FT Alphaville " Markets Live transcript 23 Jan 2012 Markets Live chat transcript for the chat ending at 12:02 on 23 Jan 2012. Hello from the Swiss Alps. We didn't tell you that we're doing ML from Davos this week. In truth it was a last minute affair. Actually, can't keep that pretence going. We're in SE1, as per usual. But we do have a source close to the slopes. I'm talking about Davos De Ville. Filing stuff for us via twatter @davosDeville Socialite, charity patron and non-executive director, Dynamic Emerging Strategic Opportunities (Guam) LLP. If found, please return to @ftalpha http://ftalphaville.ft.com/ Make sure you follow her. DavosDeville Davos DeVille Horrible morning. Got lost on my way to the spa and ended up in a meeting of Global Shapers. They're like Heaven's Gate does Jr Apprentice. 1 hour ago Favorite Retweet Reply DavosDeville Davos DeVille The Global Shapers meeting ended with a chorus of "We Are The World" and a group hug. Was lucky to be carrying my pepper spray. Somewhat lowering the tone of the event, I feel. Sorry flaying around here tryign to get a grip on the euro situation Threatening to go thru 1.30 all of a sudden Baroin says agreeement on greek debt with private creditors seems to be taking shape Not the most obvious of tape bombs, that. Though I guess there's a lot of short euro cash out there just waiting to be shaken. FTSE is trending higher Similar picture across Europe Cac, Dax, etc, all up 0.5% or thereabouts. Think this'll be our fifth "risk-on" day in six. Dollar's at a one-month low against the Swissy. Euro at 1.2988 at pixel time Climbed a cent over the past 30 mins Should do today's China Take quickly China steel production up at new record - 695m tones Up 8.9% in 2011 compares with 9.3% in 2010. More Command Soft Landing stuff. Vedanta Resources PLC (VED:LSE): Last: 1,177, up 31 (+2.71%), High: 1,180, Low: 1,138, Volume: 724.99k Rio Tinto PLC (RIO:LSE): Last: 3,729, up 44.5 (+1.21%), High: 3,733, Low: 3,672, Volume: 975.12k These numbers are from World Steel, not chinese government Well half a correction Numbers from china, via world steel Global steel production last year at 1.527 bn tonnes - up 6.8% vs 15% a year earlier. Bhp Billiton PLC (BLT:LSE): Last: 2,133, up 7.5 (+0.35%), High: 2,137, Low: 2,118, Volume: 1.17m Xstrata PLC (XTA:LSE): Last: 1,093, up 14.78 (+1.37%), High: 1,094, Low: 1,071, Volume: 2.16m but lets look at Ocado Well done. The marketing budget's already paid for itself. News to speculate upon this morning Andrew Bracey has left got a fresh job at Michael page He was the finance director Now, if Ocado was supposed to be a bid target, why's the FD gone now And about the only exec not to have come from Goldman Sachs, I think. So not part of the inner Ocado core So is Michael Page a better job? They've only warned on profits once recently, admittedly. Which is a better record than Webvan. Surprisingly big firm Michael Page very international now Replaces Stephen Puckett, who waas at Michael Page for 11 years Twice the size of Webvan by market cap, I guess. Michael Page International PLC (MPI:LSE): Last: 401.20, down 0.7 (-0.17%), High: 403.70, Low: 397.30, Volume: 140.95k Stand corrected on Bracey's past Is deeper down in the statement With the return of Jason Gissing to the board. He'll be Commercial Director. He's inside the Goldman cabal. A founder, with the glassy stare to prove it. Though, he didn't quite shine during the IPO ..... Those of you with a long memory may remember this wonderful interview with him Ninety-five per cent of the stuff that goes on in my head is completely irrelevant to what really matters. In a way it's important if the temperature in the van's not right, or if we missed this forecast, but actually, when a human being sits down and thinks about what really matters and what has made them happy, that stuff's just noise. I always used to joke to Tim that if we were the Beatles - not that we are - then I'm Ringo Starr. Paul could play the drums better than Ringo, but Paul was busy playing the guitar and singing. But then Ringo married Barbara Bach who was prettier than all the other women that the boys married - and I've got Katinka... I stare at him. Is he saying that his business partner's wife is a dog? And then I remember that the Beatles" drummer was famous for verbal gaffes, and I think they aren't that dissimilar after all. Do read it all. No-one does these interviews like Lucy. Ocado also got a new wo-man on the board - Wendy Becker, ex Vodafone Anyway, bit of comment on developments. Mr Clive Black, unsurprisingly, doesn't see much here to change his mind. We cannot see how such a resignation can be considered anything but bad news for Ocado, the company also announcing that a replacement is being sought. Whilst only our view, that Mr. Bracey has decided to leave Ocado, billed as the next big thing by some, speaks volumes. How do we see these developments? Well, we would be surprised if there is a bid is coming for Ocado. Whilst we must never say never, it would be remarkable to our minds for a executive to leave