Markets Live: Friday, 17th May, 2013 This is the transcript of the Markets Live session ending at 12:01 on 17 May 2013. Participants in this session were: Paul Murphy Lisa Pollack Bryce Elder Can anyone else see a system message that says "I **hate* mornings"?? Anyway, lets kick on Okay, everyone can see it other than Bryce Are you having technical difficulties? We've been hacked by Lisa Wait... I'll try something Don't let me interrupt Everyone's waiting for ENRC stuff But they'll ahve to wait while we do our Portrait for today Let me just do some zapping (Do bear with us ROTR. ENRC incoming, though do remember that we're doing you a favour, not vice versa.) (And please note we can remove your ability to read, individually. It's your choice.) Murph? Done zapping? Come on then. Right - anyone here for ENRC info, feel free to log off now I was going to give you some info But now I'm going to sulk Ah well. The good people at Parasite Capital will just have to hang on for an hour to see if you cheer up any. Which, frankly, I think may be a long shot. Let's see if matters improve by midday. In the meantime, let's do the usual routine. Former chairman of Caja Madrid He's been slung in jail Here's euro intelligence on the matter On Thursday, the judge investigating the failure of Bankia jailed Miguel Blesa, the Chairman of Caja Madrid in 1996-2009, over his role in the purchase of City National Bank of Florida in 2008, reports El Mundo. The judge, acting on a "succinct but clarifying" report by the Bank of Spain, summoned Blesa to the court urgently and imposed bail of €2.5m after interrogating him for 7 hours. The Bank of Spain's report, dating from 2010, claimed that the bank acquisition was structured in such a way to elude the control of the Economy and Finance Counsellor of the Madrid Region. In addition, the judge estimates that the bank was bought for twice its fair value, which led to eventual losses of €500m. In addition, a report by the US regulator OCC found "relevant oversight deficits" by the management, without a clear business strategy. The public prosecutor opposed the judge's jail order. eib - bye for good The regional government of Madrid, under current Justice Minister Alberto Ruiz Gallardón, named Miguel Blesa chairman of Caja Madrid in 1996 shortly after his friend Jose Maria Aznar became Prime Minister of Spain. However, in 2008 Blesa became embroiled in a dispute with the Madrid regional government of Esperanza Aguirre, and ended up being replaced by Rodrigo Rato, a former minister under Aznar and former IMF managing director. I think he might be the first banker thrown in the slammer since the crisis began. So he must be a worth recipient of our Portrait for Today award. This all happened at the Court of Instruction No 9 Madrid Which sounds a bit Maoist Right then - Ocado I guess. Ocado Group PLC (OCDO:LSE): Last: 265.00, up 63.1 (+31.25%), High: 296.80, Low: 247.26, Volume: 8.61mBlock Note that high of the day of 296.8p And, much as we'd like to blame this on a short squeeze, it's becoming more difficult. Here's the Ocado short data, via Markit Still 261 days to cover, please note. But a fall from nearly 32% of free float in February to just over 13% this week is notable. Seems the has already happened. And what we have here is a warm welcome to an odd kind of nil-premium-sort-of merger. So there's a lot going on here. The linkup is rather deeper than expected, and comes with a more hefty price tag. Ocado will sale and leaseback the recently opened warehouse in Dordon for the £170mn book value. Morrison takes on approximately £80mn of internal and external debt Morrison gives a 25 year lease to Ocafdo at 4.9m rent, then charges itself 50% of that back. Are you following this? Clearer than the statement tho We also have a £30m licence fee, and a further £46m of capex on shared costs. It's a merger, basically. It's a merger with a glass back, so you can see all the inner workings. Never seen anything quite like it. And I don't think Waitrose has seen anything like it either. In fact, according to their spokesperson, they've not seen it at all. Market's just not reading this as a risk, which is brave. Let me cut to some sellside, of which there's plenty. Goldman's bland ..... We view the news as a positive endorsement of Ocado's technology and business model as well as a positive financial impact. The company guide that in its first full year the deal will contribute mid-single digit growth to revenue and add a mid-teen million pound improvement to net profit, the EBITDA impact is likely to be £4-5 mn higher. While 50% of CFC2 capacity will now be available to Morrisons, the deal still leaves sufficient headroom for Ocado to grow retail revenues materially over the next three years. The releases states that Ocado expects to commence a site search for a third logistics