Markets Live: Monday, 29th April, 2013 This is the transcript of the Markets Live session ending at 12:07 on 29 Apr 2013. Participants in this session were: Bryce Elder Tony Tassell Yeah, we're late. Welcome to Markets Live, FT Alphaville's daily thing with the words and numbers and stuff. Hello Tony, thanks for joining. always glad to be a standin Paul is out for the morning so you get an Australian in his place Contact building. Can't be underestimated. i thought email had done away with that or at least that is what the prs think so lots around this morning..i see it is now customary for you start with a pic Who were you thinking? we are spoilt for choices no? Enrico Letta - the new Italian Prime minister Done him too many times. Also, he looks a bit too Hammer Horror for a Monday. or we could plop for Javier Marin who is apparently now taking over from Alfredo Saenz as ceo of Santander if only to highlight this classic bloomberg headline No German Jain Bringing Deutsche Bank to World as Customer's Man we should call him that from now on No German Jain That fits the usual criteria of a Bloomberg headline: a series of words unconnected to each other. good piece actually that one apart from the headline but i guess we have to start with Arpi no? Arki Busson (he's the one on the right) Who, despite appearances, is not a character played by Chris Morris in Brass Eye. ah..that is the great man This, of course, is because we have no Ark Gala Ball this year. Because apparently the focus of the ball had drifted a bit too far from the whole "helping children" thing. And may have focused a tad too much on the whole "obnoxious gaudy self-satisfied ostentation" thing. end of an era of course.. Congratulations, incidentally, to Sam Jones for getting "the dernier cri in sybaritism" into a news story. yes i was going to mention that Nice detail, here ... The 2010 evening ... featured a starter of lobster: the crustacea, topped with guacamole and dressed as babies, arrived at tables in vintage prams pushed by nurses. I'm hoping that doesn't mean actual nurses. One would've thought they'd be better utilised in a hospital. sounds like a brand of champagne really - dernier cri So anyway, we will assume that everyone who would've attended will be donating the £10k per head ticket price. Since it was all about the charity, right? And not just another day of living high on the hog for a bunch of tousle-haired tax dodgers with yacht tans? And with that rant over, perhaps we should start the show. full glory photos of the last dinner here should you want to see another pic of princess beatrice etc Capt B...good to see you have your priorities worked out (Rising. Sense. Of. Class War. Must. Fight. Make. It. To midday ....) Right. Where to begin? real pity Princess Beatrice did not take up the work experience stint on Alphaville btw True, true. She'd have brought an alternative insight. and some interesting fascinators So anyway, big board's at 6424 at the moment. Volume's meh, even for a Monday. In terms of corporate news, it's rats and pasties. where do you want to go to first...italy? stock spec? Requests on the right for Rentokil, so let's head there. Rentokil Initial PLC (RTO:LSE): Last: 101.90, up 5.25 (+5.43%), High: 105.00, Low: 100.50, Volume: 5.04mBlock what is up in rat catcher world? Good response to the news that they're paying £40m for someone to take away their City Link business. That someone being Better Capital, who are funding the MBO. Cash cost to Rentokil of about £10m and an asset write-down of £30m. Purchase price of a quid. is that really enough to move the share price now? how rentokil has fallen Well, this is where it gets more complicated. This has been very well flagged. Was flagged at the meetings post the last set of results. Management talked explicitly about it being gone in the short term. They didn't bother putting that in an RNS though. Which some may see as a bit slack. So, in terms of the guidance ...... Company expects consensus to move to £215m PBTA for FY13, as in removing a £5-10m City Link FY forecast loss. kind of tactic? just keep announcing stuff and the bot traders respond Though a few analysts" loss forecasts were £15m-plus for this year, so there's a bit of flex in that guidance. (Personally, I think the bots are now the strawmen of every share price move. Eventually, we will just have to accept that the people are pressing the buttons first and that the people are often dumb as sand.) Cannacord still thinks there is 20 per cent downside from here for Rentokil Yeah, the Q1 figures dragged forward from Friday do look rather rough. At least, not good enough to undo the bear case. Give us a look at Canaccord then. The