Markets Live chat transcript for the chat ending at 12:05 on 22 Feb 2012. Participants in this chat were: Paul Murphy Bryce Elder/FT
PM
Morning
PM
Welcome to Markets Live
PM
Ive got up out of my sick bed
PM
Back in the office
PM
Bryce is here also
PM
But he soldiered thru
PM
Anyway, im back
PM
Not a happy bunny tho.
PM
Complete wipe out on the Greenwich line this morning.
PM
So had to get the poxy DLR to lewisham
PM
And discovered my Oyster travel card was out of date.
PM
Landed a bloody 40 quid fine from some joyous ticket guy.
BE
Ouch.
PM
You know, do I look like a fare dodger?
BE
PM
Week in week out spend 30 quid on travel.
PM
Slip up once -> 40 quid fine, which rises to 80 if I don’t pay immediately.
PM
Who runs the DLR?
BE
Serco.
PM
Ah Servco
Serco Group PLC (SRP:LSE): Last: 537.50, down 2.5 (-0.46%), High: 543.00, Low: 536.55, Volume: 133.56k
PM
Serco
PM
Price looks a bit toppy to me.
PM
You know, when austerity starts to bite, people won’t put up with this crap.
PM
Privatised law enforcement.
PM
You watch
BE
Don’t get me started on public/private spaces. Genuinely. Don’t.
PM
As citizens we pay our taxes, which are all pretty transparent.
PM
But then there’s this extra tax thing that comes in the form of random fines for you going about your regular business.
PM
I know ive gone all richard littlejohn here
PM
But you know
PM
During good times people just wear this and think “Well, we have to provide jobs for jerks as well”
PM
But not in bad times. You watch.
PM
Who runs Serco?
PM
Hmmm
PM
Chris Hyman
PM
What does he earn?
PM
Okay, 2010 figures
PM
663k basic
PM
72k benefits
PM
166k allowance
PM
“Allowance” ??? what’s an allowance.
PM
I give my kids an allowance, but its not 166k
PM
So Mr Hyman actually earns 1.86m, before pension contributions.
PM
Oh, hang on…
PM
Awarded 145k shares during the year – valued at 6 quid at the time
PM
So that’s another 868k.
PM
Oh, there’s more
PM
PSP – another 214k shares at 604p.
PM
That’s another 1.28m quid
PM
So what does all this tot up to?
PM
4 million quid
PM
That’s a lot of fines on the DLR.
PM
Why do we pay quasi civil servants 4 million quid a year and our poor bankers get a quarter of that at best.
BE
Indeed. I dare say Mr Hyman wouldn’t get so wound up about a £40 penalty.
PM
Don’t suppose he travels on the DLR mind
PM
Serco.
PM
PM
(/rant over)
BE
You do make a fair, if rather Guardianista, point.
BE
Anyway, should we move on to the markets section of today’s Markets Live?
PM
if we must
11:09AM
PM
(/still fuming)
BE
Oh … hang on ….
BE
Synchronous news
BE
Almost as if we planned it.
BE
Capita awarded managed services contract for Civil Service training
BE
Capita plc today announces that it has been selected by the Cabinet Office to
exclusively manage the provision of training across the Civil Service. Through
the contract Capita will deliver just under half of the training directly and
will be responsible for managing the balance of 51% through a network of
specialist, small and medium sized (SME) training providers. The contract is
expected to make a significant contribution to the projected £90m per annum
savings which Civil Service Learning (CSL), the government’s training agency,
is tasked to deliver. Capita anticipates that it will generate revenues of at
least £50m per annum over the next 2 years.
exclusively manage the provision of training across the Civil Service. Through
the contract Capita will deliver just under half of the training directly and
will be responsible for managing the balance of 51% through a network of
specialist, small and medium sized (SME) training providers. The contract is
expected to make a significant contribution to the projected £90m per annum
savings which Civil Service Learning (CSL), the government’s training agency,
is tasked to deliver. Capita anticipates that it will generate revenues of at
least £50m per annum over the next 2 years.
BE
Capita will work with CSL to achieve its objectives, including the reduction of
duplication in procurement and the number of similar courses. It will also
ensure that development costs are not being paid multiple times for the same
products, daily rates are standardised across similar courses with the same
supplier, and utilisation of courses is increased.
duplication in procurement and the number of similar courses. It will also
ensure that development costs are not being paid multiple times for the same
products, daily rates are standardised across similar courses with the same
supplier, and utilisation of courses is increased.
PM
Oh marvelous
BE
More public to private value transfer.
