Good Morning,
It was hoped that this week would allow a bit more time.
With all the indicators suggesting some form of doom, why is
Gold not up? Liquidity is contracting, outlooks are being adjusted, China's
liquidity issues for SOE's are coming out, including their need to export
deflation and recession to other countries.
Wolseley's (WOS) final results weren't all that, with a feeling here
that WOS were calling the top of the market. The plumb centre owner reiterated
exactly what the market knew. The savages took their profits
and retreated to the caves. WOS, a viable company, but the outlook isn't that
great.
Over to WOS with additions from the EMC in bold to highlight
the short:
Ian Meakins, Chief Executive, commented:
"The highlight of these results was another great
performance by Ferguson in the US where we achieved strong like-for-like
revenue growth ahead of the market and a 50 basis point improvement in the
trading margin to 8.2%, which is a record. We continue to face some
challenging markets in the rest of the Group and remain focused on improving
growth rates and protecting gross margins whilst keeping the cost base
tight.
"Wolseley continues to be highly cash generative and
we have adequate resources to fund our capital investment programme, bolt-on
acquisitions and growth in ordinary dividends. We are also announcing a £300
million share buyback which reflects the Group's strong financial position and
management's confidence in the business."
Commenting on the outlook, Ian Meakins said:
"We expect to generate like-for-like revenue growth
of about 4 per cent in the first half. In the US we expect continued good
growth in Blended Branches, Waterworks, HVAC, B2C and Fire and Fabrication
underpinned by decent Commercial and Residential markets. However,
Industrial markets in North America, which account for about 15 per cent of
revenue in the region, were challenging in the fourth quarter and we expect
this to continue. We expect a continued steady recovery in Nordic
markets, although the heating market in the UK is expected to remain very
competitive with little growth. Overall, we expect to make continued progress
in 2016."
The buyback may offer some support, but is this the best
Wolseley can do with £300M? With net debt at circa £805M, prudence would
dictate either an acquisition or reducing debt. Then again...with a fall in
full-year profits one has to prop up ones share price.
The concern here is that companies should be focused on the
strength of the business not the ability to leverage to show strength. China
have met with similar issues in recent times and company buybacks are simply a
waste (view here). We're fully aware of the pros and cons, but in the absence
of a viable strategy of investment, take it as a signal that irrespective of
outlooks, the management are waving a flag of..."this is the best we can
do."
The writedowns are showing the fragility of the market place
across all sectors. WOS's guidance on the Nordic business with writedowns and
the outlook for the US business should not be ignored. The outlook contradicts
the logical buyback principles. The expansion and acquisition of decent
companies would surely be a sensible alternative to enhancing longer-term value.
It’s acknowledged Wolseley acquired, but buybacks do not
improve a business performance, only the earnings relating to each share. This
is not always the best measurement, as the EMC has evidenced many times before…
With the FED considering interest rate rises and the alleged
strength in the US, the guidance given contradicts some bulls. Reiterated by WOS
statement of price deflation in the USA,
UK and Central Europe and modest price inflation in Canada and the Nordic.
Glencore have come out with a statement in response to speculation (PDF/in full below).
Baar, Switzerland 29 September, 2015
Response to speculation
Glencore has taken proactive steps to position our
company to withstand current commodity market conditions.
Our business remains operationally and financially robust
– we have positive cash flow, good liquidity and absolutely no solvency
issues.
We are getting on and delivering a suite of measures to
reduce our debt levels by up to US$10.2 billion.
Glencore has no debt covenants and continues to retain
strong lines of credit and secure access to funding thanks to long term relationships
we have with the banks.
We remain focused on running efficient, low cost and safe
operations and are confident the medium and long-term fundamentals of the
commodities we produce and market remain strong into the future. (Ends)
So in essence, Glencore have so far had a placing they allegedly
did not need to conduct but did to assure investors. Now they're robust and
operationally/financially sound. Whatever have Capt. Kirk and Scotty got
planned next.
