Markets Live chat transcript for the chat ending at 12:26 on 21 Feb 2012. Participants in this chat were: Paul Murphy Bryce Elder/FT
PM
Hi there
PM
HI there
PM
Welcome
PM
I’m loggin in from my sick bed again
PM
But Bryce is vertical
PM
and up to speed
BE
Yes, so expect another rather messy session.
PM
I can announce the launch of a new contract thos
BE
Go on.
PM
binary bet
PM
Think we’ll get it up on Intrade
PM
Case of which will be fixed first
PM
(and we mean “properly fixed”)
PM
The Greek bailout/default
PM
Or ML streaming tech
BE
Interesting jolly, that.
PM
we will see
BE
There’s a high probability that neither will be fixed in our lifetimes.
BE
So should we begin with Part 2 of the Greek Bailout Trilogy?
PM
yeah
11:06AM
PM
This sustainability doc just does it in for me
BE
Link, for those who missed it.
PM
just betrays what a fantasy the whole thing is.
PM
We’ve got politicians arguing about whether the debt gdp ratio for greece will be 120 % or 126 % in 10 years time
BE
As Lorcan pointed out last night, are we really supposed to believe that the same people who didn’t see any of this coming are capable of telling us what Greek GDP will be within 3 percentage points by 2020?
BE
It’s hilarious.
BE
Or would be.
PM
and yet in truth no financial ministry, no economist can really say where gdp will be one or two quarters out. never mind 10 years
BE
I guess they need figures, so they make up figures.
BE
You can’t look too closely for logic among all this.
BE
It all reminds me of 17th century doctors trying to cure consumption with leeches and brain taps.
BE
We simply don’t have any idea what we’re doing.
PM
hehe
BE
But the impression of action is all that’s possible.
BE
Ok – should we reverse to a summary of what’s actually happened?
PM
sure
BE
To summarise ….
BE
Greece has agreed to be Germany’s gimp.
BE
In exchange for up to E130bn.
BE
Though we won’t know the specific number until early March.
BE
After the PSI’s signed off.
BE
Which should really be an “if” rather than a “when”.
BE
Will cut to Barcap to pick up the story from here.
BE
We feel that if the PSI is completed and the Greek government implements the prior actions (and we expect both to be the case) then the programme will be approved by the EU and the IMF by mid-March. That should reduce the likelihood of a disorderly default and a potential euro area exit for at least a few quarters following the programme approval. Nonetheless, as programme implementation is likely to remain challenging despite the enhanced programme surveillance, we still see an elevated risk of the new programme going off track in the quarters ahead. We expect the euro area will continue reinforcing firewalls to prepare for the possibility of a disorderly default and potential euro area exit.
BE
We believe the Eurogroup, mindful of the fact that very poor implementation by the Greek government and public administration is responsible for the first programme going off-track, is now focusing on enhanced monitoring of the programme (including enhancing its onsite presence, an escrow account, and a constitutional change to give priority to debt servicing).
BE
It is also clear that the debt dynamics will remain challenging even after the higher PSI (53.5% notional haircut vs 50% previously agreed). Public debt will remain excessively high and small deviations from programme targets would likely set public debt on an unsustainable path again. In fact, according to press reports on the debt sustainability analysis circulated by the ‘troika’ ahead of the Eurogroup meeting, deviations in the programme implementation (eg, privatization or failing to implement structural reforms) could result in public debt again moving toward 160% of GDP by 2020 (the estimated current level). It is therefore hard to envisage Greece returning to the markets by 2015, as the exit yield is likely to remain very high – partly because the “recovery rate” for future bondholders is bound to be very low due to the large amount of senior sector debt.
BE
The main near-term risk we see is the potential for early elections (possibly in April). Voter intention polls published by local Greek media indicate that the center parties (PASOK and ND, and in particular PASOK) continue to lose popular support, and together they account for less than 50% of overall voter intention. In contrast, the parties further from the center continue to gain popular support, and none of those parties has expressed support for the next programme.
BE
There are any number of things that can go wrong here.
BE
In fact, we should really be assuming failure.
BE
It’s the only sensible way to deal with a castle that’s built on sand, using Playdough bricks.
PM
incredible
BE
Anyway, should we cut to the market reaction?
PM
sure
BE
There isn’t one.
