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Markets Live: Friday, 9th November 2018

Morning. This again. Hello.

And a happy Friday to you all, except everyone at SSE and Innogy.

Who’ve discovered that their UK retail merger maths was all wrong so have been sent back to try again.

And another exception to everyone at FTSE

Who sneaked this wee announcement out shortly before RNS shut down last night.

Further to the FTSE Russell notice released on 31 October 2018 in relation to the cash and stock acquisition of NEX Group (UK) by CME Group (USA), Woodford Patient Capital Trust (UK) was inadvertently added to the FTSE 250 Index effective from start of trading 02 November 2018. As a result, please see details of affected indexes and effective dates below:

Woodford Patient Capital Trust (UK, BVG1CF2) will be deleted from the FTSE 250 Index.

Civitas Social Housing (UK, BD8HBD3) will be added to the FTSE 250 Index.

All changes effective from 13 November 2018.

Full Index change details are available on FTSE Russell website.

How much money tracks the FTSE 250? A reasonable amount, right?

I’m not suggesting class action lawsuit here, because that kind of thing doesn’t happen on this side of the pond, but ….. well, it must be an error worth a few million at least, right?

Anyway, Woodford’s off a bit …..

Woodford Patient Capital Trust PLC (WPCT:LSE): Last: 85.40, down 1.8 (-2.06%), High: 86.60, Low: 84.10, Volume: 1.47m

… after being relegated back to the small caps, which some might argue is probably the best place for a fund whose recent star performer is an unlisted company that claims to be making progress rewriting the laws of physics.

@Sails: I know nothing of this Ryanair story, nor the paper that’s reporting it.

And it seems to be exclusive to said paper — all follow-on articles cite Charente Libre — so dunno.

Let’s get into safer territory with a botched merger.

SSE PLC (SSE:LSE): Last: 1,141, down 41.5 (-3.51%), High: 1,153, Low: 1,135, Volume: 1.83m

The retail spinout’s been stuck on the slipway.

Because of market deterioration (?!) and the price cap (!?!?!)

Second point first, the price cap was completely known about and benign. On the first point, what market deterioration?

Retail utility pricing is extremely visible. They send you a bill.

So it’s difficult to see what exactly has changed dramatically to make SSE and Innogy think they can’t spin this out without being junked.

While we have always been sceptics on newco being able to service much debt, the emergence of a situation whereby a cash injection is potentially required is worse than our initial expectations. What is unclear from the disclosures is the relative impact of recent financial performance on the transaction, and whether the renegotiation includes a rebalancing between the parties. We suspect that market conditions have not allowed IGY performance to improve as quickly as management would have liked, but we will need to wait until the companies report next week [IGY Tue, SSE Wed] to gauge the relative shift. We would expect weakness today from stocks with UK retail exposure, but the impact on SSE, and to a lesser extent EON, should be far greater due to the company specific factors at play.

In our view, this announcement is a further knock to investor confidence in SSE, following recent profit warning on the back of a directional bet in commodity prices that went wrong. We see the following as main reasons for the re-negotiation.
– Hedging impact from the energy price cap. As a result of changes in the assumed hedging profile by Ofgem to set the price cap, retailers such as SSE and Centrica have signaled that they will see a one-off negative impact on earnings in 2019. Centrica has indicated c.£50-70m hit for the 12m of customer accounts they hold. This is roughly twice the size of SSE standalone retail customer base. Together with Innogy’s UK retail customer base of (less than 5m), we estimate a total NewRetailCo. earnings hit of c.£65m.
– Customer losses. We have seen increasing financial pressures at independent retailers, with a handful of companies having ceased trading YTD, a few having profit warned and a further 30+ suppliers not paid their ROC liabilities on time.
This does not preclude further customer losses at both companies, although overall, we expect the rate of losses at the Big 6 are falling. Both of these could potentially explain the insufficient funds at NewRetailCo. to cover credit collaterals and obtain a credit rating. We now expect cash injection into the NewRetailCo., although it is difficult to predict the precise magnitude or split between the two companies.

Also notable that Centrica’s not really reacting to this idea of a deteriorating market.

Centrica PLC (CNA:LSE): Last: 153.20, down 0.85 (-0.55%), High: 154.20, Low: 152.40, Volume: 5.16m

Though I guess having two of the big six trying to salvage this deal might be a useful distraction.

Thanks ROTR for the Ryanair updates.

Ryanair Holdings PLC (RYA:LSE): Last: 12.98, up 0.095 (+0.74%), High: 12.99, Low: 12.65, Volume: 457.99k

Anyway, let’s not get too distracted by that.

AA mentioned (somewhat in passing) on the right.

AA PLC (AA.:LSE): Last: 102.55, down 5.85 (-5.40%), High: 104.75, Low: 98.44, Volume: 2.32m

Now, here’s an interesting thing.

