Markets Live: Friday, 31st January, 2014 This is the transcript of the Markets Live session ending at 12:05 on 31 Jan 2014. Okay, from being a nicely prepared session I think this is suddenly going to go a big pete tong Bryce has just messaged over on our internal skype chat that the EBA stresss test results are out Let me get some pics out of the way Happy Chinese new year etc And let's take a look at the new reported soon to be ceo of Microsoft Let me try another file Should mention that Bloomberg also saying that gates will leave his position as president or whatever Maybe leave the board completely Bloomberg people all a-twitter on this Nadella's Mr Cloud. And Mr SaaS. Which, admittedly, is the only part of Microsoft to have delivered recently, apart from its games console. As in Office 365 and Windows Azure. Nadella's promotion would be a quite brave move away from the shrinkwrap model that's served them well. I doubt anyone can turn Microsoft into an amalgam of Apple and/or SAP, but he'd have as good a chance as any. In terms of Gates stepping back ..... While we do not believe this is overly likely, we do believe it implies that more change is being considered and the likelihood that the Board make-up could change over time is increasing. If Board changes do occur with the announcement of the CEO, it would likely be viewed positively by investors as it would imply that the new leader would have more autonomy to make the necessary internal changes. Not sure Gates is much more than a figurehead Chairman these days anyway. He and his better half are rather busy saving the world to worry about the long-term future of Windows XP hotfixes. Anyway, should we cross back over the Atlantic? This stress test stuff is just drip drip We ahve to wait till April for the proper details But yes we have a fresh taster this morning The resilience of EU banks will be assessed under a period of three years (2014-2016). Banks will be required to stress a common set of risks including: credit risk, market risk, sovereign risk, securitisation and cost of funding. Both trading and banking book assets will be subject to stress, including off-balance sheet exposures. CAs may include additional risks and country-specific sensitivities beyond this common set but the published results should allow understanding the impact of the common set of risks in isolation. In terms of capital thresholds, 8% Common Equity Tier 1 (CET1) will be the capital hurdle rate set for the baseline scenario and 5.5% CET1 for the adverse scenario. The relevant CA may set higher hurdle rates and formally commit to take specific actions on the basis of those higher requirements. The running of the exercise will involve close cooperation between the EBA and the CAs, including the ECB. In particular, the EBA will be responsible for coordinating the exercise in cooperation with the ECB (in case of SSM countries) and ensuring effective cooperation between home and host supervisors. Furthermore, the EBA will provide pan European benchmarks and will act as a data hub for the final dissemination of the common exercise. On the other hand, CAs will bear responsibility for overseeing the exercise with the banks and checking the quality of the results. The methodology and scenario are expected to be published in April 2014 and banks" individual results to be released at the end of October. Before we get onto individual stock Can we just pick up on the State Street stuff that Tony has highlighted on the right here's the final notice We often slag off the FCA on here But they do seem to have dug out a very serious case here Who'd have thought it? State Street Boring honest chaps from Boston And here they were, allegedly, not just skimming clients but gouging them bear market still with us Bryce? Consumer EM going very badly this morning. Dragging the FTSE 0.7% lower at pixel time. Off48 points at 6489 Not quite sure I can answer the "why today" question .... .... but Diageo's statement yesterday in combination with FX Which imports inflation. There's a load of sellside on the subject today, which I may as well grey for the sake of completeness. Goldman's gone neutral on Diageo post the results yesterday ..... We continue to view Diageo as well-positioned due to its 36% exposure to structurally attractive aged spirits categories which offer high barriers to entry and price-led growth. The company also benefits from a 45% exposure to EM which remain significantly underpenetrated for Western Spirits. However, we expect the softer performance in 1H to continue into 2H and see potential for continued EM challenges in FY15, particularly as Venezuela is likely to become a much reduced