Markets Live: Tuesday, 5th March, 2013

This is the transcript of the Markets Live session ending at 12:08 on 5 Mar 2013. Participants in this session were: Paul Murphy Bryce Elder Izabella Kaminska

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Morning

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Welcome

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Bryce is there (in the office)

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I’m working remotely (ie vaguely) from sick bed

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Here’s a vid to get things going

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Replaces the regular portrait

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And we are going to leave this for a few mins to so you can watch and enjoy

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Ah, didnt come up as an embed

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But you can click it

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Gives you a flavour if you can’t access youtube from the office

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Big HT to Taxloss for this

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That’s Mike Lynch

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Doing a gangsta spoof

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Talking with his sales team, back in the old pre-HP days

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Here’s some background and a talk-thru

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Phil — yes it does seem to be for real

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Waddya reckon Bryce?

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It does rather boggle belief but, yes, given it stars the good doctor it must be real.

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Ditto this

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So Lynch seems to have done a series of these

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In that one he makes a rather crude reference to the CEO of Verity ….

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What on earth is the strategy here?

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Is it the Neil Hamilton gambit?

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Neil Hamilton — blast from the past

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You face extremely serious accusations so you turn yourself, personally, into a joke?

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(He was a teacher at my school before going into politics and making a complete idiot of himself)

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Hang on is that goldfinger one recent?

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Published on 4 Mar 2013

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As in, yesterday.

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Hmm — but presumably by someone other than Lynch

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ie — he’s got a bunch of people looking to blacken his image

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Note: Lynch has been a paranoid type through out his publicly listed career

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But that doesnt mean people are not after him

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Well, his confirmed web presence is rather more sober: http://autonomyaccounts.org/

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(And not updated since February 11.)

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Anyway, we should move on to the market

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11:13AMBlock
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Where do you want to start Bryce?

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Index come off the top?

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Holding quite near it …..

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FTSE up 50 points at 6390

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Free money rally.

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(tk – it’s a ragged bbg piece — job losses here are v public as is wider Pearson reorg)

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Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville.Block
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Janet Yellen says precisely what you’d expect her to say overnight.

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So we’ve bounced back from yesterday’s China-influenced wobble.

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Movers?

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Go for it

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Well, it’s FTSE review day.

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And, not coincidentally, the two relegatees are leading us up.

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Serco Group PLC (SRP:LSE): Last: 637.00, up 58 (+10.02%), High: 650.00, Low: 610.00, Volume: 2.13mBlock
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And ….

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John Wood Group PLC (WG.:LSE): Last: 810.50, up 52.5 (+6.93%), High: 818.50, Low: 775.00, Volume: 1.05mBlock
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Now, on current numbers ….

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… as in the numbers I checked five minutes ago ….

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Both are still going out.

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But it’s close. Very, very close.

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Ah, poor Serco

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10% lift and its still getting relegated

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Payback for those random fines it hands out on the DLR

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Sorry, go on

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It’d need to rally another 2%, ceteris paribus, to survive I think.

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But the numbers are chopping around all over the place, and since our desk move I’m now a slightly longer walk away from the Bloomberg machine ….

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(Ceteris paribus or caeteris paribus is a Latin phrase, literally translated as “with other things the same,” or “all other things being equal or held constant.”)

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(Totally educated, me.)

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(I know. And I’m not.)

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(A product of Dundee College of Further Education. The third best college in Dundee.)

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Anyway, if Serco and Wood go, it looks like Easyjet and LSE will come in.

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EasyJet!?

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easyJet plc (EZJ:LSE): Last: 1,050, up 28 (+2.74%), High: 1,055, Low: 1,026, Volume: 331.71kBlock
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I know — having Stelios making noise on the sidelines of a blue-chip. Scary prospect.

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London Stock Exchange Group PLC (LSE:LSE): Last: 1,374, up 30 (+2.23%), High: 1,381, Low: 1,351, Volume: 123.12kBlock
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Be nice to see the LSE in the FTSE

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Given that they now own FTSE 100%

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FTSE 100 that is

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Italian repo house with some non-core UK interests.

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Guess so.

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Anyway, we should mention Serco results since we’re passing.

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( SoS ?)

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Divi’s the main positive.

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Returning all those unjust DLR fines to shareholders.

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Otherwise, it’s in line pretty much.

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Caz can summarise.

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Serco FY results look in line with operating profit of £314.8m compared to
our forecast of £314.0m. The surprise is the higher dividend and
commitment to higher payout rates which should be well received.
Generally, the tone seems positive and we have maintained our underlying
forecasts, albeit we downgrade 2013 EPS by 2% for IAS 19 on pensions.