disposal of CityLink is earnings enhancing in the current year and earnings neutral in 2014. Adjusting for the disposal would imply consensus PBT forecasts for the current year increasing c4% from £208M to c£216M. Nevertheless, given the softening in Continental Europe, we leave our £210M PBT forecast unchanged.ValuationPost the disposal of CityLink we make no adjustment to our price target. Within our valuation we had valued CityLink at 0p. Investor attention on the quality of Core businesses should increase post disposal. However, and as highlighted in our note on Friday ("Rating fails to reflect a lack of pricing power") we think there are fundamental challenges within the Core business. The stock trades on a Dec-13E P/E of around 11.5X (which rises to around 13X if one-off costs are added back). We would strongly advise investors SELL shares (18% downside to our 80p price target) into any bounce post the CityLink disposal. Similar message from Cazenove. core results are weaker than expected with revenue of £645m compared to our forecast of £671m and operating profit of £37m compared to our forecast of £40m.  The underlying organic revenue was down 2.1% which is worse than organic revenue growth of 0.3% of Q4. Management mentions portfolio change within Facilities Services and weather. The statement says that Rentokil experienced mixed trading during Q1 with weaker trading in Continental Europe (c.40% of revenues) and better trading elsewhere.  Cash flow has deteriorated to an outflow of £34m compared to an outflow of £19m. Management expects cash flow to strengthen during the year.  Management says that they have retained their guidance. Given that, presumably, this excluded the loss from City Link we wonder whether this means that other businesses are expected to see worse trading. We had expected City Link to make a loss of £10m in 2013.  Estimates; currently we forecast 2013 EPS of 8.2p compared to Bloomberg consensus of 8.2p. In 2014, we forecast EPS of 9.6p compared to Bloomberg consensus of 9.5p. Given the guidance from management we believe estimates will be largely unchanged.  Recommendation; we have an Underweight on Rentokil. The disposal of City Link is positive in that it removes a loss making division and a distraction. However, management has mentioned a number of times that the business is likely to be sold and the division is effectively being given away. On the negative side, core trading at Rentokil has worsened. We believe the core businesses are likely to face continued structural pressures and retain our Underweight. Rentokil trades on a 2014E PER of 10.1x compared to the Business Services sector on 14.5x. And from Deutsche Bank. A sale of Initial Facilities would be a more significant event as it would allow more meaningful M&A. However, we are sceptical of the ease of exiting that business. Organic revenue growth was down -2.1% in Q1 (up 0.8% in Q4 2012) The weakness is pinned down to poor weather in the US, portfolio changes at Initial Facilities (walking away from some single-service cleaning contracts), further weakness in Europe and pricing issues in Benelux and France. The core business was overall broadly flat in Q1 with Pest and Workwear slightly up and Hygiene slightly down. Adjusted EBITA was up 12.3% in constant currency but that includes City Link. Excluding City Link adjusted EBITA was down -1.6%, with the weakness coming from Workwear and Facilities. We note that the cost savings target for 2013E has gone from £50m to £40m ex City Link (we believe c.£30m ex Initial Facilities), which now represents a smaller proportion of the EBITA base (c.15% versus c.19% previously). EBITA ex City Link and IFS was flat YonY at c.£39m in the quarter, which implies some small decline after cost savings (stated as sub-£10m in the quarter). Company guidance implies meaningful improvement in the core in H2. Cash flow was a negative £33.8m but Rentokil believe this would be offset over the course of 2013E and still expect net debt of just sub £1bn (flat YonY). Valuation and conclusion Rentokil is trading on 11x 2014E PE (a year when cost savings will slow). We do not believe there should be a re-rating on the back of the City Link sale as it does little to earnings, and the core is struggling to match nominal GDP growth and improve profitability ex cost savings. We believe Rentokil's core business will struggle to outperform nominal GDP in the long run. Hold. (@L'Hermitte: it's nowhere near foreplay yet. It's gossiping about each other on their Facebook walls.) maybe rentokil just need to reinvent themselves...kind of big data company - they know a lot about their customer habits...that seems to be the business model for some