Markets Live: Wednesday, 19th November, 2014 This is the transcript of the Markets Live session ending at 12:06 on 19 Nov 2014. Welcome to Markets Live, FT Alphaville's daily whatnot. As you can see, today's portrait is the The Rt Hon Michael Gove MP, the Conservative Member of Parliament for Surrey and the Tory chief whip Who may be indirectly responsible for your local boozer closing. Due to his failure last night to drag Tories out of their own subsidied bar and into the chamber. MPs have voted to allow pub tenants to buy beer from any supplier they wish, calling time on the 400-year-old British concept of the "beer tie" that requires some landlords to buy supplies from the companies that own their pubs. Thought to be the government's first defeat in a whipped vote on one of its own bills since the 2010 election, the unexpected result has rattled the UK pubs industry, which has warned hundreds of pubs may close, but delighted campaigners who argue it will boost publicans" fortunes. The amendment to the small business, enterprise and employment bill was passed by 284 votes to 269 on Tuesday night, after 17 Conservatives voted against the government. Of course, you may be of the opinion that even with the beer tie in place, the pubco industry hasn't really been doing a terrific job of protecting your local battle-cruiser. Last update from Punch said it was closing 1,000. Enterprise, I'd reckon, has closed about 1,500 over the past few years. And sensible people - such as Charlie McVeigh of the rather good Draft House mini chain - argue convincingly against the tie. So perhaps all this shrieking about pubmageddon this morning should be taken cautiously. Nevertheless, markets certainly don't like uncertainty. Neither do analysts. Amendment to the Small Business, Enterprise & Employment Bill UK MPs have voted 284 vs. 269 to include a market rent only option (MRO) for tied pub tenants. This private measure is widely interpreted as an attempt to end the beer tie through the back door. The measure is aimed at companies with more than 500 tenanted & leased pubs. There are several stages for the Bill still to go through, so we don't know yet if the MRO will become law. So where does that leave the pub groups? Back on 16 June 2009, we published a lengthy analysis of the regulatory issues surrounding the PubCo sector ("The Law of unintended consequences‛). We would refer readers back to that for background. But the principle of being careful of what you wish for remains. Around 1%-2% of licensees ask for a free-of-tie option each year from ETI. The vast majority appreciate the safer option of "low fixed plus turnover rent," because it is better for cash flows. Breaking the tie in the way proposed by the above amendment will have significant consequences for the industry - which is why the Government rejected the concept when it was proposed back in June 2014. Its own analysis suggested that the MRO would accelerate pub closures & job losses. The market will want to assess what the worst case scenario could be Both ETI's and PUB's current ratings are already discounting a huge amount of bad news (c.40%-55% discounts to NAV) that, in our view, includes this issue. Back in April 2013, the Business Secretary talked about a potential value transfer of c.£4.5k per pub, most of which was to have come from the MRO, though his department eventually rejected the concept. So is this the worst case impact? By way of mitigation, we would assume that the PubCos would do the following: (i) Scrap all discretionary support. (ii) Reduce central overheads by c.25%. This would have the potential proforma impact of c. 5% PBT downgrade for ETI & PUB (see table right). (iii) We would expect all development capex to cease. Over the past decade ETI has invested over £620m. Going forward ETI plans to spend c.£70m p.a. (av. £14k/pub/year). Who will fund that? (iv) ETI has an embryonic managed pub division. At the rent reviews/lease break clause, the group may decide to take pubs back in house and run directly. (v) It is already renting 22 sites to convenience stores, all of whom are paying much higher - market - rents. On review, we would expect the PubCos to establish a market rent that includes all bids. By the end of the 5-year rolling rent review process, it is not impossible that the groups will all be much better off - which could mean that their shareholders demand that a more aggressive pure property management stance be adopted now. Is this a storm in a half pint mug or a barrel of trouble? It could be seen as the latter, but is probably the former. The MRO is against both UK