Markets Live: Friday, 16th June, 2017

  • June 18, 2017
  • 242 Views

Okay workforce, we will get by means of this collectively.

I do not know the way. You do not know the way.

But we’ll carry on typing till it ends.

“It” being Markets Live … or Friday morning … or maybe our time on this cursed moist rock.

Well, I imply, there’s information. There’s at all times information.

In at present’s information we have now Tesco promoting barely extra issues in three months than a consensus of analysts had predicted.

Meanwhile, at BHP, we have now a man in a swimsuit changing a man in a swimsuit.

Oh, and there is yet one more dose of lengthen and fake for Greece, simply in case you care about that.

Bumped one other €eight.5bn from IMF and eurozone.

Does this imply Greece is any much less more likely to fall over in any time period apart from the brief? Of course not.

The deal is a reproduction of the May-16 one. It places an finish to 9-
month lengthy bailout negotiations on the second overview and releases sufficient
funding to fulfill Greece’s ~€7bn debt redemptions within the subsequent three months and
most likely to cowl its financing wants till the tip of the programme in mid-2018.
However, the dearth of further readability on debt reduction past what was already
agreed final 12 months will depart uncertainty excessive round the potential of QE inclusion
of Greek bonds and the power of Greece to return to market entry. The IMF
determination for a barely extra formal participation within the programme, albeit nonetheless with
no financing, has helped to interrupt the impasse and permit Germany to proceed
financing Greece. We anticipate no different progress on debt reduction earlier than the German
election in September and doubtless not earlier than the tip of the present programme.
Overall, we reckon the probabilities of a fourth bailout for Greece being wanted over
the subsequent couple of years stay excessive, in our view, as we see it as fairly unlikely
that Greece might return to full market funding by the point the present programme
ends in 12 months. Very small concessions from European collectors may also
additional weaken the Greek authorities domestically, in our view, doubtlessly
resulting in elevated political turbulence.

Ah, crap, and I’ve simply realised I forgot the image.

That’s what Greece appears to be like like, in case you wanted visible prompts.

We can get Tesco out of the best way fairly simply.

Tesco PLC (TSCO:LSE): Last: 178.55, down 1.Four (-Zero.78%), High: 188.00, Low: 178.00, Volume: 23.31m

Fiscal Q1 suggests that individuals purchase extra of stuff when it is cheaper, which has helped the UK facet.

International’s nonetheless a little bit of a canine however, with administration shutting it down step by step, it appears to have been written off in most funding circumstances.

Today we get the unprofitable Thailand bulk enterprise axed.

Which dilutes LFL a bit, nevertheless it’s not UK so nobody minds..

Morgan Stanley can take us by means of the headlines.

We have spoken with the corporate. Overall, we view Tesco’s 1Q
gross sales figures as a small optimistic: whereas International gross sales have been clearly weaker
than anticipated, that is largely a operate of a choice to discontinue bulk promoting in
Thailand (which ought to have little or no affect on income) and is partially offset
by a greater than anticipated efficiency within the UK (LFL gross sales up +2.Three% vs. +1.9%
anticipated by consensus), the place efficiency of recent meals progress was comparatively
wholesome. We don’t anticipate FY PBT consensus to maneuver up on the again of at present’s
launch

(Sorry for the lumpy line breaks.)

UK: LFL gross sales elevated to +2.Three%, an acceleration vs. 4Q17, throughout which LFL gross sales
have been up +Zero.7%. This compares to Bloomberg consensus of +1.9%. We consider
that the choose up is generally a operate of meals inflation returning to the UK as of
January 2017 and now standing at +2.6% (as per Kantar) and +1.6% (as per ONS)
throughout Tesco’s 1Q18, itself a operate of the GBP depreciating in opposition to main
currencies, driving enter prices up materially (as per ONS information, Food PPI was up
c.+Four% throughout Tesco’s 1Q18). Number of buyer transactions was up +1.Three% in
1Q18 vs. +1.Zero% in 4Q17.

In the discharge, Tesco factors out that Fresh meals grew +1.6% in 1Q18, a wholesome
efficiency provided that Tesco launched Farm Brands as the identical time final 12 months.
We consider that Tesco’s LFL gross sales in 1Q18 have been dragged down by a poor
efficiency of non meals gross sales (non meals LFL have been seemingly down 2% to three%). In our
view, this is because of a mixture of proactive measures (non-food on-line
proposition was scaled down, as it’s loss making) and structural points (i.e.
relevance of the hypermarket format)

Skipping worldwide as a result of nobody cares.

