FT Alphaville " Markets Live transcript 2 May 2012 Markets Live chat transcript for the chat ending at 11:10 on 2 May 2012. Participants in this chat were: Bryce Elder/FT Izabella Kaminska Welcome to Markets Live. How many of these have I done? It must be nearing a thousand ..... Anyway, we're without Paul again. He's still flat on his back. So Iz kindly joins us from Geneva. You logged in yet, Iz? sorry for some reason not popping up seems to be working now Hiya indeed. And hiya rabble. Where to start? The overview is traditional. Didn't we have a 2007 level on the DJIA last night? @Soundbuy: Max Hastings used to host morning news conferences lying on his back on the carpet when at the Telegraph. So there's precedent. Yes - the Dow passing a psychologically whatever watermark. Off 30 points at 5781 at pixel time. Is it me, or has London totally broken away from the pack recently? doing its own thing entirely? Financials sliding, BP still out of favour. Few ex-divs, though nothing that weighty. As Bluesky notes, strong sterling's becoming a real problem. $1.6193 in the middle. Which is bad news if you're flogging £2k raincoats to Chinese tourists in Macau. not what the BoE wanted at all So why is it soooo strong? Apart from the Swiss. Which it's now a kind of proxy for. have to continue shopping in France You're caught in a perfect storm, at least in terms of grocery shopping. Anyway, we can push back to the macro in a bit ..... Can I get the day's main source of panic out of the way? Cable & Wireless Worldwide PLC (CW.:LSE): Last: 33.68, down 1.32 (-3.77%), High: 35.38, Low: 33.25, Volume: 5.06m Been battered with emails from the arbitragers all morning. Has Vodafone pulled, is the bid off, WHAT'S GOING ON HELP??? To remind, we're now down to 35.3p against a 38p offer. Which is simply too wide. And the cause is, probably, this Orbis, Cable's 19% shareholder Sounding off once more. we are evaluating our options, including remaining a minority shareholder in CWW as we did in Oce after Canon's bid, knowing very well the risk that Vodafone may withdraw its offer and CWW's share price may fall in the short term Ultimately, we shall endeavour to do whatever we believe is most likely to create long-term value for our clients, even if this comes at the cost of the short-term price volatility Which doesn't say they'll vote against, but is as close as they've come. And with CWW only sitting on 18.58% acceptances (as of Apr 23, when the deal was announced) This is all getting a bit more risky. Personally, I think Orbis should be adding Vodafone to its Christmas card list For giving it the opportunity to close out of a woeful investment with a little dignity. And, just in case there's any doubt, our enquiries this morning suggest nothing regarding Vodafone's offer has changed. This is just a nervous market, with too much money on the margin. Ok - that's that out of the way. Onwards. Well, it's retail day in the UK And, without wishing to play gender stereotypes: you go shopping, right? yes. but less so nowadays because i can't afford gucci (@yogabba: No. Haven't. Don't think we will either. Sigh.) Or order from Next Directory? I know ... it's baffling ..... People with children, I guess. Anyway, the "never bet against Next" theory holds once again. Next PLC (NXT:LSE): Last: 2,962, up 66 (+2.28%), High: 2,976, Low: 2,930, Volume: 520.40k Forecasts have been damped (excuse the pun) by the rain. And LFL was just about as bad as expected. They had a bad comparative as well Precisely. And a late Easter, and good weather in 2011. And retail shows all that. But the're doing a buyback They're always doing a buyback. There's some stat that if they keep buying back at the current pace they'll have retired their entire share capital by the end of the decade, or similar. There will be one share left, costing £15bn. They are squeezing their own shares There should be a law against that sort of thing Anyway, here's Merrill with an overview of the numbers. Though Merrill was on the high side of consensus. NEXT LFL DISAPPOINTS, DIRECTORY REASSURES Next has reported slightly weaker than expected sales for Q1 with Next Brand sales +1.4% versus our +2.1% estimate and consistent with Spring/Summer 2012 (SS12) guidance of +1% to +4%. Next Retail sales were weaker than expected and Directory in line. Full year guidance is unchanged with a PBT range of £560-610mn based on sales up between +1% and +4%. BofAMLe sales +3%, PBT c.£600mn. So far Next has bought back £36mn (1.3mn) shares out of its £200mn target and now expects full year EPS accretion from this and tax of 6% rather than 5% previously. NEXT RETAIL - SOFTER THAN EXPECTED Next total Retail sales were down -3.9% yoy vs our -2.8% estimate and SS12 guidance of -3% to 0%, with implied LFL sales down c.