FT Alphaville " Markets Live transcript 13 Jul 2012 Markets Live chat transcript for the chat ending at 10:53 on 13 Jul 2012. Participants in this chat were: Bryce Elder/FT David KeohaneFT And welcome to Markets Live. FT Alphaville's daily thing with the whatnot. Slightly different order of things today. Because New York will be blogging the JP Morgan call live. We're basically just the warm-up act for that. "We," being myself, David and possibly Kate. Murph's off to the States for a week. I'm suffering from tech problems and a hang over. Probably not unrelated. You'll fit right in. Ok - so we're going to knock off slightly earlier than usual today. @Sandyman: you don't. Too dangerous unless you are from the west coast of Ireland. And it's quite busy, all considered. Shrugging off Moody's downgrade of Italy and focusing instead on China. FTSE's up 0.7% or 37 points at 5645. Markets turned their backs on Moodys pretty sharpish. Almost mean actually. Rear view mirror, I guess. real GDP growth slowed to 7.6% yoy from 8.1% in Q1 Which is weaker than the consensus (7.7%) quarterly growth quickened to 1.8% sequentially. And that's apparently more important. Here's SocGen with an overview. While not too much emphasis should be placed on this, it may be a sign that growth has already bottomed in Q1. Note the Q1 quarterly expansion was revised down from 1.8%, although the year-on-year rate was not, but that may simply reflect a re-estimation of seasonal factors. Our forecast remains that the Q2 annual growth rate is likely to mark the low in the current cycle, and that thanks to both monetary and fiscal stimulus Q3 growth will strengthen to around 8%. Meanwhile, monthly activity indicators were also broadly consistent with bottoming out. Retail sales growth was virtually unchanged at 13.7% yoy in June (median and SG 13.4%), after 13.8% in May, but considering that inflation - as measured by the CPI - dropped sharply to just 2.2% from 3.0%, this suggests acceleration in real terms. There was also a stronger tone to the fixed asset investment figures, which indicated growth of 20.4% yoy in the year to June, up from 20.1% in Jan-May. This was stronger than expected (median 20.0%, SG 20.4%) and consistent with 21.2% yoy growth in June alone, up from 19.9% yoy in May. This rebound came despite the continued slowing of property investment spending to 16.6% yoy (YTD) from 18.5% in the Jan-May period, suggesting that public investment picked up strongly in response to Beijing's push for fiscal stimulus. That said, although railway investment spending improved to -36.9% YTD from -41.6% up to May, this was not a particularly strong rebound, especially when considering a very helpful base effect. Further strengthening in these figures is likely in coming months. The weak point of today's data releases was clearly industrial production which slowed to 9.5% yoy in June from 9.6% in May, defying expectations of some strengthening. The data are, however consistent with indications from the PMIs which suggested further loss of momentum. Compared with May, output rose 0.8% (s.a.), after 0.9% mom in May. The slowdown in year-on-year growth was evenly distributed across light and heavy industry, at 9.0% after 9.1% and 9.6% after 9.8%. Noteworthy weakness was reported in electricity production with an outright decline compared with a year ago (-0.9% yoy after 3.2%), though a particularly strong reading in June 2011 contributed to the weakness in the growth rate, which incidentally is also quite volatile from month to month. Still, this indicator is often used as a proxy for growth, and so the reported weakness is a concern. As esteemed foulmouth Kate points out, it's one of these reports where you pick what you want to justify your prestanding view. With that in mind... want a quick bit from HSBC? Taken together, policymakers in Beijing will be pressured to take more decisive easing actions in the coming months to reverse the growth slowdown. While the pick up of investment and credit growth suggest the earlier easing measures are starting to work (chart3), the current strength is not sufficient. As inflation is falling fast, it provides sufficient room for further easing. Following the recent two rate cuts, Beijing still has plenty of policy room to step up monetary easing through additional 200bp RRR cuts for the rest of this year, fiscal easing through additional tax