Markets Live transcript 28 Jun 2011

Posted by Neil Hume on Jun 28 11:04.

Markets Live chat transcript for the chat ending at 11:30 on 28 Jun 2011. Participants in this chat were: Neil Hume, FT bryce.elder

NH

Hola rabble
NH

welcome to ML
NH

an hour or so of markets related fun
NH

and I’m happy to say
NH

it’s a bit cooler in here today
NH

although
NH

that’s probably less to do with the air con working
NH

and more to do with the fact that the temp has dropped
BE

Core temperature at the FT reactor’s being kept stable at the moment.
NH

Emoticon
BE

Though the situation remains volatile.
BE

and we’re naturally wary of financial news leaking into the Thames.
BE

So anyway, should we start with the bulletproof FTSE?
NH

OK
11:08AM
NH

So
NH

we are up
NH

by the market is coming off its highs
NH

now up just 13 points at 5,735
BE

Can’t see why we’re up at all, really.
NH

nor me
NH

some dire corporate news across Europe today
NH

massive TomTom profits warning
NH

everyone is trading down
NH

and retailers keeping stocks low
NH

Siemens
NH

just had some gloomy comments
NH

June 28 (Bloomberg) — Siemens AG said it’s seeing first
signs of “easing growth” in the second half of its fiscal year
because the “tailwind” from the economic recovery is “likely
over,” according to a presentation by Chief Financial Officer
Joe Kaeser today.
Kaeser predicted sales in the fiscal third quarter will
hold steady from the preceding period, while net income adjusted
for some items will advance “slightly.”
NH

a few slashed dividends
NH

including Carpetright
NH

and more misery on the high street
NH

Thorntons cutting 120 stores
NH

and might close another 80
BE

Yeah – this feels like a downturn.
BE

A proper, western economy stalling type downturn.
BE

The tape just reads very poorly today.
NH

it does
BE

So should we tackle our domestic disaster
BE

The third profit warning in a year from C&WW?
NH

words fail me
11:12AM
NH

But i really think the time has come
BE

(@Rabble: calm down please.)
NH

for a corporate mercy killing
NH

it has to be put down
NH

if it was a sick dog you’d do the humane thing
NH

why can’t we do it here?
BE

Yeah – it’s been a dog since demerger
BE

And before, if we’re honest.
BE

And, while the company can say what it likes about deferred contracts and a tougher operating environment …..
NH

(@outlaw )Emoticon
BE

The key problem remains the same: this thing generates no cash.
NH

yep
NH

never has
NH

never will
NH

actually Swedes came up with an excellent idea
NH

Perhaps AV could establish an Indignitas Clinic? Whereby weary shareholders could nominate a chairman, CEO and CFO to be hooked up to the zapper during ML? A macroelectric shock would be administered each time Milky mentions LLOY, and/or Lorcan mentions the word “bailout”. At the end of the session, the guests will be offered a pentobarbital smoothie, served in the chewing-gum mug.
NH

A corporate Indignitas clinic
NH

I’m liking that
NH

and can think of all sorts of companies that should book an appointment
NH

anyway
NH

shall we recap on this mornings news
NH

another PW
NH

the third in a year
NH

the dividend halved
NH

the CEO resigns
NH

but the best bit of all
NH

the cherry on the cake
NH

is this
NH

In light of this, the Board of Cable&Wireless Worldwide has accepted the resignation of Jim Marsh and announces that John Pluthero, current Chairman of the Company, is to step into the role of Chief Executive. Senior Independent Director John Barton becomes Chairman of the Company and Penny Hughes is the new Senior Independent Director.
NH

John Pluthero comments: “Clearly it has been a very difficult 12 months and it is now important that we take the necessary steps to ensure the future growth of our business. I’ll be looking to take a more radical approach to building on our hosting, cloud and data services business whilst becoming more competitive and efficient in the mature product areas. It has been easy to lose sight of what this business could be; it is my intention to reassert and realise that future.”John Barton says: “John Pluthero was the architect behind the successful turnaround of Cable&Wireless prior to demerger and knows the business and sector well. The Board has given John a full mandate to accelerate growth and maximise profitability.”

NH

hang on a moment
NH

ohn Pluthero was the architect behind the successful turnaround of Cable&Wireless prior to demerger
NH

WTF?
NH

how do you define success?
NH

by the size of his bonus payment?
BE

A Blank-esque bit of rewriting history.
BE

Shareholders have been stiffed, again and again.
BE

The demerger destroyed value.
NH

yep
BE

Though to be fair, C&W as a whole was equally good at destroying value.
NH

we need to find a bidder
NH

the world needs to be rid of CWW
BE

There IS value here, possibly.
Cable and Wireless Worldwide PLC (CW.:LSE): Last: 43.70, down 8.55 (-16.36%), High: 46.11, Low: 43.34, Volume: 24.59m
BE

Customer base.
BE

Backhaul.
BE

Some nice property in nice locations.
BE

Though why a telecoms company needs nice property in nice locations has never really been answered.
NH

