Markets Live transcript 27 Jun 2011

Posted by Neil Hume on Jun 27 11:04.

Markets Live chat transcript for the chat ending at 11:36 on 27 Jun 2011. Participants in this chat were: Neil Hume, FT bryce.elder

NH

Hola
NH

and welcome to ML
NH

from a very very hot
NH

FT newsroom
NH

our air con
NH

seems to be set at Friday’s temp
NH

not today’s
NH

(Martin – YELLOW).
NH

anyway
NH

I am OK
NH

brought a giant fan in from home
NH

that I’m not sharing
NH

still
NH

I’ll need it
NH

when everyone comes in
NH

around 3.30pm
NH

and turns on their PC’s
NH

this place will be a proper sweat box
BE

Yeah, the ambient fumes from lunchtime ignite with the PC heatsinks
BE

And — to borrow a phrase from down the river — phew, wot a scorcher.
BE

So – should we stop moaning about these inhuman conditions we’re working in
BE

And turn to matters market?
NH

why not
BE

(@Milky: yellow for shouting.)
11:09AM
NH

Right then
NH

we are up
NH

19 points at 5,717
NH

what are we pinning this on
NH

the Chinese offering to buy European debt
NH

(@Milky – Yellow)
NH

because it’s not the situation in the Greek parly
NH

that’s looking even more fraught
NH

the govt need some opposition MP’s to vote with them now
NH

As many as four PASOK deputies are considering not voting for the government’s medium-term fiscal plan in Parliament this week, leaving the ruling PASOK party with the slimmest of majorities to pass the new set of austerity measures through the House.
NH

Kozani MP Alekos Athanasiadis insists he will oppose the measures. “Nothing has changed for me,” he told Skai TV on Saturday. “I want to make it clear that I will not vote for the midterm fiscal plan. I do not disagree with the government on a lot of points but I stick to my view that some public enterprises should not be sold.”
NH

If all four MPs oppose the government, PASOK would be left with a one-seat majority unless it received support from another smaller party, such as the centrist Democratic Alliance. Venizelos acknowledged on Saturday that some of the measures are “severe and unfair” but added that “this is the only way at the moment that we can address an urgent national need.”
BE

(@Milky: booked twice but still not sent off. Consider yourself the Josip Simunic of this particular session.)
BE

Ok – so …. to summarise ….
BE

We’re no closer to a resolution
NH

nope
NH

not all
NH

we will be on a knife edge all week
BE

We’ve never really been off the knife edge.
BE

It just feels like “knife edge” is the new normal.
NH

true
NH

there’s always another crisis to lurch from
11:13AM
NH

Where shall we start?
NH

what about the banks
NH

the Sir Victor Blank Cheque interview
NH

in the Sunday Tel
NH

provided much amusement for me over the weekend
BE

Highlights please.
NH

so
NH

it starts with this headline
NH

Sir Victor Blank: the City needs to give more if it is ever to be trusted
NH

which is a slightly odd thing to say
NH

and then
NH

he writes history
NH

so
NH

the Lloyds deal what is set out to do
NH

at the cost of blowing up Lloyds
NH

“Lloyds today is the number one domestic retail bank – in terms of branches, in terms of market share,” he said.
“That was where we aimed to get it when the acquisition of HBOS took place. António will come out with his review this week and he has already said that he thinks Lloyds will be performing strongly within 5 years. I personally would put a wager that it is half that time. All the ingredients are there for a really good bank and I think that he is a good and strong leader and he will deliver. Looking forward the prospects for Lloyds are strong.
BE

……….. I’m speechless at that.
NH

“If you go back shareholders would say – and I’m a big shareholder and I haven’t sold a share – look it was a lousy deal for us. And I’m very sympathetic because there was a lot of hardship caused by the loss of value and the loss of dividend, but there wasn’t an alternative. Leaving Lloyds as it was was not an option.”
NH

there was an option
NH

not buying HBOS
NH

without a massive govt guarantee
BE

Exactly.
NH

Sir Victor dismisses critics who claim that Lloyds – until then viewed as a relatively conservative institution – was asked to do the deal by a desperate Government.
“There was no negotiation,” he says. “Gordon did not say: ‘Victor do me a favour’ or ‘You must do this’. That is not how it works, it is not how it works in terms of corporate governance, it is not how it works in ­government.”
NH

really
NH

and here’s the killer line
NH

Sir Victor also insists that enough due diligence was done on the deal, in two tranches and that the risks in HBOS’s property portfolio were understood. The problem was the speed with which the economy collapsed, pulling down HBOS with it.
“What happened was very unforgiving and the losses came much faster than anyone anticipated,” he said. “What we did not anticipate – and to be fair nobody else did either – was that in the last quarter of 2008 and the first quarter of 2009 it would be so negative in terms of GDP. The economy fell off the edge of a cliff.
“Therefore the things in the HBOS portfolio, the concentration on property, the degree of risk in that property portfolio came home to roost much more quickly than anyone anticipated.
NH

What we did not anticipate – and to be fair nobody else did either – was that in the last quarter of 2008 and the first quarter of 2009 it would be so negative in terms of GDP. The economy fell off the edge of a cliff.
NH

there you go
BE

“very unforgiving”
NH

they didn’t see it coming
BE

This is absurd.
BE

The very fact that HBOS was sinking was the same reason Lloyds was sinking.
BE

To suggest the due dilligence didn’t pick up that the takeover may make a weaker whole is …. well, I’m amazed.
NH

shocking
NH

anyway
NH

those comments come
NH

as the BoE publishes some truly shocking stats
NH

on the LTV ration of secured debt at Lloyds
NH

scary stuff
NH

Data published last week by the Bank of England showed that loans representing more than a quarter of Lloyds’ mortgage book are worth at least 90 per cent of the property value they are secured against.By contrast, up to 12 per cent of loans provided by Royal Bank of Scotland and Santander have a similarly high loan to value, while Nationwide, Barclays and HSBC have a smaller proportion of such risky loans.

