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HomeMarketsMarkets Live: Wednesday, 5th April, 2017

Markets Live: Wednesday, 5th April, 2017

Suppose we could be brave, Bryce, and go with a pic of Jeffery Lacker as our portrait for today

Well, he stepped down from the Richmond Fed after fessing up to helping a colleague at a sister publication — Medley — on a story


I could give you a rival’s analysis of the story

It’s not the best news for a Federal Reserve resisting greater scrutiny. Jeffrey Lacker, president of the Richmond regional unit, has quit suddenly, conceding that he had a hand in leaking specific policy details to an analyst in 2012. While better late than never, the U.S. central bank’s slowness to examine itself may fuel demands for closer scrutiny – and sets a poor example for the banks it regulates.

The Republican “audit the Fed” campaign in the U.S. Congress, seeking greater transparency in monetary-policy decision making, already attracts quite a bit of sympathy. Meanwhile some leftward-leaning critics see too much Wall Street influence at the central bank. Neither critique is entirely fair – and the Fed is opening up. Yet its tendency is still to avoid unwanted inspection.

Lacker’s error was arguably twofold. First, back in early October 2012, his interlocutor at Medley Global Advisors – a Financial Times unit that provides intelligence to investment firms – seemed to some to be closer to a hedge fund tipster than a journalist.

Second, the discussion involved specifics of what the Fed policy committee had discussed, which wouldn’t be revealed to the public until two days later – after the Medley Global analyst published her note. Savvy central bankers know better, and keep such conversations religiously away from hard details.

The incident prompted an internal investigation and a rash of external probes. Given all the attention – not to mention that the heat turned at one point on Fed Chair Janet Yellen, who had also met Medley Global – it’s extraordinary it took this long to finger the culprit.

That doesn’t reflect well on Lacker, who admits to incomplete disclosure when he was interviewed by the Fed’s general counsel in 2012. He says he was more forthcoming with outside law-enforcement officials in 2015. According to the Richmond Fed, its board responded to government investigations – though it couldn’t quite bring itself to say it had asked for Lacker’s resignation, only that it took “appropriate actions.”

Most of all, though, it’s hard not to conclude that the central bank dragged its feet. As the top regulator of big banks, the Fed urges them to do the right thing. “A healthy culture is one where problems are identified early and promptly addressed,” New York Fed boss Bill Dudley lectured bankers at a 2014 industry workshop. “Do as I say, not as I do,” isn’t such a persuasive line.

I don’t know about this case in detail

And im not going to speculate on whether Medley are ‘journalists’ or ‘analysts’

But that still feels a harsh take, at least to me

You know the Fed — behind the scenes — over the years, has used the financial press repeatedly to message the market.

I remember one particular US economics editor whose copy could not be touched by editors because — well — it was essentially dictated by the New York Fed.

Economics editor in question had a high impression of him or herself, i might add

But let’s just leave it there

(…… “closer to a hedge fund tipster than a journalist”? Jeez.)

Right. Anyway, where to begin?

There’s a few features, even if corporate news flow generally thin.

Properly feels like Easter break now. What’s moving?

Ah, yes. The “if you can’t buy them, join them” play.

Bovis Homes Group PLC (BVS:LSE): Last: 872.11, up 25.61 (+3.03%), High: 879.50, Low: 828.00, Volume: 2.86m

New ceo, resisting takeover

Up 3% having walked away from a bid, which as Neil Collins was pointing out over the weekend, isn’t how it’s supposed to work.

But it has grabbed Greg Fitzgerald as a CEO

Greg Fitzgerald ex Galliford of course

So has arguably got the best bit of Galliford without having to sell itself.

The backdrop here is that Galliford is unwilling to bid more than 823p

And investors seem to value Greg more than 823p, which is nice for him.

Greg was formerly
the CEO and Chairman of Galliford Try and brings significant experience and a track
record of significantly growing a housebuilding business within Galliford Try. We
believe the appointment is a major positive and should help Bovis start to outline a solid
stand-alone story going forward.

