Markets Live: Monday, 3rd December, 2012 This is the transcript of the Markets Live session ending at 12:02 on 3 Dec 2012. Participants in this session were: Paul Murphy Bryce Elder From Olam to Honrby to PMIs to Murdoch Christian Noyer from the Banque de France This is the chap who wants all euro-related finance to move inside the eurozone. He'd like to close a good part of the City down. Including all the French that have moved their operations here i guess Great story from Josh Noble out in HK. Do you think this guy notices the irony? He's busy in the far east trying to get people to trade the RMB in Paris, while saying that his own currency shouldn't be traded outside it's home turf. Havent seen Monkey for a while over on the right Surrender Monkey. He is. Anyway, we shouldnt encourage casual racism on here The French are not a really race by any normal definition, but that gets us into a mire of a debate. So let's not. Instead, let's move on to matters market. Can we run thru prices Sure. Came out of the traps flying FTSE currently up less than 0.3% Ahead 14 points at 5881 Been as high as 5893.5 early doors. Total lack of corporate and interesting eco news though. So not surprised to see it drift. I'm blaming everything at the moment on simple fund flows. Cash into yield funds, GEM funds, etc. etc. etc. Causing a flight to .... well, anything really. Vedanta Resources PLC (VED:LSE): Last: 1,093, up 22 (+2.05%), High: 1,096, Low: 1,070, Volume: 228.41k Rio Tinto PLC (RIO:LSE): Last: 3,140, up 46.5 (+1.50%), High: 3,148, Low: 3,108, Volume: 1.08m Amec PLC (AMEC:LSE): Last: 1,062, up 18 (+1.72%), High: 1,069, Low: 1,051, Volume: 221.04k Pearson (PSON:LSE): Last: 1,200, up 22 (+1.87%), High: 1,204, Low: 1,178, Volume: 271.10k Good rebound in Pearson that Pearson plc is the parent company of the Financial Times, publisher of FT Alphaville. I could continue on this theme, but instead I'll allow SocGen to continue on this theme. If we could only ignore the fiscal cliff, we would have scope for a meaningful December rally. The main ingredients are in place: There is a flood of excess liquidity looking for yield in global markets; Chinese data stabilising reduces one major economic tail risk and the passage of the latest Greek bailout deal keeps fears of Euro-disaster on the backburner for now. And today's US ISM data are likely to be "OK," indicating an economy which continues to grow at a moderate rate. Political incompetence in the US is the one major risk still out there. Not sure that's correct, but it's a compelling argument. I think there's something in that The fiscal cliff thing is going to go to the wire US congressmen can;"t help themselves I'd be amazed if America's (largely idiotic, I accept) politicians don't come to some kind of muddle-on consensus within the next few weeks. Though, yes, it'll probably go to the wire. Precipice. After which we'll wonder what all the fuss was about. Can I mention Olam briefly? I know its odd to spin over to Singapore But this has just come out A circa $700m bond "rights issue" from the company that is udner attack from Muddy Waters Now, you will find it rather difficult to get hold of the actual statement from Olam - and even more difficult to get to the full document But here is is, specially for ML readers havent had a chance to read myself But its very very odd - respond to an attack of this type with....a big rights. Yeah, if I can just cut back to the company conference call on November 28 ...... This is Sunny Verghese, group MD As you can see from what we have put out today, you will see that most of it, while it is under the (inaudible) of very detailed research, is really picking up isolated facts and trying to concoct a story with the sole motive of panicking our bondholders first, panicking our creditors, panicking our shareholders following a strategy of shouting fire in a crowded room and hoping that it will devastate us. But we will stand up to this and I think I'll just complete by addressing the four big themes of this report, of this detailed report. The first is on the issue of solvency and on that we have very clearly articulated to you that we have put very appropriate capital structure in place to support our growth plans. And I will take you through some more detail as we get into Q&A. But we have preemptively raised equity and preemptively raised debt. We are very comfortable with our gearing, we are very comfortable with our ability to support the investment plans and the growth plans that we have. So that was Wednesday. By Monday they've decided that their capital structure wasn't appropriate after all. And need another $700m. Shares are suspended now The Rights Issue will enable the Company to demonstrate its ability to access the capital markets, further strengthen its balance sheet and liquidity position and provide a strong