Capita PLC (CPI:LSE): Last: 649.00, up 2.5 (+0.39%), High: 654.00, Low: 644.50, Volume: 402.71k
BE
Good news for Capita I guess
BE
Which has had a woeful record of late of actually winning contracts.
BE
It seems incapable of landing them from the private sector.
BE
But the government in its various forms has been more generous.
BE
Capita’s now in charge of both army recruitment and Civil Service training …..
BE
That boggles the mind, quite frankly.
BE
Anyway, we were about to do wider market.
11:12AM
PM
It’s a down day
BE
FTSE’s off 26 points at 5902.
BE
Still rather stuck in a range.
PM
(BREAKING: Marie Colvin killed in Syria)
PM
(http://www.guardian.co.uk/media/greenslade/2012/feb/22/sundaytimes-syria?newsfeed=true)
PM
Marie Colvin, the award-winning Sunday Times journalist, has been killed in Syria. It is reported that she died alongside a French photographer in Homs when a house they were staying was shelled.
News agencies say she and the photographer, Remi Ochlik, another veteran war correspondent, were killed by a rocket as they tried to make their escape.
Colvin, who has worn a black eye patch since she lost an eye while working in Sri Lanka in 2001, was regarded as Britain’s foremost front-line war reporter.
BE
(Word went round Twitter earlier. Desperately sad. Excellent journalist.)
PM
Sorry, back to stocks
BE
Yeah, sorry for that interruption.
BE
Not wishing to be trite, it puts things into perspective.
BE
Anyway, returning to matters of money rather of importance …..
BE
We have an actual bid this morning.
PM
The real thing
BE
Cove Energy.
PM
All the talk
PM
All the speculation
PM
Has borne fruit
BE
Well, let’s put the speculation in context.
BE
They said openly that they were for sale.
PM
of course
PM
ues
PM
yes
PM
But told you to watch Mozambique
PM
Thee place to be.
PM
BE
Yes, yes.
BE
You fixed the website yet?
PM
No. been ill
PM
PM
Cover Energy up 24% currently after Shell said it intends to bid
PM
Has to go thru some local admin first with the Moz authorities.
PM
And then intends to bid at 195p a share
PM
In hard cash.
BE
I would just like to note here that the speculation among 
and his friends got both the wrong buyer and a woefully wrong price.
and his friends got both the wrong buyer and a woefully wrong price.PM
No messing
PM
Market price is 194p. So people are generally taking this as a knock out offer.
BE
Can I be awfully cruel for a moment?
PM
er
PM
go on
BE
I think it would be remiss not to note
BE
One of the worst-timed analyst downgrades ever.
PM
ever
BE
Citi cut Cove off its buy list at 6am this morning.
BE
The bid arrived at 7am.
PM
hehehe
BE
I guess no-one had the opportunity to trade off the call
BE
Which is the only positive you can offer here.
BE
Just for posterity, here’s the downgrade.
BE
Cove has announced a successful appraisal well at Lagosta-3 in Area 1 (offshore Mozambique) that encountered high-quality sands and successfully confirmed an area of the field that was not as well-imaged on the seismic data. The result provides more confidence on the current resource range of c. 15-30TCF for the WLBC gas complex in Area 1. We have increased our base NAV to 170p/share (from 149p/share) to reflect a higher risked resource estimate for Area 1 of c.25TCF (from c. 20 TCF previously). The positive well update highlights the quality of Cove’s Mozambique asset base, which it is looking to monetise by conducting a sale process for the entire company. However, an LNG project of this scale has its challenges and the significant capital spend required to develop these resources means that potential buyers are unlikely to pay a significant premium to the current share price for Cove’s asset base, in our view. With only 10% upside to our revised base NAV of 170p/share, we downgrade to Neutral/High Risk from Buy/High Risk.
BE
Funded for at least 12 months drilling, but funds possibly needed by 2H12 — we forecast Cove had cash of c. US$140m at the end of 2011, which is sufficient to meet our estimate of planned capex in 2012 (c. US$90m). However, if a sale of the company is not completed by mid-2012, we believe Cove would have to consider raising further financing in 2H12 to ensure future capex obligations into 2013 can be met.
BE
As I say, this is merely being cruel rather than informative.
PM
(MacRus — re Pathfinder, believe incumbent management desperate to have peace talks, but the general is planning to oust the board and put technocrats in)
BE
Can I cut instead to some more prescient Cove comment?
PM
sure
BE
Sector Watcher’s pleased with the price.
