GLG‐Solvay Simulation Oct‐09
1)
PSA
Key information
/Peer/
Long
A) Internal analysis
Company Industry sector
PSA Consumption Cyclical
Market
Europe
Exchange Ticket Position
Paris UG.PA Long
2 arguments Statement Peugeot is considering alliance with Mitsubishi [references 1,2,3]
Which might significantly impact the stock valuation Explanation(s)/Justification(s) PSA is considering a tie‐up with Mitsubishi of Japan. According to La tribune, CEO Phillippe Varin is looking closely at a possible alliance with Mitshubishi. The aim is to internationalise the group. This extension could afford Peugeot to increase its market shares. That could make senses because the 2 groups are strongly complementary. PSA sells its products mainly in Europe, while Mitsubishi sells it in Japan and the US. In product terms, Mitsubishi's strengths lie in mini and large vehicles, whereas, PSA is specialised in midrange vehicles. Furthermore, PSA and Mitsubishi have already undertaken lots of projects together ( i.e. Electric car project). Complementarities would make them a good match. Their large distribution networks could be a real advantage. Both of them could access new markets. ‐‐ > New economies of scales ‐‐> Increase sales and operating margin ‐‐> Increase share's price. We believe that is not captured in the market price.
Recent interest rate S&P recently downgraded PSA's credit rating from BBB‐/A‐3 to BB+/B, announcing that downgrading has to be reviewed PSA's financial profile will not stabilise in line with the BB+ rating before 2011. PSA's rating [reference 4] cut into junk territory increases significantly borrowing costs. Looking to the capital structure [Debt ratio 16%], we believe that S&P will upgrade PSA in the next few months. Decrease borrowing cost ‐‐> Increase share price.
B) Valuation
based on your arguments above
C) 2 major Risks /Threats
1 2 3 4 5 6 7
Statement Negative Free Cash flow
Explanation(s)/Justification(s) Although there is a negative FCF expectation for 2009. We expect that the FCF will not be lower than the target (EUR1.94bn) estimated. With bad results in emerging countries and loss of market shares in Brazil, we hope that the loss will remain at the same level.
Losing ground in China [reference 6,7]
PSA has a 4% share in china and valuable distribution foothold in what will soon be the world's largest market. They don't have to loose their shares which represent a real comparative advantage. Losing share in this area could impact PSA'share price.
Sources (Below indicate the sources used for your analysis) Statements References (links) PSA is considering Alliance with Mhttp://www.mysinchew.com/node/28963 PSA is considering Alliance with MLa Tribune (sept. 4) PSA is considering Alliance with Mhttp://news.bbc.co.uk/1/hi/business/4235537.stm Peugeot Interest rate downgradin http://www.xe.com/news/2009‐08‐06%2014:22:00.0/597877.htm?c=3&t= Price/Sales ratios http://www.psa‐peugeot‐citroen.com/document/faitchiffre/CA_par_trimestre_en1240844393.pdf Losing ground in china http://www.psa‐peugeot‐citroen.com/fr/psa_groupe/expansion_b2.php Losing ground in china http://www.lesvoitureschinoises.com/20070712154/voitures‐chinoises/PSA‐Peugeot‐Citroen‐va‐investir‐dans‐une‐nouvelle‐usine‐en‐Chine.html
2)
GLG‐Solvay Simulation Oct‐09
Key information
NSANY
/Peer/
Short
Image 1
Nissan EV‐02 (prototype)
A) Internal analysis
Company Industry sector
Nissan Consumption Cyclical
Market Exchange Ticket Position
Japan Tokyo NSANY Short
2 arguments Statement Expectations of recovery in sales are too high
Which might significantly impact the stock valuation Explanation(s)/Justification(s) The last couple of months have shown a slowdown in the global auto sales decline and market expectations are high that the worst is over for the auto industry. However, a stabilisation in unit sales at low levels will not translate into higher profits, as overcapacity remains an issue and prices remain under pressure. In addition, many markets have been heavily supported by government incentives. In the best‐case scenario, these will continue in 2010, but with a diminishing impact. While Nissan’s relative sales performance in the first quarter of FY 09 improved compared to last fiscal year’s fourth quarter, total sales remain weak and have not increased from Q4 levels, according to our estimates. Given that sales have been supported by government incentives in Japan and Europe between April and June, we would have expected to see better numbers for these regions.
Electric vehicule (EV) production Nissan has announced that it will sell EVs to corporate customers in Japan and the US in 2010, followed by a mass‐market commercial launch in 2012. The not launchable in the medium term company has also said that it plans to sell hybrids based on its own technology in Japan by 2011. EVs have become Nissan’s ‘niche’ in the eco‐market, but the potential and the profitability of these vehicles are questionable, particularly in the short to medium term. As for hybrids, Nissan will be facing huge competition from already established Japanese, European and Korean hybrid producers. As a newcomer, we think that it will be extremely difficult for Nissan to compete on image, technology and pricing.