NH

a quarter of the loans!!
NH

In total, 60 per cent of Lloyds’ secured debt book – which includes mortgages to individuals and businesses – has a loan to value deemed high or very high by the Bank of England, compared with 38 per cent for RBS, 33 per cent for Santander, and just 6 per cent for HSBC.
NH

EmoticonEmoticonEmoticon
NH

toxic
NH

truly toxic
NH

if house prices tank
BE

Sorry … still, reading Victor.
BE

“What we did not anticipate – and to be fair nobody else did either – was that in the last quarter of 2008 and the first quarter of 2009 it would be so negative in terms of GDP.”
BE

TO BE FAIR? IN WHAT SENSE IS IGNORING THE PEOPLE WHO WERE RIGHT, THEN WIPING YHEIR MEMORY FROM HISTORY IN ORDER TO ABSOLVE YOURSELF, “FAIR”?
BE

Grrr.
NH

as the readers said
NH

he saw Lehman blow up
NH

he saw the mess HBOS was in
NH

and still bought
NH

without any backstops from the government
NH

an EPIC FAIL
BE

Though I’m sure he’s earned his knighthood.
BE

Sir Victor of Blankness.
NH

lot of good work for charidee
NH

anyway
NH

on to the bloke charged with cleaning up the toxic spill at Lloyds
NH

Antonio
NH

his strategy review
NH

has been so widely pre-viewed
NH

that I can’t believe there’s going to be anything in the way of a surprise
NH

still
NH

here’s an idea of what to expect
NH

via RBS
NH

Group Chief Executive António Horta-Osório will present the conclusions of the strategic review of the Group this Thursday 30th June from 9.30am-12pm. As with the HSBC and Barclays recent strategy days and investor seminars, our expectations are low. Firstly, we continue to believe it is not in Lloyds’ interest to offer too much in advance of the ICB’s final recommendations on banking reform in the UK which will be released on 12th Sept. Secondly if one of the main deliverables is a £1bn cost saving as speculated by the press over the weekend, investors will be disappointed.
NH

The focus for investors remains the normalised earnings power of the group but understanding the contribution and annuity power of the top line is what investors need more assistance with. Thirdly, reiteration that the group is exiting non-core businesses and retrenching back towards the UK will come as no surprise. Nor will a more conservative outlook over the next three years.
NH

Recent press articles have already flagged that António Horta-Osório will present an evolutionary rather than revolutionary strategy that may take three-five years to fully execute. In terms of a return to dividend paying capacity, we think that dividends of a material size will be limited until Lloyds has achieved a 10% shadow BIS3 CET1 ratio. On our forecasts, this level of capital adequacy is unlikely to be achieved before the end of FY13F.
NH

In short, although we see one of the most attractive three year TSRs in Lloyds amongst our Pan European banking universe, we do not believe the catalysts for this re-rating will be evident before FY12F. Lloyds trades on 0.75x 2011 p/TCE. More thoughts will be fleshed out later today.
Lloyds Banking Group plc (LLOY:LSE): Last: 43.82, up 0.425 (+0.98%), High: 44.13, Low: 42.79, Volume: 57.10m
Royal Bank of Scotland Group PLC (RBS:LSE): Last: 35.67, up 0.02 (+0.06%), High: 35.87, Low: 35.21, Volume: 29.77m
Barclays PLC (BARC:LSE): Last: 237.85, up 0.55 (+0.23%), High: 240.44, Low: 234.55, Volume: 13.72m
BE

(@HipHopYouDontStop: house prices in this country tank very, very slowly. Careful about making any definite statements on that.)
BE

And, the other factor on World of Banking this morning is Basel.
NH

yes
NH

they don’t want to Co-Co
NH

don’t like it
NH

they want the SIFI
NH

capitalised with pure equity
NH

here’s Citigroup
NH

on that
NH

Basel Statement of G-SIBS – On 25 June 2011, the Group of Governors and Heads of
Supervision (GHOS), the oversight body of the Basel Committee on Banking
Supervision (BCBS) agreed on a consultative document setting out measures for
globally systemically important banks (G-SIBS). While the range of capital surcharges
is consistent with recent press reports, there may be modest disappointment that
‘funding’ is via progressive Common Equity Tier 1 (CET1) although contingent capital
remains under review.
NH

Additional Buffers of 1-2.5% + 1% – The press release outlined additional loss
absorbency requirements of 1% to 2.5% met with a progressive CET1 capital
requirement. As a disincentive for banks facing the highest charge from becoming even
more systemically important, an additional 1% charge will be applied. Naturally, a
‘management buffer’ will be necessary over & above the required minimum.
NH

Drivers of ‘Tiering’ – Tiering will be driven by 5 categories including size,
interconnectedness, lack of substitutability, global activity & complexity. According to a
recent press report, Barclays, BNP Paribas, Deutsche Bank, HSBC and RBS will fall
into the top bracket, or 2.5% capital surcharge.
Timing, Sooner Rather Than Later – Officially, the higher loss absorbency
requirements will be introduced in parallel with Basel 3 capital conservation and
countercyclical buffers i.e. between 2016-18. In practice, we expect the markets to
require this sooner, by 2012-13.
NH

CoCos In Flux – At this stage the GHOS and BCBS look to “continue to review
contingent capital” as a means to fund the G-SIB capital surcharge. However, they
support the use of CoCos to meet higher national loss absorbency requirements than
the global minimum, for example in Switzerland.
NH