a company ahead of a bid in our view, particularly the CFO! Ocado made no comment to the market on Friday 20th January following a steep mark up in the shares. Assuming normal procedure on the regulatory front, we must presume that it has nothing to say and that the Board is not engaged in any form of bid talks. As for the management changes, well they do not suggest to us that the non-executive directors" are totally happy with the performance at Camp Hatfield. As such there is a need for meaningful change to presumably sharpen the operating performance of a business that in a short period of time has become a source of repeated and sustained disappointment to us, the market and its investors. We look a the freeing of Mr. Steiner's time to focus on strategic matters with a degree of incredulity. Ocado, once renowned for excellent service if not profit delivery, needs focus on operational issues and tactics rather than strategy, strategy is the last thing that it needs. Ocado's operational focus, to our minds, needs to materially improve the performance ratios at Hatfield (so called customer fulfilment centre one) and effectively commission CFC2 in Warwickshire. Indeed, unless Mr. Steiner is going to seek to flog the business perhaps harder day in day out, we see these two operational matters as being of strategic necessity to the survival of the business in its present form; noting that less than two years since flotation we have growing concerns about the financial robustness of the group having downgraded its EBITDA countless times, and its scope to work within current banking limitations whilst sustaining its investment plans. Indeed, we remain concerned that Ocado may yet need to raise further capital from the market if it wishes to see through present plans. In that respect, we continue to question the long-term viability and attraction of the Ocado business model. The "sell" at the end of that is not strictly necessary, really, given the context. Ocado Group PLC (OCDO:LSE): Last: 85.30, down 2.35 (-2.68%), High: 88.12, Low: 80.00, Volume: 1.68m How about the engineers? Not my strongest area... Who do you have in mind? A fine Scottish engineer of industrial pumps and suchlike. Which came off like a stone on Friday And no-one seemed to have a good explanation why. Weir Group PLC (WEIR:LSE): Last: 1,918, down 36 (-1.84%), High: 1,920, Low: 1,861, Volume: 1.04m Now, however, we have good explanations .... Firstly, a downgrade from Caz. The gas price and rig count data is likely to weigh on the shares in the near-term; Downgrade to Neutral Partially the shale bubble beginning to deflate. Weir has been in the top three share price performers in our universe for the last two years, with the share price up by 167% since 1 January 2010. For 2012E, we expect the group to continue to deliver growth with EPS set to rise 18%. However, given the low natural gas price in the US and high gas inventories, we expect the perceived increased uncertainty about near-term development in demand for fracking equipment to weigh on the share price (and increase volatility) given the high valuation multiples that Weir trades on. Hence, we are reducing our rating to Neutral from Overweight. There are no changes to our forecasts and we are maintaining our 2,300p price target. Oil & Gas Division. It should come as no surprise that the natural gas price is low, as it has been falling steadily since July 2011, and is likely to fall further. As expected, the gas rig count has been falling for the last ten weeks, though the oil rig count has been rising. Overall, we do not expect this to have a significant impact on the near-term prospects for Weir. Longer-term, we expect good growth in US gas production in part helped by prospects for LNG. Please see the JPM Oil & Gas team's note of 13 January (LINK). Our current forecasts for the group include around 15% organic revenue growth at SPM. While we believe the medium term outlook for the fracking business remains bright, the current depressed gas price is raising questions about near-term demand. Earnings for 2011 expected to be at least in-line with our expectations. We expect group revenue for last year to rise by almost 30% to £2,118m, while the EPS is set to rise by almost 35% to 134.6p. We believe there may be upside risk to 2011 profits on the back of the strength in demand for fracking pumps and related equipment as well as strong performance from the Minerals division. Looking forward, we expect the order inflow for the Oil & Gas division to see a marked slowdown in the near-term. Long-term outlook remains bright. We expect the group to deliver double digit earnings growth in both 2012E and 2013E on the back of strong performance in both the Minerals and Oil & Gas divisions. Share Price Following Gas Price Down - Weir's share price is down c12% since 10 January. The largest driver has been the falling US gas price and concerns about the impact this may have on activity levels in the unconventional (shale) gas market in the US. On a P/E of 12.9x12E Weir is at a premium to our sector