Okay team, we’re going to get through this together.

I don’t know how. You don’t know how.

But we’ll keep on typing until it ends.

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

Well, I mean, there’s news. There’s always news.

In today’s news we have Tesco selling slightly more things in three months than a consensus of analysts had predicted.

Meanwhile, at BHP, we have a guy in a suit replacing a guy in a suit.

Oh, and there’s yet another dose of extend and pretend for Greece, just in case you care about that.

Bumped another €8.5bn from IMF and eurozone.

Does this mean Greece is any less likely to fall over in any term other than the short? Of course not.

The deal is a replica of the May-16 one. It puts an end to 9-
month long bailout negotiations on the second review and releases enough
funding to meet Greece’s ~€7bn debt redemptions in the next three months and
probably to cover its financing needs until the end of the programme in mid-2018.
However, the lack of additional clarity on debt relief beyond what was already
agreed last year will leave uncertainty high around the possibility of QE inclusion
of Greek bonds and the ability of Greece to return to market access. The IMF
decision for a slightly more formal participation in the programme, albeit still with
no financing, has helped to break the deadlock and allow Germany to continue
financing Greece. We expect no other progress on debt relief before the German
election in September and probably not before the end of the current programme.
Overall, we reckon the chances of a fourth bailout for Greece being needed over
the next couple of years remain high, in our view, as we see it as quite unlikely
that Greece could return to full market funding by the time the current programme
ends in 12 months. Very small concessions from European creditors will also
further weaken the Greek government domestically, in our view, potentially
leading to increased political turbulence.

Ah, crap, and I’ve just realised I forgot the picture.

That’s what Greece looks like, in case you needed visual prompts.

We can get Tesco out of the way pretty easily.

Tesco PLC (TSCO:LSE): Last: 178.55, down 1.4 (-0.78%), High: 188.00, Low: 178.00, Volume: 23.31m

Fiscal Q1 suggests that people buy more of stuff when it’s cheaper, which has helped the UK side.

International’s still a bit of a dog but, with management shutting it down gradually, it seems to have been written off in most investment cases.

Today we get the unprofitable Thailand bulk business axed.

Which dilutes LFL a bit, but it’s not UK so no one minds..

Morgan Stanley can take us through the headlines.

We have spoken with the company. Overall, we view Tesco’s 1Q
sales figures as a small positive: while International sales were clearly weaker
than expected, this is largely a function of a decision to discontinue bulk selling in
Thailand (which should have very little impact on profits) and is partially offset
by a better than expected performance in the UK (LFL sales up +2.3% vs. +1.9%
expected by consensus), where performance of fresh food growth was relatively
healthy. We do not expect FY PBT consensus to move up on the back of today’s

(Sorry for the lumpy line breaks.)

UK: LFL sales increased to +2.3%, an acceleration vs. 4Q17, during which LFL sales
were up +0.7%. This compares to Bloomberg consensus of +1.9%. We believe
that the pick up is mostly a function of food inflation returning to the UK as of
January 2017 and now standing at +2.6% (as per Kantar) and +1.6% (as per ONS)
during Tesco’s 1Q18, itself a function of the GBP depreciating against major
currencies, driving input costs up materially (as per ONS data, Food PPI was up
c.+4% during Tesco’s 1Q18). Number of customer transactions was up +1.3% in
1Q18 vs. +1.0% in 4Q17.

In the release, Tesco points out that Fresh food grew +1.6% in 1Q18, a healthy
performance given that Tesco launched Farm Brands as the same time last year.
We believe that Tesco’s LFL sales in 1Q18 were dragged down by a poor
performance of non food sales (non food LFL were likely down 2% to 3%). In our
view, this is due to a combination of proactive measures (non-food online
proposition was scaled down, as it is loss making) and structural issues (i.e.
relevance of the hypermarket format)

Skipping international because no one cares.

Valuation: As of yesterday’s close price, and on consensus CY17 numbers, Tesco
is trading 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 food retail sector.

And UBS, to say much the same.