And AnthonyCodling at Jefferies.

Investors wanted an operator as CEO and
they’ve now got one.

… who seems to have come independently to the same play on words at me. Apologies to him.

Much of the success over the last 10 years at Galliford Try is due, in our view, to
Mr Fitzgerald’s vision, guidance and hard work. Investors wanted an operator at the helm
of Bovis and they have got one and have tempted Mr Fitzgerald out of retirement. In our
view it will be brave person who bets against Mr Fitzgerald to turn around the fortunes of
Bovis. With Galliford until today seeking to buy Bovis, it just goes to show, if you can’t buy
them, join them

The breakdown of the second merger discussion in a week leaves an absence of
potential acquirers, however in our view, the relatively limited synergies were unlikely to provide very material
upside from current levels. Greg Fitzgerald’s appointment should be viewed positively, given his strong
reputation and significant housebuilding experience. The statement also confirms that order intake levels are
inline with expectations, suggesting customer service issues year to date have not materially impacted demand

Blimey that’s quite an endorsement, all round

From Jefferies in particular

(@CommentGoesHere: yes, apologies. It’s due to me working on a rubbish old single-screen laptop. Concrete poetry is the phrase you’re looking for.)

Bovis also promising to return excess capital to shareholders

Do they have much — or is that just PR padding?

But all housebuilders return capital rather than, for example, build more houses.

They’ll also be passing some of the capital to Greg…

The following summarises the principal terms of the remuneration package agreed between Bovis and Greg Fitzgerald:

– Annual Salary of £650,000

– Annual Bonus of up to 100% of salary payable in shares and deferred for 3 years. For 2017 only, the Annual Bonus will be based on his leadership of the review of strategy and structure.

– LTIP award of up to 200% of salary for each of the first two years and 150% of salary thereafter. Performance will be measured over a 3 year period using measures in line with our Remuneration Policy. Awards will also be subject to a 2 year holding period.

– An award of shares of up to 100% of salary to recompense Greg Fitzgerald for relinquishing management of certain investments in order to take up this role. This award will vest at the end of December 2018 provided the Bovis Total Shareholder Return is at least in line with the median performance of sector peers over the period.

He didnt come out of retirement just for the sport

And to retread an argument we’ve done a million times: If housebuilders overinvested in landbank it’d disturb the cartel, and if they actually used that landbank there would be no reason for them to trade above NAV, so they give their spare cash back to shareholders. And that’s why we have a housing crisis.

(Ok, there are some other reasons.)

While on housebuilders, Berenberg pushing Gleeson.

Well …. it kinda feeds into that housing crisis stuff I was talking about.

“Strategic” land and cheap houses being dripfed into a market to keep supply far below demand.

Which is great! If you’re Gleeson.

A cost leader with hidden value, a clear path to growth and best-in-sector profitability: We believe Gleeson has a cost leadership and market position that allows it to sustain profits at the high end of the sector and gives a clear path for continued growth. Its housebuilding business could easily double or triple in size over the next decade, in our view. Meanwhile, we think there is hidden value in its Strategic Land division, which, with recent transactions in the sector, could soon be realised. This forms the basis of our initiation with a Buy recommendation and 740p price target.

Growth can continue for decades, expect upgrades to targets: Looking at the UK housing market, Gleeson sells houses at a point of peak demand and peak undersupply. Despite having no large listed competitors, it currently only has an 11% market share in areas it is currently active in and c6% nationwide. Combined with its cost leadership, Gleeson’s path to significant growth is clear, in our view. We expect a sustained volume growth of c10% pa at a time when other sector growth rates are generally slowing. We think the main constraint on growth is management’s ability to recruit and train suitable site managers. To this end, we expect an upgrade to management growth targets at the company’s capital markets day on 5 July.