Government policy and competition law here and in the EU, and we would expect the pub industry to appeal this amendment all the way through the courts. ETI also has the "nuclear" option of converting into a REIT. Interesting thought, that last one. As in, what if we valued pubcos as propcos? They're all trading sharply below NAV. So ... income on overpriced beer disappears, but support appears from a property portfolio that's clearly a lot more versatile than - for example - supermarkets. Anyway, more sellside. On rent review, Punch and Enterprise could consider transferring pubs into non-rent franchise pubs (why apply "market rent" to pubs that pay no rent?). Alternatively, Enterprise and Punch could compensate for the loss of income by cutting capex and support (reducing pub viability) if tenants remove the tie (in order to purchase cheap beers). We estimate this capex and support are worth a combined £20k/pub pa, financed by the central purchasing power that the MPs" vote has endangered. The Bill will soon pass into the House of Lords which should consider these unintended consequences (such as accelerated pub closures and a cap on the growth of smaller pub companies). In addition, "there are serious legal and competition issues which must be faced, as it rides roughshod over what are previously agreed contracts, and creates an unworkable, two-tier market" (BBPA). Thus, we are not changing our forecasts at this stage, but continue to advise caution. There are a number of steps to this receiving Royal Assent, and we believe the pubcos may challenge whether such a change is legal, but this could have material consequences for the tenanted pub sector. In this report, we consider the potential P&L effects on the major pub companies, and address the covenant risk. Equity view: c8% hit to ETI and PUB EBITDA, falling to c3-4% after lowering support: We estimate that the biggest impact would be on Enterprise Inns and Punch Taverns, which between them own over 9,000 tenanted pubs. The Government Impact Assessment into a free of tie rent agreement claimed that tied tenants would be £4,250 better off under a market rent only option. Using the current number of pubs, this implies a hit of £23m to ETI's EBITDA and £16m to PUB, an 8% hit to EBITDA. This would be 19% of ETI's PBT and 24% of PUB's of FY14 PBT. However, we believe that both would respond, lowering discretionary concessions and central overhead support. Under this scenario, we estimate the hit to PBT would fall to 9% at ETI, and 12% at PUB. An equity de-rating is very likely, reflecting uncertainty and high Debt/EBITDA. In both scenarios, a free of tie option would take time to work through, given it is unlikely to pass into law immediately, and given that rent reviews are every 5 years. It could be 2020 before all pubs have been converted to free of tie, which gives the pubcos breathing space from a disposal, conversion to managed/franchise, or capex perspective. However, we believe that this creates significant uncertainty for the sector and expect a de-rating of Punch and Enterprise. Marston's, Spirit, and Greene King are relatively unaffected (1-2% of PBT, on our estimates), so probably not enough to dissuade Greene King from acquiring Spirit. Booker could be a beneficiary of tenants buying more from wholesalers. We changed no ratings or Price Targets at this stage because the vote is not yet law and company reactions are currently not known, instead electing to demonstrate some potential P&L impacts. Credit view: Using our assumed beer tie stress of between 3% to 4% of EBITDA we estimate that headroom against covenants remains good for Enterprise debentures with c20%, whilst Punch A and B headroom is both c10% against their tightest ratios. We continue to expect the Unique securitisation to be restructured on a voluntary basis given that the company needs to buy back bonds above par to meet its EBITDA DSCR covenant. Debt to EBITDA after imposing our beer tie stress has the most impact on leverage at the bottom of the capital structure in Punch and Enterprise with an increase in debt to EBITDA of c0.4x. We would expect management action to more than mitigate this through trading (mainly Enterprise) and asset disposals (mainly Punch). Totally off subject ... For anyone curious on pub-to-housing conversions, I'd recommend taking a look at the old Spotted Dog pub in Willesden. They've squeezed in 44 flats to a site no bigger than your average high street boozer. Anyway, back to the sector. Greene King PLC (GNK:LSE): Last: 753.00, down 33 (-4.20%), High: 780.00, Low: 745.00, Volume: 1.59mBlock Spirit Pub