Markets Live: Monday, 3rd June, 2013 This is the transcript of the Markets Live session ending at 12:00 on 3 Jun 2013. Participants in this session were: Paul Murphy Bryce Elder We'll kick off with Greece Block Well, actually, we'll kick off with the man who might save Greece Paul's on the left there This is the Japonica chap His firm is looking to buy 10 per cent of Greek debt 10% of that on open market First-ever tender offer by private investor for European government bonds • First-ever unmodified Dutch auction for sovereign bonds • Significant premium to price in December 2012 government buy-back • Japonica to align its long-term investment interests with Greece Kazarian reckons he;s found a hidden nugget of value it would seem JAPONICA PARTNERS has a single focus business niche which is underperforming global special situations where we've discovered large value gaps based on hidden nuggets of value and transformational business plans. Discovering value gaps Changing cultures and perceptions Creating value through hands on management All team members share the same "Value Creation" KPIs: Innovativeness Leadership Quality and Quantity of Output Global Knowledge Positive Chemistry 360 degree multi-party reviews So this is a Rhode Island based investor, issuing a press release out of Frankfurt, over a Canadian newswire service...about Greece. Still, it's had the right effect on prices That's the Greek 10yr Downward tick is down to Paul Who is ex Goldman btw But you need to see that chart in historical context Anyway, see what happens to that in due course Hm. Interestingly - at least according to Factiva - this Japonica Partners has been off the radar since 2009. Mentioned a lot pre crisis and hardly ever after it. What's the index doing? Looked pretty rough earlier Oh, we really are doing nothing today. It's the first day of "go away," as the old saw goes. Volumes are pitiful. So sunny outside, not surprising In terms of the scores, we're down 25 points at 6559. Came off a four-week low of 6514 earlier on, which was just follow-on from Wall Street on Friday And i thought we were headed thru 7k Give it time. Nothing goes up in a straight line. We also have China data to blame today, should we wish. PMI 47.3 in May from 47.6 in April. As outlaw says over on the right Global markets been v difficult I have some bumpf on this Only 13 of the 46 global markets post gains as rift between emerging and developed widens YTD global markets up $3.1 trillion, but the US represents $2.3 trillion of that growth • Developed markets down in May 0.16% but down 2.61% excluding US 2.15% gain - Greece (3.67%) and Ireland (2.66%) post best returns • Emerging markets also down 2.56%, with only 6 of the 20 emerging markets gaining - led by Egypt (4.19%) From - Senior Index Analyst at S&P Dow Jones Indices, Howard Silverblatt. Developed markets oer the past month That doesnt include today's mauling in Istanbul bear market in Peru Ireland up 16% ytd tho Starting with the fallers, I guess. Though I emphasise that none of this is on volume. The Sage Group PLC (SGE:LSE): Last: 357.00, down 8.1 (-2.22%), High: 363.10, Low: 356.40, Volume: 597.59kBlock Believe there's some kind of investor meeting today. Some rumbles that the noises from that aren't too positive. Though, having failed to find anyone actually there, I can't say for sure. BT Group (BT.A:LSE): Last: 295.50, down 6.6 (-2.18%), High: 300.60, Low: 293.00, Volume: 6.69mBlock And I'm not sure why either, quite frankly. Goldman's got a note out fiddling with forecasts, but it says very little. Hold on, I'll get the gist of it. There. That literally is all of it. So, with the lack of filled out story in those two, we can turn to Tesco .... Tesco PLC (TSCO:LSE): Last: 356.90, down 8.55 (-2.34%), High: 364.05, Low: 355.12, Volume: 6.42mBlock Now, you must have a reason for Tesco's decline Investec doing the damage there. Dave McCarthy's the analyst. And it's good, punchy stuff. A decade and a half in the wilderness, basically. We find aspects of the Tesco strategy contradictory and find it hard to see how the UK operating margin can be maintained, given company and industry dynamics. We would not be surprised to see another UK margin reset in due course. Meanwhile, International is a growing problem and after 15 years there is no sign of acceptable returns. Here we update our numbers, reducing EPS by c5% on an underlying basis, preview 1Q trading (due next week) and provide an analysis of why UK operating margins are at risk. Dynamics are working against Tesco's UK target margin of 5.2% (eg poor sales, switching to the