Markets Live: Wednesday, 20th November, 2013 This is the transcript of the Markets Live session ending at 12:10 on 20 Nov 2013. For various boring reasons Celebrations after the former home of poet Philip Larkin and host of John Godber's Hull Truck Theatre was named UK city of culture 2017. The Yorkshire port beat off competition from Leicester, Dundee and Swansea Bay and succeeds Londonderry in Northern Ireland. No government money comes with the prize but it can be a catalyst for regeneration and is worth an estimated £60m, reports the FT's Andrew Bounds. I thought it was voted the worse city in England, like three times in a row But that was all previously Hull A city in the North East of England consisting of 10 per cent students and 90 per cent chavs (also see chav). Damn, that's the biggest gathering of chavs I've ever seen! What do you expect in Hull? Never been. Photo makes it look nice. I skimmed this Bernanke speech last night and thought stocks would be surging this morning I thought it was v v dovish My gut instinct remains that they won't taper in December @pseudonymosaurus: they do say Hull is other people. FTSE off 34 points at 6663. On what? Well, the possible misreading of the Fed .... We can focus on the bit about the labo (u) r market seeing "meaningful improvement" And the bit about how future tapering of bond purchases doesn't mean interest rates are on the way up. We can also note that we have home sales, retail sales and CPI all due later This is nearly unreadable. Under "GDP growth and inflation projections" Oh, I can't find the exact par now. But basically, the MPC's tying itself in knots to stress nothing. It's painfully balanced, middle-of-the road stuff. Here's what BNP Paribas made of it all. The MPC minutes revealed little that the Bank of England's Inflation Report, published last week, had not already flagged. The vote was 9-0 for unchanged policy, under the forward guidance framework, and there was little sign of much by way of dissenting views. The text of the minutes contain few surprises. The Committee noted that the news on the month remained consistent with a "sustained recovery in activity" in the UK, with surveys suggesting growth if anything faster in Q4 than Q3. The downside risks facing the economy included slow growth in real incomes as the key domestic risk. A key external risk continued to emanate from the euro-area and also a "disorderly adjustment" in some emerging markets. On inflation, the MPC noted that the recent appreciation of stetling would put further downward pressure on inflation next year. After Martin Weale's speech last week which focussed on the risks of inflation expectations becoming deanchored, one might have expected a somewhat more active discussion than the Committee had on the subject. The minutes dismiss some recent upward creep in inflation expectations as .."of little economic significance." Overall, the MPC noted the uncertainties over the "durability of the recovery" and moreover noted "there could be a case for not raising Bank Rate immediately when then 7% unemployment threshold was reached." This is a further re-iteration of the points made in last week's Inflation Report and press conference, that the 7.0% threshold is "not a trigger." Overall, the current post-guidance minutes sound like the range of disagreement on the Committee is actually less wide than itwas over the first half of the year. In one sense this is a surprise, given the pace of the improvement in the activity. In esscence the doves have come back into the pack, and for the hawks to start raising concerns will need some harder evidence that inflationary pressure, or inflation expectations, are rising. And for now that evidence is not really out there. That's David Tinsley, yes? here's Bryce, Bryce - credit Suisse The Bank of England minutes showed a unanimous vote on unchanged policy (rates at 0.5% and QE at £375bn). · The minutes were broadly in line with the attempts to convey a dovish message, as seen in the Inflation Report last week. · Of most interest was an in depth discussion of inflation expectations, with the MPC concluding that, "Set against that, some indicators of inflation expectations had risen. But these moves were thought to be of little economic significance. There were no major surprises from the November MPC minutes, which sought to convey a dovish message, broadly in line with what we saw from the Inflation Report last week. In particular the minutes reiterated that the 7% unemployment rate is not a trigger, but rather a way post at which point the committee will have learnt more about the recovery. The minutes state "But, with the proviso that medium-term inflation expectations remained sufficiently well anchored, the projections for growth and inflation under constant Bank Rate underlined