Valuation: As of yesterday’s shut worth, and on consensus CY17 numbers, Tesco
is buying and selling on EV/EBITDA and P/E multiples of 9.0x and 18.9x. This compares with
7.8x and 17.3x respectively for the European meals retail sector.

And UBS, to say a lot the identical.

UK & RoI LfL’s of +2.Three% vs. Cons. +1.9%
Tesco reported 1Q18 Group LfL gross sales of +1.Zero% vs. UBSe +1.7% (Cons: +1.6%).
Divisionally, UK & RoI was +2.Three% vs. UBSe +1.9% (Cons: +1.9%); and, International
was -Three.Zero% vs. UBSe +Zero.5% (Cons: +Zero.6%). UK efficiency is powerful with general
volumes optimistic, plus a useful margin combine with meals and grocery LfL’s +2.7% and
recent meals volumes +1.6%, outperforming the market, while it continues to step again
from promotional exercise in GM. International gross sales efficiency displays a choice to
discontinue unprofitable bulk palletised promoting exercise in Thailand, which impacted
Group LfL by -Zero.6% and International by -2.7%, and so the underside line affect of the
gross sales miss needs to be immaterial
UK customers responding to Tesco’s improved worth place
UK & RoI LfL of +2.Three% represents Tesco’s sixth consecutive quarter of progress and its
strongest gross sales print previously seven years. Our UBS Evidence Lab Pricing Monitor information
has Tesco’s LfL inflation working at -Zero.2% (Three-Month rolling to May), significantly under
its opponents and with its worth place vs. Asda the sharpest it has been in lots of
years. Today’s print suggests customers are responding, which is permitting Tesco to
preserve quantity progress and generate working leverage.
Confidence in long run plans to ship Three.5-Four.Zero% margin by FY20
The assertion reiterates ‘confidence in our long run plans… (and) ambitions we have now
set out’. Elsewhere, a capital positive factors tax evaluation in respect of sale of the Korean
enterprise in 2015 has been resolved with no additional tax payable. This will lead to
launch of a ú329m provision.
Valuation: goal worth set based on our DCF-derived NAV of £2.33/sh
Tesco trades at 16x EV/EBIT (FY18E) falling to 9x (FY20E) vs. Three/5-year common: 15x/13x

Every third e-mail in my inbox is a word on Tesco, all saying the identical factor just about.

BT Group (BT.A:LSE): Last: 288.40, down 5.1 (-1.74%), High: 293.00, Low: 287.10, Volume: 15.64m

It’s been very weak for a lot of causes this week

The shopper spending learn is not nice for upselling to fibre, for one factor.

The PL soccer viewer figures are bloody terrible for its white elephant of a TV enterprise.

The regulatory outlook has grow to be somewhat confused by the election end result.

I would not prefer to say correlation and causation right here, however Saeed Baradar has been emailing purchasers once more this morning.

BT goal goes all the way down to 220p.

Says to anticipate one other revenue warning “in due course”

RISKS EVERYWHERE – ON UNECONOMICAL CONTENT, WEAKENING ENTERPRISE, INCREASING REGULATION, HIGHER PENSION DEFICIT AND A DIVIDEND CUT

This is a spec gross sales e-mail, please remember. We quote it right here as a result of Mr Baradar’s very, superb worth for cash.

Risks are in every single place for this firm and the profile is getting worst. Previously I had highlighted the 5 primary dangers however with the Q1 outcomes getting nearer they’re set to grow to be extra seen once more (quarter ending 30 June). I anticipate the inventory to interrupt the 286p resistance stage after which we’re on a “one way” street to 222p.

BT continues to destroy shareholder worth by paying large content material prices – £2bn for soccer alone for the subsequent Three years implying a Break even of £34.Three/month/subscriber which can by no means be achieved. Add to that the truth that BT TV prospects progress can be grounding to a halt at a time of 32% content material value inflation and it turns into evident that there’s nonetheless a lot ache to come back.

With a 42% publicity to [the Enterprise Business] section, BT has the very best publicity of any European incumbent to this weakening market section. This was partly liable for the final revenue warning in January and will probably be liable for the subsequent one as effectively.