-8% vs our -6.5% forecast. At the FY12 results in March CEO Simon Wolfson gave a balanced macro outlook, with potentially an end to falling real wage growth in Q3 offset by stalling employment and potentially tighter credit conditions in the UK. Q2 comps are less demanding and stock levels are running slightly ahead of last year and consistent with the growth in sales. Next has seen little change in its product costs, gross margin or selling prices in Q1 and expects this to continue into Q2. Overall we think Next's Retail business like others in the sector is forming a broad base and should improve slightly in H2 as inflation pressure on consumers falls. NEXT DIRECTORY - IN LINE WITH EXPECTATIONS Directory reported sales +11.8% yoy broadly in line with our expectation of +11.5% and SS12 guidance of +9% to +12% yoy. Next is making further improvements to its Directory service in terms of delivery options and cost and time of picking. It should also be seeing some benefit from strong international sales where it charges higher prices and offers free delivery and paid returns. However the comparable base becomes much tougher in Q1 (+15% last year for Q1 FY12 vs +6% in Q4 FY11). Or, to summarise, never bet against Next. Whatever you think is going on out there, Wolfson just keeps on delivering the figures. like they manage their share price a bit too much they are operating the central bank of next shares strategies (@Pi1010: it's a Reliant Robin. That's like calling it a Cortina Ford. Yellow card, because I'm a pedant who's in a bad mood.) Collins, our weekend firebrand, is very vocal on the subject of share buybacks. "Paying shareholders to go away at the cost of those who remain," I think his phrase is. Though, to be fair, Next's one of the few that's done it right. Nearly every other company's bought out of the money. Well they seem to be consistent Irritatingly well managed business, from our perspective. Home Retail Group PLC (HOME:LSE): Last: 91.10, down 9.9 (-9.80%), High: 100.00, Low: 90.70, Volume: 5.01m After what appear to be in-line results. Though that's in line against very low expectations. And you may have spotted a Kleinmanwire story over the weekend About them bringing in some firm for in independent review of Argos ..... yes i did see something about that Liberum's Simon Irwin made the excellent point that the story effectively kicked any change into 2013. What's the general consensus on Argos? Is it a model that can still work in the 21st century internet retail age? Too many stores, too much exposure to consumer electronics Where the price deflation's horrific. So they're reviewing the network ...... The review takes six months, implementation takes another year ..... right. Though it used to be the only place in the world where you could get really odd household items Like garden trampolines Apart from the internet. well nowadays we have the internet Im talking about back in the day. Well, back in the day Home Retail was a FTSE 100 company and a PE target. And, as said before ... the internet has no geography. In that case, why would anyone CHOOSE to shop at Argos. Because they like stealing those little pencils? They never work. The ones in bookies shops are much more reliable. Long William Hill, short Home Retail. A pencil pair trade. So, anyway, here's Liberum again. With its take on the figures. Home Retail FY numbers were slightly below our expectations, which were marginally revised up with 4Q sales. So clean PBT for the 52w period was £102m, EPS 8.7p -59% Y/Y (LC clean PBT £105m EPS 9p). The divisional split showed Argos EBIT £94m (vs £219m) as expected, Homebase EBIT £23m (vs £48m) marginally better than expected but central costs slightly higher. Y/E net cash was £181m (£194m after 53 weeks) in line with prior guidance. The biggest unknown with the results was the dividend. After paying out a maintained, but just 1.9x covered, 4.7p at 1H, there was no final payment, cut from 10p and vs our forecast of 4p. There is no commitment to what levels future dividends will be set at. The "leak" on Monday about the employing OC&C for a root and branch review of Argos had already prepared the market for a lack of concrete action so it is marginally less of a shock that there is almost nothing in the statement about what management is going to do to arrest the decline in sales and profitability. c10 Argos stores will be closed in 2012/13 but we already knew that. Consequently it still appears that any significant degree of change is now unlikely until calendar 2013 and it is by no means clear that the company has any idea what it intends to do. ("Leak"? On Kleinmanwire? To be clear, we do not endorse this suggestion.) In the mean time current