Markets Live: Tuesday, 19th February, 2013

This is the transcript of the Markets Live session ending at 12:06 on 19 Feb 2013. Participants in this session were: Paul Murphy Bryce Elder

PM

hello there

Block

PM

here we go.

Block

PM

Another session of ML

Block

PM

So, who can name today’s portrait?

Block

PM

Block

BE

I can’t. That tie’s from Hermes though.

Block

PM

Special price is someone can do it soon.

Block

PM

its def from Hermes

Block

PM

The tie not the chap

Block

PM

Clue — he’s a former $78m man

Block

PM

dr001 got it — just and so

Block

PM

Daniel Vasella

Block

PM

Wedr001 — we will find you a prize — drop me an email with your address

Block

PM

Here’s some stuff about Vasella that you probably didnt know…

Block

PM

As a young boy in Switzerland, he was in and out of hospitals with a host of maladies, including food poisoning and asthma. At the age of eight, he suffered attacks of tuberculosis and meningitis that forced him to spend a year in a sanatorium, away from his family. The compassion of doctors and nurses in that facility helped him through that difficult period and kindled his interest in medicine. But the remainder of his youth was overshadowed by the death of his older sister from cancer when he was 10 and the death of his father in surgery when Vasella was 13.

Block

PM

Do do our background work here on ML

Block

BE

Or, rather, the BBC does and we read it: http://news.bbc.co…siness/4167921.stm

Block

BE

Good profile.

Block

PM

Actually I got it from McKinsey

Block

BE

Ah – fair enough.

Block

11:07AMBlock
PM

What’s the market doing?

Block

BE

Up a bit from yesterday, basically unchanged for the week so far.

Block

BE

FTSE ahead 20 points at 6338

Block

PM

And volume still awful?

Block

PM

Or is there a bit buying behind this?

Block

BE

Up a bit on yesterday but nothing to write home about.

Block

BE

We have German ZEW as the day’s excuse for rising.

Block

BE

48.2, from 31.5 in January.

Block

BE

Consensus was for 35.

Block

PM

Serious hike

Block

BE

Highest reading since April 2010

Block

PM

I have a snap from Jennifer McKeown on this

Block

PM

Cap Economics

Block

PM

February’s rise in German ZEW investor sentiment adds to the positive signs for the economy in the early part of this year. The rise in the headline index, from 31.5 to 48.2, was better than the expected increase to about 35.0 and left it at its highest level since April 2010 when the German economy was growing strongly. The fact that the index is now firmly in positive territory means that a large majority of investors see economic conditions improving in the next six months. But there are a few caveats. First, the index has never been well correlated with GDP growth and we will await February’s business surveys for stronger evidence of a recovery. Second, given the weak starting point of a 0.6% quarterly fall in GDP in Q4, it is hardly surprising that investors now see conditions improving – anything else would be deeply worrying. And third, the recent improvement might relate partly to the ECB’s hints of further policy support and signs of progress in the euro-zone’s periphery (including the Irish bank debt deal). With Mr Draghi’s words yet to be followed up with actions and political risks in Italy growing, we fear that investor sentiment might weaken again before long.

Block

PM

Key point: given the weak starting point of a 0.6% quarterly fall in GDP in Q4, it is hardly surprising that investors now see conditions improving – anything else would be deeply worrying.

Block

BE

Fair.

Block

PM

Lets go to stocks

Block

11:11AMBlock
BE

Vodafone mentioned on the right.

Block

Vodafone Group PLC (VOD:LSE): Last: 162.50, down 4.3 (-2.58%), High: 164.90, Low: 161.50, Volume: 59.87mBlock
BE

Bernstein downgrade, which I’ll share in a tick.

Block

PM

Poor Voda

Block

PM

Can’t seem to put a foot right

Block

BE

Yeah, that’s partly the problem.

Block

BE

Note that today, Expansion’s reporting they’re going to sign a deal with Orange Spain

Block

BE

To build fibre to the home.

Block

BE

Having been entirely outgunned by the quad players in Spain.