that there could be a case for not raising Bank Rate immediately when the 7% unemployment threshold was reached. Once unemployment had reached 7%, the Committee would reassess what it had learned about the nature of the recovery. Also of interest was the discussion of inflation expectations. The minutes suggested that increases in inflation expectations in some surveys could be a result of news on increases in electricity and gas bills, and therefore likely to pass through in time. In addition, the minutes commented that modal inflation expectations from market participants that they had surveyed remained in line with the 2% target. Furthermore, "There had been little sign of higher inflation expectations feeding into larger wage increases." On productivity, the minutes stated that recent data had not changed the MPC's view that productivity is likely to increase over the forecast horizon (see chart 1) and that slack in the economy will therefore only gradually erode. In addition, the new MPC member Jon Cunliffe, "indicated that he would judge the appropriate stance for policy in line with the guidance framework adopted by the Committee." Royal Mail PLC (RMG:LSE): Last: 541.00, down 9 (-1.64%), High: 546.00, Low: 528.00, Volume: 1.54mBlock The research blackout comes off. And no-one thinks it's going to go up. Headlines this morning were about UBS. Which was instrumental in pushing this out the door at 330p. Which, incidentally, makes it the most European mispriced privatisation in at least a decade. Joseph's just done a post on that. But back to UBS ..... Now, there are two possibilities here ..... Analyst Dominic Edridge has put his professional integrity aside to conjure up an convincing argument that stretches 72 pages ... .... because he's been pressured to justify decisions taken several months ago by his employers. Or he just thinks Royal Mail's overpriced. I'll let you judge. Effective restructuring, but it gets tougher from now on Royal Mail plc (RMG) has successfully modernised over the past six years, helping it change from being loss-making to making a c5% group EBIT margin. However, we believe many of the easy wins (such as pricing) are now largely done, with future improvement likely to be slower, driven by: (1) reaping the benefits of investments already made; (2) the slow decline in staff numbers; and (3) growing revenues. We believe increasing prices dramatically would be counterproductive for the longer term, given negative volume elasticity. Recent developments generally positive Since the flotation, we have had a number of pieces of newsflow, including a new pension deal, constructive talks to avoid strike action as well as clarification of the extent of surplus property. We also note postal peers" share prices have been strong. We believe it will be difficult to accelerate workforce attrition, with margins set to rise gradually RMG has reduced UK employee numbers by 2.6% pa since 2006 and 2.7% since 2010. We believe this annual rate of 2,000-3,000 workers is likely to continue, and is very unlikely to accelerate materially, given the desire to avoid industrial unrest, which is likely to result in a new, multi-year no-compulsory redundancy deal. Although efficiency and productivity will rise, we believe getting to the top of the allowed 5-10% margin range is only possible after parcel automation. However, automation will only become attractive if staff costs can be reduced on the back of it. We forecast and believe RMG can get to the low end of the allowed range, but it is likely to take a number of years more than the market is currently anticipating. Parcel market likely to become increasingly competitive We believe the focus on parcels is the right one, and that RMG is the clear market leader for parcels of less than 2kg. However, the "easy" wins in terms of re-pricing are now largely done, with only parcels of less than 1kg now priced significantly below the market rate. We note the recent change to the maximum small parcel size may be a sign that RMG is going to have to be careful in a competitive market. No "Ofcom put" The regulator, Ofcom, wants RMG to achieve an EBIT margin of 5-10%, so there is some temptation to assume that RMG will get to those levels. We assume RMG gets to the lower end of the target, but the current share price appears to be discounting a scenario where it reaches and maintains a margin at the mid-to-top end of the allowed range. We also note the regulator is keen to not interfere with the market except where absolutely necessary. Valuation: Initiating with a Sell rating and £4.50 price target We value RMG via a DCF valuation, cross-checked with peer group multiples, with £330m of property value included. We assume a long-term margin of 6-6.5% versus the current 2014 forecast of 4.7% and company target of 