trends in both Consumer Electronics and DIY are probably very weak. The outlook statement reads very gingerly for the year ahead, and draws mostly on reliance of macro recovery, which rather misses the point that it is suffering from significantly negative product trends, increasing competition and significant changes to the distribution model for many of Argos's core products as well. On current forecasts (PBT £77m, EPS 7p), the shares are on 14x current year PER and it is more than likely that forecasts will fall further. Although the balance sheet is optically strong, the net cash could easily be swallowed up by restructuring given lease liabilities of £3.6bn and the fact that two thirds of the £530m loan book is being used to provide free credit for Argos. And let's get away from this idea that Home's cheap. Here's Philip Gordon at Panmure Our below consensus numbers suggest a FY2013 P/E of 17x and a lease-adjusted EV/EBITDAR of 6.1x. We think that Home Retail's valuation does not take into account the potential costs of change, nor the possibility that it is too late for Argos. We therefore remain sellers, with a target price of 60p. While bulls will point to the upside if a sustainable strategy for Argos can be created and executed, we think that this will be difficult. Also, we are not great fans of SOTP calculations, especially in situations where there are substantial lease obligations (£2.9bn in the case of Home Retail). That's a recovery rating for what many feel is a structurally broken model. And all the garden trampolines in the world won't change that. With a new MD in place at Argos, we expect that its strategy will change significantly, just not yet, given that consultants have only recently been appointed, so we don't expect any interesting developments at today's analysts" presentation. We believe that Argos will need a significant store closure programme, as it shifts towards "clicks," rather than "bricks," it will need to match amazon on price and it will probably need a rescue rights issue to finance change. To be clear, we think that a store base can be an advantage in an online world, we just don't think that Argos needs 750 of them on a five year view. Needs a "rescue rights issue to finance change" ..... Nice point about the stores And fighting with Amazon on price is nigh impossible, isn't it? A lot of what Amazon sells makes Amazon no margin whatsoever. seems like the advantage they have is the store.. ppl can get the good asap. Great if a volcano blows up again. but too many stores = overheads. And shame they have no margins on the products they sell. Can't they just outsource storage to Ocado? An internet food retailer that many believe is the second coming of Webvan. Loss making yet valued at close to £1bn on flotation. Ocado needs to get its own Willy Wonka warehouse working before subletting the space to others, I suspect. However .... Home Retail Group's a volcano play. That's as good as buy case as I've heard recently. Actually, since we're on the theme .... One last thing on retail. Marks and Spencer Group PLC (MKS:LSE): Last: 357.40, down 0.3 (-0.08%), High: 360.81, Low: 355.90, Volume: 1.23m Says its internet strategy's now good enough. Well, it's the usual argument about shopping moving online And not moving to M&S, because they have no real presence In spite of the considerable efforts of the highly paid Ms Laura Wade-Gery no presence on online? Oh, I'm sure they have a website. But have you ever been on it? I haven't. but the experience was disappointing Because they didn't have enough inventory up there Assuming you're still at M&S. We have to check on a weekly basis. Ah - the old "out of stock" problem. At which point you go to Amazon. they had about 20% of the items online which they have in the stores expecially on the furniture section Can i just say one thing about M&S, which I think is pretty innovative tho i don't know how they are going to make money from it The clothes recycling thing? Joanna Llumley adovacting the big trend in clothes recycling Admirable, yes. And good for the brand. It's a "sustainable green" strategy making you feel evil and non-sustainable if you dump clothes Agree. As a Guardian reader I applaud the initiative. But as an FT reader I shrug and ask where the money is. Anyways. Here's Macquarie. We downgrade Marks & Spencer (MKS) to Underperform from Outperform, with a new £3.20 price target. The internet accounted for c70% of marginal clothing and related purchases in the UK in early 2012. We believe consensus underestimates the impact of the resultant structural decline in store densities on margins. Coupled with a muted short-term outlook for the consumer, this structural challenge leaves us c5% below consensus PBT