Block

PM

Hmm

Block

BE

Telefonica’s Fusion has added 1.5m customers since October

Block

PM

Well not many people putting infrastructure investment into spain right now..

Block

BE

Well, that’s true. But really, they’re surely too late.

Block

PM

You reckon

Block

BE

Well, I do. And so does Bernstein.

Block

BE

This is Robin Bienenstock, who’s perhaps the best writer among the sellside analysts.

Block

BE

Argument is that Vodafone’s clung on to wireline only for far too long

Block

BE

Didn’t put down the investment when it was needed

Block

BE

And now they’re left either to do me-too builds like this Spanish thing

Block

BE

Or ridiculously priced acquisitions at the top of the market, like they used to do.

Block

BE

Summary runs as follows.

Block

BE

The landscape of European telecoms has changed dramatically in the last year. With no structural change we expect their European assets (40% of Group operating profit) to shrink by 23% in 3 years. Vodafone must belatedly pick its poison.

VOD can choose structural decline mitigated by cost cutting & increased spend, or it can try to buy its way out of the problem. With wireline valuations where they are we value both options at 135-140GBp.

In neither case are VOD shareholders likely to benefit from a VZW event as VOD either needs VZW more, or risks being a forced seller. We reduce our rating to Underperform with a Price Target of 135GBp.

Block

BE

And it’s worth going into the detail, of which there is plenty.

Block

PM

yes, please do

Block

BE

Including a rather eyecatching valuation of Vod’s controlled core assets of …. 38p per share.

Block

BE

(EDIT: REDACTED AT BERNSTEIN’S REQUEST)

Block

BE

(EDIT: REDACTED AT BERNSTEIN’S REQUEST)

Block

BE

And here’s an idea. Vodafone buys Liberty Global ……………….

Block

BE

(EDIT: REDACTED AT BERNSTEIN’S REQUEST)

Block

BE

But the Verizon Wireless stake will be sold, or merged, or act as a trigger to a bid from Verizon right?

Block

BE

So it’s all okay because there’s that?

Block

BE

Nope.

Block

BE

(EDIT: REDACTED AT BERNSTEIN’S REQUEST)

Block

BE

(EDIT: REDACTED AT BERNSTEIN’S REQUEST)

Block

BE

(EDIT: REDACTED AT BERNSTEIN’S REQUEST)

Block

BE

(EDIT: REDACTED AT BERNSTEIN’S REQUEST)

Block

BE

And here’s a golden oldie ……………. Vodafone + AT&T ………..

Block

BE

(EDIT: REDACTED AT BERNSTEIN’S REQUEST)

Block

BE

We have downgraded Vodafone to Underperform and reduced our price target to GBp 135. Our
target price for Vodafone is based on forecasts which assume a continuation of current market structures; where Vodafone do not buy additional fixed line assets, but become increasingly marginalised through incumbent integrated offers. Under this scenario our DCF for Vodafone carries a long term growth rate of 0%, giving a value of £0.38 for Vodafone’s fully controlled businesses. Were Vodafone to buy KDG, Fastweb and Ono at only a modest premium to today’s prices we would value their controlled operations at £0.43, only a 13% premium to the current ‘do nothing’ scenario. We value Vodafone’s equity stake in Verizon Wireless separately based on a conservative 7.0x multiple, adjusted for debt and potential taxable gains on sale. We then discount by 15% to reflect a lack of liquidity and control in the asset. This stake is worth a total of £0.87, giving a total DCF value for the Group of £1.25. We also value the stock on a short term FCF/EV using a target peer average for the sector of 8.5% in 2013 which gives a value of £1.46. Weighting this 50/50 gives a blended price target for Vodafone of £1.35

Block

BE

Sorry for quoting at length, but Ms Bienenstock can explain her argument far better than I can.

Block

PM

No that’s interesting read

Block

11:23AMBlock
PM

}Emoticon

Block

PM

Andrew Bailey appointed deputy governor at the Bank

Block

PM

And of course CEO of the new fangled Prudential Regulation Authority

Block

PM

As expected

Block

11:24AMBlock
PM

Actually, on the subject of regulation

Block

PM

Seen this FSA fine handed out to Lloyds?