companies..does not matter what you sell or for how much..just as long as you get the data Like Iron Mountain? who are they? i should know apologies Was that what it was called? That thing Autonomy bought, possibly out of (or at least near to) Chapter 11. Had many interesting trade type conversations about data security, all along the lines of "there are no barriers for entry at all and one mistake means you're knackered" Think their speciality of killing vermin and feeding pot plants is probably safer, in the round. muppet central...well i was being a little facetious Okay - what next? Greggs? Or something more interesting? sure..you are on a rolll ok...i know that was bad So - yet another profit warning from what was meant to be a "buy and forget" stock. so Greggs have been struck by the curse of the Apprentice Oh, did they touch that reverse Midas? the runner up last year got a big promotion after the series Helen Milligan will now head the retail side of the company in the South East of England. She will be running 200 Greggs stores and will be in charge of 2,300 employees. Before her stint on the BBC television show, Milligan was the Executive Assistant to the CEO of the bakery company. I see they start a fly-on-the-wall documentary on Sky this evening too. Not, to be clear, actual flies. anyone know if she is still there Anyway, LFL sales down 4.4%. Deterioration from 4% at the 11wk stage. yes that docu is actually meant to be good Company talking about an improving trend in the past fortnight, which has the ring of desperation really. much lower footfall across the estate Transaction values basically flat. increased competition or just conditions on the high street? I'm quite sure there are too many of them. They've over expanded. As mentioned previously, there are three on the street I live. saw their whizzy new store at Stratford on the weekend...that could be an expensive rollout if they go down that route Refits are just part of retailing. The idea of them being somehow exceptional is nonsense. So, let's get some grey up here. Canaccord again? sure go for it..if they are go to people on pasties We are also mindful that this trading performance would have been worse if not for the higher level of promotional deals. We are reducing our forecasts by 11% to reflect this negative margin impact and pressures from food cost inflation, particularly flour. Our new PBT forecast is £45.9m, which is below the lowest point of the current consensus range. Greggs is entering a period where the last 9 weeks of the first half are up against a comparative of -3.7%. However, the trading backdrop appears unlikely to change much and, whilst the LFL trend may improve modestly, this is a function of the weaker comparatives and should not detract from the worsening margin performance and the structural challenges facing Greggs. The strategy for 2013 is two-fold: (1) Increase investment in the core estate with a fast pace of refurbishments as opposed to new openings. The higher level of shop closures will have a negative impact on LFL sales but over the medium term should stem the overall decline. (2) At the same time the group will invest behind its new wholesale and franchise business. We are positive on these developments as we feel a refurbished estate away from the High Street should provide the group with greater pricing power, and the opportunity to improve the quality, depth and breadth of range. Greggs remains a highly cash generative business with EBITDA of c.£77m, funding capex of c£60m and £20m of dividends. The latter is important considering the lack of EPS growth. The Greggs model suits the use of Quest and after today's forecast changes CFROA is forecast to fall below WACC in 2013 and beyond. This drives our SELL recommendation and new target price of 380p (previously 485p). Citi, meanwhile, thinks it's looking cheapish. Valuation increasingly attractive: While the shares" valuation is looking increasingly attractive, trading on 11.6x and 10.6x 2013e and 2014e EPS (predowngrades), 5x and 4.5x 2013 and 2014 EV/EBITDA and 5% dividend yield, key to the shares breaking out from its current range is see an improvement in LFL performance (which should be possible given investment and easing comparatives). We maintain our Neutral rating. Greggs PLC (GRG:LSE): Last: 423.70, down 38.8 (-8.39%), High: 439.71, Low: 421.60, Volume: 670.48kBlock Okay - what now? You mentioned Italy earlier, what were you thinking? By which I mean, "what was on your mind" rather than "are you out of your mind?" very strong bond auction and reaction to the new government... so basically we have this situation: Mayhem greets Italy's grand coalition By Guy Dinmore in Rome ©AP A man was arrested by police after the shooting outside the Italian premier's office Mario Monti and his technocrats were propelled into office 18 months ago by an external crisis on panicking debt markets. so bond markets happy Italy 10y at its lowest since 2010 ... Italian 10-year yields dropped nine basis points, or 0.09 percentage point, to 3.97 percent at 10:41 a.m. London time after falling to 3.89 percent on April 23, the lowest since Oct. 27, 2010. The 5.5 percent bond maturing in November 2022 rose 0.715, or 7.15 euros per 1,000-euro ($1,308) face amount, to 112.31. Two-year yields slid seven basis points to 1.22 percent after falling to 1.13 percent on April 23, the least on record. Spain (GSPG10YR) "s 10-year bond yield declined three basis points to 4.25 percent, after reaching 4.20 percent, the lowest since Nov. 1, 2010. that is from bloomie Hooray. Crisis over. FTSE celebrates by rising 0.05 of a point. there must have been a lot of money made betting on a rally in those bonds in the last year... down from around 7 per cent? anyway i have some macro reaction if you care for it And lost heading the other way, of course. The structural flaw of forced liquidations at the bottom tend to transfer money rather effectively among participants. Anyway, yes, fire away. Who's this from? yes of course...i was just thinking of the missed opportunities for a bullish investor do you want Italian or Brit view? well lets start with Simon Derrick of BNY Mellon 53% of Italians now "tend to mistrust" the EU compared to just 28% in 2007 according Eurobarometer (the EU's polling organisation). Recognising this simple political reality, new Italian Prime Minister Enrico Letta has already promised to challenge the EU, noting: "Europe's policy of austerity is no longer sufficient." The question now is whether he is prepared to put his money where his mouth is. It seems likely that we will find out very quickly. Mr Berlusconi had previously made clear that he wanted the next government to abolish the housing tax imposed last year by Mr Monti's government and to pay back Italians the EUR 8 Bn in tax they have already paid. Sure enough, Renato Brunetta, the leader of the People of Liberty in the lower house, has already warned that the party will not support the government in the upcoming confidence vote unless Mr Letta makes a commitment to the abolition of the tax imposed last year and restitution of the tax already paid (the vote must be held within 10 days of the cabinet being sworn in). With few other politicians seemingly willing to take on the herculean task of building a workable coalition given the current electoral split, it seems reasonable to suppose that a "no confidence" vote would trigger a move towards a fresh general election, presumably in October. Assuming that Mr Letta were to accede to this call for a sustained pushback against austerity (which we suspect he probably will) and were to win the confidence vote (ditto) then the next question is how the ECB will respond. The Bank has made clear that the terms of its OMT program - one of the three pillars of relative stability in Euro-area debt this past year - is conditional upon implementation of existing programs and an unrelenting focus on low, stable fiscal deficits. Last week, the ECB's Vice-President Vitor Constancio cast doubt on the merits of easing up, noting that "easing up on measures aimed at cutting government debt could merely increase countries" borrowing costs rather than triggering growth; and colleague Joerg Asmussen said, " (A) sound fiscal condition is really a precondition for growth ... If one postpones fiscal consolidation to a later day that comes not without risks." This has been the stated position of the Bank since last autumn, and as yet there seems little imminent prospect of change. Whether the Euro-area's "creditor" states are still prepared to back a hard-line stance by the ECB or not remains to be seen. However, for the moment, Mr Letta finds himself caught between a rock and a hard place. No wonder that he noted "I repeat this is a complicated and difficult attempt" to build a workable government for Italy. and some reaction from Dr. Loredana Federico of Unicredit the reform agenda is likely to be focused on two main topics: ■ Urgent economic and social reforms. This will likely include: 1. Measures to quickly support low-income households. Here, the main issues will be the decision about the VAT hike from 21% to 22%, which will be in place from July 2013, and discussions about some mitigating intervention in the property tax (IMU) on first homes; 2. Measures to support employment. Here, the main interventions will likely be aimed at supporting youth