It is therefore essential in our view that the ECB continues to support
Italian debt in the secondary market as Italy faces heavy bond redemption over
the next few months
NH
A number of technical factors, including poor liquidity and high bid/offer have
exacerbated the volatility of bond yields in the Italian and other core European
markets. This is likely to continue this week and the immediate hurdle will be
today’s Italian 5-year BTP auction today (see Focus below).
exacerbated the volatility of bond yields in the Italian and other core European
markets. This is likely to continue this week and the immediate hurdle will be
today’s Italian 5-year BTP auction today (see Focus below).
BE
(@Chopper: you’re becoming boring, and have previous. Consider this a warning.)
NH
Here’s some more
NH
We welcome political developments in Italy as we think that a technocratic government will have more chance of success in pushing for parliamentary approval of structural measures. Even in the context of a more positive political scenario such as this, we think that it would take time for Italy to regain fully, if at all, market confidence. Italian policy reform is a necessary condition to stabilise Italian debt markets at sustainable interest rates (Italy: Time to act, 21 June 2011). Political resistance to the reforms will not be easy to overcome. However, we feel reasonably confident that political roadblocks will be cleared in the weeks and months to come, and that Italian politicians will be able to lay the policy foundations for a rehabilitation of Italian credit. Yet, it will take time for the reforms to be implemented, and for their beneficial impact on growth and debt dynamics to become visible. In the meantime, investors will be confronted with mainly unsettling news, as fiscal consolidation tends to be associated with weak economic activity.
NH
For this reason, we believe it is essential that the ECB continues to support Italian debt in the secondary market as Italy faces heavy bond redemption over the next few months. Ideally, this support would be complemented by EFSF and IMF efforts to support the primary market (eg, through precautionary credit lines to provide a liquidity backstop should Italy face difficulties in rolling over its large debt stock in the coming months and quarters). For next year, we estimate total gross supply (bills and bonds) at EUR440bn.
NH
An ambitious economic policy agenda for the next government: Our views
In our view, the two main priorities for the new government should be implementation of pro-growth structural reforms and privatisation plans to reduce the stock of public debt. On fiscal consolidation, we consider the existing plans recently put forward by the government as probably being enough to return to a primary surplus this year and reach a balanced budget by 2014.
On the pro-growth structural reform agenda, policy measures should focus on enhancing productivity and competitiveness, thereby elevating long-term growth prospects above (currently) 1%. Specifically, the key pro-growth measures should include (in order of importance):
NH
1. Labour market reform: this would require reducing firing and hiring costs in order to lower market segmentation (under the current framework, workers with open-end contract are highly protected). Changes to the collective bargaining system to move the wage-setting closer to the firm level would help to match wages with the specific firm circumstances and productivity.
2. Pension reform: the government already has a pension reform in the pipeline. Its implementation should be phased in earlier. An area that may require further changes, is the retirement age of women, which should in our view be increased to be the same as for men. This will help not only to reduce pension costs but also enhance women labour market participation.
3. Opening up of closed professions: along with the full implementation of the Services directive, the “opening up” of close professions such as pharmacists, lawyers (etc) would reduce production costs, enhance competition and competitiveness.
NH
4. Public administration reforms: There are several areas that will require fundamental changes. First, as in the private sector, wages should be better aligned with productivity. Decisions on public sector wages should be done at the regional/provincial level to permit wage differentiation within the public sector across different regions. The rationale for this is that different regions have wide differences in productivity and unemployment levels. Second, labour mobility within the public sector should also be enhanced. Third, utilities and other public services (such as public transport) at the municipal level have a large scope for efficiency gains.
5. On the privatisation front, with debt-to-GDP hovering around 120%, we consider a reduction in the stock of debt to (ideally under) 100% as very important in order to help regain investors confidence. We are aware that the plan cannot exclusively rely on public sector enterprises (as that would have a limited impact on the debt stock). Instead, it should rely fundamentally on the sale of state-owned real estate assets. The sale of real estate assets would require coordination and approvals across different levels of the public administration (general, provincial and municipal). According to a recent study presented by the Treasury, Italy’s state property assets are worth EUR420bn, EUR72bn at central state government level and EUR348bn at local government level.
NH
There we go
NH
a lot of digest there
NH
in the meantime
NH
as the Unicredit cash call been announced yet?
NH
and what about the Western European equities business
NH
has that been shut?
NH
Not sure why they are bothing
NH
in the great scheme of things closing a business
NH
that might lose tens of millions
NH
rather pales into insignificance
NH
when you need to raise EUR8bn
NH
still it’s a bone to throw to the market I guess
BE
Well, exactly.
BE
It’s a stage-managed retrenchment.
BE
To act as a merkin on the recapitalisation.
BE
Raise e7.5bn
BE
Cut 5k jobs.
NH
and look who’s the boss of the IB division at Unicredit
NH
Head of CIB Division
Was born in Chamalieres, France, on 18th January 1961. He graduated from the French École Polytechnique and École des Mines de Paris.
On 14th March 2011 he joined UniCredit as Deputy General Manager in charge of the Corporate & Investment Banking (CIB) Division. He is member of the UniCredit Executive Management Committee.
NH
JEAN PIERRE MUSTIER
BE
After all the good work he did at SocGen. Hm.
NH
Since 2009, when he left Société Générale, he has advised various financial institutions and completed large amounts of fundraising for various non-profit institutions.
On 14th March 2011 he joined UniCredit as Deputy General Manager in charge of the Corporate & Investment Banking (CIB) Division.
NH
yep
NH
at the helm when Kerviel struck
NH
amazing isn’t
NH
bankers never die
NH
they just appear someone else
NH
are we done on banks?
BE
I am. Are you?
NH
I did have a goldman note
NH
downgrading Barclays
Barclays PLC (BARC:LSE): Last: 175.25, down 3.65 (-2.04%), High: 184.16, Low: 175.00, Volume: 16.97m
NH
I can shove that up
NH
The UK finish could double the cost of post-crisis regulatory reforms for UK banks
The ICB estimates £4-7 bn of annual pre-tax costs for the UK banks assuming proposed reforms are implemented. However, we believe this estimate does not include the cost of the PLAC buffer and estimate
all-in costs of £10 bn. Taken together, we believe the ICB proposals and the UK bank levy could more than double the cost of post-crisis regulatory reform for the UK banks (to £23 bn). We believe this regulatory super-equivalence has the capacity to structurally disadvantage UK banks, particularly outside the ringfence.
NH
Banks may partly mitigate reform costs…
To mitigate reform costs, UK banks could: cut £4 bn of costs; boost the cost of credit for UK retail/SME
borrowers by 15bp; shrink assets by £1 trn.
To mitigate reform costs, UK banks could: cut £4 bn of costs; boost the cost of credit for UK retail/SME
borrowers by 15bp; shrink assets by £1 trn.
… but ROE and EPS could decline materially
However, this is unlikely to fully offset regulatory pressure on returns and earnings. On our analysis, target ROEs could decline 1.9% (to 12.4%) and steady state EPS could fall 15% assuming ICB reforms are
implemented in full.
NH
Equity: Turning more cautious
Barclays is most exposed to ICB reforms, on our estimates. We forecast steady state ROE of 10% post-ICB and downgrade from Neutral to Sell.
Lloyds, which we view as moderately impacted by reforms, and HSBC, which we view as a key holding in the current environment, remain on our Conviction Buy List.
Barclays is most exposed to ICB reforms, on our estimates. We forecast steady state ROE of 10% post-ICB and downgrade from Neutral to Sell.
Lloyds, which we view as moderately impacted by reforms, and HSBC, which we view as a key holding in the current environment, remain on our Conviction Buy List.