internet etc). Maintaining the operating margin only looks achievable via an expanding gross margin, which suggests rising prices. Such a strategy would push Tesco down the doom loop, not shift it to the virtuous circle. We believe Tesco should re-set its margin, before it is eroded. International: After 15+ years in Europe, Tesco still seems to be destroying shareholder value. Tesco has backed the wrong format, with hypermarkets having had their day, and is left with a big problem in Europe. We believe Tesco should rationalise its international operations further. We cut our forecast EPS by c5% on the back of weaker growth (weaker LFL sales and smaller contribution from new space). We expect weaker margins in Europe but have maintained margins in the UK for now, although we flag the considerable risks to this scenario in this report. Reduced capex keeps our DCF valuation broadly unchanged. 1Q13/14 results likely to disappoint. We expect LFLs to be negative in the UK (down 0.5-1%), in Asia (-2.5%) and in Europe (-5%). The UK still lacks momentum and international is going from bad to worse. Valuation: Our revised numbers represent an underlying downgrade with a risk of more downgrades to come. Tesco is not a growth stock, nor is it an income stock and it lacks momentum. Our DCF suggests a valuation of 295p. Can't disagree with any of that. Though they are making progress in fixing the stores, at least judging by the one at Bank. Feels less like shopping in Eastern Europe now. Though the food's no better. It is. Though you'll remember house broker Cazenove downgrading Tesco last week. On a slightly less harsh argument that the whole grocery sector is rubbish. I think it's baked in now that next week's update won't be very good. Allow me to grab a preview Sorry - not next week, Wednesday ........... We expect little hard evidence of improvement, whether in its home market or its key international businesses. If correct, our forecast of a -0.5% decline in UK like-for-like sales would represent a clear step back from the encouraging performance around Christmas. Arguably the UK performance should come as no great surprise given the evidence from 4Q trading and recent Kantar market share data, but a slip back into LFL sales decline may remind the market that signs of Tesco's recovery remain pretty limited, despite management's best efforts. Internationally the picture is also set to be weak - and if we exclude FX and fuel then we are only forecasting group sales growth of +0.8%, a very weak number given the capital that has been spent to build up the business. We expect management to talk more positively on the encouraging signs they perceive "beneath the surface," but we continue to think that the market will require a more consistent LFL sales performance before it fully embraces the Tesco investment case again. They also tear into the annual report, which came out last week ..... We note that - for the first time - the margin enhancement from Tesco's investment property income has actually declined on a year-on-year basis. We also see that Tesco's UK staff levels have risen by the fastest level in five years, reflecting the investment in the offer - but also driving up staff costs. We also note that the eligibility of Tesco's management for a short-term bonus in the year ahead is driven as much by colleague engagement as UK like-for-like sales, although no bonus will be paid if trading profit does not rise in the year ahead. Thing to remember about Tesco is that it's trading at a (slight) premium to Sainsbury, which it tricky to justify. Scale versus growth, I guess. Plus a lot of value tied up in Justin King, whose employment circumstances we watch with interest. Are the banks doing much this morning? Nothing's doing much. Royal Bank of Scotland Group PLC (RBS:LSE): Last: 332.40, down 4.2 (-1.25%), High: 338.10, Low: 331.60, Volume: 3.26mBlock Lloyds Banking Group plc (LLOY:LSE): Last: 62.33, up 0.2182 (+0.35%), High: 63.02, Low: 61.68, Volume: 45.16mBlock Barclays PLC (BARC:LSE): Last: 320.60, up 0.15 (+0.05%), High: 321.67, Low: 315.86, Volume: 10.77mBlock Looking again at this Funding For Lending scheme Why do the Bank of England and the politicians continue to pretend its doing anything at all Here's are the latest figs Long image, hope it's readable Well, long image and small numbers. So cumulative net lending over the past year has gone down Lloyds shrinking like made And RBS to some extent The BoE just breezes over this Now correct me if I'm wrong, but Funding For Lending's the one that's only available on newbuild rabbit hutches, right? No