employment (probably, with some tax credits) and to make less stringent (at least, in the current phase) the regulation of temporary job contracts; 3. Measures to support firms. Here, the focal points will be further actions to finalize and speed up the payments of all arrears by government entities, as well as to support access to credit for SMEs (probably by strengthening the role of the Guarantee Fund for SMEs). These issues are expected to be high on the government's agenda. In addition, Letta is likely to talk about some interventions for the Southern regions of the country, where the growth and unemployment issues are more pressing. It will be interesting to hear whether Letta speaks about the need to go ahead with the tax reform (as suggested by the wise men), which also includes a change in cadastral values (value of property for tax purposes; bringing them closer to the market value) - essential for greater fairness and effectiveness of property taxation. ■ The reform of politics. Some constitutional reforms aimed at overcoming the current version of bicameralism system and, within this framework, reducing the number of MPs (and, hence the cost of politics). On these proposals, it should be possible to find a rapid convergence among the main political parties supporting Letta's government; 2. The long-awaited reform of the electoral system. While changing the electoral law merely requires a law which can be passed by a simple majority in parliament, the whole process may take a long time and probably involve difficult negotiations among the political parties. The financing of the political system. All these interventions are expected to be high on the government's agenda. It is difficult to predict if Letta will talk about the constitutional reform of parliamentary powers involving, for example, the possibility of moving towards a presidential system, as opposed to the current parliamentary system, or about judicial reform, also including measures aimed at reducing the length of judiciary trials. In our view, Letta's decision to appoint Cancellieri as minister of justice, as opposed to a political figure, should be considered encouraging news. as clearly stated several times by President Napolitano last week, a grand coalition government remained the only possibility of forming a government in Italy after the outcome of the general elections - and hence avoiding calling fresh elections with the current electoral system, as no party would be able to guarantee a majority in both houses of Parliament if new elections were to be held. We believe that Napolitano, now in a much stronger position, will continue to put great pressure on PM Letta and the parties that back his government in order to reach a compromise on the main issues of the government agenda, starting with the reform of the electoral law. Stay tuned. Okay - back to stocks I guess ...... (always a good idea ENRC being discussed on the right, somewhat inevitably. Now, we're a little in what we can say. brave call to make wading into ENRC as an investor And, frankly, as a commentator. But I'll note there seems to be a huge amount of apparently price-sensitive information that's getting wide circulation. When does this become a problem? information or speculation? at least the shares are not suspended like Bumi I mean, honestly, you can't stroll round Berkeley Square at the moment without an irate Kazakh thrusting bundles of "private and confidential" papers in your hand. There are so many factions lobbying against each other that the dodgy dossiers are being handed out like pizza delivery fliers. And the usual rule here is that, when a journalist finds out, a lot of people already know. So, at what point does ENRC become a false market? Is it a false market already? Certainly looks like one to me. Eurasian Natural Resources Corporation PLC (ENRC:LSE): Last: 276.10, up 6.8 (+2.53%), High: 282.70, Low: 268.31, Volume: 2.60mBlock surely there are enough health warnings out there to deter the widows and orphans But, also, will be able to get their IMS out that's due this month? Trading update that takes the place of a proper quarterly report. Demanded by European law I think. Given the boardroom seems to have fragmented 18 different ways, will they pull it together in time? Or might they end up like Bumi and get suspended as they add up the numbers? well here maybe more bad news on ENRC but surely the outcome is like fjp73 suggested on the right it is just a question who take the company out To me, the price doesn't seem to reflect the possibility of very very bad news indeed. Which, I emphasise, is a possibility on which I am speculating. And it's solely speculation. philosophically