Conclusion (Figure 1) – Nearly all banks meet likely G-SIFI requirements by end-
2013, based on our current assumptions, with the exception of Deutsche Bank which
stands at 9.2% (or close to a potential 9.5% level). However, the potential lack of an
upfront contingent capital solution does reduce the possible flexibility for the sector to
adopt a more capital efficient strategy.
NH

right
NH

I think that’s the banks done
NH

unless you have anything to add Bryce
BE

Right – quick bit on Basel from Deutsche as well, then we can move on.
BE

Over the weekend the Basel Committee provided an update on its thinking
on additional capital requirements for global systemically important banks
(G‐SIBs). The announcements were heavily trailed in the press over the preceding
week (FT, WSJ and others). Based on size, interconnectedness, lack
of substitutability, global (cross‐jurisdictional) activity and complexity, banks
will be bracketed with an additional CET1 capital requirement, from 1.0%
to 2.5%. This G‐SIB buffer could reach 3.5% if banks grew further in the
future. These buffers will be introduced on the existing Basel III timeline for
capital conservation buffers, i.e. from 2016 to 2019, and will take the total
common equity capital requirement to 8.0%‐9.5% for the 30 or so banks
expected to fall into this category.
BE

We regard this news as largely expected. In practise, we think that the market
would like to see a 10.0% common equity Tier 1 ratio as the de facto
standard for the European banking sector, and many national regulators
have been pushing their banks in this direction anyway. Clarity from the
Basel Committee will likely catalyse the capital raising process in H2 2011,
we think. We are also doubtful that many banks will be able to operate
materially below a 10.0% threshold, or be allowed to take the full implementation
period, given that smaller / less diversified banks can also be seen
as riskier. We think 10.0% common equity will therefore become a shortdated
convergence target for the sector.
BE

This also raises questions about the role of CoCos. The best possibility for
a deep and liquid CoCo market was the use of CoCos to meet G‐SIB buffers
(and we think that investors and issuers would have supported this), but the
Basel Committee appears to have ruled this out. CoCos may still have a role
in specific countries pushing for tougher overall capital requirements (e.g.
Switzerland). CoCo‐like hybrid Tier 1 debt (with loss‐absorbing capabilities
to be Basel III compliant) is also likely to have a role, albeit only for 1.0% to
1.5% of the capital structure in our view. On balance, though, we see the
Basel Committee’s announcement as no worse at the headline level than
we expected, helping to keep bank capital structures simple, and in Europe
arguably below the de facto CET1 minimum the market has already settled
upon.
NH

(@Fitz – Euronext have been having been having regular outages over the last week)
NH

we should move on
11:31AM
NH

What else is moving?
BG Group PLC (BG.:LSE): Last: 1,303, up 27.5 (+2.16%), High: 1,304, Low: 1,273, Volume: 2.01m
NH

bid rumours
NH

or is there an upgrade about?
NH

(jeez – it’s HOT IN HERE)
BE

No upgrade I’ve seen.
BE

Nor a bid rumour.
NH

(@Yes Milky it will return when they are off state aid and not before)
NH

strange
NH

in fact there’s a total lack of stories in the market place this morning
NH

a few people trying to guess the takeout price of Misys
Strange software outfit, seemingly controlled by US investor ValueAct Capital.
NH

Emoticon
NH

he reckons it will be 475p
NH

I don’t
NH

450p is more like it
NH

and also
Northumbrian Water Group PLC (NWG:LSE): Last: 389.00, up 6 (+1.57%), High: 389.70, Low: 383.40, Volume: 1.23m
NH

was strong on Friday
NH

the story seems to be a fund based in either China or Hong Kong is working on a bid
NH

but the approach has been held up
NH

because Ontario Teachers
NH

want to roll some of their stake into the buyout vehicle
NH

apparently
BE

Interesting idea, that one.
NH

indeed
NH

stock is proving quite resillient
NH

worth keeping tabs on
11:35AM
NH

Right
NH

shall we have a look at Betfair
NH

the CEO wants out
Betfair Group PLC (BET:LSE): Last: 724.50, down 18.5 (-2.49%), High: 748.00, Low: 714.00, Volume: 106.46k
NH

After ten years with Betfair, and nearly six as CEO, David Yu has informed the Board that he believes it is now the right time for the company to start looking for his successor. He does not intend to renew his current contract (which expires in October 2012) and therefore the Board will now begin a search process for a new CEO. During the process of identifying his successor, David will remain fully committed to the Company and to delivering the plans for future growth.
BE

Sure. He’s been there ten years.
BE

Though, as a listed company …. six months?
NH

yeah
NH

and the float hasn’t been a success has it?
NH

float price of £13
NH

EmoticonEmoticon
BE

Thirteen quid! Forgot that.
BE

This has been a disaster.
NH

yes
NH

it has
NH

and because they are a pretty normal bunch at Betfair
NH

it tends not get the vitriol
NH

of a certain internet grocer we could mention
NH

but this has been a stinker
NH

a real stinker
NH

(@Swedes – where else can they go at the moment give central bank financial repression?)
NH

so
NH

is this significant at all?
BE

Well, it’s ahead of results.
BE

Which, again, is rarely a good omen.
BE

Results due Wednesday
NH

right
BE

And it wouldn’t be a surprise to see some kind of warning in there.
BE

Here’s UBS
BE

Betfair has confirmed the press reports (Guardian, Telegraph) that it has begun to
search for a replacement for CEO David Yu, as he does not intend to renew his
contract when it expires in October 2012. In our view the timing of this news, only
8 months after the IPO, is disappointing. We expect shares to weaken further on
this news today.
BE

