Markets Live chat transcript for the chat ending at 12:09 on 23 Feb 2012. Participants in this chat were: Paul Murphy Bryce Elder/FT neil collins
PM
Morning
PM
Welcome to ML on time
PM
LOTS to discuss this morning
PM
lots and lots and lots
PM
Bryce is here
BE
Hi!
PM
And so too is Neil Collins
PM
Hi Neil
NC
good morning
PM
I’m going to try and ignore the fact that Serco is up
BE
Hm. I’m sure we’ll come to the BPOs later.
PM
But we thought it best to start with RBS
PM
Figures this morning
PM
Sir Stephen was on the radio
PM
Soon to be Lord hester
NC
He didn’t do quite as well as last time
PM
No he didn’t
NC
V grumpy when asked about bonuses
PM
Interviewers on the Today programme now seem scared of him
PM
After last appearance i guess
BE
It’s hard to be quite so confident, I imagine, when you’re bringing a £2.0bn loss to the table.
NC
Up to a point. He much preferred to rush off into the undergrowth of the figures
PM
Baffling everyone in the Today studio
PM
But anyway, the numbers were awful, so the stock is up how much?
BE
2.5% at pixel time.
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 28.05, up 0.72 (+2.63%), High: 28.91, Low: 26.77, Volume: 122.58m
BE
After presenting results that were 120% worse than consensus.
PM
hehe
PM
well abotu 12% short
PM
in terms of total income
BE
(Rabble: we have update issues this morning, which gives me an excuse to use a new autotext.)
BE
SNAFU
FT Alphaville would like to apologise for whichever of of our many technical problems you are currently experiencing. Please be assured that we have our best people working on it. In the meantime, try refreshing the page. And, if that doesn’t work, try refreshing the page.
PM
hey
PM
excellent new autotext
BE
Ok, let’s rewind …..
BE
So, going below the £2bn headline loss figure …..
PM
(Actually we don’t have our best person working on it. he’s away for a couple of days)
PM
Go on
BE
Non-Core and GBM losses in Q4 worse than expected
NC
8 chapters of results in the announcement….
PM
BE
….. Tangible NAV’s down to 50.1p.
BE
(Still double the share price, mind)
BE
Core profit down 18%
BE
Investment banking — or legacy investment banking, I guess we should call it ….
NC
(which shows that nobody believes the asset numbers)
BE
Profit there down a sharp 54%
BE
Ulster Bank’s a basket case.
BE
(Which is still core, mind.)
BE
(And a play on Irish house prices.)
BE
Residential mortgage impairments up 6% qoq
NC
…with loans to Greece, for example
BE
It’s just horrible.
BE
To my eye, there’s not a positive line in the whole statement.
BE
But who am I to argue with the market.
PM
Price up 2.8%…
NC
Can we say that it’s less negative than last year?
BE
Ok – yes.
BE
The fears over capital that drove it to lows in November are eased.
BE
But shares are already up 60-odd percent from there.
PM
Any research to share on this?
PM
I have Credit Suisse to hand
PM
Carla Antunes da Silva
BE
Good analyst.
PM
Underlying results were in line with us but below consensus. The main focus
will be on the new group targets and the detail of the GBM restructuring -
here for us, this is less aggressive restructuring than our scenario analysis
and so having outperformed the sector by c.18% Ytd we expect the stock to
give back some of this performance. Trading on a 0.6x last reported for a
RoNAV of 7% in 2013E, it is trading at a similar multiple for lower profitability.
We continue to prefer Barclays in a UK and European context.
■
RBS reported a Q4 net attributable loss of £1,798mn which compares to our
loss estimate of £1,074mn and consensus of £700mn loss. As is customary
there was a host of exceptional items – underlying operating loss before tax
was £246mn in line with our estimate of £238mn loss but below consensus
expectation of £100mn profit. This led to a weaker TNAV per share of 50.1p
compared to CSe 52.1p and 52.6p in Q3. CT1 was lower than expected at
10.6% compared to 11.3% in Q3 and CS estimate of 11.2%.
will be on the new group targets and the detail of the GBM restructuring -
here for us, this is less aggressive restructuring than our scenario analysis
and so having outperformed the sector by c.18% Ytd we expect the stock to
give back some of this performance. Trading on a 0.6x last reported for a
RoNAV of 7% in 2013E, it is trading at a similar multiple for lower profitability.
We continue to prefer Barclays in a UK and European context.
■
RBS reported a Q4 net attributable loss of £1,798mn which compares to our
loss estimate of £1,074mn and consensus of £700mn loss. As is customary
there was a host of exceptional items – underlying operating loss before tax
was £246mn in line with our estimate of £238mn loss but below consensus
expectation of £100mn profit. This led to a weaker TNAV per share of 50.1p
compared to CSe 52.1p and 52.6p in Q3. CT1 was lower than expected at
10.6% compared to 11.3% in Q3 and CS estimate of 11.2%.
PM
■
Group total income of £5.1bn significantly below our estimate of £5.4bn and
consensus of £5.9bn primarily due to lower non interest income. This was
partially offset by lower expenses and lower provisions than expected. GBM
PBT although still a loss came in better than expected at £95mn, as did
Global Transaction Services and US Retail and Commercial. UK Retail and
Corporate were slightly weaker than expectations but mainly the non core
saw the major miss as a result of a faster run off of non core assets.