Credit: Equity investors’ loss, fixed income investors’ gain
ICB reforms are manageable from a credit perspective and we continue to prefer certain UK banks to their European peers. UK subordinated securities offer value relative to senior as they would be less affected by
ringfencing. Top picks: STANLN, LLOYDS, HSBC.
NH
shall we move on?
BE
We shall.
BE
Market’s beginning to get the jitters.
BE
FTSE down 30 points at 5516
NH
world realises new government in Italy
NH
does not solve problems
NH
in fact it you want a really, really good read on Italy
NH
Paul Betts in Friday’s FT
NH
was a great column
NH
basically his argument is that Silvio
NH
isn’t the cause of Italy’s problems
NH
he’s a symptom
NH
and getting rid
NH
will change very little
NH
if anything
NH
here’s a taster
NH
If nothing else, last week’s G20 summit in Cannes taught us that as the eurozone crisis heads into its most dangerous phase yet, we are all Italians, or more precisely all our futures depend on a solution being found to “the Italian problem”.
Be warned though. What you see in Italy is hardly ever what you get. This is a country where the pieces never stop moving but where everything remains the same. Remember what the old Prince of Salina says in the classic Italian novel The Leopard: “If we want things to stay as they are, they will have to change.” And if you thought Greece was hard to hold to account, get ready for the main event.
Be warned though. What you see in Italy is hardly ever what you get. This is a country where the pieces never stop moving but where everything remains the same. Remember what the old Prince of Salina says in the classic Italian novel The Leopard: “If we want things to stay as they are, they will have to change.” And if you thought Greece was hard to hold to account, get ready for the main event.
NH
The system, or myriad systems that govern Italian life at every level, are in fact highly organised and impervious to change. They are almost impossible for outsiders to comprehend. The Milan market was right to be sceptical.
It goes without saying that these sophisticated and interdependent webs of power and influence are not confined to the world of politics. Corporate Italy also abounds with these structures of tribal capitalism. Take the recent example of Italy’s sixth-largest bank, Banca Popolare di Milano. Patently in need of a complete overhaul of its governance, management and finances, its entrenched local union owners and Milanese bigwigs mobilised their networks to fend off even the efforts of an apparently impotent Bank of Italy to force change. The message was clear. In spite of everything the system does not want reform. The financial adviser to BPM’s recidivists was Milan investment bank Mediobanca, itself a perfect example of the indestructible nature of Italy’s networks of resistance and power.
It goes without saying that these sophisticated and interdependent webs of power and influence are not confined to the world of politics. Corporate Italy also abounds with these structures of tribal capitalism. Take the recent example of Italy’s sixth-largest bank, Banca Popolare di Milano. Patently in need of a complete overhaul of its governance, management and finances, its entrenched local union owners and Milanese bigwigs mobilised their networks to fend off even the efforts of an apparently impotent Bank of Italy to force change. The message was clear. In spite of everything the system does not want reform. The financial adviser to BPM’s recidivists was Milan investment bank Mediobanca, itself a perfect example of the indestructible nature of Italy’s networks of resistance and power.
NH
How can the country expect to attract new foreign investors? Just look how they are treated. Take, for example, Telefónica and its total impotence at Telecom Italia although the Spanish group is the single largest shareholder. Or France’s EDF electricity group which has just managed to take control of Edison a decade after buying Italy’s second-largest power utility and seeing its voting rights subsequently capped at 2 per cent by Rome.
The nearer Silvio Berlusconi moves to the exit, the clearer it becomes that he is an expression of the problem rather than the problem itself. Commentators excitedly speculate on possible successors. But in truth it is too much to expect that any one politician possesses enough power, charisma or courage to ram through the change Italy needs, from the top down.
The nearer Silvio Berlusconi moves to the exit, the clearer it becomes that he is an expression of the problem rather than the problem itself. Commentators excitedly speculate on possible successors. But in truth it is too much to expect that any one politician possesses enough power, charisma or courage to ram through the change Italy needs, from the top down.
BE
Ok. Ta. That’ll do. Save something for behind the paywall.
BE
Meanwhile, we should — if only for the sake of routine — mention a few stocks.
BE
Top of the risers seems as good a place to start as any.
11:32AM
Smith and Nephew PLC (SN.:LSE): Last: 579.50, up 21.5 (+3.85%), High: 582.85, Low: 567.85, Volume: 1.19m
BE
What’s that about?
NH
bid rumours?
NH
usual explanation
NH
although in this instance
NH
I believe there are some upgrades around
NH
post numbers
BE
There are.
BE
Paribas giving a shove.
BE
Sales grew a market-leading 5% (Ortho 3%, Endo 7%, AWM 5%), but margin fell 300bp, hurt by mix and transitory charges in Ortho. Ortho pricing pressure was also said to be -3% y/y (vs -2% previously), probably a key reason behind the new savings plan. Our 2012/13e EPS cuts are solely the result of lowered FY11 forecasts.
BE
Many investors doubt S&N can deliver new savings after the 2007–10 EIP, but we are more optimistic and would play the better earnings momentum. As in 2009–10, the stock may pick up upon clear signs of a margin hike, which should be achieved faster this time round. Despite cautious 2012–13e top-line assumptions (4–5% growth), we are forecasting 9–10% EPS growth. This on the back of a 150bp margin hike over 2011–13 in spite of a harsh 100bp cut due to the US Device Tax.
BE
If S&N delivers on the planned savings, ROCE could return to an all-time high 25% by 2013e. S&N will also turn cash positive imminently (FCF is at approx 15% of sales).
NH
and that’s moved it 4%?
BE
Hang on! There’s more!
BE
Orthopedics’ multiples have tumbled 50% in four years (rising price pressure, macro woes). These challenges are here to stay, but 3–5% top-line growth looks sustainable in 2011–13e, with low growth in US/Europe offset by “booming” emerging markets. Such stabilisation would ease investors’ fears, with potential upside to battered multiples.
BE
With its speculative premium (rightfully) gone, S&N’s valuation is at an all-time low
(35% below MedTech, 5% below US peers), unjustifiable given the improved earnings visibility. In a reverse DCF, today’s share price suggests 0% sales growth and flat margin over 2012–20e (vs our central scenario of 3% and 100bp hike).
(35% below MedTech, 5% below US peers), unjustifiable given the improved earnings visibility. In a reverse DCF, today’s share price suggests 0% sales growth and flat margin over 2012–20e (vs our central scenario of 3% and 100bp hike).
BE
And that, as far as I can see, is it.
BE
No bid angle, no breakup theories.
NH
just pure fundamentals
NH
how times change
BE
Dull dull dull.
BE
Meanwhile, what of its namesake?
Smiths Group PLC (SMIN:LSE): Last: 947.00, no change, High: 959.50, Low: 941.50, Volume: 148.23k
BE
Hm. Unchanged.
BE
That tells its own story I guess.
NH
was up earlier
NH
some story about Apax returning
NH
with another bid for the medical division
NH
just trying to remember where Smiths was trading
NH
when the first offer was rebuffed
BE
It was January, I think.
BE
And the bid was £2.45bn.
BE
Shares were £12.50 ahead of the rejection. £13-ish afterwards.
BE
Hm.
BE
Market cap of Smiths is now down to £3.7bn.
NH
so
NH
now could be a good time
NH
to make another move
BE
Plausibly.
BE
Though this idea of a bid for the whole seems much less likely, at least to me.
NH
me too
BE
Can PE raise ~£5bn in this market?
BE
I have doubts.
11:40AM
NH
What else is moving
NH
I know
ITV PLC (ITV:LSE): Last: 65.10, up 1.45 (+2.28%), High: 66.70, Low: 64.05, Volume: 9.17m
NH
results looked OK
BE
Er …….. yeah, they were fine.