Betfair has had a difficult run since listing with shares down almost 50% from the
1300p float price. We doubt that Betfair can deliver the top line growth and margin
expansion that the market expects. In our view the negative headwind from
unfavourable European betting legislation and the difficulty of applying the betting
exchange technology to new verticals, restricts near to mid term growth prospects.
BE

Betfair is due to announce FY11 results on 29th June. This is the company’s first
full year results announcement since it listed in October. Our FY11e forecasts are
broadly in line with consensus, but for FY12e we are c10% below consensus,
reflecting our concern that the core growth may be held back by unfavourable
legislative progress in Europe, and poor take up on LMAX.
BE

And here’s BarCap
BE

External candidate most likely: While there will be an opportunity for internal
candidates to apply for the role, CFO Stephen Morana has stated that he is unlikely to
apply, and therefore we believe that the replacement is likely to be external.
NH

Morana
BE

Full year results on Wednesday, where we forecast £73m core adjusted EBITDA: The
company reports full year results on Wednesday, and believe that there is no correlation
between this resignation and the results. We forecast total revenue of £375m and core
Betfair revenue of £336m, both inline with consensus. Our adjusted EBITDA for core
Betfair of £73m is also inline with consensus, however our overall Group adjusted
EBITDA of £63m is 3% ahead of consensus, while our adjusted underlying Group EPS of
29p is 10% ahead of consensus. Any material difference to these consensus estimates
would have forced the company to pre-release.
NH

he was the ML guest
NH

Betfair
NH

I dunno
NH

it’s not really delivered on any of IPO growth plans, has it?
NH

no overseas progress
NH

LMAX has flopped
BE

European regulatory risks were hugely underplayed in the prospectus, or perhaps just hugely ignored by investors.
NH

yep
NH

there’s just no real growth angle
NH

anyway
NH

let’s go back to BG for a moment
NH

very interesting statement
NH

just hit the wires
NH

they are ignoring their usual lenders
NH

and taking $1.5bn credit line from China
11:43AM
NH

BG Group signs new cooperation agreement with Bank of China
BG Group and Bank of China today signed a key cooperation agreement that enhances the existing close working relationship between the organisations and also allows for up to $1.5 billion of new funding options to support the Group’s major growth programme.The Memorandum of Understanding (MoU) signed today builds upon existing commercial relationships between BG Group and Bank of China and confirms the intention to make extended credit facilities available that can be used to help deliver the Group’s global growth plans – including its operations in China where the Group has an established commercial presence and where an initial offshore exploration programme is underway.

NH

(@Milky – early bath for you)
NH

ZAP
Warning to rude and abusive commenters – your ability to comment will be terminated immediately and permanently, without warning. Henceforth, FTAlphaville has instituted a One Strike and You Are Out policy. We’ve had enough. We are going to clean up these pixels once and for all.
NH

I know the Chinese premier is in town
NH

but this must be the first big FTSE 100 company
NH

to tap a Chinese bank in this way
BE

Hm.
BE

People’s Bank of China has a stake in BG, if memory serves.
NH

they do
BE

Small. Below 3% certainly.
BG Group PLC (BG.:LSE): Last: 1,305, up 29.5 (+2.31%), High: 1,306, Low: 1,273, Volume: 2.14m
11:46AM
NH

Shall we go shopping?
NH

lots of very bearish headlines in the weekend papers
NH

Clinton Cards looking to shut loads of stores
NH

Jane Norman in administration
NH

JJB closing stores
NH

and through it all
NH

the big landlords refuse to lower rents
NH

my local centre
NH

the Howard Centre
NH

must be let 70% now
NH

I think it’s own by Land Secs
NH

the internet
NH

and the economy are killing the indepdents
NH

but the rents don’t come down
BE

My second-rate shopping centre, which is owned by Land Securites, must be 50% let I’d guess.
BE

The local theatre’s taken one berth. Kate Copstick gives out free books in another one.
BE

It’s all a bit grim, really.
NH

it is
NH

and yet
NH

the equity market
NH

seems keen on more exposure
NH

did you see this announcement
NH

from New River Retail
NH

The Board of NewRiver (AIM: NRR), the UK REIT specialising in value-creating retail property investment and active asset management, is pleased to announce that the NewRiver group has entered into acquisition agreements to acquire a portfolio of four freehold shopping centre assets from Zurich Assurance Limited for approximately £68 million (the “Acquisition”) and proposes to raise approximately £40 million (net of expenses) by way of a placing of 16,865,000 ordinary shares at 252 pence per share to fund part of the cost of the Acquisition and the continuing growth of the Company’s business.
Newriver Retail Ltd (NRR:LSE): Last: 257.00, down 6.5 (-2.47%), Volume: 0.00
NH

and look what they are buying
NH

Information on the Four Retail PropertiesThe Four Retail Properties are four freehold shopping centre assets located in Carmarthen, Paisley, Skegness and Wisbech.

