This is the transcript of the Markets Live session ending at 12:14 on 13 Nov 2012. Participants in this session were: Paul Murphy Bryce Elder
UK regulators are investigating an alleged attempt to manipulate the country’s physical wholesale natural gas market, the latest sign of watchdogs stepping up their vigilance of electricity and natural gas trading.
The UK Financial Services Authority and the Office of the Gas and Electricity Markets (Ofgem) are investigating unusual price activity in late September in the National Balancing Point (NBP), a so-called virtual hub that serves as the main pricing point for UK natural gas, according to people familiar with the probe.
Greece sells 4.062 bln euros of 1-month and 3-month t-bills to roll over 5 bln issue maturing Nov. 16- debt agency
Over the past week, we have been trying to make sense of Greece’s financing needs. This is not easy to do.
The first table below shows the situation at the launch of the second program back in the spring. With ambitious assumptions about the primary surplus, nominal growth and asset sales, it was possible to show Greek debt reaching 120% of GDP in 2020.
The second table below updates the financing situation with a two year delay on the fiscal objective, reduced asset sales, lower nominal growth in the near term and a lower borrowing cost on official loans. This table still has the same ambitious assumptions about the medium term fiscal position and nominal growth as was assumed in the spring. With these assumptions, the debt to GDP ratio in 2020 is 140%.
But, this table does not include the additional “stock-flow adjustment” included in the European Commission’s autumn forecast. In this forecast, Greece’s debt stock this year is assumed to be 16%pts higher than was estimated in the spring. Around 5%pts of this increase reflects an upward adjustment to the debt stock last year. Very little of the remaining 11%pts can be explained by changed assumptions about the deficit, nominal GDP and asset sales. We are not sure what this additional “stock-flow adjustment” is, but we can easily incorporate it into the tables below. If we do so, and leave all the other assumptions unchanged, then the debt to GDP ratio in 2020 is 156%.
In yesterday’s Eurogroup meeting, it was decided to delay the date when Greece is tasked to meet the 120% debt objective, by two years, to 2022. But, if the Eurogroup is working with the European Commission’s new numbers, it is difficult to see how this new objective can be met without OSI. We have not extended our table through 2022, but on the basis of nominal growth of 4%, a primary surplus of 4.3% of GDP, and asset sales of €5bn per annum, the debt stock is declining in 2020 by around 7.5%pts per year. This pace of improvement would put the debt stock at 141% in 2022.
The Eurogroup will meet again on November 20th to deal with the elephants in the room – the additional financing needs in the second program, the need for a third program, and the new objective of a debt to GDP ratio of 120% in 2022. It is not clear how it will do this given that, according to the Eurogroup president, OSI will not be part of the package.
Main surprises Q2 ‘organic’ growth in service revenues fell 1.4% Y/Y (-7.7% headline).
This is the first Y/Y fall after nine consecutive quarters of growth. To appreciate the scale of
the business deterioration note that previous guidance (cut only six months ago) was for
+1.0% to 4.0% growth. H1 EBITDA +2.9% ‘organic’ (headline -11.7%), 1.8% below
consensus. Once again, looking at the progression in Y/Y EBITDA growth over the last
two years, one can easily spot a clear pattern: +1.6%, 0.0%, -1.2% and -2.8% as of
H112/13. Driven by pressure on revenue and margins, FCF was down 16.7% Y/Y,
13.5% below consensus, leading to a downgrade in FY guidance now ‚expected to be
in the lower half of the guidance range for the FY‛. Taking into account spectrum payments
and minorities (i.e. mainly Vodacom), we estimate consolidated FCF available for
distribution falls towards c. £3.5bn. This compares to c. £4.9bn cash absorbed by the
ordinary dividend. Dividend coverage might fall even lower if the cash generated by
deferred payables is excluded. VZW dividend (i.e. £2.4bn) is a positive event but trends
follow the same pattern as other group metrics, i.e. down 15% Y/Y and c. 15% below
consensus. Our impression is that Vodafone may have scrapped its exceptional dividend
(still in consensus estimates) and decided instead for a £1.5bn share buyback. A falling
dividend yield may see Vodafone losing top ranking in the FTSE 100 table with a portfolio
reshuffling (of UK income funds) likely to follow.