BE
Self help, largely.
BE
Which is going better than some may have feared.
BE
Though forward advertising still looks rank rotten.
NH
it does
NH
and this is still an awfully cyclical business
NH
so even though it looks cheap
NH
it’s not
NH
Current FY11E EPS is 7.5p, c. 10% ahead of consensus. The company are
guiding people to people to £435m-440m EBITA (consensus currently at c.
£425m, Liberum = £456m) and EPS of 7.3p (cons = 7p, Liberum = 7.5p) so it
looks like there will be small consensus upgrades. This is predicated on Q4 ad
revenues being -2%. We think this is too conservative (we think c. 1% – 2% more
likely, as late money comes in).
guiding people to people to £435m-440m EBITA (consensus currently at c.
£425m, Liberum = £456m) and EPS of 7.3p (cons = 7p, Liberum = 7.5p) so it
looks like there will be small consensus upgrades. This is predicated on Q4 ad
revenues being -2%. We think this is too conservative (we think c. 1% – 2% more
likely, as late money comes in).
NH
that’s from Liberum
BE
Well ……………
BE
It’s a business in need of reinventing itself.
NH
and based on the current share price means it is trading on around 6.6 times 2012 PE
BE
Yup. Cheap.
BE
So it’s either a play on the last days of terrestrial TV
BE
Or an investment on a management team with cash to reinvent itself, but no convincing plan.
BE
Will cut to some comment, then we can turn again to the Euro tape bombs going off around our ears.
BE
Here’s Investec.
BE
Forecasts – we are likely to tweak cash/interest and ITV Studios profit slightly for
the better, but our ITV NAR is likely to be unchanged. Initial thoughts are that our
FY11E FD EPS should move to closer to 7.0-7.5p vs our current 6.6p.
the better, but our ITV NAR is likely to be unchanged. Initial thoughts are that our
FY11E FD EPS should move to closer to 7.0-7.5p vs our current 6.6p.
3Q TV ad sales are +1%, so slightly better than forecast (flat), while guidance for 4Q TV ad sales is -2%, in line with our forecast which may be slightly below some market numbers.
BE
Within 3Q, ITV is confirming Oct ITV Family NAR is down a bit (c. -1%), Nov up a
bit (c. +3%) and Dec looking down a lot (c. -10%), with some comment over a
tough comp last year (ahead of VAT rises), but no real reasoning beyond this.
Clearly a warning shot for 1Q next year in our view.
bit (c. +3%) and Dec looking down a lot (c. -10%), with some comment over a
tough comp last year (ahead of VAT rises), but no real reasoning beyond this.
Clearly a warning shot for 1Q next year in our view.
We forecast FY11E +0.5% for ITV Family ad sales and +2% in FY12E. These
look unlikely to change materially, though we remain concerned over 1Q given
tough comps and the poor Dec figure.
BE
9M broadcast/online sales are +3% which is as expected, more or less, but ITV
Studios (external) sales are +9%, slightly better than we forecast given better
international performance (internal ITV sales +6%). Content margin is under
pressure given investment in Studios, but we suspect this gives us some leeway
to tweak our profit number slightly.
n Costs/cash look better, partly given capex phasing (Media City/Salford move), so
FY11E is now expected to be net cash (we had c. £43m net debt).
n Pre any changes, CY11E P/E is c. 9.5x and EV/EBITDA c. 6x (full liability). We
leave our multiples-based PT unchanged at 55p and remain Holders. Key risk is
lack of visibility for 2012 an,d while we rate this management, we remain agnostic
on longer term execution towards a multi-platform model.
Studios (external) sales are +9%, slightly better than we forecast given better
international performance (internal ITV sales +6%). Content margin is under
pressure given investment in Studios, but we suspect this gives us some leeway
to tweak our profit number slightly.
n Costs/cash look better, partly given capex phasing (Media City/Salford move), so
FY11E is now expected to be net cash (we had c. £43m net debt).
n Pre any changes, CY11E P/E is c. 9.5x and EV/EBITDA c. 6x (full liability). We
leave our multiples-based PT unchanged at 55p and remain Holders. Key risk is
lack of visibility for 2012 an,d while we rate this management, we remain agnostic
on longer term execution towards a multi-platform model.
BE
Bit muddy, but you get the idea.
NH
yes
NH
and they have cut capex as well
NH
Monty’s comments are interesting
NH
ITV is rather boxed in
BE
(@Montesquieu: do you mean they’re angling to buy an top-tier production studio?)
NH
(yes)
BE
(That’s what I thought.)
11:46AM
NH
More tape bombs
NH
this time from Greece
NH
RTRS-GREEK CONSERVATIVE PARTY LEADER SAMARAS SAYS OUR CRITICISM OF THE BAILOUT POLICIES REMAINS INTACT
11:32 14Nov11 RTRS-GREEK CONSERVATIVE PARTY LEADER SAMARAS SAYS 50 PCT HAIRCUT BECAME INEVITABLE BECAUSE POLICIES HAVE FAILED
11:33 14Nov11 RTRS-GREEK CONSERVATIVE PARTY LEADER SAMARAS SAYS INSISTS ON CHANGES TO POLICY MIX
11:36 14Nov11 RTRS-SAMARAS SAYS HIS PARTY WILL NOT VOTE FOR ANY NEW AUSTERITY MEASURES
11:37 14Nov11 RTRS-SAMARAS SAYS WILL BACK ANY MEASURES WHICH HAVE ALREADY BEEN APPROVED, MAY CHANGE ANYTHING THAT NEEDS TO BE CHANGED AFTER NEW ELECTIONS
11:39 14Nov11 RTRS-SAMARAS SAYS WILL NOT SIGN ANY LETTER PLEDGING POLICIES, IS BOUND BY HIS VERBAL PLEDGES
11:40 14Nov11 RTRS-SAMARAS SAYS AGREES WITH TARGETS TO CUT WASTE, CUTTING DEFICIT AND DEBT, DOES NOT AGREE WITH ANYTHING THAT PREVENTS RECOVERY
11:32 14Nov11 RTRS-GREEK CONSERVATIVE PARTY LEADER SAMARAS SAYS 50 PCT HAIRCUT BECAME INEVITABLE BECAUSE POLICIES HAVE FAILED
11:33 14Nov11 RTRS-GREEK CONSERVATIVE PARTY LEADER SAMARAS SAYS INSISTS ON CHANGES TO POLICY MIX
11:36 14Nov11 RTRS-SAMARAS SAYS HIS PARTY WILL NOT VOTE FOR ANY NEW AUSTERITY MEASURES
11:37 14Nov11 RTRS-SAMARAS SAYS WILL BACK ANY MEASURES WHICH HAVE ALREADY BEEN APPROVED, MAY CHANGE ANYTHING THAT NEEDS TO BE CHANGED AFTER NEW ELECTIONS
11:39 14Nov11 RTRS-SAMARAS SAYS WILL NOT SIGN ANY LETTER PLEDGING POLICIES, IS BOUND BY HIS VERBAL PLEDGES
11:40 14Nov11 RTRS-SAMARAS SAYS AGREES WITH TARGETS TO CUT WASTE, CUTTING DEFICIT AND DEBT, DOES NOT AGREE WITH ANYTHING THAT PREVENTS RECOVERY
NH
so we will approve everything that’s been approved
NH
but nothing else
11:48AM
NH
Back to stocks then
Premier Foods PLC (PFD:LSE): Last: 6.19, down 0.25 (-3.88%), High: 7.50, Low: 5.76, Volume: 75.19m
NH
coming back to earth
NH
after Friday’s mental rise
BE
Return to sanity.
