Markets Live: Thursday, 10th October, 2013 This is the transcript of the Markets Live session ending at 12:01 on 10 Oct 2013. Participants in this session were: Bryce Elder Paul Murphy Welcome to FT's Markets Live, hopefully without the technology borks. And apologies once again for the shortened session yesterday. Matters were outside our control. Anyway, Murph's just arrived in the office and I've been elsewhere all morning ..... Oh, and Neil Collins is here, but is fighting with his computer. So this session could be a bit shambolic. It is a tad irritaiting Still at least the bull market is back on Bounce back from the three-month low. Up 64 points at 6402. Nice to see Pearson doing its bit We're taking the political semi-compromise-sort-of overnight at the catalyst I guess. Short term debt ceiling extension. But I readers - assuming we have any - will want to talk about that much. So let's turn to something livelier. Ladbrokes PLC (LAD:LSE): Last: 188.50, up 8.7 (+4.84%), High: 190.80, Low: 181.70, Volume: 6.51mBlock First, I guess we have to relay what we know. So, about 2.9% of the company went through the market at 170p yesterday. Shore Cap did the trade. But beyond that, we have to make take steers and make informed guesses. Now, the Telegraph has the most interesting line this morning. That Playtech founder Teddy Sagi bought the line. Paper says either on his personal account or via Playtech ...... Though it it was via Playtech that'd be something to disclose to the market, surely. Post show update, 1pm: people familiar with the companies tell us that Playtech, not Sagi, was the buyer of a 2.3 per cent stake in Ladbrokes, with Schroders the seller. The purchase was said to be in line with Playtech's strategy of taking stakes in underperforming online businesses, apparently. Playtech directs all inquiries to its external flacks, who offer no comment. PeterC - search for Bryce Elder Now, we made all the calls on the Playtech angle yesterday ..... ... and didn't get very far. First, the idea that Playtech would buy Ladbrokes is ludicrous. They wouldn't know what to do with a chain of high street bookies. Secondly, why would Playtech acquire a stake in Ladbrokes? Wouldn't that risk alienating its own customers, who see it as an independent supplier? Now, before we move on from that, we also have to ponder who the seller was. One plausible theory going round is that it might have been Dermot Desmond. Ladbrokes bought Betdaq off him earlier in the year. And he was long rumoured to be holding a load just below the disclosure limit. if Desmond's selling the market price should NOT be up circa 4% It's plausible that Desmond sold to Sagi who's holding it on PA for whatever reason, but we have no evidence for that so I note it strictly as speculation. He's gold plated shrewdie Yup ...... And I'm not going to say the same of the people buying Ladbrokes today. The CVC rumour went round again yesterday as well, as it always does. You'll remember CVC used to own Hill, and that they looked at Ladbrokes when it was being spun out of Hilton. How about this suggestion over on the right that the Coolmore Mafia might be involved Hadn't heard that, though it is a nice idea. Another nice idea is that CVC would take Ladbrokes" retail business and give the online side to Betfair ...... Though I stress that's entirely theoretical. The kind of thing that makes sense to an M&A banker starved of fees. Lots of people popping up this morning saying the PE angle really doesn't make sense at current levels. I'll try and summarise this as best I can without getting anyone into trouble. So, circa £2.5bn bid value ..... £1bn of debt in the LBO vehicle, which'd be an extremely punchy 8 times free cash. Leaving £1.5bn of equity to find, which at the required PE-type IRR would have to turn into £3bn within a few years. While paying £200m off the debt each year You're talking about Digital becoming very profitable very quickly. And ignoring the fact that Playtech will receive a cheque for £700m when it does. Oh yes, forgot that It will take a minimum of 12 months to rebuild that website Sorry, they will start from scratch it's not a rebuild. We hope Agree. Wait for the next profit warning and the CEO to exit before taking them seriously, I suggest. And it's worth underlining that Playtech really doesn't need to stick money into Ladbrokes digital. They've basically replicated the William Hill JV without investing anything. Anyway, that's Ladbrokes. I await calls from people more familiar. Okay, I think we may have a comment problem again. In the meantime, we can touch on the usual slew of Thursday results. Starting with WH Smith. WH Smith PLC (SMWH:LSE): Last: 875.50, up 40.5 (+4.85%), High: 919.00, Low: 856.00, Volume: 587.21kBlock Giving another £50m to shareholders rather than spending it on carpets. What a great twitter feed Tax has knocked the EPS figure slightly, though bear in mind the 12% or so short position out there all expecting WH Smith to miss. Which it doesn't. Ever. (Documenting the wonders of the abject carpets at WH Smith. Please share your pics) Because no one seems to grasp it's a captive customer business, not a retailer. The high street is nearly irrelevant apart from Christmas. They make their money on £1 bottles of water at airports. Merrill