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Results; Revenue was £4,913m compared to our forecast of £4,888m.
Operating profit was £314.8m vs. us on £314.0m. EPS was 42.6p
compared to our forecast of 41.7p and Bloomberg consensus of 40.6p.
Dividend of 10.1p compared to our forecast of 8.9p.

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Outlook; “Our unique breadth and depth leaves us strongly positioned
to meet the growing demand from around the world for our skills and
services. This confidence in our business prospects underpins our new
dividend policy and commitment to a higher payout ratio over coming
years”.

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Organic revenue growth of 3.3% compared to our forecast of 3.0%.
The outlook speaks of a modest improvement in organic revenue growth
in 2013 and we are retaining our forecast of 4.7%. The bid pipeline has
been maintained at £31bn.

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The operating margin rose from 6.2% to 6.4%, in line with our
forecast. The statement says that the margin will be broadly maintained
which is what we assume with our 6.4% forecast in 2013, which we
have retained.

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The dividend surprised positively on the upside, with 4.2x cover,
compared to our assumption of 4.7x cover, and Serco has committed to a
higher level of payout, with dividend cover eventually falling to 2.5x to
3x.

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Group free cash improved significantly, as per guidance, in H2, with
free cash of £181.2m in the FY compared to £168.3m. However, the
statement says that incremental working capital investment and lower JV
dividends may mean lower free cash in 2013. We believe this relates to
the build up of working capital due to the Shops Direct contract and the
buyout of the DMS JV. Net debt declined from £618m at the end of H1
to £556m.

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Estimates; we have maintained our underlying EPS estimates but
adjusted down by 2% for the IAS 19 pension accounting changes. Our
2013 EPS thus reduces from 44.4p to 43.5p. We have increased our
dividend estimates in line with the new payout policy with our 2013 DPS
rising from 9.45p to 11.76p.

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Recommendation; we have an Overweight rating on Serco as we
believe that its global public sector outsourcing markets are picking up
and the valuation looks cheap compared to history and its peers. Serco’s
shares trade on a 2013 PER of 13.0x compared to the Business Services
sector on 16.1x, Babcock on 16.1x and Capita on 15.8x.

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Expensive, these outsourcers.

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Never quite understood why.

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Good point

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Growth seems a lot more cyclical than the ratings would suggest.

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Margins have a habit of getting crunched when they screw up on a single contract, which they do habitually.

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But I digress. Where next?

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11:25AMBlock
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Stan?

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Everything pretty much inline looked to me

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Haven’t looked at the numbers, I have to admit. Blaming bank fatigue.

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Standard Chartered PLC (STAN:LSE): Last: 1,830, up 50 (+2.81%), High: 1,861, Low: 1,784, Volume: 2.62mBlock
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Been a stunning performer

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Given that this bank was about to lose its NY licence

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Management very confident this time around, by the looks of things.

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Solid start to 2013

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Got some Credit Suisse on this

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FY12 results – first thoughts
■ Results were in line and less messy than HSBC yesterday. Targets reiterated but with the stock now trading at 1.9x last reported TNAV we remain UP. Conf call at 9.45am (UK) tel 01296 480 100 passcode 871346.
■ In line results – Standard Chartered reported FY PBT of $6,876mn which was bang in line with December guidance which implied $6,875mn although they also had a $90mn gain from debt buybacks in Q4 and a lower bank levy than expected. Across the group P&L all the items appear in line. Sticking to the four targets with the group commenting that ‘2013 has started well.’
■ Capital – Basel 2 of 11.7% (vs. CSe 11.3%) vs. 11.6% at H1 and a slight decline from 11.8% at YE 2011. The bank has reiterated guidance of c.100bps Basel 3 impact. We were going for a fully loaded Basel 3 ratio of 9.8% YE 2012 but the adjustments are done on a different basis. RWAs came in at $302bn vs. $286bn last reported (11.0% annualised growth rate). TNAV per share $14.6 vs.$13.5. H1 2012 and DPS of 84c implies 3% yield.
■ Wholesale Banking – FY12 PBT at $5,803mn (ex US fines) vs. CSe $5,979mn with in line revenues, costs were higher as were provisions. In terms of outlook the bank commented on Wholesale Banking income being ahead of the comparable period last year, which we would expect; with own account income down yoy reflecting lower ALM income. Note we expect Wholesale Banking income to grow by 5% p.a. in 13E-14E.
■ Consumer Banking – FY12 PBT came in at $1,778mn vs. CSe $1,650mn with revenues ahead, costs were broadly in line and higher provisions. In terms of outlook the bank commented on Consumer Banking income being ‘well ahead’ of the comparable period last year. We expect Consumer banking income to grow by 5% in 13E and 6% in 14E.