component of group organic growth in the event of further negative FX movements (as implied by the group's FX guidance for FY14). Furthermore, there are no meaningful signs of a DM recovery for Diageo and with competitive intensity picking up in US vodka, we see a risk that DM growth deteriorates from here (DM organic revenue was +2.2% in 1H14 vs +1.9% in FY13). We reduce our EPS estimates for FY14-16 by 12.6%/13.1%/16.3% to reflect our assumptions of more conservative organic growth and lower acquisition spend in the forecast period. Our 12-month price target decreases to 1996p (from 2660p) and is based on a P/E of 16.8x applied to our CY15 EPS forecast. We reduce our target multiple to 16.8x from 19.0x to reflect our lower organic growth assumption. We therefore believe the shares are fairly valued and we downgrade our rating to Neutral. Key risks include favourable/adverse FX moves; stronger/weaker spirits sales in a core market; better/worse cost cutting outcome; and more/less acquisition spend. (@Urgeview: read back on the blog. One story in particular should jump out at you.) And we had SocGen turning negative overnight On SAB and Unilever ...... And @Urgeview, if you were among the arbs and general troublemakers that put 2+2 together on that story and spread a whole load of nonsense rumours, I'm frowning at your right now. Theme We have updated our investment cases on the 15 large cap European Consumer Staples in our coverage. We have cut TPs on several stocks mainly to reflect recent FX weakness. We have raised our TPs on two stocks, Nestlé (Buy) and Beiersdorf (Hold), to capture solid operating performances and increased confidence in their investment cases. We also include Japan Tobacco (JI Asia Buy, TP Y4000), which is covered by Mikihiko Yamato at our associate company, JI Asia. Downgrading Unilever and SABMiller from Buy to Hold We expect recent emerging market currency weakness to herald a downturn in consumer demand, with a more prolonged period of poor growth in these regions than we were anticipating. As a result, we move Unilever and SABMiller from Buy to Hold. We maintain that there is a compelling margin story at Unilever as it premiumises its portfolio, driving positive mix. Our concern is that EM category growth continues to slow just as currency headwinds worsen. Unilever's EM category growth was 8% at the beginning of 2013 but it exited the year at just 5%, putting increased onus on building market share to maintain its EM growth rate. With EM risks ratcheting up and the prospect of flat earnings in 2014, we think market appreciation of the longer-term fundamentals will be postponed until 2015. While SABM's long-term attractions also remain compelling, we are concerned that strong currency declines will result in imported inflation adversely affecting beer consumption. This has yet to hit reported sales in SABM's key EMs, but we expect an impact in cal-2014. We have also cut our target price for BAT on the same basis, but stick with a Hold rating. Main stock picks We remain Buyers of Nestlé (TP CHF73=76), Heineken, Pernod Ricard, L'Oréal and Imperial, and Sellers of ABInBev (TP €69=67). We think Nestlé has significant balance sheet optionality to increase cash returns to shareholders. There is also a 50%+ chance it will sell its stake in L'Oréal and return some of the proceeds through buybacks. With more portfolio focus we think Nestlé"s ROIC can improve markedly from the 2011 base. Our analysis of ABI's US beer business suggests that volume and margins in the US could trend down - not every quarter, not every year, but over time. We do not believe this view is in line with the consensus, and think the share price has not yet adjusted to take account of more modest growth prospects. ... Sorry, massive note. Was looking for detail on SAB. I can share prices while you are looking Diageo PLC (DGE:LSE): Last: 1,772, down 48 (-2.64%), High: 1,804, Low: 1,743, Volume: 2.91mBlock SABMiller PLC (SAB:LSE): Last: 2,681, down 72.5 (-2.63%), High: 2,765, Low: 2,651, Volume: 1.55mBlock There it is, handily located on page 57. Investment case We see SABMiller (SABM) as a two-way prospect. It has the biggest exposure to long-term growth in EMs in the US/Euro Beverages sector, and also the prospect of increasing its exposure to the high-growth, high-margin African beer and soft drinks markets via a potential acquisition of Castel. It is also widely speculated as a bid candidate for ABInBev, although this is exclusively just talk among city analysts. However, on our revised price target of 3,100p (previously 3,600p), we are downgrading our rating to Hold. Its organic sales growth over the last five years has