( I can Oilwatcher. the low income demographic in this country aren’t buying like they used to. see recent argos figs. I doubt they are buying smartphones on £50 a month price plans)
BE

But should we imagine Pluthero putting the company up for sale?
BE

The statement doesn’t point that way.
BE

I’ll be looking to take a more radical approach to
building on our hosting, cloud and data services business whilst becoming more competitive and efficient in the
mature product areas.
NH

hang on
NH

that’s what the previous CEO was doing
NH

how is that radical or different?
BE

It’s not, really. I imagine they’re still going to buy that UK internet hosting thing.
NH

just what the business needs at the moment
NH

a big acquisition from a PE company
BE

(@yogabba: yellow. It wasn’t speculation. The company said on RNS that it had rejected a bid for the global carrier business.)
NH

what was that company called
NH

hang on
NH

going to find it
BE

200
BE

£360m or thereabouts, apparently.
NH

Cable & Wireless Worldwide, the troubled telecoms group, is in talks to buy 2e2, the technology services company controlled by private equity firms.C&W Worldwide, which has issued two profit warnings over the past year, has made an informal offer of £360m ($579.5m) for 2e2, said people familiar with the situation.

They added no deal was imminent, and cautioned that one may not be concluded.

C&W Worldwide is interested in 2e2 because of the telecoms group’s efforts to expand its capabilities to provide companies with cloud computing services.

C&W Worldwide and 2e2 declined to comment. Duke Street, the private equity firm, is 2e2’s largest shareholder with a 49 per cent stake. Hutton Collins, the investment house, owns 24 per cent of 2e2.

NH

so this is the big cloud opp is it?
NH

jesus wept
BE

(@Itzman: speculation has a meaning distinct from rumour, and is qualitatively different from reported fact. It’s a pet peeve of mine.)
BE

Yeah – and the lowball bid for the global carrier side would’ve funded this purchase, more or less.
NH

as it happens the dividend cut is not deep enough
NH

a two thirds cut is actually need
NH

given the whole thing is uncovered
NH

right
NH

some comment
NH

what we got?
NH

Mark James at Liberum is usually on the ball
BE

He is, and he’s making exactly that point on the divi.
BE

Will the last one to leave……
BE

We remain of the view that underlying cash generation at CWW is insufficient to justify its £1.4bn market
cap. CWW delivered just £11m of FCF last year and our FY12 estimate is £50m. Telcos routinely trade at
10% FCF yields yet CWW trades at c.4%. Cutting the dividend in half is sensible, though we would caution
that on our numbers, an annual bill of £59m remains uncovered by underlying cash generation: we believe
it should have been cut by 2/3 rather than by 50%. We would also caution against any expectations that a
new strategy, under the incoming CWO, would differ significantly, or have much more success, than the
old one. CWW’s poor cash conversion is, in our view, the result of inadequate scale: something hard to
change in the face of declining revenues. We reiterate our Sell rating and 40p price target
BE

And Deutsche’s worth reading.
BE

If only because it manages to dream up a “buy” rating for this thing.
BE

CWW guidance is down again post poor order momentum at the out-turn of Q1.
This is disappointing given the recent stock price recovery over a bid for CWW’s
global business and the growing cloud opportunity. The lacklustre UK economy,
Govt austerity and competition are substantially to blame but management failed
to compensate. There are still opportunities however afforded by a strong balance
sheet, international assets and new data services. CWW’s lower dividend is also
now effectively covered. We keep our Buy rating.
BE

Financial performance for the first 10 weeks of 2011/12 was in line with mgt.
expectations but sales orders, which drive future profits, are below expectations.
We expect that this is likely due to a still lacklustre economy and ongoing
competition from BT. EBITDA is now expected to be 5-10% below consensus of
£440m (ie. £396-418m) and DBe of £445m. The full impact is expected to fall to
FCF and the company therefore cuts its previously high dividend by 50% to 2.25p.
BE

In light of the now thrice lowered expectations since demerger, CEO Jim Marsh
has resigned and John Pluthero, Chairman and previous CEO, takes charge. Senior
Independent Director John Barton becomes Chairman. The new CEO promises a
‘more radical’ approach to building the hosting, cloud and data centre business to
realize the co’s potential. That includes more opex investment in growth but also
we suspect, acquisitions in the cloud space and perhaps even disposals.
BE

We cut our expectations for FY11/12 EBITDA by 8.4% to £407m, the mid-point of
the new guidance range. Our later year EBITDA estimates move down by 8%. FCF
moves 26-40% lower over the next three years. Our DPS expectation for FY12
falls by 50% to 2.25p (4.3% yield) in line with guidance and which should be
readily covered even with just small EBITDA growth next year.
NH

the radical idea is to buy things
BE

Even on lower numbers CWW still remains cheap with assets which are attractive
to a number of parties (ref: recent comments from Pacnet and Singtel). Whilst it is
tempting to throw in the towel post this tough time for the co., we believe we
would be doing so at a low ebb for the share price and maintain our Buy-rating.
Chief risks are around competition and the economy. We cut our TP to 75p (90p
previously) derived by DCF (Rf 4.5%, erp4.5%, beta 1,debt risk premium 5%).
BE