BE
FTSE flattish
BE
Down 17 points at 5928
BE
Still hanging near a seven-month high.
PM
Hang on, isnt this extra confirmation that politicians will just do anything to save Europe’s banks etc?
PM
Should be confirmation that the liquidity tap remains stuck open
PM
Or maybe the markets rae just starting….
BE
The wires are somewhat troubled by this apparent dichotomy.
BE
Hang on, I’ll just grab a typical top line.
PM
just starting to realise that there are downsides to printing money…
BE
Feb. 21 (Bloomberg) — U.K. stocks dropped from a seven-
month high as investors considered whether the euro area’s
second bailout for Greece will enable the Mediterranean nation’s
economy to stage a recovery.
month high as investors considered whether the euro area’s
second bailout for Greece will enable the Mediterranean nation’s
economy to stage a recovery.
BE
That’ll do. “as investors considered …”
BE
We’re all sitting here, scratching our chins.
BE
In truth, I think the market’s just paralysed.
BE
Fund flows have dropped off a cliff.
BE
There’s no proper momentum either way.
BE
Even tape bombs have stopped working.
PM
(Juno — under MSCI categorisation Greece should surely go to “developing” when it defaults — like Argentina)
BE
We’re fatigued. Shellshocked. Disengaged. Knackered.
PM
hmm
PM
i know
PM
And ive got a stinking headaches
PM
getting meds
BE
I’ll wrap up Europe while you do.
BE
Cac off 0.8%
BE
Dax sale.
BE
Sorry — Dax same. That was a Freudian typo.
BE
Cable’s $1.5806 in the middle.
BE
And a euro buys you $1.3231
BE
Basically, it’s the biggest market non-event since the first Greek bailout.
BE
And will be until the third Greek bailout.
BE
Which may well be a cast-out.
PM
back
BE
Hooray.
BE
Will grab a bit more comment then move on to more pressing matters.
PM
No movement in the CDS prices either
PM
Ive got a bit of BNY initial reaction
PM
here you go…
PM
Comments
As we noted yesterday, the consensus view was that a deal would be struck
overnight on the Greek bailout. However, as we also noted, their remain
significant areas of concern.
As we noted yesterday, the consensus view was that a deal would be struck
overnight on the Greek bailout. However, as we also noted, their remain
significant areas of concern.
In the short term a number of issues are easy to see. Firstly, the IMF’s
reluctance to announce how much they are prepared to contribute to the deal
suggests that they remain unhappy with the results of the debt
sustainability analysis while the curiously neutral statement from Charles
Dallara, managing director of the Institute of International Finance, and
Jean Lemierre of BNP Paribas, suggests that PSI might still remain a
stumbling block. Equally, the need for Greece to complete a series of
previously agreed upon “prior actions” by the end of the month before the
deal can be agreed provides yet another issue that needs to be monitored
closely. It is also worth recalling the FT report from last Thursday of a
split between Angela Merkel and Wolfgang Schäuble. The report suggested
that Mr. Schäuble’s opposition could encourage more members of the
coalition not to back the Greek package when it comes before the German
parliament for final approval on February 27th.
PM
Our real concern, however, lies with the longer term outlook for Greece. We
have argued before that the real “so what” of the December 9th EU summit
was that it confirmed that the Euro-zone would remain a “stability union”
for the foreseeable future and that, therefore, its more peripheral members
would need to decide whether they were going to try to transform themselves
into more Germanic economies or make dignified exits. More particularly,
Greece had to decide whether it was prepared to go through the immense pain
of economic transformation while, at the same time, coping with continued
political opposition, a strong currency and monetary policy settings that
would likely prove sub-optimal. Given this it seemed to us that the most
significant part of last night came with the leak of the “strictly
confidential” 10-page debt sustainability report prepared for Euro-zone
finance ministers.
have argued before that the real “so what” of the December 9th EU summit
was that it confirmed that the Euro-zone would remain a “stability union”
for the foreseeable future and that, therefore, its more peripheral members
would need to decide whether they were going to try to transform themselves
into more Germanic economies or make dignified exits. More particularly,
Greece had to decide whether it was prepared to go through the immense pain
of economic transformation while, at the same time, coping with continued
political opposition, a strong currency and monetary policy settings that
would likely prove sub-optimal. Given this it seemed to us that the most
significant part of last night came with the leak of the “strictly
confidential” 10-page debt sustainability report prepared for Euro-zone
finance ministers.