A unique business model that is not easy to replicate: Gleeson is the onlylisted builder of “low-cost” homes. Its average build cost of c£85,000 per house is 60% below the sector average of £200,000. That results in gross margins in its Homes division at the top end of the sector at c33% despite selling at an average £126,000 compared to the sector on £310,000. We think that Gleeson’s cost model is the result of savings across the entire process, possible due to its deep knowledge of its customer base. We do not see it as easy to replicate, leaving Gleeson in a league of its own.

Potential hidden value in the Strategic Land division: We think the market values Gleeson’s Strategic Land business at c£100m – the DCF of 2016’s cash flow into perpetuity. That ignores residual value in the portfolio of 21,250 controlled plots. Recent transactions in the sector suggest a higher value. We use a variety of methods to arrive at a £100m- £300m valuation range and settle on £130m as our probability-weighted fair assumption. This would imply upside with the Homes business trading on only 7.9x 2018 P/E, 11% below the sector, despite its best-in-sector profitability and growth.

Valuation Our EPS estimates are 6% above Bloomberg consensus in 2018 and 8% in 2019, and we see further upside. With a £130m value for Strategic Land, Gleeson Homes offers a c20% discount to history on 2018 P/E. Putting this on a 20% premium to the sector to 10.7x P/E, as the housebuilder with best-in-sector profit margins and growth, implies our price target of 740p.

The Gleeson model, for those who don’t know it, is the £125k home.

676p market price currently

….. sector average for a newbuild is £290k.

Yet it still does a gross margin of 35%.

What does it make the houses out of?

Sorry, 33%, on a build cost of £85k.

The houses look okay. There are a bunch of savings, such as no porches and standardised roof designs and fenestration and stuff.

… Really, though, I’d be okay with paying £125k for a house with slightly less interesting windows than a £290k one.

We should mention McCarthy & Stone in passing i guess

But the figs looked ok, i thought

Has it had a bit of a run in advance?

Decent rally since the profit warning, which was of course on falling volumes.

And a resulting reluctance for olds to move out of their big houses.

But it’s reiterated guidance

There are a few bear points, if you want to find them.

Operating margin for one.

But, yes, it’s mostly about getting back on track and rebuilding the order book for medium term.

UBS is a seller, so picks out the following to highlight.

H117 underlying operating profit was worse than expected at £24.1m (-40% y/y) vs
UBSe £32.7m at a margin of 10.1% (-6ppt y/y). PBT was £22.8m (-42%) which requires
MCS to generate £79m in H217 to meet consensus/UBSe PBT of £102m.

MCS has commenced build activity on 44 new sites (FY16: 34) and a further 16
expected in Q317 (FY16: 9), leading to a doubling of sales releases in FY18. The order
book is still running 1% behind last year at £496m.

MCS has reiterated guidance for FY17 PBT in line with consensus at £102m, which
seems in our view increasingly difficult to achieve. Yet, MCS anticipates a higher
weighting of higher margin new sites into H217.

Canaccord is a buyer, so picks the following to highlight.

Interim results are broadly in line with expectations with no big surprises with underlying
PBT of £22.8m, versus our expectation of c.£24m. As expected, full year numbers will
be second-half weighted this year due to the lower order book coming into this year
and fewer sales releases. Reassuringly, comments around recent trading are positive
with the group clearly having traded well since the start of the year; the order book
has now virtually caught up with the previous year’s level and is now down by only 1%.
Management is also pointing to double the number of sales releases in FY2018 versus
the current financial year. With build programmes looking on track, the group is confident
of meeting full year consensus and the profit growth expected over the next few years
also looks well supported, assuming the market holds up. Dividend was a bit ahead of
our expectations. It is clear that management reacted understandably cautiously to the
slowdown in trading immediately post Brexit and is now adjusting the business for a
more normal market that has unfolded since the autumn. With sales releases increasing
materially and a good land bank in place, the group looks back on track to deliver the
anticipated profit growth over the next few years, market permitting. We think consensus
is unlikely to move materially today, but the shares should be well supported by these
results and outlook comments.