Well, we're sure that's all fine and dandy. The
gossip/rumours suggest all is not as rosy at the mill. Cargill's winding down of their $7bn hedge fund arm (FT) won't
have assisted Glencore in the sale of the grains business.
With the current outlook and Russian taxation woes that are likely to have hurt GLEN, the suggested price tag of $12B for the grains business may be a struggle. Then again they got significantly more for the Las Bambas mine in Peru - over to the sales folk.
With the current outlook and Russian taxation woes that are likely to have hurt GLEN, the suggested price tag of $12B for the grains business may be a struggle. Then again they got significantly more for the Las Bambas mine in Peru - over to the sales folk.
There's gossip suggesting that Glencore are having
issues with suppliers. This is unsubstantiated at the moment, but with credit
lines and liquidity tightening globally, it’s with no surprise that rumours are surfacing of
a big utility company cutting its credit line to GLEN. If this is true, what
are the implications for operations? It will undoubtedly have operational and
financial implications.
One is wise to measure Glencore on its assets, the price of
its commodities and marketing, in conjunction with its debt. Simply, the
assets, save for coal are tier 2 (EMC view) without significant investment
(see African Copper Update) to improve operational performance,
and until the development of these assets the outlook will remain
challenging.
With some large IB's and analysts believing
that Glencore is a viable business, this won't on its own make for a lower risk
investment case and suggests an element of knife catching. Certain
Brokerages have advocated that there are participants willing to
lend to Glencore in comparison to than Anglo American (AAL). This in its
own right isn't necessarily the best comparison, albeit, it does indicate what
some brokers/analysts are using as a comparator. The absence of comparatives
to tier one commodities companies rather says a lot.
Would it pay to buy Glencore? Quite frankly the unknown
operational model poses some risks, but it’s always nice to have some higher
risk exposure. It’s noted that personally the risks of being long are greater
than having been negative on Glencore since IPO. This doesn't mean there cannot
be a share price recovery, with the machine doing the rounds, expect some
support. Investors would be wise to keep an eye on commodity prices.
To end on a cheery note, another leveraged play on
commodities Freeport-McMoRan (NYSE: FCX). FCX had some good news with the drill
head. Their 100% owned Horn Mountain Deep well in the Gulf of Mexico came
in on the money The release in
any other market would have been positive, more so, if it didn't mean the
commitment of $$ to enable production the share price would have perhaps risen.
Over to Icahn to break this one up…
One hopes that the acquisition of the Tonkolili Mine by Shandong was above board. It never rains but it poors (poor I know) for the former-AMI. AWOKO article - one hopes the 'new' AMI has resolved such minor issues as moisture content, shipping and diesel disappearing. What are the chances of a three-pronged stimulus by China just as ore hits the market?
Have KAZ Minerals got their cap out yet?!?! Put us out of our misery on the 50 pence rights issue please?!?!
Atb Fraser
Over to the grammar police/time limited and long-days.
Hi Fraser- Thanks for the update, as usual.
ReplyDeleteRe Gold- the "perceived wisdom" is that gold has been sold so the leveraged can cover their exposures elsewhere. I can see that everything is connected at some point but these circular arguments are sometimes lost on a simple soul like me, suffice to save gold and other commodities are where they are and that's that, gold staying above $1,100 being in contrast to the continue plunge in most non precious metals over the last few weeks. I will look no further into gold as that way leads to madness.....
No doubt GLEN, KAZ and AAL will reprice their stocks and production at spot to put us all in the picture re their undoubted financial health shortly- I see that GLEN bonds are traded at junk levels today, so perhaps another positive RNS is needed to steady things, especially with Chinese manufacturing figures due overnight and they could be nasty if the other Chinese numbers are any indication. A fortnightly fund raise (as suggested via FTML contributors yesterday) could be a help, as you say Giftaid may be needed as it is unclear if GLEN can trade their way out of this one, the hole being deep and the shovel still being employed instead of a ladder....
On the tiddler front I see that RUR have kitchen sinked and ripped into their previous management, so perhaps Ivan could look in the mirror before his next missive. (No GLEN position here)
Cheers. The Leggie