Yes – that’s it.
BE

C&WW is now a cashless acquisition machine.
BE

With equity at a distressed valuation.
BE

What could go wrong?
NH

and what well Pluthero demand
NH

in terms of a performance package
NH

for his latest brainwave?
BE

(@LYO: it isn’t. One’s conjecture and the other is an unverified account.)
BE

Who knows. He’s always been spectacularly well paid for a man who runs a failed utility.
NH

nice work if you can get it and all that
NH

and good point G
NH

the corporate governance people
NH

won’t be happy that the chairman becomes the CEO
NH

having overseen the whole shambles
NH

and the justification that he knows the business well is not enough
NH

perhaps a fresh perspective is actually needed here
BE

(@Yogabba: my understanding is that the international side is actually a quite decent business, hence its attractiveness to buyers. If it were sold, I’m not convinced there would be all that much left to pin a forecast on.)
NH

OK
NH

enough
NH

we should move on
NH

lots more to get through
11:34AM
BE

Ok – what’s this Rank news?
NH

the board have just walked out
Rank Group PLC (RNK:LSE): Last: 149.70, down 0.2 (-0.13%), High: 150.00, Low: 149.50, Volume: 92.38k
NH

the same board
NH

who recommended a low ball bid from the biggest shareholder
NH

then changed their mind
NH

and now have quit
NH

another UK corporate governance mess
NH

The Rank Group Plc (“Rank” or the “Group”) announces that both Ian Burke, chief executive of Rank since March 2006, and Paddy Gallagher, finance director of Rank since June 2008, have resigned from the board with immediate effect.Both Ian and Paddy have also given notice to terminate their employment as, respectively, chief executive and finance director and will remain with Rank so as to ensure an orderly handover to their respective successors when they have been identified.

NH

Following the announcement by the board yesterday in relation to the offer for the Group by Guoco Group Limited (the “Offer”), Ian and Paddy have expressed to the board their view that, given the feedback received from institutional shareholders since the announcement, coupled with the advice from the Group’s brokers’ in light of this feedback as to the possible level of acceptances of the Offer, it is now more than likely that the Offer will result in a cancellation of the listing of Rank’s shares on the Official List and the admission to trading of Rank’s shares on the London Stock Exchange’s main market for listed securities.The board is convening urgently to discuss these latest developments with its advisers and a further announcement will be made shortly.

NH

so the listing will be cancelled
NH

and presumably all of the above
NH

will be hired by the bidder
NH

and note that Burke has sold businesses to Guoco before
NH

think Thistle Hotels
BE

You’re right – many years ago.
BE

I’d always thought it was the CEO’s job to act in the interests of shareholders. Perhaps I’m being naive.
NH

and here just for reference is yesterday’s statement from Guoco
NH

The Rank Group Plc (“Rank” or the “Group”) notes the statement by Guoco Group Limited (“Guoco Group”) on Friday, 24 June 2011 regarding its offer for Rank (the “Offer”).The statement sets out Guoco Group’s intention to continue the listing of Rank shares on the London Stock Exchange (the “Listing”) in clearer and more comprehensive terms than previously explained by Guoco Group. In particular, the Board of Rank (the “Board”) notes that:

– Guoco Group has no intention of taking any steps available to it under the Listing Rules to cancel Rank’s listing voluntarily while sufficient shares remain in public hands;

– In circumstances where less than 25% of Rank shares remained in public hands, Guoco Group intends to discuss with the FSA whether the free float is sufficient for Rank to remain as a listed company; and

NH

so it was being delisted on Monday
NH

but on Tuesday it is
NH

these resignations are an empty gesture
NH

totally meaningless
Rank Group PLC (RNK:LSE): Last: 149.70, down 0.2 (-0.13%), High: 150.00, Low: 149.50, Volume: 92.38k
BE

Well, more than that, it’s a corporate sleight of hand
BE

Exiting doesn’t change the conditions of the bid, nor the acquiescence with which Rank directors accepted it.
BE

All they’ve done is take the heat off themselves.
BE

Very gallant.
NH

not in the least bit satisfactory this situation
NH

we should do more on this
11:40AM
NH

Right I need to issue a correction
NH

and give myself a yellow card
NH

we made an error in the online market report today
NH

on Rockhopper for which I unreservedly apologise
NH

there’s no issue with the well head temp
Rockhopper Exploration PLC (RKH:LSE): Last: 256.25, down 6 (-2.29%), High: 265.00, Low: 250.36, Volume: 3.05m
NH

however,
NH

I got an interesting insight into the mind of a retail investor
NH

some manc called this morning
NH

told me I was wrong
NH

I said yes and we corrected that
NH

he then went on to ask what the Times and its sister publication the FT
NH

had against Rockhopper
NH

why are we so negative?
BE

We’re a sister publication to the Times now?
NH

yep
BE

Yikes.
NH

owned by Murdoch
BE

Something exciting must’ve happened at the FT summer party last night.
NH

NFI to that
BE

I’ll await the memo on that one.
NH

and I’m an editor
NH

anyway
NH

just to be clear
NH

we aren’t owned by News International
NH

in fact we are owned by the evil market makers
NH

who like nothing better
NH

than screwing over muppet investors
A term of endearment used to describe BB share promoters on FT Alphaville.
NH