no - broad usage SME lending as well Commenting on today's data, Paul Fisher, Executive Director for Markets at the Bank of England, said: "The picture of flat lending growth overall is broadly as expected at this stage reflecting reductions in some legacy portfolios being roughly offset in aggregate by expanding new lending. The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013. Oh - sorry, I was getting my wires crossed. Yeah, well there's so much hot air around this It's easy to get confused But there are the numbers And they are rubbish Oh look, Ian Gordon is still selling RBS For all the popular talk of fresh stimulus and (allegedly) improving mortgage demand, today's Q1 2013 BoE Funding for Lending Scheme data tells a rather predictable story. RBS reported £1.6bn negative net lending in Q1, virtually flat vs. Q4 2012 (-£1.7bn), while Barclays (Buy) saw reduced (but positive) net lending of +£1.1bn and Lloyds (Sell) maintained planned balance sheet shrinkage with £1.0bn negative net lending. All UK banks maintain an embarrassment of liquidity, so (as expected) made no FLS drawings at all. Whilst not surprising, we regard the RBS data as the most disappointing. Following excellent progress with the run-off of its non-core assets, it is no secret that RBS now has excess liquidity. Unfortunately, however, today's data provides further evidence that it is currently unable to deploy this - with negative consequences for revenues, earnings and returns. RBS" negative net lending of £1.6bn in Q1 2013 reflects the continuing impact of the planned (and necessary) non-core run-off, a particularly weak quarter for mortgage lending across the industry, and the Company-specific impact of the retraining of its mortgage salesforce during January which further curtailed volumes. Corporate loan demand remains muted. We remain of the view that RBS will miss its target for 3% net growth in "Core" customer loans in 2013. Barclays (Buy) achieved +£1.1bn of (positive) net lending in Q1 2013 - down from +£1.9bn in Q4 2012 - reflecting the weaker industry trends. Nationwide saw a broadly similar QoQ decline from +£1.8bn to +£1.2bn. Lloyds (Sell) achieved a reduction in net lending to -£1.0bn in Q1 2013 versus -£3.1bn in Q4 2012. Although divisional disclosures were omitted from its Q1 2013 IMS statement, we believe that this reflects both a reduction in the pace of a "self-imposed" shrinkage of its mortgage book and a slight improvement in (positive) net "core" corporate lending. RBS Sell rec and RoE-g/CoE-g derived 300p TP reaffirmed. Actually, since you mention it (obliquely) ..... HSBC's got a big note out on UK inflation today. Which is worth sharing. Basically saying that the May inflation report was a blip Because the easing of inflation was due to lower transport costs, and part of this was due to the "Easter effect," And Easter doesn't really help the May figures. Going forward, the picture could be volatile as buoyant financial market sentiment and disappointing hard economic activity data exert opposing forces on oil. In the short term at least, the former seems to be pulling harder. The spot price of Brent stabilised in April and has since increased by 8.6% in sterling terms so far in May. Finally, it is worth remembering that there are still plenty of structural cost pressures in the UK. The rise in energy prices at the start of the year, plus recent reports of acute gas shortages, makes it likely that gas and electricity bills will go up again around the winter period. Despite some fears over the Fed's tapering of asset purchases, central banks around the world are once again leaning towards more monetary easing, and the low inflation environment makes it easier to justify this despite fears over competitive depreciation (see Currency War, USD to soar, 22 May 2013). The most pertinent change has been at the Bank of Japan, which is now committed to meeting its 2% inflation target by open-ended asset purchases. Other central banks from Israel to Australia have also acted to cut interest rates ahead of market expectations. One general feature of monetary easing over the past few years has been the financial markets anticipating the policy change and the subsequent impact some periods before any discernible effects can be measured. This is often expressed in higher asset prices, including of commodities. The market reaction to another round of rate cuts/additional QE is likely to be similar this time around. We do not expect the Bank of England to resume asset purchases. However if sterling appreciates significantly due to easing elsewhere, that