■
More detail has been provided on GBM restructuring although it is not as
aggressive as our restructuring scenario. The bank is targeting £70bn
RWAs reduction whereas we were going for £116bn. They have highlighted
a restructuring cost of £550mn which compares to our estimate of £3.4bn.
The bank is highlighting a net capital benefit of £6.6bn which compares with
our estimate of capital improvement of c.£10bn.
■
Group core RoE target lowered in line with recent guidance at 12% (from
15%). CI target ratio of <50% is now c.55% as they have to reinvest more.
Group total income of £5.1bn significantly below our estimate of £5.4bn and
consensus of £5.9bn primarily due to lower non interest income. This was
partially offset by lower expenses and lower provisions than expected. GBM
PBT although still a loss came in better than expected at £95mn, as did
Global Transaction Services and US Retail and Commercial. UK Retail and
Corporate were slightly weaker than expectations but mainly the non core
saw the major miss as a result of a faster run off of non core assets.
■
More detail has been provided on GBM restructuring although it is not as
aggressive as our restructuring scenario. The bank is targeting £70bn
RWAs reduction whereas we were going for £116bn. They have highlighted
a restructuring cost of £550mn which compares to our estimate of £3.4bn.
The bank is highlighting a net capital benefit of £6.6bn which compares with
our estimate of capital improvement of c.£10bn.
■
Group core RoE target lowered in line with recent guidance at 12% (from
15%). CI target ratio of <50% is now c.55% as they have to reinvest more.
BE
And here’s Michael Helsby at Merrill
BE
Who’s an analyst.
BE
Op profit was up 11% YoY. Income net of claims was £24.8bn (BAMLe £25.8bn,
cons £25.6bn). Income in Core was £168mn light of our forecasts so the big miss
is in non-Core; this is due to disposal and trading losses associated with the
unwind and de-risking. Costs were £15.5bn vs our forecast of £15.6bn (and cons
of £15.8bn). Bad debts stood at £7.4bn for the FY – we were going for £8.2bn and
the market for £7.6bn. Core PBT was £6.1bn (BAMLe £6.3bn), Non Core loss
was £4.2bn (BAMLe £4.4bn). Group T/NAV was 50p per share, vs our 51p
forecast (flat on FY10).
cons £25.6bn). Income in Core was £168mn light of our forecasts so the big miss
is in non-Core; this is due to disposal and trading losses associated with the
unwind and de-risking. Costs were £15.5bn vs our forecast of £15.6bn (and cons
of £15.8bn). Bad debts stood at £7.4bn for the FY – we were going for £8.2bn and
the market for £7.6bn. Core PBT was £6.1bn (BAMLe £6.3bn), Non Core loss
was £4.2bn (BAMLe £4.4bn). Group T/NAV was 50p per share, vs our 51p
forecast (flat on FY10).
BE
UK retail PBT was £2bn (we expected op profit of £2.0bn). UK Commercial PBT
was £1.4bn (BAMLe £1.4bn). Ulster op profit loss came in at £1bn, vs BAMLe of
£1bn. Group NIM in 4Q11 was 184bp versus 184bp in 3Q11, this is reassuring
given the large step down in 3Q11. Overall in the UK Retail NIM is a bit weaker
than expected driven by the hedge rolling off and good deposit growth. Corporate
NIM was better though. UK impairment trends look stable to slightly improving.
was £1.4bn (BAMLe £1.4bn). Ulster op profit loss came in at £1bn, vs BAMLe of
£1bn. Group NIM in 4Q11 was 184bp versus 184bp in 3Q11, this is reassuring
given the large step down in 3Q11. Overall in the UK Retail NIM is a bit weaker
than expected driven by the hedge rolling off and good deposit growth. Corporate
NIM was better though. UK impairment trends look stable to slightly improving.
BE
Group bad debts were £7.5bn. Core was £3.5bn vs our estimate of £3.4bn and
Non Core was £3.9bn versus our estimate of £4.7bn. Within in Core, UK Retail
bad debts were £788mn (BAMLe £796mn), with UK Commercial bad debts at
£785mn vs our £807mn. Ulster divisional bad debts came in at £1.4bnbn (BAMLe
£1.3bn) while total Ulster NPLs (core + non core) stood at £17bn, vs £17bn at end
3Q11.
Non Core was £3.9bn versus our estimate of £4.7bn. Within in Core, UK Retail
bad debts were £788mn (BAMLe £796mn), with UK Commercial bad debts at
£785mn vs our £807mn. Ulster divisional bad debts came in at £1.4bnbn (BAMLe
£1.3bn) while total Ulster NPLs (core + non core) stood at £17bn, vs £17bn at end
3Q11.
BE
GBM is off to a good start. Retail and Commercial performance is expected to
remain broadly stable on income, with improvements still coming through from
impairments. Group NIM is expected to be stable with 2H11.
remain broadly stable on income, with improvements still coming through from
impairments. Group NIM is expected to be stable with 2H11.