7-8% in 2017. The current valuation discounts an 8% margin into perpetuity, in our view. It is a very good bit of research, as it happens. A lot of the criticism of UBS this morning seems spurious ..... Their scribbler makes an excellent argument a very convincing argument why this thing should have a 4 handle. The fact that the market currently disagrees would seem to misunderstand the point both of markets and analysis. Though I'm sure the Westminster "grilling" will straighten all this out, as Westminster "grillings" invariably fail to do. Want some more sellside? Barclays. They're sellers. Well, they're neutral with 16% downside. Why's that not a sell? Dunno. Parcelled for success Following milestone regulatory changes and a landmark pension agreement, Royal Mail Group is, in our view, set to benefit from: a) price flexibility, mitigating the impact of letter volume decline; 2) parcel volume growth, driven by rising online retail penetration and economic recovery; and 3) efficiency improvements and cost-containment potential. We forecast EPS CAGR of 21% over the next four years and robust free cash flow generation, allowing for aggressive deleveraging and a competitive dividend policy. However, following the share price performance since its listing, we believe the stock fully reflects the group's strong prospects. We therefore initiate coverage with an Equal Weight rating and a 466p price target. Price increases and rising parcel demand support top-line growth. Following last year's regulatory changes governing the UK postal sector, Royal Mail benefits from pricing flexibility around mail products, allowing the group to raise prices and hence generate adequate financial returns despite declining letter volumes. Meanwhile, growth momentum in the parcel market is robust, thanks to rising e-commerce penetration and economic recovery. Transformation and automation initiatives imply cost-cutting potential: The group is in the process of implementing a significant transformation strategy, focusing on improving its delivery systems and sorting processes. We expect rising productivity and reduced transformation costs to benefit the company's operating margins. Strong FCF generation capacity to boost dividends and reduce debt. Thanks to improved operating profit, we forecast free cash flow generation to average c.£400mn annually over the next four years. This will fuel dividend payment and deleveraging. We forecast the group's net debt to decline by c.90% over the next four years. Share price reflects a blue sky, though we think realistic, scenario. Based on our sum-of-the-parts analysis, we identify a price target of 466p, which, on calendar 2014 would imply an EV/EBIT of 9.6x (versus the sector at 9.4x). On our estimates, the current market price reflects more optimistic assumptions for volumes, restructuring and real-estate disposals, which, on our sensitivity analysis, could imply an upside case fair value of 575p. On the other hand, lower volumes and lower proceeds lead to our downside case valuation scenario of 334p. They're not a seller, but still reckon it's dead money. Our view: Following strong post-IPO performance (+67%) we initiate at Sector Perform, and would look for opportunistic entry points on a lower share price or on EPS upgrades. We see the shares valued as reflecting present restructuring goals and a strong management track record, but medium-term risks (parcel price, automation execution, industrial relations, volume outlook, 2015 political backdrop) counterbalance the present risk/reward outlook. Operating leverage potential through growth and efficiency gains. We project 2.1% revenue CAGR (2012/13-2016/17E) delivering 13.5% underlying EBIT CAGR, with margins lifting from 4.4% (2012/13A) to 6.7% (2016/17E). The largely fixed cost base and ~2-3% pa efficiency effects are key to margin growth. We project 13.5% p.a. clean EBIT CAGR to 16/17E with half from operating gearing, half from lower restructuring expenditure. This results in RBCe 20% p.a. e-commerce delivery opportunity sees Parcel revenue growth offsetting declining letter mail demand. We see parcels becoming the majority (52%) of revenues in 2013/14E. While electronic media cause substitution of traditional letter mail, our research suggests it also drives increased e-commerce demand. Royal Mail has a 53% UK parcel volume market share - and is unique in being able to offer parcel delivery six days a week to every UK household. Cash improvement could outpace operating profit development. We forecast that lower transformation investment on rising profits could see cash dividend cover increase on a dividend that could grow to £281 million at a 50% payout of adjusted profits by 2017 (28% cash DPS CAGR). Base case - Restructuring growth into yield. We project Royal Mail to see improving EBIT, EBIT margin, and cash generation in the next three years. We set a 580p price target based on the NPV of 2015/16E profits on peer multiples. 