would make it easier for Mark Carney to persuade the rest of the MPC to adopt more radical policy. We expect his preference for "flexibility" means the MPC will tolerate a certain degree of currency weakness. This would limit the potential disinflationary impact from the exchange rate. Apart from oil prices, other commodities have also started to rise or at least stopped falling in recent months. Food prices actually made a positive contribution to inflation in April, driven by prices of vegetables which have suffered from very cold weather in Q1, which delays planting. This has meant that even though import price inflation may have moderated as sterling has stabilised, the prices of home produced foods could continue to accelerate. There is now a significant divergence in the rate of inflation in food compared with other goods (chart 4). There is typically a lag of up to six months between changes in raw commodity prices to consumer prices (chart 5), and the pass-through is not as clear-cut as it is in the case of oil and petrol. Nevertheless, given the recent turnaround in agricultural commodity prices, which has fed through into higher producer input prices, we think food price inflation will continue to add to inflation in Q2 and Q3 this year. And there's a lump on house prices, which is why I raise the theme. A final, UK-specific reason for why we believe inflation will not fall in 2014 concerns housing costs, much of which are not covered by CPI but is included in the RPI. We had been cautiously optimistic on the UK housing market since the start of the year (see UK Housing Market Chartbook: Ready for Lift-off, 15 January 2013 and subsequent chartbooks). The government's help-to-buy mortgage guarantee and the Bank of England's Funding for Lending Scheme are both additional boosts for the housing market. It is reasonable to expect house price inflation to rise, maybe even rapidly. That would have implications for RPI in particular, as house prices are used to calculate two components of RPI, mortgage interest payments (MIPS) and owner-occupied housing depreciation. Housing depreciation is essentially proxied by the ONS house price index (chart 8). As the house price index seems to have returned to growth recently, and leading indicators such as the RICS survey suggest further increases in activity and prices in the months ahead, we expect the contribution to inflation from depreciation to increase. MIPS is calculated by using a combination of average ONS house prices and a projection based on the Halifax house price index. Again, we expect both measures to pick up. MIPS is also driven by mortgage interest rates. As we do not expect any changes to Bank Rate over the forecast horizon, and given effective mortgage rates have come down close to all-time lows again (helped by the Funding for Lending Scheme), the downside from lower interest rates would also be limited. Interestingly, housing (including rent, council tax, water, DIY and repairs) now accounts for 25.4% of the RPI, which is a record. So here's another example of people believing the Funding for Lending scheme works! How is the FfL a boost when the numbers are negative? The whole thing is just a waste of pixels Sorry, interrupted on inflation Nah - I'm done there. Was just loading up on pessimism. out of South Africa. Union member shot dead at a Lonmin mine, according to the NUM. Lonmin PLC (LMI:LSE): Last: 286.50, down 8.5 (-2.88%), High: 295.50, Low: 286.00, Volume: 504.87kBlock Rand going lower on that. Current price for Lonmin's 3.1% lower. Last thing they need is another labour flareup. Anglo American PLC (AAL:LSE): Last: 1,541, up 14 (+0.92%), High: 1,549, Low: 1,511, Volume: 833.70kBlock Aquarius Platinum Ltd (AQP:LSE): Last: 42.50, up 0.5 (+1.19%), High: 43.25, Low: 41.50, Volume: 267.76kBlock While on South Africa ..... ... albeit at the more diddy end of the market. Massive profit warning from FastJet late on Friday. Stick out your results on 6:30pm on Friday. As if we're not going to notice. And they're remarkable. Including a "significant doubt" warning from the auditor. Printed a $56m loss for 18 months. Including $23.5m of writedowns largely from the curious deal to buy Five Forty Aviation. The Fly540 businesses acquired from Lonrho Plc have all seriously underperformed relative to expectations with an EBITDA loss due to continued Fly 540 operations being US$17.8m. Management has taken steps to restructure these businesses and remove legacy inefficiencies. We have reviewed the fair value and the goodwill and impairment of the assets acquired as a result of the Lonrho