to summarise. WH Smith has reported PBT of £108mn for the year to 31 August in line with our estimate and slightly ahead of consensus of £107mn. EPS was up +15% yoy and the final dividend of 21.3p was also up 15% yoy, giving a total dividend for the year of 30.7p (+14% yoy) slightly ahead of our 30.5p estimate. forecasts are affected by a non-cash pension accounting adjustment which has increased WH Smith's reported tax rate. However on an underlying basis we are looking for PBT growth of at least 5%, with EPS growth of at least 10%, following another £50mn share buyback programme, plus a dividend yield of 4%. moves from 925p to 950p based on the average of a DCF and sum-of-the-parts analysis. WH Smith now trades at c.11x cal. 14 EPS which we consider good value at a c.25% discount to the UK General Retail sector. By category we estimate Stationery LFL was down -3% with gross margin up +190bps, Books LFL was -10% (-6% excluding the impact of Fifty Shades of Grey) with gross margin up +50-60bps and News & Impulse LFL was -4% with gross margin up +230bps. Travel grew trading profit by 5%, with LFL down -4% and gross margin up +170bps due to mix benefits. WH Smith opened 30 new units in the UK during the year giving a total of 579 and expects to open a further 30 or so in 2014. Outside the UK it now has 94 units open with a further 47 units yet to open, giving a total of 141 units either open or won. High Street total sales were down -7% with gross margin up +200bps yoy. Smith achieved cost savings of £18mn during FY13 and has identified £10mn of additional cost savings making a total of £22mn over the next 3 years. These will come from areas such as logistics, energy efficiency and more self checkouts. In terms of new information in the release, we would flag three main points. 1) £10m of new High Street cost savings have been announced, taking the total to £22m over the next three years. 2) 20 new International stores have been announced, taking the total number of sites that have been won and opened to 141. There has been a change in the operating style of the International stores, with 56% now operated under franchise, 35% direct lease, and the remainder JV. Previously this was 67% franchise and 25% direct lease. We are interested whether this is a change in emphasis, or merely a function of where the sites have been won. Of the 20 sites won in H2, 4 were in Dublin and 6 were in Australia, locations where we would expect the company to prefer direct lease, so it seems likely that the mix change reflects the location of the contract wins. 3) A £50m buyback has again been announced for FY14, consistent with previous years. Combining buybacks, dividends, and special dividends, the group has returned £536m to shareholders since 2007, around 50% of the current equity value. There is no comment on LFLs since the start of the year as usual (the IMS is due next month), but we believe the year has started well. Common with many companies, the introduction of IAS-19 will result in a pension charge (c£3m in FY14 for the company) which represents a headwind. However, we believe the outlook for underlying trading is positive and hence there will be modest upgrades to consensus EBIT. We believe the shares continue to offer good value, and look very cheap on a relative basis vs the long-term average. The stock trades on a CY14 PE of 10.9x, FCF yield of 9.2%, and dividend yield of 4%. let's just share a twitter pic for all those who cant access that link above You know part of WH Smith's cost saving drive is to get the till staff to hoover the floors? That might explain the state of the stores. Last thing I'd want to do after eight hours of dealing with the unwashed is to push a Henry around. Anyway, that'll do there. Oh, just while on captive customer businesses ...... Restaurant Group PLC (RTN:LSE): Last: 546.00, up 28 (+5.41%), High: 546.50, Low: 523.50, Volume: 1.62mBlock Big seller cleared out this morning at what looked a rather low price. Don't have details to hand but that looks to be the catalyst. Just in case anyone tries to fantasise a bid rumour later. Feels like the moment to move to Gulf Keystone Shaikan Production Update Gulf Keystone is pleased to confirm that, further to a communication received from the Ministry of Natural Resources of the Kurdistan Regional Government, commercial production from its Shaikan field in the Kurdistan Region of Iraq has recommenced. As previously announced, the Company plans to ramp-up production from the first Shaikan production facility ("Shaikan PF-1″) to 20,000 barrels of oil per day ("bopd"), while completing the construction and commissioning of the second Shaikan production facility ("Shaikan PF-2″), which will add a further 20,000 bopd of production capacity. Just two paragraphs telling the facts I think GKP has had a serious comms makeover Probably Murray's work I'd note it took two weeks for them to tell is that production had stopped, which was buried in the results statement. This is certainly an improvement over that. The next supermajor, potentially sitting on 60bn barrels of oil in Kurdistan. Loved by muppets across the globe.Block Gulf Keystone Petroleum Ltd (GKP:LSE): Last: 177.50, up 5.75 (+3.35%), High: 180.00, Low: 176.25, Volume: 2.05mBlock can I share some positive broker comment