The report revealed (according to the FT) that “even under the most
optimistic scenario, the austerity measures being imposed on Athens risk a
recession so deep that Greece will not be able to climb out of the debt
hole over the course of a new three-year, EUR 170 Bn bail-out.” In addition
it warned that austerity measures being forced upon the Greek economy could
actually cause debt levels to rise by severely weakening the economy.
Meanwhile the much discussed EUR 200 Bn debt restructuring “could prevent
Greece from ever returning to the financial markets by scaring off future
private investors.” As to quite how bad the situation could get, under one
“tailored downside scenario” debt levels might only fall to 160% of GDP by
2020, requiring a further EUR 75 Bn bailout at some point. Even assuming
that Greece manages to struggle back to growth by 2014 (a highly optimistic
assumption) Greece would still need an additional EUR 50 Bn before 2020.
PM
This, then, seems to be the situation as it currently stands. Greece, now
faces an austerity programme that, in the absence of a freely floating
currency or the ability to ease monetary policy aggressively, will not only
very likely exacerbate an already severe recession but may very well still
leave it requiring an additional bailout in the years ahead. This point
will no doubt not be lost on politicians from New Democracy and PASOK as
they watch their ratings slump and voters turn to the anti-bailout leftist
parties ahead of the April election. This, and the fact that there is a
risk that Greece may not be able to return to the markets at any point in
the foreseeable future will also no doubt weigh heavily on the thoughts of
Dutch, German and Finnish politicians in the weeks ahead.
faces an austerity programme that, in the absence of a freely floating
currency or the ability to ease monetary policy aggressively, will not only
very likely exacerbate an already severe recession but may very well still
leave it requiring an additional bailout in the years ahead. This point
will no doubt not be lost on politicians from New Democracy and PASOK as
they watch their ratings slump and voters turn to the anti-bailout leftist
parties ahead of the April election. This, and the fact that there is a
risk that Greece may not be able to return to the markets at any point in
the foreseeable future will also no doubt weigh heavily on the thoughts of
Dutch, German and Finnish politicians in the weeks ahead.
PM
That’s from Simon Derick
PM
Derrick even
BE
And thanks for that.
11:25AM
BE
Ok – stay with eco or should we move onto something corporate?
PM
your call
BE
The rabble seem to be mired in Greece
BE
So let’s stay macro for a bit longer.
PM
We can, but not sure how much more we can add to this
BE
Well, I’m sure you’ll welcome the news
BE
That the UK recorded a £7.75bn fiscal surplus in January
BE
Up from a surplus of £5.2bn a year earlier.
PM
ah yes
BE
That’s brought the cumulative deficit for April-January to £93.5bn.
BE
Down by £15.6bn from a year earlier.
BE
And it’s much, much, MUCH more than expected.
BE
The OBR had projected that the deficit would fall by about £9bn over the whole fiscal year.
BE
So, Osborne’s slash and burn policy on public spending is working.
BE
After a fashion.
BE
And depending on your politics.
PM
hmm
PM
Im guessing he’s crowing
BE
I haven’t had the stomach to turn on the news this morning
BE
But I imagine so.
BE
Here’s Citi’s Michael Saunders to throw it all into come context.
BE
Central government revenues slowed, rising 2.8% YoY in January, bringing their growth over the fiscal year to date to 4.7%, close to the OBR forecast (4.8% YoY for the full year). However, spending remains weak, with central government current spending up just 1.6% YoY in April-January, versus the OBR forecast of a 3.1% rise over the full fiscal year. In addition, public investment is falling a little faster than the OBR had expected, while the finances of local authorities also are unexpectedly favourable so far. If government spending catches up in the last two months of the fiscal year, then the full year deficit will be close to the OBR’s forecast.
BE
However, with only two months to go, it seems more likely (in our view) that spending will not fully catch up, and we are trimming our full year deficit forecast to £122bn, from £123bn previously
BE
Nevertheless, this spending undershoot (if it does occur) is probably accidental, and is not a solid foundation for further fiscal outperformance next year, especially given risks that the economic slowdown will cap revenues. The Chancellor approaches this year’s Budget with the prospect of a slightly better-than-expected outturn for the current fiscal year, but no scope to ease up on the planned fiscal squeeze for 2012/13 and later years.