Block

PM

4.3m fine for being tawdry on PPI payouts

Block

BE

“Tawdry”?

Block

PM

I meant tardy

Block

BE

Either way, it works.

Block

PM

You got to feel for Lloyds over this

Block

PM

PPI compensation is chaos

Block

PM

There’s loads of fraud

Block

PM

Spivvy claims companies

Block

PM

And Lloyds gets it in the neck for some cheques being slow

Block

PM

FSA just lashing around because it can.

Block

PM

Increasingly looks like a regulator out of control.

Block

PM

Anyway

Block

11:27AMBlock
PM

Nobby mentioned german car sales over on the right earlier

Block

PM

See those figs earlier?

Block

BE

Nope. Interesting?

Block

PM

Block

PM

Actually ive got graphs for each eurozone country, courtesy of JP Morgan

Block

PM

Shall I share quickly?

Block

BE

Please.

Block

PM

Block

PM

Block

PM

Block

PM

Block

PM

Block

PM

Block

PM

Block

PM

Block

PM

Block

BE

I’m getting the idea.

Block

PM

Not pretty eh?

Block

PM

But what’s happening in Austra?

Block

BE

Yeah. perhaps cars just last longer now (except in Austria).

Block

PM

Oh, for completeness here’s the pan euro chart

Block

PM

Block

PM

And some quick comentary from Greg Fuzesi

Block

PM

Based on the ECB’s seasonally and calendar-adjusted measure, Euro area car registrations slumped to a new all-time low in January. The 9.6%m/m fall more than reversed December’s gain and leaves the level in January 24% annualised below the 4Q12 average. The declines were also quite broadbased across countries. Germany saw a 7%m/m decline in January, which is almost a two and a half year low and which leaves January 21%-ar below 4Q12. Through the monthly noise, the trend is even weaker in France, with car registrations in January 30%-ar below 4Q12. Italy got off to a similar start to 1Q13. In contrast, Spain continued to recover somewhat following the recent post-VAT declines. Hence, Spanish car registrations rose 5.9%m/m in January, which was the third consecutive monthly gain and leaves January up 54%-ar on the 4Q12 average. Both Ireland and Greece have been looking more stable in recent months, while Portuguese car registrations may still be trending modestly lower.

Block

11:31AMBlock
PM

Where now?

Block

BE

Not sure. I was just reading about the Austrian car industry.

Block

BE

But I guess we should return to something more prescient.

Block

BE

Request on the right for InterContinental …..

Block

InterContinental Hotels Group PLC (IHG:LSE): Last: 1,957, down 32 (-1.61%), High: 1,964, Low: 1,925, Volume: 549.50kBlock
PM

What’s the story?

Block

BE

Figures are fine, really.

Block

BE

The story is travel / arrive.

Block

BE

Slight beat at the consensus, decent current trading, no update (as expected) about the various hotels they’ve failed to sell so far.

Block

BE

Barclay in New York has been on the market for bloody years now.

Block

BE

So Barclays (the broker, not the hotel) can summarise for us.

Block

BE

InterContinental released a strong set of full-year and Q4 numbers this morning, with Q4 EBIT coming in 6% ahead of consensus at $161m vs our $157m and cons £152m. We expect upgrades to 2013 vuma consensus EBIT/EPS forecasts on the back of this release at the total level as the group benefits from London hotel depreciation coming off (+6m) and Felcor liquidated damages (+23m) plus current RevPAR forecasts appear conservative, though additional investments in China and AMEA are likely to provide a drag on margins next year, which should offset some of this.

Block

BE

Financial highlights:

· FY EBIT $614m vs consensus $605m

· PBT 7% Q4 beat

· FY EPS 141.5c vs cons 140.8c – EPS difference lower than pbt due to higher tax. Underlying tax guidance for 2013 30% in line

· DPS 64c vs our 64.7c, cons 62.3c

· Q4 RevPAR of 3.9% compares to our 3.9% so it was margins that were ahead (+200bps) though not all of this will roll into 2013

· Net debt $1074 vs our $990m

· 2013 System growth 2.7% at higher end of 2-3% range, no formal guidance for 2013.