Company PLC (SPRT:LSE): Last: 100.00, down 8 (-7.41%), High: 105.00, Low: 93.00, Volume: 7.95mBlock Spirit price telling us there's a risk Greene King will walk. Personally, I'd be very surprised. FTSE off 0.1 per cent and it's largely a news-free day. And you'll be amazed to hear we're having unprecedented internet problems at FT Towers ... So apologies for incidences of dead air, like then. Royal Mail mentioned. Royal Mail PLC (RMG:LSE): Last: 431.00, down 38.2 (-8.14%), High: 477.10, Low: 424.00, Volume: 4.66mBlock I guess I must've missed the public apology to Vince Cable. For his work in pricing the IPO pretty much correctly, it turned out. Today we get the usual assortment of warnings and cautions from Royal Mail. Amazon's a tricky competitor, for example, as it is for everyone. Not having to make a profit does that. Let me grab some sellside to summarise what's been said. Jefferies incoming. ... once the intenet works. (@Pancakes: probably. The FT is a product of as many as several people with different opinions though.) Oh, hell's teeth. Perhaps we should scrap this idea of doing Markets Live online and send everyone a postcard instead. Interim results were not as weak as feared, with a 21% drop in adjusted EBIT to £279m, 5% ahead of JEFe and 7% ahead of consensus. The outlook for the parcel market is worse than expected, with expected volume growth of only 1%-2% for around 2 years, which implies parcel revenues would remain stable at best. This effect would be somewhat mitigated by higher than expected cost savings, but on balance we think the outlook has further deteriorated. Interim results not as weak as feared. Interim results reflected a 21% drop in adjusted EBIT to £279m, 5% ahead of JEFe £266m and 7% ahead of consensus £260m, mainly due to a better than expected performance in letters, while parcels performed in line with expectations. Reported revenues were stable at £4,525m, 1% ahead of JEF £4,480m and in line with consensus £4,520m, reflecting a 2% underlying increase. Letter revenues increased by 1% to £2,242m, 2% ahead of JEFe £2,206m, driven by the impact from election mail, while addressed letter volumes decreased by 3%, in line with expectations and the performance in Q1. Parcel revenues decreased by 1% to £1,461m, in line with JEFe £1,466m, on the back of parcel volume growth of 2%, more than offset by negative price & mix effects, reflecting a highly competitive environment. GLS realised underlying revenue growth of 7% to £813m, on the back of volume growth of 7%, resulting in 7% EBIT growth to £56m versus JEFe £53m. FY14/15E outlook unchanged. For FY14E, Royal Mail indicated its performance remains in line with expectations for the full year (of single digit revenue growth and a 50bps underlying EBIT margin improvement), but doesn't provide concrete guidance in view of the dependence on trading during the Christmas season. Higher than expected cost savings. The management reorganization program is expected to result in cost savings of £70m (compared to £50m previously), including £25m in H2, resulting in an expected stable underlying UKPIL operating costs for this and next year. Valuation & risk factors. Royal Mail shares have recovered by 17% over the last month and are now trading at 9.5x FY15E EV/EBIT, implying a 16% premium to the postal sector and at 17.0x FY15E P/E, implying a 30% premium, while its fundamentals are among the weakest. We estimate the implied value of the London development property is around 100p per share, corresponding to a total value of £1.0bn, 3x higher than the value of £330m estimated by the UK government at the time of the IPO and 2x our estimated fair value of £500m. Postal operators are exposed to a number of risk factors, including largerthan- anticipated volume pressure due to faster e-substitution, increasing competition, regulatory limitations and limitations to restructuring initiatives with a unionized labour force. Additional risks for Royal Mail include increasing competition in the end-to-end market in the UK from TNT Post UK, dependent on an Ofcom review into Royal Mail's pricing strategy, increasing competition from Amazon in parcels, substantial claims on cash flow from restructuring and pensions, government share overhang and a relatively short earnings track record. Sorry, there's a lot of dead air today. FT Internet's totally spannered. Not that anyone in the office seems to have noticed. I'll persevere though. @markopolo is right to note that we're Quindell free today. And sticking with that promise, I'll observe that Andy Bryant of Cenkos is moving to pastures new. But we're