70p of our price target is based on an assessment of property disposal value, which could crystallise over the next three years. This implies 19.5x current year PER but 10.6x 15/16E when earnings growth normalizes and peers trade at 13x. We see a current 3.5% yield growing to 4.5%. Upside potential due to efficiencies. Royal Mail is investigating UK parcel sorting automation (presently manual). In the next three years, as parcel demand grows and letters shrink, Royal Mail deautomates. Potentially, in the longer term, after capex and employee exit costs, efficiency could lift. Peer benchmark analysis suggests that UK EBIT margins could more than double from our base case and yet still be below bpost's levels. This could see our price target almost double to £10. Risk arises from volume decline, price sensitivity thresholds, competitor response, and from labour force and industrial unrest threats - all of which contribute to our Sector Perform recommendation. Merrill? Dead money as well. On a PE premium to peer average, with a market yield In our view, the strong share price performance of Royal Mail since IPO has captured most of the obvious upside potential. While we believe the stock might surprise in terms of cost-cutting or "hidden value" in the property portfolio, it should not be forgotten that the core mail operations remain under pressure and that there are risks to parcels growth and industrial relations. The shares trade on 14.9x CY14E PE, 7.4x EV/EBITDA, with a CY14E dividend yield of 3.5%. That puts it above the peer group average and in line with the market average yield, which feels about right, in our view. They sort parcels manually? Property offers some upside potential, but uncertain Recent debate has focused on Royal Mail's surplus London property portfolio. Our analysis suggests that the three main sites may have a combined value of £480m, although this assessment is subjective and the timing of any sale uncertain. If we were to "back out" this property value in full, the stock would trade on 13.6x 14E PE and 6.8x EV/EBITDA, in line with the peer group. Strong EBIT growth expected as costs are reduced Royal Mail is targeting a c.7-8% in 3-5 years, which we think is realistic. We forecast sales to grow 3.9% in FY14E, 3.0% in FY15E and 2.6% in FY16E. We expect tight underlying cost control, operating leverage and falling transformation-related costs (from £195m in FY13A to £108m by FY16E), to drive EBIT margins up from 4.4% in FY13A to 6.2% by FY16E. As a result, we expect EBIT to grow c.15% p.a. on average FY13-16E. But superior growth and cash dynamics offset by other risks The strong growth and cash generation (100%+ Op.CF/EBITDA conversion) should not overshadow other areas of risk, in our view. Mail volume declines of 4 to 6% are higher than average for Europe (with no guarantee that they will not deteriorate further), the parcels growth strategy is not risk-free and negotiations with the workforce on a new pay deal still require resolution. Okay, plenty to digest there Bryce No profit warnings today to speak of @TK: you're not a train user, I suspect. Yeah, first day in ages we've not had a warning. Results we have are mostly quite dull. So instead, and since it's nearly half time, can I highlight this great story in the paper? On our old favourite Man Group. I remember working for a company that split its floors in to sublease half a level. It didn't end well. It did end though. Which, needless to say, leads us to have a look around Man's offices. Thanks to regular poster @Swedes for this link. Note, "cooking theatres" What's a cooking theatre? I dread to imagine .... Expensive taste in lightware. Verner Panton Topans above the bar ... Flos Arco in the background ... Nice 1930s club armchairs, for that Great Depression vibe. Anyway, that's enough of that. Man Group PLC (EMG:LSE): Last: 83.40, down 0.5 (-0.60%), High: 84.70, Low: 82.80, Volume: 1.28mBlock Okay, back to business I guess. But not that Graham Wallace At least I don't think so Ex of Man City? Exited in January. Having joined in 2009. Mr Wallace was employed by Manchester City Football Club, first as Chief Financial Officer (March 2009 - October 2010), and then as Chief Operating Officer (October 2010 - January 2013), during a period of unprecedented success in that club's history. Whilst at Manchester City, Mr Wallace led the transformational changes in the business after the acquisition of the club by Abu Dhabi United Group, implementing world class business processes and corporate governance standards. Before joining Manchester City, Mr Wallace was Senior Vice President and Chief Financial Officer of IMG Media, the