23 February 2017
Week in Brief:BUSINESS AND THE CITY
NOT YET FULLY FUELLED: Anything to do with aerospace seems to be bad financial news at the moment. British Aerospace itself continues to struggle through, hoping that times are getting better; Rolls Royce last week announced a whopping loss – though said that underlying trading is improving. This week’s bearer of bad tidings is Cobham plc, the company formerly known as Flight Refuelling Ltd, which neatly encapsulates what it principally does, a business which is the root of its current problems. Like Rolls Royce, Cobham has a new chief executive, David Lockwood, but he denied that this was the new man having a clear out; it is, he pointed out, the fifth profits warning in 15 months – profit forecast reduced by a further £20m, but this one came with £750m or so of right downs and adjustments – a veiled warning that the company might soon need a rights issue to rebase the balance sheet. Mr Lockwood blamed two main factors for the company’s problems: firstly, well known issues on a contract with Boeing to supply flight refuelling systems to 179 fuel transporter aircraft for the US Air Force, a US$40bn contract in total. Cobham is a subcontractor but is liable for key problems and penalties, which led to the £150m write down on the contract due to delays and “technical complexities”. The second cause of trouble was the acquisition of Aeroflex, an American specialist maker of aerials and antennae, which has caused further strain and write downs, though the underlying business is said to be good with strong potential. But current weakness on this contributed to a further £500m plus of write-offs. On the other hand the future of Cobham is closely linked to flight systems, especially to military applications, and this is giving Mr Lockwood some comfort. Military spending is likely to go up over the next five years after many years of cuts to budgets. The combination of Mr Putin and the worn out nature of much kit – and the new American president wanting to kick start manufacturing to deal with employment levels – should create rising demand for Cobham’s products, in which it is undoubtedly the market leader.
MAKE MINE A HALF: Given the trouble of the public house trade, which has suffered a long slow decline for over twenty years, with, it is said, a pub closing every week, it is wonder that anybody wants to invest in it. Indeed Punch Taverns, one of the largest chains of pubs in the UK with 3,350 outlets, has decided to halve the size of its business, and bundled up 1,900 pubs for sale to a partnership of Heineken, the Dutch based brewer, and Patron Capital, a specialist investment fund which manages the endowment funds of Harvard University, amongst other clients, and which likes to look at the potential of specialised property assets to create extra returns . The price agreed was £403m and all looked set far for an early closing and no doubt a couple of drinks to celebrate. Until the Competition and Markets Authority turned up to spoil the party. It has now started a formal investigation into the acquisition – pointing out that Heineken already owns 1,100 pubs in its Star division. The investigation could take up to six months although the new Heineken based group will be smaller than the old Punch based group. It is believed to have been prompted by objections from landlords of pubs in the portfolio that Heineken is much more rigorous in wanting to sell its own products through its chain than the present owner. The Star chain is believed to have 85% of its beer and cider products sourced from Heineken. Landlords like to have flexibility as to where they source their stocks, so as to give an attractive choice to customers and to buy competitively. The management of Star has already said that they intend to allow the acquired pubs greater flexibility in buying, especially in their ability to buy from specialist and niche breweries and cider houses. If the Competition regulator will not accept this there may be additional conditions put in place, though the deal is unlikely to be stopped altogether.
POWER CORNER: The troubles of the electricity generating sector continue to hit the headlines. Latest one to worry its investors is Drax group, whose keynote power station is the huge Drax plant in East Yorkshire, but which has and continues to diversify away from its old coal powered dependence. Drax is one of the largest producers of power from bio-mass – renewable grown sources and wood chips, including at Drax itself, now 50% from green energy sources. But it is still one of the largest coal burners in the UK , with all its coal being imported from Europe, as indeed is much of its woodchip supply (some also comes from the USA and from the UK). The company has struggled with political turmoil in the funding arrangements for biomass, losing a High Court action against the government early last year relating to subsidies. On the output side, the company has also suffered from price volatility, and has now decided that it must adopt a more conservative dividend policy to protect its capital base; this was announced by chief executive Dorothy Thompson, who pointed out that underlying net earnings had more than halved from 2015 to 2016 and that in the current economic climate it was wise to be prudent. The problem is that power generators have long been regarded by investors as stable utilities – like water companies – which can be held in an investment portfolio as low risk, if also low return, income. If they cease to be seen as stable and low risk, that means required yields will rise and the share price will fall – as it did after Ms Thompson’s announcement.
OFF THE MARKET: The sorry tale of the attempts by Royal Bank of Scotland Group to sell its Williams and Glyn division – a number of outlets principally in the north-west, W&G’s historic base, bundled up to sell as a condition of more banking diversification following the state rescue of RBS, seems to have finally concluded – without a sale. RBS has had several bidders, the latest being the Clydesdale and Yorkshire Bank, but nobody could reach the price RBS wanted – which was itself allegedly below the costs (£1.8bn) incurred by RBS in trying to separate the W&G part from the rest of its operation; nor could bidders see how to give the group modern management and recording systems without huge further expense.
But now the UK Treasury is said to have reached an agreement with the European Commission that the de-bundling need not take place. Instead the Treasury will provide around £750m to various bodies, including challenger banks and funds, to compete with RBS in personal and small business banking, and RBS will be required to provide clearing and cash systems to these competitors to increase competition. Just a pity nobody thought of this before spending £1.8bn on trying to sell the unit…
KEY MARKET INDICES:
(as at 21st February 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.36% (steady); 5 year 0.74% (falling).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.01% (falling)
US$: 1 mth 0.77% (steady); 3 mth 1.05% (slight rise); 5 year 2.00% (steady)
Currency Exchanges:
£/Euro: 1.18, £ slight rise
£/$: 1.24, £ steady
Euro/$: 1.06, € steady
Gold, oz: $1,229, steady
Aluminium, tonne: $1,877, slight fall
Copper, tonne: $6,002, slight fall
Oil, Brent Crude barrel: $57.03, slight rise
Wheat, tonne: £147, steady
London Stock Exchange: FTSE 100: 7,290 (falling). FTSE Allshare: 3,997 (rise)
Briefly: UK interest rates show some decline, unlike the dollar and euro, but elsewhere the picture shows little excitement; all eyes are still on copper with more industrial action taking place, but the price moved down a little – profit taking say the analysts. The FTSE 100 and FTSE Allshare moved marginally in opposite directions – a comparatively unusual event.
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