and c4% below EPS for 2012/13. Since 2007, we estimate that internet and non-store-based sales have accounted for 71% of the growth in UK ex fuel retail sales. Internet sales have grown at a CAGR of 27% vs just 0.9% for store-based sales. In early 2012, c70% of every marginal £1 spent in the UK on clothing, footwear and textiles was spent online. At MKS we estimate in-store General Merchandise LFLs were -3.1% in 2011/12 and forecast a further -1.7% in 2012/13. Not only is consensus, on our analysis, looking for -1.2% in-store LFL, we think it also materially underestimates the impact of these negative LFLs on profitability. We estimate that our UK EBIT (ex M&S Money) margin estimates are some 40bps below consensus. Lower in-store like-for-likes have pressured margins and M&S have responded well through improved sourcing and various efficiency measures. However, with Tesco's staffing woes still ringing resoundingly in our ears, we have to question how much longer cost cutting can delay the inevitable. Despite increasing internet sales and the growth in employee dense food areas, M&S has seen its UK employees/sqft fall 14% since 2007. We estimate the John Lewis Partnership has c80% more store staff per sqft/selling space. With customer service the key competitive advantage vs internet rivals, and 2011/12 a very strong year for UK Opex cost cutting at MKS, we think consensus is too ambitious in its implied cost cut estimates for 2012/13. Despite the respite from falling cotton prices, rising emerging market wages and muted UK consumption environment mean we do not see any tailwind for 2012/13. MKS's valuation vs historical averages looks unchallenging at 10.6x FY13E PE vs the 5 year average of 11x. However, with an enduring structural threat to c85% of the UK GM business, we still see downside risk to the multiples. We value MKS at £3.20 (vs £4.00 previously) on a DCF basis, implying an FY1 PE multiple of 9.5x. @Mannering: take your bromide and go have a lie down. Ok - that's 46 minutes on retail. We should probably take a look at something else. ....... though I'm struggling to think of what. The bank that's not fit for purpose. Mainly because of a loss on their own credit Here's the bit from their statement Net profit attributable to UBS shareholders was CHF 827 million in the first quarter of 2012 compared with CHF 319 million in the fourth quarter of 2011. Pre-tax profit improved to CHF 1,304 million from CHF 481 million, reflecting increased revenues before own credit across all business divisions and the Corporate Center. The first quarter included an own credit loss on financial liabilities designated at fair value of CHF 1,164 million, primarily reflecting the tightening of our credit spreads over the quarter, compared with a loss of CHF 71 million in the prior quarter. In addition, the first quarter included a debit valuation adjustment loss on our derivatives portfolio of CHF 53 million compared with a loss of CHF 189 million in the fourth quarter. They are still trying to shrink their balance sheet as well But the credit loss was a bit of a whopper Though the private bank.. which is what they are focusing on now, did gain CHF6.7bn in fresh assets What was the phrase Neil Hume used to describe Newco UBS? Julius Baer on steroids. wasn't it? They are also doing well on meeting Basel III risk weightings ha .. that's a good description It made a lot of people very annoyed. Some of which may have worked in Broadgate Circle. Just reading some comment. UBS is being valued at its tangible equity value? I'd have assumed a discount. Though, I guess, not a wide one. Anyway, thanks for all that. To be honest, I gave up on a post on UBS because apart from the credit loss, it was kind of boring There's only one really interesting thing about UBS now, and it's happening in Southwark Court. Anyway, let's move on. Commenter @PoliticalMarkets mentions Herbalife .... Which was Einhorned last night. googling quickly.. tho remember some mention of Herbalife on Twitter yesterday (Reuters) - Shares of Herbalife Ltd (HLF.N) fell as much as 21 percent, wiping out about $1.8 billion (1.11 billion pounds) of market value, after influential short-seller David Einhorn questioned why the nutritional supplements marketer had stopped disclosing details about its distributors. He came in to ask about disclosure Ah, nobody cared about the details But we can start doing it again... no problem The prominent short seller Mr Einhorn basically hijacked the Q1 conference cvall. With a bit of "when did you stop beating your wife" questioning. To be clear, I've no idea whether his questions are valid or not. Largely because I've never looked at Herbalife. Einhorn fly-by always fun tho all i know about herbalife The showmanship