PM
(Swedes — RBS conference call was at 9.30 — maybe that)
BE
So – operating profit’s a bit better
BE
And the guidance isn’t entirely a warning.
BE
Hm.
PM
Okay thanks for that.
BE
Best just mention Lloyds
BE
Up in RBS’s slipstream.
Lloyds Banking Group plc (LLOY:LSE): Last: 36.17, up 0.7466 (+2.11%), High: 37.33, Low: 35.02, Volume: 105.66m
PM
Hmm
BE
Q4s due Feb 24
BE
Or tomorrow, as it’s also known.
BE
Here, from WestLB, is what to expect.
BE
We maintain our Buy rating on Lloyds Banking Group (LBG) ahead of Q4 2011
results due on 24 February. Our Q4 PBT estimate of £0.20bn (statutory basis)
compares with consensus of £0.35bn (source: FactSet). We expect underlying
Q4 PBT to he held back by a rise in loan loss provisions (Ireland) relative to Q3
and costs (UK bank levy). But we leave our Buy rating unchanged as LBG (a)
has no capital shortfall under the EBA sovereign stress test, and (b) trades on a
2013E P/TNAV discount to the sector of 40%.
results due on 24 February. Our Q4 PBT estimate of £0.20bn (statutory basis)
compares with consensus of £0.35bn (source: FactSet). We expect underlying
Q4 PBT to he held back by a rise in loan loss provisions (Ireland) relative to Q3
and costs (UK bank levy). But we leave our Buy rating unchanged as LBG (a)
has no capital shortfall under the EBA sovereign stress test, and (b) trades on a
2013E P/TNAV discount to the sector of 40%.
11:16AM
PM
Any other banking stuff to sweep here?
BE
Should mention Comedybank.
PM
Oh, yeah, gone back on their words to to be raising new money
PM
Last month said everythnng was fine on them meeting these EBA targets
PM
Just do it by reducing RWA etc
PM
But now there’s a $1bn fund raising
PM
Is that correct?
BE
Yes – though it’s a hybrid raise
BE
So it’s rather opaque
BE
But Nomura reckons it’s 10% dilutive.
BE
We see CBK’s action as a negative for the stock as well as a
negative read-across for the sector. The exchange offer leads to up
to 10% dilution of the shares, which we do not believe the market
was expecting after the overwhelmingly strong messaging from
CBK on capital in January. The exchange offer implies about six
days of selling pressure on the ordinary shares assuming no
hedging has been done so far and will be open for seven trading
days, including today. After the AGM, CBK will be able to once
again issue up to 10% of its outstanding shares, a possibility that
now cannot be ruled out in H1 12.
negative read-across for the sector. The exchange offer leads to up
to 10% dilution of the shares, which we do not believe the market
was expecting after the overwhelmingly strong messaging from
CBK on capital in January. The exchange offer implies about six
days of selling pressure on the ordinary shares assuming no
hedging has been done so far and will be open for seven trading
days, including today. After the AGM, CBK will be able to once
again issue up to 10% of its outstanding shares, a possibility that
now cannot be ruled out in H1 12.
BE
The messaging on capital is a negative read-across to the sector, in
our view. The sector started its rally partly on the belief that dilution
risk is limited, a view that was catalysed by CBK’s January
statement. Hence, this is negative for sentiment, in our view.
However, many other banks have met or are within touching
distance of the EBA requirements, and ahead of the LTRO appetite
for selling the sector may be limited.
our view. The sector started its rally partly on the belief that dilution
risk is limited, a view that was catalysed by CBK’s January
statement. Hence, this is negative for sentiment, in our view.
However, many other banks have met or are within touching
distance of the EBA requirements, and ahead of the LTRO appetite
for selling the sector may be limited.
PM
Yes, Credit Suisse come up with similar figures
BE
(@Mo again: self evidently, yes.)
PM
Richard Milne (over my shoulder here) just saying that Commerzbank will be 85% towards its EBA target…
PM
richard’s a Germany expert
PM
btw
PM
But i dont know
PM
just look at the share price
PM
Down almost 5% this morning
PM
All the other euro banks off also
PM
mediobana, unicredit
PM
Credit agricol
PM
agricole
BE
Oh, hang on. Just getting some feedback on the Comedybank conference call.
BE
this could potentially be the last hybrid action, and CBK
views it as more of a capital restructuring rather than capital increasing
measure. CBK still believes that 9% core tier 1 is the right number to
be at. This assumes a Basel 3 requirement of 7% and then an
additional 100bp as an SIFI buffer. Questioned on whether reaching
>11% core tier 1 would allow repayment of silent participations; the
CFO commented that the bank would first fulfil the EBA requirement
before thinking about repayments.
views it as more of a capital restructuring rather than capital increasing
measure. CBK still believes that 9% core tier 1 is the right number to
be at. This assumes a Basel 3 requirement of 7% and then an
additional 100bp as an SIFI buffer. Questioned on whether reaching
>11% core tier 1 would allow repayment of silent participations; the
CFO commented that the bank would first fulfil the EBA requirement
before thinking about repayments.
BE
So it’s a capital restructuring, not a capital increase.
BE
Silly us.