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Fire away.

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Fired

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And RBC.

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(We should probably be cautious throwing around that word today, given Bloomberg’s ridiculously beat-up story overnight.)

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(hehe)

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Standard Chartered reported a stated FY’12 PBT of $6.88bn, compared to a
Bloomberg consensus of PBT $7.2bn. However, after adjusting for the US fine
amount of $667m, the underlying PBT came in at $7.5bn. It is difficult to
ascertain whether the consensus including the entire US fine or only a partial
component. But STAN’s underlying PBT increased by 11% vs 2012 and that
should be seen as robust when compared with its European peers.

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On a group basis, revenue growth was 8%; while this is not the double digit that
SC is used to delivering, on a constant currency basis, revenue grew by 10% (as
SC suffered for the weaker Indian Rupee). Cost grew by 10%, but stripping the
$670m US fine, underlying cost growth was up by only 3%, implying a very
positive revenue cost jaw. Interestingly, looking at only the H2 performance,
revenues went up by 8% YoY but cost (when excluding the US fine) was flat
YoY, illustrating strong cost control by the management (see pg2). Impairment
charge came in at $1.2bn for the full year; while that represents a 30% year on
year increase, H2 was flat on H1 so that should be seen as reassuring.

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In addition, STAN increased its dividend to 84c per share, a 10.5% increase on
2011. The Group remains well capitalised, with a 11.7% core tier 1 ratio.

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Oh, of course. I forgot Stan was one of the few banks to pay an actual dividend.

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In terms of outlook – management stated that income in both Wholesale and
Consumer divisions are ahead so far in 2013 vs 2012. In addition, they are
again maintaining previous guidance of double digit income growth, costs in
line with income, double digit growth in EPS and mid-teens RoE.
Looking ahead, current 2013 Bloomberg consensus is assuming revenue growth
of 10% in 2013, cost growth of 10%, and PBT growth of 8% (all versus 2012
figures reported today). At first glance, there is little obvious room for upgrades
to consensus on either revenue increase or costs. However, asset quality in 2013
remains key, in our view, as current consensus assumes a further 18% year on
year increase from $1.2bn to $1.4bn in 2013. Assuming that H2/H1 impairment
trends continue and impairments remain flat in 2013 on a year on year basis,
this would results in a 3% upgrade to current 2013 consensus estimates.

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Nothing much else happening in the sector.

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Royal Bank of Scotland Group PLC (RBS:LSE): Last: 312.70, up 5.8 (+1.89%), High: 315.50, Low: 309.70, Volume: 4.09mBlock
HSBC Holdings PLC (HSBA:LSE): Last: 711.40, up 1.4 (+0.20%), High: 715.50, Low: 83.83, Volume: 9.09mBlock
Lloyds Banking Group plc (LLOY:LSE): Last: 52.02, up 0.7244 (+1.41%), High: 52.44, Low: 51.53, Volume: 50.54mBlock
Barclays PLC (BARC:LSE): Last: 303.85, up 3.45 (+1.15%), High: 305.66, Low: 302.15, Volume: 10.59mBlock
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All up with the trend, really.

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fine, let’s move on

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11:31AMBlock
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Mention the FSA briefly?

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Please do.

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What’s the story?

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Given themselves a mild whipping over LIBOR

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The Internal Audit Report covered the period January 2007 to May 2009. Internal Audit searched 17 million records, reviewed 97,000 documents in detail, and interviewed 20 FSA employees or ex-employees.

The Report identifies important areas where the FSA should have performed better, and makes valuable recommendations for the future, but does not suggest major regulatory failure on the scale identified in the Northern Rock (March 2008) or RBS (December 2011) reports.

The Report identifies that the FSA, at all levels of management, was aware of severe dislocation in the LIBOR market in the period from summer 2007 to early 2009. However, this dislocation reflected market conditions, and would have occurred even if lowballing had not occurred.

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The Report identifies however a number of instances where information available provided some indication that lowballing might be occurring. Of the 97,000 documents reviewed in detail, 26 are judged as providing a direct reference to lowballing or a reference that could, in Internal Audit’s judgement, have been interpreted as such. The two clearest indications relating to a specific firm were the telephone calls from Barclays in March and April 2008, which were included in the FSA’s Final Notice on Barclays published on 27 June 2012.