BE
Friday was insane.
BE
Up 50% after a couple of low-level directors spent the cost of a second-hand BMW 3 Series on the stock.
BE
Is there a reason for the retrace, other than the one stated above?
NH
UBS downgrade
NH
to sell
NH
not seen it
NH
but apparently it’s around
BE
Oh – hang on. Will dig it out.
BE
A disappointing trading performance in Q3 made it likely that Premier will breach
its banking covenants at YE. Subsequently mgt have negotiated a deferral of the
next covenant test to end March and are in discussions with the banks aimed at
putting a new facility in place. Mgt are signalling that they will seek to take out
more costs, make disposals and focus resources behind 8 ‘power brands’.
its banking covenants at YE. Subsequently mgt have negotiated a deferral of the
next covenant test to end March and are in discussions with the banks aimed at
putting a new facility in place. Mgt are signalling that they will seek to take out
more costs, make disposals and focus resources behind 8 ‘power brands’.
BE
Acknowledging the banks’ understandable reluctance to take outright control of
Premier via a debt./equity swap, it is our belief that they are now in a position to
set the agenda. The banks overriding priority must be to get their money back as
quickly as possible and whilst this requires Premier to make profits/ generate cash,
we are concerned that the interests of equity shareholders are now subordinate.
Premier via a debt./equity swap, it is our belief that they are now in a position to
set the agenda. The banks overriding priority must be to get their money back as
quickly as possible and whilst this requires Premier to make profits/ generate cash,
we are concerned that the interests of equity shareholders are now subordinate.
BE
Even assuming a ‘recovery’ in Ebita next year to £230m, which given the need in
our view to increase investment behind the brands is ambitious, we estimate
Premier’s EV/Ebitda would be 6x. Yes, there is greater equity leverage at Premier,
but given Dairy Crest trades on CY12 EV/Ebitda of 6x, we judge this to be
insufficiently attractive to compensate for the risk of a transfer of value from
existing shareholders to other stakeholders.
our view to increase investment behind the brands is ambitious, we estimate
Premier’s EV/Ebitda would be 6x. Yes, there is greater equity leverage at Premier,
but given Dairy Crest trades on CY12 EV/Ebitda of 6x, we judge this to be
insufficiently attractive to compensate for the risk of a transfer of value from
existing shareholders to other stakeholders.
BE
Our price target stems from our belief that there is a significant risk that the equity
may be worthless. To reflect this we are applying a forward EV/EBITDA of 5.5x
to reach our 2p price target. We are downgrading our rating from Neutral to Sell.
may be worthless. To reflect this we are applying a forward EV/EBITDA of 5.5x
to reach our 2p price target. We are downgrading our rating from Neutral to Sell.
BE
2p target.
BE
The shares might be just 7p, but the EV is approximately £1.8bn
NH
BE
And creditors moving to the front of the queue.
NH
good note
NH
the idea that this covenant waiver
NH
was somehow good news
NH
always seemed odd to me
NH
and said more about the banks
NH
than the strength of Premier
NH
ie extend and pretend
NH
don’t take a bad debt hit
BE
We should headline these stories “Lenders grant stay of execution.”
BE
Because that’s all it amounts to.
11:54AM
NH
Right
NH
where now
Glencore International PLC (GLEN:LSE): Last: 433.30, down 6.7 (-1.52%), High: 442.50, Low: 431.80, Volume: 1.13m
NH
that was up a little earlier?
NH
what’s happened
NH
are people spooked by the recent Noble profits warning
NH
and there’s some read across?
BE
We’ll find out when Glencore reports, I guess, which is shortly.
BE
Numbers Thursday
BE
Which have been somewhat eclipsed by the index rejiggery
BE
Here’s Credit Suisse on both.
BE
Glencore will report Q3 production numbers on Thursday 17th
November. Our expectations are provided in Fig 1. While financials and
marketing data will not be provided, Glencore will provide a qualitative
update on market developments. Market trends were generally weaker in Q3
vs. Q2 as evidenced by commodity price performance through the quarter.
November. Our expectations are provided in Fig 1. While financials and
marketing data will not be provided, Glencore will provide a qualitative
update on market developments. Market trends were generally weaker in Q3
vs. Q2 as evidenced by commodity price performance through the quarter.
BE
Expiry of locks ups: the six month lock-up period on cornerstone investors
ends on 25 November and will likely cause a change in index weighting.
Glencore’s actual free float will increase from c.12% to c.17%, but
Glencore’s effective free float from an indexing perspective will increase
from the 12% band to 20%. The major tracker funds (FTSE and MSCI) will
therefore need to increase their Glencore share holdings by c.67%. We
estimate the FTSE and MSCI trackers need to buy a further 83m shares,
equivalent to 7.5% of the actual free float. The bigger indexing event will
occur next year when expiry of staff lock-ups will take Glencore’s freefloat to
over 50%.
ends on 25 November and will likely cause a change in index weighting.
Glencore’s actual free float will increase from c.12% to c.17%, but
Glencore’s effective free float from an indexing perspective will increase
from the 12% band to 20%. The major tracker funds (FTSE and MSCI) will
therefore need to increase their Glencore share holdings by c.67%. We
estimate the FTSE and MSCI trackers need to buy a further 83m shares,
equivalent to 7.5% of the actual free float. The bigger indexing event will
occur next year when expiry of staff lock-ups will take Glencore’s freefloat to
over 50%.
BE
Indexing timing: For the FTSE index inclusion an announcement is likely
be made on 7 Dec and inclusion effective from 16 Dec. For the MSCI the
latest possible review date is 28 Nov with the indexing effective two days
later on 30 Nov. If this date is not met then the next review period is end
Feb. Based on 3m average volume of c.10m shares/day and assuming
FTSE buying spread over 30 days then FTSE indexing alone could increase
daily trading volumes by 25%.
be made on 7 Dec and inclusion effective from 16 Dec. For the MSCI the
latest possible review date is 28 Nov with the indexing effective two days
later on 30 Nov. If this date is not met then the next review period is end
Feb. Based on 3m average volume of c.10m shares/day and assuming
FTSE buying spread over 30 days then FTSE indexing alone could increase
daily trading volumes by 25%.
BE
Valuation – remains attractive: Glencore is trading on a 2012E PE of 7.5x
a small premium to the sector on 6.8x but a discount to marketing peers on
over 10x. Glencore is currently trading at a 11% discount to our market price
based SOTPs. Alternatively, the implied valuation of Glencore’s marketing
division is $18bn, below our EV/IC based valuation of $25bn.
a small premium to the sector on 6.8x but a discount to marketing peers on
over 10x. Glencore is currently trading at a 11% discount to our market price
based SOTPs. Alternatively, the implied valuation of Glencore’s marketing
division is $18bn, below our EV/IC based valuation of $25bn.
BE
As for Noble ………
BE
The problem was unrealized mark-to-market losses
BE
The read-through for Glencore is difficult
NH
as ever
BE
Though there’s some worries about Aggies.
BE
Here’s Morgan Stanley to pick up the story.
BE
Noble’s ‘Ags’ business impacted by lower crushing
margins and high customer defaults: According to
the Noble release, overall profitability of its ‘Ags’
business during Q3 was impacted by defaults among
US farmers that forced Noble to cover physical
deliveries by purchasing cotton in the spot market at
elevated prices. Moreover, it stated that crushing
margins in Asia/Latam remain under pressure, thus
implying a negative read-across for Glencore’s ‘Ags’
business, which represents c.7% of Marketing EBIT.
margins and high customer defaults: According to
the Noble release, overall profitability of its ‘Ags’
business during Q3 was impacted by defaults among
US farmers that forced Noble to cover physical
deliveries by purchasing cotton in the spot market at
elevated prices. Moreover, it stated that crushing
margins in Asia/Latam remain under pressure, thus
implying a negative read-across for Glencore’s ‘Ags’
business, which represents c.7% of Marketing EBIT.
