Markets Live chat transcript for the chat ending at 12:07 on 8 Feb 2012. Participants in this chat were: Paul Murphy Bryce Elder/FT neil collins
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If the deal gets through, it will highlight again the inappropriate size of the rescue facilities. If more PSI transactions are required for other countries, the ECB is likely to use the same procedure. As a consequence, the EFSF/ESM would have to use a large part of its ammunition – currently targeted at €500bn – to fund the purchases of ECB government bond holdings under the SMP of currently €219bn.
There’s been some speculation reported in the press (eg FT) that Inmarsat could
be a target for either EADS or General Electric. We think this is credible. Why?
One of the points we’ve been making consistently is that the new Global Xpress
constellation of satellites which start going up at the end of 2013 is going to be
launched into a massive wall of demand. Inmarsat’s new system will deploy the
only global Ka-band system with ultrafast data connectivity anywhere in the world.
While the investment is seen as a “defensive” move in the maritime segment it is
“offensive” (to use the American term) in the adjacent markets it’s not currently in.
One of the big uses we see there and we’ve been talking about for some time is
the nascent market for Drones.
These unmanned aerial vehicles (or UAVs) use a
colossal amount of data all via satellite as they send signals back encrypted but
uncompressed to get the maximum amount of resolution. We expect demand for
drones to grow exponentially. Indeed we understand the replacement for the US’
F-35 fighter jet is likely to be pilotless. On top of that the military is gearing up
more for electronic warfare. Since the US government has cancelled its TSAT
programme, a series of US military communication satellites it will be forced to
rely more and more on trusted third party NATO allies – in other words
INMARSATs new Global Xpress network. This wall of demand is the reason why
we think Boeing has pre booked 10pct of the Global Xpress capacity already. So
why EADS or General Electric? Well actually there are some clues here, EADS
recently bought Vizada, one of the main distributors of Inamrsat’s services, and
EADS is pushing to get involved more in military procurement.
Such a move
could therefore make sense. General Electric, obviously with a lot of military
connections also has some geo-stationary satellites which it picked up in the split
off transaction from SES back in 2007, and so there would be some operational
synergies as those satellites, like Inmarsat’s are also geostationary ones so there
would be operational and ground control centre synergies. As a reminder we
have a 780p Price Objective on Inmarsat, which is 80% upside potential,
excluding the 6.5% dividend yield.
in the eyes of Falcone this gives him the right to use 40 thousand plus booster stations all they way across America so he can retransmit to everyone. Of course these booster stations will also be connected to ground-based fibre networks where appropriate. And so Falcone plans to build another US national cell phone network or at least to sell spectrum to the existing networks.
This is – to put it mildly – audacious. And there is little doubt that American consumers would benefit from more wireless spectrum capacity.
But also to put it mildly it is a massive lean on the American taxpayer. You see if the spectrum had been auctioned like traditional spectrum the taxpayer would have received billions of dollars – dollars that will might now flow to Lightsquared and Falcone. Rarely have I seen taxpayers give away larger gifts to corporates (and that includes the banks) but in this case they are giving the gift to one slightly compromised billionaire and his hedge-fund clients. It is really hard – nay impossible – to see any policy basis for that gift.
LFL slow in Jan, PBT seen in line with our low end forecast
Overall Q3 trading for the 3 months ended Jan showed an improved trend vs
Christmas trading, mainly driven by a better performance in wholesale. However
the slower trend in Retail LFL in January means management now expects FY12
PBT to come in line with our low end forecast of £50.7mn (consensus range £50- £54mn). Although this statement could, once again, renew speculation about the longevity of the brand in the UK, we would highlight that 1) January is not an important month for Retail (it contributed to 6% of annual group’s sales last year) 2) at 12x cal.12e P/E we don’t think the shares were pricing in the high-end consensus numbers anyway and 3) we expect more positive newsflow in 2012 on new AW12 ranges, margins and operational efficiencies. Given the shares are up c.38% YTD and 60% from November lows we would not be surprised to see some near-term correction, but would regard any dip as a good buying
Q3 Retail sales grew 28% with LFL +4.4%, in line with the Christmas trading
update. However, a higher space contribution in January, some demand brought
forward into December (LFL +9%) combined with higher discounting across the
high street had a negative impact on SuperGroup’s January LFL sales (we
estimate small negative).
