27 October 2016
Week in Brief:BUSINESS AND THE CITY
THE PRICE OF PLEASURE: The effects of the weak pound are starting to hit British consumers where it hurts – in their sweet tooth. Nestle, the Swiss domiciled chocolate and food manufacturer who own the former Rowntree’s brand in the UK, have announced that they will soon be increasing the price of KitKat’s and other best selling chocolate products if the pound does not strengthen. Surprisingly, for a product mostly made in the north of England, many of the ingredients of the sweet things are imported – including even milk products and sugar – so manufacturing costs are rising and Nestle will be attempting to pass some of that on to the consumer – though it may also encourage the world’s largest food manufacturer to go back to local sourcing where UK agri-products will have a price advantage. Nestle are making very cautious noises about this and promising the consumer they will absorb all the costs they can before passing price increases on – their approach, no doubt, coloured by the experiences of Unilever a couple of weeks ago who found their products boycotted by Tesco who cleared Marmite and Pot-Noodles off their shelves for twenty four hours when the big U attempted to impose sudden price increases. That caused a quick back down, but the problem for big food importers is real enough – and the solution may in the long term benefit British farmers, fearful of losing the EU farming support regime.
Nestle in fact painted a glum picture of its world-wide business, with costs starting to increase after two years of static or even falling input prices, and sales slowing in key markets, with even China, a previous bright spot, slowing markedly. Some years ago Nestle tied itself to a demanding growth target – at least 5% a year organic sales growth. 2016 will be the fourth year in succession it fails to meet it – though many business would be perfectly happy with the 3.5% plus that Nestle has achieved.
GOOD TIME FOR HARD LANDINGS: As the excitement over the well leaked announcement that Heathrow would be confirmed as the site for south-eastern airport expansion abounded last week, Heathrow Airport, the owning company, hit the market (quietly) with the news that it had made a £293m loss for the first nine months of this financial year (to the end of September 2016). Last year the same period saw a profit of £552m. Much of this sharp turnaround was caused by property revaluations and one off hits on such things as currency positions; the underlying figures were better, with turnover up just over 1% to £2.1bn. However, the cash position continues a stretch – external debt grew 2.3% and now totals £12bn, with the new runway and terminal costs to be added to that – and presumably new equity to be raised before work starts. As with other companies, the pension fund continues to be a heavy burden on the shareholders – it showed a small surplus at the end of last year, but that has now fallen into a £474m deficiency.
The news that Heathrow is the chosen one will be no doubt delight the company and its shareholders, but as the continuing controversy over the decision shows – and the immediate debate about how the runway should cross the M25 which has a major cost implication, the airport business is all about very big numbers and very long-term payback horizons.
TROUBLES ON THE TRACKS ALSO: It’s not just big airport projects that are difficult; although the new administration has signalled that it is fully committed to HS2, the new high speed railway from Euston to Birmingham and onwards north, its opponents scent weakness and the protest groups are becoming more vociferous about the environmental and cost aspect of the new line. That includes some of the politicians with roots in the northern conurbations, who are concerned that the new government is much less committed to the “Northern Powerhouse” concept. They are looking at the costings for improving rail and even motorway links between northern cities which they suggest, would cost a lot less than the proposed HS2 second phase – which is any case might increase the pull to London.
HS2 itself has been left short on leadership in recent months with defections of senior management to perhaps more assured jobs and career paths, and the appointment this week of Roy Hill as interim chief executive has caused concern amongst both those opposed to the project and some of its supporters. Nobody doubts Mr Hill’s abilities – but what causes the trouble is that Mr Hill was until his new (temporary at the moment) appointment, chief executive of CH2M, a Midlands engineering business which already has won a £350m contract for work on engineering the new railway and is bidding for several contracts for the construction of the new rail line. Although HS2 say that Mr Hill would be excluded from anything to do with decisions involving his old firm, that will not be easy in practice
The company has confirmed Mr Hill is unlikely to be appointed to the job permanently and head-hunters are seeking a range of candidates for the job. HS2 currently employs 1,200 people, a number which will significantly increase when it moves from the planning phase to begin building.
INTU AND OUT: Intu Properties is a FTSE 100 company which specialises in owning and managing shopping malls in the UK, its largest investment being the Trafford Centre between Manchester and Liverpool, the largest mall in the North West. It also owns the MetroCentre near Newcastle on Tyne, the largest mall in the North East, and Britain’s first regional mall. In a review of its business this week it confounded fears from investors that Brexit may be affecting its business model – footfall it said, is holding up well, as are rents, which are steady in spite of some very public failures of retail chains soon as BHS. And it was able to provide solid proof that values are doing ok also, with the announcement of the sale of its mall at Bromley, south-east London to the sovereign wealth fund for Alaska at £178m, a figure higher than an immediately post Referendum day valuation. Intu said that its emphasis now is on managing assets to get more shoppers into the malls and increase their “linger” time – and spending. That should in the medium term help move rents up and keep values stable.
SCOTTISH SAVIOUR FOR SCOTTISH PROBLEM? Just as RBS was contemplating giving up its long running attempt to sell its Williams and Glyn business, a 300 branch retail bank mainly in the north-west formed to deal with a requirement of the government rescue package, an offer has come in to buy it by Clydesdale and Yorkshire Bank, a bank recently floated on the LSE as part of its disengagement from former parent National Australia Bank. No price or terms have been revealed but the W&G chain would be a good fit regionally and C&Y has the systems and infrastructure to take the operation on – W&G currently runs on a RBS platform and building a new technology for the purchase would be very expensive – as RBS has been trying (expensively) to do.
KEY MARKET INDICES:
(as at 24h October 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.40% (steady); 5 year 0.61% (steady).
Euro€: 1 mth -0.37% (steady); 3 mth -0.31% (steady); 5 year -0.20% (steady)
US$: 1 mth 0.53% (steady); 3 mth 0.88% (steady); 5 year 1.26% (steady)
Currency Exchanges:
£/Euro: 1.12, £ rising
£/$: 1.12, £ falling
Euro/$: 1.08, € falling
Gold, oz: $1,274 slight fall
Aluminium, tonne: $1,650, slight fall
Copper, tonne: $4,719, slight rise
Oil, Brent Crude barrel: $51.76, steady
Wheat, tonne: £136, rising
London Stock Exchange: FTSE 100: 7,017 (slight fall). FTSE Allshare: 3,805 (slight fall)
Briefly: A really remarkably steady week in the markets, with very little movement one way or another. The charts suggest the current sterling movements are now complete but politics will decide that. Wheat continues to push up; oil is hoping for a hard winter.
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