13 July 2017

Week In Brief: BUSINESS AND THE CITY

CONTRACTING CONTRACTORS:  Building and property have always been cyclical sectors and the current bull market has had a reasonably long run, so commentators are looking for signs suggesting that the next step is down.  The results of major building contractors seem to indicate that we may indeed be at that point.  Although there have not yet been any significant financial failures in the sector, there are certainly signs that activity and margins are both in decline.  Best evidence for that so far is from Carillion, a FTSE250 constituent, who announced some interim trading indications this week – accompanied by the departure of the chief executive, Richard Howson; always a warning sign.  Although no specific profit figures were given, the group said first half results would be weaker than expected, that the full year trading was not looking good, and announced £845m of write offs on contracts which are loss making or where it may not get paid.  Slightly under half of that came on three big UK contracts which are likely to result in losses – two hospitals and a major road contract.  Carillion has a major business in several Gulf States and they accounted for much of the rest of the loss,  it being anticipated that contracts will not proceed or that no further payments would be forthcoming – primarily due to the fall in the oil price.  The dividend due this year will be cancelled, which will save £80m of cash payments; the Canadian business and several other smaller activities will be sold which might raise £125m of capital.   Given that the debt burden is now £695m, this is unlikely to be enough and the chances are that the new chief executive Keith Cochrane (interim, at least for now, suggesting all this has been a bit of a surprise to the board) is going have to implement a pretty rapid rights issue.   The stock market certainly think so – the share price dropped 40% on the announcement.  Carillion indicated a quarter ago that it was finding conditions more difficult and inward payments were getting slower; since then a financial review by accountants KPMG had confirmed the problems.  The company is not alone in its struggles – its main rival Balfour Beatty is also seeing the same trends and has had a change of senior management to address the problems

But the greatest irony is that the departed Mr Howson had, as one of the main planks of his strategy for the business, diversification away from the cyclical high risk big project construction end of the business into support services and management, a business which offers lower margins but gives longer contracts, regular payments and low capital risks.  It seems that they have just not been able to move fast enough into that sector.

TELLING IT LIKE IT IS:  More troubles for BT and its soon to be detached Openreach unit, which provides BT’s broadband service.  The regulator of that business, Ofcom, further criticised the slow roll out of ultrafast service – in fact, Sharon White, who is the head of Ofcom, says that only 2% of British homes and premises have superfast connections – based on fibre networks – compared with Spain, Portugal, and South Korea, amongst others, who have more than 70% connectivity.  Currently passing through Parliament is a bill to make UK networks business rates free, and to encourage competition to Openreach and the big providers.  A £400m fund will encourage new small providers to cable local areas and put salt on the big boys tails.  And as further salt, the Advertising Standards Authority (“ASA”) said that it was conducting a review into advertising by Openreach, Sky, and Virgin to the effect that they are providing fibre connections when they sign up customers.  The ASA says this is often not true – the local connection, newly installed, may indeed be fibre, and it may be fibre in the data centres, but the connection between the two is often copper, which is slower.  Compounding that is the advertisers’ use of the phrase “up to” when describing connection speeds.  “Up to” is meaningless says the ASA, unless it is normally available to the vast majority of users – and if they are using a part copper connection, it won’t be.  This action seems to have come from complaints from users about data speeds and from the smaller service providers who are providing new local fibre networks but having to compete with big operators whose systems are only part fibre.  Up to a point, Lord Copper…

BACK IN FOCUS:  The demise of the cinema has long been predicted; even in the 1960’s it was confidently announced that the lure of the home TV and the comfy armchair would deter viewers from venturing out to a distant, expensive and uncomfortable cinema; dividing the big screens with hardboard into smaller screens where you could hear two soundtracks at once did not help much either.  But somehow the cinema chains kept enough customers to begin a fight back, and used better technology to improve sound (and sound proofing) and film viewing quality.  That battle between home comforts and cinema quality goes on; with the entry and success of independent cinemas who, having capacious chairs and food and drink to consume in the auditorium (possibly a dubious enhancement) add a new level of luxury to the movie watching experience.  In fact, experts suggest that the next three years could see cinema takings increase by 20%, both from more movie goers and from luxury viewers prepared to pay more for those big cosy chairs.  The largest chain is now Vue, which began in 2000 and has steered a middle course between the budget operators and the smaller specialist high price screens.  Vue has 212 cinema locations, many multiscreen, which makes it the sixth largest in the world and probably the largest in the UK (measures differ).  Now it is suggesting that it will be sold next year, capitalising on the trends for the big groups to get bigger – which means economies of scale on operating and advertising, and more fire power with the film makers and distributers.  The other five larger chains are already owned as part of conglomerates, so for anybody building an international chain this is the last chance to find a ready made chain of outlets in the UK.  The company is majority owned by two pension funds but the management, including founder Tim Richards, still own 27% and would like to get some money out while the market is looking good.  Sales were nearly £800m last year, but the group is not putting a price on itself just yet.  Given that the similar sized Odeon chain sold last year for over £900m, whatever the price the shareholders should be able to afford giant sized popcorn tubes for the rest of their lives.

KEY MARKET INDICES:  (as at11th July 2017; comments refer to changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, (unchanged0: 3 month 0.30% (unchanged); 5 yr 0.89% (unchanged).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.22% (rise)

US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.99% (rise)

Currency Exchanges:

£/Euro: 1.13, £ weakening

£/$: 1.29, £ steady

Euro/$: 1.13, € steady

Commodities:

Gold, oz: $1,210, slight fall

Aluminium, tonne: $1,913 rise

Copper, tonne: $5,779, slight fall

Iron Ore, tonne: $64.48, rise

Oil, Brent Crude barrel: $46.77 fall

Wheat, tonne: £141, fall

London Stock Exchange: FTSE 100: 7,341 (slight fall). FTSE Allshare: 4,008 (slight fall)

Briefly:

Back to marking time, nothing dramatic in the markets this week, although oil yet again failed to break out and sank back into the mid $40’s.  In spite of the eyebrow wiggling coming from the Bank of England interest rates, having made a move last week in the longer maturities, refused to move further, with participants in the market suggesting current economic data indicates a downward, not upward, movement. Though at these levels it is hard to think that borrowers are very sensitive to what is happening

 

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