Aviation and Fly540 acquisitions and made impairments totalling US$15.9m and fair value adjustments of US$19.0m, details of which are set out in the notes. seriously underperformed Honestly - take a moment or two to read the statement if you've time. For anyone needing a backgrounder ...... This is the thing chaired by David Lenigas, he of the 147 directorships. Hived out of Lonrho, which still has a 49% stake. @outlaw: tell it to Ken Dodd. Backed by Sir Stelios. But with very a peculiar structure, with the ultimate ownership of licences, equipment and brand not entirely clear. Not to me anyway. And with a curious deal to a 75% stake in an holding company previously called Blockbuster. Which is a vehicle for a few businessmen including Jacob Zuma's son, Edward. Who seems to get a rather disparaging press in South Africa. Had a big legal spat over its licencing of the Fly540 brand, with all sorts of allegations around regarding unpaid bills. And discovered in February - apparently much to everyone's surprise - that Tanzania wanted paid for using their airports. Oh, and just keeps raising cash. I make it seven equity issues in six months, though that may not be complete. Stuffed innocent investors with around £1.6m at 3.5p in November Took another £500k from Henderson Global Investors, its biggest shareholder, at 4p a share in January. And another £4m from them and others in February, at 2.25p. Issued £15.7m in convertibles from Bergen Global Opportunity Fund in March, a load of which it converted immediately at 1.3p. Took Henderson and others for another £2m at 1.25p in April. Jeepers, this really is a penny dreadful Trading under a penny, currently (@Nobby: Edward Zuma's BBE credentials are open to question. But there's some law that airlines need to be 75% resident owned, which this investment may help skirt.) Fastjet PLC (FJET:LSE): Last: 0.934, down 0.321 (-25.58%), High: 1.05, Low: 0.90, Volume: 37.62mBlock Course, the question here is ........... Given all this, what on earth is the angle on the Lonrho takeover? Which looks increasingly like an act of charity. Lonrho PLC (LONR:LSE): Last: 9.92, up 0.1 (+1.02%), High: 9.95, Low: 9.80, Volume: 5.87mBlock What are Rainer-Marc Frey and Thomas Schmidheiny thinking? Odd. Very odd. Thanks for all taht Someone was wanting comment on Igas earlier .......... IGas Energy PLC (IGAS:LSE): Last: 103.00, up 10 (+10.75%), High: 107.50, Low: 97.98, Volume: 3.30mBlock Lancashire shale play. With between 15 trillion and 172 trillion cubic feet of something. With a middle estimate of 102 tcf. Their previous guidance was "over 9 tcf," so that's certainly "over." Here's what Jefferies makes of it. Very large potential in-place volumes... Most likely gas in place of c.100 tcf is highly significant, both relative to IGas" existing reserve/resource base and the UK's existing gas reserves. While only a portion of that will be recovered even in a success case (US shale recovery factors generally estimated to be c.10%-30% with current technology/development plans), total proved gas reserves of the UK are c.7 tcf, indicating the materiality of the potential. These estimates imply an average of 93 to 677 bcf/sq mile (340 bcf/sq mile at most likely estimate), which ranks favourably compared to successful US shales which have gas in place per square mile of c.50-250 bcf. This is due to the thick shale sequence as well as the higher clay content which increases the shale's capacity to hold gas. This is only for their NW acreage and does not include any volumes from the identified shale potential of their East Midlands/Weald basin acreage which is at an earlier stage of evaluation. ...but range of uncertainty is also large. IGas" estimates are based on c.330 km of 2D seismic and well data from c.20 wells near their acreage but only one well on their acreage which has penetrated the shale (but has not gone through the entire section). As such, the uncertainty surrounding the shale properties across their position is very significant with the high case estimates over 10x the low case estimates. Additional drilling is needed to increase their confidence of their estimates and more accurately estimate its potential. E&A programme commencing in 4Q with two vertical wells. The increased gas in place estimates highlights why IGas (and others, both in industry and government) believe the UK shale potential is worth exploring. However, it also highlights the amount of additional data that is needed to assess its eventual technical and commercial potential. IGas is beginning their programme to collect this data, with 2 vertical wells planned