PM
so was an accident
PM
brilliant
PM
all helps
BE
Yup. The beat is “probably accidental” and pretty much irrelevant to the crushing effects of austerity the wider economy over the next few years.
BE
That’s Saunders’ view.
BE
Not mine. I have no political views. I am merely a conduit of opinion.
BE
And, on that theme, here’s some more.
BE
HSBC this time.
BE
The Chancellor could reasonably claim victory in meeting current fiscal year targets when he announces the Budget on the 21st of March. February’s public sector finance figures are also released on the same day, but are unlikely to prevent the government hitting this year’s targets. Indeed, even if the PSNBex in the final two months of the fiscal year were unchanged from the previous year, the government would still be beating the OBR’s full year deficit target by around GBP7bn.
BE
Today’s numbers could give greater room for the government to set a less onerous deficit target for the next fiscal year. However, it is important to note that government spending is still increasing – it is currently 1.7% higher than in the same ten months in the last fiscal year. Most of the improvement to the deficit is coming from the revenue side, which is 4.7% higher y-o-y. The potentially bigger challenge is to push through the planned cuts in public expenditure, which is still to come in the next financial year.
BE
Bottom line: UK public sector finances better than expected on higher tax revenues. The government should now easily hit its deficit targets for the current fiscal year. But much of the fiscal consolidation lies ahead, and the big challenge going forward will be to slow public spending growth.
11:35AM
BE
I see the rabble have picked up this LSE press release
BE
Announcing that Google has gone with free realtime pricing on stocks.
BE
Now, Google announced this about a month ago.
BE
And implemented it quietly about a month before that.
PM
indeed
BE
So I’m not entirely sure why LSE’s crowing about it now.
BE
Still ……
PM
usefu for people tho
BE
Very.
PM
useful
BE
I imagine this will put pressure on all other retailer sites to match Google.
BE
The licence for realtime pricing is not hugely expensive.
PM
We should prod someone here…
BE
We should.
BE
It was a bit of a cold war between the sites.
BE
Everyone knew it was possible, feasible and affordable
BE
But no-one blinked.
BE
Now Google’s blinked, I’m not surprised LSE wants to publicise the fact.
BE
Though, as the ROTR note …. where exactly does this leave Reuters and Bloomberg pricing?
PM
Well, they levy LSE charges — claims the money goes straight to the LSE etc
PM
Short nswer: i dont know
BE
I don’t think Reuters does either.
BE
Anyway, let’s move on.
11:40AM
BE
Ok – to the movers.
BE
And it’s a bit of a ragbag out there.
BE
Oh, hang on ……
BE
Sorry — realtime raw check.
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.
PM
wot?
BE
Getting a few nervy emails regarding our old friend Kenmare.
BE
Trying to find out if there’s news ….
BE
Titanium pricing settlements and suchlike.
BE
And, as far as I can see, there isn’t.
PM
Was rather frothy last week
BE
Shares currently up 6.3% at 60p.
BE
No sellside pushing …. no specific rumour that I’ve heard yet.
BE
Though … checking. Odd move. Worth noting.
BE
Leave that with me … apologies for the vagueness.
BE
Rest of the miners are all down, pretty much.
PM
waht’s the price
BE
Kenmare? We’re at 60p in the middle now. Up 6.4%.
PM
auto pricing bust again
BE
It’s volatile at the best of times ….. but ……
BE
Moving up the market for a moment.
BE
Evraz is leading us down.
BE
Russian steel maker, largely owned by Abramovich.
BE
Now, I think is is probably on an Alfa Bank note.
PM
So blinkin volatile, Evraz
BE
Indeed. Not least because no-one really follows it.
BE
It sneaked into the FTSE under cover of darkness.
BE
The Alfa Bank note’s quite interesting though.
BE
If you’re excited by the Russian scrap market.
BE
Which some of you may be.
BE
Why are steel scrap prices falling in the midst of improving
economic data and stock prices? We point to declining home
sales in China and conclude that Chinese residential
construction – representing 10% of global steel demand and the
dominant source of demand growth since 2008 – will decline
while industrial activity levels stabilize. We reduce our 2012 steel
demand forecast to +3% y/y, expecting a weak spring steel price
rally and then a retracement. We downgrade our two recently
upgraded O/W stocks, EVR and FXPO, after reasonable gains.