BE
Wow – the mighty Royal Dutch Shell has offered what appears to be a stunningly high price for the entire issued share capital of COV. At an offer price of 195p/share this represents a 73% premium to the price on January 4th i.e. the day that COV announced it was putting the company up for sale. The offer has been recommended by the board of COV and is conditional upon the Mozambique government’s approval, which I’d imagine will be forthcoming fairly rapidly.
BE
Shell’s rationale for the deal is to increase its exposure to East Africa, especially to the massive gas discoveries offshore Mozambique, where two separate Anadarko and ENI-led joint ventures have discovered around 40-50 tcf of recoverable gas in the past couple of years. Following a drilling update from COV and its partners yesterday, I reiterated our Hold recommendation and 132p/share target price, which was clearly a bad call. Our NAV was based on a discount rate of 12%, whereas I reckon Shell has used something like 9% to get to its valuation. In terms of read-across to other stocks, I think Ophir Energy stands out. The group is partnered with BG and has extensive Tanzanian acreage and a busy drilling programme this year. Our NAV at 15% is 392p/share whilst this rises to over 700p/share using a 10% discount rate, i.e. almost double yesterday’s closing price.
BE
And Investec looks at the rest of the sector.
BE
Inevitably.
BE
Shell has announced a proposed offer for Cove at the top end of expectations and for cash. The 195p proposed offer is unlikely to face a challenge in our view and, having been longstanding fans of the Cove story, we downgrade to Hold. Our target price of 195p reflects the value suggested, which we think ascribes a fair amount of upside to the 15-30 Tcf of gross resources the consportium has found. Next in line in our view might be Ophir (Buy, PT 277p) where we think a bid would need to be pitched around 500p.
BE
Shell (Sell, TP 2000p) has made a proposed offer to acquire Cove for 195p in cash. This is a much better price than the market anticipated (with suggestions of 160p predominating pre this news) and will likely not see a rival bid. We take our money off the table and downgrade to Hold.
BE
We think a bid of around 200p reflects a buyer paying for the midpoint of Cove’s share of the 15-30 TCF gross resources on the Rovuma Offshore Block 1, Mozambique. Given the considerable cash outlay and forward execution risk, we think 195p is a fair price for Cove’s 8.5% equity position in what we expect to be a world-class gas field. It values our base case gross reserves of 12.5TCF at around $5/boe with $3/boe for the extra 10TCF.
BE
n The proposed offer would value the entire issued and to be issued share capital of Cove at approximately £992 million and would represent a premium of 73.3 per cent. to the closing price of 112.5 pence per Cove share as of 4 January 2012, the last business day prior to Cove’s announcement of the sale process for the company; and 28.5 per cent. to the average closing price of 151.75 pence per Cove share over the five business days ending on 21 February 2012, the last business day prior to the date of this announcement.
BE
There may be more bids in E&P-land. In terms of laterals, we expect further acquisitions and highlight Ophir and Gulf Keystone (Buy, TP 191p) as the two most likely bid targets in our view. We remain sceptical about the price that Bowleven (Hold, TP 94p), which is subject to approach from Dragon Oil, may obtain.
Ophir Energy PLC (OPHR:LSE): Last: 401.90, up 36.4 (+9.96%), High: 404.40, Low: 373.50, Volume: 2.33m
Bowleven PLC (BLVN:LSE): Last: 120.25, up 2.5 (+2.12%), High: 123.79, Low: 117.58, Volume: 8.12m
PM
Anything and everything with “energy” in the name is moving sharply higher
BE
Actually ……..
BE
That’s not entirely true.
Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 389.00, down 26 (-6.27%), High: 415.00, Low: 374.25, Volume: 15.59m
PM
That must be a technical problem.
PM
Temporary appearance of more sellers than buyers
BE
Well, one rather large seller.
BE
Capital’s slotted 2.25m
PM
Made a lot of money in this i guess
PM
rude not to take profits
PM
Always leave a little on the table for the next man
BE
Precisely. And it helps provide liquidity among the private investors
PM
hehe
PM
indeed it does
PM
Fairer market all round
PM
Gives people a good entry point
BE
I’m sure Capital just anticipated Todd’s warning about the wicked institutions forcing out the PIs.
BE
Anyway, we shouldn’t get mired in annoying the cultists again.
BE
(@BMAlpha: not that it matters, but yes.)
PM
Not just ” *** Energy stocks that are rising
PM
Madagascar Oil – that’s up 6.4%
PM
ON account of Madagascar being across the Mozambique channel from Moz
PM
BE
And Soco
SOCO International PLC (SIA:LSE): Last: 335.10, up 18.5 (+5.84%), High: 345.60, Low: 317.00, Volume: 581.22k
BE
Because Vietnam is …. er …….