breaks and fiscal spending, and more effectively opening up more sectors to private investors. We believe further easing measures will fully filter through to generate a modest growth recovery of 8.5% y-o-y in the coming quarters. Bottom line: China's 2Q GDP slowed to a three-year low of 7.6% y-o-y. Despite the pick up of investment and credit growth, industrial output and import showed further slowdown, pointing towards downward pressure on growth. This will likely prompt more easing steps in the coming months. Once filtering through, these measures should lift the GDP growth to around 8.5% in the coming quarters. We are revising our 2012 GDP forecast down to 8.2% from 8.4% and our 2013 GDP forecast down to 7.9% from 8.2%. The revision is mainly due to the weaker-than-expected Q2 GDP growth. We maintain our view that growth will likely rebound in H2 and reach slightly below 9% by Q4. While the market consensus expects growth to pick up in 2013, we believe 2013 growth will be slower than 2012 for two reasons. First, the ongoing policy stimulus will likely support GDP growth in 2012, which should lead to positive output gap and cause inflationary pressure in 2013. Monetary policy may then have to tighten, reducing growth. Second, we believe the government may choose to lower its GDP growth target from 7.5% in 2012 to 7% in 2013, which is the growth target for 2011-2015 in the 12th five-year plan. Now Kate tells me the key part here is the possibility that the OFFICIAL target would be cut to 7% next year Eurasian Natural Resources Corp PLC (ENRC:LSE): Last: 402.30, up 8.7 (+2.21%), High: 402.30, Low: 391.00, Volume: 719.37k Kazakhmys PLC (KAZ:LSE): Last: 715.50, up 14 (+2.00%), High: 726.50, Low: 703.50, Volume: 457.69k EVRAZ plc (EVR:LSE): Last: 249.50, up 5.9 (+2.42%), High: 251.50, Low: 244.60, Volume: 189.28k Bhp Billiton PLC (BLT:LSE): Last: 1,783, up 31.5 (+1.80%), High: 1,784, Low: 1,760, Volume: 2.36m Actually, there is a story of sorts around in Kaz and ENRC. All about Kazakhmys swapping its 26% stake in ENRC for Glencore's 51% stake in Kazzinc. Not a new idea, but one that's getting some attention this morning. Partly because ING's done some work on it. Overall, we find any potential deal would likely generate operational and capex synergies, as well as an improved growth profile for Kazakhmys. On our estimates, such a swap would warrant an equalisation payment to Kazakhmys since the proposed IPO of Kazzinc's gold assets is no longer likely to generate additional value, in our view. Asset swap more likely than cash sale of ENRC stake: A cash exit appears unlikely following ENRC's poor share price performance, in our view. Kazakhmys has little need for additional cash as its balance sheet is strong and its key growth projects enjoy low-cost Chinese funding. We believe returning cash proceeds from any potential sale of ENRC to shareholders could also result in Kazakhmys being relegated from the FTSE 100 index. We think management would rather swap Kazakhmys" minority stake in ENRC for a controlling stake in additional base metals assets in central Asia. Glencore still expects to acquire additional Kazzinc shares despite delay: While we feel comfortable that Kazzinc would be a good strategic fit for Kazakhmys, Glencore might not, of course, be a seller. Glencore has already agreed with Verny (announced at Glencore's IPO) to increase its ownership in Kazzinc from 50.7% to 93% for US$3.2bn. However, we note that the average equity value of mid-tier zinc producers has almost halved since Glencore's IPO, while the intended IPO of Kazzinc's gold assets is no longer likely to generate additional value, in our view. Relative valuation suggests an equalisation payment to Kazakhmys: Our NPV estimate for Kazzinc (100% basis) is US$4.3bn, valuing Glencore's 50.7% stake at c.US$2.2bn. Our NPV for ENRC (100% basis) stands at US$10.2bn (US$7.92 per ENRC share), valuing Kazakhmys" 26% stake at US$2.65bn. Our fair value estimates suggest Kazakhmys should receive an equalisation payment from Glencore of c.US$0.5bn in addition to the asset swap. Is Kazakhmys still a SELL? We think the potential for a value-accretive exit from ENRC remains too speculative at this stage, and we maintain our SELL recommendation for Kazakhmys. We continue to believe the market is underestimating Kazakhmys" costinflation problem and consensus EPS is too high (albeit falling