and book-talking here makes me a little edgy. Is that they are much bigger than you would expect them to be Anyway. Any other yank stock news? What about Xstrata? Or is that old news now? Oh, hang on. I'll just whack up some sellside rushing to protect Herbalife's honour ..... HLF shares were under pressure today after Greenlight Capital's David Einhorn questioned management on the percentage of product sales consumed by distributors, as well as the makeup of the compensation structure, on the Q1 earnings conference call. In our view, these are fairly standard questions, but in this forum have aroused concern around the validity of the multi-level marketing model. In our view, a lack of complete visibility into where a product goes after sale to a distributor has always been fairly standard in consumer products and is not isolated to direct selling. Today's share price reaction reminds us of the time HLF's distribution model was purported to be a scheme by a high profile investor. Herbalife's challenge, in our view, is to provide transparency that there is nothing questionable about the multi-level marketing model. While the company has issued a press release noting its belief that today's weakness presents a buying opportunity (citing its $428m buyback authorization) and that it will post answers to Mr. Einhorn's questions on its web site later today, we believe in the near-term, it may be difficult to attract new investors to the stock, as the market will likely anticipate a more detailed investment case from Greenlight. We continue to believe that multi-level marketing, when executed soundly, is a legitimate business model, and believe the company's strong cash flow performance suggest as much. And I note we're at midday already. We have an Alphaville photoshoot in London today. So I'll have to wrap this up rather quickly. Just a couple of smallcaps to note. First, a bid for Kewill Software maker and dot-com survivor Kewill PLC (KWL:LSE): Last: 95.25, up 19.25 (+25.33%), High: 97.41, Low: 95.00, Volume: 2.53m PE specialist offers 96p. Looks a done deal and a passable exit for shareholders. An offer of 96p looks full and fair to us, given that Kewill could have missed numbers by more than it did, had it not signed a large deal in a non-core area at the last minute. Given that the core business appears to have weakened significantly and Kewill has failed to deliver much in the way of organic growth over the last five years, we would advise holders to accept the offer. Year to March could have been much worse: Since an aborted bid approach in 2010, thought to be at around 120p, Kewill's shares have been de-rated and the trading performance has deteriorated. At the half-year ended September, the company said it needed to close four large deals to meet expectations for FY2012. In a 5 April trading statement management confirmed that deal slippage meant that only two of these four deals had been closed, but a large reverse logistics deal prevented a more significant miss. We estimate that final FY2012 results will be around 10% short of expectations at the start of the year, but this could have been a lot worse. Reverse logistics is not core to Kewill's business and therefore the underlying miss was of significant concern.  Valuation looks fair: 96p represents 13x the 7.3p of EPS we expect the company to report for the year ended March 2012. This EPS is nearly 20% lower than it was five years ago, as Kewill has struggled to gain traction with its SaaS offerings. A higher price might have been possible if one of the large ERP players had been interested, but this now looks unlikely. We would suggest investors accept the offer at 96p. That's all from Paul Morland. And, lastly, very strong results from Numis Numis Corp PLC (NUM:LSE): Last: 89.75, up 8.75 (+10.80%), High: 92.50, Low: 78.00, Volume: 287.88k Which seems to have carved out a nice niche for itself in this low-churn, no IPO environment. Interim sales basically steady. £23.3m versus £26.5m. Prints a loss for the period But there's a "discernable improvement in the pipeline of corporate deals" Difficult market conditions mean that consolidation is finally occurring in a market populated by far too many brokers and many large banks are cutting back significantly in areas where we compete. Ultimately these challenges will lead to Numis emerging as a premier and very profitable player when market conditions improve Which is a cheery note to end on. Ok - thanks everyone for joining. Thanks, Iz, for sparking a long and "interesting" debate on right about cotton recycling. We'll be back tomorrow. Paul probably won't be, but someone will. This entry was posted by support on Wednesday, May 2nd, 2012 at 11:01 and is filed under Uncategorized.