12 January 2017
Week in Brief: BUSINESS AND THE CITY
BOOTS: One of the largest retail chains in the UK, with shops in almost every street it often seems -there are 2,500 of them – is Boots, supplier of a wide mixture of goodies, from sweets to perfumes to medicines. Boots was taken over some years ago by the USA conglomerate Walgreen, and Boots trading results, which used to be seen as a reliable indicator of the consumer market, are now consolidated into those of their international trading division. However, as Boots is by far the largest part of that, some inferences may be drawn. The Walgreen report says that in local currency terms, international turnover was 0.5% up, but that margins were down in the UK, pulling gross profits down by 2.7%. After translating financials into US$, international sales were down 14.4% and profits down over 17%, which also reflects the weakness of the pound sterling against the American dollar. The company commented that Boots’ performance was “flat” during the year, and that further pressure was expected from the controls being reinforced by the British government on prescription costs. Also of concern were possible further cost increases for imported goods for resale, continuing to be affected by weak sterling – and Boots has little export business to counter that.
PEER PRESSURE: One of the fastest growing sectors in commercial debt provision has been the peer to peer sector, which has provided a useful, if expensive, source of credit, mainly to the property and building sectors at a time when the traditional providers, the clearing banks, have reduced their activity. The aim of the peer-to-peers is to directly match deposits to borrowers, and although they have slightly different structures, they hope to make money from intermediation in this process. One of the leaders is Wellesley and Co, founded in 2013, whose business has grown rapidly to a loan portfolio round £360m of commitments, but where recent results show signs of some pressure from the slowdown in the residential development market, who are major users of peer to peer funding. Wellesley raised some additional committed funding by a £30m bond issue a couple of years ago, but in the most recent annual report its auditors point to continuing losses – from the costs of growth, including a big spend on a TV advertising campaign for investors, say the directors – and comment that the bondholders will struggle to get their bonds repaid unless the business becomes profitable or the board strengthens the balance sheet by raising further capital. The business raised a further £2.5m in capital among private backers last September, and is now running a further public capital raising. The annual report says that provisions for bad debts are running at about 1.8% of loans, as against a forecast 1%, resulting in a loss of about £3.3m for the 18 months to end of December 2015, as against a loss of £1.1m for the previous 12 months. About half of the property financed is situated in London and the South-East, although the company is broadening its activities across England. Although margins are much higher than in conventional lending, a couple of modest loan losses can impact very heavily on capital reserves. This seems to be further confirmation that recovery from the 2008 recession for the property industry is perhaps now complete and that markets are moving into a new and more difficult phase.
EASY RIDER, HARD FINANCIALS: A mixed year at EasyJet, the Europe budget airline. Figures just released for 2016 show that passengers carried were up nearly 7%, meaning an extra five million more passengers, a total of 74 million, compared with 2015. The load factor – the percentage of seats filled, which is a key operating measurement figure for airlines, was also impressive, at 91%. Unfortunately that did not benefit the bottom line – the depreciation of sterling increased costs, especially fuel, which moved up smartly in the second half of the year, and cut revenue form the UK. No profit figures yet, but a profit warning instead – EasyJet said that it now expected around £495m and has cut its intended dividend, and also warns that it does not expect 2017 to be a great year from a financial perspective, though it hopes for continuing good loadings. This is not least because of its continuing battle for passengers with Ryanair and several newcomer budget airlines, and also the costs of its intended expansion, involving both extra routes and enhancing its aircraft fleet; analysts think this programme may now come under review with a renewed concentration on the bottom line. The market took this well though – the difficulties of operating an airline are well flagged – and the share price rose slightly on the day.
FUTURE SHOCK: Wood Mackenzie, the energy consultant and analyst, has been looking at the future for the North Sea oil and gas industry. That, it says, is a very gloomy picture; there have been no new significant finds so the extraction business is now in its closing years, but, worse than that, there now come the difficulties – and the costs – of closing the North Sea infrastructure down and removing it. The government has promised that it will not just leave all those wells and platforms at sea, but will properly seal sea bed intrusions and remove all the kit which has been placed in and above the sea over the last fifty years. That will not come cheap – £16bn said the Treasury – but more probably £24bn says Wood Mackenzie. The only possible relief is that it is likely to take forty years to remove everything, so the costs will be spread over a long period, but it does mean that there is likely to be no net income from oil and gas extraction now – the income will simply go to pay the removal costs. The process is starting – with £5bn likely to be spent over the next five years. Also a problem is that the remaining reserves are, naturally, the most difficult and expensive to get out, so net income is falling steeply. This may explain some of the Scottish Nationalist Party’s apparent refooting of its policy on Scottish independence – Scotland’s calculated share of North Sea revenues will be a percentage of nil, and soon, negative, which will not be much a of a battle cry for economic self-sufficiency. In 2011-12 Scotland’s share of revenues were £9bn plus – with oil at over US$100 a barrel – in 2016 it was £60m.
JOBS FOR ALL: Although UK manufacturers have been a major beneficiary of the Referendum result, with provincial employment levels improving, London went the other way, with gloom in the capital about prospects especially for financial services, which fed into employment – with the number in work shrinking. However in November last year that reversed, as numbers employed went up, with a further increase in December. That seems already to be also helping wage levels (if you are an employee, that is) – there is evidence that as the number of strong candidates for jobs falls, that is already leading to a general increase in pay.
KEY MARKET INDICES:
(as at 10th January 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.37% (fall); 5 year 0.79% (falling).
Euro€: 1 mth -0.37% (steady); 3 mth -0.32% (steady); 5 year -0.02% (slight rise)
US$: 1 mth 0.77% (steady); 3 mth 1.01% (rising); 5 year 1.90% (falling)
Currency Exchanges:
£/Euro: 1.14 £ falling
£/$: 1.21, £ rising
Euro/$: 1.06, € rising
Gold, oz: $1,176, slight rise
Aluminium, tonne: $1,717, slight rise
Copper, tonne: $5,551, slight fall
Oil, Brent Crude barrel: $54.94, slight fall
Wheat, tonne: £145, rise
London Stock Exchange: FTSE 100: 7,249 (rise). FTSE Allshare: 3,932 (rise)
Briefly: The New Year continues with a pretty steady picture, the wheat market being the strongest performer with continuing rising spot wheat prices. Also up are the London Stock Exchange indices, to record levels. On interest rates, dollar rates now seem stable, although most commentators (and the Fed), think the direction should be up.
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 ShawSheet