i think stocks should continue to trade in these situations... it is more an issue of how regulators should act to improve the flow of information if there is material issues to disclose Philosophically I agree. But with the stamping on grey market information by the regulators, I'm not sure how anyone can abide the sheer amount of briefings happening and paperwork getting left in the back of taxis at the moment. Over on Planet Nomura, they've upgraded this thing. With only passing reference to the criminal investigation ongoing. Big note about China, basically. Has to cover the sector, takes ENRC off the sell list. For completists, here's the relevant bit. a focus on the fundamentals then? Positives • Revised growth strategy - Necessary consolidation of the group's DRC assets has now been completed and capex budget has been reduced to focus on more capital efficient DRC copper and Kazakh iron ore. • Volume growth - We expect key assets to deliver 85ktpa copper (Frontier in DRC), 70kpta copper (Kolwezi in DRC) and 440ktpa ferrochrome (Aktobe in Kazakhstan) over the next two years. • Ferroalloy division - This a high-quality asset, but exposed to steep price decline. • Take-out potential - Founders and the Kazakh government are in discussion to make an offer for ENRC. An offer at fundamental NPV of 439p per share would value ENRC at ~13x and ~6x on 2013E P/E and EV/EBITDA. • Potential weakening of Kazakh tenge and mineral extraction tax relief would provide immediate margin relief. Yup - they find five positives. Heroic stuff. Negatives • Corporate governance issues - The resignation of chairman, CCO and executives, replacement of legal counsel, and formal investigation by Serious Fraud Office (SFO) are many corporate governance issues that the company is facing. • Higher geopolitical risk - the majority of its near-term earnings/growth is still focused in DRC and Kazakhstan. • DRC copper concentrate export ban - The company faces a significant impact from the recent export ban on copper and cobalt concentrate in DRC. • Weak balance sheet - Lower profits with substantial capex have driven net debt to 2.5x net debt/EBITDA (2013) and negative free cash flow expected in 2013 and 2014. • Ferrochrome market - There is short-term downside given exposure to potential fall in Chinese spot ferrochrome prices after cyclical restocking and weak South African rand. does Nomura have a relationship with ENRC dare i ask Not of which I'm aware. MOST and Deutsche took the hospital pass of being this thing's house broker. maybe this is a rationalisatio of reverse engineering of the buy argument - it will be taken out eventually Nearly out of time - best mention Invensys. On the Sunday Times's sensational story that there was an RNS a fortnight ago. That saved you the cost of going through their paywall. Next - Balfour Beatty? Third profit warning in six months. c. £50m of operating profit deterioration in the UK construction business Its biggest division, needless to say. So, analysts talking about a 20% hit to earnings. In terms of what went wrong, folk playing down the sector readthrough. Execution the problem, not market. Here's Citi with a good summary. What has happened ? This does not appear to be a volume issue - the problem looks to be execution on the existing contract base. BALF has been conducting a review of its 950 UK contracts since the end of last year and the findings emerged last week, leading to today's statement. The ongoing restructuring BALF has been conducting for the last year or so may have contributed to some issues, and CEO Andrew McNaughton is taking control of the UK business. The main problem has been the UK regional business, where supply chain issues and cost over-runs have driven down profits. This may lead to further restructuring, and some areas may be deemed un-commercial in the future. However some issues have also arisen in a few major national contracts. Impact on cash - BALF has seen major working capital outflows in recent years and management were already guiding to £200m of cash outflow as construction volumes fall. This is not a volume issue - however the £50m profit deterioration will quickly fall through to cash. Our initial take is that average net debt this year should increase to c. £300m, with the year end figure approaching £300m. This would remain within funding headroom (BALF recently refinanced and has c. £600m), however we would not rule out further asset disposals to shore up the balance sheet (PFI and possibly some businesses). And Merrill, if only for a second opinion. A £50mn reduction in operating profit forecast for Construction would imply close to 20% cut to consensus PBT (currently at £255-260mn) and