averaged 7%. This year (to March 2014) we expect a lower rate, 5.6% (including share of associates), with reported growth at 2.5% - i.e. adverse FX lowering reported sales ca. 4ppt. The slowdown in organic growth has been gradual and disproportionately affected by the collapse in sales in Russia following the botched integration of SABM and Efes" businesses. SABM's CEO stresses that EMs continue to grow. However, we are concerned that some currency declines will bring imported inflation in consumer categories, hitting sales in 2014. We are convinced of African and Asian consumption growth over the next 20 years, supported by a young, aspirational population, increasing urbanisation and strong GDP growth. These trends particularly suit beer, and SABM has encouraged consumption by expanding its offering both downwards and upwards to capture more affluent consumers. But for the moment, we do not expect outperformance. How we value the stock Over the past ten years, SABM has traded at an average calendar P/E premium to the Staples sector of 3%. It currently trades exactly in line with that average for calendar 2015e, at 17.3x vs the sector on 16.7x, and in line with the Beverages sector. Prior to EM FX weakness, it traded at a 10-20% premium to the Beverages sector, so the FX downgrades and weaker trading in Russia have prompted a 10% de-rating. We believe that the worst of the FX hit is in our numbers, and the shares should return to a premium rating. At our TP they would trade at a c.10% premium to the Beverage sector and give a 10% TSR including a 60.3p 12m forward dividend. However, due to the sector derating this now implies a price target of 3,100p. Hence our downgrade to Hold. And since we're here ..... Imperial Tobacco Group PLC (IMT:LSE): Last: 2,239, up 57 (+2.61%), High: 2,285, Low: 2,232, Volume: 1.01mBlock Cheap, they say. And not without the odd risk, I'd suggest. But I'm not Goldman. Sector note, which looks like this. Since July 2012, the MSCI Europe tobacco index has underperformed the MSCI Europe index by 30% and the staples sector by 19%, highlighting: 1) a low investor appetite for defensive stocks during the "hope" phase of the cycle; 2) unfavourable volatility of key currencies; and 3) challenging consumer conditions driving above-average cigarette volume declines, particularly in the EU where investors are also concerned about the volume impact from smokers migrating to e-cigarettes. BAT and IMT now trade on significant P/E discounts of 29% and 45%, respectively, to the Europeanbased staples multinationals. We do not share concerns over growth sustainability as over 80% of cigarettes sold globally still retail for less than $2/pack of 20 (versus greater than $10 in the UK), providing significant profit pool growth opportunities for the tobacco industry. Over the next five years, we expect CROCI to expand by 230 bp for EU cigarette makers, compared with a 20 bp average decline for EU food, HHPC and alcohol producers. We believe the pull-back offers an attractive investment opportunity. Imperial Tobacco is our top pick; new PT is 2840p (28% upside) We upgrade our rating on IMT to Buy (from Neutral) and add the stock to our Conviction List, with a new 12-month price target of 2840p (from 2545p). We believe IMT is now at the end of the earnings downgrade cycle, as encouraging unemployment trends in Western Europe drive an improvement in organic growth. We also expect the company to distribute £8.8 bn of cash over the next four years, representing 34% of the current market cap, and we do not rule out IMT being viewed as an attractive M&A target. Our valuation now incorporates an M&A weighting. BAT remains Buy despite FX headwinds; new PT 3420p (15% upside) We remain positive on BAT, which in our view remains well positioned to the key drivers of long-term shareholder returns. However, we lower our 12- month price target to reflect EM currency risk (c.10% earnings drag in 2014E); as a result, our FY14 EPS forecasts are 6% below Reuters consensus estimates. We note the stock is down 13% over the last 3 months. And that, I feel, is more than enough for the consumer staples. Oh, except to note Coke. Coca Cola HBC AG (CCH:LSE): Last: 1,628, down 39 (-2.34%), High: 1,667, Low: 1,625, Volume: 54.19kBlock 18% of sales, I think, are in rubles. That's all you need to know there. thanks for that Bryce We thought we introduce an new occasional feature And not just Blinkx tho we could mention that I was struck by Serco tho, cos i had rather missed the action in this yesteray for various reasons Serco. Bounced 3% this morning Serco Group PLC (SRP:LSE): Last: 433.10, up 9.9 (+2.34%), High: 434.90, Low: 410.00, Volume: 