I hope that’s all clear
NH

and out in the open
NH

the market makers are the real eneny here
NH

still
NH

none of that explains why Rockhopper fell back yesterday
NH

after good news
NH

perhaps it’s those market makers again
11:44AM
NH

Talking of Muppets
NH

Bryce has some breaking news
BE

(@TK: Good question. Assanka were invited. We weren’t.)
Cracking little software shop who built FT Alphaville
BE

Actually, calling it breaking news is too much.
BE

But I’ve just had the final judgement mailed through in Excalibur Ventures LLC v Texas Keystone
NH

(Lorcan that’s my thinking. texas is a long way away from the Falklands(
BE

It’s 31 pages long
BE

And too much for me to make sense of immediately.
NH

gawd
BE

So – how’s this for a plan ….
BE

I’ll put it in the Usual Place right now
BE

So the rabble can nip in and extract whatever they think is relevant to share.
BE

How’s that for an idea?
NH

there’s a word for that isn’t there?
BE

Crowdsourcing
BE

Or laziness.
NH

that’s it
The next supermajor, potentially sitting on 60bn barrels of oil in Kurdistan. Loved by muppets across the globe.
Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 130.50, no change, High: 134.25, Low: 128.28, Volume: 1.24m
BE

I’ll accept both answers.
11:48AM
NH

back to the market
NH

where now?
NH

shall we have a look at TomTom?
NH

shares off 26%
NH

now what’s happening here
NH

is this another Nokia being eaten alive by Apple and smartphones
NH

mixed in with a bit of consumer slowdown?
BE

Six and half, I suspect.
BE

Not sure TomTom’s market’s really been hit cannibalism
BE

Though it’s probably hit saturation.
NH

it’s a pretty grim profits warning this
NH

40% coming off forecasts
BE

(GKP versus Excalibur here: http://tinyurl.com/5uxgn8f )
NH

here’s RBS
NH

Profit warning; estimates cut 18%
On the back of weak PND volumes, TomTom has cut its official FY11 sales
outlook by 15%. We downgrade FY11F reported EPS by 40% and FY11F cash EPS
by 25%, and our estimates are 18% lower on average for 2011-13. We reduce our
TP to €8.50 (from €11.0) and remove the stock from our Benelux favourites list.Missing 2Q consensus expectations by 8%
TomTom issued a severe profit warning after market close on 27 June. 2Q revenues missed
company-compiled consensus by 8%, which took us by surprise. Unexpected destocking is
the main reason for 2Q11 volumes falling 500,000 units short of our expectation. Mainly due
to mix effects, TomTom’s ASPs were still relatively flat in the quarter.

NH

Cutting the FY11 outlook as well
In addition the company lowered its FY11 outlook by 15% and consequently TomTom’s
reported FY11 EPS outlook was cut from about €0.50 to a range of between €0.25 and €0.30
per share. This implies FY11 cash EPS (adjusted for amortisation on past acquisitions) will
come down by 25% from €0.75 to €0.50 per share. We believe TomTom is kitchen sinking,
but still we chose to adjust our estimates according to company guidance.Taking PNDs out of the equation again
All non-PND business lines are performing as planned and continued to grow at a doubledigit
rate in 2Q11. Given the profit warning relates solely to the PND business (once again)
we believe it is time to revisit an old idea, splitting the value of the PND business from the
remaining core. On our estimates, the non-PND business is worth at least €1,059m. On the
current EV, this leaves a modest valuation of €280m for the standalone PND business. We
estimate PNDs will generate €650m in gross cash over 2011-13. In other words, investors
already fail to attach any remaining value to the PND business.

NH

Recommendation and valuation
We lower our estimates by 18% on average for 2011-13. Consequently, we lower our DCF
based target price from €11.0 to €8.50. Shares are trading at 8.5x 2011F earnings and 5.5x
EV/EBITDA. We retain our Buy rating but remove the stock from our Benelux favourites list.
NH

so we’ve now had profit warnings
NH

from TomTomo
NH

and Wolfson
NH

who is next?
NH

Logitech
NH

surely that must be pregnant with a profit warning?
BE

Yeah – seems vulnerable. But then, it always does.
BE

ASML?
BE

Infineon?
NH

down 50% already this year Logitech
NH

perhaps it’s in the price
NH

with regards to Tom Tom
NH

interesting to see Halfords selling off
NH

on the back of it
Halfords Group PLC (HFD:LSE): Last: 389.00, down 11.1 (-2.77%), High: 401.00, Low: 386.90, Volume: 305.35k
BE