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Hm. So, flagellation on The North Colonnade.

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“We could’ve spotted the gaming, but didn’t.”

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As Lisa pointed out eloquently on the Christmas video, the gaming was in plain sight.

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And it wasn’t picked up because, quite frankly, no one cared.

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In retrospect, the FSA probably should’ve cared a bit more.

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As should the BBA

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But the excuse that they just didn’t pick up on the clear, blatant evidence doesn’t really sit right with me.

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11:36AMBlock
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Okay – back to stocks?

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Sure

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Glenstrata attracting attention on the right.

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Yes, as well it might

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Izzy’s take on this here http://ftalphavill…dities-writedowns/

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Yeah, interesting stuff about the leverage.

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I see what she means!

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Current borrowings doubled to 16bn

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IK

Hiya…

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stalking

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Good morning, Iz. So. Glenstrata’s geared up to the hilt and primed to explode as soon as the markets go against it, right?

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Hi Izzy

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well that’s the simple way of looking at it.

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Net debt sub the marketable inventories of $32.7bn ….

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Bryce — not to be too alarmist

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I’m sure it’s all very well balanced out (glen would say i’m sure)

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No risk, because of hedges etc

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hmm

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… net debt up from $27.8nn at June …. Net debt to equity of 45%, which I think is the highest in the sector.

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but that just pushes out the problem. Who is providing the hedges… etc.

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Look i have a very simple brain when it comes to this stuff..

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Emoticon

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And people who are much better informed seem to think none of this is an issue

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EmoticonEmoticon

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I am perplexed, but apparently using depreciating assets for leverage is totally ok.

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I also noted the energy trading margin is down quite a bit

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It was suspected to be below 1%, and turns out it’s about 0.4%

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Can you explain energy trading margin, for those with an actual simple brain (rather than the false modesty to claim one.)

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well it was the subject of a really cool piece on reuters regarding Vitol

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That even tho profits are up

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The margin on CE is down

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Here’s the relevant bit

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this is re. Vitol from a story which was published by reuters on Feb 28

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Gross profits rose only by around $100 million to $2.438

billion, generating an overall gross margin for the year of 0.8

percent, down from 1.1 percent in 2010, 2.7 percent in 2009 and

1.2 percent in 2008, according to Reuters calculations.

By adding some $90 billion of additional revenue in 2011,

Vitol increased its gross profits only by about $100 million,

which means that the margin on that extra revenue was around one

tenth of 1 percent.

Vitol’s biggest rival, Glencore

, has said its

margins in the oil sector are below 1 percent.

“There’s lots of volume and sadly small margins. I think

that’s one of our concerns – it remains incredibly competitive,”

Vitol Chief Executive Ian Taylor told Reuters in an interview

last year. [ID:nL5E8DL8OX]

Vitol declined to comment on its profit and loss report and

cash flow statement for 2011.

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…. Okay. Wholesale market margins are wafer thin. This ain’t really a surprise is it?

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IK

sure. But it’s only getting worse.

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and profits are all about turnover and volume

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and getting other unrelated deals done on the side…

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so a bit like retail banking!

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And that is why Glencore’s trying to become Opec 2.0?

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presumably

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Opec had the same issue back in the 70s

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but also glencore is now a financier…

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Like this deal it’s done with Rosneft

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Where it’s basically acting as intermediary between Rosneft and the banks (along with Vitol) to raise $10bn

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so it can give it to Rosneft, so that rosneft can pay for TNK

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My head hurts just thinking about it all

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Indeed

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All backed by oil collateral basically

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IK

anyways.. will leave you guys to it.

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Okay, cheers Izzy

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A comms trader that’s 45% net debt to equity providing Russian oil companies with mezzanine finance. ….

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I’m not quite sure I can get my head around that right now.

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11:51AMBlock
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Where now Bryce?

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I was about to say “from the sublime to the ridiculous …”

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But, really, “from the ridiculous to the ridiculous” would be a better segue.

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Instead just say Jellyworks?

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Jellybook, please.

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I stand corrected

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And farewell, Jellybook, we hardly knew ye.

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Jonathan Rowland’s clown stock Jellybook

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that had no relation whatsoever to Jonathan Rowland’s internet bubble clown stock Jelly works

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Raised £11m to invest in something internet, or something. Don’t ask difficult questions.

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Social meeja

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Rowland was backed by Toscafund i think

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Floated in the summer of 2011

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Raised, what was it, 3x the target?