told that his departure is entirely unrelated to Quindell. And, by extension, entirely unrelated to the note Andy sent out post the director share sales reported as buys. Much of which was wrong. Quindell PLC (QPP:LSE): Last: 48.50, down 5.5 (-10.19%), High: 54.00, Low: 48.00, Volume: 5.01mBlock Icap requested, happy to help. ICAP PLC (IAP:LSE): Last: 395.90, down 33.6 (-7.82%), High: 420.00, Low: 394.10, Volume: 1.65mBlock Not a major miss, but if you're looking for pessimism there's plenty to find in the statement. Canaccord move to sell. ICAP reported half year results today. Revenue was £620m vs. our estimate of £653m EPS adjusted was 10.1p vs. our 13.7p estimate Dividends maintained at 6.6p for the interim Outlook: Market conditions remained relatively fragile, with some return of positive sentiment in recent weeks. FX volatility recovered in Q3. Management sees mediumterm opportunities in some business lines. Impact on the Canaccord Genuity view Valuation multiples have expanded to 12x from 16x YTD following management action to maintain profitability with cost cuts of c.£60m. Consensus bakes in 13% EPS growth in FY16 and another 9% in FY17. We believe this will be harder to achieve without a finance director in place. Trading conditions remain tough as regulations continue to curtail volumes in the interdealer market and low volatility compresses spreads. We expect headline revenue growth to remain challenging at least in the near to medium term. We expect current consensus EPS growth to be challenging despite current cost saving measures. Valuation ICAP trades at 16x current and 14x forward consensus estimates. We are of the view that these valuations reflect an investment case with headline revenue growth and rising EPS, which is not the consensus or our view of ICAP. ICAP has generally been valued at a generous multiple compared to its listed peers given the size of its franchise and breadth of its electronic platforms. This valuation differential is close to highs seen in 2007 (Figure 4). We retain our target price of 350p based on our ROE vs. PBV approach (or c.12x earnings) and cut our recommendation to SELL (from Hold). Actually, no. SocGen's not worth repeating. Have Barclays instead. CAP 1H15 results on 19 Nov were broadly in-line. Underlying PBT £86m is a 2% miss vs Barclays" estimate of £88m and down -38% yoy, while EPS of 10.1p is a 3% miss vs our 10.5p. Interim DPS of 6.6p is in line. Management's outlook was cautiously optimistic given high volatility in Oct/Nov benefitting FX and rates volumes in particular, but they think it is too early to say if these volumes persists and so are leaving full-year expectations unchanged (we forecast £233m PBT for FY15). The cost rationalisation programme is on track, with the statement giving some new detail that broker headcount has been cut by 13%, equivalent to a 3ppt annualised reduction in broker comp ratio (FY14: 57%). Guidance of 53-54% broker comp ratio in FY Mar16 is positive but the long timeline might be frustrating to some. Finally, ICAP reassures on its regulatory capital position that its consolidation waiver does not expire until Apr 2016, and if the FCA asked it to eliminate excess goodwill similar to Tullett Prebon, it would require £600m capital. ICAP believes this can be eliminated through retained profits over time. Underlying PBT of £86m is a -2% miss vs Barclays forecast of £88m £86m is down -38% yoy. Management did signal that due to £10m of investment spend in 1H and the projected cost rationalisation of £43m not taking effect until 2H, such that profits would be heavily skewed to 2H. We project PBT of £233m (-14% yoy) for FYMar15. Revenues down -15% yoy, -9% on a constant-currency basis Revenues of £620m is in line with -15% guided to in the Sep pre-close trading statement. This is down -1% yoy and is a -1% miss vs our estimate £624m, driven by slightly lower Electronic revenues than we expected. On a constant currency basis, Group revenues were down -9%, revenue in Post Trade was up 12%, which was offset by a 5% decrease in Electronic and a 15% decrease in Global Broking. Outlook cautiously optimistic As expected, the outlook was cautiously optimistic on volatility seen in Oct/Nov caused by a surge in FX and rates volumes in particular, with EBS and Brokertec achieving some record days in Oct. However, management say there is no change to full-year expectations (we forecast £233m PBT for FY15) as it is too early to say if these volumes are sustainable. The volatility index VIX has receded from peak but is still at a more elevated level than May-July. The CVIX (FX volatility) is