centre (CFC3) at the end of FY14E. Barclays is a bit surprised. The deal announced today involves a number of different agreements, which results in a much more integrated deal than we would have anticipated. On the one hand the deal is positive in the sense that it gets the Morrison online business up and running relatively quickly. On the other hand, the market has been quite sceptical on Ocado's fundamentals and it would therefore not be surprising if the market is somewhat concerned about Morrison fully "buying in" to the Ocado business model. Morrison is currently guiding to positive EBITDA for the online business by 2016/17 and positive EBIT by 2017/18. The deal involves a number of outflows from Morrison, including a significant initial investment. The deal also implies a further £25m of P&L development costs in this year, taking the total P&L "exceptional" charges to £65m. Capex will increase by a further £100mn, taking full-year net debt guidance to £2.7bn. We believe the deal is far more significant from Ocado's point of view. There are clearly some positives but also some concerns. First, the significant cash inflows from the sale and leaseback, as well as licensing fees, will firm up Ocado's balance sheet. On the other hand, a sale and leaseback of Ocado's "family silver" does not necessarily have positive implications for the core Ocado business. Our biggest concern, however, is that of the Waitrose relationship. We suspect that even if this arrangement does not break the word of Ocado-Waitrose's existing contract, it may be seen by Waitrose to break the spirit of the agreement. The Waitrose-Ocado contract can be terminated as early as March 2017, but notice would need to be given 18 months before, in other words in September 2015. Guidance from Ocado: The deal will contribute a mid-single-digit percentage of Ocado's revenue in the first full year, and will be significantly accretive to Ocado's net profitability in the first full year. The deal will contribute a mid-teen million pound improvement to Ocado's net profit as a result of the service fees and cost sharing arrangements. There will be a greater impact on EBITDA than to net profit of £4-5mn, primarily as a result of increased interest charges. Ocado will receive a total cash inflow of an estimated £165 million, prior to the repayment of £85m due under the existing capex facility. The cashflow impact of the net profit will be lower due to the effect of the amortisation of the up-front licence fee. Finally, Ocado comments it is expected to rephase its capacity planning, bringing forward the building of further CFCs which may be joint developments. Ocado comments that searching for a potential shared CFC3 could begin towards the end of 2014. Jefferies ponders what the hell Morrison is up to. Yeah, I asked a hundred people what the point of CFC2 was. None had an answer (pre Morrison filling it, obviously) I do wonder if this was Ocado's Plan A. I do wonder if it was even their Plan B or Plan C. I also wonder if Morrison might be pulling a bit of an HP here. Erk, yes. For clarity ........ Very good Peace and Love ... I only mean that Morrison seems to be taking a very, very expensive gamble on what they think is a disruptive technology for their industry. Ah, okay, fair enough Rather than doing the apparently logical thing and building out themselves. But they are spectacularly late to market. Anyway, two more ..... Strategic rationale. The transaction will allow Morrisons to get access to the most advanced food.com delivery experience currently available in the market, combined with clear cost advantages (reduced length of the supply chain, much higher pick rates than at alternative solutions, and delivery software leading to much more optimal routing of vans, which represents the biggest cost challenge for a food delivery model). We believe this will put Morrisons in a much stronger position in supplier negotiations (as it will be able to quickly build a presence in the most rapidly growing channel within the industry). Financial implications. There are considerable details available from the agreement in today's release. However, to us the key ones include an overall capital outlay of £216m (for which Morrisons will get the Dordon long lease, half of the mechanical handling equipment, its share of investment to expand Dordon to its full capacity, an initial fleet of vans, a food.com website interface) accommodated within a group budget that increases by only £100m to £1.2bn. We note that the cumulative investment by Ocado into Dordon has so far amounted to £190m (with £80m invested on the land and building alone). Morrisons has outlined that it expects an incremental £25m of new business development costs from the deal (to be added to the previous £40m guidance for "13/14, and corresponding to around 3% to