Impact on consensus estimates? We think consensus FY 13 group revenues of £44.5bn and EBITDA of $13/5bn will ease back perhaps £1-200m, with follow-on 2-3% downgrades to FY14 EBITDA estimates. This could be partially offset by raised expectations for the US, and group operating profit.
No Special dividend. Verizon Wireless announced an $8.5bn distribution, down 15% on the $10bn announced last year (and expected again this year by us and the street). Rather than pay out another special dividend the Company has decided to use the £2.4bn due to be paid by year end for a share buyback. Not only has the form changed but the pass through declined as well; of the £2.8bn received by Vodafone in FY12, the company paid a dividend of 4GBp per share (total £2bn), a pass through of around 70%, versus a pass through of just 62% this year. The Company remains committed to the ordinary dividend payment of 10.2 GBp or 6.1% yield, but that dividend is only just covered by the Company’s Free Cash (ex-VZW).
Group guidance was maintained but it is the accounting of Verizon Wireless profits that will hold up the results – revealing a business that has little ambition or optimism to improve the performance of controlled operations. Adjusted operating came in ahead of consensus, due mainly to associate profits from VZW that were 28% higher than in H1 12, and £300m ahead of consensus. Assuming a similar return from associate profits (ie an accounting measure of profits) in the second half of the year, Vodafone AOP would still be in the higher end of guidance without having to believe a turnaround around in the underlying business – so, in line with our current estimates for H2 which forecast a considerable incremental decline in margins of 2.2 ppts. Adjusted operating profit is now guided to the higher end of the range (£11.1bn – £11.9bn); we expect £11.8bn. Operating FCF is now guided to the bottom of the range (£5.3bn-£5.8bn). Previous guidance to positive revenue growth for the full year has been dropped.
The strategic review reiterates the current strategy, that we believe is insufficient to offset what are now major structural headwinds in Europe. We think that the current strategy is ill-suited to an environment that has changed dramatically around Vodafone. In this new world Vodafone faces incumbents that have a high incentive to offer total telecom offers that discount wireless. Vodafone in our view is on a path to become a high cost structure wireless only operator with dwindling access to the best customers in each market. It is unlikely that the presentation this morning will reveal anything new to combat what increasingly looks like structural decline.
With Verizon Wireless the only thing that keeps number afloat, it seems that only the very brave would countenance sale of what is now Vodafone’s best asset. For long term shareholders this should raise alarm bells. Vodafone has no structural solutions for its position as a wireless only player in an increasingly integrated European world.
Outlook for flat FY12 NAR, which is in line with our forecasts
ITV is forecasting Q4 Family NAR down 2% (vs NOMe of -1.4%) with
FY12 NAR flat (we are also flat). This breaks down into October -2%,
November -2% and December 0% and we note that ITV has historically
been conservative in its guidance so we may see some upside,
particularly to the December forecast where bookings are still ongoing.
The outlook is particularly reassuring given recent mixed media buyer
messages from -8% in The Independent and 0% to -4% for Q4 from our
recent media buyer conversations
Further cost savings and Studios may move EPS up by c.5%
ITV surprised by raising its cost-saving target for FY12 from GBP 20m to
GBP 30m. If we assume all these extra savings flow to the bottom line,
this would add 3% to FY12E EPS. We forecast GBP20m of savings in
FY13, which looks very attainable in light of this development. Studios
also performed strongly and ITV now expects Studios to generate over
GBP100m of profit in FY12 – we had forecast GBP93m and if we move
to new guidance this leads to an additional 2% EPS boost for FY12.
9M results perfectly in line
Total 9M group revenues were GBP 1,573m (vs NOMe of GBP 1,574m)
with Broadcasting & Online of GBP 1,309m (vs NOMe of GBP 1,310m).
The Studios division external revenue growth was 20% at 9M with
revenues of GBP 264m (vs NOMe of GBP 263m). This represented a
significant slowdown in growth from 47% at 1H, with this slowdown
expected given the front-end loading of shows such as Hell’s Kitchen US
to 1H and tough Titanic 3Q11 comps. Management has guided to 10%
Studios revenue growth for FY12, although we believe this can be
exceeded and we forecast 13% growth for the year.
Some decline in audience share
ITV Family SOV was down 3% to 22.2% at YTD 30 October. The fall in
SOV was a slowdown from the 23% figure at 1H, with the
underperformance driven by the Olympics.
ITV1 adult SOCI (which is used in CRR calculations) was down 6%,
which was a modest fall from -5% at the 1H stage.