OFCOM maintaining the strain on BT throughout the board from the implementation of “Openreach” separation, to cost controls on fastened voice providers to the brand new WLA overview which encompasses the regulatory entry to G.quick and the requirement to extend CAPEX within the community. Pressure on FCF to be maintained.

The present ongoing pension tri-ennial valuation which is more likely to spotlight a deficit in extra of £10bn may end up in a rise in pension deficit funds, additional pressurising the FCF and the unsustainable dividend coverage.

Does anybody actually consider that given the above, the progressive dividend coverage is sustainable? Well it’s – so long as it’s a progressively falling dividend.

I’ve mentioned it earlier than and I will say it once more: get on the Louis Capital distro checklist. Whether you agree with it or not, it is the form of attack-led evaluation we see very not often as of late.

(LeChiffre: answering that query would take the remainder of the session. To summarise, we do not know. It’d be incorrect to imagine that all the analysis we share right here comes direct from supply, and there is a public curiosity “maintain an honest market” remit to us sharing stuff we’re not speculated to. How folks react to being reminded they’re paying for stuff stays to be seen.)

(@LeChiffre: agree. Someone will discover a method to get rich off MifidII, nevertheless it’s unlikely to enhance the lives of both the producers or the customers of sellside.)

There’s Rentokil, of all issues, main us up proper now.

Rentokil Initial PLC (RTO:LSE): Last: 283.00, up 6 (+2.17%), High: 283.90, Low: 278.70, Volume: 2.92m

Which is Exane advising a change from Berendsen (as a result of the supply’s priced in) and Elis (as a result of it is shopping for Berendsen).

We consider the market continues to underestimate the expansion and margin alternative at Rentokil. Deepening density continues to drive margins larger in US Pest with Rentokil’s ‘pure’ US pest management margin (ex crops and distribution) nonetheless c.600bp under friends at c18-19%, on our estimates. The latest JV allows higher administration give attention to Hygiene, the place margins are under friends. On our up to date estimates, Rentokil trades at a 2018e P/E of 20.3x, at parity or a reduction to different high quality progress names in our sector regardless of, in our view, a superior and/or extra clearly outlined earnings progress outlook (c.15% base-case 3yr ccy CAGR together with future M&A).

The SA mining constitution stuff referred to on the proper is fascinating.

Response appears to be that the proposals make no sense as written.

The key proposals being 1) BEE minimal possession as much as 30% from 26%.

And 2) “Once empowered, always empowered”

The one on the sharp finish of that is most likely S32.

…….. which refuses to autoprice.

More usually, although, it reinforces the concept South African mining carries dangers that make it poisonous.

Anglo American PLC (AAL:LSE): Last: 973.80, down 21.Three (-2.14%), High: 1,Zero04, Low: 972.50, Volume: Four.25m

Lonmin PLC (LMI:LSE): Last: 68.25, down Zero.75 (-1.09%), High: 69.00, Low: 68.00, Volume: 376.14ok

Affirmative employment, a BEE (Black Economic Empowerment) buying requirement, a BEE royalty levy and BEE possession to 30% – these are highlights of the South African authorities’s intention to extract additional financial advantages from the mining business and to unfold these throughout the broader inhabitants, all inside a 12-month implementation interval. This proposed Charter will improve the dangers going through the business and it’s no shock the Chamber of Mines has already introduced a number of challenges to it. We anticipate to see a prolonged interval of uncertainty whereas the court docket processes grind into motion.

And HSBC, whose title is …..

New Mining Charter: destroying the funding case

……. although if the unique funding case concerned an egregious exploitation of human capital, one can query whether or not it ought to have been an funding case within the first place.

While the “once empowered, always empowered”
precept seems to have been adopted within the new Mining Charter that was gazetted
on 15 June, this appears to have been misplaced in a Charter that business observers extensively
regard as unclear and complicated. In the unlikely occasion that the Charter is just not
modified, we consider that the SA mining business might grow to be non-investable. We
sense that the business has reached an inflection level and, whereas the method will
take time, widespread sense means that a lot of what has been proposed may very well be
reversed sooner or later.

The Charter was drafted with little enter from the business. Consequently, it’s of no
shock that the Chamber of Mines will pursue a declaratory order and serve an
interdict to droop the implementation of the Charter and to take it on overview (as per
its press launch of 15 June). The Chamber rejects the unilateral growth and
imposition of the Charter by the Department of Mineral Resources (DMR) and is of
the view that the method adopted by the DMR in growing its model of the
Reviewed Mining Charter is flawed. The ANC has additionally expressed considerations concerning the
proposed Charter.