vote of confidence from its strategic shareholder. Right. So it's symbolic. We're raising capital because we can, to prove we can. @Deep Breath nails it. A tautological cash call. The Company has appointed Credit Suisse (Singapore) Limited, DBS Bank Ltd., The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch and J.P. Morgan (S.E.A.) Limited as joint bookrunners, lead managers and underwriters of the Rights Issue ("Joint Bookrunners"). The Rights Issue is underwritten in full by the Joint Bookrunners subject to the terms and conditions of an underwriting agreement entered into between the Joint Bookrunners and the Company (the "Underwriting Agreement"). Yep, it is remarkable. Carson Block won't like that Shares are suspended btw Talking DAX targets on the right, for some reason. Guess that's as good a reason as any to chuck in a 2013 preview. Runs for 164 pages, which may well be a record. The gist is: "Lord make me bullish, but not yet." Generally positive but index targets are rather meek. And a lot of stuff about how the first half could get rocky. Concerns about sustainability of record-high profit margins. And tilting from the US to the eurozone, largely via financials. Here's the readable bit. Our constructive equity outlook for 2012 was predicated on the expectation of an aggressive policy response to the Euro crisis and to weakening global growth. In addition, equity valuations were exceptionally cheap; the price of safety was too high. For 2013, we think stocks could ultimately deliver positive returns, but there might be a better entry point during 1H. Equity valuations remain undemanding vs other asset classes. However, P/Es have rerated smartly over the past 12 months. Eurozone forward P/E, for example, has increased by as much as 35%. Consensus expects further multiple expansion, but we fear that this was largely a 2012 story. The price of safety is not as high anymore, a lot of supportive policy newsflow is behind us and growth is likely to remain subtrend. The important question, in our view, is over the state of global profit margins, as profitability drives corporate behaviour. Unless corporate confidence improves quickly, capex plans could deteriorate in earnest. We note that equities have tended to perform less well in the 1st year of a US presidential cycle (2013) than in the 4th. Regionally, we believe Eurozone equities will outperform the US. The source of risks is shifting. In a sense, the Eurozone is more advanced in the adjustment process. Fiscal drag could be greater in the US in "13. Eurozone earnings and margins have already repriced lower. Eurozone valuations remain extremely cheap when contrasted with their US counterparts, at more than 40% P/B and cycle-adjusted P/E discount. Last year, our top country pick was the Dax, but we don't think risk-reward for the Dax stands out anymore. Irrespective of market direction in 2013, we think the Dax will not outperform. We were OW core over periphery for 3 years in a row, but now we think peripheral markets offer an improved risk-reward for 2013. Thematically, we wanted to have US top line and consumer exposure for "12. We were bearish on Chinese exposure, mainly through infrastructure. We stay bearish on China plays, again largely reflected in our cautious stance on commodities. We shift our preference from US exposure towards the Eurozone. This is predominantly reflected through our preference for Financials. In terms of styles, we think the focus on high and, most importantly, sustainable FCF yield will remain. There's also a massive list of preferred/not preferred stocks, which I can't cut and paste as it's too dull. Usual place for more, I guess. While we are on 2013 outlooks I should also share Nomura No this is not Bob the Bear its Inigo Fraser-Jenkins The pdfs borked - cant copy Will usual place it later 68 pages, so its a quick read Great name, Inigo. As in Jones. Or Montoya. Let me check if I have it in grey-able form. The equity risk premium has not moved down even as measures of political uncertainty have declined. Moreover, despite the market being 16% higher than it was on 1 June, sentiment is as low as it was then. Earnings growth is likely to remain relatively subdued given our Economics team's forecast of a contraction in GDP next year. Hence our positive view is a multiple expansion story, and less one of growth. We are downgrading the UK to neutral. We do not see potential for a repricing of tail risk here, plus input costs and comparative sector valuations are not supportive. Bottom-up stock pickers have badly underperformed since June and are still defensively positioned. We think that the subsequent need to rebalance will provide an extra catalyst for sector and factor rotation. We maintain an overweight on Basic Materials for now and add gold exposure. We increase our weight in Energy to a larger