global sports and entertainment media company, from October 2006 to March 2009. Mr Wallace, originally from Dumfries, also has a degree in business management from Robert Gordon University. Seems to spread himself around a bit .... Current Partnerships and Directorships: Marlborough Sports Media Ltd. Past Directorships and other positions: CSI Sports Limited CSI Sports Trading Limited Darlow Smithson Productions Limited Great Percy Productions Limited IMG Media Limited International Management Group (UK) Limited Manchester City Football Club Limited PGA European Tour Productions Limited Sports New Television Management Limited Tiger Aspect Assets Limited Tiger Aspect Films Limited Tiger Aspect Holdings Limited Tiger Aspect Pictures (Dog Eat Dog) Limited Tiger Aspect Pictures (Royston Vasey) Limited Tiger Aspect Pictures (Tosspot) Limited Tiger Aspect Pictures Limited Tiger Aspect Productions Limited Tiger Aspect Scotland Limited Tiger Television Limited Tigress Productions Limited TWI Interactive Limited Now, I guess this needs ratified at the forthcoming AGM. there's a possibility he'll get bumped straight back out again by the rebel group. Which'd be awkward, if not entirely out of character for this slowmotion shambles of a company. Rangers International Football Club PLC (RFC:LSE): Last: 41.50, down 1 (-2.35%), High: 41.50, Low: 41.50, Volume: 26.63kBlock Rivington Street Holdings Is this Jim Mellon vehicle? Was suspended last month I think. Mr Mellon's the chairman. Ah yes, remember now We'll know them best as the parent company of Bishopsgate Communications. An ex Ah, it owns/owned T1ps.com Yup, his curious Isle of Man-themed pizza place is in Rivington Street, isn't it? I assume that's not coincidental. And, to be clear, Tom left some time ago. We'll point that out before he does. Back up the market? But to what I'm not so sure Trying to think .... There's not that much around really. Vodafone's ex div ..... Vodafone Group PLC (VOD:LSE): Last: 226.95, down 5.1 (-2.20%), High: 229.20, Low: 226.65, Volume: 21.38mBlock @Swedes: very funny. Which makes putting up this note from Citigroup look gratuitous, but I will anyway. Simon Weeden reckons Vod might be a takeover target for AT&T. Stop me if you've heard it before. I thought Lex decided was a daft idea? Oh, that was old Lex. We're now in the age of Lex 2.0, AV edition. Anway, here's what Simon Weeden thinks. Part of a massive telco thing called "barbarians at the gate" Asset scarcity, tax point to more upside for Vodafone - We see the smaller, post-VZW Vodafone as a potential bid target. As has been widely covered in the press and as we outline in this report, we see SoftBank and AT&T, possibly in partnership with América Móvil, as potential bidders. We retain our Buy rating on Vodafone with an increased target price of 260p (from 235p) ex 11p in dividend. To calculate our target price we take the average of our "Transaction" SOP of 290p, which reflects a bid premium, and our "Go-it-alone" SOP of 250p, now including tax assets at an NPV at £7.9bn or 16p/share, and then deduct the dividend. Limited downside under Go-it-alone SOP; Project Spring accretive in time - We see relatively little downside to Vodafone even without a bid, given peers are trading at an average of 6.2x 2014E EBITDA vs 5.5x for Vodafone ex Project Spring. We expect a dramatic improvement in its top-line growth over the next 12 months due to fading of multiple sources of deflation, notably MTR and roaming price cuts, migration to Vodafone Red and loss of some MVNO contracts. On our forecasts, EBITDA in FY14E rises 5% it £13.4bn due to bringing forward the consolidation of KDG and falls 5% in FY15E to accommodate Project Spring. AT&T's Possible European Re-Union - AT&T's potential interest in European wireless parallels Vodafone's rationale for Project Spring, we think. In AT&T's case, we characterize this as a triple-bottom thesis with: 1) the economic cycle, 2) the industry regulatory cycle and 3) the product cycle at or close to their respective troughs with LTE deploying and the European Commission's more supportive stance. We remain cautious on any future benefits to AT&T though, as European telcos are still managed on a country-by-country basis, and repatriation of cash may face tax hurdles. SoftBank ambitions could be met by acquisition of Vodafone - We think an acquisition of Vodafone could make sense for SoftBank, as it is seeking scale and likely to prioritize network capabilities. Vodafone's ample spectrum in the 2.6GHz band is probably attractive to SoftBank given its focus on TD-LTE. If SoftBank is able to use spectrum in this band in each of Japan, the US and Europe we believe it would quickly be able to realise device and equipment cost synergies. ... Mentioned Softbank here in the past. It's an interesting idea. If