An unworkable Charter: While the rise from the 26% Black Economic
Empowerment (“BEE”) fairness requirement to 30% was effectively flagged (however will seemingly be
opposed by the Chamber of Mines), additional complexities have been added to this
requirement. In addition, there are new calls for and constraints on the mining
business that will probably be exceptionally troublesome to execute and in some cases may very well be
in battle with the Companies Act and perhaps the SA Constitution. In brief, the
proposed Charter is extensively thought to be unfair and due to this fact is more likely to face
resistance from each the business and buyers.

(@Lefevre: “While around 32% of our S32 NPV comes from assets in South Africa, only 14% is from Coal & Manganese assets impacted by the new Mining Charter.” says JP Morgan.)

Actually, a bit extra on S32.

To recap, S32’s greatest South African asset (in our opinion), Hillside, falls outdoors this dialogue given its classification as a processing operation, somewhat than a
mine. Manganese and Energy coal would require further, incremental promote down to maneuver from the present 26% BEE goal to the brand new 30% goal, and
relying on the funding mechanism (typically vendor financed), and valuation (normally at ‘honest worth’) is more likely to have solely a modest affect on the underlying
earnings of the group as an entire. the incremental royalty may very well be as little as US$10-20m yearly (in opposition to group revenus of US$7-7.5b) primarily based on our forecasts
of revenues for FY17E. However, regardless of the intention for firms to be compliant inside 12 months, we expect there may be appreciable uncertainty across the
closing particulars of this new constitution because the legality of sure features will probably be examined by the Chamber of Mines. This announcement additional underlines the businesses’
latest commentary surrounding incremental funding in South Africa given these dangers (which we mentioned in our latest word “In the capital allocation sport,
South Africa Energy Coal the loser…”, 1 June, 2017)

We consider this could have solely a ‘impartial’ affect on S32, given the publicity is primarily restricted to manganese and thermal coal (and Aluminium is the extra
beneficial asset), the potential monetary affect needs to be modest, and additional actions within the Rand present a pure offset to doubtlessly decrease earnings and
money stream. The actuality is, nevertheless, that sentiment is more likely to be impacted given lingering uncertainty across the implementation of this new coverage. In addition,
Australian buyers haven’t any different vital South African publicity within the mining sector, typically making S32’s publicity straightforward to pigeon gap as “too hard” or
“too risky” as compared and occasions akin to this sadly are likely to validate the supposition.

Sorry as soon as once more for the scattergun line breaks.

Guess we must always word the brand new man at BHP

BHP Billiton PLC (BLT:LSE): Last: 1,169, up 9 (+Zero.78%), High: 1,181, Low: 1,161, Volume: Four.71m

Ken MacKenzie, which as names go is a wee bit Boaty McBoatface.

He replaces Jac Nasser, efficient 1st September.

Onboard since Sep’16, effectively appreciated by Oz shareholders after 23 years at Amcor

A decade of which was as CEO.

What does this inform us concerning the evolution of BHP’s technique? Literally nothing.

The key to the longer-term outlook will probably be how Mr. MacKenzie positions the enterprise to take care of its strategic challenges, significantly the US Onshore oil & fuel enterprise, the place it stays unclear if it ought to stay inside BHP’s “core” portfolio. The strategic subject going through US Onshore has grow to be more and more extra acute in latest months with the strategy from Elliott Funds who’ve known as for a overview of the division, which they consider has “broad based shareholder support”. In this respect, Mr. MacKenzie’s expertise within the manufacturing section & track-record shaping firm / business technique needs to be helpful in his new position. However, particular priorities ought to grow to be clearer as Mr. MacKenzie completes a worldwide “listening tour” over coming months.

Given Mr MacKenzie’s background and historical past at Amcor, and with out having the
legacy of being on the board for the US Shale acquisition that the opposite entrance
working candidates had, there may very well be extra potential for a disposal of those belongings
to unlock worth within the portfolio – Unlocking Value versus Growing Value.

Change usually breeds change so the query is what are the additional
implications? Current CEO Andrew Mackenzie has been within the position for simply over Four
years, appointed after the US Shale acquisitions in 2011, and has pushed a
vital discount in prices throughout the enterprise and a slimming down of the
portfolio by means of the demerger of South32. With a brand new Chairman and focus shifting
to unlocking productiveness enhancements by means of realizing latent capability and
delivering tasks there could also be some subsequent adjustments amongst administration.