Yeah – satnav’s been a good market for Halfords over the years.
BE

Though that may also reflect the horrendous state of UK retail, as referenced above.
NH

right
NH

shall we stay with the retailers?
11:55AM
BE

Ok – what next?
NH

Marks
NH

going on sale earlier apparently
Marks And Spencer Group PLC (MKS:LSE): Last: 367.40, down 0.6 (-0.16%), High: 372.60, Low: 366.40, Volume: 1.02m
NH

this from Oriel
NH

M&S sale starts today which is a week earlier than last year.
• Much of the high street started their sales early this year and we suspect that M&S is
just taking advantage of the better weather at the moment to help then clear through.
• Whilst the shares may see a small hit in the very short term, we believe that Marc
Bolland has assembled the right team at M&S with which to drive the online business
and the overseas expansion.
NH

At Home the clothing business continues to benefit as customers trade up to higher
quality offers and we believe M&S continues to take share.
• Within the food operation, the trend towards smaller weekly shops that are
supplemented by top up shop in high street convenience operations favours M&S
through Simply Food.
• Elsewhere within the food business there is plenty of innovation in the ranges and all
the industry data suggests that M&S is at least holding share.
• Overall this doesn’t change our fundamentally positive stance on the stock which is
trading on just 10x our March 2012 eps forecast and offers excellent recovery potential
to 525p, BUY.
NH

(Brass Mokey – are you sure?)
NH

John Lewis
NH

has been on sale for weeks
NH

before they officially went on sale
NH

it’s dismal out there in retail land
NH

dismal
BE

(Brass Monkey: it falls into the Car Enhancement category, which is 28% of group sales.)
NH

(brass I’m sure it’s way more than figs you have quoted)
NH

Jane Norman gone
NH

TJ Hughes gone
NH

Carpetright final dividend gone
NH

120 Thortons stores gone
NH

(brass – YELLOW FOR YOU)
NH

(Milky – YELLOW FOR YOU)
NH

in fact Thorntons
NH

seem to be intent on destroying their brand
NH

by making cheap chocs for supermarkets
BE

Job done, some would argue.
BE

Outplayed by the posh choc places, undercut by the cheapos.
NH

(Milky – the internet, upward only rent reviews, lowest disposable household income in decade. It’s not just a few weak people suffering)
NH

Right
NH

let’s have a bit of comment on Thorntons
NH

from Portugal’s leading investment bank
NH

Thorntons – Strategy review from new CEO
Sell, FV 30p
NH

Own store portfolio to be cut from current 364 to 180. 120 stores will be closed over three years at a cost of up to £4.8m. Will explore opportunities to close a further 60 over the same period. In most locations, will replace these stores with franchised stores. Commerical channel expected to become the main sales channel over the next three years. Aim to de-seasonalise the business, growing the relevance of all year round gifting occasions. Central cost and supply chain savings of c. £2m from FY13 onwards
NH

A ‘nominal’ dividend will be paid for FY11. Current trade remains ‘challenging’ but in line with management expectations. We currently forecast FY11 PBT of £3.2m (3.4p) and broadly flat thereafter. Presentation at 11am should give more details on the financial impact of these changes and we will review the investment case on the back of that. Store closure programme was widely expected, the key here remains on Thorntons’ ability to capture sales from other channels (commercial, franchise and internet) and continue to utilise its factory production capacity at least to current levels, which is the aim. Shares trade on 18.7x cal. 2011E P/E, so not cheap and new management has much to prove.
NH

(@Mrs Martin I am give serious though to ignoring it)
BE

(@Gladys: that’s the same as the house price argument. Central London demand, a play on world GDP and GBK weakness, distorts the trend. Tell the folk of Basingstoke and Stirling that Smythson’s doing well and see the reaction.)
NH

and let’s have a quick look at Carpetright
Carpetright PLC (CPR:LSE): Last: 679.00, down 11 (-1.59%), High: 679.00, Low: 645.00, Volume: 79.74k
NH

stock holding up pretty well considering the final dividend has been cut
NH

then again
NH

it wasn’t exactly an income stock
NH

still
NH

the company is clearly worried
NH

here’s Nick Bubb at Arden
NH

Carpetright (Sell): The pressures on UK big-ticket consumer spending are obvious…but we weren’t expecting Carpetright to pass their 8p final dividend with today’s final results for y/e April. On a historic yield of 2.3% it wasn’t exactly a high income stock, but the 16p full-year dividend was still covered 1.1 x on underlying earnings and there had been no indication that the company was so fearful of the future. There is no comment on current trading (CPR are hiding behind the conventions of quarterly reporting), but it is clear that the carpet market is “challenging” and the suspicion remains that CPR’s market share is under pressure, so the business is hunkering down for another tough year, with cost cutting and store closures in the pipeline
NH