We forecast flat advertising growth for 2012 (consensus is also flat) and
we are more conservative for 2013 with -1% advertising (vs consensus
at flat). We are buyers of ITV with Studios and cost savings being key to
this thesis (this drives 11% EPS growth in FY13E despite a -1% ad
forecast). In light of today’s results, we believe further cost savings and
ongoing Studios growth help underpin this view.
BP and AAR, joint shareholders in TNK-BP, today announced that they have reached a comprehensive agreement to settle all outstanding disputes between them, including the current arbitrations brought by each against the other.
The agreement includes an immediate waiver of the new opportunities provision in the TNK-BP shareholder agreement, allowing each party to explore new opportunities and partnerships in Russia and the Ukraine, effective immediately.
The parties have agreed to work constructively together with each other and with Rosneft to progress their respective disposals of their shareholdings in TNK-BP.
Environmental risk may lead to financial risk. This is a fluid situation
for stakeholders, as we believe it feasible the mine may face a breach of
its environmental standards. Such a scenario could compromise the
mine’s ability to restart swiftly, which would have adverse consequences
for TALV’s financial position and its shareholders.
Best case, still encounters 1H’13 liquidity gap: The best case we
envisage is TALV rectifies the leak and is able to restart production in
the near future. However TALV still faces acute liquidity stress given
that it had only €87m in cash at the end of September but has a €77m
convertible repayment due May 2013.
Worst case, permitting renewal delays feasible. We now see tangible
risk that TALV’s environmental permit, which is due for renewal in early
2013 as standard, could be delayed or may not be forthcoming. This
could compromise TALV’s ability to continue producing and exacerbate
its already severe liquidity problems.
Near term risks are to downside. It is clear the shares will remain
under selling pressure until management provide reassurance on the leak.
We believe a speedy resolution or clarity on the scale of the permitting
risk likely to be faced in early 2013, could deliver significant upside to
TALV’s battered shares. We retain belief TALV would hold strategic
interest for a partner that could alleviate its capital starved predicament
and remedy repeated operational shortfalls.
GERMANY PRESS: GREECE TO GET E44 BILLION IN AID IN ONE PAYMENT
The Group’s IMS, issued on 24 July 2012, referred to, inter alia, important opportunities in the pipeline yet to be confirmed for production in the current financial year. Since then, as expected, a number of important orders have been received for delivery in the 2013/14 financial year. However, a number of significant orders which had been expected and planned for production in the second half of the current financial year have continued to be delayed. It will now be too late for these orders to benefit the current financial year, and as a result the Board expects that the financial results of the Group for 2012/13 will be similar to those for 2011/12.
De La Rue has issued an update as we approach H1 results RNS which
suggests a big miss on FY results, though bizarrely should mean more
confidence in 2014 rather than less. While we can hardly describe the size of
the miss as a storm in a teacup, having seen the volatility of delayed orders
for Currency a number of times before, we are more confident in future
forecasts rather than less. However, while we reduce our Target Price
accordingly on sentiment/credibility issues, the shares remain a Hold.
O utlook: This is where it gets tricky. While the order book is unchanged, the timing on
order placements to print a number of banknote orders has slipped into next year, and
the economic gearing effect hits profits hard as a result. However, next year should see
orders bulk together and the gearing work the other way – this is something we’ve seen a
few times at DLR and is a ‘normal’ course of business in banknote printing. However,
with a material increase in banknote paper manufacturing capacity in the market comes
increased price competition; does paper volumes down 15% in H1 suggest DLR is not
dropping prices aggressively to stay involved? No doubt specifying its own paper for the
vast majority of order leaves it better placed than other paper manufacturers and slightly
more confident as a result, though the economics of paper production make it highly
volume sensitive. This will be the wild-card element of 2014 (and was the basis of our
bear case before the recent Improvement Plan), though with Currency mix
improvements and on-going cost reductions, improvements should be smoothed out. As
a result, we envisage a rockier ride…. albeit to the same final destination. However,
investors may do well to take a rest stop at Cynicism Gulch along the way to remind
themselves how this could play out given the terrain.
F orecasts & Target Price: We reduce our March 2013 forecast from £77.8m to
£57.1m (EPS -26.9% to 42.7p), all based on lower Currency turnover and margin
assumptions, although we leave our 2014 forecast unchanged at £95.4m (EPS 71.7p).