for 4Q13. Data from these wells will then be analysed before deciding the follow on program which may include fracture stimulations of the vertical wells in 2014 and possible horizontal wells thereafter. These wells will help IGas understand not only the gas in place potential of their acreage but also begin collecting data to help determine if the shale will be capable of flowing at commercial rates. Confirms our expectations of higher gas in place estimates. In our detailed review of the UK's Bowland shale Best "Bow" since Bowie? Let's Dance, the data clearly indicated to us that IGas" original gas in place estimate was likely to increase significantly. Today's announcement supports what we think could be the ultimate unrisked potential but like the gas in place estimates, the range of uncertainty of numerous technical and commercial variables is still very large, not least of which is whether any portion of this in-place potential can flow at commercial rates. Please make a note of the title on that previous report. Valuation. Our 36p/sh risked valuation on the shale assumes unrisked 2.5 tcf recoverable. We carry IGas" Bowland shale potential at 36p/sh risked in our 125p risked Sum of the Parts based on 500 wells recovering 5 bcf/well, driving total resources of 2.5 tcf with a realised gas price of $9.40/mcf and a 15% chance of success applied. We estimate based on our cost and gas price forecasts, a horizontal well must be capable of producing at least 3 bcf to be commercial (earn a 10% real IRR). And, for the TL;DR crowd, here's Sector Watcher. 102 tcf of gas in place (on a "Most Likely" basis) is a huge number, although it should be stressed that (i) it is an internal, un-corroborated estimate, (ii) no drilling has yet taken place on the acreage to confirm this, and (iii) no guidance is given on recovery factors. On the final point, if we assume a 10% recovery factor, then the group is looking at over 10 tcf of recoverable gas or 1.7bn boe. Difficult to find a comp for this data, but if we look at two basins in Argentina (San Jorge and Aguada Bandera) then these contain 151 bcf/sq mile and 149 bcf/sq mile, whilst IGAS is claiming more than double this with 340 bcf/sq mile. Moreover, in 2009 the EIA did a World Shale Gas report where the UK was assigned only 20 tcf recoverable shale gas resources. Drilling is due to commence in Q4 this year, and if the first well is successful, then there is clearly huge upside for the shares. At the same time the group will face a number of issues, given that there is no existing shale gas industry in the UK, and also that it is highly likely to encounter significant opposition to onshore drilling and hydraulic fracturing (fraccing) in the UK. Nevertheless this looks like positive news for the share. Still sunny outside Bryce Indeed it is. And ditto. Anything to finish up on here Why's taht at the top of the leaders? I think this is just follow-on from Ghana's development approval late on Friday. Which many people seemed to miss, because it was Friday afternoon. Basically, it was expected and predictable. What it does mean is that Tullow can start the process of selling a stake in its TEN development. Which is possibly the next Jubilee. Macquarie can give us the numbers for that. Our Target price of £8.80/sh for Tullow Oil contains US$2.0bn or £1.35p/sh (risked) for Tullow's WI in the Deep Water Tano Block containing TEN Project. That Target price is underpinned by a £5.64/sh Core NAV including US$1.3bn or £0.90/sh for the P50, 360mmboe gross development case at TEN. Overall Ghana, including the producing Jubilee field, makes up 65% of our Core NAV and 50% of our Target price (see Fig 3 & Fig 6 in the report for further details). A valuation read across from a farm-out at TEN is significant because it calibrates much of our Core NAV, i.e., showing if and how much industry is prepared to pay for upside beyond (our) P50 development case valuation. The second significance is that with a Core NAV valuation more firmly established, the exploration premium being applied by the market to Tullow's stock will be better understood. Ironically, yesterday also saw a non-commercial exploration well result offshore Cote d'Ivoire for Tullow Oil. In Figure 1 inside the report we update our "Jubilee-like play" exploration record for company seeing Calao-1 as the 24th West African "Jubilee-like" prospect. And that's that, I think. Quick FTSE reading. We're down 11 points now. 10 point rally through the session, for no particular reason and on no particular volume. And, with that, I think we're done. Back tomorrow rabble!