2.74mBlock Interesting warning, really, though the specific detail was slightly ignored because it was the second in a month. Oz immigration, in short. Boats arriving at customs in Australia became very much fewer from September. Worth mentioning that matthew earl was ahead of the curve again on this one You've got me following this guy Bryce recommend him - just drop your email address into the box on his site he reckons Serco is going even lower here He does know the sector, and I'm comforted rather than put off by the fact that he's playing with his own money. Though, as ever, make your own decisions. thing about matthew is that he's already caused us to receive one complaint for feature his work amidst these pixels Which kinda guarantees a repeat appearance... So there's a request for Serco comment post the warning and we're happy to provide. Morgan Stanley says says "avoid" Staying on the sidelines. The concerns on near-term margin and growth risk from contract delays, mix effect, Australian DIAC volumes and FX that drove our cautious EW rating post November's profit warning continue to play out. With today's ~20% cut to EPS, we believe expectations now better factor in known risks, with an element of "kitchen sinking," but valuation and our concerns on visibility keep us on the sidelines. Progress with UK government but lack of visibility a key concern: Government sign-off on Corporate renewal was largely expected but is still a positive. New contract wins are now key to easing market concerns on reputational risk. DIAC revenues are now assumed at -50% for 2014 and this now feels like downside is more limited. However, lack of visibility on this and new contract wins reduces confidence in our 2015 earnings growth estimates. Our EPS falls by 19-21%, maintain EW rating. We lower estimates to factor in the lower growth, higher cost and additional margin pressure for 2014-15. Our new PT is set at 455p; however, despite upside on a 12-month view, we remain happy to stay EW for now until comfort is gained on 2014 risks and 2015 earnings growth. Swedes - no leaks. not held yet And Citi - which will take a second to open - says "yeah, probably avoid, but it's really not that expensive any more." UK rehabilitation - The Cabinet's Office positive assessment allows Serco to be awarded new UK central government contracts once again. Not only should this end debate about risk to Serco's existing UK central government contract base (ex N. Rail, est. £300m revs, March 14E) but also enable it to bid to conclusion its outstanding DIO and Magnox tenders.  2014E downgrade - We downgrade our 2014E EBITA from £278m to £243m (-12.5%). This is slightly ahead of management's mid-point guidance of c£235m as our forecasts already discounted corporate renewal costs. We're now assuming 50% lower volumes at DIAC this year and next, and cut 2014E organic growth from +2% to -4%, but still expect 4% growth in 2015E.  Cash call fears unfounded - We're forecasting 2013E and 2014E Net debt EBITDA of 2.1x and 2.5x, in line with management expectations, and well below covenants of 3.5x. Significant one-offs should weigh on cash generation in 13E and 14E, but we expect normalisation from the latter half of this year. This is not uncharted territory, Serco has been here before and we view cash call fears as unfounded. 2015E Net Debt EBITDA should improve to 2.1x, we believe. CEO catalyst - We think it reasonable that a new CEO may be appointed during 1Q 14. While a new CEO may be tempted to take profits guidance down one more time (potentially focusing on more conservative accounting), a longer-term narrative could develop around Serco's margins. At 5.1% in 2014E, Serco's EBITA margins sit well below those of other outsourcers, including Babcock's equivalent of c9%.  Staying Buyers - If our catalyst roadmap plays out, Serco's investment debate could evolve from "what is the worst-case profit scenario?" to "what is the margin upside with new management?" Incidentally, on the cash call angle ..... Has exactly the same problems as Serco and a weaker balance sheet once you bundle in the pension hole. G4S PLC (GFS:LSE): Last: 236.20, down 1.5 (-0.63%), High: 238.00, Low: 235.00, Volume: 1.57mBlock I know new management has said it can manage without raising money but one "transformation cost" type warning and that could change quite a lot. Should mention that their big danish rival, ISS, is floating soon - but in Copenhagen, not here ISS that G4S tried to take over, only to discover that its shareholders didn't really want such an heroic move Think that deal is dead According to my guy in the ISS camp, in any case Goldman and other shareholders floating ISS (@daveirl: Well, Google has failed to break the real estate portal market three times, spending rather more than £6m. The internet has a habit of forming into natural oligopolies and fighting them tends to be a Canute-like manoeuvre.) I also note an investment of £6m equals one two-bed flat each in Pimlico for the estate agents involved. Actually, if we are going off-piste/DPL... what someone in London needs to do is licence this software and run it here: http://streeteasy.com/ It's a brilliant site in NYC (No need. Really. Rightmove and Zoopla work well enough.) Spend some time on streeteasy - -trust me (Though since we're talking in brackets .... Just Eat. Have you ever tried to actually use it?) If anyone needs to look closely at their tech, it's them. (The site is shockingly bad. Amateurish. Hopeless.) (And this thing's floating with a £1bn cap? Eesh.) Okay! Back out of brackets. But still in dead cat corner, briefly Blinkx PLC (BLNX:LSE): Last: 129.00, up 10.25 (+8.63%), High: 131.75, Low: 119.00, Volume: 14.46mBlock 9.5% live, all be it dead Sellside has stepped up to defend its honour. Actually, the notes worry me a bit. They all say basically the same thing. Blinkx's traffic is audited by specialist audit agencies who exist to support the market Much like Fitch and S&P audited .... oh, you know where I'm going with that. ..." and the customers pay Blinkx so it must be okay." Think that's a libel on the rating agencies Bryce Which is saying something It might've been if I'd finished the sentence. I cannot be responsible for the inferences you take. At your peril Via Con ! Well, since he's mentioned it, here's Goldman. Repeating that 340p price target Heroic 340p price target But adding ... "um, perhaps management should answer a few questions ...." News Blinkx's share price was under considerable pressure today (January 30, down 32%), following market concerns surrounding the company's business model. The company issued a press release indicating that it "strongly refutes the assertions and conclusions made by a consultant on a recent blog post." Management also confirmed that there has been no material change to the operational and financial performance or outlook for the business, and that 3QFY14 was in line with its expectations. Analysis Click fraud is an ongoing theme in online advertising and given the highly fragmented and unorganized nature of the industry, it will likely persist. The best defense against click fraud is to have rigorous filters and optimization criteria, which we believe Blinkx is adopting. The company derives a majority of its traffic from external websites (not self-generated) and uses 48+ internal filters and best of breed 3rd party verifiers to filter most of the traffic. Additionally, it recognizes revenue and gets paid only when the ad campaigns have been verified by 3rd party auditors. While historically acquired entities may not have had best practices in place, our discussions with Blinkx management indicate that all entities have now been integrated into a group wide compliant financial reporting system. We also believe that Blinkx has a broader and differentiated product offering (video search/discovery syndication, mobile) vs. adtech peers which enables higher monetisation vs. point vendors. Implications On the basis of the news flow today, our estimates are unchanged. On our estimates, we view current valuation as attractive and retain our Conviction List-Buy. However we acknowledge that additional clarity from management to alleviate concerns around its business model is key for share price recovery. CEO Brian Mukherjee will present at the GS Technology & Internet Conference in San Francisco on February 12. This stuff baffles me. Analysts shoving this thing as a three and four-bagger .... ... now saying, "yes, the whole market in which Blinkx just happens to be sector leader does look a wee bit fishy, doesn't it?" Perhaps we should have mentioned that earlier. Look, if you had been subject to the sort of detailed attached suffered by Blinkx, you need to come out fighting in a completely transparent manner rather than trying to hint that it's an evil bear raid Shooting the messenger doesn't work. Never do it. Effective silence here just fuels our doubts Anyway, here's Numis (joint house with Citi) to do the "they're independently audited" thing. On January 28th, a US blogger paid by unnamed third parties published a report which raised concerns about the business model of Blinkx. The concerns related to the acquisitions of Zango and AdOn and the Blinkx.com site. Blinkx has released a statement which "strongly refutes the assertions made and the conclusions drawn in the blog