valuation (11.5x), but more in line with the mining and global oil service peers. We retain a Neutral rating, but could see near-term downside risk if the US gas price continues to decline. While in the sector .......... IMI currently leading us down. IMI PLC (IMI:LSE): Last: 857.00, down 20.5 (-2.34%), High: 866.50, Low: 843.50, Volume: 591.04k Again, sellside driven. It's off UBS's buy list. We still like IMI's self-help story and balance sheet optionality but after the disappointment over Q3 growth, at least versus our expectations, combined with a recently buoyant share price we find it difficult to remain bullish on the stock and downgrade to Neutral. We think the 4% organic growth IMI saw in Q3 deteriorates further into 2012, making it more difficult to keep the margins trending up. Record margins and improved returns on capital are a sign of management's work, but the growth doesn't seem to be there to the extent of other companies in the sector. The diverse business mix, high presence in Europe and the exposure to some cyclical sub-segments makes it difficult to spot the upside and get more bullish. Severe Service is potentially a bright spot given its backlog, as is IMI's exposure to US consumers in Merchandising & Beverage but it's not enough to fully offset more subdued trends in Indoor Climate and Fluid Power in our view. We leave our estimates unchanged but see modest downside risk given declining growth rates in Fluid Power. US peer Parker Hannifin saw orders weaken in Q4 and cut their guidance on both US & International, assuming negative growth in the latter. Even currency moves are probably unhelpful given IMI's euro exposure. IMI is not an expensive stock but the multiples have shifted ahead of the historical average. Our lower price target reflects minor estimate changes (currency) and our view of IMI's lacklustre growth outlook. We downgrade to Neutral from Buy. Have to admit, I can never remember exactly what IMI does. Think it makes drinks machines and air conditioners. Its the Irish management Institute, obv That is partly the issue. Acronym that means nothing. Some quick euro stuff update Germany's Scaeuble denying FT story About the French and Germans sliding on Basel III This is the "false" story. France and Germany are to call for a relaxation of global bank capital rules to prevent lending to the real economy being choked off, setting them at odds with the UK's stricter approach to banks. A joint paper by Wolfgang Schäuble, German finance minister, and his French counterpart, François Baroin, will on Monday call for important elements of the Basel III rules to be watered down to mitigate any "negative effect" on growth. Euro still threatening (but failing) to move thru 1.30 But worth noting alng the way that Italian and Spanish paper tightenign significantly Even Portugal come off the top Anyway, back to stocks Right - early visit to smallcap corner? Does Cove Energy count as small cap? By index it does, if not by market cap. We've had this Thai firm PTT Exploration and Production - confirmed that they are looking at whether to bid for Cove. That was first in the Sunday Times The hot money is saying there are at least three or four potential bidders here. Talking a price of up to 180p Key asest here is an 8.5% stake in Rovuma block off the coast of Moz. Luckily, all this exploration is happening much further up the coast from But we've got a while to wait on Cove. Bidding process doesn't actually get underway until the back end of next month apparently. There's also been talk of a couple of Indian firms being interested in Cove ONGC Videsh - part of the state owned Oil and Natural Gas Corp Everyone want to get into Mozambique euro thru 1.30 finally I'd imagine all the Rovumo partners (bar Anadarko) will be having a look. Mitsui, ENH, Bharat, Videocon ..... Plausible that Total and BG might get involved too. Given they're in Kenya with Cove. It's throw a dart stuff at the moment though, to be honest. okay, we can come back to it Davos, how weird is it We should draw Ms DeVille's attention to Klaus Schwab Burnout is a condition associated with exhaustion, stress, pessimism, cynicism, withdrawal and a bunker mentality. These symptoms are worrying in an individual, but can be disastrous in world affairs. In the run-up to the annual meeting of the World Economic Forum in Davos, there is a distinct sense of burnout in the air. I hope that this year's meeting will help to form a new model of leadership capable of overcoming this malaise. Was looking for Mr Schwab's inspiration for that op-ed piece earlier, printed today in various asian papers.. 