Dangerous undercurrents amid apparently calm waters will
surprise, we expect, and thus we move back to U/W on steel and
iron.
economic data and stock prices? We point to declining home
sales in China and conclude that Chinese residential
construction – representing 10% of global steel demand and the
dominant source of demand growth since 2008 – will decline
while industrial activity levels stabilize. We reduce our 2012 steel
demand forecast to +3% y/y, expecting a weak spring steel price
rally and then a retracement. We downgrade our two recently
upgraded O/W stocks, EVR and FXPO, after reasonable gains.
Dangerous undercurrents amid apparently calm waters will
surprise, we expect, and thus we move back to U/W on steel and
iron.
BE
Home sales data tell the story: Recent Chinese home sales data
demonstrate a negative trend, and housing policy remains restrictive.
Chinese residential construction directly accounts for about 10% of global
steel demand and has been the key growth driver in 2008-2011. In turn,
we expect construction will slow, explaining why spot scrap and Chinese
rebar, as well as forward iron ore prices, are falling.
demonstrate a negative trend, and housing policy remains restrictive.
Chinese residential construction directly accounts for about 10% of global
steel demand and has been the key growth driver in 2008-2011. In turn,
we expect construction will slow, explaining why spot scrap and Chinese
rebar, as well as forward iron ore prices, are falling.
BE
Expect a weak rally followed by a fall backward: Investors expect steel
to rally in the spring, but any rally is likely to be weak and short-lived, with
prices then retracing to 1Q12 levels. We reduce our steel growth forecast
to 3% y/y and 2012 HRC Black Sea forecast to $630/t from $690/t.
to rally in the spring, but any rally is likely to be weak and short-lived, with
prices then retracing to 1Q12 levels. We reduce our steel growth forecast
to 3% y/y and 2012 HRC Black Sea forecast to $630/t from $690/t.
BE
EVR and FXPO O/Ws played out: We downgrade EVR and FXPO to
E/W after 13% and 16% gains, respectively, since our recent upgrades.
E/W after 13% and 16% gains, respectively, since our recent upgrades.
BE
Five months after upgrading to E/W, we return our view to U/W: No
stocks are O/W, and we prefer EVR, SVST and FXPO over MMK, NLMK
and IRC.
stocks are O/W, and we prefer EVR, SVST and FXPO over MMK, NLMK
and IRC.
BE
Hope that’s useful. I doubt many in London are on Alfa Bank’s distribution list.
11:50AM
BE
Ok – what next.
PM
hmm
PM
thanks for that
PM
REFRESH
BE
Wow – 11:50am already.
BE
There was a request on the right for Croda
BE
Which may well step into the FTSE in next week’s review.
BE
(@Zelingrova: leading questions earn you a yellow.)
PM
i don’t know
PM
From twatter…
PM
Staggering nugget from BCG’s Louise Cooper: total combined value of Greek bail-outs is nearly €20,000 per member of population
BE
Hm.
PM
I seem to be writing for the virtual spike.
PM
I seem to be writing for the virtual spike.
PM
I seem to be writing for the virtual spike.
PM
(sorry about that — got connection probs)
BE
Sorry all – this is turning into a daily rage against the machine.
BE
If you think you lot are frustrated by tech problems, try this side of the chat.
BE
Anyway, returning to Croda.
BE
The blue-chip sheep grease extractor.
BE
Potentially.
BE
It was on the cusp when I checked this morning.
BE
Think it depends all on the performance of Hargreaves Lansdown and possibly Mondi.
BE
It’s going to be quite tight.
BE
(Though not for Essar and Cairn, which are guaranteed out.)
BE
Anyway, Croda beats.
BE
Positive outlook.
BE
All good.
BE
(TK: any more Dinner Party Live will get zapped. It’s distracting.)
BE
Will grab some comment.
BE
Ah – Numis calls the numbers “superb”
BE
Croda has readily beaten the consensus and – in contrast to the H1 and Q3
positions – it is unlikely that the market will find anything to carp at with these
numbers. Growth must now moderate, but the business philosophy of focusing on
profitable and growing market niches continues to be an excellent one.
positions – it is unlikely that the market will find anything to carp at with these
numbers. Growth must now moderate, but the business philosophy of focusing on
profitable and growing market niches continues to be an excellent one.
