Morgan Stanley: Today’s Research
The Morning Call
We see early stages of a turnaround in hedge fund flows with redemption pressures easing andinflows growing. Our research suggests SWFs, foundations and pension funds have overtakenendowments and HNW HFoF as the largest source of funds. We think the market is underestimatingthe potential upsurge in demand for absolute return funds from private clients andsmaller institutions. In the UK, in Q309 there were $2.1bn inflows into absolute return funds, 3xthat of Q1, and we see this growing. Our base case assumes hedge fund AUM returns to 2Q07levels by 4Q10, although we see risks from performance, regulation and reputational issues.Our work supports our Overweight on Man Group, with strong Asian HNW sales, where weforecast 11% NNM growth at Man FY11. We also see upside at SDR and HGG.
A recovery in absolute strategies helps the i-banks - we estimate 27-32% of equities revenues at CSG,Deutsche and Barclays came from prime brokerage, while trading and platforms should help too.Overweight-rated CSG, Barclays and Soc Gen are our preferred picks.
Morgan Stanley is currently acting as financial advisor to BlackRock, Inc. ("BlackRock") withrespect to its announced proposed acquisition of Barclays Global Investors, the assetmanagement arm of Barclays PLC ("Barclays"), including its iShares business.The proposed transaction is subject to the consent of Barclays shareholders and other customaryclosing conditions. This report and the information provided herein is not intended to (i) providevoting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in theprocurement, withholding or revocation of a proxy or any other action by a security holder.BlackRock has agreed to pay fees to Morgan Stanley for its financial advice, including transactionfees that are subject to the consummation of the proposed transaction. Please refer to the notesat the end of the report.
ADVICES
We are raising our earnings forecasts and price target following a stronger than expected3Q09 result and better outlook for tyre volume. Pirelli Tyre revenue decreased by 2% in 3Q09vs. the -28% of Nokian and the -11% of Michelin and Continental, mostly due to a favourablegeographical and product mix. Pirelli net debt came at €691m, around €70m better than weexpected and the company improved the year-end target by €100m to €700m.
Earnings revision driven by improved outlook for tyre volumes and revisited real estateassumptions: We increased our tyre volume growth assumption to -7.6% in 2009 (from -9.8%),+5.9% in 2010 (from 5.2%) and 6.2% in 2011 (from 5.6%) following our improved forecasts for theBrazilian car market and stronger than expected tyre shipment data in October. We also changedour estimates for real estate writedowns from €255m to €48m in 2009-10.Price target raised by 16% to €0.52 from €0.45. More than half of the increase to ourLBO-based price target is due to the positive revisions to our net debt and cash flow forecaststhrough 2011.
We believe strengths in the South American market can keep building Pirelli's top linemomentum. We think the market has underestimated the extent to which Pirelli South Americacontributes to value and earnings for Tyres. Our group operating income estimates are 12%above consensus in 2010 and 14% in 2011. Further news on the announced real estate divestureplans may also attract new capital in the stock.
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