BE
Weakness in Metals, Minerals, and Ore business
(MMO) has limited read-through to Glencore: The
significant drop in profitability and margins of Noble’s
MMO business was mainly attributed to price volatility
and weakening iron ore volumes sold into China as well
as the margin erosion in Aluminium sales. While these
indicators underline a more cautious tone, we flag that
the composition of Glencore’s marketing business is
different to that of Noble (notably its limited exposure to
iron ore and high exposure to copper, which has
demonstrated volume resilience given the rise in
cancelled warrants and solid premiums).
(MMO) has limited read-through to Glencore: The
significant drop in profitability and margins of Noble’s
MMO business was mainly attributed to price volatility
and weakening iron ore volumes sold into China as well
as the margin erosion in Aluminium sales. While these
indicators underline a more cautious tone, we flag that
the composition of Glencore’s marketing business is
different to that of Noble (notably its limited exposure to
iron ore and high exposure to copper, which has
demonstrated volume resilience given the rise in
cancelled warrants and solid premiums).
BE
Profitability of Energy activities remained solid, with
a slight decline in margins, yet business is different
to Glencore’s: Volumes of coal, coke, and oil continued
to be strong, with margins slightly declining; moreover,
Noble did not express concerns on the profitability of the
business in the release.
a slight decline in margins, yet business is different
to Glencore’s: Volumes of coal, coke, and oil continued
to be strong, with margins slightly declining; moreover,
Noble did not express concerns on the profitability of the
business in the release.
NH
thanks for that
NH
shall we move
NH
to some small caps
12:00PM
NH
Autonomy may no more
NH
although I wouldn’t bet on HP spinning it off one
NH
day
NH
but its bastard offspring
NH
still trades
Blinkx PLC (BLNX:LSE): Last: 105.00, down 9.5 (-8.30%), High: 119.00, Low: 102.00, Volume: 3.11m
BE
In spite of no-one ever using the website.
BE
At least, not to my knowledge.
BE
(What does it DO? I’ve never been able to work it out.)
BE
So those who picked up stock in the placing the other week have been taken out in a bucket.
NH
so a couple of days after raising £10m at 134p a share
NH
they issue figures
NH
which miss expectations
NH
and have the house broker
NH
asking all sorts of interesting questions
NH
that’s Citi BTW
NH
and here is their post results comment
NH
Blinkx Reports Full 1H Results – Blinkx has reported its full 1H results, although in all
candour, there is nothing particularly incremental from the trading update on
Wednesday. The group has reported $44.6m of revenue, $5.7m of EBITDA (ex
restructuring). While this is below CIRA c. $50m/$6.5m, it is more in line with
consensus (range $45.2-45.9m/$5.4-$5.7m).
candour, there is nothing particularly incremental from the trading update on
Wednesday. The group has reported $44.6m of revenue, $5.7m of EBITDA (ex
restructuring). While this is below CIRA c. $50m/$6.5m, it is more in line with
consensus (range $45.2-45.9m/$5.4-$5.7m).
NH
Focus #1: Growth Trends – While the results previewed on Wednesday and released
today are technically in line with consensus expectations, the market reaction was one
of disappointment. With Blinkx valued at 31.1x 2012E P/E (calendar) the market was
implicitly expecting more than a ‘meet and hold’ set of results. What the full 1H release
brings into focus, though, is the growth profile. Yes, results were in line to slightly
disappointing, but the growth is impressive: 63% growth at the revenue level, 96% at
the profit level. In as far as it is growth that justifies the multiple, the full release may
give some comfort.
today are technically in line with consensus expectations, the market reaction was one
of disappointment. With Blinkx valued at 31.1x 2012E P/E (calendar) the market was
implicitly expecting more than a ‘meet and hold’ set of results. What the full 1H release
brings into focus, though, is the growth profile. Yes, results were in line to slightly
disappointing, but the growth is impressive: 63% growth at the revenue level, 96% at
the profit level. In as far as it is growth that justifies the multiple, the full release may
give some comfort.
NH
Focus #2: Process with Acquisitions – The group announced the acquisition of
PVMG on Wednesday. Like Burst, the rationale appears to be based on the potential
arbitrage between traditional display and video CPMs. The pushback from investors
has been that there is not enough of a track record from Burst to get a proper sense of
whether this will work out. In as far as the release gives some incremental detail on
trends at Burst, (and of course the conference call gives the chance for
analysts/investors to push management further in person) the full release may give
some comfort on this front.
PVMG on Wednesday. Like Burst, the rationale appears to be based on the potential
arbitrage between traditional display and video CPMs. The pushback from investors
has been that there is not enough of a track record from Burst to get a proper sense of
whether this will work out. In as far as the release gives some incremental detail on
trends at Burst, (and of course the conference call gives the chance for
analysts/investors to push management further in person) the full release may give
some comfort on this front.
BE
(@fjp73: I’d assume that anyone who wanted to invest on the basis of it being a potential patent troll would take a very close look at who owns which of their patents. I’d be interested to see that analysis.)
BE
Fundamental View: Scarcity Value – We are upbeat on the opportunity from online
video advertising and Blinkx’s longer-term positioning. The group is expensive (cf. 31x
CY2012E P/E) but the growth profile should be dramatic, even with short term
investment in PVMG. While the lack of near-term momentum may weigh on sentiment
we are minded to stick with a positive fundamental view. We rate BLNX Buy.
video advertising and Blinkx’s longer-term positioning. The group is expensive (cf. 31x
CY2012E P/E) but the growth profile should be dramatic, even with short term
investment in PVMG. While the lack of near-term momentum may weigh on sentiment
we are minded to stick with a positive fundamental view. We rate BLNX Buy.
NH
acquisitions
NH
cash calls
NH
disappointing results. I am not liking this
BE
It has a very interesting board, Blinkx.
NH
go on
BE
One executive director.
BE
The CEO.
NH
this really the son of Autonomy
NH
they only had one man in charge
BE
Chairman’s the guy who used to run Interwoven and Zantaz.
NH
this gets worse
BE
Two of Autonomy’s …. more criticised acquisitions, let’s say.
BE
Then there’s this guy ….
BE
Dr Michael Lynch, Non-executive Director
Mike Lynch
Mike Lynch
Dr. Mike Lynch, OBE, founded Autonomy in 1996 and rapidly established the company’s reputation as the world’s leading provider of infrastructure software for unstructured information and meaning-based technologies. Prior to this, Mike Lynch founded and ran Neurodynamics where much of Autonomy’s proprietary technology was developed.
December 2005 saw Autonomy’s $500 million acquisition of former competitor Verity which consolidated Autonomy’s position as number one in the market and last year Autonomy posted record revenues and profits in what he described as a transformational year. Mike is a past winner of the CBI’s Entrepreneur of the Year Award and was recently appointed a Non-Executive Director of the BBC. He studied Electrical and Information Sciences at Cambridge and received a Ph.D. in adaptive techniques in signal processing and connectionist models, as well as a research fellowship in adaptive pattern recognition. He holds the Institute of Electrical Engineers’ medal for Outstanding Achievement.
NH
BE
Think I’ve heard of him.
BE
Good to know he’s still with us.
NH
the man who took HP to the cleaners
NH
and cost its CEO his job
NH
who could forget him
NH
the man who had a very unwise public spat with Larry Ellison
BE
Who’d bet against him doing a two-for, though? Sell this thing to Yahoo!?
BE
(Difficult to punctuate that sentence.)