overweight. Valuations on this sector are now extreme, in our view. Banks are the only truly high beta sector. Insurance also offers beta and we like the earnings and dividend growth. We are adding exposure to the asset management sector. Within Consumer Cyclicals we overweight Autos and underweight General Retail. We maintain a zero weighting to Consumer Staples and Utilities and a significant underweight in Healthcare. We lower our Tech and Media weights (to a small overweight) and maintain a neutral on Telco as our preferred choice among defensive sectors. We maintain thematic exposures to US housing and corporate capex. We maintain our Russian exposure. With "fundamentals" weak, this is not a traditional bull market. Rather it is about investor sentiment and positioning being too depressed, hence the analogy of a phoenix is better than a bull. There. Messy. But there. Okay, in terms of corporate. Guess C&WC is the main story of the day. Cable & Wireless Communications PLC (CWC:LSE): Last: 36.53, up 1.83 (+5.27%), High: 37.14, Low: 35.30, Volume: 5.84m Question to the right about whether this presages a full breakup. I'd suggest the breakup is already happening, albeit piecemeal. The news, in case anyone missed is, is the $1bn disposal of M&I. Remarkably good price, really. Though most of it will be swallowed by the net debt pile. General relief taht they've got the deal done tho Well, Monaco Telecom still has to approve. But, yes, it looks like progress. Albeit with a slightly complex two-stage structure. Here's Deutsche to explain. CWC has announced a two stage process to sell its Monaco & Islands businesses to Batelco, with potential total cash proceeds of $1,025m equivalent to a 6.7x EBITDA valuation. Stage 1 will encompass the sale of all assets except Monaco Tel (where only 25% of the stake will be sold) for $680m, equivalent to a valuation of 6.3x EBITDA and should be completed by YE 31 March 2013. Stage 2 will encompass the sale of the remaining stake in Monaco for a further $345m, subject to regulatory approval including that of the principality of Monaco. CWC and Batelco will have put and call options on this stake should approval be given to complete the transaction. If no approval is received CWC will take back the stake and return $100m of the original $680m and will pursue other avenues to sell the Monaco asset. Which kind-of explains why it's taken at least three months to arrange. With this deal, CWC takes a major step towards its stated ambition of focusing more on the pan-American region and reducing the disparate footprint; on a proforma basis c.70% of Group EBITDA would derive from the region with international exposure reduced by one third from 30 to 20 countries. Valuation looks good at 6.7x EBITDA in total and is around 3p per share ahead of DB expectations. Near-term cash proceeds mean CWC's leverage is materially reduced to around 1.8x Net Debt to EBITDA. On the flip side, use of proceeds is less clear with CWC prioritising reinvestment in the pan-AM region over cash returns, and stockpiling cash means headline EPS dilution is double-digit. But overall we regard this as a positive catalyst for CWC shares and remind investors that management have also confirmed they are in discussion over the potential sale of assets in Macau. CWC has committed to using proceeds to pay down a $330m revolver facility. The company states that remaining proceeds and those potentially due from the Monaco Tel deal will be retained as cash to increase financial stability and flexibility and to pursue investments in the pan-American region. As a result of retaining cash in such a manner and until any deal or alternative use of cash takes place (e.g. buyback), we estimate around 10-15% consensus earnings dilution based on the deconsolidation of M&I earnings offset by the reduction in revolver debt cost and minimal interest received on cash at bank. Headline Net Debt / EBITDA gearing will reduce to 1.8x (12m to H1 13). We currently value the M&I assets at $899m versus stage 1 and 2 proceeds of $1,025m. As such, assuming full completion, the effect would be to raise valuation around 3p per share. So - great price but still only worth about 3p a share. It's very difficult to make the numbers move much for C&WC. Final line from Jefferies. Shift in focus has potential implications for dividend prospects. There is no change in dividend policy announced today. We understand that mgmt still intends to recommend a US4cent dividend on FY13 earnings. However, the M&I division contributes c.22% of group OpFCF (EBITDA minus capex) on our estimates (FY13e) so investors will need to understand how mgmt intends to replace these cash flows. We would expect the company to deploy c.