PM
A restructuring involving asking for more money
PM
Anyway, the ceo is having his salary capped at E500k
PM
He’d be better off workingn at Serco
PM
Get eight times that
NC
Won’t he get headhunted at that price?
NC
we’re always told that bankers must be paid the market rate
BE
Perhaps he’ll join RBS.
NC
Good test. Job offers for Martin Blessing, please
NC
otherwise the world will see it’s all a sham
BE
Anyway, fun though this is, we should move on.
PM
yes we should
11:24AM
PM
Just share this quick note on HSBC
PM
from Ronit Ghose there
PM
Structural Strengths for 2012 – After two years of declining revenues, we expect a
GBM bounce back in 2012. HSBC has structural strengths relative to developed market
focused banks: it is one of the largest FX banks globally, especially in EM, and a $10
billion GTS juggernaut. Both businesses are growing top-line at a double-digit rate, and
are larger for HSBC versus most peers.
Recovery Stories for 2012 – Credit, poor in 2011, could positively surprise in 2012.
HSBC is one of the leading European and Asian DCM banks YTD. Investment grade
corporate issuance is up c30% ytd versus 2011, Asia +50%. Rates trading has been hit
by Greece in 2H11, which should not recur in 2012. The US run-off consumer portfolio
remains a wild card, but improving US macro trends should help reduce impairments.
The World’s Connected Bank – How does the world’s self-proclaimed local bank
ensure it is the world’s local and profitable bank? Exiting small local businesses that
add to sprawl and not to connectivity. In the past year, the “new” management at HSBC
has sold about 20 businesses, mainly retail focused and in smaller markets. The recent
closure of the sale of ING Direct to Capital One smoothes the path to completing on the
US card sale, while a disposal of non-life insurance also looks imminent.
Attractively Valued – HSBC may not be as lowly rated as some Euro Area banks but
trading at 1.2x P/TB, 1.0x P/B and 9x P/E (all 1-year forward), HSBC shares are at
multi-year low multiples relative to its history. 2012 should be a better year for
profitability, in our view, with GBM rebounding. Capital ratios are satisfactory relative to
peers. We reiterate our Buy rating and increase our target price to £6.50 (HK$79.60)
from £6.25 (HK$77.30), reflecting a roll forward of our DDM and a re-rating of peers.
GBM bounce back in 2012. HSBC has structural strengths relative to developed market
focused banks: it is one of the largest FX banks globally, especially in EM, and a $10
billion GTS juggernaut. Both businesses are growing top-line at a double-digit rate, and
are larger for HSBC versus most peers.
Recovery Stories for 2012 – Credit, poor in 2011, could positively surprise in 2012.
HSBC is one of the leading European and Asian DCM banks YTD. Investment grade
corporate issuance is up c30% ytd versus 2011, Asia +50%. Rates trading has been hit
by Greece in 2H11, which should not recur in 2012. The US run-off consumer portfolio
remains a wild card, but improving US macro trends should help reduce impairments.
The World’s Connected Bank – How does the world’s self-proclaimed local bank
ensure it is the world’s local and profitable bank? Exiting small local businesses that
add to sprawl and not to connectivity. In the past year, the “new” management at HSBC
has sold about 20 businesses, mainly retail focused and in smaller markets. The recent
closure of the sale of ING Direct to Capital One smoothes the path to completing on the
US card sale, while a disposal of non-life insurance also looks imminent.
Attractively Valued – HSBC may not be as lowly rated as some Euro Area banks but
trading at 1.2x P/TB, 1.0x P/B and 9x P/E (all 1-year forward), HSBC shares are at
multi-year low multiples relative to its history. 2012 should be a better year for
profitability, in our view, with GBM rebounding. Capital ratios are satisfactory relative to
peers. We reiterate our Buy rating and increase our target price to £6.50 (HK$79.60)
from £6.25 (HK$77.30), reflecting a roll forward of our DDM and a re-rating of peers.
PM
Buyers of HSBC — see price going to 6.50
BE
Shares flat. Flatish.
HSBC Holdings PLC (HSBA:LSE): Last: 577.10, up 1.5 (+0.26%), High: 581.80, Low: 575.10, Volume: 4.47m
PM
Ok, lets move on
PM
enought banks
11:25AM
BE
Right. What next?
BE
The ROTR are obsessing themselves with oil.
PM
Sorry, just meant to add that that note was from Citi
11:26AM
PM
Braoder market
PM
marginal up day?
BE
FTSE’s still stalled.
BE
Up 0.2% or thereabouts.
BE
15 points at 5931.
BE
This must be driving the girls and boys at Bloomberg to insanity.
PM
indeed
BE
They have to rewrite every market report every time the index moves 0.2%
BE
Below that and it’s little changed. Above that and it’s either up or down.
PM
With a new explanation
BE
Exactly. Explain the move.
BE
It’s the job of Sisyphus at the best of times.
BE
Anyway, oil.