Block

BE

Current trading

Current trading is strong with January RevPAR +6.6%, with US +7%, Europe +-0.1%, AMEA +6%, Greater China +21% (helped by Chinese NY shift and management not providing underlying figures though continues to expect recovery from March).

Block

BE

Asset sales

The company announced this morning that the process for the London Park Lane hotel has officially commenced and continues for the New York Barclay.

Block

BE

Valuation

Trading at 19.1x calendar 13e PE the shares have had a very strong run into these figures. We continue to see significant upside risk to 2014 EPS as a result of the RevPAR upside and cash returns from asset sales.

Block

BE

Oh yeah — IHG Park Lane’s for sale.

Block

BE

Officially, I mean.

Block

PM

Horrible hotel

Block

BE

It is. Theo Randall’s place is okay.

Block

PM

hmm

Block

BE

But the bar is awful. As is the lounge, and the ballroom where they stick on the awards dinners I don’t go to.

Block

PM

Such a location. Someone should rebuild

Block

BE

Though who in their right mind stays in Park Lane?

Block

PM

Russians

Block

PM

You have been to the Dorchester

Block

BE

I have, repeatedly. It makes me nervous.

Block

BE

I dislike that they have a bloke in the toilets, as if it’s a provincial nightclub.

Block

PM

hehe

Block

BE

Anyway, we’re waffling because there’s nothing else to say about IHG.

Block

BE

Results fine, consensus won’t budge, trading okay.

Block

11:40AMBlock
PM

How abotu STAN?

Block

PM

Who is it behind this move? Morgan stanley?

Block

Standard Chartered PLC (STAN:LSE): Last: 1,780, up 50.5 (+2.92%), High: 1,784, Low: 1,729, Volume: 1.37mBlock
BE

Yeah. In a market totally bereft of ideas, they provide one.

Block

PM

it’s been a great performer over the past six months

Block

PM

Following that close shave with the jumped up NY state regulator

Block

PM

What are MS saying?

Block

BE

Well, it’s a switch recommendation.

Block

BE

Out of HSBC

Block

HSBC Holdings PLC (HSBA:LSE): Last: 723.40, down 2.6 (-0.36%), High: 725.20, Low: 719.60, Volume: 3.31mBlock
BE

Because, relatively speaking, STAN is no longer at a premium

Block

BE

So you may as well go for the one with the better growth story.

Block

BE

We see an opportunity to switch into STAN. STAN’s
improving Asia outlook implies lower risk of NPL pickup,
and India/MESA appears to be normalizing. This
indicates the asset quality concerns underpinning our
previous EW may fade. We believe the shares’
underperformance presents an opportunity and upgrade
to OW. We raise our STAN price target by 16%, as we
increase 2015 EPS by 4% and we link valuation to a
higher 2015 RoTE/TBV (HSBC already on this basis).

Block

PM

Hmm

Block

BE

HSBC has now performed well (+27% over past
year) on strong Asian earnings and an improved
balance sheet. It now appears fully valued, in our view,
given an uninspiring revenue outlook, and we move to
EW. We do see room for payout increases at HSBC and
raise our payout expectations to 50% (with 35% scrip
component). This gives a cash yield of ~3.3%, but we
see the top end of consensus as too bullish on dividends,
as we expect HSBC to aim for capital ratios towards the
top of the pack and to deploy capital for balance sheet
growth.

Block

BE

Valuation: The traditional 1-1.5x PE premium afforded
to STAN due to faster growth and cleaner Asia exposure
has closed to ~zero, with both trading at ~10x 2014e. On
2015e P/TBV (which accounts for differential TBV build)
both stocks trade at 1.3x, but we would expect that a
premium for STAN would justified by stronger growth
and its higher 2015e RoTE (16% vs. HSBC at 14%).

Block

BE

Stan’s developed markets exposure’s just 14%, versus HSBC at 64%

Block

BE

That’s the argument, basically.

Block

PM

Well…

Block

PM

I seem to remember we said Emoticon when this thing was threatening to fall thru 12 quid.