our current year net estimate), but we expect this to be the peak of costs. Morrisons expects Morrisons.com to be EBITDA positive already by "16/17 (and at EBIT level by the following year). This looks like a good investment with only limited dilution to earnings in the early years. And finally, Ocado arch bear Philip Dorgan Ah yes, hit us with it Or has he come out with his hands up? Morrison will launch online in January 2014 as promised. However, this comes at a cost and we think that the deal is easily a better one for Ocado than it is for Morrison. In particular, signing a 25 year deal in an online world with an unprofitable, unproven operator looks likely to cause problems. We remain Sellers of Morrison. Morrison has also chosen an unprofitable business model and rejected the only proven online food model, which is picking in store. Whether any model's "proven" yet is debatable. Still waiting for a straight answer on how much it costs the average Tesco and Sainsbury online shopper to get a delivery. Figures of £15-ish banded around the industry. Making the entire thing a loss leader and a land grab. But anyway, we'll see. Market's made its decision, as is its wont. WM Morrison Supermarkets P L C (MRW:LSE): Last: 286.60, up 4 (+1.42%), High: 288.21, Low: 282.99, Volume: 3.73mBlock We seem to have got rid of the bid arb jerks Like a bouncer at the door, turfing undesirables out. Eurasian Natural Resources Corporation PLC (ENRC:LSE): Last: 298.20, up 2.9 (+0.98%), High: 300.40, Low: 292.39, Volume: 1.24mBlock You had a line in your market report this morning saying the oligarchs have requested a 28 day extension to the PUSU deadline, is that right. That's been confirmed by someone I was chatting to this morning. Current Panel deadline is today, I believe. Are the Panel going to give them another month How about the ENRC independents? Guess it would suit all advisers involved if the ollies get 28 days - from a fees perspective. But the ENRC independents are bound to call for a shorter period, if only to keep up appearances. Guess the ollies need time to get the money together, if they are going to bid. I know I said I doubted they would actually bid but ive changed my mind. To be fair, it can't be easy logistically, pinging between London and Astana. But look we advertised the fact that we might be able to offer guidance on what the ollies might offer. You know four weeks has passed since we first put a Bunsen burner under this. The Panel then did the decent thing and forced them to put out a statetment, confirming. So, on the basis that you should never tell someone to BUY unless you are going to be around to tell them when to SELL. And even if it is informed speculation, things can change. Especially if the Panel give the ollies 28 days. So, with all the usual reader beware warnings, here's our prediction of the ENRC bid price. If you are one of those people hoping to get four quid out of Kazakhstan, prepare to be disappointed. How can the ollies arrive at a price that is just 15% above the current market price? Simple - use the undisturbed price and add a 30% premium. Now, you can argue all day about what the undisturbed price might be. But our current understanding is that the ollies and their advisers are planning on using the 30 days prior to our advice to ie - 30 days up until April 19 I need to check the maths, but I believe the average price during that period was about 260p. Add a rough 30% to that. 338/340, somewhere round there. where this will get fiercely controversial is whether the price really was undisturbed during that period. Was it in fact being disturbed in a southerly direction? And, if so, who was doing the disturbing? rocky6 - would you buy this for a 15% upside, given situation? The one footnote I'd throw into this is that Kazakhmys's 26% ENRC stake is on the books at 375p. Would they accept ~340p? Would they rather hold a stake in an unlisted, privatised entity awaiting the probable Kaz merger in a few years time? Oh, and what happens to what was previously called Camrose? Does it end up with what was previously called Glencore? Glencore Xstrata PLC (GLEN:LSE): Last: 344.71, up 7.71 (+2.29%), High: 347.00, Low: 336.50, Volume: 6.69mBlock Anyway, there'll be news of some kind before 5pm. That much we can say for certain. Okay - back to matters more prosaic. We are, in national terms, finally up on our Lloyds shares. Lloyds Banking Group plc (LLOY:LSE): Last: 62.03, up 1.12 (+1.83%), High: 63.32, Low: 60.38, Volume: 119.94mBlock Government's in price is 61p. (Except it isn't, of course. That's just the figure the treasury uses.) rocky6 - fair enough - im just reporting a conversation i had earlier... People talking about bank re-privatisations by the first quarter 2014. Cameron dropping heavy hints in that direction in New York this week. Can also note that