BE
Full year PBT of £242.2m (+25.9%) compared to a market consensus of £238.9m
(Numis £240.3m, range £236.0-241.0m). The Q4 PBT of £60.0m represented growth of
22.7% and compared to Q1′s £60.7m (+40.2%), Q2′s £64.1m (+21.9%) and Q3′s
£57.4m (+20.9%). Q4 is Croda’s seasonally weakest Q and comps grew tougher as
2011 progressed. It is also noteworthy that December 2011 proved a dull month, with
some knock-on impact from Eurozone issues.
(Numis £240.3m, range £236.0-241.0m). The Q4 PBT of £60.0m represented growth of
22.7% and compared to Q1′s £60.7m (+40.2%), Q2′s £64.1m (+21.9%) and Q3′s
£57.4m (+20.9%). Q4 is Croda’s seasonally weakest Q and comps grew tougher as
2011 progressed. It is also noteworthy that December 2011 proved a dull month, with
some knock-on impact from Eurozone issues.
BE
The dominant Consumer Care division progressed EBIT by 27.0% YoY, with the
margin 380 bps ahead at 30.2%. Industrial Specialities grew EBIT by 11.1% with the
margin 120 bps ahead at 14.0%. The Consumer Care margin attained 31.8% in Q4,
with Industrial Specialities hitting a record 15.4% then.
margin 380 bps ahead at 30.2%. Industrial Specialities grew EBIT by 11.1% with the
margin 120 bps ahead at 14.0%. The Consumer Care margin attained 31.8% in Q4,
with Industrial Specialities hitting a record 15.4% then.
BE
Net debt of £231.1m was close to the £223.9m we had projected. There was an
increase of £10.8m YoY but £50m was spent on a buyback plus the new policy of
paying out 40-50% of earnings as dividends was adopted at the H1 stage. Altogether,
£118m was returned to shareholders in the year.
increase of £10.8m YoY but £50m was spent on a buyback plus the new policy of
paying out 40-50% of earnings as dividends was adopted at the H1 stage. Altogether,
£118m was returned to shareholders in the year.
BE
Outlook comments are solid: trading in January “was encouraging and this positive
trend has continued”.
trend has continued”.
BE
A goal of 5-10% pa revenue growth and a margin above 25% has been set for
Consumer Care medium term, with 4-8% pa sales growth and a margin of 20% for the
new Performance Technologies division.
Consumer Care medium term, with 4-8% pa sales growth and a margin of 20% for the
new Performance Technologies division.
BE
We will overhaul our forecasts (those below for 2012 and 2013 are
existing ones) and reassess our TP following this and will publish revised numbers.
Croda remains a high quality situation, a point recognised by the pending elevation to
the FTSE-100.
existing ones) and reassess our TP following this and will publish revised numbers.
Croda remains a high quality situation, a point recognised by the pending elevation to
the FTSE-100.
PM
rather chirpy note
BE
(@wokinpark: some excellent, good value places around the American University.)
11:58AM
BE
Ok – nearly out of time.
PM
(MacRus — yes)
PM
Sorry im so pathetically ill Bryce
BE
Should mention Homeserve
PM
will try and shake off by tomorrow
BE
That’s fine. I can waffle on my own.
PM
Home serve…
BE
Yes – partly because I forgot yesterday.
BE
Was too busy chasing other stuff.
BE
But as you all know already, CPP was suspended yesterday.
BE
The “credit card insurer” that, some argue, doesn’t really insure much.
BE
And this has a read-through for Homeserve, the home repairs insuere that some argue doesn’t really insure much.
BE
(Complaints to the usual email.)
PM
right…
BE
Basically, the FSA’s mullered the former’s business
BE
And is working closely with the latter to try and figure out what its business is.
BE
So I’m not awfully surprised to see Homeserve off another 5% this morning.
BE
Though, adding to the pressure, is a Jefferies note.
BE
Saying their US side may have issues as well.
BE
We believe consensus growth expectations for Homeserve in both the UK
and North America are materially too high. Our research into the US market
suggests Homeserve is impeded by regulations and a lack of interest in the
home emergency insurance markets by utility companies. Given that it is taking
longer and costing more to switch UK marketing back on, we reduce our bottom
of the range FY13F EPS by 2% and our price target to 195p.
and North America are materially too high. Our research into the US market
suggests Homeserve is impeded by regulations and a lack of interest in the
home emergency insurance markets by utility companies. Given that it is taking
longer and costing more to switch UK marketing back on, we reduce our bottom
of the range FY13F EPS by 2% and our price target to 195p.