UK & RoI LfL’s of +2.3% vs. Cons. +1.9%
Tesco reported 1Q18 Group LfL sales of +1.0% vs. UBSe +1.7% (Cons: +1.6%).
Divisionally, UK & RoI was +2.3% vs. UBSe +1.9% (Cons: +1.9%); and, International
was -3.0% vs. UBSe +0.5% (Cons: +0.6%). UK performance is strong with overall
volumes positive, plus a helpful margin mix with food and grocery LfL’s +2.7% and
fresh food volumes +1.6%, outperforming the market, whilst it continues to step back
from promotional activity in GM. International sales performance reflects a decision to
discontinue unprofitable bulk palletised selling activity in Thailand, which impacted
Group LfL by -0.6% and International by -2.7%, and so the bottom line impact of the
sales miss should be immaterial
UK shoppers responding to Tesco’s improved price position
UK & RoI LfL of +2.3% represents Tesco’s sixth consecutive quarter of growth and its
strongest sales print in the past seven years. Our UBS Evidence Lab Pricing Monitor data
has Tesco’s LfL inflation running at -0.2% (3-Month rolling to May), considerably below
its competitors and with its price position vs. Asda the sharpest it has been in many
years. Today’s print suggests shoppers are responding, which is allowing Tesco to
maintain volume growth and generate operating leverage.
Confidence in long term plans to deliver 3.5-4.0% margin by FY20
The statement reiterates ‘confidence in our long term plans… (and) ambitions we have
set out’. Elsewhere, a capital gains tax assessment in respect of sale of the Korean
business in 2015 has been resolved with no further tax payable. This will result in
release of a ú329m provision.
Valuation: target price set according to our DCF-derived NAV of £2.33/sh
Tesco trades at 16x EV/EBIT (FY18E) falling to 9x (FY20E) vs. 3/5-year average: 15x/13x

Every third email in my inbox is a note on Tesco, all saying the same thing pretty much.

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 number of reasons this week

The consumer spending read isn’t great for upselling to fibre, for one thing.

The PL football viewer figures are bloody awful for its white elephant of a TV business.

The regulatory outlook has become rather confused by the election result.

I wouldn’t like to say correlation and causation here, but Saeed Baradar has been emailing clients again this morning.

BT target goes down to 220p.

Says to expect another profit warning “in due course”


This is a spec sales email, please be aware. We quote it here because Mr Baradar’s very, very good value for money.

Risks are everywhere for this company and the profile is getting worst. Previously I had highlighted the 5 main risks but with the Q1 results getting closer they are set to become more visible again (quarter ending 30 June). I expect the stock to break the 286p resistance level and then we are on a “one way” road to 222p.

BT continues to destroy shareholder value by paying huge content costs – £2bn for football alone for the next 3 years implying a Break even of £34.3/month/subscriber which will never be achieved. Add to that the fact that BT TV customers growth is also grounding to a halt at a time of 32% content cost inflation and it becomes evident that there is still much pain to come.

With a 42% exposure to [the Enterprise Business] segment, BT has the highest exposure of any European incumbent to this weakening market segment. This was partly responsible for the last profit warning in January and will be responsible for the next one as well.

OFCOM keeping the pressure on BT across the board from the implementation of “Openreach” separation, to price controls on fixed voice services to the new WLA review which encompasses the regulatory access to G.fast and the requirement to increase CAPEX in the network. Pressure on FCF to be maintained.

The current ongoing pension tri-ennial valuation which is likely to highlight a deficit in excess of £10bn can result in an increase in pension deficit payments, further pressurising the FCF and the unsustainable dividend policy.

Does anyone really believe that given the above, the progressive dividend policy is sustainable? Well it is – as long as it is a progressively falling dividend.

I’ve said it before and I’ll say it again: get on the Louis Capital distro list. Whether you agree with it or not, it’s the kind of attack-led analysis we see very rarely these days.

(LeChiffre: answering that question would take the rest of the session. To summarise, we don’t know. It’d be wrong to assume that all of the research we share here comes direct from source, and there’s a public interest “maintain an honest market” remit to us sharing stuff we’re not supposed to. How folk react to being reminded they’re paying for stuff remains to be seen.)

(@LeChiffre: agree. Someone will find a way to get wealthy off MifidII, but it’s unlikely to improve the lives of either the producers or the consumers of sellside.)

There’s Rentokil, of all things, leading us up right 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 switch from Berendsen (because the offer’s priced in) and Elis (because it’s buying Berendsen).

We believe the market continues to underestimate the growth and margin opportunity at Rentokil. Deepening density continues to drive margins higher in US Pest with Rentokil’s ‘pure’ US pest control margin (ex plants and distribution) still c.600bp below peers at c18-19%, on our estimates. The recent JV enables greater management focus on Hygiene, where margins are below peers. On our updated estimates, Rentokil trades at a 2018e P/E of 20.3x, at parity or a discount to other quality growth names in our sector despite, in our view, a superior and/or more clearly defined earnings growth outlook (c.15% base-case 3yr ccy CAGR including future M&A).

The SA mining charter stuff referred to on the right is interesting.

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

The key proposals being 1) BEE minimum ownership up to 30% from 26%.

And 2) “Once empowered, always empowered”

The one at the sharp end of this is probably S32.

…….. which refuses to autoprice.

More generally, though, it reinforces the idea that South African mining carries risks that make it toxic.