PBT has already collapsed, with last year 40% down at £16.9m on the back of 6% fall in UK LFL sales. We expect more slippage this year, with LFL sales still falling, and our current £15.2m PBT forecast (15.9p eps) is bottom end of a range that goes up to around £19m. Cost cutting could prop things up, but forecasts will come under pressure today, given the dividend steer. Even on our current forecast, the rating defies rational expectation (at last night’s close of 690p a P/E over 44x and EV/EBITDA of 14x…) and, as usual, we maintain a Sell, targeting a price of no more than 350p. There is a constant fear that Phil Harris will take the company private at some point and pay up to buy out minority investors, but he doesn’t look like a man who would willingly do that at this point in the cycle…and we look forward to judging his mood at the meeting at 9am. On the back of today’s Carpetright dividend cut, we also reiterate our Sell in Home Retail, where we fully expect the dividend to be cut this year…
NH

PE of 44
NH

wow
NH

thanks Shovel
NH

a short position
NH

would explain its resillience
BE

I’ve never, ever, ever understood why Carpetright trades at a tech PE.
BE

No matter how much it’s been explained to me.
BE

How much does the Lord own?
NH

19%
NH

Franklin 16%
NH

Olayan 15%
NH

Harris 10%
NH

that’s Harris Associates
NH

all in all
NH

a pretty illiquid stock
NH

no one ever sells
BE

(@MacRus: opening fine for me. Think it’s a read-only doc though, which may be monkeying with your Word settings.)
NH

talking of Sainsbury
J Sainsbury PLC (SBRY:LSE): Last: 326.20, down 0.9 (-0.28%), High: 328.20, Low: 325.70, Volume: 569.75k
NH

this landed in my inbox earlier today
NH

Further to our note last week suggesting the Qataris are in a quandry of when & if to buy SBRY outright, SBRY continue to do the right thing to underline the following: Just recruited Ocado’s web genius Jon Rudoe & this was an area which SBRY did actually lag Tesco Direct. And have laid out their plans to crush Asda on the Petrol Price War, 10p off per litre if they also spend +£60. In short, like MKS, a SBRY customer CAN spend £60 whereas most Asda consumer’s can’t! Then we’re left with the following:
An internet food retailer that many believe is the second coming of Webvan. Loss making yet valued at close to £1bn on flotation.
NH

1) SBRY trades on 0.2x sales. The lowest its EVER traded at. Its either going bust (which its not) or its trading for free (which it is!) 2) Its 5.2% Gross yield is attractive enough to tempt back the pe buyers that undoubtedly would be there if the Qataris did not own 25%. 3) On 9x, its the cheapest in a group thats average is 15x. 4) Lastly, its gearing of 21% is the lowest of the majors that all approach 30% of their equity. – Whats the answer for the Qataris, simply, buy it all, and apparently, THAT is the questions that is still repeatedly being asked..
NH

there we go
NH

this Qatar bid rumour
NH

WILL NOT DIE
BE

More speculation than rumour.
BE

But, yes, it simply won’t disappear.
12:09PM
NH

Right
NH

I guess we should look at
Northumbrian Water Group PLC (NWG:LSE): Last: 409.90, down 3.6 (-0.87%), High: 417.00, Low: 409.00, Volume: 3.77m
BE

In the wake of, at long last, an actual bid story emerging.
NH

well sort of
BE

Yeah – it’s not clear cut, is it?
NH

nope
NH

Cheung Kong Infrastructure Holdings Limited (“CKI”)
Statement regarding Northumbrian Water Group plc (“Northumbrian Water”)CKI notes the recent speculation regarding a possible offer for Northumbrian Water.

CKI is in the preliminary stages of assessing a potential cash offer for Northumbrian Water. There can be no certainty that an offer will ultimately be forthcoming.

NH

so it’s very very early stage
NH

I take if from that statement
NH

that CKI have decided to approach NWG’s biggest shareholder
NH

The Ontario Teachers Pension Fund
NH

and see if they would be happy to sell
NH

and reinvest some of their equity in the buyout vehicle
BE

(@Born cynic: I think your tinfoil hat may need realignment.)
NH

now
NH

I reckon the upside here is 50p
NH

and the downside is the same
NH

but this deal is fraught with danger
NH

it’s cross boarder
NH

China, UK, Canada
NH

cross culture
NH

and there’s regulatory risk
NH

if CKI bid
NH

they will be referred to the Competition Commission
NH

because they own Cambridge Water
NH

and all water company deals get referred
NH

so that’s another problem
NH

they may have to sell assets
NH

if that is
NH

they can agreed a price with OTPP
BE

Ok. So what’s Li Ka-shing’s angle here?
BE

Why does he want Northumbrian anyway?
NH

there’s an interesting angle on debt
NH

most of NWG’s isn;t inflation linked
NH

hang on
NH

I have something on this
NH

We upgrade Northumbrian Water to Buy (from Neutral) following
significant sector-relative underperformance over the last three
months. NWG has the least index-linked debt of the four water
companies, and so potentially has the greatest short-term EPS
sensitivity to higher RPI
NH