PM
BE
9-month high
BE
After IAEA officials were denied access to an Iranian military base
BE
and said negotiations over the country’s nuclear program “couldn’t finalize a way forward”
PM
Neil — you were talking about this John Kemp column earlier
PM
About the loss of diesel rich crude
PM
Kemp from Reuters of course
PM
Ex-Sempra economist
NC
v good post
NC
why diesel is dearer than 4-star when it should be cheaper
NC
Seasoned oil market observers have struggled to find an adequate explanation for the surge in Brent prices over the past fortnight, which has taken front-month futures to the highest level since July 2011.
But the conundrum becomes easier to unravel if the focus is switched from the overall crude supply-demand balance, which remains comfortable, to balances for individual fuels (especially distillates) and the types of crudes being impacted by the supply disruptions.
Dieselisation and the increasing imbalance in the global refining system (producing too much gasoline and not enough diesel) has made the crude markets particularly vulnerable to the loss of diesel-rich crudes, which is why both crude prices and European gas oil futures have been rising in recent sessions in response to the loss of exports from South Sudan.
Most analysis of the oil market still focuses on the overall supply-demand balance, implicitly treating all crudes as undifferentiated. But the price surges triggered by Libya and North Sea outages in 2011, and now Sudan in 2012, illustrate the need for a more fine-grained approach, in which relatively small losses of key crudes (low in sulphur or rich in middle distillates) can produce an outsized response in prices.
PM
ah right
PM
We’d provide a link, but Reuters are awful at getting Kemp’s stuff up on the web
PM
Actually what is the crude price Bryce
BE
Brent’s $125.98 in the middle.
BE
Providing support rather than a catalyst to the sector.
BG Group PLC (BG.:LSE): Last: 1,532, up 23.5 (+1.56%), High: 1,534, Low: 1,500, Volume: 2.15m
BE
(And, no, we’ve heard nothing new on BG, despite everyone on the planet asking.)
Royal Dutch Shell Plc (RDSB:LSE): Last: 2,355, up 9.88 (+0.42%), High: 2,360, Low: 2,344, Volume: 778.72k
BP PLC (BP.:LSE): Last: 494.00, down 2.95 (-0.59%), High: 497.77, Low: 492.67, Volume: 6.30m
BE
Etc.
11:34AM
PM
Some quick Albert Edwards
PM
which has landed this morning
PM
Headline news: he’s still a bear
BE
I see he’s illustrated the note with a picture of a crab biting his foot.
BE
Colin the crab mistakes my toe for a juicy prawn or does he know exactly what he is doing?
PM
Yes, we ahve the pic
PM
but can’t share on here
PM
Arielle, one of our senior salespersons e-mailed me a couple of weeks ago with a question:
“Hi, any change in your views? Just checking…as I have questions from Clients.” Reading
between the lines I think the question was whether I am near throwing in the towel. Bloomberg
reports that Global Strategists Abandon Bearish Views After Missing Rally link. Rest
assured, I am not one of them. What will make me more bullish? As I believe that we are still in
the grip of a valuation bear market the answer is easy cheaper valuations.
“Hi, any change in your views? Just checking…as I have questions from Clients.” Reading
between the lines I think the question was whether I am near throwing in the towel. Bloomberg
reports that Global Strategists Abandon Bearish Views After Missing Rally link. Rest
assured, I am not one of them. What will make me more bullish? As I believe that we are still in
the grip of a valuation bear market the answer is easy cheaper valuations.
BE
Albert Edwards is something of a rule to himself in the world of analysis.
PM
His basic point is that corporate earnigns have stalled
PM
And he is particularly exercised by these British proposals to cut corporate tax
PM
Which he thinks is a stupid idea
PM
Just waiting for this latest burst of market hope to be crushed
PM
etc
NC
Interesting point.
PM
Why do I regard the idea of cutting UK company taxes as laughably stupid at this time? It is
simply the fact that UK corporations, like their US counterparts, are sitting on piles of excess
cash with very little evidence that they want to either spend or distribute these surpluses.
Indeed in a blog at the end of last year, the FTs Martin Wolf pointed out that UK corporations
have been running HUGE financial surpluses for some years (i.e. the excess of profits over
investment spending and dividend distributions, see chart below and blog link).
Why do I regard the idea of cutting UK company taxes as laughably stupid at this time? It is
simply the fact that UK corporations, like their US counterparts, are sitting on piles of excess
cash with very little evidence that they want to either spend or distribute these surpluses.
Indeed in a blog at the end of last year, the FTs Martin Wolf pointed out that UK corporations
have been running HUGE financial surpluses for some years (i.e. the excess of profits over
investment spending and dividend distributions, see chart below and blog link).
PM
And to the extent that sectoral balances MUST sum to zero, if the government wants to
reduce its deficit, another sector must reduce its surplus, most probably the corporate sector.
This can either be done by reducing profits or boosting their spending. At a time when it is
estimated that UK (and US) companies are sitting on huge cash piles, it seems totally
senseless to boost profits still further by lowering taxes in the hope that they will spend this on
hiring and investing. If they had wanted to do this, there is most certainly no shortage of
funds. Indeed if the government really does want to reduce its bloated budget deficit, and if as
appears to be the case, the UK (and US) corporate sector cant find useful things to do with its
cash mountain they should be relieved of this troublesome burden via HIGHER not lower
corporate taxes. Alternatively a one-off levy on excess cash corporate piles should be applied.