Anglo American PLC (AAL:LSE): Last: 973.80, down 21.3 (-2.14%), High: 1,004, Low: 972.50, Volume: 4.25m

Lonmin PLC (LMI:LSE): Last: 68.25, down 0.75 (-1.09%), High: 69.00, Low: 68.00, Volume: 376.14k

Affirmative employment, a BEE (Black Economic Empowerment) purchasing requirement, a BEE royalty levy and BEE ownership to 30% – these are highlights of the South African government’s intention to extract further economic benefits from the mining industry and to spread those across the wider population, all inside a 12-month implementation period. This proposed Charter will increase the risks facing the industry and it is no surprise the Chamber of Mines has already announced multiple challenges to it. We expect to see a lengthy period of uncertainty while the court processes grind into action.

And HSBC, whose title is …..

New Mining Charter: destroying the investment case

……. though if the original investment case involved an egregious exploitation of human capital, one can question whether it should have been an investment case in the first place.

While the “once empowered, always empowered”
principle appears to have been adopted in the new Mining Charter that was gazetted
on 15 June, this seems to have been lost in a Charter that industry observers widely
regard as unclear and confusing. In the unlikely event that the Charter is not
changed, we believe that the SA mining industry could become non-investable. We
sense that the industry has reached an inflection point and, while the process will
take time, common sense suggests that much of what has been proposed could be
reversed in due course.

The Charter was drafted with little input from the industry. Consequently, it is of no
surprise that the Chamber of Mines will pursue a declaratory order and serve an
interdict to suspend the implementation of the Charter and to take it on review (as per
its press release of 15 June). The Chamber rejects the unilateral development and
imposition of the Charter by the Department of Mineral Resources (DMR) and is of
the view that the process followed by the DMR in developing its version of the
Reviewed Mining Charter is flawed. The ANC has also expressed concerns about the
proposed Charter.

An unworkable Charter: While the increase from the 26% Black Economic
Empowerment (“BEE”) equity requirement to 30% was well flagged (but will likely be
opposed by the Chamber of Mines), further complexities have been added to this
requirement. In addition, there are new demands and constraints on the mining
industry that will be exceptionally difficult to execute and in some instances could be
in conflict with the Companies Act and maybe the SA Constitution. In short, the
proposed Charter is widely regarded as unfair and therefore is likely to face
resistance from both the industry and investors.

(@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 more on S32.

To recap, S32’s best South African asset (in our opinion), Hillside, falls outside this discussion given its classification as a processing operation, rather than a
mine. Manganese and Energy coal would require additional, incremental sell down to move from the current 26% BEE target to the new 30% target, and
depending on the funding mechanism (often vendor financed), and valuation (usually at ‘fair value’) is likely to have only a modest impact on the underlying
earnings of the group as a whole. the incremental royalty could be as little as US$10-20m annually (against group revenus of US$7-7.5b) based on our forecasts
of revenues for FY17E. However, despite the intention for companies to be compliant within 12 months, we think there is considerable uncertainty around the
final details of this new charter as the legality of certain aspects will be tested by the Chamber of Mines. This announcement further underlines the companies’
recent commentary surrounding incremental investment in South Africa given these risks (which we discussed in our recent note “In the capital allocation game,
South Africa Energy Coal the loser…”, 1 June, 2017)

We believe this should have only a ‘neutral’ impact on S32, given the exposure is primarily limited to manganese and thermal coal (and Aluminium is the more
valuable asset), the potential financial impact should be modest, and further movements in the Rand provide a natural offset to potentially lower earnings and
cash flow. The reality is, however, that sentiment is likely to be impacted given lingering uncertainty around the implementation of this new policy. In addition,
Australian investors have no other significant South African exposure in the mining sector, often making S32’s exposure easy to pigeon hole as “too hard” or
“too risky” in comparison and events such as this unfortunately tend to validate the supposition.

Sorry once again for the scattergun line breaks.

Guess we should note the new guy at BHP

BHP Billiton PLC (BLT:LSE): Last: 1,169, up 9 (+0.78%), High: 1,181, Low: 1,161, Volume: 4.71m

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

He replaces Jac Nasser, effective 1st September.

Onboard since Sep’16, well liked by Oz shareholders after 23 years at Amcor

A decade of which was as CEO.

What does this tell us about the evolution of BHP’s strategy? Literally nothing.

The key to the longer-term outlook will be how Mr. MacKenzie positions the business to deal with its strategic challenges, particularly the US Onshore oil & gas business, where it remains unclear if it should remain within BHP’s “core” portfolio. The strategic issue facing US Onshore has become increasingly more acute in recent months with the approach from Elliott Funds who have called for a review of the division, which they believe has “broad based shareholder support”. In this respect, Mr. MacKenzie’s experience in the manufacturing segment & track-record shaping company / industry strategy should be beneficial in his new role. However, specific priorities should become clearer as Mr. MacKenzie completes a global “listening tour” over coming months.