Credit Suisse downgrades to underperform …. but part of its argument is that AA is offering customers who try to quit a secret special offer.

Exclusive unadvertised retention offer of £45 a month if you only break down near home.

Now, of course, by downgrading Credit Suisse are advertising that offer.

Which make customers likely to take advantage of it, and makes the downgrade self propelling.

I’m not suggesting there’s anything wrong with this, to be clear. I’m just interested in the model of advertising things companies try to keep secret as a basis for going short.

It’s almost like a refinement of the Muddy Waters model that can get through IB compliance.

Anyway, their main grumble is the loyalty penalty supercomplaint.

The headline that causes us most concern is the CAB’s super-complaint which, although not referencing the Roadside offering, has a clear read across as we believe that loyal customers who stay with the AA for longer are paying significantly higher rates than new customers. With an average tenure of c.12 years and c.710k members having been with the AA for over 20 years, the implications of a negative CMA review could be material. We do not believe that corrective actions will be demanded straight away but, in our view, pricing is likely to change proactively to address the issues raised. We forecast the average price per roadside policy will decrease 1%-3% FY20E-FY22E as the AA rebalances its price points to benefit loyal customers.

But let’s do the Local Driver Membership stuff too, just in case it’s useful for anyone.

Upshot here is that it covers drivers within a 20 mile radius of their home address.

And is only applicable to existing AA members.

Currently only 27,000 policies have been taken out, but as the AA is not publicizing this and merely using it as a retention scheme we believe this number
could materially rise as more people look to switch/leave.
With a popular breakdown cover, according to the AA landing page, starting at £99 (which
as mentioned, the company’s website quotes as including an £80 new member discount
on the average renewal quote for this cover of £179), this represents a material step down from what the member could have otherwise been paying. In our view this is most applicable to the older AA members who may regularly use their
cars but only for short trips. With the average age of an AA member being 51 years old it suggests there is a material tail of clients over 65 years old.

(@wayne: good catch. £45 annually, not monthly. Soz.)

Which creates a bit of a battle. Old folks are the least likely to go outside the 20 mile loop around their home, but are also the least likely to cancel the service.

But on top of that you’d assume they’re the most active users of the service, and there’s no particular company cost advantage to AA’s offer of a 20 mile cutoff.

We believe this offering represents an innovative retention strategy from the AA, but, if this concept were to increase its take-up, it would be cannibalistic to the personal membership revenue base.
We also question (given the loyalty investigations underway by the CMA) if offering a significantly reduced service only when requested by exiting clients as opposed to publically marketing to all clients is sustainable. We have included this risk within our explicit membership cohort modelling and believe that it could rise to c.115,000 policies by FY23, drawn from a reduction in both the 20+ year members and the 10-20 year members. We believe the price point is too low however and will need to be increased and forecast it reaching c.£55 by FY23E.

……. More on Rynair and …………. uh, ….. Departuregate.

(Like Watergate, see. Help me out here, it’s Friday.)

Okay, fight to claw back subsidies.

Ryanair Holdings PLC (RYA:LSE): Last: 12.93, up 0.045 (+0.35%), High: 12.99, Low: 12.65, Volume: 494.65k

@chad_john, I can do little more than note the Mysquar news here ……

………….. which is that SPAngel has resigned with immediate effect.

And that £900k has gone for a long walk.

MySQUAR announces that following the announcement of 5th November that the two non-executive directors of the Company (being Neil Osborn and Stephen Austin) have carried out a preliminary investigation into the use of proceeds of the issue of £2.11m convertible bonds announced on 7th March 2018 and £2.22m convertible bonds announced on 20th June 2018.

This preliminary investigation has concluded that it appears that approximately £900,000 was paid out of Company funds to either third parties or former directors without either Board or Remuneration Committee approval (as appropriate) at the time such payments were made. The Company is considering its options for the recovery of such payments.

A number of staff have been made redundant in the Company’s businesses to conserve cash. Trading in the businesses of the Company continues but the ongoing viability of these businesses depends upon urgent external funding to meet working capital requirements. A creditor of the Company has indicated that it is prepared, in principal, to provide such working capital and is currently conducting due diligence but there can be no guarantee that funding will be forthcoming. As a consequence, there remains a material uncertainty regarding the Company’s working capital position and trading in the Company’s shares will remain suspended pending clarification of the Company’s financial condition.

I’m stunned, stunned, to see this kind of thing happening on Aim.

Is it the third or the fourth major blowup since Marcus Stuttard told Bloomberg he was ridding Aim of its “Wild West” reputation?

Anyway, it could be suggested that despite many obvious failings Mysquar always had an easy ride in the press ….. and that could be down to the involvement of some stong personalities ….. but I’ll leave that there.

Have we run out of things to write about yet?

It’s been a long, quite annoying week. Let’s draw a line through it.

(@Soundbuy: our tech people are the best and I won’t hear a word against them.)

Ta for the comments. Back Monday.


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