UBS is pushing the financials today. Both Lloyds and RBS. Nick Nelson's the strategist The argument is that investors are turning to favour cyclicals .... ... here's the fund flow stuff. And banks are the natural beneficiaries as interest rate expectations move up. Here's the top line. We shifted to a tactically cautious stance in early February after the sharp rally from June 2012 left technicals over-bought, the political calendar appeared challenging (Italy elections, Cyprus, US sequestration), and economic momentum was slowing. From mid February to mid April, the MSCI AC World Index was roughly flat. Now however, the outlook appears more favourable. Political events around Cyprus, Italy, and US sequestration have largely been absorbed, central banks have all recently expressed commitment to accommodative policies (including the ECB, which is signalling more potential actions), economic momentum has stabilised, and a number of key tactical indicators appear well positioned. Accordingly, global equity markets have jumped nearly 7% from the April lows. In particular, the expected "soft patch" in the US appears to have been just one month long. We continue to be bullish on the US economy. We remain structurally positive on the outlook for global equity returns and are making the following changes to our sector allocations to take advantage of the improved environment: Upgrade Financials to Overweight from Underweight Downgrade Telcos to Underweight Downgrade Energy to Neutral Part of the reason we are making these changes now is we see a strong potential for a change in market leadership toward Cyclicals. Defensives have been strong outperformers this year (continuing a trend that goes back to late 2010). However, the current environment now appears to favour Cyclicals as economic momentum reasserts itself, investor risk appetite recovers, and the global economy continues to normalise. In addition, we've observed an apparent inflection point in our most recent Flow Watch report: the net buying of defensives over cyclicals seems to be coming to an end. Let me pick out a few lines of the financials stuff. It's broad brush and big picture. We upgrade the Global Financials sector to overweight from underweight. The global economy is healing and even in Europe, some tail risks have disappeared. Financials should be exposed to an improvement in the global economy and are on low valuations. The hangover from the global credit crunch is fading and, in some markets, notably the US, we are seeing a turn in the credit cycle. As asset prices improve in the US (house prices are now rising at double-digit percentage gains year on year), so too do will banks" balance sheets. Ultra-low interest rate policies have depressed net interest margins for banks globally. Rising interest rate expectations would be a very strong driver for the sector, as rising rates would drive margins and (assuming the economy was recovering) be accompanied by improved volumes. Given regulators" desire for banks to be better capitalised and market forces, 2008 through to 2011 saw heavy net equity issuance by global financials, causing massive shareholder dilution. 2012 was the first year since the crisis began where net issuance was close to zero. Post this rebuilding of capital the dividend yield for the sector becomes interesting again - the sector could shift from one that absorbs shareholders" cash to one that generates, and redistributes it. The 12m forward dividend yield for the sector of 3.2% compares favourably to the market at 2.8%. Valuations for Financials are attractive. The discount for the P/BV of the global Financials sector has narrowed somewhat from the lows of last summer, but it is still at close to a 40% discount to MSCI AC World. The P/E relative to the world is at a 10% discount, in line with its post crisis average. But this is still on very depressed "E" relative to the market. The RoE relative to the world is at a 425bps discount. Whilst this is highly unlikely to go back to the premium that it traded at relative to the world in the first half of the 2000"s, there are some signs of it stabilising and even rising relative to the world. After fairly persistent earnings downgrades (relative to the market) since 2007, earnings momentum appears to have turned. ken.menager: Stephane are you there? - typing in the wrong box? Thanks for that Bryce And so to the top muppet story of the day Top read announcement on the Muppet-detector. Ahead of Ocado and even Sound Oil. So. It's US Oil & Gas. Dublin registered holding company, trades through Houston And has a patch of Hot Creek Valley, Nevada. It also has a competent persons" report that says it might contain 189 million barrels (on a 50-50 chance) We should note and emphasise that this thing trades on GXG Markets, which was where much the stuff that was kicked off Plus ended up. It's the market of choice for companies such as Herrington Teddy Bears and China Bamboo Biolife Corp. And it's based in Copenhagen - the market that is While much of the interest in US Oil & Gas was stirred up in November when the Irish press ran this kind of thing ........ An Irish company may be on the verge of discovering one of the biggest oil lakes in US history. And, once the retailer get excited about millions of barrels, they start fighting among themselves. Always happens. There's a Lord of the Flies dynamic to this kind of stuff. Here's the relevant bulletin board if you want to see the seedy underbelly of punterstockage. The internet is a very dangerous place in the wrong hands. Still, congratulations to Mr US Oil & Gas (I get the impression that it is really just one bloke) for going to the shareholders directly. Even if it does have a Streisand effect, as evidenced by us talking about it. Doesnt make the shares anymore attractive to my mind tho Would simply avoid on the basis of the GXG quote Ah, if you're willing to gamble there are worse ways to do it. Slot machines, for instance. Or greyhounds. They shouldn't be confused with investing either. We're through the witching and it looks like the FTSE's decided to creep higher post that. Ahead 24 points at 6712. Longest run of gains (bar yesterday) since the Boer War, highest since the dawn of time or something. Though, news wise, Intertek's disappointed. Intertek Group PLC (ITRK:LSE): Last: 3,295, down 157 (-4.55%), High: 3,326, Low: 3,260, Volume: 600.79kBlock Barometer for corporate activity, I thought. Perhaps I'm wrong. Basically saying the year's not started that well. Organic revenue slightly below, margins down against expectations of up. RBC can talk us through it. Organic growth - organic revenue growth was +7.0% - versus our 8.0% forecast. This is in line with the Nov/Dec run-rate despite the inclusion of Moody within organic growth for the first time. Minerals has been weaker than expected and toys/hardlines has been flat, with some weaker growth in electrical testing in Europe. Margins weak - The margin is down YoY driven by Minerals due to lower volumes and price competition. This decline is expected to continue into H2 - this compares with our +20bp forecast for the full-year. If we extrapolate the 9.9% sales growth for the 4m and the comment that EBITA "increased slightly" (we assume 2%), then this would imply H1 margins are likely to be down over 100bp. Outlook -The outlook is more varied, with the economic environment more mixed than originally expected. Management believes that the FY margin will be broadly flat, which implies a significant increase in H2 - whilst Minerals comps ease, the Trade Good investment costs laps in Consumer and restructuring should benefit, this still leaves a lot to do. Forecasts - We have lowered our 13E and 14E EPS forecasts by c.5%. For 2013, we now forecast 7.5% organic growth (vs 8.5% previously) and margins down 20bp (vs +20bp previously). Valuation - Whilst we like the structural growth story of the testers, valuation in our view remains high at 14E PE of 20x and whilst the acquisition potential remains high, we believe is already reflected in the PE and is of lower quality than pure organic profit development. We are surprised the stock has not seen more of a de-rating today, given the scale of the margin decline only 2 months after positive FY results. Note: 20 times 2014. The "defensive growth" theme hasn't half been played out this year. Similar scale of downgrades from SocGen. We have revised down our 2013-15 EPS forecasts only moderately (-2%) as the cut in our adjusted EBITA margin forecasts is partly offset by an increase in our revenue forecasts to reflect the (positive) impact of sterling depreciation. For 2013 specifically, we expect: 1) organic revenue growth of 7.3% (was 8.4%); 2) reported revenue growth of 10.3% (was 9.7%); 3) an adjusted EBITA margin of 16.3% (was 16.7%, vs 16.3% in 2012). We cut our target price by 5% from 3,700p to 3,500p, based on a DCF valuation inputting a WACC of 7.1% (was 7.0%); medium-term sales CAGR of 5%, perpetuity FCF growth of 2.5%, and a normalised EBITA margin of 17.1% (was 17.4%). We maintain our Hold rating on A 3% 12m projected TSR. Although the stock is trading on high multiples (see table below) we think this captures the group's capacity to generate 7% organic growth (as indeed it did in the first four months of this year) despite a difficult macro context and a high comparison base. (@nordic1: every time I claim something has a readthrough for Weir, someone comes and tells me off for my substandard understanding of the international pumping equipment market. But I'll take your word for it.) I **hate** mornings.Block Cheers for all that Bryce Thanks (most of the0 Rabble Have a good weekend