30 slides on recovering from burnout Because, when suffering burnout, the first thing you want is a PDF presentation. That's had a terrible effect on us here The song is regularly sung at football matches by supporters of Dundee United, who have adopted it as an unofficial anthem for their club. Vested interest declared. Right - sticking with African oil ... With a bit of Kursdistan in there as well. Afren looking rather poorly. had a good run tho previously Looks like it's travel and arrive. Because there's nothing in the statement that's negative. In fact, there's barely anything in the statement at all. Given they announced a discovery last week. And updated on Ebok at the start of the month. They had zip left to say, so they said zip. Here's Cazenove with the summary of nothing. Production, capex and net debt are broadly inline with Bloomberg consensus although 2012 production of 42-46 kboepd is slightly below our forecast of 50 kboepd. We will revert with any changes to our core NAV of 150p post the CMD although do not expect any material changes given lower net debt than we had forecast. Operational highlights: Afren's 2011 production of 19.2 kboepd is slightly ahead of our estimate of 18.5 kboepd. However, 2012 production guidance of 42-46 kboepd is below our estimate of 50kboepd, partly due to slightly later than expected first production from Barda Rash, where first oil is expected in August 2012. Financial highlights: 2011 sales is expected at c.$600m, slightly below consensus of $642m. Capex for 2011 was $550m, inline with our model. Capex in 2012 is expected to range between c.$450-500m, below our forecast of $575m. Net debt at year end was c.$548m, inline with consensus of $558m. 2012 busy with exploration: Following the Okoro East discovery, announced on Tuesday, Afren has a number of high impact wells scheduled for 2012. The JS-2 exploration well on Ain Sifni (Kurdistan) is drilling ahead on schedule. Two exploration wells on Ebok North and OML 115 are also planned, along with wells in Tanzania, Kenya, and the JDZ. We estimate the 2012 programme could add c.244p unrisked (43p risked) (@Senior muppet, Square Peg etc: please don't talk in tickers. It's too much effort on a Monday morning to try and remember which is what.) A term of endearment used to describe BB share promoters on FT Alphaville. Should mention the bloody banks Aside from RBS, which is at circa 28p... Former Comedybank up 10% Credit Agricole up 6.8% Even mediobanca is up - 5% What time does Eurogroup meet? 1:30pm London time, isn't it? Lorcan put the calander up earlier With Greece, it seems to be a case of worse to travel than arrive Here's some BNY Mellon on Greece etc Summary The FT quotes one banker involved in the PSI talks as saying that the demand by official creditors on Friday for a further average interest rate cut of 50 basis points on new long-term bonds "may have put a voluntary deal out of reach." Comments Although a spokesman for the IIF insisted that Charles Dellara's unexpected trip to Paris on Saturday was for a long-standing social arrangement and that his departure was "in no way a reflection on the (PSI) talks," reports in the press indicate otherwise. As one person with "direct knowledge of the talks" told the WSJ: "Right now there are no talks. There will be consultations with the EU and the IMF to determine where we stand and then we'll see. It has again become complicated with the new demands over the coupon. According to the FT the hold-up came after officials from the European Commission, ECB and IMF called for a lower average interest rate on the new bonds. Although the IIF had already agreed a 4% average on Friday with the Greek negotiators, the representatives of the troika believed that this would not ensure that Greece's debt burden was put on a sustainable path. As a result they called for a new average rate on the bonds of 3.5%, pushing the net present value losses for bondholders from 68% to more than 70%. This, according to one banker present, was "a level that institutions may be unwilling to accept voluntarily." This point was also made by Mr. Dellara himself on Sunday when he stated that private owners of Greek debt had made their "maximum" offer for the losses they were willing to accept. Critically he added: "I think its clear we are at the limits of a voluntary deal." The reason why this mattered was spelt out to the WSJ by a senior euro-zone government official: "We may not be able to reach a deal before Monday's Eurogroup. This is unfortunate because the finance ministers were supposed to have crucial talks on the bailout loan provided there was a deal on the haircut. Or, as Chancellor Merkel and President Sarkozy made clear two weeks ago: "We must see progress on the voluntary restructuring of Greek debt. Otherwise it won't be possible to pay out the next tranche for Greece. However, with Reuters citing an unnamed source as saying that "an agreement is unlikely before next week, if there is an agreement at all," there is every reason to now believe that no approval will forthcoming for the second bailout. The importance of reaching such an agreement was spelt out in no uncertain terms by Greek Government spokesman Pantelis Kapsis at the start of this month when he told Skai TV that "the bailout agreement needs to be signed otherwise we will be out of the markets, out of the EUR." Even if an "agreement" on PSI is hammered out this week (putting aside issues of timing) it will be very difficult to characterise what results as "voluntary." As one banker "involved in the talks" told the WSJ last week: "There is nothing voluntary about all this. We have a gun pointing at our heads. As such, even if a disorderly default is avoided, there is a high chance that the ratings agencies will declare Greece in technical default at some point in March. Beside the very direct impact on Greece and Greek institutions, it is arguable that either of these outcomes would have significant implications for the ECB. Der Spiegel highlighted earlier this month (http://www.spiegel.de/international/europe/0,1518,808998,00.html) that since May 2010, the ECB has purchased an estimated EUR 55 Bn of Greek bonds. In addition the Bank of Greece owes the European central banking system around EUR 101 Bn, likely reflecting the amount lent by the bank to domestic institutions. Little wonder then that Jean-Claude Trichet was warning at his monthly press conference in June that the ECB was "not in favour of restructuring" and excluded "all concepts that would not be voluntary" or include "any element of compulsion." He added: "We call for avoiding any credit event and a selective default. That is our position that we have made clear for a period of time. This then would appear to be the state of play at the start of the week: as things currently stand there is no agreement on PSI and, as a result, it seems unlikely that the second bailout will be authorised by the Eurogroup today. As such, there is now a reasonable prospect that Greece will experience a disorderly default on March 20th and (entirely possibly) an exit from the Euro-zone. Even if an "agreement" is forthcoming, it is likely to be seen by the ratings agencies as a default with all the implications that would have. we'll get a bunch of anonymous sources making the afternoon bumpy with unattributed and vague leaks. Then a presser at 9pm London time saying absolutely nothing. If you want to trade into that, be my guest. Gone from 10p to almost 15p in little more than a week dunno whether we have much to add Well, I thought that too. Simply the "last man standing" theory And management seem surprisingly competent, in comparison to some of their predecessors. But Morgan Stanley has stretched those observations out into an entire 31 page note. And, to be fair, Geoff Ruddell is a very good analyst. He goes Underweight to Overweight Having safely navigated a difficult Christmas trading season, Dixons should be able to refinance later this year. Facing an increasingly benign competitive landscape, we are becoming more confident that Dixons will be a long-term "survivor." Dixons is not out of the woods yet...Dixons is a retail business selling high-ticket, discretionary goods to consumers in some of Europe's most challenged economies. Its balance sheet is stretched, it has too much selling space and electrical sales continue to migrate online in many European markets. ...but it is on the right path, and the terrain is getting easier. However, it has a strong management team, a modernized store estate and a much-improved customer proposition. It is rapidly seeing-off its main competitors in most markets, and we are increasingly confident that it will be well placed to prosper when the economic and product cycles eventually improve. At 14p per share we now see the risk-reward as favourable. We continue to believe that Dixons equity would have only nominal value in a bear case scenario, but believe the probability of this is reducing. In a bull case scenario the shares could be worth more than 80p. We think it very unlikely that the shares will reach that level in 2012, but from a 14p starting point, we think the shares could very plausibly double, or even triple, this year. We think this makes for an attractive risk-reward scenario, so double upgrade our rating The danger of retailers being priced as binary calls, I guess. HMV Group PLC (HMV:LSE): Last: 6.10, down 1.05 (-14.69%), High: 7.52, Low: 5.29, Volume: 40.28m MASSIVE rally on Friday Because it had agreed somehow to be its own credit insurer A remarkably inventive bit of survival improvisation. I'm minded to ask how that works Bryce Much as I'd like to explain, it is indeed Monday. The statement reminded me of that Uruguay rugby team whose plane crashed. Anyway, are we nearly done? should share this Alan Beattie story just out on FT.com\ you know how the IMF were going to bail everyone out... The head of the International Monetary Fund said on Monday the eurozone needed a bigger firewall to prevent Italy and Spain sliding towards default, underlining Europe's responsibility in solving its own sovereign debt crisis. In a speech in Berlin, Christine Lagarde, IMF managing director, said that without a larger bail-out fund, fundamentally solvent countries like Italy and Spain could be forced into a financing crisis. So we need our own bigger bailout fund first or at least the eurozone do titleist 3 - no - there's a trial underway Also, the Polly Peck trial today - Asil Nadir... Thanks for joining today back tomorrow at 11am prompt Yeah - cheers for your comments.