After all, deficit reduction is this UK governments number 1 priority.
And to the extent that sectoral balances MUST sum to zero, if the government wants to
reduce its deficit, another sector must reduce its surplus, most probably the corporate sector.
This can either be done by reducing profits or boosting their spending. At a time when it is
estimated that UK (and US) companies are sitting on huge cash piles, it seems totally
senseless to boost profits still further by lowering taxes in the hope that they will spend this on
hiring and investing. If they had wanted to do this, there is most certainly no shortage of
funds. Indeed if the government really does want to reduce its bloated budget deficit, and if as
appears to be the case, the UK (and US) corporate sector cant find useful things to do with its
cash mountain they should be relieved of this troublesome burden via HIGHER not lower
corporate taxes. Alternatively a one-off levy on excess cash corporate piles should be applied.
After all, deficit reduction is this UK governments number 1 priority.
NC
if companies don’t spend their cash, they’ll have it taken off them
PM
indeed
NC
CEOs are incentivised to buy in shares
NC
while spending it takes much longer to produce rersults
NC
I think Edwards has a point here. Political pressure will rise if companies keeping hoarding cash
PM
Theme to watch
11:40AM
PM
As so to Capita
BE
Yup – indedd.
BE
Results. Bit better than hoped.
Capita PLC (CPI:LSE): Last: 717.00, up 28.5 (+4.14%), High: 734.00, Low: 685.50, Volume: 2.28m
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Or guided, or whatever.
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Guidance re pipeline is positive.
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Cashflow’s bad
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But there’s no warning
NC
Number of mentions in Private Eye usually a bearish signal
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Ha.
NC
been a few recently
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I had a very long email conversation with Capita’s head 
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That ran for the whole of yesterday’s working day.
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I’d love to share, but sadly …..
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Suffice to say, he’s earning his fee.
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Returning to today’s news…..
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Results are, in truth a bit swings and roundabouts.
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(Which I dare say Capita will soon be managing.)
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Here’s BarCap with the summary.
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Positives from Capita 2011 results are: 1) earnings inline; 2) organic growth seems underpinned for 2012 due to recent contract wins; 3) bid pipeline largely replenished despite recent contract announcements. The main negative is on cash flow, which has come in light due to working capital outflows in 2011, and is likely to be a recurring feature in 2012. FCF of £157m vs. our £200m forecast cast, with Cash flow from Operations of £364m vs. our £416m. For 2012, the company is pointing to likely additional £60m+ working capital outflows vs. our forecast of only a £10m outflow. As for the figures, 2011 EPS of 48.5p is 1% ahead of our forecast, operating profit of £427 is 1% ahead of us (2H 2% ahead), margin 20bps better than us, and dividend of 21.4p inline. Pipeline has been replenished, now at £4.6bn vs our £4.3bn forecastcst, in spite of the recent Civil Service and Army Recruitment contract wins. We do not expect 2012 consensus EPS to move materially, and we think the company is comfortable with 3% organic in 2012, and modest margin attrition. Shares trade on 12.5x ’12 PE, 9.3x EV/EBITDA, 7.5% FCF yield, compared to Serco on 12.7x PE, 8x EV/EBITDA, according to our estimates.
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And Collins Stewart
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Which asks some pointed questions about the quality of earnings.
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FY11 organic sales growth declined by 7%, as expected. ‘Underlying operating profit’ of £427.4m +8% (EBITA margin of 14.6% vs guidance of flat margin on
14.4% in FY10) and underlying PBT of £385.2m +6% were 1-2% better than consensus. Within this, management comments on an unusually high level of restructuring costs (£8m), and £14m of captive insurance claims (note 2 to the accounts), offset by a £23.9m pension credit (from the switch from RPI to CPI).
The Free Cash Flow of £157m was significantly down on the prior year (£241m) owing to previously highlighted working capital factors. And the net debt of
£1.33bn (net debt/EBITDA of 2.5x) was about £200m higher than the consensus expectation of £1.13bn, owing to circa £380m cash spend on acquisitions (including assumed net debt).
14.4% in FY10) and underlying PBT of £385.2m +6% were 1-2% better than consensus. Within this, management comments on an unusually high level of restructuring costs (£8m), and £14m of captive insurance claims (note 2 to the accounts), offset by a £23.9m pension credit (from the switch from RPI to CPI).
The Free Cash Flow of £157m was significantly down on the prior year (£241m) owing to previously highlighted working capital factors. And the net debt of
£1.33bn (net debt/EBITDA of 2.5x) was about £200m higher than the consensus expectation of £1.13bn, owing to circa £380m cash spend on acquisitions (including assumed net debt).