BE

Nice. Paisley.
NH

anyway
NH

on retail
NH

HMV has sold its Canada business
NH

and remarkably
NH

someone has actually given them some money for it
NH

only £2m
Hmv Group PLC (HMV:LSE): Last: 9.30, down 0.15 (-1.59%), High: 9.75, Low: 9.03, Volume: 973.39k
BE

Canadian HMV stores are pretty good, in comparison.
NH

there’s a benchmark for you
BE

Though I expect the Vancouver store got smashed up after the Canucks lost the hockey.
BE

That must’ve knocked £500k at least off the price.
NH

but at least
NH

HMV didn’t have to pay someone money
NH

to take the business off their hands
NH

whereas
NH

Kesa
NH

will have to pay someone an awful lot of money to take on Comet
Kesa Electricals Plc (KESA:LSE): Last: 134.30, up 0.2 (+0.15%), High: 134.90, Low: 132.70, Volume: 294.63k
NH

OK
NH

here’s Nick Bubb
NH

on the latest HMV indignity
NH

he’s also got something to say on recession proof Carpetright
NH

HMV (Reduce): Today’s news that HMV has sold its Canadian business for £2m to the scavenger company Hilco was widely expected and is part of the wagon-circling strategy of the beleaguered management as they prepare for a final defence of the core UK business this Xmas, post the disposal of Waterstone’s. All that is left of the once mighty HMV Overseas empire are the small but profitable operations in Hong Kong and Singapore, which are largely immaterial (sales of £31m). And £2m from Canada is largely immaterial in the context of group net debt of £120m-£130m, although HMV have done quite well to get as much as £2m for Canada given the outlook. We thought it was at best worthless and feared that HMV might have to pay somebody to take it of its hands, with the business likely to move into loss this year on sales of c£200m.
NH

. Five years ago the Canadian business was usefully profitable, making over £12m, but it is a minor tragedy that HMV couldn’t see the writing on the wall and get out of Canada when the going was good, at the same time as the exit from HMV Japan in 2007. Alas, the business in Canada has been slip-sliding away ever since…The focus now shifts to the success of the “technology store” roll-out and HMV will say a lot more about this shortly, with the final results scheduled on Thursday. We remain cautious on how the “technology” push will go this Xmas, expect the group to break-even at best this year and still expect an equity raise after Xmas, whatever happens. The shares are still best avoided.
NH

Carpetright (Sell): Talking of the pressures on UK big-ticket consumer spending…we look forward to hearing what Carpetright say about life when they report their finals tomorrow, although in theory CPR can hide behind the conventions of quarterly reporting. PBT collapsed last year to £16.2m on the back of 7% fall in LFL sales and we expect another slip this year, with LFL sales still falling as market share comes under pressure in a tough market. As usual, the rating on that basis defies rational expectation (P/E over 40x, EV/EBITDA of 14x…) and, as usual, we maintain a Sell, despite the constant fear that Phil Harris will take the company at some point and pay up to buy out minority investors…
Carpetright PLC (CPR:LSE): Last: 691.00, down 2 (-0.29%), High: 703.02, Low: 686.50, Volume: 6.89k
BE

Anything else to mention in retail?
NH

only that Mary Portas
NH

is of course
NH

trying to save the high street
NH

Mary Portas, the retail expert and TV personality, is set to meet the British chief executive of Tesco this week, kicking off a series of meetings with Britain’s biggest retailers, as she examines the future of the country’s ailing high streets.Ms Portas, best known for her Mary Queen of Shops TV programme, has been appointed by the government to carry out an independent review of Britain’s high streets, which have been blighted by boarded up shops in the economic downturn.

She will meet Richard Brasher, the new chief executive of Tesco’s UK business, which has become a focal point for anti-supermarket sentiment.

BE

The John Harvey-Jones for the new millennium.
NH

I suggest
NH

she goes to the see the bosses of
Land Securities Group PLC (LAND:LSE): Last: 826.00, up 4.5 (+0.55%), High: 827.50, Low: 818.50, Volume: 657.67k
Hammerson PLC (HMSO:LSE): Last: 465.60, up 4.4 (+0.95%), High: 466.10, Low: 460.00, Volume: 258.31k
NH

etc
NH

might be more relevant than Tesco
NH

good independent retailers can survive against Tesco
NH

but not when rents are so high
11:58AM
BE

Right – smallcap corner
BE

What’s moving?
NH

breaking news from Helphire
BE

EmoticonEmoticonEmoticon
NH

on the recent mis statements
NH

getting now
NH

BN 06/27 10:57 *HELPHIRE SAYS OVERVALUATION IN CARRYING VALUE OF ABI DEBTORS
BN 06/27 10:57 *HELPHIRE SAYS NOW RECEIVED RESULTS OF WORK CARRIED OUT BY KPMG
BN 06/27 10:57 *HELPHIRE SYAS BECOME AWARE OF MATERIAL OVERVALUATION :HHR LN
BN 06/27 10:57 *HELPHIRE GROUP : FINL UPDATE
NH

oh dear
Helphire Group PLC (HHR:LSE): Last: 3.50, down 0.25 (-6.67%), High: 3.90, Low: 3.50, Volume: 409.97k
NH

Financial Update
In the IMS announcement dated 6 May 2011, the Group included a statement that
it had just become aware of a potential material overvaluation in the carrying
value of its ABI debtors in the financial systems, compared with the
underlying operating systems. Preliminary indications were that the
overstatement could be approximately £25 million. The Board engaged KPMG to do
an independent review of the Credit Hire receivables and they have now
quantified the overstatement as £27 million.As part of the overall investigation into this matter, the Board has further
reviewed the carrying value of Credit Repairs and the estimated basis of the
settlement value of outstanding cases and concluded that further adjustments
of £2 million and £12 million respectively are required.