rapidly). Our 630p target price represents a 15% discount to our NPV estimate for the company. @Nobby: well summarised. Before we get too far from China I might throw this link in: http://www.alsosprachanalyst.com/markets/chinas-fx-reserve-accumulation-and-eurusd-revisited.html?utm_source=dlvr.it&utm_medium=twitter Go on ... What's that about? Its China's FX reserve accumulation and euro dollar Simple enough trend. looks like a ski slope Interesting theme. Euro's $1.2198 in the middle at pixel time. German 10yr's 1.231, fairly flat. Credit market quite calm, relatively speaking. And start on the fallers board, I think. G4S PLC (GFS:LSE): Last: 273.90, down 9.1 (-3.22%), High: 284.20, Low: 272.40, Volume: 3.15m Having become a political football. Over its failure to find 13,700 warm bodies to protect our sports day. In terms of impact ...... Dunno. The actual Olympic contract's about 2% of sales this year. Have to assume there will be fines to pay. But the bigger worry is the 10% of sales G4S gets from the UK public service. Exane's run the numbers as best it can .... On 12 July, the UK government announced that the military will have to provide up to 3,500 extra troops to guard the London Olympics after G4S admitted that it would be unable to supply all 13,700 guards it was contracted to deliver (c.4,000 people at work across 100 venues and 9,000 more are going through the final stages of the required extensive training, vetting and accreditation process). G4S, which has encountered some issues in relation to workforce supply and scheduling (delays in progressing applicants through the final stages), still believes it can get close to the numbers required but understands the government's decision to provide back-up security. The government has warned that G4S will face financial penalties for failing to provide enough staff for the London Olympics. Although it is difficult to speculate on the impact at this stage, it is worth noting that the total contract is worth GBP284m (o.w GBP200m booked this year, mostly skewed to Q3) or c.3% of group sales and less of EBIT. G4S said that there are no indications that there would be any significant financial impact on the group. Admittedly, the mismanagement of the event is a negative for G4S, which has a good record in managing contracts. G4S explained it by the unprecedented and very complex security recruitment and deployment exercise which is being carried out to a very tight schedule -the London Olympics is the first major event to have security outsourced in this way. Beyond this specific event, the key question is to assess if this failure could impact G4S's ability to win other UK contracts, and notably with the government, a key element given the strong bid pipeline in this region (45% of total pipeline ow 20% with the government). Beyond the short-term negative buzz around the Olympics problem, we believe that G4S remains a compelling equity story, given 1) its growth prospects thanks to a strong EM exposure (30% of group sales) and niche segments and backed by a strong bid pipeline (GBP3bn net of renewals for the next 12 months); 2) attractive valuation versus peers and history (G4S trades on 10x P/E 2013e and 9x EV/EBITA 2013e versus respectively 12.4x and 10.5x historically). A consensus long, G4S. Lombard went clairvoyant if anyone is interested: http://www.ft.com/cms/s/0/1b6caee0-cc11-11e1-839a-00144feabdc0.html "I've seen gentler water boardings." Ok - galloping though today ..... Question to the right regarding ITV ITV PLC (ITV:LSE): Last: 75.05, up 2.8 (+3.88%), High: 75.70, Low: 72.60, Volume: 4.37m Now, a lot of old stories are being retreaded at the moment. Post the Aegis bid, I think. Which took two decades to arrive. And, incidentally, it'd be shockingly brass necked to try and claim Aegis as RAW, but we did note rumours in May that someone was looking. Fitch has a note out on bolt-on M&A post Aegis actually Oh, does it? Fire away. Dentsu's GBP3.2bn acquisition of Aegis creates a viable fifth global advertising holding company, and emphasises the importance of digital expertise to the sector, Fitch Ratings says. But we expect bolt-on acquisitions rather than large company takeovers of this type to remain prevalent. Dentsu's move therefore does not signal an increase in major M&A risk in the sector. In bringing significant international exposure and strong digital capabilities to