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Management’s confidence in an acceleration in organic growth in 2012 is underpinned by recent contract wins (Army RRP and Civil Service Training) and a
replenishment of the bidding pipeline (£4.6bn over 35 bids at Feb-12 vs £4.7bn at Jul-11 over 30 bids), though we still believe management’s guidance for 2012 of 4-5% will be a stretch. We think the inclusion of a one-off, non-cash pension credit is a low quality source of profits. Not only is the cash performance worse than we had expected – the working capital outflow of £96m was far greater than we had expected (£96m vs CS est. £50m) – but management has indicated that
working capital terms in the future are likely to be less favourable, on average, than they have been in the past.
replenishment of the bidding pipeline (£4.6bn over 35 bids at Feb-12 vs £4.7bn at Jul-11 over 30 bids), though we still believe management’s guidance for 2012 of 4-5% will be a stretch. We think the inclusion of a one-off, non-cash pension credit is a low quality source of profits. Not only is the cash performance worse than we had expected – the working capital outflow of £96m was far greater than we had expected (£96m vs CS est. £50m) – but management has indicated that
working capital terms in the future are likely to be less favourable, on average, than they have been in the past.
BE
We retain our HOLD recommendation. We anticipate a stronger organic growth performance this year, but are concerned by the quality of short-term earnings.
The high spend on acquisitions is the principal driver of the deterioration in the returns on average invested capital (17.2% from 20.6% in 2010).
The high spend on acquisitions is the principal driver of the deterioration in the returns on average invested capital (17.2% from 20.6% in 2010).
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As does JP Morgan.
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Cashflow conversion is the main negative today at 85% vs. 112% in FY 2010, a 29% decline. In H1 the cash conversion was 93% compared with 121% in H1 2010 a 28% decline. The main reason for the decline as in H1 was working capital. The cash conversion is expected to improve in 2012 and 2013. There are also then the expected settlements of £17.9m for Arch Cru and a £10m pension contribution back to Cumbria County Council. Capex at 3.6% of sales was below the target ceiling of 4%. Net debt/EBITDA at 2.5x.
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So – as I say, positive in the context of a big bear position.
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Positive in the sense of recent contract news.
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But, according to the sellside, still a lot to prove.
PM
Hmm. was just looking at the annual report. The board don’t seem to be paid anything like as much as their counterparts at Serco. Maybe that’s the problem
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Hang on …..
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By memory, Capita’s CEO drives an Aston Martin DB9.
PM
Very nice
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I doubt he goes unrewarded from the public purse.
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Hang on ……… I’m sure there was a Daily Mail hatchet on him last year.
PM
Ah, do share if you can
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How dare you call me a fat cat, I only earn £14,500 a WEEK
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The wealthy boss of an outsourcing firm stunned his workers when he complained about being labelled a fat cat, even though he earns thousands a week.
Paul Pindar, chief executive of Capita, was upset by a leaflet handed to him at the company’s London headquarters which claimed he was on a £9.8 million pay and benefits package.
PM
14k a week, plus incentives/shares/evertything else
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All performance related.
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And it’s undeniable (according to the ) that Capita improves the quality of all our lives.
) that Capita improves the quality of all our lives.BE
(Unless you’re in Lewisham, perhaps)
PM
being the felt
being the feltNC
so that’s what the emial exchange was about
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Personal conversations. I really can’t share, sadly.
NC
do you feel your quality of life improved becasue of Capita?
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Anyway. let’s push on.
PM
11:51AM
PM
LOOK AT GOO GO
Gold Oil – little resources play, with assets in Peru, Colombia and Cuba. Not for the faint-hearted.
PM
Price is up 18%
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Er …………
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Why?
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I’ve not heard anything.
PM
Clairvoyant trading, obv
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Right. Well, good luck to all buyers.
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3.325p in the middle.
PM
you may need it
PM
While we are on speculative oil plays…
PM
GKP?
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And a chance to use another updated autotext ……..
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Muppetism
Muppetism (n). a dogmatic belief in True Value of your investment, to the point that anyone holding a different view is regarded part of an organised conspiracy.
PM
Yo’ve been busy Bryce
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updating the autos
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Didn’t have a lunch yesterday. Did some tidying.
PM
very good
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So GKP’s been all over the shop this morning.
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Opened down 9% or so.
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After a 12% fall yesterday.
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As the EVIL MARKET MAKERS shook the tree ……
PM
Undeserved 12% fall
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Obv.
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And it’s all market maker manipulation
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Of a £3bn valued stock.
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That trades 16m or so per day.
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(Sigh.)
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So anyway, we’ve rallied
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Ahead of Genel presenting this afternoon.
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Genel being Tony Hayward’s thing
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That used to be the Turkish thing.
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That owns a bit of a field operated by GKP. (After session edit: Apologies. Genel and GKP own 40% each of the Ber Bahr field, but it’s operated by the former not the latter.)
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And, even though Genel can say nothing price sensitive ….
Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 387.25, up 22.25 (+6.10%), High: 395.50, Low: 336.00, Volume: 19.20m
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It all makes perfect sense.
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If you suffer from Muppetism.
PM
WINS must love this
PM
5-10% per day
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Actually, I have the latest TD Waterhouse figures.
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GKP’s only number 2 among the private punters.
PM
Wots no1?
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Xcite
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Accounted for about 25% of TD Waterhouse’s trade last week.
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Because they went on a trip to Dundee.
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To look at an oil rig
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In dry dock.
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And perhaps stop off at Fat Sams on the way back.
PM
Press trip
PM
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Aim’s brilliant. And by “brilliant” I mean insane.
11:58AM
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Ok – nearly midday.
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Couple of things to mention.
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C&W Worldwide.