post." The group also confirms trading is in line with expectations. In addition to proprietary internal filters, the group uses external verification from Fraudlogix (online verification), Integral Ad Sciences (ad viewability), DoubleVerify (placement level metrics) and Nielsen OCR. These third parties rate Blinkx sites as "low risk" while for visibility it is top quartile. We view the sharp fall in the group's shares as a buying opportunity. Verification. In addition to proprietary internal filters, the group uses external verification from Fraudlogix (online verification, www.fraudlogix.com), Integral Ad Sciences (ad viewability, www.integralads.com), DoubleVerify (placement level metrics, www.doubleverify.co.uk) and Nielsen OCR. These third parties rate Blinkx audience as "low risk" and top quartile for visibility. In addition, Nielsen OCR, which maps audience against Facebook data, recognises over 90% of its audience. We also highlight that Blinkx receives payment upon confirmation of campaign performance, as verified by the originating advertiser based on the delivery metrics of their choosing. Outlook. Blinkx was the best performing UK media stock in 2013 and prior to today's fall traded at 25x March 2014 EBITDA. At its interims in November, it reported revenue growth of +36% against the Olympic comparative, indicating underlying growth of c50%. As with any strongly performing, highly rated stock the group is susceptible to volatility and we view the share price movement as a buying opportunity. People we've not heard from in all this, by the way, are the customers. I'd rather like a testimonial from someone saying "Blinkx really helped me sell a million widgets" If anyone can find me such a thing, I'm interested to read it. They have 30 billion strategic partners, after all. Someone who gives them money must be willing to tell us why. by the way - anyone want details of the next stock in this space being targeted by certain West Coast (shrewdy?) hedge funds?? That'd be very useful, yes ........ Whistles innocently Okay, let's move on What's left to mention Bryce? We can step back out of dot-com-land and into the blue-chips. Though there's not much that's good up there. BT results are what they are. BT Group (BT.A:LSE): Last: 379.60, up 8.7 (+2.35%), High: 386.30, Low: 375.00, Volume: 12.70mBlock What they are is top o fhte leaderboard Bryce Revenue beat. Guidance raise. rearrange that sentence as necessary Just not sure what to say, frankly. It's a good quarter, largely on Global Services rather than retail (though you wouldn't know that from the press coverage) Have we learned anything about the PL rights bidding? The mobile strategy? The pay-tv price war? The cable-cutting trend? The pension? Not really. But perhaps I'm wanting too much from quarterlies. Main surprises - P&L figures ahead but FCF behind. EBITDA guidance slightly upped. Revenue £4,599m (+1.8% ahead of consensus); EBITDA £1,537m (+1.9% ahead) and FCF £554m (c.8.9% behind), dragged down by worse working capital trends. EBITDA guidance upped from £6.0-£6.1bn range to "upper end of the range." FCF guidance unchanged. Revenue & EBITDA beat driven by Global Services (GS). GS accounts for £69m of the £80m beat to consensus on group revenues and for almost all the beat in EBITDA (i.e. £27m of £28m). According to management, GS was "helped by the timing of contract milestones and supported by operations in high-growth regions." Cost savings are (mostly) paying for BT Sport. BT Retail came broadly in line with consensus. This is currently the mostly closely watched business segment as it manages the launch of BT Sport channels. Importantly, cost savings helped to compensate for most of the rising costs in BT Sport (i.e. +£140m) due to content and marketing expenses. Furthermore, broadband net adds came in at a healthy 150k (228k in fibre) driven by buoyant industry trends (+252k, which were 4% above Q3 12/13 levels). Worse working capital trends should not be a concern, being mostly related to the £60m deposit for UEFA broadcast rights. The increase in the pension deficit from £5.4bn to £5.7bn is a negative in a generally positive set of results. The increase in inflation expectations negated positive developments to the pension deficit driven by rising interest rates and buoyant equity markets. 3Q ahead aided by larger-than-expected GS milestones. FY14 EBITDA guidance nudged up (expect cons +0.5%). 3Q EPS beat could translate into 1-2% FY upgrade. But caution that GS is in a sweet-spot this year, with margins already higher vs. peers. FY15 sees key GS projects move into service phase. We'd be reluctant to stretch forecasts, Retail already stretched to justify C.League rights. Upside to FCF possible if capex falls as fibre deployment matures. 