B) Valuation
based on your arguments above
C) 2 major risks /Threats Statement Electric car charging points
Explanation(s)/Justification(s) If cities alike New York, Chicago (see above EV plan in the US) start installing charging points everywhere (like velib' in Paris) that might impact significantly Nissan which is in advance on Electric Vehicle development.
a green tax increase [image 1]
Nissan will be less impacted than some of its peers (Peugeot) thanks to the development of its EV and hyprid cars. (to develop !!!)
Sources (Below indicate the sources used for your analysis) Statements Nissan EV Nissan EV Nissan results
References (links) http://revengeoftheelectriccar.com/nissan‐promises‐ev‐for‐2010/ http://www.popularmechanics.com/blogs/automotive_news/4276765.html http://www.nissan‐global.com/EN/IR/
GLG‐Solvay Simulation Oct‐09
3) Key information
TSCO.L
/SINGLE/
Long
Chart 1
Tesco share price vs. Food RPI% Correl lead 1Q =63.97%
Chart 2
UK Consumer confidence index
A) External Analysis
Company Industry sector
Tesco Consumption Non‐Cyclical
Market
Europe
Exchange Ticket Position
London TSCO.L Long
1 quantitative argument Statement more inflation in the next months [references 1,2,3 & charts 1,2]
Explanation(s)/Justification(s) As it can be seen on the chart 1, Tesco's share is significantly affected by marked changes in Food alimentation [correlation of 63.97% on the last 5 years]. So inflation might be a threat for Tesco' share price ... However...Food inflation has remained higher in the United Kingdom than the rest of Euro and the US zone because of the sterling's weakness against the Euro and US (Purchasing power parity theory). Looking forward, we expect more inflation in the rest of Europe and in the US, no just because is painful for the retail sectors but also because macro conditions [i.e. France and Germany climbed out of technical recession in August ] and consumer confidence are rebounding. In the meantime, we expect that euro currency and Dollars will remain stronger than sterling over the next 12 months. ‐‐> with other things the same inflation will increase in the next few months (PPP theory) >< market anticipation ‐‐> Price is undervalued.
1 qualitative argument Statement Explanation(s)/Justification(s) Recovery period will favour We believe that UK consumers can not afford to go abroad and to go to the restaurant as it use food and home goods to be. We think that home retailers (Food and general) will benefit from this business cycle to spending [own opinion] improve their revenues. We do believe that during the recovery period the UK consumer will prefer saving money and spending money in food and Home goods. This is still not integrated in consensus.
B) Internal Analysis 2 arguments Statement Doubling loyality points [references 4,5 & image 1]
Which might significantly impact the stock valuation Explanation(s)/Justification(s) Tesco has doubled the loyalty card rewards on 75% of its products (except petrol, tobacco, Tesco mobile). Tesco has run a successful campaign where customers doubled‐up points on selected categories over the last three months. This yielded 500,000 new club card members, and over 1.5 million existing Club card holders took advantage of the offer.In the meantime, It has been given exceptionally wide advertising coverage (lots of banners in the free paper handed out in the last couple of days). In a sector of high promotional activity, increased retention value ( loyalty) might be a real competitive advantage. Even if this new reward scheme represents an important cost, It should increase Tesco's market share and and thus improve its sale volumes , earnings, and P&L (if its COGS are unchanged ). We believe it is still not fully captured in the consensus.
Good customer insights [reference 7, 8]
Everybody knows that knowledge is a kind of power. With its loyalty card scheme, Tesco has collected 15 years of data. Analysis allows Tesco to provide real insights on shopping habits and very effective targeting of existing and new customers. Building on this insight, Tesco has been successful in extending its brand into new product and new market. The lost of confidence of bank's customers is a great opportunity to take market shares for its new financial activities with analysing deeply its customers insight. We believe that this point is still not fully captured in the consensus and market share.
image 1
C) Valuation
D) 2 major Risks /Threats Statement Plan for UK VAT increase from 15% to 17.5% or 18.5% [reference 8]
Explanation(s)/Justification(s) We do believe that UK VAT increase will not have impact on small purchase. However, the UK VAT rise is more likely to have an effect on a large ticket purchase. The proposed increase of UK VAT from 15% to 17‐18% could be launch on the 1 of January 2010 which might have a relative impact on our portfolio performance...However...There remains significant lobbying pressure to push back the date. Moreover, election approaching might delay this proposition (UK general election in may 2010).
Interest rate change [reference 9 & chart 3]
As it can be seen on the chart 3, Tesco share's price is relatively influenced by the interest rate changes [correlation of 48.9%] . Many other factors have an impact on the share price but shifts in interest rate do influence share performance. As the monetary environment remains highly simulative, we fear that interest rates will be hiked by The Bank of England during the next 12 months.