Dentsu, whose revenue has mostly been generated in its domestic Japanese market, the transaction should increase competitive pressure on Interpublic Group (IPG), Omnicom, Publicis, and WPP. Thirty-five per cent of Aegis Media's revenue is derived from digital or online businesses. The need to grow in new markets and add digital capabilities will drive further M&A activity in the sector. However, we would expect this to consist of smaller (albeit sometimes substantial) deals such as WPP's GBP350m acquisition of a majority stake in digital agency AKQA, announced last month, and Publicis's move to take full control of Bartle Bogle Hegarty, completed early in July. Consensus seems to be that Havas is now the most vulnerable of the listed ones. One reason is simply that, with Aegis off the table, there is one less large target company. A large proportion of industry revenue is concentrated in the global, diversified ad agencies, which have already engaged in large M&A to become global operators. This has not precluded major takeovers, such as WPP's 2008 acquisition of TNS. But the emphasis has shifted towards bolt-on deals that, because of the fragmented nature of the industry outside the top five or six agencies, will always tend to be smaller. In addition, both WPP and IPG, which we affirmed at "BBB+" and "BBB," respectively, in March and April, have indicated that they can exercise financial discipline, and that management has a regard for their credit profiles. At WPP, for example, financial policies were reined in following the TNS acquisition, with limits placed on future M&A, dividend growth and share buybacks. We expect the AKQA deal to add 0.1x-0.2x to WPP's average net debt/EBITDA metric, which is likely to remain within the company's target range of 1.5x-2.0x. This change has no ratings impact, while the acquisition adds further depth to WPP's already good digital position. We expect IPG to manage unadjusted gross leverage at a level below 2.5x, and are comfortable with management's ability and willingness to maintain its rating. apols for giving a rating agency attention No worries. It sums up the sector quite well, for a ratings agency. As for ITV specifically though .... I'd highlight Comcast's deal to sell its 15.8% stake in A&E Networks Which owns the History Channel and suchlike. Disney & Hearst paid $3bn Which sticks a $19bn value on a content business that, I'm told, generates $1.5bn-ish in sales a year. All of which is rather positive for the sector. That, I think, is why ITV's been seeing some support. Though I won't be surprised to see the usual PE rumours tomorrow morning. Elsewhere on Friday raw. Usual noise around Shire. Shire PLC (SHP:LSE): Last: 1,881, up 17 (+0.91%), High: 1,888, Low: 1,865, Volume: 341.45k And paper readers will see we reheated the Diageo / Moet theory this morning. Diageo PLC (DGE:LSE): Last: 1,672, up 7 (+0.42%), High: 1,675, Low: 1,661, Volume: 580.36k Think there has to be management change at either or both before anything can happen, which makes it a 2014 story. However, I mention Diageo because there's a rather smaller story around. Some talk that they might buy a stake in United Spirits 10% for $240m or thereabouts. This is the Indian spirits maker. With some brilliant brands. Whiskies including Bagpiper and Black Dog. Vodka such as Pinky and Romanov. Oh, and White Mischief. Anyway, I note it in passing. I can confirm that Black Dog works We need something that sounds Scottish. Ok - bagpipes and a euphemism for depression. That'll do. Decent note out on game theory in the €zone if you fancy it? @Sandyman: D3 surely, though there remain some rumours of the SFL vote being bypassed in the football equivalent of force majeure. Game Theory! Yes! Bring it on. The cost of insuring against EUR tail risk has fallen sharply over the past month. The EU Summit has persuaded many investors that the negative consequences of a euro breakup are so great that politicians will pay whatever price necessary to avoid it. We have reservations about the soundness of this logic and view EUR tail risk premium as mispriced Jarvis2009: midday or thereabouts. We make our case by using game theory and a cost-benefit study of the relative incentive for a voluntary exit. Our analysis leads to three surprising conclusions.One, Eurobonds are not a Nash equilibrium. Two, while Germany and Austria have the least incentive of any