Wholesale returned to growth in January and overall Q3 was up 18% (vs. -4% in
Nov-Dec) as wholesale accounts received earlier deliveries of SS12 ranges.
Going forward we still expect international to drive wholesale growth, although the
annualisation of the acquisition of SuperGroup Europe in Feb 2011 means the
rate of growth will slow.
Supergroup has seen sales slow dramatically over the last 3 weeks, with the Q3
outturn implying LFLs of -3% through January, even against weaker comps. We
lower our Apr-12 PBT forecast from £54.1m to £49.0m and, with the stock trading on 15x earnings, reiterate our SELL recommendation.
Sales slow in January: Having posted a Christmas trading update which saw LFLs
improve over the first 9 weeks of Q3 to +5.8% (+9.3% through December), Supergroup
has seen sales slow dramatically over the last 3 weeks of January. LFLs ended Q3 at
+4.4%, implying a run-rate of -3% since the Christmas trading update. Moreover, the
statement notes that the slowdown was only for the last 3 weeks of January, implying a
considerably worse exit rate, likely at least -5%.
Against weaker comps: Strikingly, this performance is set against weaker comps; last
year, the slowdown from the 9 week Christmas sales growth to the 13 week Q3 update
implied this 4 week stub was facing comps c.10% below those over Christmas.
There were mitigating factors: While we had expected sales growth to resume its
declining trend through 2012, we had not expected such a rapid change in trajectory.
Admittedly there are mitigating factors; this is a fairly insignificant period in terms of
sales, competitor clearance activity ran longer than last year and the warmer weather
didn’t suit Superdry’s product range. However, it is also worth pointing out that with
internet still growing, and international online sales included in the LFL number, the UK
store-based LFLs must have moved comfortably into double-digit negative LFL territory.
Brand increasingly mass market: In our view, the solid performance over the
Christmas peak, followed by a deeper trough during non-peak periods reflects the
continued mass-marketisation of the brand; Superdry is increasingly appealing to
customers who only shop twice a year – at Christmas and for a summer outfit.
Forecasts lowered, reiterate SELL: Although Wholesale sales resumed its growth
trend (+59.2%), management has guided PBT to be towards the lower end of
expectations; we cut our earnings forecast from £54m to £49m. The shares now trade
on 15x and we reiterate our Sell recommendation, believing the brand has passed its
peak and expecting the sales trend will continue a negative trajectory through 2012.
If Misys’s new software had been progressing as planned, we suspect it would not have contemplated a merger with an arch rival.
Terms “in principle” regarding an allshare merger have been agreed. Misys shareholders will own 54% of the enlarged group, which is equivalent to its market cap at last night’s close relative to that of Temenos. Based on those prices, the newco would have a market cap of just over £2bn and, with our estimated net debt of £280m, an EV/sales of 3x and a PE of 16.5x (based on 25% tax). This looks too high to us, based on our own estimates of cost savings, which have yet to be released by Misys, and the integration risks associated with the deal. The market will also be disappointed that no other bidder has emerged. The new company would continue to be listed in London (possibly also on SIX Swiss Exchange) with its HQ in Switzerland
Cost savings but integration risk: Misys and Temenos operate in over 100 countries, suggesting ample scope for cost savings through the closure of sales offices as well as significant head-office costs at Misys. We estimate that the removal of £50m of costs could create a group with around £760m of sales and operating margins close to 30%. Such a company could eventually command an EV/sales of around 3x. However, this is before taking into account merger risks associated with two different technologies, a banking market in turmoil and companies that have not always seen eye to eye.