M&A potential linked to Ontario Teacher’s Pension Plan stake
NWG is unusual among listed water companies in having one large shareholder – Ontario
Teacher’s Pension Plan (OTPP) owns 27% of the company. Therefore M&A potential is
slightly different as we believe it is a less obvious target for an external acquirer such as
CKI. However press speculation (Bloomberg, February 2010) led OTPP to make a statement
in February 2010 saying that at the time it did not intend to make an offer to acquire the
rest of the company. Despite the statement, we believe that there is still a chance that
OTPP will launch a bid for the rest of the company.
On balance, we believe that the lower likelihood of an external bidder is offset by the
chance of a bid from OTPP for the rest of the company, and therefore use a 50% weighting
for our M&A valuation, as we do for the other water companies.
NH

so that’s the angle
NH

buy something with earnings linked to inflation
NH

but debt that isn’t
NH

in terms of read across
NH

I’m not sure there’s much
NH

for the rest of the sector
BE

Well, there’s a straight read-through on valuation
BE

Which RBS has done
NH

hang on
BE

At closing price of 413p, Northumbrian is trading at a 14% premium to RAB, at a 25%
premium (as per other CKI UK regulated acquisitions) it would be worth 480p. We value
Northumbrian’s unregulated assets at £520m, the biggest element of which is the perpetual,
government-backed, index-linked contract to run Kielder Water. We use a 2.5% real discount
rate to value this (at £390m) which may appear conservative to a bidder.
NH

we don’t have a bid yet
BE

Yeah – true – and there’s a lot to go wrong, as you note.
BE

Nevertheless ….
BE

If we used a 1.5% real discount rate then our per share value would climb by an extra
50p/share.
BE

If a bid emerges for Northumbrian, then it will underpin valuations in the wider water sector.
UU SVT & PNN are all trading at c.2% premia to their 2012 RABs, showing the scope for
further upside.
Severn Trent PLC (SVT:LSE): Last: 1,462, up 47 (+3.32%), High: 1,473, Low: 1,423, Volume: 916.47k
Pennon Group PLC (PNN:LSE): Last: 677.50, up 11.5 (+1.73%), High: 683.50, Low: 667.50, Volume: 915.09k
NH

(@G that’s a statement of the bleedin obvious)
NH

thanks for that
NH

to finish on this
NH

some comment from JP Morgan
NH

Potential level of an offer
On our estimates since 2004 the transaction multiples for UK regulated
utilities has ranged from a 20% premium to RAV in July 2010 to a 48%
premium in November 2007, with an average of 29%.
CKI bought EDF’s UK electricity distribution networks last year at a 21%
premium to RAV and Cambridge Water in April 2004 at a 27% premium
to RAV.RAV of 14.8%. On our calculations if CKI offered a 20% premium to
RAV that would equate to a share price of 443p, a 25% premium would be
477p and a 30% premium would be 511p.

NH

Competition issues
CKI currently owns stakes in four regulated networks in the UK as well as
a gas fired power station. The key issue, however, is its 100% ownership of
Cambridge Water, which it bought in April 2004. Under the special merger
regime in UK water, any merger between UK water companies is
automatically referred to the Competition Commission (CC), which would
likely extend the completion of a deal by around a year. CKI may look to
sell its stake in Cambridge Water to avoid this occurring as the March 2012
RAV of Cambridge water is around £69m (2% of NWG’s RAV).
NH

Probability of a successful offer
NWG’s shareholder structure is very concentrated. According to
Bloomberg, the largest shareholder Ontario Teachers Pension Plan, owns
26.7% of the company with the five largest shareholders overall owning
51.3% of the company. Therefore the views of those top five large
shareholders will be critical in deciding the success of any approach. We
would expect CKI to be able to assess quite quickly what will be required
for a successful bid. We therefore believe that the offer process will
progress speedily, although the outcome remains uncertain.
12:18PM
NH

OK
NH

I have a lunch to get to
NH

so we should look at finishing up
NH

Yogabba is right
NH

Carrefour is interesting
NH

if you can make sense of it
NH

here’s one summary I got today
BE

Go on.
NH

lost it
NH

CARREFOUR (CA FP) – CA has received a proposal submitted by Gama to form a strategic partnership that would create the largest player in the Brazilian retail industry, combining the assets of CA and those of CBD in an equally-owned company. The transaction contemplates the merger of CA’s Brazil’s shares into CBD, further to CBD’s share merger into Gama and a capital injection of EUR1.5bn in CBD. The rebalancing of Gama’s and CA’s participating interest in CBD at 50-50, in a manner which would allow full consolidation by CA as of Jan. 1, 2013. This would be implemented by a transfer of Gama’s stake in excess of 50% of CBD in exchange for 90m preferred shares of CA. Following completion of the transaction, Gama could acquire additional CA’s shares on the open market representing up to 6% of CA’s share capital. Gama would benefit from representation rights on CA’s Board of Directors with two Board seats. CA’s Board will hold a meeting in the coming days to review this proposal. Gama is a company wholly-owned by an investment fund managed by BTG Pactual, to be capitalised by the Brazilian National Development Bank (BNDES). Gama has indicated that it will benefit from a capital injection from BNDES and BTG Pactual of EUR2bn and debt financing for EUR500m.
NH