Block

PM

Last summer — we stuck our necks out.

Block

PM

So the performance since then must be close to 50%

Block

PM

trading at 1777 currently

Block

BE

Yes, yes. Your (entirely theoretical) knife catching among the banks has proved correct.

Block

BE

“Deep value.”

Block

PM

Ever been in the reception of STAN?

Block

BE

Can’t say I have, no.

Block

PM

It’s got some great artifacts from around the world

Block

PM

great if you like ethnic stuff

Block

PM

Lets move on

Block

11:46AMBlock
BE

…… Okay, what next?

Block

PM

Dunno

Block

BE

Someone (a lurker) was asking for the JP Morgan food retail note this morning.

Block

BE

Which I haven’t read.

Block

BE

But have just accidentally opened.

Block

BE

So here it is.

Block

BE

We initiate coverage on 15 Euro food retailers expanding our European food
retail coverage to 20* stocks. Food retailing is about format and execution,
and in our view, choosing the right format has become more important than
ever before. The ‘right’ format is one that is low capital, low cost and low
price, a combination typically achieved by discounters, low cost convenience
players and efficient C&C operators. We identify seven companies in our
universe that, in our view, meet these criteria: BIM, Jerónimo (JM), Dia,
Magnit, Booker, Eurocash and Bizim. The rest are exposed to challenged
formats and are difficult to be recommended for very long term investment
portfolios. We see them more as trading stocks.

Block

BE

Tesco (OW): we expect positive sales momentum to continue in the UK and
management to become more focused on capital discipline. We expect a
strategic review of Turkey and parts of China to follow that conducted on
the US. We rate Morrison UW where we are 10% below consensus for
2013/14. Sainsbury (UW) has proved to be resilient but the combination of
a pedestrian ROIC with no signs of change and high capex does not draw us
in. Despite its strong recent performance, we rate Booker OW as we are
impressed with its management team and the very attractive Makro deal.

Block

BE

We rate Carrefour OW as we believe that its depressed margins should
benefit from better execution. We also anticipate a reduction in financial
expenses. We rate Casino N. We recognize potential to unlock value in the
group from corporate restructuring but we are concerned about the shortterm
effects of its French price repositioning. Casino can be played via
Rallye (OW) where we believe the discount to NAV should fall.

Block

BE

We rate Metro UW for its challenged formats – we do not expect sales to
improve in the short term. We rate Ahold OW as we anticipate a good start
into 2013. We also believe that the majority of the ICA proceeds (20% of
Ahold’s market cap) are to be used for share buybacks, potentially
enhancing EPS by 7%. We rate Colruyt OW. The stock is a consensus ‘sell’
(13 sells vs three buys), yet we believe the company is addressing the issues
that have been pressuring ROIC.

Block

BE

Dia (OW): like Booker, a stock that has done very well but is worth owning
for the long term. Dia Fresh, Schlecker, Brazil and the exit from loss-making
countries should drive earnings strongly. JM (OW): we believe that Poland
is far from mature. Although not immune to the slowdown, the company is
maintaining its performance gap against peers. We rate BIM N as we
believe it will be increasingly challenged to dilute costs as a percentage of
sales. This should eventually translate into less price investments and a
moderation of LFL growth. We prefer Eurocash (OW) to Bizim (N) on
valuation.

Block

Tesco PLC (TSCO:LSE): Last: 366.41, down 0.544 (-0.15%), High: 370.10, Low: 366.00, Volume: 2.60mBlock
Booker Group PLC (BOK:LSE): Last: 112.40, up 1.3 (+1.17%), High: 112.80, Low: 112.03, Volume: 186.53kBlock
BE

And that’s that. Exciting, huh.

Block

11:49AMBlock
BE

Amazingly, it feels even quieter than yesterday.

Block

BE

Small caps?

Block

PM

Sure

Block

BE

Phytopharm’s trading sub cash value now …..

Block

Phytopharm PLC (PYM:LSE): Last: 1.68, down 0.219 (-11.53%), High: 2.00, Low: 1.68, Volume: 3.39mBlock
PM

How do you value this thing?