BE
Nighthawk Energy ….
BE
Up 5%. I think that’s drilling in the semi-autonomous frontier state of Texas.
BE
So. Oil up. That’s what we’re saying.
PM
Like the oil price
BE
Brent’s $123.36 in the middle.
PM
hmm
PM
okay, happy to move on
11:29AM
BE
Ok, so leading us down …………..
BE
(@yogabba: What? Do you have stock Tourettes?)
BE
Is Vedanta.
BE
Having led us up yesterday
BE
On reports all over the Indian press that it would fold one of its subsidiaries into the other.
BE
You may remember a similar plan in 2008.
BE
Which lasted approximately one week in the open.
PM
Hmm
PM
i do
BE
Think it was the Sterlite shareholders who screamed that they were being sold a pup at an inflated price.
BE
And ….. without wishing to be over cynical ….
BE
They may be screaming again.
PM
Vedanta come rattlilng back, that’s for sure
PM
Price off 4.5% currently
PM
13.88
BE
That’s post a 7% rally yesterday.
BE
The possible proposal, if I understand it ….
BE
Would be to sell one subsidiary to the other subsidiary then transfer the cash from that sale into the holding company to cut debt.
BE
Debt being Vedanta’s biggest problem.
BE
Should note, however, that the company’s not confirmed any of this.
BE
It came out with a very vague non-denial yesterday.
PM
Just confirmed it is looking to simplifer corporate structure
PM
simplify
PM
as well
BE
Wait …. Breaking …
BE
*GREECE’S LONG-TERM RATINGS CUT TO C FROM CCC BY FITCH
BE
Ok – tape bomb out of the way …..
PM
Junking junk
BE
Exactly. Shouldn’t be relevant.
BE
Right, back on Vedanta …..
BE
The bear case is made well by RBC today.
BE
Who downgrade to “sector perform”
BE
Which I think means “hold”.
BE
Despite what we thought were a good set of 3Q12 EBITDA results, Vedanta’s
aluminium business has been experiencing losses at the operational level which,
due to the lack of consolidation, offset much of the attributable profits in other
operations. For fiscal 2012, this has already translated into significantly higher
taxes (+30%) and minorities (+80%) than for the past few years. In our view,
consolidation of the existing corporate structure or operational improvement (at
Aluminium) are the only ways out of this earnings dilutive scenario.
aluminium business has been experiencing losses at the operational level which,
due to the lack of consolidation, offset much of the attributable profits in other
operations. For fiscal 2012, this has already translated into significantly higher
taxes (+30%) and minorities (+80%) than for the past few years. In our view,
consolidation of the existing corporate structure or operational improvement (at
Aluminium) are the only ways out of this earnings dilutive scenario.
BE
The FirstPost of India yesterday noted that Vedanta could be attempting to
consolidate both Sterlite and Sesa Goa minorities into Vedanta Plc. We think this
would be a positive move for Vedanta’s corporate strategy and would help the
company from a consolidation perspective going forward. However, from a
numbers perspective, we calculate the total market value of the Sterlite and Sesa
Goa minorities combined at ~US$5.7bn, or 90% of Vedanta’s current market
capitalisation. That would require a near doubling of the shares outstanding in an
all share transaction, or a cash outlay that could put Vedanta over its covenants.
consolidate both Sterlite and Sesa Goa minorities into Vedanta Plc. We think this
would be a positive move for Vedanta’s corporate strategy and would help the
company from a consolidation perspective going forward. However, from a
numbers perspective, we calculate the total market value of the Sterlite and Sesa
Goa minorities combined at ~US$5.7bn, or 90% of Vedanta’s current market
capitalisation. That would require a near doubling of the shares outstanding in an
all share transaction, or a cash outlay that could put Vedanta over its covenants.
BE
We have lowered our FY12 forecasts in Aluminium, Iron ore and Power, while
making modest adjustments to our zinc and copper divisional forecasts. More
importantly, we have raised our year end minorites rate to 86% and our year end
tax rate to 33%. Our revised FY12e EPS forecast stands at US$1.08/share, a 65%
decrease from our previous forecast, mainly due to the increased minority rate.