understand that?
BE

Nope.
BE

Don’t even begin to understand that.
NH

Carrefour needs busting up
NH

that I do know
NH

and there’s been speculation
NH

that Arnault and Colony Capital
NH

have approached the French govt
NH

and asked them if the could please please please
NH

let Wal-Mart but the company
12:22PM
NH

To finish
NH

a new small cap fav
Chariot Oil and Gas Ltd (CHAR:LSE): Last: 166.00, up 14 (+9.21%), High: 168.25, Low: 143.00, Volume: 1.20m
NH

oil
NH

lots of it
NH

off the coast of Namibia
NH

good news today
NH

they have managed to get an extension for their licenses
NH

which should mean
NH

they can sign a farm out
NH

here’s some comment
NH

and them I am done
NH

Matrix
NH

Chariot has received formal approval from the Ministry of Mines and Energy in Namibia to enter the first renewal phase for its central blocks (2312 A& B and northern halves of 2412 A&B) and southern block (2714A), offshore Namibia. This exploration phase will be two years, starting 31 August 2011. Chariot will retain 100% of the acreage for these blocks; no relinquishment is required, as the company significantly exceeded its work commitment for the initial exploration phase.
NH

The committed work programme: (1) for the centrals blocks includes the acquisition of 2,000 km of 2D and 200km of 3D seismic (minimum spend $5m) and (2) for the southern block (2714A), drilling of a minimum one exploration well (to a depth of 3,000m and minimum spend $20m). As part of the renewal application, Petrobras has exercised its option and has committed to drill and operate the commitment well.Positive news for Chariot, this extension should allow the company to finalise farm-out negotiations with potential partners. The focus there remains on the quality of potential farminees and the commercial terms that Chariot is able to secure. Petrobras’ commitment is a significant step forward, but there is no firm drilling timetable at this stage. We would expect the shares to be stronger today.

NH

and Ambrian
NH

Receipt of government approval to enter the first licence renewal phase is a major step towards concluding the first — eagerly anticipated — farm-out over Chariot’s large offshore Namibian licence area.Licence renewal was a key event as it provided potential farminees with surety of title for at least the next two years. We would be hopeful that the removal of this uncertainty will assist the conclusion and signing of a second (after Petrobras in 2009) material farm-out for Chariot in the coming weeks and will also ensure that at least two exploration wells will be drilled over the next 12 months.

NH

Also of note in the announcement was confirmation that Petrobras has exercised its option to continue participating in exploration activities in the region; this is important to Chariot as it obliges Petrobras to drill a commitment well in their shared southern licence blocks and ensures that Nimrod, the multi-billion barrel prospect identified towards the end of 2010, will be drilled and operated by a technically competent, proven deepwater operator.We maintain our BUY recommendation and target price of 421p.

NH

Bryce
NH

anything more from you?
BE

Best just switch from micro to macro for a moment
NH

go on
BE

Because Q1 GDP, while in line at the headline, was quite interesting below
BE

And reinforces our theme of the day
BE

Ie: the consumer’s got no cash.
BE

Here’s Citi with the detail
BE

Q1 GDP growth was not revised from the 0.5% QoQ gain reported previously, although
revisions to earlier quarters (up in Q1-2010, down in Q3-2010) cut the YoY rate for Q1-
2011 to 1.6% from 1.8% reported previously.
BE

Within that roughly unchanged aggregate, the GDP data show a marked rebalancing of
the economy from domestic spending to exports. With revisions, domestic demand is
slightly less weak than published previously (down 0.9% QoQ versus down 1.3%
reported previously), but the split is still of weak domestic demand and a large
improvement in net trade (which added 1.4% to QoQ growth, the biggest contribution
since 1977). Export volumes (goods) rose 15.1% YoY in Q1 (up 16.0% YoY excluding
MTIC-related fraud), the biggest rise (excluding MTIC-related fraud) since 1980.
BE

With household wage and salary income up only 2.3% YoY in Q1 (nominal terms) and
inflation (consumer spending deflator) of 5.7% YoY, the ONS report that household
real disposable incomes fell 2.7% YoY in Q1, the biggest drop since 1977. With this
brutal squeeze on incomes, it is no great wonder that consumer spending is weak
(down 0.5% YoY in real terms in Q1) and so many retailers are struggling. Unlike the
early 80s and early 90s recession, household real disposable incomes did not fall in the
recent recession – but that squeeze was merely deferred and is clearly evident now.
BE

There accompanies a graph with real household disposable income down to 1981-type levels.
NH

right I have to shoot. cya tomorrow rabble
BE

Ok – and thanks for all your comments today, rabble.
BE

It’s been lively.
BE

Remember our crowdsourcing experiment over in the Long Room
BE

At first glance there seems to be rather a lot of interesting stuff in there, so well worth sticking your nose in over lunch.
BE

So until tomorrow, thanks again and good afternoon everyone.

This entry was posted by Neil Hume on Tuesday, June 28th, 2011 at 11:04 and is filed under Uncategorized.

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