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Backed by people who were not around during the dot comedy i guess

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Yes, 3.7 times target

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Without a business model of any kind. Hilarious.

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“Give us some money. We’ll think of something to do with it. Oh, hang on, we haven’t.”

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Prospectus is here.

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Sorry – not prospectus. Annual report.

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And so it’s been a more or less gentle slide from 10p to 5p over the past 1.5 years

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I enjoyed the detail that Rowland’s Banque Havilland “earned” £327,500 from the IPO.

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And Colegate Management (ie. Rowland) took a further £65k (including £15k of debt) in the first flush for undefined “professional services” ….

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Not that I’m suggesting there’s anything wrong about that. Does seem a little poor for a company that’s done nothing though. Literally nothing.

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Anyway, farewell Jellybook. We look forward to you becoming a cash shell for some other value destructive barking nonsense.

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11:59AMBlock
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Anything to mention before we wrap up?

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Ophir, maybe?

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ok

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You’ll remember Bloomberg wrote a big fantasy M&A piece yesterday ….

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Yep

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Shell keen, vulnerable bnecause of the funding hole, blah blah blah.

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Yep

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Unfortunate to write that story on the same day as Ophir pulls a massive rights issue.

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Just bad luck.

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Ophir Energy PLC (OPHR:LSE): Last: 494.60, up 32.9 (+7.13%), High: 499.80, Low: 469.10, Volume: 2.29mBlock
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Oh dear

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Basically, this gives them a couple of years of breathing space

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And takes the chance of a predatory lowball bid off the table.

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Hence the rally today, I guess.

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Shareholders in “look at the long term” shocker.

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I’ll allow Goldman to summarise where we are.

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Ophir has announced that it is to raise c. £550 mn by way of an
underwritten placing and rights issue. The placing will issue up to 19.5mn
shares at a price of 460p per placing share, while up to 168mn will be
issued through the rights issue (2 new shares for 5 existing shares). The
issue price for the rights issue will be 275p/share, a 32.5% discount to the
TERP of 407p. Use of proceeds are varied but focus on drilling and
appraisal activities in the company’s African acreage.

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Although dilutive to our valuation of the company (this is currently 86%
potential upside to our 12-month SOTP-based price target of 860p), we
believe the removal of the funding gap for the exploration /appraisal
campaign highlighted by the company in its October capital markets day
(since when the shares are down c.20%) is a positive. The raise is bigger
than the funding gap we had seen, which should mean the company is
funded well into 2014 and that the company is able to continue to farm out
assets on a strong financial footing. We had assumed that the company
waited to farm out assets before drilling, hence our current estimates
assume only a US$50 mn placement. Our theoretical ex-rights 12-month
target price with no further changes to our modelling is 680p.

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The raise is significant which creates a lot of supply for the shares, but we
note that the raise should draw a line under funding concerns for the rest
of 2013, allows the company a stronger financial position from which to
negotiate farm outs and gives a clearer line of sight to drilling the
company’s significant exploration programme, which we see as positive.

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And UBS

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It had been well flagged that Ophir was pursuing asset sales and farm-outs of a
number of its assets to plug a funding gap (FY12 net cash: ~$200m vs. FY13E
capital plan ~$650m). Some may argue the outcome of an equity raise implies the
industry is not as bullish as Ophir on its prospect inventory. Ophir would suggest
the raise allows the company to negotiate farm-outs from a position of strength.

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Having drilled 11 consecutive successful wells Ophir has demonstrated itself to be
an innovative and successful explorer, now sitting on resources of ~10TCF in
Tanzania plus ~3TCF in Equatorial Guinea. It is a small player in the big boys’
game of East African LNG, making it a potential future consolidation candidate.
This year it will be involved in a handful of wells that could be company-defining:
the 22TCF Basin Floor Fan in Tanzania (£0.55-3.08/sh; risked-unrisked), Padouck
Deep (£0.89-5.91/sh) & North Cluster Angolan pre-salt plays (£0.41-4.55/sh) and
the Keta Basin wildcat in Ghana (£0.06-0.60/sh).

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Based on cash received and equity issued we calculate ~20% dilution to Risked
NAV of £6.06/sh. Newly funded wells may offset this effect, however.

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Tight discount at 460p. Nice to see

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What is that? 7% or so?

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Yeah. The way it should be, really.

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Are we done?

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12:06PMBlock
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I think we are.

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Yes, we’re done. I have a lunch and an early deadline and a dinner to get to.

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Not simultaneously.

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Right, let’s go. I need meds

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Thanks Rabble!

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Seeya tomorrow

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