BE
Our proprietary research suggests the US conversion will take longer than the
market expects. Our survey of 28 utilities, covering 51m households, suggests two key
impediments to customer growth: 1) regulations in some states may actually prohibit
Homeserve’s activities; and 2) many utility companies appear a long way behind the curve
in understanding the home insurance market. The US also appears more adverse to crossselling.
This drives our belief that Homeserve’s medium-term customer growth and earnings
in the US will be at the very bottom of a range of scenarios presented to analysts.
market expects. Our survey of 28 utilities, covering 51m households, suggests two key
impediments to customer growth: 1) regulations in some states may actually prohibit
Homeserve’s activities; and 2) many utility companies appear a long way behind the curve
in understanding the home insurance market. The US also appears more adverse to crossselling.
This drives our belief that Homeserve’s medium-term customer growth and earnings
in the US will be at the very bottom of a range of scenarios presented to analysts.
BE
Our earnings forecasts are bottom of the consensus range. In the US, our mediumterm
forecast (2021) is for £35m of EBITA versus a wide £37m – £162m range provided by
Homeserve based on a number of possible out-turns. In the UK, customer growth guidance
has been downgraded three times since the announcement of mis-selling issues. There is
a danger that, with recommencement of marketing activities taking longer than expected,
further downgrades will be required. We expect policies per customer to be affected by the
withdrawal of some multi-policy products. This has led us to cut our forecasts more severely
than the company has cut guidance. We reduce our FY13F EPS by 2% following the 3Q
trading update. We are now 15% below consensus and have set a new low in the range.
forecast (2021) is for £35m of EBITA versus a wide £37m – £162m range provided by
Homeserve based on a number of possible out-turns. In the UK, customer growth guidance
has been downgraded three times since the announcement of mis-selling issues. There is
a danger that, with recommencement of marketing activities taking longer than expected,
further downgrades will be required. We expect policies per customer to be affected by the
withdrawal of some multi-policy products. This has led us to cut our forecasts more severely
than the company has cut guidance. We reduce our FY13F EPS by 2% following the 3Q
trading update. We are now 15% below consensus and have set a new low in the range.
12:04PM
BE
Ok – we’re done I think.
PM
hmm
PM
okay thanks for that
PM
> back to bed
BE
Yes, thanks for joining us Paul.
PM
Cheers tho
BE
And, without wishing to bore anyone, I’ll just note in passing that we’ve been under attack once more from the keyboard warriors.
BE
Simply put it pi 55 es the FT off that they dont TK’s ear and as with anything arrogant they stick there nose up thinking they are better, this is the same group NEWSWIRE part of News corp that the News of the World came from, there is simply no credibility in the paper or the group, unfortunately they dominate media in this country and globally, but if you look hard enough, you’ll find far better reporting elsewhere.
BE
That kind of thing.
BE
It is a bind, what with the FT being part of News International ….
BE
Anyway, once again to the GKP liberators …
BE
I asked for questions about 18 months ago and replied as best I could.
BE
The answers, inevitably, found their way onto the cultist bulletin boards.
BE
Such as here
BE
And I guess we can also note the Canaccord “sell” on GKP
BE
Which went out to clients yesterday
BE
But seems to have been picked up by the wires today.
BE
Braden Purkis is the analyst
BE
Gulf Keystone has been riding a wave of success and excitement since its multi-billion barrel discovery of the Shaikan field in 2009. Since that time Shaikan’s estimated resource has gone from 4.0 billion barrels of Oil-in-Place (Pmean, gross) in January 2010 to 10.0 billion barrels of Oil-in-Place (Pmean, gross) as of November 2011. Gulf Keystone has also added two more large discoveries in nearby Akri-Bijeel and Sheikh Adi. The first weeks of 2012 have witnessed Gulf Keystones shares up 110%, mostly due to speculation on resource increases, take out premiums, and more exploration success. All of which has led us to believe that the market’s valuation now reflects a Shaikan +800 kbopd development project, while ignoring multiple risks. As such, while we remain excited about the Gulf Keystone story, based on valuation we are recommending investors take profits after the recent run up in share price. We initiate with a SELL recommendation and target price of 210p.