NH

The Group has kept its bank lenders fully informed of the issues described in
this announcement and they remain supportive.
NH

“That this error arose is a matter of huge disappointment to the Board who
have been working for more than two years to deliver change and stabilise the
business. During the last two and a half years, management have completely
re-engineered the operation, consolidating five separate claims systems to one
for new business and from four operations centres to two. Annual overheads
have been reduced by over £60 million and net debt has been reduced by in
excess of £200 million since 31 December 2008, whilst the quality of new
business taken on has been greatly improved.”
NH

all in all very disappointing
NH

I though the business had been cleaned up
NH

clearly not
BE

Hang on ….
BE

“a potential material overvaluation in the carrying value of its ABI debtors in the financial systems, compared with the underlying operating systems.”
BE

My brain’s too overheated to work out exactly what that means.
NH

yeah
NH

lets move on to something easier
NH

Wolfson
NH

profits warning
Wolfson Microelectronics PLC (WLF:LSE): Last: 182.00, down 55 (-23.21%), High: 199.75, Low: 175.89, Volume: 587.20k
NH

is this all because of RIM?
BE

Looks that way, though they’re not naming them.
BE

Possibly, also, the failure of everyone except Apple to make a tablet people actually want to buy.
NH

what do they provide for RIM?
BE

Sound chips, to simplify.
NH

right
BE

They make audio chips, once considered of a better grade than the average
BE

But then the average got better
BE

Leading Apple, among others, to switch to something cheaper.
NH

I see
NH

and they got left with RIM
NH

not good
NH

Wolfson and CSR
NH

they are forever disappointing the market
BE

CSR should buy Wolfson.
BE

(Just an idea. Won’t happen. Robots: cease and desist.)
NH

any comment
NH

(Thermo just hit 95o in the office)
BE

Few bits.
NH

(Tracy has just left. She’s going outside into the sun where it’s cooler)
BE

Here’s Numis
BE

WLF warns Q2 revenue is likely to be at the bottom end of guidance and FY11E
revenue growth in the 10-20% range, well short of consensus 30%. The delays to
new product launches at RIM combined with a soft consumer electronics market
are the likely culprits. Without the ‘hoped for’ step change in revenue, visibility on
material profitability has once again evaporated. Our first cut is 78% downgrade to
FY11E EPS to 3c from 12c.
BE

Q2 revenues are now likely to be $37-39m (prior guidance was $37-45m) and FY11Erevenue growth is likely to be in the 10-20% range (consensus 30%). WLF blames
lower sell-through (likely attributable to broader consumer electronics exposure like
TVs) and delays in customer’s new product introductions (likely RIM). The weak outlook
would also suggest share loss in Samsung smartphones may be worse than expected.

BE

I Despite the poor short term environment, WLF says adoption of its products is“accelerating”, however we would note that this was the case last year, but it isn’t
translating into the step change in revenue needed to get back to material profitability.

BE

I First cut downgrade FY11E revs to $178m from $208m (13% growth). WLF provides noindications of opex cuts, which means earnings are almost wiped out with new FY11E
EPS cut by 78% to 3c from 12c. In FY12E we cut revenue to $205m from $255m and
EPS by 72% to 6c from 21c.

BE

Unfortunately WLF is an example of what happens to a semiconductor business whichlacks scale, when its key categories come under pressure. It is a good example of the
rationale for CSR buying Zoran to build a broader more sustainable business.

BE

Now visibility on meaningful earnings has once again evaporated, the stock is likely tobe more driven by its strategic value. Cut TP to 200p from 250p, which would be
EV/Rev of 1.6x, which could be achievable on a trade sale.

NH

done with that
NH

time for a bit of E&P
NH

and Rockhopper
Rockhopper Exploration PLC (RKH:LSE): Last: 274.50, up 7.75 (+2.91%), High: 278.00, Low: 266.00, Volume: 2.39m
NH

flow rates from Sea Lion out today
NH

all looks good
NH

but not much of a pop in the price
NH

not surprised
NH

given the recent oil price action
NH

seems that a few analysts and investors
NH

are worried that Rockhopper will ever be able to produce oil commerically
NH

i mean the oil is there
NH

but where do they ship it?
BE

Gulf of Mexico, I guess.
BE

South America won’t touch it.
NH

nope
NH

Brazil won’t
NH

how much is it going to cost to ship all that oil
NH

to the GoM?
BE

Good question.
NH

anyway, the sector watcher still LOVES the Rock
NH

A great result from the Falklands specialist, with RKH’s latest 14/10-5 appraisal well flowing at a stabilised rate of 5,500 b/d of oil, and a hugely impressive peak flow of over 9,000 b/d. A full suite of tests was run on the upper fan only, with a mini-DST on the smaller lower fan indicating the potential for an additional 800 b/d. Including the small amounts of gas produced, this gives a total cumulative stabilised rate of around 6,500 boe/d.
NH

The flowing wellhead temperature of 62C was significantly higher than the previous test on 14/10-2 last year thanks to the use of Vacuum Insulated Tubing (VIT). This is a great result for RKH and hugely increases the likelihood that Sea Lion is commercially viable. The group’s P90 case of 155 million barrels of oil looks increasingly attainable. The rig will now move 4.5 km to the west of its current location to drill 14/10-6 which will test the group’s “mid-case reserves” although these are as yet undefined
NH

It wouldn’t surprise me if a successful well here would push reserves up to the 200-250m barrel mark, although let’s be clear, it’s a relatively high-risk well. Even so our base case NAV of 593p/share assumes only 170m barrels, hence the shares at the current level of 274p look heavily oversold. It’s not too late to get involved in the RKH success story – BUY.
NH

not sure it’s heavily oversold
NH

but anyway
NH

some further comment
NH

Here’s Oriel Secs
NH

Rockhopper announced this morning that the Sea Lion appraisal well has been
successfully flow tested.
 The main sands flowed at 5.5kbopd for a 48 hour period with a well head pressure of
783psi. In a second test these sands flowed at 9.0kbopd with a well head pressure of
625psi.
 Whilst flowing the well head temperature was 62*C, and no wax inhibitors were
needed during the flow test.
 Two of the sands in the lower fan were tested with a mini-DST which showed that the
lower fan could have added a further 0.8kbopd if they had been tested.
 Unsurprisingly the Board believes this is a commercial flow rate which should help
validate that Sea Lion is a commercial discovery.
 The rig will now move off to drill an appraisal well 4.5km from this well.
 Our risked NAV stands at 543p/sh which includes a 170mmb low case risked at 90%
and an upside case of 240mmb risked at 66% (which may be de-risked by the next
well).
 We retain our BUY recommendation
NH