For FY13e and FY14e, our EPS forecasts are US$3.40/share and US$4.06/share,
both down 26%.
making modest adjustments to our zinc and copper divisional forecasts. More
importantly, we have raised our year end minorites rate to 86% and our year end
tax rate to 33%. Our revised FY12e EPS forecast stands at US$1.08/share, a 65%
decrease from our previous forecast, mainly due to the increased minority rate.
For FY13e and FY14e, our EPS forecasts are US$3.40/share and US$4.06/share,
both down 26%.
BE
We reduce our VED price target to £15/share, from £17/share previously, and
versus closing price of £14.53 on 21 February. With just 3% potential upside to
our price target we downgrade VED to Sector Perform (from Outperform
previously). The stock is one of our top performers YTD and we think that
investors should be locking in profits with Vedanta’s operational risk profile.
versus closing price of £14.53 on 21 February. With just 3% potential upside to
our price target we downgrade VED to Sector Perform (from Outperform
previously). The stock is one of our top performers YTD and we think that
investors should be locking in profits with Vedanta’s operational risk profile.
BE
Remind me some time to put up a schematic of Vedanta’s structure.
BE
It’s hilarious.
BE
It looks like the circuit board of a ZX Spectrum.
11:37AM
PM
Cheers for that
PM
Even tho arguably irrelevant
PM
let’s just share the Fitch stuff
PM
In Fitch’s opinion, the exchange, if completed, would constitute a ‘distressed debt exchange’ (DDE) in line with its criteria and consequently yesterday’s announcements set in motion the agency’s process for reviewing Greece’s issuer and debt securities ratings. The sovereign IDR has accordingly been lowered to ‘C’ from ‘CCC’ indicating that default is highly likely in the near term. The ratings of the securities subject to the exchange have also been lowered to ‘C’ from ‘CCC’.
PM
Fitch considers that the proposal to reduce Greece’s public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default, and result in the country’s IDR being lowered to ‘Restricted Default’ (‘RD’) upon completion. The ratings of GGBs affected by the exchange, including those not tendered but restructured under CACs, which are expected to be imposed retrospectively on bonds issued under Greek law, will also be lowered to ‘D’ (‘default’) at this time.
PM
Shortly after completion of the exchange with the issue of new securities, Greece’s sovereign rating will be moved out of the ‘RD’ category and re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile.
PM
Fitch regards the imposition of retrospective CACs as a material adverse change in the terms and conditions of GGBs in the context of an imminent debt exchange and confirms its assessment that the exchange will be distressed and de facto coercive on private holders of Greek bonds. Nonetheless, the primary credit event is the exchange itself and Fitch will rate Greece and its securities accordingly.
PM
There you go
PM
(Capt B Mannering: — what words can you think of that begin with C?
PM
(hehe — cornered very good)
BE
(Keep ‘em coming, ROTR. You’re in your zone on this one.)
11:40AM
BE
Ok – staying with macro
BE
Should mention MPC.
PM
oh yes
PM
Minutes out this morning
BE
And they’re dovish.
BE
Surprisingly so.
PM
Posen and someone else on the committee wanted 75bn
PM
QE
PM
yes, as dovish
BE
No-one was expecting a split.
BE
So I guess this opens the door to further QE. Right?
PM
Maybe, maybe
PM
But you’ve got to expect the debate on whether QE actually works to get louder
PM
All the calls now for fiscal measures…
PM
And QE screws pensioners
PM
Don’t foget that one
BE
Of course. Crushing bond yields.
BE
And, in truth, it’s a confusing old read.
BE
There are hawks round the table as well.
BE
‘For some members . . . a case could be made for maintaining the stance of policy at this meeting’ though none actually voted for this and, ultimately, the policy debate boiled down to whether to sanction a £50bn or a £75bn QE extension.
BE
Really, I think the only thing to conclude is that the committee are in disagreement.
BE
Which may be healthy but is not really all that positive.
BE
Grab some comment. Here’s HSBC.
BE
That two members had voted for more QE was slightly surprising and means the minutes were more dovish than expected.
Some members clearly think the economy has considerable spare capacity and that more deleveraging is still likely, meaning
demand could be depressed for a prolonged period. This broadly fits with our view that demand will stay weak because a
reduced squeeze on real incomes may be saved or used to pay down debt rather than spent – and we had called for GBP75bn
ahead of the February policy meeting.
Some members clearly think the economy has considerable spare capacity and that more deleveraging is still likely, meaning
demand could be depressed for a prolonged period. This broadly fits with our view that demand will stay weak because a
reduced squeeze on real incomes may be saved or used to pay down debt rather than spent – and we had called for GBP75bn
ahead of the February policy meeting.