See this Panera Bread thing’s on the tape.

Yeah, lots of bread for bread

ST. LOUIS, April 5, 2017 PRNewswire — Panera Bread Company (“Panera” or the
“Company”) (NASDAQ: PNRA) and JAB today announced that the companies have
entered into a definitive merger agreement under which JAB will acquire Panera
for $315 per share in cash, in a transaction valued at approximately $7.5
billion, including the assumption of approximately $340 million of net debt.
The agreement, which has been unanimously approved by Panera’s Board of
Directors, represents a premium of approximately 30% to the 30-day
volume-weighted average stock price as of March 31, 2017, the last trading day
prior to news reports speculating about a potential transaction, and a premium
of approximately 20% to Panera’s all-time high closing stock price as of that
same date.

The undisturbed price was around $265 i think

Well done to those that got on board with last week’s rumours. Have to say, we (well I) went into “cry wolf” mode the moment the name came up.

Ah, you did well to highlight the chatter

And JAB always looked like the obvious buyer.

(Actually , properly undisturbed price rather lower)

Arash was explaining it to me. They’re like a New York-ish bakery that rolled out across the midwest states with a concept of bagels that have several thousand calories each.

That kind of thing, yes. Then they pivoted to be healthy, sort of.

It’s a common story in US fast food. The concept that makes your name turns your brand toxic as fashions change.

(@Lefevre: sure, I’ve heard that argument and don’t dismiss it. Paying labour more is usually the solution to getting more labour though.)

He’s still banking on a recession in the US

In this business they say a chart saves 1,000 words and having worked on the buy side I can
tell you that I found nothing more useful in the 1980s than Ed Hyman’s great chart books,
which had lots of thick bold arrows and annotations plastered over every chart. I know there is
very little point producing the large quarterly reports the sell-side still publishes. They take an
awful lot of time and effort and usually end up being deleted or binned without being read. The
buy side just does not have the time or inclination to read such documents. My experience of
sitting with piles of sell-side research on my desk when at Bank America Investment
Management is one of the key reasons why I promise my readers they will able to read each
document in less than 5 minutes flat. I always do my best with my charts to illustrate my
argument clearly and to break up the text. But by far and away the clearest and most
interesting charts I see in the market at the moment are from the former Morgan Stanley
Strategist, Gerard Minack, who still writes ‘The Downunder Daily’ from Sydney, and who has
now struck out as an independent.

Gerard’s latest thoughts are similar to my own views and so in my current Tokyo jet-lagged
state, I’m going to be particularly lazy this week and ‘borrow’ some of his excellent charts to
illustrate my points (for those of you who want a trial of The Downunder Daily, pop me a mail
and I will forward it on). Gerard notes how unusual it is that the recent strong US data is not
accompanied by a sharp rise in bond yields (see chart below). As I said above, that is likely to
have had something to do with recent extreme positioning.

Let me get an example of those charts

Downunder Daily — we should try and get on the distribution list

We covered this yesterday, of course. Didn’t know the kitchen sink exercise was coming out today mind.

Yep, quick action by the new ceo. Grasping the bullet and biting the nettle.

Kinda surprised at the extent of the price drop — given that the stock had already given up circa 40% in the run-up

It was pretty well flagged, wasn’t it?

But well… As I i’ve said, early investors been selling out persistently.

Allied Minds PLC (ALM:LSE): Last: 218.57, down 42.43 (-16.26%), High: 236.00, Low: 207.80, Volume: 1.04m

News is that $146.6m will be written off, as seven subsidiaries slated for sale or liquidation

Float price was 190p i think

In addition to $4.7m of related charges you get a 28% hit to the last portfolio value, or 21% including estimated current cash.

Bullish argument is that they can concentrate management time on the core businesses in the portfolio, but also as ive said — we don’t have special insight on this company now

Optio Labs is probably the only surprise among those businesses being put into rolloff.

The kitchen sinking, nettle grasping and bullet biting is entirely to be expected though, and was widely flagged post the founder walking.