BE
Operating review
The Shaikan-4 appraisal well is in the midst of completing testing operations, and Shaikan-5 and -6 are currently drilling ahead. We are looking for test results from SH-4 in the 5-9 kbopd range. The high impact Ber Bahr exploration well is expected to hit TD in 4-6 weeks time.
For Gulf Keystone to monetise the Shaikan field we have assumed the drilling of 200 development wells, the building of a 440 kbopd 122 km pipeline, facility construction, and the eventual ramp up of production to 440 kbopd by utilising four rigs. We expect first export production via the pipeline to begin in early 2014. Our production profile indicates 3.0 billion barrels of recoverable oil with a corresponding 12 billion OOIP. Given Gulf Keystone’s development license is expected to last a maximum of 30 years arguably the plateau production profile becomes more important to NPV than any increases in resource from this point forward.
The Shaikan-4 appraisal well is in the midst of completing testing operations, and Shaikan-5 and -6 are currently drilling ahead. We are looking for test results from SH-4 in the 5-9 kbopd range. The high impact Ber Bahr exploration well is expected to hit TD in 4-6 weeks time.
For Gulf Keystone to monetise the Shaikan field we have assumed the drilling of 200 development wells, the building of a 440 kbopd 122 km pipeline, facility construction, and the eventual ramp up of production to 440 kbopd by utilising four rigs. We expect first export production via the pipeline to begin in early 2014. Our production profile indicates 3.0 billion barrels of recoverable oil with a corresponding 12 billion OOIP. Given Gulf Keystone’s development license is expected to last a maximum of 30 years arguably the plateau production profile becomes more important to NPV than any increases in resource from this point forward.
BE
Financial review
Gulf Keystone is now selling volumes into the domestic market of Kurdistan, which we estimate can account for 25% of the company’s funding requirements over the next 24 months. The remaining 75% is expected to come out of current cash on hand of an estimated US$280 million at year-end and the potential sale of the Akri-Bijeel license.
Gulf Keystone is now selling volumes into the domestic market of Kurdistan, which we estimate can account for 25% of the company’s funding requirements over the next 24 months. The remaining 75% is expected to come out of current cash on hand of an estimated US$280 million at year-end and the potential sale of the Akri-Bijeel license.
BE
Recommendation and valuation
We currently value Gulf Keystone on the basis of our calculated Total NAV of 172p/share using a 15% discount rate and US$90/bbl flat real oil price. We arrive at our 210p/share target price by applying a 22% premium, which accounts for a potential takeout of Shaikan using a 12% discount rate. At 400p/share we estimate that the market is pricing at a 10% discount rate and a production plateau closer to 800 kbopd (gross). Volumes approaching 1.0 million bopd from Shaikan would likely require the expansion of the Fyshkhabour to Ceyhan pipeline and twice as many development wells as our modeled case. Furthermore, Gulf Keystones current share price does not appear to factor in political risk, operational risk, or third party risk. As such, we believe the risk/reward dynamic of Gulf Keystone has shifted significantly to the former and our recommendation is SELL.
We currently value Gulf Keystone on the basis of our calculated Total NAV of 172p/share using a 15% discount rate and US$90/bbl flat real oil price. We arrive at our 210p/share target price by applying a 22% premium, which accounts for a potential takeout of Shaikan using a 12% discount rate. At 400p/share we estimate that the market is pricing at a 10% discount rate and a production plateau closer to 800 kbopd (gross). Volumes approaching 1.0 million bopd from Shaikan would likely require the expansion of the Fyshkhabour to Ceyhan pipeline and twice as many development wells as our modeled case. Furthermore, Gulf Keystones current share price does not appear to factor in political risk, operational risk, or third party risk. As such, we believe the risk/reward dynamic of Gulf Keystone has shifted significantly to the former and our recommendation is SELL.
BE
There.
BE
Though shares are up, of course.
BE
And I sincerely wish each and every holder a happy retirement sailing their yacht round the Maldives. Even those who make death threats against us for not treating their point of view with the required gravitas.
BE
Ok – that’s that out of the way.
BE
Do join us tomorrow.
BE
Thanks for all your comments.
BE
And farewell.