BE
Despite the 7-2 vote, more members could have sympathy with the Posen/Miles view. The minutes suggest some members
might have voted tactically: there were concerned that, given market expectations, “a larger increase [in QE] risked sending a
signal that the Committee thought the economic situation was worse than it was”.
might have voted tactically: there were concerned that, given market expectations, “a larger increase [in QE] risked sending a
signal that the Committee thought the economic situation was worse than it was”.
BE
The divisions may run deeper than just on how much additional stimulus was required given that at least two MPC members
thought there was a case for no further policy easing in February. Although in the coming months, no change in policy is likely as the MPC assess the impact of existing measures, from May things could get more spicy. We think the MPC may hold in
May but that a further extension of QE is likely later in the year – we now think August – as demand remains weak.
thought there was a case for no further policy easing in February. Although in the coming months, no change in policy is likely as the MPC assess the impact of existing measures, from May things could get more spicy. We think the MPC may hold in
May but that a further extension of QE is likely later in the year – we now think August – as demand remains weak.
BE
Bottom line
The ongoing dovish bias in the MPC suggests they are not convinced the recent uptick in output indicators means growth has
turned the corner. And they remain concerned about the eurozone, despite some recent progress. But the MPC may be more
divided than the vote suggests – the minutes indicate at least one member thought there was a case for no further policy easing
last month. So today’s minutes make the UK policy outlook more, not less, uncertain.
The ongoing dovish bias in the MPC suggests they are not convinced the recent uptick in output indicators means growth has
turned the corner. And they remain concerned about the eurozone, despite some recent progress. But the MPC may be more
divided than the vote suggests – the minutes indicate at least one member thought there was a case for no further policy easing
last month. So today’s minutes make the UK policy outlook more, not less, uncertain.
BE
And Exane.
BE
In its latest quarterly inflation report, the BoE raised its inflation forecast to reach the
2% target by end-2014, on the back of both an extension of QE and on a higher path
for oil and other commodity prices. However, inflation was still judged to be more
likely below target than above it for a major part of the forecast period. Furthermore,
BoE minutes point out that money growth was weak in Q4 2011, and that credit
conditions for many households and businesses still remain tight. Thus, although the
upgrade of the inflation forecasts makes the prospect for further QE less likely, the
MPC has clearly left the door open for additional asset purchases. Our base case
scenario is for GBP50bn additional asset purchases in May.
2% target by end-2014, on the back of both an extension of QE and on a higher path
for oil and other commodity prices. However, inflation was still judged to be more
likely below target than above it for a major part of the forecast period. Furthermore,
BoE minutes point out that money growth was weak in Q4 2011, and that credit
conditions for many households and businesses still remain tight. Thus, although the
upgrade of the inflation forecasts makes the prospect for further QE less likely, the
MPC has clearly left the door open for additional asset purchases. Our base case
scenario is for GBP50bn additional asset purchases in May.
BE
Recent economic data from the UK has been better than expected. Both the Services
& Manufacturing PMI surveys rose above their historical averages in January, and
forward looking components suggest that activity is likely to improve further in Q2.
The MPC suggests that part of this increase could be due to firms now deciding to
proceed with previously postponed investment/spending decisions given that
uncertainty has somewhat declined of late. However, other measures of economic
activity such as the CBI retail trade survey, GfK consumer confidence, and the BCC
survey expectations still paint a bleak picture. In our view, February data will be key to
assess whether the recent improvement in momentum is genuine or temporary. All
told, recent data suggests upside risks to our Q1 GDP growth forecasts, and confirms
our view for positive momentum in to Q2.
& Manufacturing PMI surveys rose above their historical averages in January, and
forward looking components suggest that activity is likely to improve further in Q2.
The MPC suggests that part of this increase could be due to firms now deciding to
proceed with previously postponed investment/spending decisions given that
uncertainty has somewhat declined of late. However, other measures of economic
activity such as the CBI retail trade survey, GfK consumer confidence, and the BCC
survey expectations still paint a bleak picture. In our view, February data will be key to
assess whether the recent improvement in momentum is genuine or temporary. All
told, recent data suggests upside risks to our Q1 GDP growth forecasts, and confirms
our view for positive momentum in to Q2.
PM
cheers for that
BE
Worth noting cable’s not really budged.
BE
$1.5704 in the middle.
BE
And e1.880-ish.
11:49AM
PM
We meant to do house builders
PM
request on the right earlier also
PM
Galliford — good figs
BE
Yup – positive omens for results season.