only because a sniff of competition might force AT&T to stop faffing around. AMX interest in India - With AMX's attempt to buy the shares that it did not already own in KPN having failed in mid-October, and presumed genuine ambitions to diversify geographically, we think it could be interested in buying Vodafone's assets in India or Eastern Europe, if they were to come up for sale, although it has given no indications it plans to. If AT&T (which owns c.10% of AMX) were to proceed with an acquisition of Vodafone, we think AMX might partner by buying some of Vodafone's developing market assets to expand its footprint and make financing less challenging for AT&T. And want to read the tax stuff? Which, history tells us, the sellside tends to get wildly wrong. Vodafone has significant tax losses with £20.2bn of tax assets recognized on its balance sheet, which we value at £7.9bn (16p/share) assuming no change in the structure of the group. Vodafone says that these losses would be available to a potential acquirer depending upon the jurisdiction and structure of a transaction. These and the ability of multinationals to optimize their tax affairs could be a significant dimension in any deal and could release additional value. If the use of Vodafone's tax losses can be accelerated to £1bn pa (from £0.67bn), this adds £2.5bn in value or 5p per Vodafone share. However, in the case of a US bidder there is a catch, which is that as US tax on repatriation of foreign earnings is applied to any profits upstreamed from abroad to the US top company, any benefit would be negated once repatriated. In general, we believe that any bidder could effect a structure for an acquisition of Vodafone, which would keep the Luxembourg losses in place and keep most or all of Vodafone's German losses for use in its existing German operations. A US bidder may be able to apply an asset purchase structure to create tax deductible goodwill to offset against US tax on repatriation of foreign earnings, although given the complexity of this undertaking we are not clear about possible consequences of an asset purchase (rather than a stock purchase) for other aspects of the tax structure. @TheLeggie: I'd not be assuming that. Actaulluy, jsut on US tax did you notice this thing overnight @anthrax: that might just be you. Dem senators tabled a proposal to slap a windfall tax of 20% on all US corporate cash held abroad 20% on somethhing like 2 trillion Sure it will never happen, given the US congress But it's a talking point once again Nice little big of uncertainty to throw into the mix Wait, what? Tax 20% of foreign cash annually? Or some kind of one-off? That's nearly unworkable. But it might encourage a bit of spending And/or special divis Do you get charged the one-off tax on the amount your offshore tax pile rises each year? Or can you put $1 into Luxembourg then dump the other $130bn in there in 12 months and a day? Won't happen. Silly idea, albeit a well-intentioned one. Oh, while we didn't have any big UK profit warnings today ..... Note Worley Parsons overnight. Talking about a ""delay" in the market upturn The decline in the Australian business has been greater than expected, as hydrocarbons projects in northern Australia move into the final construction and delivery phase and the minerals and metals business remains weak It's been a terrible results season for the oil services companies .... .... and for anything reliant on Australia. Not sure who's left of the UK stocks to warn, but I'd not be getting involved with SGS in the meantime. As discussed previously, much of the problem's America's 35 per cent tax rate Which encourages such avoidance. In fact, it assumes the avoidance. Avoidance is hardwired into the US corporate tax system. Oh, should mention BSkyB before we knock off. British Sky Broadcasting Group PLC (BSY:LSE): Last: 836.50, up 11.5 (+1.39%), High: 838.50, Low: 821.50, Volume: 2.02mBlock CEO on the tape this morning saying they think they can get BT to sell them football wholesale. I'd prefer to hear BT's opinion on that, personally. Yes, sounded a bit panicky to me Also talking about advertising being better than expected. Which it's safe to say, because advertising's value to Sky is negligible. Heavens have just opened here Proper winter has arrived Meanwhile, I'd note that Sky's in rather aggressive customer retention mode right now. So they're offering £21.50 a month with free installation And you'll get a £100 credit on your account If you buy before tomorrow ... Plus £116 cashback. All in all, it works out at less than £43 for the whole 12 months. You can't afford not to do it Looks to me like they're charging a twelfth of their ARPU to get new signups. To me, that looks desperate. That's not utility behaviour. Looks like i will have to eat in the bloody canteen today