While our confidence in achieving the 2014 forecast has increased, market cynicism will
no doubt increase given the history of profit volatility and we reduce our multiple
assumption to 13x (from 15x), producing 933p and leaving the shares as a Hold at
GERMAN FINMIN SPOKESWOMAN, ASKED ABOUT NEWSPAPER REPORT, SAYS NO FINAL DECISION YET ON GREEK LOANS – RTRS
UK inflation numbers for October came in higher than expected. RPI grew 3.2%yy in October (Reuter’s expectations: 2.9%, prior: 2.6%). CPI also surprised to the upside at 2.7%yy (expectations: 2.3%, prior: 2.2%). A substantial source of this upside was the increase in university tuition fees – which caused the education component of the index to rise 19%mm. Since education is around 2% of the index, this meant that the tuition fee increases caused around 40bps of the 50bps monthly increase in CPI.
Interestingly, some of the increases in electricity and gas prices introduced in October did not show up in this month’s index. This means that inflation was above expectations even without this component. In addition, it suggests that once the increases in electricity and gas prices are included over the next two months, CPI inflation could be above 3% – and into letter-writing territory – by the beginning of next year.
The BoE could argue that these increases are temporary and transitory (though it is worth noting that tuition fee increases will occur for the next three years as successive generations of students enter onto higher fees). However, the fact that inflation is once again surprising to the upside is likely to give the hawkish members of the MPC further ammunition in their arguments that QE should be kept on pause. Temporary factors can only be blamed for so long before they start to lose their appeal as a way of framing the debate.
Core inflation also rose to 2.6%yy from 2.1% last month – though it should be noted that this includes tuition fees and so the headline reading is not necessarily suggestive of such a sharp increase in underlying inflation pressures.
Upside news in the October release was distributed fairly widely.
Compared to our forecast, the major upside news was in food, non-energy
industrial goods (notably clothing), and services (notably education,
where the effect of the tuition fee increase was larger than we had
expected). Partially offsetting this, energy inflation was lower than we
had forecast. We had expected the price increase announced by utility
firm SSE to show up in the October index, but it now appears that this
will first appear in the November print. Because the downside news
appears to reflect issues of timing, whereas the upside news (such as on
tuition fees) will prove persistent, we would anticipate that on balance
today’s release implies upside news for inflation in coming months.
Near-term inflationary pressures have picked up sharply, with annualised
3m/3m (sa) CPI inflation rising to 4.2% from 2.6%. Looking across the
major expenditure components, near-term inflation is now above the 2.0%
target for the majority of spending components (see chart below;
education is not shown owing to its highly seasonal character). This
measure is likely to exaggerate the true degree of inflationary
pressures, since it annualises 3m/3m increases in prices, such as those
for university tuition, that in reality are adjusted only once per year.
Nevertheless, above-target inflationary pressure now appears to be
With five of the ‘big-six’ energy firms having announced price hikes of
between 6% and 11% to take effect by December, we expect higher utility
prices to add an additional 0.3-0.4pp to inflation over the next two
months. We may also see further inflationary pressure from higher food
prices, although the pass-through to consumer prices tends to be rather
uncertain in both magnitude and timing. Our expectation is that inflation
is likely to persist at around the 2.5-3.0% level in the near to medium
term, reflecting recent price increases, sustained inflationary pressure
from university tuition fees (which will push up on inflation for the
next three years) and a squeeze on firms’ margins from elevated unit
We expect tomorrow’s Inflation Report to project higher inflation in the
near term at least, driven primarily by stronger-than-expected utility
price increases due during Q4, helping to account for the more cautious
stance on policy seen at the November policy meeting (see UK MPC
Watching: Inflation Report preview – Edging towards policy stability, 12
November 2012). In recent years elevated inflation has been one of the
main headwinds for activity, squeezing real household incomes and hence
consumer spending. The upside news in today’s release from higher
university tuition fees may have a smaller contractionary effect than
inflation from other sources. Fees affect only a small portion of the
population, and students are able to borrow to finance fees, implying
only a marginal effect on current levels of consumption. Nevertheless,
there is enough broadly-based upside news in the October release to be
concerned about inflationary pressures becoming more embedded, and we
expect these relatively strong inflation numbers to restrict further the
MPC’s room for manoeuvre in the coming months.