PM
Stock up 10%
PM
553p currently
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However …………
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Before we go into the details there
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There was a good note from Collins Stewart on the sector earlier this week
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That we never had the opportunity to bring you.
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It takes a very non-consensual bear tack.
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And is likely to entertain all Dinner Party Live participants over on the right.
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Here’s page 1.
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In the face of strong momentum, we initiate on the sector with an overall
negative stance. UK housing could be stuck in a “lost decade”, with tight lending
putting pressure on prices and record low volumes. We believe government
support for builders could backfire and – controversially – challenge the “housing
shortage” mantra. Next results may sound upbeat but we advise taking profits.
negative stance. UK housing could be stuck in a “lost decade”, with tight lending
putting pressure on prices and record low volumes. We believe government
support for builders could backfire and – controversially – challenge the “housing
shortage” mantra. Next results may sound upbeat but we advise taking profits.
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Can’t buy, won’t buy. Can’t lend, won’t lend.
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Oooh, a lost decade for british property
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Housing could remain for years caught between weak consumer appetite for
borrowing and banks’ aversion to mortgage lending largely due to Euro-zone
risks. We believe lending, transactions and prices could fall this year.
borrowing and banks’ aversion to mortgage lending largely due to Euro-zone
risks. We believe lending, transactions and prices could fall this year.
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Sales and margins likely to disappoint later this year
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We differ from most peers in assuming at least two or three years of steady
house price erosion, putting our estimates progressively below consensus.
house price erosion, putting our estimates progressively below consensus.
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Shortage, what shortage? State aid could stoke negative equity
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We show data that could debunk the view the UK builds too few homes. This
potential myth has underpinned valuation assumptions as well as government
support for builders, which could lead to negative equity for first time buyers.
potential myth has underpinned valuation assumptions as well as government
support for builders, which could lead to negative equity for first time buyers.
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Valuations reflect inflated view of land
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Most observers attempt to value housebuilders on multiples of NAV, but we
believe these have been understated on the way up and overstated now because
of an oddity in accounting standards. We have used a consistent approach to
“marking to market” land holdings. On this basis most look over-valued to us.
believe these have been understated on the way up and overstated now because
of an oddity in accounting standards. We have used a consistent approach to
“marking to market” land holdings. On this basis most look over-valued to us.
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Catalyst: fillip from reporting round, but watch the Eurozone
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The sector has beaten the FTSE-All Share by 9% over the past three months. We
suspect companies will present a resolute tone in the imminent reporting round,
possibly supporting further short-term momentum. But believe a new Eurozone
flare-up could trigger further lending contraction.
suspect companies will present a resolute tone in the imminent reporting round,
possibly supporting further short-term momentum. But believe a new Eurozone
flare-up could trigger further lending contraction.
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Alastair Stewart’s the analyst.
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And I bring you it because it’s a punchy view.
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Today, however, it’s all about results.
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Kicking off with Galliford
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H1 ahead of expectations.
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Alastair should lend himself out for dinner parties
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Yes – good idea. It’d supplement his bonus.
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We should do AV dinner parties actually
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rather than just drinking parties
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Anyway, sorry Galliford
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I can imagine nothing worse.
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Imaging being stuck next to …. (insert name here)
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Anyway, sorry Galliford.
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I’ll just whack up Northland Capital’s summary.
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All eyes will be on the second half as the group moves towards achieving its ambitious growth target in housing completions. Given the growth in H1 of 59% to sales of 1,352 units with an 11% operating margin, it is hard to deny the group is on course to deliver the profit on those sales that will keep investor interest.
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Sales reserved by GFRD, contracted or completed rose 42% to £522m (H1’11: £367m) with completions up 59% in H1’12 to 1,352 including JVs (H1’10: 851) according to its trading update.
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The management reiterated its belief that it could achieve its 3,300 house sales target for the current year (an increase of 52% on the 2,170 completed to June 2011) and increase the operating margin. This confidence was based on an 86% increase in actual sales reservations compared to H1’11 and 75% of land owned now at higher current margins. This margin recovery should further benefit from an improving product mix and the regional bias towards the South East of England and London.
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The product mix has also reduced its first time buyer exposure, a product mix that may need to be adjusted when the mortgage indemnity scheme supports more first time buyer activity from April 2011.
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Driving the recovery in order book is the increase in sales rate during the first half to 0.45 units per week per site, up 36% on the comparable figure for H1’11. 86 sites are currently active (2010: 65) which the group hopes to increase to 100 by June 2012.
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Earlier feedback from senior management and individual heads of the group’s core divisions reflected the positive view of the first half for both housing and construction.