NH
not me
NH
with Frank Quattrone in tow
NH
I’m sure HP would probably buy it
NH
double up
BE
Reinvent itself as a video search engine. It’s tried everything else, I guess.
BE
Anyway, anything else in smalls worth mentioning?
NH
yes
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: 188.00, up 10.75 (+6.06%), High: 201.91, Low: 179.06, Volume: 19.08m
NH
there was talk in the market on Friday
NH
of Hess making an offer in excess of 200p a share
BE
Hess are already in Kurdistan, right?
BE
So they’re the bidder of default on this type of rumour?
NH
either that
NH
or Tony Hayward
NH
but he only wants to spend £250m
NH
in the area
NH
and Todd Kozel
NH
doesn’t get out of bed for that
NH
anyway
NH
lots of debate
NH
about how positive the Exxon makes Kurdistan legit news
NH
really is
NH
for example
NH
Canaccord
NH
Late on 11 November, following news of Exxon Mobil’s recent entry into Kurdistan, press reports began to circulate that an accord may have been reached between Baghdad and Erbil. However, the key features of the accord remain to be seen. Interestingly, in the face of this seemingly positive symbolic news, we note the crosstalk out of Baghdad, with continued reports of some officials criticizing Exxon Mobil’s move into Kurdistan.
NH
While it is difficult to quantify the impact of any potential resolution on our NAVs at this stage, we note that progress, albeit slow with conflicting reports, appears to be being made. In the event of an acceptable resolution, we could envision a continuation of the recent wave of consolidation that has swept over the region. In the meantime, ahead of any firm details, we leave our valuations unchanged.
NH
It has been reported recently that ExxonMobil has signed contracts with the KRG to explore for oil and gas in six blocks in the region last month. Further press commentary from Reuters indicates that the federal Iraqi government has warned Exxon Mobil that any oil exploration contract signed with the KRG would be deemed illegal and could result in termination of its deal to develop the West Qurna oilfield.
NH
This marks the first super-major entry to the region and follows recent moves by Hess and Repsol as well as Marathon and Murphy. We also note a flurry of recent M&A activity in the region, including TAQA’s investment in Western Zagros, Vallares’ pending acquisition of Genel Energy and Afren’s acquisition of interests in the Barda Rash and Ain Sifni PSCs from Komet Group and the KRG, respectively.
NH
and here’s a nice list
NH
of plays on the region
NH
Publicly listed players with Kurdistan operations include (but are not limited to):
o Afren (AFR : LSE | SELL, 75p target price)
o DNO International (DNO : OL | Not Rated)
o Groundstar Resources (GSA : TSX-V | Not Rated)
o Gulf Keystone Petroleum (GKP : AIM | Not Rated)
o Hess Corporation (HES : NYSE | Not Rated)
o Heritage Oil (HOIL : LSE | HOLD, 335p target price)
o Longford Energy (LFD : TSX-V | Not Rated)
o Marathon Oil (MRO : NYSE | Not Rated)
o Murphy Oil (MUR : NYSE | Not Rated)
o Niko Resources (NKO : TSX | Not Rated)
o Petroceltic International (PCI : AIM | BUY, 12p target price)
o ShaMaran Petroleum (SNM : TSX-V | SPECULATIVE BUY, C$1.15 target price)
o Sterling Energy (SEY : AIM | Not Rated)
o Talisman Energy (TLM : NYSE, TSX | HOLD, US$16.00 target price)
o Vallares (VLRS : LSE | Not Rated) – to be renamed Genel Energy upon completion of the transaction, which is currently expected to occur around 21 November 2011.
o Vast Exploration (VST : TSX-V | Not Rated)
o WesternZagros Resources (WZR : TSX-V | Not Rated)
o Afren (AFR : LSE | SELL, 75p target price)
o DNO International (DNO : OL | Not Rated)
o Groundstar Resources (GSA : TSX-V | Not Rated)
o Gulf Keystone Petroleum (GKP : AIM | Not Rated)
o Hess Corporation (HES : NYSE | Not Rated)
o Heritage Oil (HOIL : LSE | HOLD, 335p target price)
o Longford Energy (LFD : TSX-V | Not Rated)
o Marathon Oil (MRO : NYSE | Not Rated)
o Murphy Oil (MUR : NYSE | Not Rated)
o Niko Resources (NKO : TSX | Not Rated)
o Petroceltic International (PCI : AIM | BUY, 12p target price)
o ShaMaran Petroleum (SNM : TSX-V | SPECULATIVE BUY, C$1.15 target price)
o Sterling Energy (SEY : AIM | Not Rated)
o Talisman Energy (TLM : NYSE, TSX | HOLD, US$16.00 target price)
o Vallares (VLRS : LSE | Not Rated) – to be renamed Genel Energy upon completion of the transaction, which is currently expected to occur around 21 November 2011.
o Vast Exploration (VST : TSX-V | Not Rated)
o WesternZagros Resources (WZR : TSX-V | Not Rated)
NH
and Citi
NH
which recently took up coverage of the region
NH
a long with some other bulge brackets
NH
with its view
NH
Further positive newsflow from Kurdistan – It has been reported by Radio Free
Europe over the weekend that the Kurdistan Regional Government and the Iraqi
Central Government have reached “mutually acceptable” solutions to disputes over oil
sharing, as well as territorial claims and armed forces. This follows the reports last
week that ExxonMobil had agreed a deal for six exploration blocks in Kurdistan despite
its presence in Southern Iraq. Adal Barwari (an advisor to the Iraqi Prime Minister on
Kurdish affairs) said in the interview that the Iraqi Prime Minister al-Maliki and the
Kurdish Prime Minister Barham Salih held talks in Baghdad in late October and
appointed three committees to resolve their differences. Those committees completed
their final reports on 5 November and submitted them to al-Maliki and Salih. The details
of the agreements as yet remain unknown. While the political risks around Iraqi
Kurdistan are not removed completely, we believe these comments illustrate significant
progress towards a resolution of the long-standing issues around the validity of
Kurdistan oil contracts and payment of oil exports.
Europe over the weekend that the Kurdistan Regional Government and the Iraqi
Central Government have reached “mutually acceptable” solutions to disputes over oil
sharing, as well as territorial claims and armed forces. This follows the reports last
week that ExxonMobil had agreed a deal for six exploration blocks in Kurdistan despite
its presence in Southern Iraq. Adal Barwari (an advisor to the Iraqi Prime Minister on
Kurdish affairs) said in the interview that the Iraqi Prime Minister al-Maliki and the
Kurdish Prime Minister Barham Salih held talks in Baghdad in late October and
appointed three committees to resolve their differences. Those committees completed
their final reports on 5 November and submitted them to al-Maliki and Salih. The details
of the agreements as yet remain unknown. While the political risks around Iraqi
Kurdistan are not removed completely, we believe these comments illustrate significant
progress towards a resolution of the long-standing issues around the validity of
Kurdistan oil contracts and payment of oil exports.
NH
Political discount on Kurdistan-focused names likely to narrow – We expect
Kurdistan-focused operators to benefit from these developments and the market to
reduce the political overhang currently discounted in the shares. The key names in our
coverage standing to benefit from the improving political environment are DNO
(Neutral) and Afren (AFRE.L; £0.86; 1H), which offer exposure to material oil deposits
in the Kurdistan region of Iraq. We view DNO as best positioned to benefit from
improved clarity around the contract terms, or potential M&A in the region. We
calculate a base NAV of NOK 10.1/share, which could potentially be de-risked towards
NOK13/share if the political issues are fully resolved. We also expect a positive readacross
for other mid-cap players in Kurdistan. Other mid-cap players in Kurdistan
include Heritage (HOIL.L; £2.02; 2H), Gulf Keystone, Petroceltic, and Genel Energy,
which is due to start trading again next week.