eurozone countries to exit, Italy and Ireland have the most. Three, Germany's incentive to pay other countries to stay is more limited than meets the eye Our analysis suggests that only a much weaker euro can reduce the breakup risk by reducing the incentive for exit and buying time for reforms. We feel that the downside to our near-term 1.20 EUR/USD target is increasing, especially given the low level of US real yields that will reduce the impact of further Fed easing on the USD. We initiate a new recommendation to buy a 6m EUR/USD 1.10 onetouch option that has a 5 to 1 payoff. On to some Prisoner's Dilemma The prisoner's dilemma problem can help us better understand the dynamics of the eurozone crisis, in our view. Below (Table 1), we present a highly abstract, stylized form of the game that Germany and Greece have been playing for the last two years. Greece is given two options: austerity or no austerity. Germany also has two options: Eurobonds or no Eurobonds. For each of the four possible outcomes, we assign a certain payoff for each country that is meant to be illustrative, but captures the essence of the different political/economic considerations of the two countries. As the payoffs in Table 1 imply, both countries would fare better if they choose to cooperate (Greece agreeing to austerity while Germany agreeing to Eurobonds) than if they do not cooperate (no austerity and no Eurobonds). However, Greece would be even better off if it chooses no austerity but Germany agrees to Eurobonds. Similarly, the best outcome for Germany is that it opts for no Eurobonds but Greece chooses austerity. We assume that neither country knows what the other country is going to do before it has to decide on a course of action. It is easy to see that the Nash equilibrium is no austerity and no Eurobonds (uncooperative equilibrium). This is because from the point of view of Greece, regardless of what Germany chooses, it will be better off if it opts for no austerity. Similarly, from the point of view of Germany, regardless of what Greece does, it will be better off if it chooses no Eurobonds. As with the Prisoner's Dilemma, no austerity and no Eurobonds can be shown to be the Nash equilibrium (using backward induction) even if we were to allow for the game to be played repeatedly. In our view, the fact that the dominant strategy for both countries is not to cooperate is why more than two years into the crisis Greece is not closer to implementing a credible reform program and Germany is not any closer to agreeing to Eurobonds (Chancellor Merkel and Minister of Finance Schäuble were both quoted recently as saying that Germany will not agree to shared liabilities in their lifetime). The obstacle is that neither side is able to make a credible pre-commitment to doing the "right thing," to the extent that there is no enforcement mechanism to ensure that each country lives up to its promises. Indeed, to the extent that any trust and good faith among eurozone members is slowly wearing out, the probability of a benign outcome of the peripheral crisis, at least for Greece, is rapidly declining. A German poll conducted after the EU summit found that 49% of Germans want Greece to quit the single currency. The lack of an enforcement mechanism is why the Germans are demanding that fiscal union will have to precede Eurobonds. Fiscal union, by taking fiscal policy out of the hands of the national governments, solves the pre-commitment problem. However, very few eurozone countries are willing to entertain the notion of giving up their independent fiscal policy, especially given that, as members of the monetary union, they do not have recourse to an independent monetary policy. This may be why France appears to be more hesitant than Germany in terms of wanting to move quickly towards deeper European integration. @Anthrax: when you said that, I read "astronomy's allowed buy astrology isn't?" That's the last of that as the formatting is a pain. Will bung in the usual place later if anyone is interested OK - JPM hitting the tape. We do not endorse Bryce'd idyllic TA retreat etc That's the CIO hit, needless to say. But we won't focus on this because ML NYC will be in shortly to pick on the baton. I refuse to leave this without mentioning http://www.bbc.co.uk/news/business-18813208 The Republic of Ireland's growth rate last year was double previous estimates at 1.4% but this