05 May 2016
Week In Brief: BUSINESS AND THE CITY
IT’S A RAIL GAIN: Network Rail, which owns and operates Britain’s railway network, including much of the property which the system needs to accommodate its operations, is looking at selling off some of its property assets. This has been done before of course. The railways were historically one of Britain’s greatest landowners and, as their operations have changed, they have been able to supplement operating income by the proceeds of property sales. Also they have worked together with commercial developers to maximise the development potential of various mainline railway stations, recently at Kings Cross, but perhaps most famously at Liverpool Street Station in the City of London, where much of the huge Broadgate development is on rafts over the railway. But in such cases the railway retained the operating part of the buildings which they needed, usually by leasing off the developable parts. Now Network Rail is proposing to go one step further – by selling and leasing back operating railway stations. The need is to raise money. NR finds itself with a major funding gap due to the continual expense of maintaining the system and its infrastructure, made worse by the bad weather this winter which has caused much damage to bridges and embankments across the network. Sales of stations would release capital and reduce the need for borrowing. Also NR feels that property investors as owners might well bring extra commercial nous to ownership, exploiting retail opportunities and exploiting underutilised space, which will attract more users to the station and maybe more travellers, in the way the airport sector has done. There is much more to resolve yet, such as structure of leases and how rent reviews would be carried out, to say nothing of ensuring enough flexibility for the train operators, but it is maybe the face of future railway stations – shopping malls with a train at the back.
RESULT: ! HSBC managed to show falling profits and yet please the market, when announcing the bank’s trading result for the first quarter of 2016. Profits were down nearly 14% – but that was good news because it was ahead of the bank’s projections, and analysts’ forecasts. After tax, which was up because of the UK Chancellor’s new banking profit surcharge, profits were down 18%, but that was still good news as Chief Executive Stuart Gulliver has achieved more than he thought he might in cutting costs – down 6.5% in the quarter. What is a bit more worrying for future performance is that headline revenues were down 10% as the bank’s key Asian markets saw declining turnover and tighter margins. Even so, Mr Gulliver was cheerful about the prospect for the rest of the year, pointing out HSBC was doing better than most of its rivals, and that its strategy for redeploying capital from poorly performing markets such as South America to the much stronger Far East would underpin future growth. The dividend was held at the same level as last year – HK$0.10 per share – and it is a key part of the bank’s balance sheet policy to maintain or increase dividends. The market is starting to doubt that. Current yield on the shares is 8%, which suggests doubt on the part of investors as to the future of the dividend, but is certainly currently a better yield than the bank is paying on deposit accounts.
DRUG DEALERS PROSPER: The financially embattled NHS faces further problems with continuing costs increases way above inflation for many proprietary drugs. The latest hit is from Concordia Healthcare, the Canadian drugs group, which has increased the price of eye drops to treat bacterial conjunctivitis fourteen-fold. Needless to say, the company is the only maker of the patent protected treatment, but justifies its increase in price by saying that it needs to fund expensive research into new drugs for the future, such research proving increasingly expensive and speculative. It also calculated that the average price of all drugs which it supplies to the NHS as around £4.90 per prescribed unit, against a standard prescription charge of £8.40. Analysts noted however that Concordia bought AMCo, which owns the drug patent and manufactures it, last September for £2.3bn, widely regarded as a full price, so no doubt there is a need to recoup that cost. The business is highly geared – C$3.2bn of debt plays C$1.6bn of equity, and the share price has dropped 34% this year.
GREEN AND CONCRETE LAND: The Centre for Policy Studies, which is a quango think tank tasked to step back and try to find alternative ways of solving apparently intractable problems, has been looking at the housing shortage in the South East of England. So far its main approach is to try to stimulate the debate. One of the problems the UK faces is a growing population overall, but with particular pressures in the South East and a couple of other regional centres, (Birmingham for instance is said to lack sufficient executive housing) and over-supply in others. Gateshead is a good spot if you want value for your housing pound. In a report last week the CPS has not come up with anything very original. Build on the London greenbelt it says, claiming that that could supply 50,000 houses a year for London, many of them within 2 miles of a train or underground station, but it encourages other interested parties to join constructively in the thinking. However the political fallout which would result from its suggestions would be very difficult to manage, especially for a Tory government with key parliamentary seats and local councils in the areas affected. At the moment 86,000 houses are planned for the London greenbelt – roughly 1,000 acres of land, but that could take ten years to build.
(B)LOCKED OUT: In the esoteric world of on-line advertising, various parties are lining up for litigation. The issue is “pop-up” ads, those irritating things that appear before or during the on-line videos you are trying to watch, where technology has invented “blockers” which stop the ads popping up. But technology also provides the adman’s solution to that – a blocking of your blockers, so you can’t switch them off, or blocking of your access if you block the pop-ups. Now the European Commission has got involved saying that blocking users breaches privacy laws – an area already legislated for in Europe where cookies have to be consented to by the user (because the cookies store information). The EC says that blockers should be treated the same way.
BOOKING OUT: If you had popped round to your local William Hill last autumn and put a double accumulator on Donald Trump to be the Republican candidate in the USA presidential elections and Leicester City to win the English Premier League you would be contemplating the colour of your new Ferrari now. Round at William Hill, the national chain of bookmakers, the mood is not quite so cheerful. The bookie took bets from 25 customers at odds of 5,000-1 for Leicester City to win; it says that this year it has lost £2.2m on football league bets – that is ten times more than it has ever lost before. No doubt they’ll get it all back next season…
KEY MARKET INDICES: (as at 04th May 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.63% (steady); 5 year 0.96% (falling).
Euro€: 1 mth -0.28% (steady); 3 mth -0.22% (falling); 5 year -0.11% (falling)
US$: 1 mth 0.46% (steady); 3 mth 0.51% (steady); 5 year 1.22% (falling)
Currency Exchanges:
£/Euro: 1.27, £ steady
£/$: 1.45, £ steady
Euro/$: 1.15, € rising
Gold, oz: $1,290, rising
Aluminium, tonne: $1,629, slight fall
Copper, tonne: $4,995, steady
Oil, Brent Crude barrel: $43.20, rising slightly
Wheat, tonne: £108, rising
London Stock Exchange: FTSE 100: 6,185 (falling). FTSE Allshare: 3,394 (falling)
Briefly: Sterling has had a good little run but this week has marked time, whilst dollar interest rates now seem to have stopped their upward advance. Everything else is relatively steady, other than UKSE which has seen some modest falls over the past week, and one commodity which does not often get a mention – wheat, where the prospects for this year’s harvest are not looking so good after drought in the southern hemisphere and a very wet spring across Europe.
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