Kurdistan-focused operators to benefit from these developments and the market to
reduce the political overhang currently discounted in the shares. The key names in our
coverage standing to benefit from the improving political environment are DNO
(Neutral) and Afren (AFRE.L; £0.86; 1H), which offer exposure to material oil deposits
in the Kurdistan region of Iraq. We view DNO as best positioned to benefit from
improved clarity around the contract terms, or potential M&A in the region. We
calculate a base NAV of NOK 10.1/share, which could potentially be de-risked towards
NOK13/share if the political issues are fully resolved. We also expect a positive readacross
for other mid-cap players in Kurdistan. Other mid-cap players in Kurdistan
include Heritage (HOIL.L; £2.02; 2H), Gulf Keystone, Petroceltic, and Genel Energy,
which is due to start trading again next week.
NH
Increasing optimism, but formal confirmation still required – The news on the
potential resolution of the dispute between the Iraqi Central Government and the KRG
and ExxonMobil’s announced entry into Kurdistan will likely improve investor and
industry confidence around Kurdistan, and have positive implications for the
independents operating in the region. Clarity on the outstanding issues could lead to an
acceleration in industry activity with further large cap names entering the region, as
highlighted in our recent note (Iraqi Kurdistan: Land Of Opportunity?, 4 November). No
final agreement has been reached, and details of the deal between the regional and
federal governments remain unknown. We believe risks still remain that the current
PSC terms in Kurdistan could be changed in order for the Iraqi government to ratify
them.
potential resolution of the dispute between the Iraqi Central Government and the KRG
and ExxonMobil’s announced entry into Kurdistan will likely improve investor and
industry confidence around Kurdistan, and have positive implications for the
independents operating in the region. Clarity on the outstanding issues could lead to an
acceleration in industry activity with further large cap names entering the region, as
highlighted in our recent note (Iraqi Kurdistan: Land Of Opportunity?, 4 November). No
final agreement has been reached, and details of the deal between the regional and
federal governments remain unknown. We believe risks still remain that the current
PSC terms in Kurdistan could be changed in order for the Iraqi government to ratify
them.
BE
Hm. Ok then.
NH
OK
NH
one of the rabble asking about
NH
Interserve
Interserve PLC (IRV:LSE): Last: 320.80, down 0.2 (-0.06%), High: 328.50, Low: 320.80, Volume: 74.07k
NH
is this another one of those support services companies
NH
where we can’t figure out what it does to make money
NH
and signs all these large orders
NH
and then finds out
NH
it has not priced them properly
NH
or is that just everyone else in the sector?
BE
Yeah, that’s right. It always reminds me of “Interslice,” which was one of Homer Simpson’s suggested names for his internet company.
NH
BE
Which didn’t do anything either.
BE
Interserve is one of the world’s foremost support services and construction companies.
We are based in the UK and are listed in the FTSE 250 index with revenue of £1.9 billion and a workforce of nearly 50,000 people worldwide.
BE
Why Interserve?
* Partnership approach in all we do
* Value for money and predictability of cost
* In-depth expertise in each of our sectors
* Commitment to safety and sustainability
* Client-focused service culture
* Innovation, flexibility and creativity
BE
So …. er ….. it outsources. That’ll do.
NH
and its had results out
NH
and a big contract win
NH
any comment?
BE
Collins Stewart’s a buyer.
BE
In its IMS, management maintained its FY11 guidance for PBT (“broadly flat”)
and net debt. The company has won over £600m of contracts since 30-Jun. This
has maintained the order book at c. £5.3bn (including Associates, but excluding
Equipment Services which has no order book). Revenue visibility for 2012 is
c.£1.4bn (including Associates), which is around 72% visibility on our 2012 sales
forecast (including Middle East Associates). The company has announced a
major contract renewal/expansion with the Defence Infrastructure Organisation,
worth £60m p.a (and up to £420m in total) in the Falklands, Ascension Island,
Cyprus and Gibraltar. Further progress in negotiating tax treatment of cash flows from the Middle East will keep the H2 tax rate low.
and net debt. The company has won over £600m of contracts since 30-Jun. This
has maintained the order book at c. £5.3bn (including Associates, but excluding
Equipment Services which has no order book). Revenue visibility for 2012 is
c.£1.4bn (including Associates), which is around 72% visibility on our 2012 sales
forecast (including Middle East Associates). The company has announced a
major contract renewal/expansion with the Defence Infrastructure Organisation,
worth £60m p.a (and up to £420m in total) in the Falklands, Ascension Island,
Cyprus and Gibraltar. Further progress in negotiating tax treatment of cash flows from the Middle East will keep the H2 tax rate low.
BE
We forecast PBT growth in the current year, driven by an improvement in Support
Services margins and an initial recovery in Equipment Services utilisation rates,
offsetting declines in the UK construction margin. Our 2012-13 EPS forecasts are
8-13% above consensus. Our 2011 net debt forecast is £63m.
Services margins and an initial recovery in Equipment Services utilisation rates,
offsetting declines in the UK construction margin. Our 2012-13 EPS forecasts are
8-13% above consensus. Our 2011 net debt forecast is £63m.
BE
Our investment case remains unchanged. Management has articulated an
ambition to double earnings (organically) 2010-15, which is a materially stronger
outlook than most of the companies in our coverage universe. The consensus
forecasts little EPS growth over the next three years, so we see scope for material
earnings upgrades.
ambition to double earnings (organically) 2010-15, which is a materially stronger
outlook than most of the companies in our coverage universe. The consensus
forecasts little EPS growth over the next three years, so we see scope for material
earnings upgrades.
BE
Our price target of 450p is based on the mid point of our Quest Sensitivity
valuation of 443p (using our above consensus EPS forecasts) and our sum of the
parts valuation of 460p. We believe there is scope for a re-rating of the shares.
valuation of 443p (using our above consensus EPS forecasts) and our sum of the
parts valuation of 460p. We believe there is scope for a re-rating of the shares.
BE
And so, I think, is Canaccord
BE
Trading on a 2012E P/E of 6.9 times, we believe the shares remain cheap given the
material reassurance that our recent review of Interserve’s Qatari operations has provided,
after which the shares have shown modest (c.2%) outperformance.
We reiterate our BUY recommendation and sum-of-the-parts derived target price of 397p
(22% potential upside from current levels).
material reassurance that our recent review of Interserve’s Qatari operations has provided,
after which the shares have shown modest (c.2%) outperformance.
We reiterate our BUY recommendation and sum-of-the-parts derived target price of 397p
(22% potential upside from current levels).
BE
So there you go. Buy Interslice.
NH
hmmm
NH
moving on
12:19PM
NH
What’s up with the mighty Pearson this morning
Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.
Pearson (PSON:LSE): Last: 1,109, down 28 (-2.46%), High: 1,142, Low: 1,108, Volume: 583.76k
NH
i thought there was some good news from a rival on Friday
NH
or rather bad news that was good news
BE
Houghton Mifflin Harcourt?
NH
yep
BE
Aren’t they cutting jobs though?
NH
Houghton Mifflin announces restructuring… The FT reported on Saturday that privately owned educational publisher Houghton Mifflin Harcourt
(HMH) will cut c10% of its workforce and engage in restructuring in an effort by new mgmt to improve its profitability and refocus on its core education
business.
(HMH) will cut c10% of its workforce and engage in restructuring in an effort by new mgmt to improve its profitability and refocus on its core education
business.