(Always Expectant — racking disable??)

Still waiting for first proof point; cash burn remains high. While we acknowledge that ALM has an interesting collection of assets in tech and life science domain, we continue to wait for the first commercialization announcement or liquidity event. In addition, CEO and co-founder (Chris Silva) had recently left the company after 10 years of tenure, which we see as an indication of slower-than-expected progress at key subsidiaries. In the meantime, cash burn also remains high (CSe at ~$100mn pa). Here we note that having raised $81mn in Dec-16 through share issuance, we estimate ALM to have gross cash of $194mn ending 2016.

We lower TP to 215p (from 400p) which is based on EV to NPV ratio of 1.50x (vs. 2.0x earlier) given limited visibility around progress towards milestones in key subsidiaries. Taking into account inherent risks and uncertainty, we see a blue sky valuation of 550p (at 4.0x EV to NPV), while our grey sky scenario shows 80p (at 0.5x EV to NPV).

That’s quite a downgrade — given CS brought in the SIngaporeans at a price somewhat higher than this!

All credit to the analyst

While on the sector, people on the right seem interested in BNN Technology.

Who’ve put out a curious statement while we were on air, in response to the shares selling off early.

The Board of BNN Technology (AIM: BNN), a London-listed Chinese technology, content and services company has noted the share price reaction over the past week and is not aware of any reason for today’s share price movement.

Trading Update

Gross Transaction Volumes (GTV) through the company’s platform have continued to progress well in recent weeks. Gross transaction volume has grown by 46% to over £400 million in the three months to March 2017, following £273 million in the three months to December 2016.

The company’s financial results for the 12 months ended 31 December 2016 are scheduled to be released by the end of next week.

The company’s NASDAQ listing process is also progressing, as previously announced. We are working towards completing the listing in Q3 2017.

Supported by the launch of the recently announced motorist platform, which we expect will generate revenues in H1, we continue to expect significant revenue growth for the Group in the current year. Since the initial announcement, we have added a second major fuel retailer to the motorist platform, in addition to the market-leading operator already reported.

The company continues to operate with a strong and healthy balance sheet, and began the calendar year with approximately £28 million of cash and cash equivalents.

Now, that line on the Nasdaq listing …. didn’t they apply yonks ago? Was Q3 2017 always the target?

Was it ever a stated target?

Do we know what this company actually does?

Our Mission is to enrich the lives of Chinese consumers, by utilising our technology to enable our partners to deliver first class value added services, content and new and evolving opportunities.

At our core, we are a technology company that processes high volumes of transactions and delivers content. We aspire to enrich the lives of Chinese citizens and grow with our public and private sector partners by enabling more rural and urban communities across the country to access exclusive content and pay for more services online.

……… it excites retail punters is what it does.

What it actually sells, search me.

Seems to have pivoted fro online lottery stuff to mobile payments

Spinning back to the October announcement that they’d officially applied for a Nasdaq ADS … does it usually take a year to rubber stamp that? I thought it was a formality.

Still, good luck holders. Chinese online payments sounds a great sector in which to park your money.

@Stringer wants Deutsche on Petrofac.

Petrofac Ltd (PFC:LSE): Last: 893.51, down 29.49 (-3.20%), High: 920.00, Low: 884.50, Volume: 2.39m

It’s expensive, they say.

Having exited a large part of IES, trimmed net-debt and contained working
capital, management has done a good job at tackling the main issues.
However, based upon our updated project market analysis, which drives our
estimate changes we find the valuation looks stretched and consensus implies
an improbable pickup in awards and/or win rate. While possible, both would
need to surpass historical precedents, which seems unlikely. Given the full
valuation, YTD project losses and optimistic consensus, we downgrade to Sell.

