4 August 2016
Week in Brief:BUSINESS AND THE CITY
STEADY…: There is a great deal of chat now that Brexit vote has not had the expected negative effects on the UK economy and that the economic outlook is good, even dazzling. And also, in direct contradiction, that economic indicators are weak and pointing steeply downwards to slump and a repeat of the 2008 crash. The first view, not surprisingly, is generally from former proponents of “Leave”, and the second from those devoted to “Remain”. The truth is of course, that most evidence so far is entirely anecdotal, as all the formal surveys on actual performance are looking at results from surveys prior to the Referendum vote.
That will change soon as we can see what has actually happened since the vote; and we certainly know already that there was a slowdown before the vote, with investors and businesses not wanting to make tmajor decision before knowing the result. In the property market, some leasing decisions were put on hold, but then again, some went through and the rental market continues to move up. Some (many?) of those decisions were not really Brexit dependent one way or the other, so maybe what we will soon see is a catch-up upsurge in some areas of activity. But other decisions remain on hold – overseas investment into UK property assets for instance has clearly been delayed, though the drop in sterling and the consequent effective yield improvement for investors now seems to be bringing forward some deals, whilst others will want to take more soundings before risking a longer term investment. The biggest casualty – though it may turn out to be not – is perhaps the EDF Nuclear power station at Hinkley Point, now under review by the UK Government. But interestingly of course EDF had board approval to proceed so not too much evidence of post Referendum nerves there.
As we do seem to be having a summer holiday slowdown, it is likely to be the finally quarter of this year before we really start to get some reliable economic data, so take it all with a pinch of salt and keep up the relaxation classes for a little while longer.
CHEMICAL STACK: Croda is one of Britain’s leading chemical companies, albeit most of its sales and 80% of its production is now outside the UK. Nevertheless, it is a sterling area business with a large export position, and had benefitted already from the fall in sterling, even before recent events. First half figures, to the end of June, show sales up nearly 8%, to £608m, and profits up 7%, to £145m. Croda have adjusted their figures for sterling depreciation; on that basis, profit still shows an increase of 6%, but turnover is up a more modest 2%. The business is currently valued on the FTSE250 market at around £4.4bn, and, not surprisingly, there are rumours of takeover interest, though the market cap suggests that is fully in the share price. Croda has a blue-chip customer list, including L’Oreal, Proctor and Gamble, and Estee Lauder, its outputs including raw materials for cosmetics, shampoo, specialist paints, and crop sprays. Analysts suggest that the business has not pushed its returns, preferring long term relationships with its customers, so it is possible that a predator might see cost savings and cross selling opportunities; a bid might yet appear.
“STEADY AS SHE GOES”: was the comment from InterContinental Hotels Group’s Chief Executive, Richard Solomons when he presented the Group’s first half results (to 30th June). IHG owns various brands, the best known and biggest being Crowne Plaza and Holiday Inn. Revenues were down to US$838m, a fall of 8%, and profits down by more than 50% to $298m. However this was mostly because the comparables last year included the sale of the LeGrand Hotel in Paris, for $175m. IHG is engaged in selling most of its owned estate so that it becomes a manager of hotels owned by third party investors. Owning hotels is too capital expensive for most hotel operators now – and there are plenty of investors looking to park their money in real estate in major cities if they can find somebody else to run it for them. Taking out that sale the figures show revenue up 5% and profits up 10%, and that in spite of some difficult trading in the Americas (blamed on oil industry travails) and in Paris (terrorist concerns). The company is reasonably confident about the outlook for the rest of the year, being more attuned to the business and upper levels of the tourism market which seem to be less affected by present world troubles.
FOXY OUTTURN: Foxtons, the up market London residential estate agent were very quick to blame the Referendum result for expected poor figures for their first half (30th June end). In fact it was worse than the market was expecting – profits were 42% down and chief executive Nic Budden says that things may well be worse in the second half. Whether this can be blamed on the Referendum is a moot point – all but seven days of the period under review were prior to the big day – but there is no doubt that the central London residential has seen a big cooling off in value and turnover from a year ago. There is more product appearing but with less buyers, discounting is becoming common and some vendors are having to let rather than sell – though rents look weak in some areas also. That hits Foxtons on their sales business and may start to hit the rental business too – both are based on turnover. Mr Budden says he wants to expand the present 63 branches to 100; the market is not so keen – the share price has fallen one third since 23rd June.
MINING DEEP: Some time ago we covered the successful outcome of Sirius’s, the mining company, planning application to dig a potash mine in the North York Moors National Park. Since then the company has finalised its plans and fully costed the works – which have come in at US$2.9m, $700m less than originally thought. Plus the fall in sterling has given a big boost to projected profitability – most potash is exported. The company is currently raising debt and expects to start mining in September this year.
BANKING SOLUTION: Seven years ago Royal Bank of Scotland was required to sell off its former Williams and Glyn chain of branches as a condition of the rescue of RBS by the government, to try to increase banking competition. The bank has so far failed to do so because of technical complexities – and probably because branch banking is a dying trade, as on-line banking takes over. Now, the rumour has it, Santander has come up with a solution – buy them to expand its network. Not quite what the government had in mind, and an interesting conundrum for the new Chancellor…
KEY MARKET INDICES:
(as at 2nd August 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.53% (steady); 5 year 0.44% (rising).
Euro€: 1 mth -0.36% (rising); 3 mth -0.28% (rising); 5 year -0.28% (falling)
US$: 1 mth 0.51% (steady); 3 mth 0.74% (rising); 5 year 1.08% (falling)
Currency Exchanges:
£/Euro: 1.18, £ steady
£/$: 1.32, £ rising
Euro/$: 1.12, € rising
Gold, oz: $1,348, rising
Aluminium, tonne: $1,645, rising
Copper, tonne: $4,906, slight fall
Oil, Brent Crude barrel: $40.75, falling
Wheat, tonne: £127, slight rise
London Stock Exchange: FTSE 100: 6,693 (modest fall). FTSE Allshare: 3,635 (steady)
Briefly: The markets are still in the summer dog days; the action this week is coming from oil, whose price continues to fall. The FTSE has finally paused in its post Brexit vote rise; so has wheat. There seems to be some slight moves upwards in shorter term interest rates in our three currencies, though whether this is a trend or a blip is too soon to call.
If you enjoyed this article please share it using the buttons above.
Please click here if you would like a weekly email on publication of the Shaw Sheet