3Q results ahead. Revs £4,599m (cons £4,523m), EBITDA £1,537m (cons £1,508m), EPS 7.3p (cons 6.6p). In addition to the c.£30m EBITDA beat, D&A came in £15m below cons (and -£35m y/y). Norm FCF was a bit light at £554m (cons £615m), reflecting working capital move due to a £60m football rights payment to UEFA. Within the divisional mix, GS was ahead on revs and EBITDA, whilst Wholesale had a tough quarter. Retail maintained its robust recent momentum. Group revs ex-transit +2.4% y/y (from -0.5% in 2Q), aided by a high level of GS milestone receipts. BT states group revs ex-transit would have been positive this quarter without that, suggesting milestone effect was £50-100m. tk etc - that's a 5% fall so far. bear market is 20% Robust Retail momentum sustained. Consumer line loss -70k (vs. JEF -85k, last Q -65k). Was -173k this time last year. So no slippage in BT's retail improvement even after launch impact of BT Sport passed. BB net adds 150k (JEF 140k, last Q 156k). Like Sky yday, BT has sustained its momentum beyond the summer. Suggests Talk/Virgin probably squeezed again. BT Sport reports base reached over 2.5m, implying c.0.5m net adds in the quarter (JEF 0.4m). The addition of Sky Movies to BT TV has not done much to accelerate take-up: net adds of 53k (JEF 45k, 2Q 70k, 1Q 23k). Fibre net adds were ahead, however, coming in at 228k (vs. JEF 190k, 2Q 195k, 1Q 197k). Retail revenue growth accelerated by more than expected: +3.6% y/y (vs. JEF 2.6%, 2Q 1.9%, 1Q 0.2%). As expected, the Retail EBITDA trend improved as BT Sport launch costs dropped away, although partly offset by a full 3 months of sports rights costs. Global Services had a strong quarter. Milestone timing effect may have been greater than expected. Rev growth accelerated to +2.6% (from -3.6% 2Q, 1Q -2.0%). Last quarter BT highlighted how a low level of milestone receipts depressed rev trends. We expected that to reverse in 3Q but the 6pp sequential rev growth swing suggests the tailwind was closer to £100m than £50m. Milestone receipts also seem to have boosted the GS EBITDA margin to a exceptional-looking 22.3% in 3Q (JEFe 13.5%, 2Q 10.4%). Wholesale had a tougher time. Relative to cons, revs were 4% below, EBITDA 6% light. The loss of the Post Office consumer BB contract to TalkTalk was known. BT reports that low levels of network build by other CPs reduced demand. Looking ahead to 4Q, Wholesale faces the headwind of Narrowband Market Review implementation. FY13/14 guidance raised in places. BT is still guiding for an improved trend in revs ex-transit (JEFe: -0.7% vs. -3.1% in FY12/13). EBITDA now seen at upper end of £6.0-6.1bn range. JEF at £6,045m. Capex now seen below FY12/13 (prev in-line). JEF at £2.45bn, flat y/ y. Norm FCF target is kept unchanged at c.£2.3bn (JEF £2.35bn). What to look for on the 9am call. (1) BT's plans to enter the low-tier triple-play segment in light of Sky's announcement yesterday that it will bundle NOW TV with BB from spring. PlusNet currently has a triple-play trial underway. (2) Scope for EBITDA margin expansion at GS now that margin-dilutive erosion of switched voice revenue is slowing. Voice now down to sub-10% of GS revs. That said, GS having a good year (benefit from £ weakness) and 12.5% YTD margin already looks quite high. (3) Potential for on-going capex reduction post March 2014, especially as fibre deployment slows (90% coverage likely by late 2015). That's Jerry Dellis. Swedes - it's a loose measure, unspecific Just like 10%"s a correction when it makes a good headline and ignored at other times Cairn, as mentioned on the right, probably needs a mention on the left. Cairn Energy PLC (CNE:LSE): Last: 212.92, down 3.98 (-1.83%), High: 221.30, Low: 212.70, Volume: 1.25mBlock Statement out today saying absolutely nothing, really. It's all rather unsatisfactory, this. The Indian tax case it playing out via the Indian press and Cairn has been able to communicate nearly nothing to shareholders via the official channels. For anyone needing a catchup, JP Morgan has all the detail of what's actually going on. What is in the letter Cairn received a letter from the Deputy Director of the Department of Income Tax on 22/1/14. While the letter contains a number of details, the main point of discussion concerns the difference in value of the entire share capital of Cairn India Holdings Ltd transferred internally under Cairn Energy plc during reorganization (2006) and the value of the same company listed as an investment in the then newly-listed Cairn India Limited. Period of investigation - tax year 2006/07 In 2006, ahead of the Cairn