Management has done a good job at reducing direct upstream exposure and in
turn tackling the main issues. The Berantai divestment and good cash
collection helped contain working capital plus reduce off-/on-balance sheet
debt/capital intensity. A few bumper years of awards help provide reasonable
confidence (c85% cover) in ‘17 estimates/consensus. However, this cover falls
sharply to c65% in ‘18, which is low vs. history and given relatively subdued
contracting activity and the historic/YTD win rate poses a risk to earnings/SP.

The quarterly data is lumpy; however, MENA oil and gas project awards have
begun to recover from the 3Q16 low and annualised could surpass 2016.
Despite our assumption of a sustained project award recovery and higher y/y
win rate we find ourselves c10% below consensus in 2017-18 (ex-IES).
Likewise, analysis of the publicly available contracts that Petrofac is tendering
on implies that an improbably large upswing in awards and/or conversion rate
is required to achieve consensus. In this regard, both the value and volume of
implied contract wins would need to surpass historic precedents, we find.

As a result of our forecast changes, our DCF derived (c8% CoC; 1.8% RFR/TGR;
1.2x beta) 775p/sh PT falls c14% and implies c15% downside. Relative to
Petrofac’s 5Y history it trades at an implied premium ranging between 10-30%
on PE, EV/EBIT and EV/EBITDA on our revised FY18 estimates. Even after
adjusting for the market rally the stock still looks fully valued relative to the UK
OFS sector at a 20% premium on FY18 PE (vs. -12% historically). That said, a
FCF covered c6% DY could appeal, offsetting a full valuation/muted tendering.

We lower our DCF-derived TP (CoC 8%; TGR1.8%) to 775p. Besides the oil
price, contract awards are the main SP catalyst e.g. Bapco (May) and Duqm
(mid-17) packages. Risks:a sustained upswing in MENA oil and gas awards
and/or win rate. Our analysis uses publicly-available contracts, which exclude
projects where Petrofac is engaged in bilateral negotiations/fast track projects.

While on the sector, hould also note that WoodMEC has found more people to sack.

John Wood Group PLC (WG.:LSE): Last: 780.00, up 19 (+2.50%), High: 804.00, Low: 774.00, Volume: 1.32m

Amec Foster Wheeler PLC (AMFW:LSE): Last: 546.00, up 13 (+2.44%), High: 565.50, Low: 538.00, Volume: 1.06m

Merger cost savings increased.

RBC to summarise, since we’re already over time.

As a result of ongoing analysis and integration planning, Wood Group has increased the expected level of pre-tax cost synergies from the Amec Foster Wheeler
acquisition to at least £150m ($183m) per annum from at least £110m ($134m) by the end of the third year following completion of the acquisition. This is an
increase of ~36% compared with the anticipated synergies originally set out by the company, and continues to be risk adjusted, exercising a degree of
prudence. As further information and analysis becomes available, Wood Group is also confident additional cost synergies can be realised in due course.
The additional synergies appear to be linked to an increase in operational efficiencies; and the total cost savings are expected to come from the following
areas;
l Operating efficiencies: ~50% of cost synergies are expected to be generated from economies of scale in addressable operating cost, efficiencies in
operational procurement spend and the reduction of duplicate costs across country and regional leadership;
l Corporate efficiencies: ~20% of the cost synergies are expected to be generated from the reduction of duplicate costs across Board and executive
leadership teams, in addition to other Corporate and Group functional costs;
l Administration efficiencies: ~30% of the cost synergies are expected to be generated from the consolidation of overlapping office locations, the
elimination of duplicated IT systems and the reduction of duplicate costs across central support functions. These anticipated synergies will accrue as a
direct result of the Combination and would not be achieved on a standalone basis.
Wood Group estimates one-off costs of ~$231m to realise these synergies are likely to be incurred in the first three years post-completion, which is unchanged
from the original deal and synergies announcement.
Our view: Wood Group’s increase to the synergies estimate from this deal is in line with our expectation that the original $134m target materially
underestimated the opportunities for cost savings. Wood Group expects to publish the deal prospectus late-May/June and could increase its estimate further by
this time.

And thanks for joining us on the right

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