to EPS (currently at 28-29p) for FY2013. The impact for FY2014 is harder to assess but assuming also a £50mn downgrade (ie still no profit contribution from UK Construction) could result in cuts to consensus closer to 15%. We note that management has not modified its outlook for Construction division's sales growth in FY2013 (-20% in the UK, flat in the US and up in the Rest of the World) and group's working capital performance (a £200mn deterioration in FY2013). Besides UK Construction, the remaining businesses are overall performing in line with management expectations. The German rail subsidiary should be £10mn below budget at the operating profit level in FY2013, but the company expects to offset this by some outperformance in PPPs and Professional Services. A 15% cut to BBG consensus in 2014E would still leave the stock trading at 8.9x 2014E P/E (a 12% discount to its 10-year average). We will update our estimates following a conference call scheduled for 8am London time today. is there any evidence that they are tackling the executiion problems Dropping the CEO in to knock heads might work. McNaughton has a passable reputation, I thought, in spite of Balfour's recent record. .would have thought that te UK business would have been a key area beforehand for a ceo back on Invensys, do you know much about Value Act Quite a bit, really. Mostly from the Misys story. the new activist investor that supposedly signals the company is on the block? so they Misys experience suggests they are not the long term holder their website suggests Well, they held on a fair while then launched a stalking horse bid with CVC Which was then trumped by an outfit valled Vista Equity Partners. do you think a bid for invensys is likely then? just curious It's as likely as it was last week, frankly. Invensys is the most sitting of sitting ducks. Emerson's back onside so can take a look. Heard suggestions that Schneider's running the numbers. again as you said...this is familiar territory All this is known knowns. Once the signalling deal completes, someone will buy Invensys. so apologies for that distraction..where to next Frankly, I'd have been more interested if Valueact bought a year ago and at 85% lower. terribly dull name by the way - Value Act..is that hard to think of something better This just looks lazy pre-event, quite frankly. But I still hope they enjoyed their lobster with guacamole brought by a nurse. Actually, I think we're done. Anything to conclude with, Tony? should we mention Llloyds before we go part of the great retreat Ian Gordon has a good line this morning on it "Your Spanish mortgage could COSTA lot less" screamed the Halifax Spain marketing literature through the Noughties. It cost Banco Sabadell rather less today! In recent weeks, Lloyds has extricated itself from a poor deal with the Co-op, re-launched a thoughtful Commercial Banking strategy, executed a neat transaction to unlock value in St James's Place (Buy) and now exited its unattractive Spanish retail business for a loss of £250m. Quite a few nuggets of good news, feeding heightened expectations ahead of tomorrow's Q1 IMS. Lloyds transaction with Banco Sabadell (Not Rated), announced this morning, disposes of its Spanish Retail business with assets of £1.5bn - primarily expat mortgage lending - crystalising a loss on disposal. With incremental impairments running at c.£50m p.a. and a loss in 2012 of £43m, we think the market will see this as a price worth paying to exit in 2013. he consideration is to be paid in Banco Sabadell shares valued at c.£72m with a two-year lock-up, (and with a possible deferred cash consideration of up to £20m). The deal is not capital-accretive, but RWAs reduce by c.£600m. Lloyds" Corporate business in Spain with c.£2bn assets is not affected. Ahead of tomorrow, our forecast for "underlying" PBT in Q1 2013e of £1.17bn appears to be marginally ahead of consensus (c.£1.1bn). However, our enthusiasm is somewhat constrained by a weak outlook for revenue and returns and what we see as an already "full" valuation. With implementation of IAS19, we expect Lloyds to report a reduction in tNAV per share from 55p to c.53p, so the stock already trades on 1.0x. Moreover, despite our above-consensus view (further tried to find one of those Costa ads this morning...failed..would be indebted if anyone has a link Lloyds Banking Group plc (LLOY:LSE): Last: 53.28, up 0.37 (+0.70%), High: 53.85, Low: 53.07, Volume: 55.81mBlock That's your challenge rabble. anywhere interesting for lunch Bryce? Pret, probably. Unless my phone rings in the next two minutes. So we'll see you tomorrow, folks. ciao..thanks for having me Thanks for joining, thanks for the comments, thanks Tony.