Given Mr MacKenzie’s background and history at Amcor, and without having the
legacy of being on the board for the US Shale acquisition that the other front
running candidates had, there could be more potential for a disposal of these assets
to unlock value in the portfolio – Unlocking Value versus Growing Value.

Change typically breeds change so the question is what are the further
implications? Current CEO Andrew Mackenzie has been in the role for just over 4
years, appointed after the US Shale acquisitions in 2011, and has driven a
significant reduction in costs across the business and a slimming down of the
portfolio through the demerger of South32. With a new Chairman and focus moving
to unlocking productivity improvements through realizing latent capacity and
delivering projects there may be some subsequent changes amongst management.

The Jansen potash project is the other contentious issue that is raised in our recent
meetings with investors, especially given the oversupplied state of the market
(demand ~60mt v capacity more than 80mt and growing) and need to assume significantly
higher prices than spot to generate the 12% IRR for the US$4.7b stage 1 project
(US$400+/t price required even if US$3b sunk capital ignored). Given these issues
there is the potential that at the very least this project is delayed – first production is
possible from FY23 and additional capex will need to be approved ~FY19 once the
shaft is completed.

(@You can call me Al: sympathies. I spent a time living under the approach route to RAF Leuchars. Those things are a nightmare.)

Still here, just. Was scanning about for anything else to cover.

Ideas, ROTR? It’s been a long week, for various reasons, and I’ve nothing left on the notepad.

Which you need to read. But that’s not really out remit here, nor is it in my job desc to send readers elsewhere.

(@JuB: is that a stock or have you just canonised me?)

Otherwise, I think we’re just counting down the clock now.

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

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

UBM PLC (UBM:LSE): Last: 728.50, up 22 (+3.11%), High: 737.00, Low: 721.50, Volume: 604.70k

Upgrade to Outperform with a TP of 825p: We upgrade UBM to Outperform (from Neutral) for three main reasons: 1) UBM has committed to accelerating its annual events organic growth (ex-rationalisation) from the 3.1% level seen in 2016. We are also getting closer to the end of 2017, when rationalisation stops. 2) Drawing from our discussions with industry experts, we examine how structurally secure the events industry might be and conclude that while behavioural change from digital natives and Augmented/Virtual Reality are potential longer-term threats, B2B exchanges such as Alibaba and Amazon Business are not replacing trade shows. 3) On P/E and FCF yield, UBM trades in line with free TV and advertising agencies, where structural issues are much more acute and long-term growth prospects are lower.

■ Key positives: Events should grow in line with global nominal GDP, UBM is guiding for an acceleration in growth and structural threats look limited, UBM is a pure play on events and is now better organised and invested. UBM’s portfolio is industrially and geographically diverse with a US/EM bias, the market is fragmented and ripe for consolidation, there is scope for greater margin expansion than consensus assumes and the business has good cash generation with low capex/sales.

■ Catalysts & Risks: The fashion vertical (17% of Events) could decelerate faster than expected, other verticals could suffer online disruption, digital natives could veer away from face-to-face events, acquisitions could disappoint and the economic cycle could be overextended. Travel and free trade issues could also arise and growth improvement may be lumpy due to phasing. Catalysts include H1 results (28 July) and further acquisitions.

And, as Soundbuy notes, Liberum’s been talking to media buyers.

Speaking generally, I’m always fascinated by the trend that analysts who buy ITV talk to media buyers who are positive about the outlook, and analysts who sell ITV talk to media buyers who are negative about the outlook.

Observer-expectancy effect, maybe? Dunno.

Feedback from several media buyers suggest that September TV advertising is stabilising and that FY17E is likely to be down 4-4.5% for the UK TV market. However, we do not think this represents a fundamental shift to online and feedback on YouTube suggests it is suffering badly from recent controversies. We see TV weakness as more driven by sector-specific factors in FMCG and Retail, which we think will reverse over time. In the meantime, we bring down our ITV NAR TV forecasts from -2.1% to -4.5% but the increasing lack of gearing means little impact on EPS. At a 10.5x FY17E adjusted PE, generating strong cashflows and dividends, we believe, ITV is in a structurally attractive position and we continue to like the story.

ITV PLC (ITV:LSE): Last: 179.00, down 0.1 (-0.06%), High: 179.90, Low: 178.40, Volume: 9.74m

And with that, let’s close. We’re done. It’s over.

Thanks for joining, both today and this week.

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

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