Sell down to 300p: As a stand-alone entity, we had a fair value target of 280p for Misys. We now raise this to 300p, equating to an EV/sales of 2.5x and a sector average PE of 15x before cost savings for the combined business. After cost savings, the PE could be 10-20% lower, but we take the view that this is countered by the integration risk and weak market conditions for banking software. We would advise investors to sell down to 300p. Small cap funds are also likely to be sellers today.
The Monetary Policy Committee will announce its policy decision at noon
on Thursday. We and the consensus expect a 50bn expansion of asset
purchases, with Bank Rate held at 0.5%. This decision would take the
stock of asset purchases to 325bn, more than 20% of annual GDP. We
expect the Bank again to indicate that purchases will be exclusively of
The November Inflation Report gave a clear signal that the MPC believed
it would have to expand asset purchases beyond the 275bn announced in
October. The Report showed that without further policy stimulus the MPC
expected inflation to undershoot the 2% target by 50-75bp in the medium
term. Using the BoE’s ready reckoners for the effects of asset purchases
on inflation, additional QE of anywhere between 75bn and 200bn would be
needed to eliminate the projected undershoot.
Even so, we have taken the view that the practicalities of asset
purchases meant the MPC was unlikely to announce more than a 75bn
expansion this month, since, if implemented over three months (tiding the
committee over to the May Inflation Report), such a move would require
upping the pace of asset purchases, something the BoE appears reluctant
to do. At the same time, we believe the MPC is unlikely to announce less
than 50bn of asset purchases, as this would make little headway in
closing the projected gap.
Recent MPC communications suggest the committee has become less dovish
about the inflation outlook since November. A number of factors appear to
lie behind this: the ECB’s liquidity support has reduced the stress in
European interbank markets; the euro sovereign debt crisis appears a
little more contained; activity data in the world beyond Europe have been
somewhat reassuring, while the euro area recession looks likely to be
shallow; and domestic activity indicators point to an improvement in Q1.
In addition, the MPC remains concerned that inflation might prove to be
stickier than it is projecting, with the minutes of the January meeting
noting that 3m/3m CPI inflation rates had been surprisingly resilient and
still above target.
(With regard to this last point, it is worth noting that the MPC will
have a preview of the January CPI outturn, due to be published next
Tuesday, when it meets. Another substantial decline is expected, as last
year’s VAT rise drops out of the annual calculation – we predict a fall
to 3.6%, from 4.2% in December. Although no individual datum should be
considered to drive policy, at the margin a stronger- or
weaker-than-expected outturn could well influence the MPC’s decision,
although we do not have a strong view on where the balance of risks
Interestingly, the minutes of the January meeting implied that the
impetus behind further asset purchases was less than had previously been
thought, and raised the prospect that support for a February expansion
may not be unanimous. Some members saw the case for extra QE as “more
finely balanced” because it was “less clear that inflation would fall
below the target in the medium term”. Some comments by individual MPC
members also played to the notion that the momentum behind additional QE
had waned: David Miles, an enthusiastic supporter of QE, went so far as
to question the presumption that QE would be expanded at this week’s
meeting, while Adam Posen, the most dovish MPC member, acknowledged that
the downside risks that had prompted the committee to re-start QE in
October now seemed less threatening.
No signs QE is working
The sheer size of the inflation target undershoot that was projected in
November means we continue to expect a QE expansion this week – there has
not been anywhere near enough positive news on the economy to close the
projected gap, in our view. However, the recent indications that the MPC
has become less alarmed with the outlook make us lean towards 50bn as
being the most likely amount.
No signs QE is working
But on any measure, there is precious little evidence that it is working.
For instance, lending to consumers fell £377 million in December. Even worse, year-on-year borrowing by consumers has taken a lurch back down, even from the low levels it had achieved in 2010/2011, which in itself was a fifth of the peak in 2004.
So whatever QE was meant to achieve, all it has really done is transfer a large amount of capital risk (duration) out of the hands of the private sector and into the hands of the state, through the agency of the Bank.
We spoke to Misys, who said the Panel asked for that piece to be removed from the release as it had now become a Takeover Panel transaction.