The Jansen potash venture is the opposite contentious subject that’s raised in our latest
conferences with buyers, particularly given the oversupplied state of the market
(demand ~60mt v capability greater than 80mt and rising) and must assume considerably
larger costs than spot to generate the 12% IRR for the US$Four.7b stage 1 venture
(US$400+/t worth required even when US$3b sunk capital ignored). Given these points
there may be the potential that on the very least this venture is delayed – first manufacturing is
potential from FY23 and extra capex will must be accepted ~FY19 as soon as the
shaft is accomplished.

(@You can name me Al: sympathies. I spent a time residing beneath the strategy path to RAF Leuchars. Those issues are a nightmare.)

Still right here, simply. Was scanning about for anything to cowl.

Ideas, ROTR? It’s been a protracted week, for numerous causes, and I’ve nothing left on the notepad.

Which you must learn. But that is probably not out remit right here, neither is it in my job desc to ship readers elsewhere.

(@JuB: is inventory or have you ever simply canonised me?)

Otherwise, I believe we’re simply counting down the clock now.

(@JuB: ah, no. Went to high school in St Andrews, however not was not at St Andrews. Too dim to qualify.)

Um, there’s Credit Suisse on UBM if anybody cares?

UBM PLC (UBM:LSE): Last: 728.50, up 22 (+Three.11%), High: 737.00, Low: 721.50, Volume: 604.70ok

Upgrade to Outperform with a TP of 825p: We improve UBM to Outperform (from Neutral) for 3 primary causes: 1) UBM has dedicated to accelerating its annual occasions natural progress (ex-rationalisation) from the three.1% stage seen in 2016. We are additionally getting nearer to the tip of 2017, when rationalisation stops. 2) Drawing from our discussions with business consultants, we study how structurally safe the occasions business is perhaps and conclude that whereas behavioural change from digital natives and Augmented/Virtual Reality are potential longer-term threats, B2B exchanges akin to Alibaba and Amazon Business will not be changing commerce reveals. Three) On P/E and FCF yield, UBM trades in keeping with free TV and promoting businesses, the place structural points are way more acute and long-term progress prospects are decrease.

■ Key positives: Events ought to develop in keeping with world nominal GDP, UBM is guiding for an acceleration in progress and structural threats look restricted, UBM is a pure play on occasions and is now higher organised and invested. UBM’s portfolio is industrially and geographically numerous with a US/EM bias, the market is fragmented and ripe for consolidation, there may be scope for higher margin enlargement than consensus assumes and the enterprise has good money technology with low capex/gross sales.

■ Catalysts & Risks: The trend vertical (17% of Events) might decelerate sooner than anticipated, different verticals might undergo on-line disruption, digital natives might veer away from face-to-face occasions, acquisitions might disappoint and the financial cycle may very well be overextended. Travel and free commerce points might additionally come up and progress enchancment could also be lumpy as a result of phasing. Catalysts embrace H1 outcomes (28 July) and additional acquisitions.

And, as Soundbuy notes, Liberum’s been speaking to media consumers.

Speaking usually, I am at all times fascinated by the development that analysts who purchase ITV speak to media consumers who’re optimistic concerning the outlook, and analysts who promote ITV speak to media consumers who’re detrimental concerning the outlook.

Observer-expectancy impact, perhaps? Dunno.

Feedback from a number of media consumers recommend that September TV promoting is stabilising and that FY17E is more likely to be down Four-Four.5% for the UK TV market. However, we don’t assume this represents a elementary shift to on-line and suggestions on YouTube suggests it’s struggling badly from latest controversies. We see TV weak spot as extra pushed by sector-specific components in FMCG and Retail, which we expect will reverse over time. In the meantime, we deliver down our ITV NAR TV forecasts from -2.1% to -Four.5% however the rising lack of gearing means little affect on EPS. At a 10.5x FY17E adjusted PE, producing robust cashflows and dividends, we consider, ITV is in a structurally engaging place and we proceed to love the story.

ITV PLC (ITV:LSE): Last: 179.00, down Zero.1 (-Zero.06%), High: 179.90, Low: 178.40, Volume: 9.74m

And with that, let’s shut. We’re achieved. It’s over.

Thanks for becoming a member of, each at present and this week.

Enjoy your weekend and we’ll see you again right here Monday.

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