3 August 2017
Week in Brief:BUSINESS AND THE CITY
COY BROADCASTERS: As the BBC struggles with the fallout from revelations that it had been paying some of its male star broadcasters more than women doing the same or similar jobs, its terrestrial rival ITV has kept its head well down. It says it will not be revealing anything about what it pays its people, chairman Sir Peter Bazalgette saying that it would never discuss details of private and commercially sensitive information (he also said the majority of its employees are women). But the broadcaster was happy to talk about its financial results for the last six months, although they were not great. Advertising revenues, the lifeblood of the company which is free to view, were down 3%, to slightly under £1.5bn, but are expected to recover quite sharply in the second half. That is partly due to some successful shows which are improving the viewing figures (meaning that ITV can charge more for its advertising, especially at peak times), but also because the first half saw uncertainty amongst advertisers, with the after effects of the Referendum still making a mark, further exacerbated by the election. Some advertisers seem to have got over that and to want to attract the public once more – especially retail banks and the perennial favourite among admen, supermarkets. The company, soon to be led by a new and very well regarded chief executive Dame Carolyn McCall, will be hoping for a big pre-Christmas advertising splurge and spend from retailers this year.
NOT TAKING OFF: Airbus has proudly trumpeted its answer to Boeing’s jumbo jet, the A380, but the airlines who are supposed to be buying them are not responding so well. Airbus has been cutting production for several years and it is now building only one a month, which will drop to one every six weeks in 2019; it has no firm forward orders for them at all. The principal reason for this is that airlines are now worrying about the economics of big jets, finding it increasingly difficult to fill them to the capacity needed at a time of hugely competitive airfares and a lack of operational flexibility as there are so many airports not geared up to take them. Airbus also has problems with its smaller A320 model because of reliability problems with the engines supplied by Pratt and Whitney. Those engines are also used in the A400M transport military plane which Airbus builds and where it is also having to slow its delivery programme. No great news anywhere in fact, and showing in its results for the first half of 2017 – earnings dropped 35%, more or less what the market had been expecting following some well-informed coat trailings within the sector.
THE RESULTS THAT CHEER: Figures fromDiageo, the specialist but wide ranging distillery owner, cheered the market for two reasons. It has just published its full year results to end of June 2017 (no late night drinking sessions there to get them out so fast) and they showed profits 25% up on 2015/16 at £3.6bn. Not only that, Diageo says it does not need all the capital it has and is proposing a £1.5bn share buyback, which will underpin the share price nicely – they went up 6.5% after the announcement. It says it can fund itself, including possible further acquisitions, from existing capital and savings which it expects to create during the current financial year, of around £700m. It acknowledges that the weak pound post the Brexit Referendum had helped the results, but says that underlying business is strong – up around 6% on adjusted comparables.
BUILDING VARIATIONS: Differing fortunes for two of Britain’s leading house builders. Berkeley Group, founded and still led by Tony Pidgley has not only a long record of success but also has been able to call all the major downturns in the housing market in the south-east, to which it has historically confined its operations, though it has recently opened in the area around Birmingham. The group operates under the Berkelely name, and also St George, St William, and other specialist brandings, and mainly concentrates on the mid and upper markets. Profits for the last year (to end April 2017) were up 53% at £812m, pushing net assets per share up 18%, with £285m of cash on hand even after a share buy back programme. The directors are especially happy with that result – their long term bonuses are linked to complex targets but especially driven by share price performance. That meant Mr Pidgley and the chief executive Rob Perrins were awarded £29m and £28m respectively for the year.
But a very different picture round at Taylor Wimpey, bigger than Berkelely, and operating nationally. There, half year profits (to end of June) were down by 24% though turnover was up 18%. The problems were almost entirely caused by the current fuss over the industry practice of selling houses in some areas on leases, with escalating ground rents. No matter that these are currently set out in the leases when purchasers exchange contracts; no matter that any house purchaser will no doubt have a lawyer or conveyancer who is supposed to advise on such matters; no matter that such houses sell more cheaply than comparable freeholds. The issue has become such a political hot potato that the housebuilders are likely to be banned from the practice in future and are having to compensate purchasers by scrapping existing arrangements or buying back freehold housing reversions sold to investors. In Taylor Wimpey’s case, that is likely to cost around £130m, and it has provided for that amount in the half year accounts. But, allowing for that, the results were not bad, with the number of units sold up 9% and adjusted profits up a quarter. And not bad news for the future (maybe) – London land prices are moving down, which should enable the company to buy more sites there, in what is traditionally an especially remunerative market.
PETROL/FLAMES: BP, the oil company, having shocked investors with a loss of £2.2bn in the second quarter of 2016 (as it wrote off costs on the Deepwater Horizon fire and spill) drew a line under that with a return to profits in the 2017 comparable quarter. That gives the company US$553m profits, and also cheered investors still further with the announcement that cost cutting and technology enhancements meant that BP now sees its breakeven cost of oil as circa $40 a barrel. That compares with around $60 in recent years; BP has made a point of disposing of high cost operations and buying into more accessible fields. Oil remains a big cost business though – BP is likely to invest around $60bn in operations over the new next four years. The big uncertainty remains the oil price – see brief comment below.
KEY MARKET INDICES:
(as at1st August 2018; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, (unchanged): 3 month 0.29% (unchanged); 5 yr 0.81% (rise).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.17% (rise)
US$: 1 mth 1.23% (steady); 3 mth 1.31% (steady); 5 year 1.88% (steady)
Currency Exchanges:
£/Euro: 1.12, £ steady
£/$: 1.33, £ strengthening
Euro/$: 1.18 € weaker
Commodities:
Gold, oz: $1,267, slight rise
Aluminium, tonne: $1,903 slight rise
Copper, tonne: $6,346, rising
Iron Ore, tonne: $71.99, 10% rise
Oil, Brent Crude barrel: $52.83 rise
Wheat, tonne: £146, rise
London Stock Exchange: FTSE 100: 7,431 (slight fall). FTSE Allshare: 4,075 (steady)
Briefly:
Congratulations to copper which broke through the 6,000 mark in some style (not so good for the building trade though). In fact most commodities moved up to some extent. But oil continues to look weak in its trading patterns; it fell at the end of trading and is $2 down at the time of writing this. Commentators seem to be turning bearish; having expected it to test $60 a barrel this summer, they now see a descent into the higher $40’s as OPEC continues to fail to hold its cartel together and new and cheaper sources of supply announce themselves.
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