India IPO, Cairn reorganized its Indian assets, consolidating a number of subsidiaries based in several countries into one business, Cairn India Holdings Ltd. In Cairn's 2006 Annual Report, it reported this consolidation in section 33 of the notes to financial statements. This included; 1) A share exchange agreement with Cairn UK Holdings Ltd (a new subsidiary). Cairn Energy plc received 221,444,034 ordinary £1 shares at par in a share for share exchange for the entire issued share capital of: Cairn Petroleum India Ltd, Cairn Energy Discovery Ltd, Cairn Energy Gujarat Block 1 ltd, Cairn Energy Hydrocarbons Ltd, Cairn Energy Holdings Ltd, Cairn Exploration (No.7) Ltd, Cairn Exploration (No.6) Ltd, Cairn Exploration (No.4) Ltd, Cairn Exploration (No.2) Ltd. 2) A debt conversion with a subsidiary. Cairn UK Holding Ltd issued 29,780,710 ordinary £1 shares at par to Cairn Energy plc, in respect of debt agreement between Cairn Energy plc and Cairn UK Holdings Ltd, Cairn India Holdings Ltd and Cairn Energy Hydrocarbons Ltd. In total 251,224,774 ordinary £1 shares were issued to Cairn Energy plc. In Cairn India first annual report in schedule 5 of the financial statement it highlighted long term investments (at cost). There is one item; 251,224,774 ordinary £1 shares in Cairn India Holdings Ltd. Valued at 266,818,710,140 Rupees (equivalent to $4.3bn at today's exchange rate). The difference in value here as noted by the Indian Tax Authority is 245,035,012,588 (converting the par value of shares at a GBPINR exchange rate of 86.71 as per the letter). This is serious wet towel stuff Yup, three levels of exposure here...... CGT, needless to say ...... First - Securities Transfer Tax - if the subsidiary companies were independently listed, these rates (0%, 15%) could be the levied rates on a sale. However, this inquiry does not relate to listed securities. Second - Cairn Energy's gain on the IPO - Cairn recorded a gain of £1,361m on the IPO of Cairn India ($1,984m in Cairn's 2007 Annual report). The proceeds of the gain were distributed to Cairn Energy shareholders (£481m, ~$940m), retained for investment in India by CIL (~$600m), and the balance retained by Cairn Energy plc for investment in its operations (~$440m). We do not see this gain as under discussion but reference it here due to its inclusion in the letter. Now, brace yourself. Here are the hypothetical exposures. And the range is as wide as a bus. Or, in terms of earnings .... Of if that's all TL;DR ..... ....Canaccord summarise on the back of today's very uninformative holding statement. We understand Cairn has not received a claim, making it difficult for the company to quantify the potential magnitude of any impact. Indian press reports point an amount of around $800m (~80p/sh). There remains limited visibility on this issue and we are left in the slightly absurd position of referring to press articles as the only estimate of a potentially large liability. With the company unable to provide a concrete rebuttal at this stage we continue to advise caution. Cairn was already a high risk, frontier exploration story and the risk profile has deteriorated further. Whilst a favourable resolution of this tax issue would result in a sharp upwards move in the shares we find it extremely difficult to assess the likelihood of such a development and remain cautious. We estimate Cairn will need to either dispose its remaining Cairn India stake, or draw down debt, to fund the North Sea development program before year-end 2015. With limited visibility we have chosen to incorporate 50% of an assumed US$800m liability, equating to 41p/sh, in our risked NAV. We have also moved to value the remaining Cairn India stake at a 3% discount to the market value (assuming a modest placing discount) rather than our bottom up analysis, which accounts for a ~30p reduction to our NAV at a 10% discount rate. Incorporating these revisions Cairn trades at 89% of our 241p/sh Central NAV (the value of discovered resources), a premium to the larger E&P's at 79%. We revise our target from 285p/sh to 230p/sh reflecting our Central NAV at a 12.5% discount rate. This one's going to run forever. Indeed, look at the time We mention the wider market We happen to be off 1.3% now footsie down 85 points at 6452 Nevertheless - or maybe becuase of - will share this new West Coast target You will have to do your own research here Cos ive read the document in circulation - but not closely enough to do a post as yet (@Via Con: fx on the VZW cash and AT&T in the cooler for six months. Not sure if there's anything more.) But the company to have a look at is: Blucora, Inc. Oh! Infospace. Will share more on that when we can