(Nick – built a port on the Falklands and built a pipeline to Gom. It’s an idea I guess)
NH

as for Salamander
NH

I don’t really follow this one
NH

probably should
Salamander Energy PLC (SMDR:LSE): Last: 252.10, down 1.4 (-0.55%), High: 256.90, Low: 249.60, Volume: 183.25k
NH

and here’s what the sector watcher makes of it all
NH

Salamander Energy – SMDR LN
A good result for SMDR, with a well on its 100%-owned B8/38 licence offshore Thailand coming in successfully. The East Terrace well encountered 35 metres of net oil pay over three zones, with estimated recoverable reserves of 8-14m barrels of oil. At the midpoint this could be worth in the order of 35p/share to SMDR. We’ve got a Hold on SMDR and a current NAV (i.e. prior to today’s news) of 285p/share, some 13% above the current price. Hence I’d be a buyer at these levels.
BE

(@JSC: Is Brazil going to put the wishes of Sam Moody over those of Christina Colombo? I have my doubts.)
NH

(Sun Seeker – YELLOW. We are delayed on prices and you should not that)
12:16PM
NH

Elephant in the room time?
NH

(LYO – YELLOW)
BE

Why not.
BE

Though if they can deliver us a dozen Cornettos this afternoon it may temper my opinion.
NH

@Sun Seeker – prices are nothing to do with us. but thanks for noticing. You are still on one yellow however)
NH

we are of course
NH

talking
Ocado Group PLC (OCDO:LSE): Last: 187.00, up 2 (+1.08%), High: 194.20, Low: 182.80, Volume: 908.05k
NH

which is below the float price again
NH

180p for reference
NH

(Sun Seeker – they come from Wall Street on Demand)
BE

(And, indeed, our autoquote is borked.)
BE

Ocado’s down 17.6p at 169.4p
An internet food retailer that many believe is the second coming of Webvan. Loss making yet valued at close to £1bn on flotation.
NH

so results out
NH

they made a profit
NH

of wait for its
NH

£200,000
NH

that’s lower than a lot of people were looking for
NH

but that’s not why the Webvan 2.0 is down
BE

(@Frazek: what?)
NH

its more a matter of further downgrades
NH

and signs they can’t scale the business
NH

they still have sorted the capacity issues at warehouse No1
NH

and in the meantime
NH

a load of performance metrics are suffering
NH

deliveries on time
NH

substitution
NH

that sort of thing
NH

on top of all that
NH

July 6
NH

directors can sell
NH

but will they
NH

would they dare
NH

Senior Muppet the Ocado price is
A term of endearment used to describe BB share promoters on FT Alphaville.
NH

18.2p lower at 168.8p
NH

DOWN 10%
NH

I guess the reason for the fall is
NH

the stock has been quoted for almost a year now
NH

and we have had
NH

three rounds of downgrades
NH

and thus
NH

there’s no justification for the massive valuation
NH

none at all
BE

Ok, let’s spin back here.
BE

So demand is exceeding its capabilities.
BE

The capabilities of its spectacularly expensive warehouse.
BE

I’m not sure I grasp this.
NH

I do
NH

the model is not that scableable
BE

Yeah – perhaps.
BE

Clive Black of Shore Cap asks some good questions.
NH

he always does
NH

fire away
BE

Ocado has released interim results for the 24 weeks to 15 May 2011. Trading data has already been
provided by the company covering H1. In that update Ocado disappointed the market, revealing a
material slow down in trading momentum in the latter part of the trading period – c17% sales growth
was the Q2 running rate from over 25% albeit Ocado often has dip in activity in the spring months.
Additionally though, Ocado has spoken of limiting order commitments in recent weeks to ensure
satisfactory customer service although, as we have written elsewhere, we ourselves and in
conversation with others, have seen more stock outs and substitutions this year from Ocado than last
(98.0% items delivered exactly as ordered from 99.1% in 2010).
BE

EBITDA of £14.3m in H1
Ocado has reported EBITDA in line with expectations of £14.3m (2009/10A; £8.0m) – note with a lot
of IT kit, distribution centre fixtures & fittings and vehicles depreciation and software amortisation are
real costs of business and so the argument that EBITDA is some form of clean measure for Ocado’s
performance is subject to considerable debate (do not value Ocado on an EV/EBITDA multiple
alone!). An EBIT of £2.4m is reported (2009/10 – a £2.7m loss). Despite cash and cash equivalents
of £123.6m, Ocado’s financing costs were still £2.2m, leading to a Continuing Pre-Tax profit of £0.2m
(EPS; 0.4p). As expected, no dividend has been declared, the only stock in the sector not to offer an
income stream.
BE