on this? Just a couple of pars, like the announcement Gulf Keystone Petroleum (BUY) - Shaikan field production to recommence GKP LN (172p, TP 235p), Market cap: £1,526m GKP has announced that following communication from the Ministry of Natural Resources of the Kurdistan Regional Government ("KRG"), production at its flagship Shaikan field has recommenced. The company plans to ramp-up production from the first Shaikan production facility ("Shaikan PF-1″) to 20,000bopd while completing the construction and commissioning of the second Shaikan production facility ("Shaikan PF-2″), which will add a further 20,000bopd of production capacity. GKP is on the verge of moving into a phase of significant production, with the capacity to produce up to 40,000bopd from Shaikan in the medium term and up to 400,000bopd in the coming years. If achieved, the company would therefore be a key contributor in meeting the KRG's oil production targets of 1mbopd in 2015 and 2mbopd by 2019. Our model assumes GKP will reach 20,000bopd in 2014 and 40,000bopd in 2016, which if sold into the export market, would represent a transformational milestone for the company, in our view. The share price has seen material gains since our last BUY note in June 2013 (+31%) following a positive resolution with M&G and a conclusion to the legal dispute with Excalibur, and we believe this trend will continue ahead of an active period of drilling activity. We retain our BUY recommendation and TP of 235p. Yeah, everyone's saying similar really. Dr Dougie at VSA says this ..... The company has confirmed that production as restarted at the Shaikan field at an unspecified rate. The field currently has 20,000bbl/d of installed capacity and construction continues at the second identical production facility. Positive news, but it would have been useful to have been some more detailed information on the current rate. The company does state that production will ramp up to 20,000bbl/d, but no timescale was given. We feel that the share price will strengthen today on this news. We also highlight that the share price has fallen back to pre-litigation resolution levels as investors have locked in profits. Today's news is a good reason to start buying the stock again. Oh, and we should also give some airtime to HSBC Which has closed its GKP short this morning. Analyst Christopher Hitchens does seem to time the market very well. Sorry! Peter Hitchens. Quite the wrong type of Hitchens ..... The euphoria over the successful verdict in its court case against Excalibur Ventures on 10 September has resulted in extreme volatility in Gulf Keystone's share. After a sentimentdriven spike of more than 17% upon the announcement of the verdict, the shares have since given up most of the gains and have fallen by 24%. This has left the shares trading at a 9.7% discount to our unchanged target price of 185p/share. The English Commercial Court's ruling on 10 September dismissed all the claims from Excalibur Ventures, which believed it had rights to a 30% working interest in all of Gulf KeyStone's operations in the Kurdistan Region of Iraq (KRI) by way of an introduction fee. Although this is undoubtedly good news, our long-term view of the company remains unchanged. Without the distraction of a court case, management is now able to focus on building up the operations of the company with the key being the development of the giant Shaikan in the KRI. Whilst we realise that this is positive, our target price based on the current asset base does not take into account sentiment and, hence, remains at 185p/share. However, the movements in the share prices now imply a potential return of 11%. This, under the HSBC research model, falls in the Neutral band of -2.5% to 17.5% for volatile UK stocks. Therefore, we upgrade our rating on the stock to Neutral (V) from Underweight (V). Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Valuation: Our target price is derived on a DCF basis of the group's oil and gas assets. This is achieved using our standard oil price assumption of USD90/bbl and a discount rate of 10%. We derive a core asset valuation for Gulf Keystone of 346p/share from the group's discovered oil and gas resources. We then adjust for the net debt of the business, which equates to a further zero p/share. On top of this, we add the risked exploration upside over the next 12 months, which adds a further 24p/share to the metrics. Given the political uncertainty in the KRI, our target price adopts a 50% discount to the DCF value of the oil and gas assets (as opposed to our generic 30% discount for most other regions). This gives a target price of 185p/share. In the scenario of successful exports from the KRI, we would reduce our 50% discount for assets in the KRI to our traditional 30%, which would result in a potential valuation of 259p/share. This, however, could be some way off as we would require evidence of export sustainability. There you go, feel free to cut and paste that into your favoured bulletin board while calling us ignorant clowns for sharing it. This melt is accelerating 71 points now no the Footsie And I've been elsewhere all morning so am a little behind the curve, so it's slightly difficult to pick out significant movers. @FJP: stop causing trouble, you. Talvivaaran Kaivososakeyhtio Oyj (TALV:LSE): Last: 6.88, down 1.68 (-19.63%), High: 7.64, Low: 6.81, Volume: 5.98mBlock Now they're running out of money. Swedes - its to do with the compromise-maybe-of shorts in DC "liquidity position has weakened more than anticipated" ... undertaking "an assessment of all available funding options." They blame nickel prices, in part. Rather than the fact that their mine doesn't work. And has never worked. And has a habit of belching poison across the Finnish countryside. Talvivaara Mining - U/R - Another weak of production results, with production YTD of 7,123kt of nickel versus an initial guidance of the year at 18,000t, as excess water continue to impact grades in solution and aeration of the stacks. This guidance was scrapped last quarter and has yet to be replaced. They are looking for additional financing to solve their liquidity issues, as not only is it a weak operational performance but prices have remained stubbornly low due to the impact of the growth of low cost RKEF production out of China. This is not expected to change anytime soon as the Indonesian export ban (which could have tighten fundamentals) is unlike to be implemented in full force. Unclear what the financing will be, the last rights issue was heavily dilutive for major shareholder and CEO, Pekka Para. @TheLeggie: because it's their only asset and the CEO owns most of the company. Let me grab some JP Morgan as well, which I can only assume must be shop broker. TALV had €101m cash at 30 Jun"13 post its €247m rights issue in April. Therefore with an ongoing cash burn at current nickel prices ($6.16/lb) and €410m net debt at H1"13, we believe acute liquidity risks are to the fore again. Management expect an improved production performance in Q4"13, but we believe market expectations for the operational and equity outcome will become increasingly pessimistic. Valuation: at the time of writing, TALV's share price of GBp 7.5/sh is equivalent to a €169m market cap, which is at a material discount to our previous forecast unrisked NPV of €895m, the realisation of which we believe can only materialise if TALV overcomes acute operational and liquidity risks, which appears increasingly challenging. Had a memory that Merrill were saying this thing was going to zero. Seems not. They were buyers into today's warning. Back up to the large caps? There's only three losers in the Footsie What's wrong with Glaxo? GlaxoSmithKline PLC (GSK:LSE): Last: 1,542, down 8.18 (-0.53%), High: 1,566, Low: 1,542, Volume: 2.94mBlock Apart from the obvious risk-on stuff ...... We have Credit Suisse turning negative on the sector ....... They have about 12 notes out on the subject, but none of them seems to get to the point very quickly. I'm reading the Ideas Engine at the moment, which is rather too dry to share. Ah! Hang on! There's a Glaxo breakout note. Downgrading GSK to Underperform and lowering our target price to £15.00 (from £16.70). This is supported by: ■ PharmaValues 2013, GSK ranks least attractive: Our PharmaValues 2013 analysis, published in conjunction with this report, shows GSK to be most overvalued relative to NPV (trading at an 18% premium vs 4% premium for peers) and to score poorly on a number of strategic parameters. ■ Consensus earnings are already too high: Following recent newsflow, we cut our EPS estimates by 2-4% pa. Credit Suisse 2013-2017E Core EPS is now 6-12% below consensus. We believe market expectations for margin accretion, in the context of low single digit sales growth, are unrealistic. ■ Mismatch between R&D spend and pipeline opportunity: Our R&D productivity analysis suggests GSK management face a tough decision. We calculate that, assuming GSK's R&D productivity ratio is equal to peers, in order to fund all pipeline assets R&D spend will need to increase by c. We note Credit Suisse and consensus currently forecast broadly flat R&D spend. ■ No upside to our forecast cash returns: All excess annual FCF is already assumed to be returned to the shareholder in the form of a dividend and a sustained £2bn annual share buy-back. They're also negative on Shire, but I'm not going hunting for that. Shire PLC (SHP:LSE): Last: 2,387, no change, High: 2,403, Low: 2,376, Volume: 364.19kBlock Got the chairman and interim ceo complaining about the share price Victoria Oil and Gas PLC (VOG:LSE): Last: 0.97, down 0.11 (-10.19%), High: 1.02, Low: 0.91, Volume: 40.77mBlock Last week was a challenging one for VOG and its shareholders. Like many shareholders, I am concerned about the weak share price which I believe grossly undervalues our business. In less than four years, our Company, backed only by its shareholders, has succeeded in drilling two complex wells, installing gas processing facilities for 20mmscf/d, laying 22km of pipeline, selling gas and collecting revenue. But it's accompanied by a lengthy trading update Directors should not, not, not comment on the share price. Up or down, it's only tangentially their business. Their business is the business. It's one step away from blaming short sellers. As for the trading update ..... Daily gas consumption of 3.6 -9 mmcf/d by year end 2013 Target of 12 mmcf/d gas supply target now expected in 2014, which is a downgrade isn't it? Hint - don't moan about your share price while downgrading guidance. No change from the BoE btw