Chart 3
correl lag 0 =48.55%
Sources (Below indicate the sources used for your analysis) 1 2 3 4 5 6 7 8 9
Statements References (links) RPI% DATA http://www.statistics.gov.uk/statbase/TSDdownload2.asp France and germany out of rec http://www.time.com/time/business/article/0,8599,1916261,00.html Gfk Datastream Loyality cards http://www.dailymail.co.uk/news/article‐1206564/Tesco‐steps‐supermarket‐war‐doubling‐loyalty‐card‐points.htm Loyality cards http://www.marketingmagazine.co.uk/news/927616/Industry‐experts‐dissect‐Tescos‐tactic‐doubling‐Clubcard‐points/ Good customer insight http://www.dailyreckoning.co.uk/lessons‐from‐history/tesco‐customer‐insight‐keeps‐food‐retailer‐on‐top.htm http://customer.corante.com/archives/2005/08/07/tesco_triumphs.php Good customer insight UK VAT http://www.telegraph.co.uk/finance/financetopics/budget/3521525/Pre‐Budget‐report‐Secret‐plan‐for‐VAT‐increase‐to‐18.5‐per‐cent.html Interest rate DATA http://mortgage‐x.com/general/indexes/default.asp
GLG‐Solvay Simulation Oct‐09
4) Key information
KBC.BR
/Single/
Short
Chart 1
Corporate prime
Chart 2 `
KBC share price vs. Euribor 3m
Image
Virgin Money website
A) External Analysis
Company Industry sector
KBC Financial
Market Exchange Ticket Position
Europe EBR KBC.BR Short
1 quantitative argument Statement Explanation(s)/Justification(s) Corporate prime is still high Corporate prime is still high, Belgian economic is not recovery yet, interest rate estimation given and Interest rates are by the forward rate and analysts' forecasts are still very low (0.5% for the ECB rate). As it can be correlated with the KBC stock seen on the chart 2, KBC share price is significantly driven by the Euribor 3 months. During the [reference 1, chart 1,2] recovery period, we don't believe that the interests rate will increase. Consequently, KBC share wil probably remain low.
1 qualitative argument Statement Explanation(s)/Justification(s) New kind of banks and saving We believe that new kind of banks and account savings have a big future. More and more of non‐ Auction [reference 3, image 1] financial company (i.e. Tesco, Carrefour, Virgin, O2..) proposed to their clients safe saving accounts with other offers (credits card, insurance, loyalty scheme...). We believe with the crisis and the lack of confidence in the banking sector that this kind of new activities for the non‐financial companies can be nefast for Banks. Even if Belgium is not still reached by this kind of new banks, we believe this alternative will arrive soon . Another threat is the saving auction websites launched this year. Today, you can auction your cash for maximize your interest. This allows you to get the best rate from a panel of European banks. Increasing competition is good for customers but not for banks shareholders. ‐‐> This threat is not captured in consensus yet.
B) Internal Analysis 2 arguments Statement KBC restructuration is a big shadow [reference 4]
Which might significantly impact stock valuation Explanation(s)/Justification(s) KBC will submit a detailed restructuring plan to the European Commission by the end of September, final approval is not expected before December. This restructuration will take time and it is difficult to know speed at which KBC will reduce its Risk profile.In a small competitive market as Belgium where the customers are strongly risk averse,It is difficult to know if customers will remain loyal or if they will switch to another bank already restructured . This is a big issue which is still not captured in the share's price.
KBC structured products still exposed [reference 5]
KBC has lots of structured products [credit products such as CDO's/ABS and equity products such as Capped Call]. The vast majority of those products is built with counterparts. It is clear that futher write‐back with those counterparts would enhance KBC's ability to reimburse state capital as soon as they pretend. In the meantime, internal risk migrations could lead to an increase in capital requirements under Basel II, this could force product structured sales at potentially distressed prices.
C) Valuation
D) 2 major Risks /Threats Statement Complexity of valuing KBC (structured product recovery completely captured)
Image
Virgin Money website
Explanation(s)/Justification(s) Owing to the size of its bond portfolio and its financial product portfolio (structured product). There is maybe a mispricing in KBC stocks even if we believe the the value of the potential recovery of the value of CDO portfolio is already almost completely factored in.
Polish units to sell? [reference According to the press, KBC is looking to sell its Polish property insurance operations a unit of its 6] local subsidiary Warta, for around 1bn zloty (EUR261m). Furthermore, it was indicated that Co. is also looking to sell another small Polish subsidiary Zagiel, a financial services intermediary. This divestment of Polish insurance operations is not a good development. Operations are very profitable, show solid growth and we believe Poland would be one of the growth drivers. The market has already captured this news. If the deal is cancelled the stock price could go up which would be not good for our strategy.
Sources (Below indicate the sources used for your analysis) 1 2 3 4 5 6
Statements Euribor 3m Euro Interest Rate forcast Auction website KBC restructuration KBC structured product KBC polish units to sell
References (links) http://www.euribor‐rates.eu/euribor‐rate‐3‐months.asp http://www.dailyfx.com/story/currency/eur_fundamentals/Euro_Interest_Rate_Forecast_1221237471183.html https://www.maxbips.com/ http://cash.rnews.be/fr/argent‐et‐bourse/nouvelles/kbc‐la‐commission‐europeenne‐veut‐un‐plan‐detaille‐pour‐sa‐restructuration/article‐1194515725681.htm http://www.structuredproductsonline.com/public/showPage.html?page=304405 http://www.lecho.be/actualite/entreprises_finance/KBC_envisagerait_de_vendre_ses_activites_d‐assurance_en_Pologne.8209747‐584.ar