still close to peak levels for the year. Profits skewed to Post-Trade and Electronic Out of operating profits of £100m, 83% was from Electronic/Post Trade. However, overall operating profit is still down -35% yoy reflecting historically low volatility. Operating margin in Post Trade and Electronic also declined slightly to 39% and 34% respectively due to investment in EBS and TriOptima/Traiana. Management outlook for 2H is more bullish, guiding to margin improvement due to volume recovery and lower investment spend. Volume surge in Sep/Oct Electronic volumes for Sep/ Oct show a strong surge in FX and Treasuries volume, stimulated by the Scottish referendum and the ECB rate cut. Sep ADV was +8% yoy and +18% yoy for Oct. FX volumes were up +45% yoy in Sep. Positive volume trends continued in Oct with FX volumes up +69% yoy and Treasuries up +44% yoy. Cost-rationalisation programme on track Management detail that the restructuring programme remains on track to deliver annualised cost savings of ~£60m for FY Mar15 and then a further £40m for FY Mar16. Expected savings are heavily skewed to H2 - £6m was recognised in 1H and £37m is expected in 2H, giving a total of £43m this FY and the balance coming through in FY16. New detail on reduction to broker comp ratio ICAP details the restructuring programme has resulted in a 13% reduction in broker headcount, with a net 261 brokers leaving the firm worldwide and broker compensation ration being cut by 3ppt on an annualised basis. The benefit is largely cash and reduction in broker payout ratio will reduce variable costs. For FY16, it is expected that the ratio with be 53-54%, down from the current 56% and FY14 of 57%. We believe this detail is welcome but the long timeline might frustrate. Reassurance on regulatory capital with £600m capital required in capital rebuild scenario Tullett Prebon disclosed on 07 Nov that as a condition of extending its waiver from consolidated accounting it has to rebuild tangible book value over the next 10 years to a position where it exceeds it regulatory minimum capital requirement. We suspected the same would be true for ICAP when its waiver runs-out in April 2016. In the 1H15 results ICAP details that in the event the waiver was not renewed upon expiry, the incremental capital requirement would be £600m, which it believes can be eliminated through retained profits over time without affecting the dividend. In our view, it is reassuring that it would not need any capital raise but this would reduce potential for further capital returns or M&A/investment appetite. Possible combination of shipping business with Howe Robinson Today ICAP also announced that it is in discussions to combine ICAP Shipping with Howe Robinson Group, the leading ship-broking group to create one of the world's leading businesses in the sector. The newly formed ship-broking company is expected to be operational in the second quarter of 2015. We think this is likely to be a small non-transformational M&A transaction if it goes ahead. Share price performance The ICAP share is down -6% ytd vs FTSE Allshare -1%. However in the past three months the shares have performed well, up 18%, so there could be an element of travelling and arriving today. Valuation 14.5x cal 2015E PE. While this session remains Quindell free .... I'm intrigued by the discussion on the right regarding a take-private. That'd surely have to be an MBO, because they're the only people with any kind of grasp of the sprawling insanity of the business. But I'd think the M in MBO would be considered a significant risk for any private equity funds looking to get involved. ...... But, as I say, this session remains Quindell free. Ignore that. @markopolo: relatively safer to do via a securitisation - which is more or less what Quindell's trying to do as per the Sunday Times story, no? Oh, I'm reminded that Barclays is selling Foxtons this morning. Foxtons Group PLC (FOXT:LSE): Last: 147.20, down 6.2 (-4.04%), High: 153.90, Low: 146.27, Volume: 349.67kBlock Floated at 230p just over a year ago. What an absolutely predictable stinker this has been. Barclays prefer Savills. Supportive fundamentals and the emergence of value. We believe that underlying property markets continue to exhibit favourable conditions: although residential property prices reliant on low interest rates, this scenario is highly likely to transpire, in our view, based on financial market indicators (low bond yields, swap rates, and inflation) and even the rhetoric of the Bank of England; commercial property market conditions remain buoyant, with strength in London now permeating