Here’s the knife between the shoulderblades.
BE

Why not focus on demonstrating Hatfield works?
Ocado is now in the midst of the development of its second Customer Fulfilment Centre at Dourdon
in the English Midlands, with construction reported to be on-time and on budget. We still struggle with
the expenditure of c£210m on a second distribution centre, not least to our minds at least because
Ocado has not demonstrated that its Hatfield facility is especially profitable and cash generative after
nearly a decade of trading in reasonably soft competitive conditions. With investment, Ocado’s cash
balances will be materially eroded in forthcoming months. Ocado is investing in the Hatfield facility to
ease the current capacity constraints, though we expect the capacity issues to hinder Ocado’s top
line growth at least through the summer.
NH

ouch
BE

Watch-out for Waitrose
Over the period reported the John Lewis Partnership sold out of Ocado stock. To our minds the end
of the financial involvement between the two is significant. Whilst there is a supply arrangement for
much of this decade, allowing Ocado to remain what it essentially is…, a distributor of Waitrose
goods…, Waitrose has revealed its intention to take Ocado on, head-to-head in the key London
market from July. As The Financial Times recorded recently (20 June 2011), Waitrose has put
together a significant marketing programme with which to challenge Ocado within the M25. We see
this as a growing and significant challenge to Ocado and whilst Waitrose needs to show that it can
match the commendable service package of Ocado, if it does, then we can see a lot folk going
straight to ‘organ grinder rather than the monkey’. Elsewhere in its range, Ocado has announced a
supply partnership with Carrefour to distribute its ‘Reflets de France’ range in the UK, with the
Ocado’s own label range now extended to 350 SKU’s. Management have also confirmed a lease has
been signed for a 100k sq-ft warehouse from which its move into non-food will be fulfilled, though
non-food plans remain in the early stages with no further details provided.
BE

…and it’s not just Waitrose
And as we highlighted in our recent update on the developments at Waitrose, it is not just the John
Lewis food store that is competing well against Ocado. Sainsbury (SBRY^, Hold) has recorded
stronger trade online than Ocado in recent weeks (20%+) whilst Tesco.com (TSCO#, Buy) in the UK,
several times larger than Ocado, has similar trading momentum in excess of 15%. We also point out
that Marks & Spencer (MKS^, No Recommendation, Coverage Pending) and Wm. Morrison (MRW^,
Hold at 292p) have yet to enter the market; the former could be the greatest challenge of all to
Ocado.
NH

ouch again
NH

Oriel
NH

none too impressed either
BE

Go on.
NH

Ocado’s Interim results are steady enough given we knew the sales number, but the
current trading runes are not good and we stick with a sell: there remain far too many
questions unanswered to justify the current multiple.
 The PBT range was -2m to 2m (ours was the latter forecast), and the outcome is 0.2m.
 Interestingly, basket size fell by 1.4%, due to more customers switching to the
“delivery pass”.
NH

at a time when competition is increasing, risking irritating customers can’t be good
news.
 There’s an interesting supply tie- in with Carrefour but that’s about it where good news
is concerned.
 Management reports that current trading remains capacity constrained (despite
promises at the Q2 trading statement that this wouldn’t persist): there’s no sales
growth number, but we’d wager that our 19% sales growth forecast is toppy.
 We will probably downgrade our numbers today but will wait for the analysts’ meeting
for more colour. The shares remain extortionately valued, but the business shows no
signs of delivering the requisite upgrades. The shares can be nothing other than a
SELL.
NH

they have that right
NH

none of the requisite upgrades
BE

Hang on – Clive’s had the wit to stick Ocado on an earnings multiple.
NH

excellent
NH

must be three digits
BE

Which is ………. 442.5 times.
NH

wow
NH

falling to?
BE

Doesn’t push it forward.
BE

Which, when you deliver three profit warnings in short succession, seems sensible.
NH

prolly can’t push it forward
NH

because the new warehouse
NH

will put it into losses
BE

You could still EV/EBITDA, which is 30.3
NH

jesus wept
BE

Rather … er …. punchy.
NH

do we have any comment from JPMorgan
NH

house broker
NH

downgraded last week
NH

before today’s fall
BE

Doesn’t say much.
BE

Just rehashes last week’s note.
NH

i see
BE

Capacity constraints continue to hold back top line progression. As has
been well documented, at peak times Ocado has insufficient capacity at
CFC1 to meet demand, which has negative connotations for topline growth
and productivity, both of which have lagged the market’s expectations this
qtr. However, with only £10.4m spent on increasing capacity in H1 (£80m
budget by end of 2012), the quieter summer period should provide an
opportunity for Ocado to accelerate this process and drive capacity and
productivity higher in H2 vs H1, something which should help alleviate
some investor concerns. The one disappointing aspect of today’s results is
the lack of productivity gains in terms of units picked per hour (UPW). Due
to the capacity constraints at CFC1 and need to hire part-time staff for
trolley picking, UPW has actually decreased by 7.0% to 114 (JPMCe: 125).
This is much lower than our estimates but should now start to improve in H2
as capacity increases.
NH

what about the other apologist, Goldman?
BE

Shop broker Goldman?
BE

Certainly. Here’s what shop broker Goldman thinks.
BE

In our view, this is a solid set of results and the company is on track to
meet our estimates.
BE

Management continues to address capacity
constraints and CFC1 expansion will continue during the relatively quiet
summer months.
BE

The company also indicated that the development of
CFC2 remains on time and budget
NH

hang on
NH

the capacity were supposed to have been sorted
BE

We forecast FY2011 gross sales growth
of 23% (2H11 implied 24%) and our EBITDA estimate of £37.5 mn is broadly
in line with Reuters consensus.
BE

“Broadly” ……….
BE

By which they mean “not”.
NH

lovely word “broadly”
NH

very English
NH

“that was broadly in line with what I was thinking”
NH

ie not at all
NH

other variants on this include
NH

“it’s an interesting contribution to the debate”
NH

ie it’s rubbish we can ignore
NH

we are wittering now
NH

and it’s passed 12.30pm
NH

shall we end?
BE

Yeah – I need to go find a dark corner
BE

And some ice.
NH

me too
NH

that’s rabble
NH

I need to replace some lost fluids
NH

even with a fan
NH

i reckon I am three litres down this morning
NH

until tomorrow
NH

rabble
NH

EmoticonEmoticon
BE

Bye.
NH

cya

This entry was posted by Neil Hume on Monday, June 27th, 2011 at 11:04 and is filed under Uncategorized.

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