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With a good combination of new sites and land coming into production with gross margins above 20% and the ability to position product to meet regional demand trends, we believe the group has considerable upside using its current strategy.
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Cash position appears strong and construction has secured 100% of this year’s lower (£1.6bn against £1.75bn 2011) targeted order book. It is also proving its ability to major in the more complex and less competitive construction market segments with participation in the second road bridge over the Forth as an example.
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NORTHLAND UK VIEW: Growth is clearly being gleaned in a flat market and housing remains the core driver as 11% operating margins indicate a better than expected outcome for profit growth in 2011/12. Galliford Try’s housing operations, including its partnership and social capability, are showing particular potential. The number of available housing sites in the best possible locations, given its regional positioning and its land bank, offers investors continuing margin recovery potential and impressive volume growth. Whilst the market is undoubtedly challenging, the strategy taken from a position of strength offers further self-help orientated recovery. An emerging team with an improving track record continues to extract growing returns from the improved, higher margin land bank supported by the cash generation of the tightly controlled construction operation.
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And, because I’m lazy
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Northland can also summarise BDEV for us
Barratt Developments Plc (BDEV:LSE): Last: 135.10, up 5.4 (+4.16%), High: 137.00, Low: 128.02, Volume: 7.04m
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Activity has picked up well in the first seven weeks of 2012 and the group is well set to beat the margins of the comparable period last year (7.4% at the operating level) and completions of 4,775 units. We now predict 9% operating margin and an 11% growth in H2 completions.
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Private sales and reservations are up 22% in the first seven weeks of the group’s H2 at 246 units (last year 202) from a sales rate per site per week of 0.61 (last year 0.55. This is before the government initiative to provide mortgage indemnity for first time buyers is yet to emerge.
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mortgage indemnity for first time buyers is yet to emerge. First half results are in line to slightly ahead of expectations given the detailed update in January 2011. Sales moved ahead by 7.6% to 5,198 in H111/12 with notable strength in London (15% of group). The reservation cancellation rate remains low at 14.5% for Barratt.
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NORTHLAND UK VIEW: Growth in the current half points to an opportunity for some upgrades in expectations. Clearly showing the benefits of the group’s turnaround strategy, the first half shows a marked improvement that we expect to accelerate in H2 especially as London is clearly offering greater potential for profit improvement. Driven in part by a greater exposure to London, Barratt is, in our view, making solid progress in reshaping and re-energising its business to glean steady recovery with little help from overall housing activity. The outlook remains positive according to the group and with new government initiatives yet to kick-in. As a true national housebuilder, the group’s management has devoted its efforts to implementing a strategy of self-help in a flat market. New land and products are driving margin recovery in the stronger regional markets where there is a little help from underlying housing demand. Barratt’s volume potential should accelerate its financial performance ahead of the median position of its peers with any housing market recovery. Its debt is now easier to carry following the debt restructuring programme. Our rating remains ADD.
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There. That’s more than enough grey for the housebuilders.
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(yogabba and BMAlpha — happy to act as email clearing house for you both… paul.murphy@ft.com — assuming you don’t want to post your email publicly)
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Right — its gone 12
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And ive got to go and talk to Chris Adams
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before hot footing it to lunch
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Brasserie Blanc, before you ask
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Oh. Never mind.
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It might have improved.
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Before we switch off, someone was mentioning Misys ……
Strange software outfit, seemingly controlled by US investor ValueAct Capital.
Misys PLC (MSY:LSE): Last: 333.20, down 4.8 (-1.42%), High: 337.00, Low: 327.80, Volume: 2.29m
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Ah yes, good point
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Not a lot to add to the story earlier in the week.
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It’s no secret that timelines are very tight.
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Though I’m a little surprised that all media keep saying Vista’s possible counterbid is at a very very early stage.
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(Jarvis2009 – yep — my experience also)
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As I understood it, not only had they brought in GS as advisors ….
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But Delloite were already doing the due diligence.
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And Jefferies was bringing the financing together.
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And Kirkland and Ellis was sorting out the legal.
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I heard. All rumour, obviously.
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That’s all very encouraging…
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Educated raw
RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.
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par-boiled
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Flash fried
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Rare
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So if the 360p that’s APPARENTLY on the table disappears in favour of the merger, then some investors may want to ask a few pointed questions.
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Right. That’s that noted.
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We should round up now.
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we are done
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Thanks for all that Bryce
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Thanks to everyone on the right
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back tomorrow, 11am sharp
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Bye.