$330m to paying down the RCF. As regards potential acquisitions in Caribbean/ central America region we would expect mgmt to reassure investors that its focus is on well-established cash generative businesses. In our view, potential targets that CWC may explore include buying out the government stake in Panama (current CWC holding 49%) and establishing control in Trinidad & Tobago (where CWC also owns 49%) currently. Not sure how that'd go down. Acquisitions I mean. Remember speculation about buying Panama and Trinidad way back when CWC split from CWW. It has been a slow and rather cloudy corporate story, and now that Pluthero is not involved, my interest has drifted. There's only so interested I can be in Jamaican fixed-line pricing. Right - quickly before i forget I have a pic of the fabulous box in a box in its new home... ROTR member DC has this now @taxloss: apology accepted. Its sitting on a silver platter which was presented to DC's Squadron Leader father I should mention that I know have a fabulous fat chinese pen to give away But not today, cos we need a competition You're giving away the pen!? The pen's good payola though. I thought we only gave away the rubbish in competitions. Reader note: the pen is "ivory" and "silver" and is about the size of a torch. Await pictures later. Ok - few things to mention I guess. Reed Elsevier PLC (REL:LSE): Last: 660.50, up 18 (+2.80%), High: 662.00, Low: 644.00, Volume: 1.75m No, I don't know what's happening. That's because no-one I've spoken to this morning seems to know either. The best explanation I have - and I don't claim it's the right one - is a Cazenove note from Friday. Which talks a lot about restructuring And a pair trade against Wolters Kluwer. (sp?) I'll throw it up here in lieu of anything more useful to say. We continue to prefer Reed PLC/NV (OW) shares to Wolters (UW) for five reasons: 1) more favourable geographic mix (less Europe, more EM), 2) restructuring benefits for Reed now helping all business units grow (Wolters" largest division, Legal & Reg., is declining) and Reed is seeing more margin improvement (JPMe +80/+30bps for Reed in 12E/13E vs +20/+10bps for Wolters), 3) higher organic rev growth (JPMe +3.9%/+2.4% for Reed in 12E/13E vs +0.9%/+1.5% for Wolters), 4) greater cash return potential for Reed (we see potential for a sizeable buyback in 13E) given lower leverage (1.7x end Jun 12 for Reed vs 2.9x WKL), and 5) given EPS growth expected, we think Reed PLC/NV shares offer better value. Overall, Reed remains one of our four top Media picks together with WPP, Publicis and Vivendi. We slightly increase our Reed PLC EPS ests (by +0.1%/+0.3% in 12E/13E) as we adjust for FX, some small disposals (e.g. Variety), increased buyback and higher Risk Solutions growth; our NV ests fall by -0.1%/-1.4% with the difference due to FX. Our Dec-13E PLC Price Target increases from 675p to 685p, while our NV Dec-13E PT remains €13.0. We also adjust our Wolters ests for FX and slightly lower organic growth (Legal & Regulatory), our 12E/13E EPS ests fall by -0.4%/-1.0%, and our Dec-13E PT decreases from €13.9 to €13.7. We reiterate our OW rating on Reed PLC/NV shares as we continue to see a two leg story: 1) We expect the stocks to continue to re-rate as further restructuring benefits come through, helping to improve organic rev growth and margins (e.g. we expect Legal margin to improve as duplicated tech infrastructure is eliminated, which should reassure after recent higher investment). 2) We see little downside to ests and think upgrades may begin to be driven by a) further potential buybacks (every c£200m adds +1% to EPS), b) further funding rate decrease following debt refinancing, and c) restructuring benefits. On our ests, Reed PLC shares trade on 12.9x/12.3x 12E/13E P/E, and Reed NV shares on 11.7x/11.2x. Which is nearly unreadable. Hang on, I'll skip to a bit written in English. Actauly that is unreadable We expect further restructuring at Reed, with its efforts beginning to have a meaningful impact at group level and only starting to be rewarded Reed has been restructuring its RBI business for some time and has managed to substantially increase the division's margins each year from 8.4% in H1 09 (the trough) to 18.2% in H1 12. However, we think this successful restructuring was not priced in as RBI represents only c11% of group revenues and the company for some time had not yet stabilised growth and/or margins for all of its other four business units. This changed with H1 12 results, where the company outperformed expectations for each business unit, and saw important improvements in other divisions - e.g. its Legal margin improved by +70bps YoY after several years of decline (higher investment). We expect the company to continue to dispose of more marginal products in each of its divisions and reinvest in better growth and margin assets. Some potential areas for further improvement we think are: 1) Legal margins with increasing depreciation charges more than