Block

PM

It’s got 5.5m of cash

Block

PM

And 55m of tax losses

Block

PM

I was tryign to find out yesterday but couldnt — how do you value tax losses

Block

PM

So subjective

Block

BE

I think you write off the tax losses and value it as a cash shell, because that’s what most failed biotechs become.

Block

BE

Can’t see management being given time to try bringing another product up to failure point.

Block

BE

So — we await the strategic review, which’ll say they’re looking for a buyer, which they won’t find, and they’ll end up getting reversed into by some bloody oil punt or B2B website.

Block

BE

At best.

Block

PM

Here’s their pipelin: http://www.phytoph…le&id=51&Itemid=37

Block

BE

Anything beyond Phase 1?

Block

PM

here was the great (failed) hope: PYM50028 (Cogane™), an orally active neurotrophic factor modulator increases dopaminergic receptor density, brain BDNF levels and tyrosine hydroxylase density in aged rats.

Block

PM

Good for ratty pensioners

Block

BE

And are any investors willing to pay for brain BDNF levels and tyrosine hydroxylase density in aged humans? Can’t see it.

Block

BE

………. Otherwise ……………

Block

Chariot Oil and Gas Ltd (CHAR:LSE): Last: 25.50, down 4.5 (-15.00%), High: 28.06, Low: 24.28, Volume: 7.10mBlock
BE

Wheels have come off. Again.

Block

BE

With drilling not set to commence until 2014

Block

BE

And needs farmouts for that.

Block

BE

So the stock’s been run back towards cash value of $68m, or around 22p/sh;

Block

BE

Think Sector Watcher had some thoughts on this.

Block

BE

An uninspiring update from the African explorer, with a revised forward-looking work programme after last year’s two disastrous dry holes in Namibia. This year the group expects to spend $25m on seismic offshore Mauritania and a further $15m on G&A, from an existing cash pile of $68m. Hence CHAR will have less than $30m left by year-end i.e. insufficient to drill the two wells planned for 2014 offshore Namibia, unless it manages an industry farm-out. Based on the two dry holes it has already drilled, this may prove difficult. In saying that, Brazilian explorer HRT is about to commence a two-well programme offshore Namibia, and success from either of these could certainly help CHAR. However I don’t see any compelling reason to own the shares in the short-term, even after the 85% fall from its high last year.

Block

BE

Another triumph for Aim. Oil company drills dusters and can’t afford to keep drilling.

Block

BE

And that concludes small caps I think.

Block

11:59AMBlock
PM

I have a lunch to go to

Block

BE

Likewise. We should knock off early-ish.

Block

PM

Im going to this place — which is new to me

Block

PM

Newman Street tavern

Block

PM

Over near Google st

Block

PM

On newman street as it happens

Block

PM

Been there?

Block

BE

Nope. Chef’s ex of The Boundary apparently.

Block

PM

That place in Shoreditch?

Block

PM

Havent been there either

Block

BE

That’s the one.

Block

BE

It’s nice, if you live in Shoreditch and need somewhere quiet to bring your folks.

Block

PM

Im too old to live in Shoreditch

Block

BE

As am I, though I understand Shoreditch lacks that option. Food’s Conran though.

Block

BE

Though I’m sure he’s trying harder at his own place.

Block

PM

Will report back

Block

PM

Right Rabble, we are done.

Block

PM

Sorry the newsflows a bit quiet

Block

BE

Couple of things crossing the tape as we leave.

Block

BE

HSBC’s sold its Panama business.

Block

BE

$2.1bn.

Block

BE

… sorry, “to sell”, quoting Bloomberg.

Block

BE

And Manager-Magazin has another Vod/Kabel story.

Block

BE

Noting the German FCO’s likely prohibition of Kabel Deutschland’s acquisition of TeleColumbus.

Block

BE

The weekly suggests that the FCO was particularly concerned over Kabel Deutschland’s market power in eastern Germany, where the company is predominantly active, and believed that the acquisition would give the company a market dominant position.

Block

BE

Kabel Deutschland results tomorrow.

Block

BE

Okay – bored now. Goodbye.

Block