26 November 2015
Week in Brief:BUSINESS AND THE CITY
BIGGER AND FASTER: Jaguar Land Rover is one of the great success stories of modern UK motor manufacturing. Since its take-over in 2008 by Tata, the Indian owned diversified group, it has grown rapidly, modernising its range of luxury cars and building a truly premium brand. This week it announced further investment, by way of £450m for expansion of its engine factory at Wolverhampton. This plant, which opened in 2014 produces ultra low emissions diesel engines, which motor industry experts see, in spite of the recent scandal of misleading testing at Volkswagen Group, as key to greater engine economy combined with less emissions. This extra investment will take the total spent on the new plant to around £1bn. JLR says it is already taking the number of workers on site up to 1,400 by end of 2016, and the new investment will produce a requirement for several hundred extra jobs.
JLR have recently said that they intend to double the number of cars they produce by 2020, but there has been concern in the UK that much of that expansion will be in cheaper locations. The company has a new plant now operating in China, is building one in Brazil, and has announced plans for a third in Slovakia. But this announcement does reinforce the company’s expressed intent that the UK will remain at the core of its luxury car business. Land Rover has been an undoubted success with its meld of luxury and off road capable vehicles, but historically Jaguar has struggled to compete in the saloon business against brands such as Mercedes and BMW. However, the new Jaguar models which have been introduced recently, have proved very popular with buyers, and the word is that new smaller Jaguar, the XE, is selling very well. Around eighty percent of Land Rover production now goes for export – China is a particularly strong market – and JLR now sees similar prospects for Jaguars of all sizes.
A RUBBISH INVESTMENT: From luxury to rubbish – another British success story is Biffa, who are believed to be the largest waste management business in the UK – you have almost certainly been held up by one of their waste trucks collecting household detritus in a street near you. Their most visible customers are local authorities, whose demands are increasingly complex as modern regulations on sorting and handling waste into various recyclable types require increasing care in handling and processing. But municipal work is actually only about a quarter of their business – Biffa also provides waste disposal services for many large corporates, key customers being J Sainsbury, Royal Mail, and Pret a Manger, the City types’ sandwich bars of choice, and many smaller customers.
Biffa is no new boy on the bins – it was founded in 1912 by Richard Biffa when it went into business removing (and indeed, recycling into road construction) ash and clinker from power stations. It remained family controlled until 1971 and then passed through a series of owners until it was sold at the very peak of the market in 2008 to a consortium of venture funds using a very high leverage, which gave the over geared business a few difficult years. In 2013 it was sold to a new consortium of investors who have sorted things out, invested new money – the business now has 2,500 trucks and 6,000 employees – and got it back on the customer acquisition trail.
So the owners are thinking about cashing in at least some of their investment and word is that they are looking at an IPO. Expect to see investment bankers riding the dustcarts over the next few weeks as they do their due diligence for a spring float.
BEDDING IN: There seems to be no end to IKEA’s ability to go on producing further growth in both turnover and profits. The Swedish privately owned furniture and household items retailer has become a staple of many British homes, and its clean Scandinavian styles will no doubt be regarded as symbolic of early C21st living. All that has been very good for the IKEA UK business, which has announced that turnover is up again, making four years of consecutive growth, the last two being in double digits. Sales in the year ended 31st August this year showed growth of eleven per cent. Bedroom furniture and furnishings were especially strong sellers –mattresses were up thirty percent. The company has not opened any new stores in the UK for seven years, preferring to sweat the existing stores with longer opening hours and new customer friendly services such as delivery and assisted assembly. Now though it has decided to increase its coverage, is building a new superstore at Reading to open next year, and has also bought sites for further stores in Sheffield, Greenwich and Exeter, all areas where it sees gaps in its coverage. Somewhat surprisingly, given that its products seem to be in every home, IKEA estimates that it has under eight per cent of the UK market, so there is plenty of scope for growth yet
OFFICE SUPPLIES: The boom in construction in London goes on – and indeed it is difficult to miss in both the West End and especially the City, where every street, it seems, features tower cranes and scaffolding. The latest statistics prove the impression; over eleven million square feet of commercial space, mostly offices, is under construction. Half of that is in the City; and that does not include a lot more space coming down the track which has planning consent but where work has not yet begun (most notably the Stuart Lipton/AXA building formerly known as the Helter Skelter, now a redesigned square block containing another million square feet of offices, given consent by the City last week). That maybe because the developers are still trying to get their funding in place, and as the banks, traditionally a major source of short term development finance, are still cautious about construction risk, that may constrain things a little. On the other hand, equity is very widely available, and comparatively cheap….
The letting agents are pretty confident that this space can all be let, and more. Current rents, reaching record heights all over London, are reflecting strong demand , but Deloittes, who have been perusing the market, sounded a note of caution – their best guess is that in each of 2017, 2018, and 2019 some seven to nine million square feet of office space will be completed – that could be twenty seven million square feet in a market where the long-term average take-up is perhaps half that. Most of what is under construction now is pre-let, and there is undoubtedly a continuing strong demand, but the difference between feast and famine in the letting markets is narrow, and can have dramatic effects on rents and yields.
MAKING YOUR POT: New challenges for the IPO market are always welcome, and this one must surely be a first. Golden Leaf Holdings is looking to float on the New York market before the end of this year, and on either the London or German markets early next. But the product may cause a few raised eyebrows, not to say glassy looks – it is one of the largest cannabis oil producers in the USA. The business though is not dealing the product at the back of concert halls or in the toilets of crowded bars – it is mainly producing the oil for its many medical applications and some food uses. But as more and more American states legalise cannabis use for recreational purposes, it sees a potentially large market opening up and wants to raise new capital to get in there before the tobacco companies diversify into something more fragrant. Cool, man, cool.
KEY MARKET INDICES: (at 25th November 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.57% (steady); 5 year 1.26% (falling).
Euro€: 1 mth -0.10% (rising); 3 mth-0.04% (rising); 5 year 0.05% (falling)
US$: 1 mth 0.48% (rising); 3 mth 0.66% (rising); 5 year 1.55% (easing)
Currency Exchanges:
£/Euro: 1.42, £ steady
£/$: 1.51, £ steady
Euro/$: 1.07, € steady
Gold, oz: $1,075, steady
Aluminium, tonne: £951 falling
Copper, tonne: £3,004, falling
Oil, Brent Crude barrel: $46.12, falling
Wheat, tonne: £112, steady
London Stock Exchange: FTSE 100: 6,277 (steady). FTSE Allshare: 3,441 (rise)
Briefly: The FTSE indices have steadied after last weeks falls on security and consequent business concerns. Short interest rates moved up in both Euros and dollars but continue steady in sterling, but all five year rates are falling, quite dramatically in the case of sterling – to recent record lows. Commodities generally are also still falling, with copper in particular sinking fast – it dropped below £3,000 a tonne during the week, though has recovered slightly since.
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