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More cynicism that Vodafone will ever actually bid for this thing.
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You’ll remember that Vodafone has said they’re looking
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But not yet actually talking.
PM
yeah, yes good point to make
BE
Good note from Charles Stanley this morning.
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Although we have been suggesting for at least a couple of years that CWW might be bought by a mobile phone company, now that the market believes it is a real possibility we are more sceptical:
NC
As a shareholder, I rather hope they’re just window shopping
BE
In a private meeting in early December the Vodafone CFO said to us that Vodafone has only bought fixed line businesses where it felt that the incumbent from whom it would otherwise lease capacity (eg in Spain and Italy) might not provide a satisfactory service (to a competitor in the mobile space). In the UK BT Group, which provides the core network and backhaul for Vodafone’s mobile phone traffic and which has no mobile arm, apparently provides a satisfactory service. CWW would anyway offer only a partial backhaul coverage, less than BT. Vodafone is in general agnostic between buying and renting, and it has steadily rejected the view that its networks may be swamped by a surge of data. It would have to believe that it can develop a better network than BT, or else possibly that it would have a large pricing advantage, to decide to own CWW’s network (or networks? See Gavin Darby’s comments, above).
BE
In our view Vodafone’s business model is to spread best practices through the group, focusing on branding, products, distribution, efficiencies and so on. It does not buy complicated businesses like CWW and keep this bit, sell that bit, sort out a further bit, and so on. If a private equity firm were to buy CWW and offer Vodafone just those parts that Vodafone wished to buy, that might be different. However, John Pluthero said a while ago that, for example, the domestic and international parts of CWW were quite intertwined and it would not be a quick job to separate them
BE
We would be surprised if Vodafone wished to devote resources and time to fixing the “too difficult to do” issues, after buying CWW. Any integration or disposal problems with CWW would probably receive much higher coverage than the deal would merit, and this could detract from the group message.
BE
It is not clear to us whether or to what extent Vodafone would be able to make use of CWW’s UK tax losses. However, Vodafone’s 2010/11 adjusted EBIT was £348m. Tax shelter @25%, say, for a decade and discounted at 8%, say, would be worth £580m. There would also be an immediate earnings benefit to CWW if it were to provide the core and backhaul for Vodafone UK.
BE
Perhaps the summary view is that we can see the acquisition being attractive to Vodafone in financial terms, but Vodafone doesn’t really do “financial” deals (although clearly it looks for pretty good prices on disposals). Vodafone could have contracted with CWW rather than BT, if its network was so good, but it chose BT – no doubt at an attractive price, but the service must have been at least as good. Why should it suddenly make sense, for operational reasons, to own CWW’s network?
BE
Finally, what of the chances of a bid by private equity? Again, we believe that a private equity firm would not wish to retain all of CWW’s businesses, but that it would also be checked by the time and trouble needed to separate the UK and international businesses, and to deal with the “too difficult to do” issues. Bank debt might be hard to arrange at required levels, given the current poor cash generation
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And second, the rather persistent @martingredo wants an update on Kenmare.
PM
Hmm — CWW v intersting
PM
interesting even
PM
Sorry — Kenmare
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Friend of the show Taxloss notes results from Iluka this morning.
PM
Back to the Grat Moz Growth story
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Mozambique
Disclaimer: FT Alphaville does not endorse Paul Murphy’s idyllic holiday retreat on the secluded, unspoilt Barra beach near Inhambane, Mozambique, where availability is strictly limited so book now to avoid disappointment. http://kayamj.com/
PM
NC
well, it was unspoilt…
BE
So Iluka is the Aussie peer to Kenmare.
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And they made rather cautious noises today regarding M&A
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One of the Aussie papers was flagging them up last week as a possible buyer for Kenmare
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Though I see more problems than advantages in that story.
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So anyway, Iluka apparently said they’re better developing than buying at the moment.
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And that zircon demand’s soft.
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Wihhc is bad, apparently.
PM
Fair enough
12:05PM
PM
before we go
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Neil, were you gong to shares some stuff on Anthony Bolton?
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Guru investor Anthony Bolton
NC
He’s admitted that China might be too hard for him to crack
NC
While it is no secret that Bolton’s trust has not lived up to some investors expectations – losing 25.8% over the 12 months to December 2011 versus a drop of 11.44% in the MSCI China Index – the manager admittted he had never been asked how long he had to turn things around in a grilling from Wealth Manager.
‘It is the first time I’ve been asked that. I’m not going to run the fund forever and I cannot tell you anything more than I have said publicly. A lot of people have bought in to my optimism about China, saying that it is one of the great opportunities of all time…if I’m totally wrong on that, then, quite right, stop. Let’s face it when we get there,’ Bolton said.
PM
oh dear
NC
That’s Citwire
PM
Down 26%
PM
Ouch
NC
He was caught by one of those Chinese frauds which provide such entertainment to fans of Bronte Capital
PM
Tempted to say “easily done” — But john hempton would dispute that
PM
okay we are done
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Thanks Neil and thanks Bryce
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And thank you to everyone on the right
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We are back tomorrow
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at 11am sharp.
BE
Yup. Ta for your comments. Afternoon all.
PM
Seeya