year started badly, official figures show. The revision to the 2011 figures came after the final quarter of last year was shown to have grown 0.7%, rather than shrunk 0.2% as had been thought. It means Ireland escaped technical recession last year - two consecutive quarters of negative growth. Although I can't make up my mind if I'm happier with the revision or irritated by its need Yup check back in for US ML later. Should be good Ok - that's us nearly done with the intro to today's ML epic. Invensys mentioned on right. AGM today. Haven't heard anything particular that's worth sharing. Oh, and should mention Booker. Looks like they're Kervieling the problem. And that's not me suggesting any impropriety by anyone, obviously. Cash and carry. Shore downgrade. Good company. Too expensive. Here's the note. A leader in its field... Booker is an excellent company, a market leader in its field, which if anything is pulling away from the pack in its day-to-day activities, operations, attention to detail and efforts to fulfil its customers" requirements in the British wholesale catering and retailing markets, plus with a little Indian action to add some "spice" to the story. That lead could widen further, if anything, through the acquisition and integration of Makro in the UK from Metro AG (MEO-F, No Recommendation, Coverage Not Pending at €23.50), which is taking a near 10% stake in Booker as part of the transaction (see attached PDF of the 30th May 2012). ...with a leader in his field Booker is a cash-rich business with March 2012A balances of c£63m (we forecast March 2013 balances of c£64m) that has a bright future to our minds doing more of the same: organic growth augmented by selective acquisition. Booker's transformation from a debt-laden near-collapsed entity to its current strong financial constitution is in no small part down to its Chief Executive, in our view - Charles Wilson, whom we hold in the highest regard in British food retailing. Indeed, to our minds, Mr. Wilson may in time enter a hall of fame that contains the likes of Sir Kenneth Morrison, Sir Terry Leahy, Lord John Sainsbury and Archie Norman - noting as we do that Mr. Wilson has assembled a strong team around him to execute his plans. Are the ratings becoming too fulsome? Whilst all this is so, and as thrilled as we have been to chronicle the progression of the company and its share since its reversal into Blueheath and subsequent relisting, we do believe that Booker's shareholders need to keep a watchful eye on valuations. Booker stock has considerably re-rated, decoupling from the increasingly challenged asset-heavy, or is that rich, superstore operators. On our 2013/14F Booker financial forecasts, post the integration of Makro UK, the stock at its current 92p share price trades on: · PER of 18.2 times (x) · EV/sales of 0.3x · A prospective yield of 3.3%, covered 1.7x by EPS For 2014/15F, when we assume full integration of the Makro estate and apply Booker EBITA margins (forecast at 2.6%) across its sales base (we assume 6% annual growth, ahead of core Booker), we forecast group operating profit of £133.5m. Our model does not assume any benefit to gross margins or revenues from the closer relationship with Metro. Quite where "fair value" rests for Booker's shares is a matter of debate. Growth rates are good, cash continues to build though asset support is modest, as are the EBITA and EBITDA margins (Shore Capital forecasts 2014/15 margins of 2.6% and 3.0%, respectively). With this all in tow we do continue to argue that Booker's equity merits premium ratings to its UK quoted retail peers; a share price of 75p (c18.5% below the current price) places the stock on a 2013/14F PER multiple of 14.8x and an EV/EBITDA ratio of 9.0x; an implied yield on a 1.7x covered by earnings DPS of 4.0%. We would be much more comfortable with such metrics and premium than the current highly elevated levels, repeating as we do the virtues of this very well-managed and likeable company. That's the ever excellent Clive Black. Booker Group PLC (BOK:LSE): Last: 88.70, down 2.6 (-2.85%), High: 91.60, Low: 86.60, Volume: 3.17m Ok , rabble, save the JPM chat for ML part 2, which will be starting shortly. Cardiff and Joseph liveblogging the conference call. In the meantime, thanks for all your comments. This entry was posted by support on Friday, July 13th, 2012 at 11:00 and is filed under Uncategorized.