NH
this is from UBS
NH
that could limit further investment We believe this suggests that HMH will not be accelerating their investment in content and technology in the
near-term – in stark contrast to the high level of investment made by PSON that we believe has been key to its strong performance. Since 2001 we
estimate that PSON has made nearly US$1bn more cash investment than its other main competitor McGraw-Hill and that this extra spend has
generated a mid-teens ROIC.
near-term – in stark contrast to the high level of investment made by PSON that we believe has been key to its strong performance. Since 2001 we
estimate that PSON has made nearly US$1bn more cash investment than its other main competitor McGraw-Hill and that this extra spend has
generated a mid-teens ROIC.
NH
PSON – share gains offset macro pressures We believe that market share gains both in the US and internationally have been a key contributor to
the robust operating performance of PSON, as seen in the reassuring recent Q3 results despite the worsening macro environment.
Valuation: Buy, 1450p DCF/SOTP-based PT, UBS Key Call We estimate recent acquisitions/FX moves should provide a c5% uplift to cons EPS by
2013, although this could be partially offset by lower underlying assumptions next year given macro weakness. PSON trades at 8x 2012E EBITDA
which in our view does not reflect its position as the global leader of a global structural growth industry.
the robust operating performance of PSON, as seen in the reassuring recent Q3 results despite the worsening macro environment.
Valuation: Buy, 1450p DCF/SOTP-based PT, UBS Key Call We estimate recent acquisitions/FX moves should provide a c5% uplift to cons EPS by
2013, although this could be partially offset by lower underlying assumptions next year given macro weakness. PSON trades at 8x 2012E EBITDA
which in our view does not reflect its position as the global leader of a global structural growth industry.
NH
strange move
BE
Competitor pulling in its horns? That’s surely positive for the mighty Pearson.
12:21PM
NH
OK
NH
a couple of things to wrap on
NH
there’s one retailer doing well at the minute
Majestic Wine PLC (MJW:LSE): Last: 397.75, down 18.25 (-4.39%), High: 408.99, Low: 392.75, Volume: 222.65k
NH
20% increase in profits
BE
Why are the shares down then?
NH
recent same store sales
NH
they aren’t good
NH
even Majestic aren’t suffering
NH
we aren’t turning to drink anymore
BE
Speak for yourself.
BE
So give us the details.
NH
like-for-like sales have declined during the course of the year from 4.4pc in the first 10 weeks, to approximately 1.9pc in the last 16 weeks of the first half
NH
there you go
NH
still, this is the higher end of the market
NH
not the usual supermarket plonk
BE
I was wondering aloud the other day what Majestic’s going to do in Scotland.
BE
Where bulk-buy discounting’s been made illegal.
BE
No-one seems clear what does and doesn’t apply to wine merchants.
NH
has it
NH
but no one drinks wine in Scotland
NH
not strong enough
BE
Steady. We’re very partial to the fortified stuff.
NH
NH
what like Thunderbirds
BE
Thunderbird and Buckfast are core to the Scottish CPI basket.
NH
BE
Anyway, let’s have some Majestic comment.
NH
Here’s Oriel
NH
Majestic Wine has reported numbers a shade light of our expectations (PBT £8.8m vs
Oriel: £9.3m) and current trading has fallen into negative territory, we remain concerned
that higher pricing is affecting volumes, and stick with our recent move to HOLD, having
been long-standing buyers.
Oriel: £9.3m) and current trading has fallen into negative territory, we remain concerned
that higher pricing is affecting volumes, and stick with our recent move to HOLD, having
been long-standing buyers.
NH
We knew LfLs were +4.4% for the first ten weeks of the half, for the final 16 weeks they
slowed to +1.6% and in current trading (since September) LfLs were -1.1%. We were
expecting UK store LfLs of +1.5% for the second half.
slowed to +1.6% and in current trading (since September) LfLs were -1.1%. We were
expecting UK store LfLs of +1.5% for the second half.
NH
Meanwhile gross margins have been relatively stable, +60bps and costs appear to have
been kept under control.
Average bottle prices are up 6.9% implying volumes have been -4.2% over the half.
Meanwhile ATV is +2.5% implying that the growth in transactions is flat.
We have not spoken to the company yet, but we and consensus will probably need to
downgrade by c 5%.
been kept under control.
Average bottle prices are up 6.9% implying volumes have been -4.2% over the half.
Meanwhile ATV is +2.5% implying that the growth in transactions is flat.
We have not spoken to the company yet, but we and consensus will probably need to
downgrade by c 5%.
NH
We recently moved to HOLD following concerns that higher pricing may be starting to
affect volumes. Indeed prices appear to continue to be ticking up and there is little
transaction growth. The company states that in the current trading period, October was
particularly poor.
With the beneficial impact to sales growth from the move in minimum purchase (12 to 6)
passing, we think earnings momentum will struggle to maintain its historic upward trend,
on 14x forward PER, the shares are fully valued. HOLD.
affect volumes. Indeed prices appear to continue to be ticking up and there is little
transaction growth. The company states that in the current trading period, October was
particularly poor.
With the beneficial impact to sales growth from the move in minimum purchase (12 to 6)
passing, we think earnings momentum will struggle to maintain its historic upward trend,
on 14x forward PER, the shares are fully valued. HOLD.
BE
Ok – that’ll do for wine.
BE
Are we done yet? Nearly 12:30.
NH
yes
NH
one more thing
NH
strategy call from RBS
NH
everyone is starting to come out with their predictions for 2012
NH
and this one is well
NH
punchy
NH
With or without you
We think equity markets will achieve substantive gains in 2012. 25% upside may sound
aggressive. It’s not – at least in terms of the valuation normalisation it implies. A global
economy that shrugs off the drag of the euro zone, combined with margin resilience that
reflects a generalised disinflation influence on the corporate cost base, has the potential to
drive double-digit earnings progression. That should surprise a bearish consensus.
We think equity markets will achieve substantive gains in 2012. 25% upside may sound
aggressive. It’s not – at least in terms of the valuation normalisation it implies. A global
economy that shrugs off the drag of the euro zone, combined with margin resilience that
reflects a generalised disinflation influence on the corporate cost base, has the potential to
drive double-digit earnings progression. That should surprise a bearish consensus.
NH
Sunday b****y Sunday
We hope for fewer Sunday evenings studying the political rhetoric to emerge from yet
another summit. It’s tortuous to watch, and policymakers have certainly been reactionary
rather than proactive, but at least we can say the response has been progressive. The euro
zone’s problems are not insurmountable. Elsewhere in the world the central banks have lined
up the cannons. We expect more policy stimulus to kick-start risk assets.
We hope for fewer Sunday evenings studying the political rhetoric to emerge from yet
another summit. It’s tortuous to watch, and policymakers have certainly been reactionary
rather than proactive, but at least we can say the response has been progressive. The euro
zone’s problems are not insurmountable. Elsewhere in the world the central banks have lined
up the cannons. We expect more policy stimulus to kick-start risk assets.
NH
Are you gonna wait forever?
As the catalysts materialise, the upside to markets should be released. The prospect of
substantive gains drives a beta preference. Stronger growth prospects outside Europe
demand overseas exposure. The rotation into Cyclicals should not be delayed any longer.
The market darlings of the last six months – non-cyclical growth stories that come complete
with demanding relative valuations – look vulnerable as potential funding sources.
As the catalysts materialise, the upside to markets should be released. The prospect of
substantive gains drives a beta preference. Stronger growth prospects outside Europe
demand overseas exposure. The rotation into Cyclicals should not be delayed any longer.
The market darlings of the last six months – non-cyclical growth stories that come complete
with demanding relative valuations – look vulnerable as potential funding sources.
NH
25% upside
BE
……………. blimey.
NH
bring on the 
market
marketNH
and with that
NH
we bid you all good day
NH
thanks for joining us
BE
Bye!