into the regions. While some headwinds persist (a slowdown in the London residential market; simmering social tensions in Hong Kong; economic malaise in Europe), we believe that value has now emerged in the embattled UK-listed property services sector. We initiate coverage with a Neutral industry view and see strong upside potential for two stocks: Countrywide and Savills. Countrywide provides exposure to the recovery of regional property markets in the UK. The company has leading positions in the estate agency and lettings markets, derives a number of ancillary revenues from these sources, and operates the UK's pre-eminent regional commercial property advisor (Lambert Smith Hampton). With regional housing markets continuing their slow, steady improvement, mortgages becoming more available (underpinned by the government's Help to Buy scheme), and the company's shares having fallen by c30% in the year to date, we believe that attractive value has emerged here. We initiate coverage on Countrywide with an Overweight rating, and a 525p price target (potential upside of c23%). Foxtons" roll out continues, despite more challenging conditions. Reflecting fears of a major downturn in the capital, Foxtons" share price has halved in the year to date. Though we feel such a scenario is unlikely, we believe that conditions in the mid to upper tier of the London residential market are likely to remain under some pressure for the foreseeable future (possibly until after the General Election in May). As such, we believe that it remains too early to expect an imminent improvement in the company's trading performance. In fact, we believe it is possible that the company could warn on profits again either side of Christmas. With these factors in mind, we initiate coverage with an Underweight rating, and a 174p price target (upside potential of 14%). Savills" diversification presents significant defensive qualities. Buoyed by the acquisition of Studley in the US - game changing, in our view - Savills has added a new and interesting strand to its growth story. With over half of its revenues coming from non-transactional sources - intact post the Studley deal - the company has added growth while retaining its defensiveness. That its Asian business delivered revenue and profits growth at a time of distress in the Hong Kong market is testament to its defensive qualities, a key feature of the business. We initiate coverage with an Overweight rating, and a 780p price target (upside potential of c22%). (@fjp73: who? Me? I can assure you that I'm sincerely sorry.) Savills PLC (SVS:LSE): Last: 649.50, down 5.5 (-0.84%), High: 669.50, Low: 649.50, Volume: 45.66kBlock Countrywide PLC (CWD:LSE): Last: 426.00, down 3 (-0.70%), High: 430.30, Low: 424.00, Volume: 40.41kBlock Brief look around to see if there's anything I'm missing. There isn't. Odd story on the wires re Tesco Tesco PLC (TSCO:LSE): Last: 194.91, up 2.21 (+1.15%), High: 197.45, Low: 193.40, Volume: 15.60mBlock Nov. 19 (Bloomberg) - Tesco removed affected fish products from shelves and stopped product procurement from the relevant supplier, and it also conducted extra checks on similar products from other suppliers, put in additional food safety measures for live fish sales, according to an e-mailed statement from co. today. To be clear, that's China. Shanghai's FDA said last week that there were excessive chemicals in Tesco fish Which reminded me that Tesco in China sells live turtles, among other stuff. No, ROTR, I have no update on BWin. Bwin.Party Digital Entertainment PLC (BPTY:LSE): Last: 105.48, down 2.82 (-2.60%), High: 107.90, Low: 105.10, Volume: 952.32kBlock As reported previously, there's a very big seller suppressing the price. No idea if that seller knows more than us though, or less. And it's not one I'm prepared to second guess. On safer territory ....... Centrica PLC (CNA:LSE): Last: 299.20, down 1.2 (-0.40%), High: 301.00, Low: 296.80, Volume: 4.29mBlock SocGen, I think, is selling ahead of the numbers tomorrow. We expect the trading update to be cautious given the impact of mild winter weather and lower UK gas/power prices (the impact of UK nuclear outages appears to be within existing guidance). To reflect these factors we have reduced our 2014e operating profit by c.£170m (c.£80m Downstream /c.