offset by cost savings (e.g. eliminating duplicated tech infrastructure that has been developed during the company's recent investment phase so that only one architecture is run); 2) Trim some products in Elsevier that are holding back organic growth of the division - e.g. print books and pharma promotional products. Yes, that old theme. We have calls in, though, and will get back to you if any of them turn out to be useful. Bit of smallcaps, maybe? Bellzone Mining PLC (BZM:LSE): Last: 14.75, up 1.75 (+13.46%), High: 17.00, Low: 13.50, Volume: 55.54m This is iron ore in central Guinea. Or will be, rather, if they can find around $4.5bn. See its top of the volume list Yeah, that's because there was a 50m trade at the open, on the book at 17p. Which is about 7% of the company. Still waiting on clarification as to who bought and who sold. The most persistent idea seems to be that China Sonangol may have been buying. They already have 17.6%. And founder Nikolais Zuks has about 40%, which would seem to make him the likely seller. China Sonangol's an odd beast. Chinese minerals investment vehicle incorporated in Singapore and headquartered in HK. Set up in part to find new ways for Chinese enterprises to expand overseas. Paying well over the market price spread is around 15p currently Which makes me suspect it was Zuks selling in an off-market deal. This is all hypothesis though. I will note in passing though that it does come a week after Bellzone was enveloped by the takeover code. Bellzone Mining plc (AIM:BZM) ("Bellzone" or the "Company") announces that as a result of Bellzone's place of central management and control being in Jersey as determined by a majority of the Board of Directors being resident in Jersey, the Company is now subject to the City Code on Takeovers and Mergers (the "City Code"). Coincidence? Possibly. Interesting timing though. (@Atarashī: I think you're right. @TheLeggie: averaging down? Possibly.) Quick bit of dinner party live? hat tip to EdConwaySky for this Top five postcodes for house prices Postcode Area Price per sq ft (£) SW1X Belgravia (London) 1585.76 W1K Mayfair (London) 1585.90 W1J Mayfair (London) 1367.52 WC2R Strand/Embankment (London) 1240.75 SW3 Chelsea (London) 1219.93 Bottom five postcodes for mainland UK house prices Postcode Area Price per sq ft (£) NP24 New Tredegar, Wales 59.33 CF43 Ferndale, Wales 60.33 DN31 Grimsby, Yorkshire & the Humber 60.84 CF42 Treorchy, Wales 62.12 TS1 Stockton-on-Tees, North East 64.65 Glanced at a newbuild under the shadow of Trellick Tower the other day. Two bedroom boxes selling off plan for ~£680k. Though I read something the other day that banks are now able to get 2% retail mortgage funding. Which, even in a market looking fragile, surely makes lending free money for them. Anyway, that's my dinner party contribution for today. Hehe's doing a Q&A twitter session on December 12 if you go to that page, click refresh every now and then and you can see the number of followers rise exponentially Pontifex .... He's chosen a name that makes Him sound like an Argos own-brand fridge freezer. Pontifex Energysave, with auto defrost. £199.95 (delivery 14 days.) Okay then. Mention on the right of Informa. We don't know what's going on. The original source that detailed the Providence approach for Informa will not talk to us at present. If you own the shares and are worried that the bid will fail, sell the shares and stop worrying. Informa PLC (INF:LSE): Last: 433.60, up 13.2 (+3.14%), High: 433.80, Low: 422.60, Volume: 367.48k Rumours too widespread for them not to have said anything, so have to assume there's nothing to say. It's not like the Takeover Panel's lax about this stuff. ITV PLC (ITV:LSE): Last: 101.20, up 2.3 (+2.33%), High: 101.40, Low: 98.65, Volume: 6.11m Because people are watching ITV. That thing where people you don't recognise eat kangaroo testicles. "Monkey Tennis," I think it's called. Hang on, I'll grab Panmure on this. P eak-time audience: According to ITV, the final of I'm a Celebrity had a peak audience of 10.6 million, which was a 47% share of TV viewers. This is significant because the ability to deliver major prime-time audiences is key to advertising and, in turn, content/format sales. If anything, the entertainment genre - as opposed to drama - has been tougher for ITV this year. Downton Abbey - reconfirmed: ITV also recently confirmed that filming of eight new episodes for autumn 2013 plus an extended special episode for Christmas 2013 begins at Highclere Castle and Ealing Studios in February. In vestment comment: The shares remain well supported and, in our view, the valuation is attractive. On our estimates, the shares are on 7x EV/EBITDA, falling to 6.2x in FY 13. There is also growing appreciation of the Content/Studios arm of ITV Now it's midday. Thanks for joining us today back tomorrow at 11 am sharp