£90m Upstream) and our adj. basic EPS by 4% from 20.7p to 19.9p. Our medium-term EPS forecasts are reduced more materially to reflect the recent declines in oil/gas/power forward curves - we have reduced our 2015 adj. basic EPS by 15% to 21.0p and our 2016e EPS by 21% to 20.3p. With much of the earnings decline experienced in the more lowly valued oil & gas division, the impact on the group's valuation is more limited but we have still reduced our price target from 295p to 280p. SG view We now forecast essentially flat EPS at around 21p for the next three years. While the dividend payout rises to sustain the real dividend growth policy (peaking at 92% in 2016), this payout level is (unfortunately) in line with many of its peers, and even after full cash dividends, the business should generate greater than £300m net cash flow. However, to meet Moody's more stringent (greater than 30%) RCF/floor metrics, we now model around 20% scrip dividend participation and a cut in E&P capex from £930m in 2014 to around £800m in 2015/16 (£500m longer term) which results in 32% RCF/net debt in 2016. Events, catalysts & risks Q3 IMS statement on 20 November. The fiscal regime for oil and gas producers will be reviewed in the Chancellor's Autumn Statement on 3 December (reversing the March 2011 increase in the tax rate of mature fields from 70% to 82% would be taken as a positive surprise). Pre-close analyst meetings will be held on 9 December. Risks to TP: downside - political or regulatory intervention and/or additional tax measures; failure to execute on the disposal programme; safety/technical issues; upside - higher commodity prices, a power market recovery or reduced political risks. .... and while on the sector, Severn Trent. Severn Trent PLC (SVT:LSE): Last: 2,061, up 38 (+1.88%), High: 2,067, Low: 2,039, Volume: 411.80kBlock HSBC saying much the same as Deutsche yesterday. Potential for outperformance Severn Trent (SVT) offers the highest RCV growth of 10% to 2020e compared to listed peers. We believe the new CEO, Liv Garfield, will be able to deliver operational improvements in order to allow Severn Trent to achieve a return on regulatory equity (RORE) at the upper end of the range of +3.35% to -4.85% over or below the base of 5.85%. Strengthening the balance sheet for growth: a dividend cut and a hybrid? Given the lower-return environment of the regulated business, we assume that SVT (with a new treasurer in place) might want to strengthen its balance sheet, in line with utility peers SSE, and National Grid, who issued hybrid debt. In such a scenario, there would be dilution to earnings. We have said in our reports on SSE and Grid, at the time when both issued hybrid debt that these instruments are applicable if there is a need for accelerated investment. Severn Trent has the largest RCV growth to 2020e of its listed peers, 10% vs. 2% as discussed above. The dilution of its dividend cover from a hybrid coupon may not obviate a dividend cut (we continue to assume a 15% rebasing) but would underpin its credit metrics. Severn Trent also still has some GBP400m of difference between the book value and fair value of its debt. We expect this to reduce as it refinances significant bonds in 2016 and 2018. SVT is trading on a 17% premium to March 2015e RCV. Many investors have said to us they believe that, post the final determinations in December, there might be offers for the remaining listed water stocks (seven have been taken private out of ten). The last three bids were at c30% EV/RCV premium. On our estimates, the takeout premium of recent deals would imply a valuation around 2,450p for SVT. TP increased to 2,080p from 1,890p rating upgraded to N from UW We use three methods - DCF, DDM, and SOTP - to value SVT. We take the average of these to derive our target price of 2080p (was 1890p). We have looked at the possibility of Severn Trent issuing GBP1bn hybrid. We have therefore reduced our net debt by GBP500m in 2015 to reflect the equity credit afforded by the rating agencies. We have also revisited its potential for increased returns on regulatory equity assuming it achieves a 3% premium above the base RORE of 5.85%. This increases the value creation over 5 years which we add to our sum of parts. It's odd the things that set off the rabble. Back when I lived in Shepherds Bush, the 24 hour grocer next door started selling goldfish Which seemed a weird diversification from overpriced milk and canned goods. Turns out he'd spotted a key market Which was Australians Every Sunday, they'd go to the Walkabout, get drunk and dare each other to drink live goldfish. He'd sell dozens of them. Until the police had a word. Anyway, is that us at midday yet? Oh, Lex Live's doing its thing today. Japan Equities today. Head over there now. It'll be more educational than here, though probably with fewer fish puns. Thanks for joining though. Particularly you, @Atarashī. See you all tomorrow.